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Chapter 1
Introduction to
Business Combinations and the Conceptual Framework
Multiple Choice
1.
Stock
given as consideration for a business combination is valued at
a.
fair
market value
b.
par
value
c.
historical
cost
d.
None
of the above
2.
Which
of the following situations best describes a business combination to be
accounted for as a statutory merger?
- Both companies in a combination continue to
operate as separate, but related, legal entities.
- Only one of the combining companies survives
and the other loses its separate identity.
- Two companies combine to form a new third
company, and the original two companies are dissolved.
- One company transfers assets to another company
it has created.
3.
A
firm can use which method of financing for an acquisition structured as either
an asset or stock acquisition?
- Cash
- Issuing Debt
- Issuing Stock
- All of the above
4.
The
objectives of FASB 141R (Business Combinations) and FASB 160 (NonControlling
Interests in Consolidated Financial Statements) are as follows:
- to improve the relevance,
comparibility, and transparency of financial information related to
business combinations.
- to eliminate the
amortization of Goodwill.
- to facilitate the
convergence project of the FASB and the International Accounting Standards
Board.
- a and b only
5.
A
business combination in which the boards of directors of the potential
combining companies negotiate mutually agreeable terms is a(n)
- agreeable combination.
- friendly combination.
- hostile combination.
- unfriendly combination.
6.
A
merger between a supplier and a customer is a(n)
- friendly combination.
- horizontal combination.
- unfriendly combination.
- vertical combination.
7.
When
a business acquisition is financed using debt, the interest payments are tax
deductible and create
- operating synergy.
- international synergy.
- financial synergy.
- diversification synergy.
8.
The
defense tactic that involves purchasing shares held by the would-be acquiring
company at a price substantially in excess of their fair value is called
- poison pill.
- pac-man defense.
- greenmail.
- white knight.
9.
The
third period of business combinations started after World War II and is called
- horizontal integration.
- merger mania.
- operating integration.
- vertical integration.
10. A statutory ______________
results when one company acquires all the net assets of another company and the
acquired company ceases to exist as a separate legal entity.
- acquisition.
- combination.
- consolidation.
- merger.
11. When a new corporation is formed
to acquire two or more other corporations and the acquired corporations cease
to exist as separate legal entities, the result is a statutory
- acquisition.
- combination.
- consolidation.
- merger.
12. The excess of the amount offered
in an acquisition over the prior stock price of the acquired firm is the
- bonus.
- goodwill.
- implied offering price.
- takeover premium.
13. The difference between normal
earnings and expected future earnings is
- average earnings.
- excess earnings.
- ordinary earnings.
- target earnings.
14. The first step in estimating
goodwill in the excess earnings approach is to
- determine normal earnings.
- identify a normal rate of return for similar
firms.
- compute excess earnings.
- estimate expected future earnings.
15. A potential offering price for a
company is computed by adding the estimated goodwill to the
- book value of the company’s net assets.
- book value of the company’s net identifiable
assets.
- fair value of the company’s net assets.
- fair value of the company’s net identifiable
assets.
16. Estimated goodwill is determined
by computing the present value of the
- average earnings.
- excess earnings.
- expected future earnings.
- normal earnings.
17. Which of the following statements
would not be a valid or logical reason for entering into a business
combination?
- to increase market share.
- to avoid becoming a takeover target.
- to reduce risk by acquiring established product
lines.
- the operating costs of the combined entity
would be more than the sum of the separate entities.
18. The parent company concept of
consolidation represents the view that the primary purpose of consolidated
financial statements is:
- to provide information relevant to the
controlling stockholders.
- to represent the view that the affiliated
companies are a separate, identifiable economic entity.
- to emphasis control of the whole by a single
management.
- to include only a portion of the subsidiary’s
assets, liabilities, revenues, expenses, gains, and losses.
19. Which of the following statements
is correct?
- Total elimination is consistent with the parent
company concept.
- Partial elimination is consistent with the
economic unit concept.
- Past accounting standards required the total
elimination of unrealized intercompany profit in assets acquired from
affiliated companies.
- none of these.
20. Under the parent company concept,
consolidated net income __________ the consolidated net income under the
economic unit concept.
- is the same as
- is higher than
- is lower than
- can be higher or lower than
21. Under the economic unit concept,
noncontrolling interest in net assets is treated as
- a liability.
- an asset.
- stockholders' equity.
- an expense.
22. The parent company concept
adjusts subsidiary net asset values for the
- differences between cost and fair value.
- differences between cost and book value.
- total fair value implied by the price paid by
the parent.
- total cost implied by the price paid by the
parent.
23. According to the economic unit
concept, the primary purpose of consolidated financial statements is to provide
information that is relevant to
- majority stockholders.
- minority stockholders.
