aa2e_hal_testbank_ch02.docx

Chapter 2 Introduction to the Consolidation Process Learning Objectives – Coverage by question Multiple Choice LO1 – LO1 – Explain the guidelines for

determining the existence of “control.”

Exercises

Problems

1, 2, 12, 13, 14,15

LO2 – LO2 – Explain the consolidation process

on the date of acquisitions when price equals book. LO3 – LO3 – Explain the consolidation process

on the date of acquisitions when price exceeds book.

37, 38

16, 21, 22, 23, 24, 25, 27, 28, 29, 30, 31, 32, 33, 34, 35, 36, 39, 40

1

1, 2, 4, 5

2, 3, 4

LO4 – LO4 – Explain the measurement of

identifiable assets acquired, liabilities assumed and goodwill in business combinations.

11

LO5 – LO5 – Explain when deferred taxes are

recorded in business combinations and the effect of deferred taxes on the recognition of business combinations.

3, 4, 5, 6, 9, 10, 17, 18, 19, 20

3, 6

Appendix 2A – 2A – Measuring Assets

Acquired and Liabilities Assumed (Advanced).

Test Bank, Chapter 2

7, 8, 18, 26

©Cambridge Business Publishers, 2014 2-1

Chapter 2: Introduction to the Consolidation Process

Multiple Choice Multiple Choice – Theory Topic: Distinguishing Business Combination from Asset Acquisition LO: 1 1. All of the following are necessary to distinguish a business combination from a simple asset

acquisition except: a. The entity has initiated planned activities. b. The entity has human and material resources, as well as intellectual property. c. The entity has begun to generate revenues. d. The entity entity will be able to obtain access to customers. customers. Answer: c

Topic: Indicators of “Control” LO: 1 2. When an investor is deemed to have "control" over an investee, GAAP requires presentation of

consolidated financial statements. Which of the following would not be considered an indicator of control? a. The investor has majority interest in the investee. b. The investor owns 40% of the investee's stock and and the rest is owned by the investee's founder. c. The investor owns 40% of the investee's stock and the rest is owned by a large number of small investors. d. Instead of owning stock, a company licenses technology to another company in an agreement allowing the licensor to appoint a majority of the licensee's board of directors. Answer: b

Topic: Acquisition-Related Costs LO: 5 3. Acquisition-related costs incurred by b y the investor for services provided by outside accountants, as

well as the investor's employees, are: a. Expensed immediately b. Expensed if indirect, but capitalized if direct c. Capitalized, subject to impairment testing, but not amortization d. Capitalized, subject subject to both both amortization and impairment testing Answer: a


Advanced Accounting, 2nd Edition

Topic: Stock Issuance Costs LO: 5 4. Stock issuance costs are:

a. b. c. d.

Treated the same as acquisition-related costs Debited to the Equity Investment account Debited to the Common Stock account Treated as a reduction in additional paid-in capital

Answer: d

Topic: Acquired Research and Development Costs LO: 5 5. In-process intangible research and development costs incurred in a business combination are:

a. b. c. d.

Expensed, consistent with the accounting treatment of a firm's own R & D expenditures Debited to The Equity Investment account Recorded as indefinite-lived intangible assets, subject to amortization Included in the annual Goodwill impairment tests

Answer: d

Topic: Restructuring Costs LO: 5 6. Often, the investor or investee will adopt a restructuring plan to achieve certain synergies from

the acquisition. Certain restructuring costs are required for implementation of such a plan. Which of the following statements correctly describes the GAAP treatment of such costs? a. A liability for restructuring costs expected to be incurred is included in the purchase price allocation at date of acquisition. b. If a restructuring plan is not already in place, the liability and related expense must be recognized subsequent to the acquisition. c. Costs that the investor is not legally obligated to incur may be accrued at the acquisition date or expensed as incurred. d. Recognizing a restructuring obligation at date of acquisition results in early recognition of expense. Answer: b

