Group assignment on Business Combinations
FOR SOLUTION OF THE BELOW CASE STUDIES, VISIT AND ASK IT AT ESSAYTUTORS.NET Group assignment on Business Combinations Case .1 You have been engaged to audit the financial statements of Solamente Corporation for thefiscal year ended May 31, 2010. You discover that on June 1, 2009, Mika Company hadbeen merged into Solamente in a business combination. You also find that both Solamenteand Mika (prior to its liquidation) incurred legal fees, accounting fees, and printing costsfor the business combination; both companies debited those costs to an intangible assetledger account entitled “Cost of Business Combination.” In its journal entry to record thebusiness combination with Mika, Solamente increased its Cost of Business Combinationaccount by an amount equal to the balance of Mika’s comparable ledger account. Instructions Evaluate Solamente’s accounting for the out-of-pocket costs of the business combination with Mika in light of IFRS and GAAP guidelines. Case .2 You are the controller of Software Company, a distributor of computer software, which isplanning to acquire a portion of the net assets of a product line of Midge Company, a competitorenterprise. The projected acquisition cost is expected to exceed substantially the currentfair value of the identifiable net assets to be acquired, which the competitor has agreedto sell because of its substantial net losses of recent years. The board of directors of Softwareasks if the excess acquisition cost may appropriately be recognized as goodwill. Instructions Prepare a memorandum to the board of directors an answer to the question, after consulting the guidelines issued by either FASB or IASB Case .3 On February 15, 2005, officers of Sun Corporation agreed with George Merlo, sole stockholderof Merlo Company and Merlo Industries, Inc., to acquire all his common stock ownershipin the two companies as follows: 1. 10,000 shares of Shane’s $1 par common stock (current fair value $30 a share) would be issued to George Merlo on February 28, 2005, for his 1,000 shares of $10 par common stock of Merlo Company. In addition, 20,000 shares of Sun common stock would be issued to George Merlo on February 28, 2010, if aggregate net income of Merlo Company for the five-year period then ended exceeded $300,000. 2. $250,000 cash would be paid to George Merlo on February 28, 2005, for his 10,000 shares of $1 par common stock of Merlo Industries, Inc. In addition $250,000 in cash would be paid to George Merlo on February 28, 2010, if aggregate net income of Merlo Industries, Inc., for the five-year period then ended exceeded $300,000. Both Merlo Company and Merlo Industries, Inc., were to be merged into Sun on February28, 2005, and were to continue operations after that date as divisions of Sun.George Merlo also agreed not to compete with Sun for the period March 1, 2005,through February 28, 2010. Because the merger was negotiated privately and George Merlosigned a “letter agreement” not to dispose of the Sun common stock he received, thebusiness combination was not subject to the jurisdiction of the SEC. Out-of-pocket costs ofthe business combination may be disregarded. Selected financial statement data of the three constituent companies as of February 28, 2005 (prior to the merger), were as follows: Sun Corporation Merlo Company Merlo Industries, Inc. Total assets $25,000,000 $ 500,000 $ 600,000 Stockholders’ equity 10,000,000 200,000 300,000 Net sales 50,000,000 1,500,000 2,500,000 Basic earnings per share 5 30 3 The controller of Sun prepared the following condensed journal entries to record themerger
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