- creditors.
- both majority and minority stockholders.
24. Which of the following statements
is correct?
- The economic unit concept suggests partial
elimination of unrealized intercompany profits.
- The parent company concept suggests partial
elimination of unrealized intercompany profits.
- The economic unit concept suggests no
elimination of unrealized intercompany profits.
- The parent company concept suggests total
elimination of unrealized intercompany profits.
25. When following the parent company
concept in the preparation of consolidated financial statements, noncontrolling
interest in combined income is considered a(n)
- prorated share of the combined income.
- addition to combined income to arrive at
consolidated net income.
- expense deducted from combined income to arrive
at consolidated net income.
- deduction from current assets in the balance
sheet.
26. When following the economic unit
concept in the preparation of consolidated financial statements, the basis for
valuing the noncontrolling interest in net assets is the
- book values of subsidiary assets and
liabilities.
- fair values of subsidiary assets and
liabilities.
- general price level adjusted values of
subsidiary assets and liabilities.
- fair values of parent company assets and
liabilities.
27. The view that consolidated
financial statements represent those of a single economic entity with several
classes of stockholder interest is consistent with the
- parent company concept.
- current practice concept.
- historical cost company concept.
- economic unit concept.
28. The view that the noncontrolling
interest in income reflects the noncontrolling stockholders' allocated share of
consolidated income is consistent with the
- economic unit concept.
- parent company concept.
- current practice concept.
- historical cost company concept.
29. The view that only the parent
company's share of the unrealized intercompany profit recognized by the selling
affiliate that remains in assets should be eliminated in the preparation of
consolidated financial statements is consistent with the
- economic unit concept.
- current practice concept.
- parent company concept.
- historical cost company concept.
Problems
1-1 Perkins Company is considering the
acquisition of Barkley, Inc. To assess
the amount it might be willing to pay, Perkins makes the following computations
and assumptions.
A. Barkley, Inc. has identifiable assets with a
total fair value of $6,000,000 and liabilities of $3,700,000. The assets include office equipment with a
fair value approximating book value, buildings with a fair value 25% higher
than book value, and land with a fair value 50% higher than book value. The remaining lives of the assets are deemed
to be approximately equal to those used by Barkley, Inc.
B. Barkley, Inc.'s pretax incomes for the years
2009 through 2011 were $470,000, $570,000, and $370,000, respectively. Perkins believes that an average of these
earnings represents a fair estimate of annual earnings for the indefinite
future. However, it may need to consider adjustments for the following items included
in pretax earnings:
Depreciation on
Buildings (each year) 380,000
Depreciation on
Equipment (each year) 30,000
Extraordinary
Loss (year 2011) 130,000
Salary Expense
(each year)
170,000
C. The normal rate of return on net assets for
the industry is 15%.
Required:
A. Assume that Perkins feels that it must earn a
20% return on its investment, and that goodwill is determined by capitalizing
excess earnings. Based on these
assumptions, calculate a reasonable offering price for Barkley, Inc. Indicate how much of the price consists of
goodwill.
B. Assume that Perkins feels that it must earn a
15% return on its investment, but that average excess earnings are to be
capitalized for five years only. Based
on these assumptions, calculate a reasonable offering price for Barkley,
Inc. Indicate how much of the price
consists of goodwill.
1-2 Pierce Company is trying to decide
whether to acquire Hager Inc. The
following balance sheet for Hager Inc. provides information about book
values. Estimated market values are also
listed, based upon Pierce Company's appraisals.
Hager Inc. Hager
Inc.
Book Values Market Values
Current Assets $ 450,000 $ 450,000
Property, Plant &
Equipment (net) 1,140,000 1,300,000
Total Assets $1,590,000 $1,750,000
Total Liabilities $700,000 $700,000
Common Stock, $10 par
value 280,000
Retained Earnings 610,000
Total Liabilities and
Equities $1,590,000
Pierce Company expects that Hager will
earn approximately $290,000 per year in net income over the next five
years. This income is higher than the
14% annual return on tangible assets considered to be the industry
"norm."
Required:
A. Compute an estimation of goodwill based
on the information above that Pierce might be willing to pay (include in its
purchase price), under each of the following additional assumptions:
(1) Pierce is willing to pay for excess earnings for an expected life of
4 years (undiscounted).
(2) Pierce is willing to pay for excess earnings for an expected life of
4 years, which should be capitalized at the industry normal rate of return.
(3) Excess earnings are expected to last
indefinitely, but Pierce demands a higher rate of return of 20% because of the
risk involved.
B. Determine the amount of goodwill to be
recorded on the books if Pierce pays $1,300,000 cash and assumes Hager's
liabilities.
