You have been engaged to audit the financial statements of Solamente Corporation for the fiscal year ended May 31, 2005. You discover that on June 1, 2004, Mika Company had been merged into Solamente in a business combination. You also find that both Solamente and Mika (prior to its liquidation) incurred legal fees, accounting fees, and printing costs for the business combination; both companies debited those costs to an intangible asset ledger account entitled “Cost of Business Combination.” In its journal entry to record the business combination with Mika, Solamente increased its Cost of Business Combination account by an amount equal to the balance of Mika’s comparable ledger account.InstructionsEvaluate Solamente’s accounting for the out-of-pocket costs of the business combination with Mika in light of IFRS and GAAP guidelines.
Case .2You are the controller of Software Company, a distributor of computer software, which is planning to acquire a portion of the net assets of a product line of Midge Company, a competitor enterprise. The projected acquisition cost is expected to exceed substantially the current fair value of the identifiable net assets to be acquired, which the competitor has agreed to sell because of its substantial net losses of recent years. The board of directors of Software asks if the excess acquisition cost may appropriately be recognized as goodwill.InstructionsPrepare a memorandum to the board of directors an answer to the question, after consulting the guidelines issued by either FASB or IASB
Case .3On February 15, 2005, officers of Shane 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: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 Shane 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.$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 Shane on February 28, 2005, and were to continue operations after that date as divisions of Shane. George Merlo also agreed not to compete with Shane 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 Shane 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: