{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Chapter 16 - Solution Manual

Since companies are always making replace or keep

Info iconThis preview shows pages 21–23. Sign up to view the full content.

View Full Document Right Arrow Icon
opportunity to purchase another one just like it is not relevant. Since companies are always making replace or keep decisions, they are reinvesting in the asset by keeping rather than selling it. This is in effect a capital budgeting decision-making process. If you were trying to decide whether to sell or keep, you would compare the future cash flows for each alternative. The future cash flows to sell would be what you would get by selling the assets combined with the cost of acquiring a new one along with financing decisions, tax effects and potential effects on cash flow resulting from increased efficiency of a replacement asset. You would not be acquiring another asset in the same condition as the old one. The future cash flows to keep would be similar, but would not include the cost of replacement, since keeping the asset would negate its replacement. Debate 16-3 Goodwill of an acquired company SFAS No. 160 requires that Goodwill be measured at 100% of its fair value. Team 1: Argue that Goodwill reported in balance sheets should only be measured at the value purchased by the parent company. Your arguments should refer to parent company theory.
Background image of page 21

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
358 According to parent company theory, consolidated statements are prepared only for the benefit of parent company stockholders. The parent company and its subsidiary companies are controlled by the parent company and thus by the owners of the parent company (the parent company stockholders). Parent company theorists argue that the parent and subsidiary businesses operate for the benefit of parent company shareholders, rather than for the benefit of noncontrolling subsidiary stockholders. From the parent company’s perspective, the parent company has purchased an interest in each subsidiary that it controls. The parent company paid to obtain subsidiary shares. If less than 100% of the shares of any subsidiary is owned by the parent company, the amount paid to acquire control of the net assets of a subsidiary is less than 100% of the value of those net assets on the acquisition date. Any additional amount paid to purchase subsidiary shares is assumed to have been spent to purchase the parent company’s share of the subsidiary’s goodwill. From the parent company’s perspective, reporting only the amount of goodwill that is purchased by the parent company is consistent with the historical cost principle. The remaining amount of goodwill was not purchased. Since the historical cost principle implies that the initial cost of an asset is equal to the price paid for it plus all costs necessary to acquire it and get it ready for its intended use, the amount of goodwill purchased by the parent company is its historical cost. An additional argument for reporting only the portion of goodwill that is purchased by the parent company is the argument that the parent may have paid more to acquire subsidiary shares in order to obtain control of the subsidiary. This extra amount is called a control premium. If a control premium was paid, the amount of the purchase price assigned to goodwill is equal to the value of purchased goodwill plus the control premium.
Background image of page 22
Image of page 23
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}