1-3 Pope Company acquired an 80% interest in
the common stock of Simon Company for $1,540,000 on July 1, 2011. Simon Company's stockholders' equity on that
date consisted of:
Common stock $800,000
Other
contributed capital 400,000
Retained
earnings 330,000
Required:
Compute the total noncontrolling
interest to be reported in the consolidated balance sheet assuming the:
(1) parent
company concept.
(2) economic
unit concept.
1-4 The following balances were taken from
the records of S Company:
Common stock
(1/1/11 and 12/31/11) $720,000
Retained
earnings 1/1/11 $160,000
Net income for
2011 180,000
Dividends
declared in 2011 (40,000)
Retained
earnings, 12/31/11 300,000
Total
stockholders' equity on 12/31/11 $1,020,000
P Company purchased 75% of S Company's
common stock on January 1, 2011 for $900,000.
The difference between implied value and book value is attributable to
assets with a remaining useful life on January 1, 2011 of ten years.
Required:
A. Compute the difference between cost/(implied)
and book value applying:
1. Parent company theory.
2. Economic unit theory.
B. Assuming the economic unit theory:
1. Compute noncontrolling interest in
consolidated income for 2011.
2. Compute noncontrolling interest in net assets
on December 31, 2011.
Short Answer
1. Estimating the value of goodwill to be
included in an offering price can be done under several alternative
methods. The excess earnings approach is
frequently used. Identify the steps used in this approach to estimate goodwill.
2. The two alternative views of
consolidated financial statements are the parent company concept and the
economic entity concept. Briefly explain
the differences between the concepts.
Short Answer
Questions in Textbook
1. Distinguish
between internal and external expansion of a firm.
2. List four
advantages of a business combination as compared to internal expansion.
3. What is the
primary legal constraint on business combinations? Why does such a constraint
exist?
4. Business
combinations may be classified into three types based upon the relationships
among the combining entities (e.g., combinations with suppliers, customers,
competitors, etc.). Identify and define these types.
5. Distinguish
among a statutory merger, a statutory consolidation, and a stock acquisition.
6. Define a tender
offer and describe its use.
7. When stock is
exchanged for stock in a business combination, how is the stock exchange ratio
generally expressed?
8. Define some
defensive measures used by target firms to avoid a takeover. Are these measures
beneficial for shareholders?
9. Explain the
potential advantages of a stock acquisition over an asset acquisition.
10. Explain the
difference between an accretive and a dilutive acquisition.
11. Describe the
difference between the economic entity concept and the parent company concept
approaches to the reporting of subsidiary assets and liabilities in the
consolidated financial statements on the date of the acquisition.
12. Contrast the consolidated effects of the parent
company concept and the economic entity con-cept in terms of:
(a)The treatment of noncontrolling
interests.
(b)The elimination of intercompany
profits.
(c)The valuation of subsidiary net
assets in the consolidated financial statements.
(d)The definition of consolidated net
income.
13. Under the economic entity concept, the net
as-sets of the subsidiary are included in the consolidated financial statements
at the total fair value that is implied by the price paid by the parent company
for its controlling interest. What practical or conceptual problems do you see
in this approach to valuation?
14. Is the economic entity or the parent concept
more consistent with the principles addressed in the FASB’s conceptual
framework? Explain your answer.
15. How does the FASB’s conceptual framework
influence the development of new standards?
16. What is the difference between net income, or
earnings, and comprehensive income?
Business Ethics
Questions from the Textbook
From
1999 to 2001, Tyco’s revenue grew approximately24% and it acquired over 700
companies. It was widely rumored that Tyco executives aggressively managed the
performance of the companies that they acquired by suggesting that before the
acquisition, they should accelerate the payment of liabilities, delay recording
the collections of revenue, and increase the estimated amounts in reserve
accounts.
1.
What
effect does each of the three items have on the reported net income of the
acquired company before the acquisition and on the reported net income of the
combined company in the first year of the acquisition and future years?
2.
What
effect does each of the three items have on the cash from operations of the
acquired company before the acquisition and on the cash from operations of the
combined company in the first year of the acquisition and future years?
3.
If
you are the manager of the acquired company, how do you respond to these
suggestions?
4. Assume that all
three items can be managed within the rules provided by GAAP but would be
regarded by many as pushing the limits of GAAP.Is there an ethical issue?
Describe your position as: (A) an accountant for the target company and (B) as
an accountant for Tyco.
Chapter 2
Accounting for
Business Combinations
Multiple Choice
1. SFAS 141R requires that all business
combinations be accounted for using
a. the pooling of interests method.
b. the acquisition method.
c. either the acquisition or the pooling of
interests methods.
d.
neither
the acquisition nor the pooling of interests methods.
2. Under the acquisition method, if the
fair values of identifiable net assets exceed the value implied by the purchase
Pratt of the acquired company, the excess should be
a. accounted for as goodwill.
b. allocated to reduce current and long-lived
assets.
c. allocated to reduce current assets and
classify any remainder as an extraordinary gain.
d. allocated to reduce any previously recorded
goodwill and classify any remainder as an ordinary gain.
3. In a period in which an impairment loss
occurs, SFAS No. 142 requires each of the following note disclosures except
a. a description of the facts and circumstances
leading to the impairment.
b. the amount of goodwill by reporting segment.
c. the method of determining the fair value of
the reporting unit.
d. the amounts of any adjustments made to
impairment estimates from earlier periods, if significant.
4. Once a reporting unit is determined to
have a fair value below its carrying value, the goodwill impairment loss is
computed by comparing the
a. fair value of the reporting unit and the fair
value of the identifiable net assets.
b. carrying value of the goodwill to its implied
fair value.
c. fair value of the reporting unit to its
carrying amount (goodwill included).
d. carrying value of the reporting unit to the
fair value of the identifiable net assets.
5. SFAS 141R requires that the acquirer
disclose each of the following for each material business combination except
the
a. name and a description of the acquiree.
b. percentage of voting equity instruments
acquired.
c. fair value of the consideration transferred.
d. Each of the above is a required disclosure
6. In a leveraged buyout, the portion of
the net assets of the new corporation provided by the management group is
recorded at
a. appraisal value.
b. book value.
c. fair value.
d. lower of cost or market.
7. When the acquisition price of an acquired
firm is less than the fair value of the identifiable net assets, all of the
following are recorded at fair value except
a. Assumed liabilities.
b. Current assets.
c. Long-lived assets.
d. Each of the above is recorded at fair value.
8. Under SFAS 141R,
a. both direct and indirect costs are to be
capitalized.
b. both direct and indirect costs are to be
expensed.
c. direct costs are to be capitalized and
indirect costs are to be expensed.
d. indirect costs are to be capitalized and
direct costs are to be expensed.
9. A business combination is accounted for
properly as an acquisition. Which of the
following expenses related to effecting the business combination should enter
into the determination of net income of the combined corporation for the period
in which the expenses are incurred?
Security Overhead allocated
issue costs to the merger
a. Yes Yes
b. Yes No
c. No Yes
d. No No
10. In a business combination, which of the
following costs are assigned to the valuation of the security?
Professional or Security
consulting fees issue costs
a. Yes Yes
b. Yes No
c. No Yes
d. No No
11. Par Company and Sub Company were combined
in an acquisition transaction. Par was
able to acquire Sub at a bargain Pratt. The sum of the fair values of identifiable
assets acquired less the fair value of liabilities assumed exceeded the cost to
Par. After eliminating previously
recorded goodwill, there was still some "negative goodwill." Proper accounting treatment by Par is to
report the amount as
a. paid-in capital.
b. a deferred credit, which is amortized.
c. an ordinary gain.
d. an extraordinary gain.
12. With an acquisition, direct and indirect
expenses are
a. expensed in the period incurred.
b. capitalized and amortized over a
discretionary period.
c. considered a part of the total cost of the
acquired company.
d. charged to retained earnings when incurred.
13. In a business combination accounted for
as an acquisition, how should the excess of fair value of net assets acquired
over the consideration paid be treated?
a. Amortized as a credit to income over a period
not to exceed forty years.
b. Amortized as a charge to expense over a
period not to exceed forty years.
c. Amortized directly to retained earnings over
a period not to exceed forty years.
d. Recorded as an ordinary gain.
14. P Corporation issued 10,000 shares of
common stock with a fair value of $25 per share for all the outstanding common
stock of S Company in a business combination properly accounted for as an
acquisition. The fair value of S
Company's net assets on that date was $220,000.
P Company also agreed to issue an additional 2,000 shares of common
stock with a fair value of $50,000 to the former stockholders of S Company as
an earnings contingency. Assuming that
the contingency is expected to be met, the $50,000 fair value of the additional
shares to be issued should be treated as a(n)
a. decrease in noncurrent liabilities of S
Company that were assumed by P Company.
b. decrease in consolidated retained earnings.
c. increase in consolidated goodwill.
d. decrease in consolidated other contributed
capital.
15. On February 5, Pryor Corporation paid
$1,600,000 for all the issued and outstanding common stock of Shaw, Inc., in a
transaction properly accounted for as an acquisition. The book values and fair values of Shaw's
assets and liabilities on February 5 were as follows
Book
Value Fair Value
Cash $ 160,000 $ 160,000
Receivables
(net) 180,000 180,000
Inventory 315,000 300,000
Plant and
equipment (net) 820,000 920,000
Liabilities (350,000)
(350,000)
Net assets $1,125,000 $1,210,000
What is the
amount of goodwill resulting from the business combination?
a. $-0-.
b. $475,000.
c. $85,000.
d. $390,000.