Topic: Preacquisition Contingencies LO: Appendix 7. Accounting standards require that a portion of the cost of an acquired company be allocated to

investee liabilities. However, often in the case of pre-existing contingent liabilities, the amounts may be unknown at the acquisition date. What are the general financial reporting requirements for the consolidated statements at date of acquisition? a. If the fair value of a pre-existing contingent liability is unknown, the liability should not be recognized. b. A contingent liability would not be recognized unless the loss was "probable." c. Contingencies meeting the "possible" threshold would be disclosed, not accrued. d. All of the above statements are true. Answer: d



Topic: Contingent Consideration LO: Appendix 8. Acquisition agreements sometimes include a provision requiring an increase in the cash price

contingent upon investee's profits exceeding a specified level within a certain time period. Regarding the contingent consideration, acquisition accounting requires at acquisition date: a. Recognition of a liability in the amount expected to be ultimately paid b. Recognition of a liability at its fair value, resulting in an increase in goodwill c. No disclosure of the contingent consideration because of the high degree of uncertainty d. Recognition of a liability at its fair value, but with no effect on the purchase price Answer: b

Topic: Measurement of Goodwill LO: 5 9. Which of the following statements best describes how goodwill is measured? a. Acquisition price – goodwill = fair value of net tangible assets b. Acquisition price – fair value of net tangible assets = goodwill c. Acquisition price – fair value of net tangible assets – fair value of identifiable intangible assets

= goodwill. d. Acquisition price – book value of net assets = goodwill Answer: c

Topic: Intangible Assets LO: 5 10. Which of the following statements is incorrect regarding the recognition of intangible assets in a

business combination? a. Intangible assets arising from contractual or legal rights are recognized separately from goodwill. b. Intangibles that can be separated from the business and sold, rented or licensed are recognized separately from goodwill. c. Separately recognized intangibles are identified as either limited life or indefinite life intangibles. d. The acquirer in a business combination does not recognize intangible assets unless they appear on the investee company's balance sheet. Answer: d

Topic: GAAP Approaches to Business Combinations LO: 4 11. Current GAAP identifies three approaches to assigning values to assets acquired in a business

combination. Which of the following is not a recognized valuation technique for allocating the acquisition price to specific assets? a. Market Approach b. Book Value Approach c. Cost Approach d. Income Approach Answer: b



Topic: Parent and Subsidiary Relationship LO: 1 12. Which of the following statements best describes the relationship between a parent and its

consolidated subsidiary? a. In legal form they are separate, but in economic substance they are one. b. In legal form and economic substance they are one. c. In legal form they are one, but in economic substance they are separate. d. In legal form and economic substance they are separate. Answer: a

Topic: Elimination Entries LO: 1 13. If Spahn Company acquires all of the common stock of Burdette, Inc. Where will the entries

necessary to arrive at consolidated balances appear? a. On Spahn's books only b. On Burdette's books only c. On a worksheet only d. On the books of both the parent and the subsidiary Answer: c

Topic: Indicators of “Control” LO: 1 14. Under what circumstances might consolidation of a majority owned investee not be appropriate?

a. b. c. d.

The investee is a U. K. company The investee is in bankruptcy The two companies are in different industries The two companies have different accounting periods

Answer: b

Topic: Consolidation Process LO: 1 15. Why is the consolidation process not just a matter of adding together the financial statements of

the investor and the financial statements of the investee? a. Such a procedure would result in double counting of investee assets. b. The subsidiary's stockholders' equity does not represent ownership by those outside the economic entity. c. The book values of the parent's assets are combined with the fair values of the subsidiary resulting in meaningless totals. d. Both answers a and b are reasons why the consolidation process is complex. Answer: d



Topic: Acquisition Method of Accounting for a Business Combination LO: 3 16. Which of the following statements is true regarding the acquisition method of accounting for a

business combination? a. Assets of the acquired company are recorded at book values. b. Assets of the acquired company are recorded at fair value, but only if the acquisition cost equals or exceeds fair value of the subsidiary's net assets. c. Assets of the acquired company are recorded at fair values regardless of the acquisition cost. d. Consulting costs related to the combination reduce additional paid-in capital. Answer: c

Multiple Choice – Computational Topic: Acquisition-Related Costs LO: 5 17. On December 31, 2012, Pelfrey Company issued 15,000 shares of its common stock with a fair

value of $30 per share for all of the outstanding common shares of Santana Company. Stock issuance costs of $4,500 and direct costs of $3,000 were paid. What amount was debited to Equity Investment at date of acquisition? a. $450,000 b. $453,000 c. $454,500 d. $457,500 Answer: a

Topic: Acquisition-Related Costs and Contingent Consideration LO: 5 and Appendix 18. On December 31, 2012, Sarge Company issued 15,000shares of its common stock with a fair

value of $30 per share for all of the outstanding common shares of Toney Company. Stock issuance costs of $4,500 and direct costs of $3,000 were paid. In addition, Sarge promised to pay an additional $1,550 to the former owners if Toney's earnings exceeded a certain amount during the next year. The fair value of the potential obligation is estimated at $1,500. Compute the investment to be recorded at date of acquisition. a. $450,000 b. $451,550 c. $453,000 d. $451,500 Answer: d



Questions 19 and 20 are based upon the following set of facts:

Leslie acquires 100 percent of the outstanding voting shares of Marcie Company on January 1, 2013. To obtain these shares, Leslie pays $100,000 cash and issues 5,000 shares of $10 par value common stock on this date. Leslie's stock had a fair value of $18 per share. Leslie also pays an additional $2,500 in stock issuance costs. At date of acquisition, the book values and fair values of Marcie's net assets amounted to $140,000 and $165,000, respectively. Topic: Acquisition-Related Costs LO: 5 19. How much additional paid-in capital was recorded as a result of the combination?

a. b. c. d.

$ 40,000 $ 47,500 $ 37,500 $90,000

Answer: c

Topic: Measurement of Goodwill LO: 5 20. What amount was reported for goodwill as a result of this acquisition?

a. b. c. d.

$ -0$25,000 $27,500 $50,000

Answer: b

Questions 21-30 are based on the following set of facts.

Richland Company acquires Seameyer, Inc., by issuing 20,000 shares of $1 par common stock with a market price of $25 per share on the acquisition date and paying $100,000 cash. The assets and liabilities on Seameyer's balance sheet were valued at fair values except equipment that was undervalued by $175,000. There was also an unrecorded patent valued at $32,500, as well as an unrecorded trademark valued at $80,000. In addition, the agreement provided for additional consideration, valued at $60,000, if certain earnings targets were met. The pre-acquisition balance sheets for the two companies at acquisition date are presented below. Cash Accounts receivable Inventory Property, plant, and equipment

Accounts payable Salaries and taxes payable Notes payable Common stock Additional paid-in capital Retained earnings


Richland $ 130,550 64,000 97,000 1,611,050 $1,902,600 $

31,350 24,530 550,000 110,000 850,000 336,720 $1,902,600

Seameyer $ 17,300 116,000 149,000 179,350 $461,650 $ 21,150 36,800 100,000 30,000 37,500 236,200 $461,650


Topic: Acquisition-Date Consolidation when Purchase Price Exceeds Book Value LO: 3 21. At what amount is the investment recorded on Richland's books?

a. b. c. d.

$120,000 $600,000 $540,000 $660,000

Answer: d

Topic: Acquisition-Date Consolidation when Purchase Price Exceeds Book Value LO: 3 22. Compute the consolidated balance in Cash.

a. b. c. d.

$147,850 $ 47,850 $ 30,550 $ 17,300

Answer: b

Topic: Acquisition-Date Consolidation when Purchase Price Exceeds Book Value LO: 3 23. Compute consolidated common stock.

a. b. c. d.

$130,000 $110,000 $140,000 $160,000

Answer: a

Topic: Acquisition-Date Consolidation when Purchase Price Exceeds Book Value LO: 3 24. Compute consolidated additional paid-in capital.

a. b. c. d.

$ 850,000 $1,330,000 $ 887,500 $1,367,500

Answer: b

Topic: Acquisition-Date Consolidation when Purchase Price Exceeds Book Value LO: 3 25. What amount of goodwill was recorded in the acquisition?

a. $-0b. $356,300 c. $ 68,800 d. $ 8,800 Answer: c



Topic: Contingent Consideration LO: Appendix 26. Compute consolidated liabilities.

a. b. c. d.

$605,880 $763,830 $157,950 $823,830

Answer: d

Topic: Acquisition-Date Consolidation when Purchase Price Exceeds Book Value LO: 3 27. Compute consolidated property, plant & equipment.

a. b. c. d.

$1,965,400 $1,790,400 $1,611,050 $1,997,900

Answer: a

Topic: Acquisition-Date Consolidation when Purchase Price Exceeds Book Value LO: 3 28. Compute consolidated inventory.

a. b. c. d.

$ 97,000 $149,500 $246,000 $326,000

Answer: c

Topic: Acquisition-Date Consolidation when Purchase Price Exceeds Book Value LO: 3 29. Compute consolidated identifiable intangible assets.

a. $ 32,500 b. $172,500 c. $ 80,000 d. $112,500 Answer: d

Topic: Acquisition-Date Consolidation when Purchase Price Exceeds Book Value LO: 3 30. What is consolidated retained earnings?

a. b. c. d.

$374,220 $336,720 $572,920 $366,720

Answer: b



Questions 31-33 are based on the following set of facts.

On January 1, 2014 Perez Company purchased 100% of the common stock Hinske Enterprises for $280,000. On that date, Hinske had common stock of $50,000 and retained earnings of $190,000. Equipment and land were both undervalued by $10,000 on Hinske's books. There was a $5,000 overvaluation of Bonds Payable, as well a $15,000 undervaluation of inventory. Topic: Acquisition-Date Consolidation when Purchase Price Exceeds Book Value LO: 3 31. What is the amount of goodwill recorded in connection with this combination?

a. b. c. d.

$0 $40,000 $10,000 $ 5,000

Answer: a

Topic: Acquisition-Date Consolidation when Purchase Price Exceeds Book Value LO: 3 32. The consolidation entries necessary for a date of acquisition balance sheet include all of the

following except: a. Land debit, $10,000 b. Inventory debit, $15,000 c. Bonds Payable credit, $5,000 d. Equipment debit, $10,000 Answer: c

Topic: Acquisition-Date Consolidation when Purchase Price Exceeds Book Value LO: 3 33. The combined consolidation entries necessary for a date of acquisition balance sheet include all

of the following except: a. Common Stock debit, $50,000 b. Retained Earnings credit, $190,000 c. Equity Investment credit, $280,000 d. No debits or credits to goodwill Answer: b

Topic: Acquisition-Date Consolidation when Purchase Price Exceeds Book Value LO: 3 34. Maddon Company acquired 100% of Stonebraker by issuing 100,000 shares of its $1 par value

stock. The market value of the stock is $10 per share. Maddon also paid $10,000 in consulting fees related to the acquisition. Maddon's journal entry to record the acquisition would include: a. A credit to additional paid-in-capital, $900,000 b. A credit to common stock, $1,000,000 c. A credit to cash, $1,010,000 d. A debit to Equity Investment, $1,010,000 Answer: a



Topic: Acquisition-Date Consolidation when Purchase Price Exceeds Book Value LO: 3 35. On July 1, 2013, Watson Co. paid $215,000 for all of the stock of Squire, Inc. On that date, book

values of Squire's assets and liabilities were $200,000 and $45,000, respectively. The fair values of the assets and liabilities were $210,000 and $35,000, respectively. What is the amount of goodwill at date of acquisition? a. $60,000 b. $50,000 c. $40,000 d. $-0 Answer : c

Topic: Acquisition-Date Consolidation when Purchase Price Exceeds Book Value LO: 3 36. On December 30, 2012, Whatley Co. acquired 100% of Manster Corporation for $200,000 cash.

The post-combination balance sheets of the two firms showed total assets of $612,500 for the parent and $157,500 for the subsidiary. Total assets on the consolidated balance sheet would be: a. $770,000 b. $570,000 c. $970,000 d. $612,500 Answer: b

Topic: Acquisition-Date Consolidation LO: 2 37. Krista Company had common stock of $70,000 and retained earnings of $98,000. Storey, Inc.

had common stock of $140,000 and retained earnings of $196,000. On January 1, 2013, Storey issued 34,000 shares of common stock with a $5 par value and a $18 fair value for all of Krista Company's outstanding common stock. Immediately after the combination, what were the consolidated net assets? a. $ 504,000 b. $ 336,000 c. $1,116,000 d. $ 948,000 Answer: d



Questions 38-40 are based upon the following set of facts.

