The board of directors of Banking Enterprises, Inc., a holding company with 25 subsidiary federally chartered banks, has offered $2,500,000 to Mary Phillips, the 40% minority stockholder of Bank of Provence, for the entire 40% interest, which has a carrying amount of $1,800,000 in the consolidated balance sheet of Banking Enterprises, Inc. and subsidiaries. In a discussion of the appropriate accounting for the $700,000 difference between the amount offered and the carrying amount, Banking`s chief financial officer, Wendell Casey, supports recognition of goodwill. However, controller John Winston of Banking Enterprises, Inc., believes that some of the $700,000represents a greenmail-type loss, and should be recognized as such. In an appearance before Banking”s board, both Casey and Winston argue their positions forcefully. The board instructs the two men to consult with the engagement partner of Banking”s independent auditing firm, Crandall & Lowe, CPAs, to resolve the matter.
Ø Assume you are the above-described partner of Crandall & Lowe, CPAs. How would you resolve the dispute between Wendell Casey and John Winston? Explain, including mention of the additional information you would need.
In a classroom discussion of accounting standards for consolidated financial statements, student Tigist questioned the propriety of displaying dividends payable to minority stockholders of a partially owned subsidiary as a liability in the consolidated balance sheet.
She pointed out that, under the economic unit concept of consolidated financial statements, the minority interest in net assets of subsidiary is displayed with stockholders’ equity in the consolidated balance sheet, and that dividends payable to minority stockholders clearly area part of the interest of those stockholders in the net assets of the subsidiary. In response, student Carl contended that dividends payable to minority stockholders unquestionably meet the definition of liabilities in paragraph 35 of Statement of Financial Accounting Concepts No. 6, “Elements of Financial Statements.”
Ø Do you support the view of student Tigist or of student Carl? Explain.
3On February 15, 2005, officers of Sun Corporation agreed with George Merlo, sole stockholder of Merlo Company and Merlo Industries, Inc., to acquire all his common stock ownership in 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 February 28, 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 Merlo signed a “letter agreement” not to dispose of the Sun common stock he received, the business combination was not subject to the jurisdiction of the SEC. Out-of-pocket costs of the 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.|
|Basic earnings per share|
The controller of Sun prepared the following condensed journal entries to record the merger on February 28, 2005:
Assets other than goodwill 600,000
Common Stock 10,000
Common Stock to Be Issued 20,000
Paid-in Capital in Excess of Par 280,000
To record merger with Merlo Company, with identifiable assets and liabilities recorded at current fair values and goodwill recognized.
Payable to George Merlo 250,000
To record merger with Merlo Industries, Inc., with assets and liabilities of Merlo Industries, Inc., recorded at current fair values and goodwill recognized.
Ø Do you concur with the controller’s journal entries? Explain