16. P Company purchased the net assets of S
Company for $225,000. On the date of P's
purchase, S Company had no investments in marketable securities and $30,000
(book and fair value) of liabilities.
The fair values of S Company's assets, when acquired, were
Current assets $
120,000
Noncurrent assets 180,000
Total $300,000
How should the $45,000 difference
between the fair value of the net assets acquired ($270,000) and the
consideration paid ($225,000) be accounted for by P Company?
a. The noncurrent assets should be recorded at $
135,000.
b. The $45,000 difference should be credited to
retained earnings.
c. The current assets should be recorded at
$102,000, and the noncurrent assets should be recorded at $153,000.
d.
An
ordinary gain of $45,000 should be recorded.
17. If the value implied by the purchase
price of an acquired company exceeds the fair values of identifiable net
assets, the excess should be
a.
allocated
to reduce any previously recorded goodwill and classify any remainder as an
ordinary gain.
b.
allocated
to reduce current and long-lived assets.
c.
allocated
to reduce long-lived assets.
d.
accounted
for as goodwill.
18. P Co. issued 5,000 shares of its common
stock, valued at $200,000, to the former shareholders of S Company two years
after S Company was acquired in an all-stock transaction. The additional shares were issued because P
Company agreed to issue additional shares of common stock if the average post
combination earnings over the next two years exceeded $500,000. P Company will treat the issuance of the
additional shares as a (decrease in)
a.
consolidated
retained earnings.
b.
consolidated
goodwill.
c.
consolidated
paid-in capital.
d.
non-current
liabilities of S Company assumed by P Company.
19. In a business combination in which the
total fair value of the identifiable assets acquired over liabilities assumed is
greater than the consideration paid, the excess fair value is:
a.
classified
as an extraordinary gain.
b.
allocated
first to eliminate any previously recorded goodwill, and any remaining excess
over the consideration paid is classified as an ordinary gain.
c.
allocated
first to reduce proportionately non-current assets then to non-monetary current
assets, and any remaining excess over cost is classified as a deferred credit.
d.
allocated
first to reduce proportionately non-current, depreciable assets to zero, and any
remaining excess over cost is classified as a deferred credit.
20. The first step in determining goodwill
impairment involves comparing the
a.
implied
value of a reporting unit to its carrying amount (goodwill excluded).
b.
fair
value of a reporting unit to its carrying amount (goodwill excluded).
c.
implied
value of a reporting unit to its carrying amount (goodwill included).
d.
fair
value of a reporting unit to its carrying amount (goodwill included).
21. If an impairment loss is recorded on
previously recognized goodwill due to the transitional goodwill impairment
test, the loss should be treated as a(n):
a.
loss
from a change in accounting principles.
b.
extraordinary
loss
c.
loss
from continuing operations.
d.
loss
from discontinuing operations.
22. P Company acquires all of the voting
stock of S Company for $930,000 cash.
The book values of S Company’s assets are $800,000, but the fair values
are $840,000 because land has a fair value above its book value. Goodwill from the combination is computed as:
a.
$130,000.
b.
$90,000.
c.
$40,000.
d.
$0.
23. Under SFAS 141R, what value of the assets
and liabilities are reflected in the financial statements on the acquisition
date of a business combination?
a.
Carrying
value
b.
Fair
value
c.
Book
value
d.
Average
value
Use
the following information to answer questions 24 & 25.
Pratt
Company issued 24,000 shares of its $20 par value common stock for the net
assets of Sele Company in business combination under which Sele Company will be
merged into Pratt Company. On the date
of the combination, Pratt Company common stock had a fair value of $30 per
share. Balance sheets for Pratt Company
and Sele Company immediately prior to the combination were as follows:
Pratt
Sele
Current Assets $1,314,000 $192,000
Plant and Equipment (net) 1,725,000 408,000
Total $3,039,000 $600,000
Liabilities $ 900,000 $150,000
Common Stock, $20 par value 1,650,000 240,000
Other Contributed Capital 218,000 60,000
Retained Earnings 271,000
150,000
Total $3,039,000 $600,000
24. If the business combination is treated as
an acquisition and Sele Company’s net assets have a fair value of $686,400,
Pratt Company’s balance sheet immediately after the combination will include
goodwill of
a.
$30,600.
b.
$38,400.
c.
$33,600.
d.
$56,400.
25. If the business combination is treated as
an acquisition and the fair value of Sele Company’s current assets is $270,000,
its plant and equipment is $726,000, and its liabilities are $168,000, Pratt
Company’s financial statements immediately after the combination will include
a.
Negative
goodwill of $108,000.
b.
Plant
and equipment of $2,133,000.
c.
