Problem I: Merrill acquires 100 percent of the outstanding voting shares of Harriss Company on January 1, 2004 for $390,000 in cash and stock. Harriss’ book value of stockholders’ equity is $280,000 on the acquisition date. Merrill is willing to pay $390,000 for a company with a book value of stockholders’ equity of $280,000 because it feels that Harriss’ buildings are undervalued by $70,000. It considers the remaining balance sheet items to be fairly valued (no book to market difference). The remaining $40,000 of purchase price excess over book value is ascribed to general unidentifiable intangible assets (e.g., goodwill). The balance sheets of the individual companies immediately following the acquisition follow:
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January 1, 2004
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Post-Acquisition Balance Sheets
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Merrill,
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Harriss
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Accounts
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Inc.
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Co.
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Cash
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$ 84,000
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$ 40,000
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Receivables
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160,000
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90,000
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Inventory
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220,000
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130,000
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Investment in Harriss
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390,000
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Land
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100,000
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60,000
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Buildings (net)
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400,000
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110,000
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Equipment (net)
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120,000
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50,000
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Totals
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$ 1,474,000
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$ 480,000
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Accounts payable
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$ 160,000
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$ 30,000
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Long-term liabilities
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380,000
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170,000
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Common stock
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500,000
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40,000
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Additional paid-in capital
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74,000
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-
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Retained earnings
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360,000
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240,000
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Totals
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$ 1,474,000
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$ 480,000
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All of the following questions relate to the consolidated balance sheet prepared immediately subsequent to the acquisition.
Q1. At what amount will the $390,000 investment in Harriss be reported on the consolidated balance sheet?
Q2. How will the $40,000 ascribed to general unidentified intangible assets be reported on the consolidated balance sheet (account title and $amount)?
Q3. At what amount will buildings be reported on the consolidated balance sheet?
Q4. Briefly describe the accounting for goodwill subsequent to the acquisition.
Q5. What will be the total dollar amount of consolidated stockholders’ equity?
Problem II: GE reports the following in footnotes to its 2004 10-K:
We adopted Financial Accounting Standards Board (FASB) Interpretation No. (FIN) 46R, Consolidation of Variable Interest Entities (Revised), on January 1, 2004. The standard required us to consolidate investments previously accounted for as equity method, and added $2.6 billion of GECS assets and $2.1 billion of GECS liabilities to our consolidated balance sheet as of that date...This accounting change did not require an adjustment to earnings.
Briefly explain why this accounting change did not require an adjustment to earnings.