Plant
and equipment of $2,343,000.
d.
An
ordinary gain of $108,000.
26. On May 1, 2011, the Phil Company paid
$1,200,000 for 80% of the outstanding common stock of Sage Corporation in a transaction
properly accounted for as an acquisition.
The recorded assets and liabilities of Sage Corporation on May 1, 2011,
follow:
Cash $100,000
Inventory 200,000
Property &
equipment (Net of accumulated depreciation) 800,000
Liabilities (160,000)
On May 1, 2011, it was determined that
the inventory of Sage had a fair value of $220,000 and the property and
equipment (net) has a fair value of $1,200,000.
What is the amount of goodwill resulting from the business combination?
a.
$0.
b.
$112,000.
c.
$140,000.
d.
$28,000.
Use
the following information to answer questions 27 & 28.
Posch
Company issued 12,000 shares of its $20 par value common stock for the net
assets of Sato Company in a business combination under which Sato Company will
be merged into Posch Company. On the
date of the combination, Posch Company common stock had a fair value of $30 per
share. Balance sheets for Posch Company
and Sato Company immediately prior to the combination were as follows:
Posch
Sato
Current Assets $ 657,000 $ 96,000
Plant and Equipment (net) 863,000
204,000
Total $1,520,000 $300,000
Liabilities $ 450,000 $ 75,000
Common Stock, $20 par value 825,000 120,000
Other Contributed Capital 109,000 30,000
Retained Earnings 136,000
75,000
Total $1,520,000 $300,000
27. If the business combination is treated as
an acquisition and Sato Company’s net assets have a fair value of $343,200,
Posch Company’s balance sheet immediately after the combination will include
goodwill of
a.
$15,300.
b.
$19,200.
c.
$16,800.
d.
$28,200.
28. If the business combination is treated as
an acquisition and the fair value of Sato Company’s current assets is $135,000,
its plant and equipment is $363,000, and its liabilities are $84,000, Posch
Company’s financial statements immediately after the combination will include
a.
Negative
goodwill of $54,000.
b.
Plant
and equipment of $1,226,000.
c.
Plant
and equipment of $1,172,000.
d.
An
extraordinary gain of $54,000.
29. Following its acquisition of the net assets
of Sandy Company, Potter Company assigned goodwill of $60,000 to one of the
reporting divisions. Information for this division follows:
|
Carrying Amount
|
Fair Value
|
|||||
Cash
|
$ 20,000
|
$20,000
|
|||||
Inventory
|
35,000
|
40,000
|
|||||
Equipment
|
125,000
|
160,000
|
|||||
Goodwill
|
60,000
|
|
|||||
Accounts
Payable
|
30,000
|
30,000
|
|||||
|
|
|
|||||
Based on the preceding information, what amount of goodwill will
be reported for this division if its fair value is determined to be
$200,000?
a.
$0
b.
$60,000
c.
$30,000
d.
$10,000
30. The fair value of net identifiable assets exclusive
of goodwill of a reporting unit of X Company is $300,000. On X Company's books,
the carrying value of this reporting unit's net assets is $350,000, including
$60,000 goodwill. If the fair value of the reporting unit is $335,000, what
amount of goodwill impairment will be recognized for this unit?
a.
$0
b.
$10,000
c.
$25,000
d.
$35,000
31. The fair value of net identifiable assets
of a reporting unit exclusive of goodwill of Y Company is $270,000. The
carrying value of the reporting unit's net assets on Y Company's books is
$320,000, including $50,000 goodwill. If the reported goodwill impairment for
the unit is $10,000, what would be the fair value of the reporting unit?
a.
$320,000
b.
$310,000
c.
$270,000
d.
$290,000
32. Potter Corporation acquired Sims Company through
an exchange of common shares. All of Sims’ assets and liabilities were
immediately transferred to Potter.
Potter Company’s common stock was trading at $20 per share at the time
of exchange. The following selected information is also available:
Potter Company
|
Before Acquisition
|
After Acquisition
|
Par value of
shares outstanding
|
$200,000
|
$250,000
|
Additional
Paid in Capital
|
350,000
|
550,000
|
What
number of shares was issued at the time of the exchange?
a.
5,000
b.
17,500
c.
12,500
d.
10,000
Problems
2-1 Balance sheet information for Seitz
Corporation at January 1, 2011, is summarized as follows:
Current
assets $ 920,000 Liabilities
$ 1,200,000
Plant
assets 1,800,000 Capital
stock $10 par 800,000
Retained
earnings 720,000
$2,720,000 $ 2,720,000
Seitz’s assets and liabilities are
fairly valued except for plant assets that are undervalued by $200,000. On January 2, 2011, Pell Corporation issues
80,000 shares of its $10 par value common stock for all of Seitz’s net assets
and Seitz is dissolved. Market
quotations for the two stocks on this date are:
Pell
common: $28
Seitz
common: $19
Pell pays the following fees and
costs in connection with the combination:
Finder’s fee $10,000
Costs of registering and
issuing stock 5,000
Legal and accounting
fees 6,000
Required:
A.
Calculate
Pell’s investment cost of Seitz Corporation.
B.
Calculate
any goodwill from the business combination.
2-2 Peterson Corporation purchased the net
assets of Scarberry Corporation on January 2, 2011 for $560,000 and also paid
$20,000 in direct acquisition costs.
Scarberry’s balance sheet on January
1, 2011 was as follows:
1, 2011 was as follows:
Accounts receivable-net $ 180,000 Current liabilities $
70,000
Inventory
360,000 Long
term debt 160,000
Land 40,000 Common
stock ($1 par) 20,000
Building-net
60,000 Paid-in
capital 430,000
Equipment-net 80,000 Retained
earnings 40,000
Total assets $
720,000 Total liab.
& equity $ 720,000
Fair values agree with book values
except for inventory, land, and equipment, which have fair values of $400,000,
$50,000 and $70,000, respectively.
Scarberry has patent rights valued at $20,000.
Required:
A. Prepare
Peterson’s general journal entry for the cash purchase of Scarberry’s net
assets.
B. Assume Peterson
Corporation purchased the net assets of Scarberry Corporation for $500,000
rather than $560,000, prepare the general journal entry.
2-3 Pyle Company acquired the assets (except
cash) and assumed the liabilities of Sand Company on January 1, 2011, paying
$2,600,000 cash. Immediately prior to the acquisition, Sand Company's balance
sheet was as follows:
BOOK
VALUE FAIR VALUE
Accounts receivable (net) $
240,000 $ 220,000
Inventory 290,000 320,000
Land 960,000 1,508,000
Buildings (net) 1,020,000 1,392,000
Total $2,510,000 $3,440,000
Accounts payable $ 270,000 $ 270,000
Note payable 600,000 600,000
Common stock, $5 par 420,000
Other contributed capital 640,000
Retained earnings 580,000
Total $2,510,000
Pyle Company agreed to pay Sand
Company's former stockholders $200,000 cash in 2012 if post- combination
earnings of the combined company reached $1,000,000 during 2011.
Required:
A. Prepare the journal entry necessary for Pyle
Company to record the acquisition on January 1, 2011. It is expected that the earnings target is
likely to be met.
B. Prepare the journal entry necessary for Pyle
Company in 2012 assuming the earnings contingency was not met.
2-4 Condensed balance sheets for Payne
Company and Sigle Company on January 1, 2011 are as follows:
Payne Sigle
Current Assets $ 440,000 $200,000
Plant and Equipment (net)
1,080,000 340,000
Total Assets $1,520,000 $540,000
Total Liabilities $ 230,000 $ 80,000
Common Stock, $10 par value 840,000 240,000
Other Contributed Capital 300,000 130,000
Retained Earnings 150,000 90,000
Total Equities $1,520,000 $540,000
On January 1, 2011 the stockholders of
Payne and Sigle agreed to a consolidation whereby a new corporation, Lawson
Company, would be formed to consolidate Payne and Sigle. Lawson Company issued 70,000 shares of its $20
par value common stock for the net assets of Payne and Sigle. On the date of
consolidation, the fair values of Payne's and Sigle's current assets and
liabilities were equal to their book values.
The fair value of plant and equipment for each company was: Payne,
$1,270,000; Sigle, $360,000.
An investment banking house estimated that
the fair value of Lawson Company's common stock was $35 per share. Payne will incur $45,000 of direct
acquisition costs and $15,000 in stock issue costs.
Required:
Prepare the journal entries to record
the consolidation on the books of Lawson Company assuming that the
consolidation is accounted for as an acquisition.
2-5
The
stockholders’ equities of P Corporation and S Corporation were as follows on
January 1, 2011:
P Corp. S Corp.
Common Stock, $1 par $1,000,000 $ 600,000
Other Contributed
Capital 2,800,000 1,100,000
Retained Earnings 600,000
340,000
Total Stockholders’ Equity $4,400,000 $2,040,000
On January 2, 2011 P Corp. issued
100,000 of its shares with a market value of $14 per share in exchange for all
of S’s shares, and S Corp. was dissolved.
P Corp. paid $10,000 to register and issue the new common shares.
Required:
Prepare the stockholders’ equity section
of P Corp. balance sheet after the business combination on January 2, 2011.
2-6 The managers of Petty Company own 10,000
of its 100,000 outstanding common shares.
Swann Company is formed by the managers of Petty Company to take over
Petty Company in a leveraged buyout. The
managers contribute their shares in Petty Company and Swann Company then
borrows $675,000 to purchase the remaining 90,000 shares of Petty Company for
$600,000; the remaining $75,000 is used for working capital. Petty Company is then merged into Swann Company
effective January 1, 2011. Data relevant
to Petty Company immediately prior to the leveraged buyout follow:
Book
Value Fair Value
Current Assets $ 90,000 $ 90,000
Plant Assets 255,000 525,000
Liabilities
(45,000) (45,000)
Stockholders' Equity $300,000 $570,000
Required:
A. Prepare journal entries on Swann Company's
books to reflect the effects of the leveraged buyout.
B. Determine the balance of each of the following
immediately after the merger:
1. Current Assets
2. Plant Assets
3. Note Payable
4. Common Stock
2-7 On January 1, 2010, Presley Company
acquired the net assets of Sill Company for $1,580,000 cash. The fair value of Sill’s identifiable net
assets was $1,310,000 on his date. Presley
Company decided to measure goodwill impairment using the present value of
future cash flows to estimate the fair value of the reporting unit (Sill). The information for these subsequent years is
as follows:
|
|
|
Carrying value
of
|
Fair Value
|
|
|
Present value
|
Sill’s
Identifiable
|
Sill’s
Identifiable
|
|
Year
|
of
Future Cash Flows
|
Net
Assets*
|
Net
Assets
|
|
2011
|
$1,400,000
|
$1,160,000
|
$1,190,000
|
|
2012
|
$1,400,000
|
$1,120,000
|
$1,210,000
|
* Identifiable
net assets do not include goodwill.
Required:
A: For each year determine
the amount of goodwill impairment, if any.
B: Prepare the journal
entries needed each year to record the goodwill impairment (if any) on
Presley’s books.
2-8 The following balance sheets were
reported on January 1, 2011, for Piper Company and Sieler Company:
Piper Sieler
Cash $ 150,000 $ 30,000
Inventory 450,000 150,000
Equipment (net) 1,320,000 570,000
Total $1,920,000 $750,000
Total liabilities $ 450,000 $150,000
Common stock, $20 par
value 600,000 300,000
Other contributed
capital 375,000 105,000
Retained earnings 495,000 195,000
Total $1,920,000 $750,000
Required:
Appraisals reveal that the inventory
has a fair value $180,000, and the equipment has a current value of
$615,000. The book value and fair value
of liabilities are the same. Assuming
that Piper Company wishes to acquire Sieler for cash in an asset acquisition,
determine the following cutoff amounts:
A. The purchase price above which Piper would
record goodwill.
B. The purchase price at which Piper would record
a $50,000 gain.
C. The purchase price below which Piper would
obtain a “bargain.”
D. The purchase price at which Piper would record
$75,000 of goodwill.
Short Answer
1. SFAS No. 142 requires that goodwill
impairment be tested annually for each reporting unit. Discuss the necessary steps of the goodwill
impairment test.
2. Briefly describe the different treatment
under SFAS 141 vs. SFAS 141R for the following issues:
a.
Business
definition
b.
Acquisitions
costs
c.
In-process
R&D
d.
Contingent
consideration
Short Answer
Questions from the Textbook
1. When contingent
consideration in an acquisition is based on security prices, how should this
contingency be reflected on the acquisition date? If the estimate changes
during the measurement period, how is this handled? If the estimate changes
after the end of the measurement period, how is this adjustment handled? Why?
2. What are pro
forma financial statements? What is their purpose?
3. How would a
company determine whether goodwill has been impaired?
4. AOL announced
that because of an accounting change (FASB Statements Nos. 141R [ASC 805]
and142 [ASC 350]), earnings would be increasing 2002, Veritas Software
Corporation’s CFO resigned after claiming to have an MBA from Stanford
University. On the other hand, Bausch & Lomb Inc.’s board re-fused the CEO’s
offer to resign following a questionable claim to have an MBA. Suppose you have
been retained by the board of a company where the CEO has ‘overstated’
credentials. This company has a code of ethics and conduct which over the next
25 years by $5.9 billion a year. What change(s) required by FASB (in SFAS Nos.
141Rand 142) resulted in an increase in AOL’s in-come? Would you expect this
increase in earnings to have a positive impact on AOL’s stock price? Why or why
not?
Business Ethics Question from Textbook
There
have been several recent cases of a CEO or CFO resigning or being ousted for
misrepresenting academic credentials. For instance, during February 2006,the
CEO of RadioShack resigned by ‘mutual agreement’ for inflating his educational
background. During states that the employee should always do “the right
thing.”(a) What is the board of directors’ responsibility in such matters?(b)
What arguments would you make to ask the CEO to
resign? What damage might be caused if the decision is made to retain
the current CEO?
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