Hairington Corporation issues 20,000 shares of its common stock for all of the outstanding shares of Alton, Inc. Hairington’ shares have a par value of $10 and a market value of $18 per share. Topic: Acquisition-Date Consolidation LO: 2 38. What is the increase in consolidated additional paid-in capital resulting from the combination?

a. b. c. d.

$360,000 $200,000 $160,000 $-0-

Answer: c

Topic: Acquisition-Date Consolidation when Purchase Price Exceeds Book Value LO: 3 39. If Alton's net assets have book values and fair values of $240,000 and $300,000, respectively,

what is the resulting amount of goodwill? a. $360,000 b. $ 60,000 c. $120,000 d. $-0 Answer: b

Topic: Acquisition-Date Consolidation when Purchase Price Exceeds Book Value LO: 3 40. If Alton's net assets have book values and fair value of $340,000 and $400,000, respectively,

what is the resulting amount of goodwill? a. $360,000 b. $ 20,000 c. $ 40,000 d. $-0 Answer: d



Exercises Topic: Acquisition-Date Consolidation when Purchase Price Exceeds Book Value LO: 3 1. Mackey Corporation exchanges 2,000 shares of $10 par value common stock, with a market

value of $100 per share for all of the shares of Richardson, Inc. On the acquisition date, Richardson had $100,000 of Common Stock and $50,000 of Retained Earnings. Book values were equal to fair values except for land which was undervalued by $50,000. Required:

a. Prepare the entry on Mackey’s books to record the purchase. b. Prepare all necessary consolidation entries. Answer:

a. Equity Investment 200,000 Common Stock Additional paid-in capital To record the investment on investor's books. b. Common Stock 100,000 Retained Earnings 50,000 Equity Investment To eliminate subsidiary's stockholders' equity. 50,000 Equity Investment To bring Land to fair value and eliminate Equity Investment.

20,000 180,000

150,000

Land

50,000

Topic: Acquisition-Date Consolidation when Purchase Price Exceeds Book Value LO: 3 2. McClellan, Inc. acquires all of the outstanding common stock of Cranston Enterprises for

$150,000 cash. On the acquisition date, the subsidiary had Common Stock of $30,000 and Retained Earnings of $30,000. A patent unrecorded by Cranston was valued at $60,000. Required: a. Pr epare the entry on McClellan’s books to record the purchase.

b. Prepare all necessary consolidation entries. Answer:

a. Equity Investment 150,000 Cash To record the investment on investor's books. b. Common Stock 30,000 Retained Earnings 30,000 Equity Investment To eliminate subsidiary's stockholders' equity.

150,000

60,000

Patents 60,000 Goodwill 30,000 Equity Investment 90,000 To eliminate Equity Investment and allocate acquisition cost to identifiable assets and Goodwill.



Topic: Acquisition-Related Costs and Contingent Consideration LO: 5, Appendix 3. HRL Corporation had the following selected account balances and fair values at December 31,

2013 when it was acquired by Kiefer Enterprises.

Receivables Customer relationships Patents In-process R& D Liabilities Common Stock Additional paid-in capital

Book Values $20,000 25,000 -0-0100,000 25,000 75,000

Fair Values $20,000 125,000 350,000 75,000 100,000

Kiefer Enterprises acquired all of the common shares of HRL Corporation by issuing 5,000 shares of its own common stock valued at $75 per share. Kiefer incurred stock issuance costs of $2,500 and paid $18,750 in direct clerical and legal costs of the combination. Kiefer also agreed to pay an additional $25,000 if HRL achieved certain profit goals within the first three years. The contingent payment was determined to have a market value of $7,500. Required:

a. b. c. d.

What is the acquisition cost of the combination? How do the stock issuance costs affect Kiefer's balance sheet? How do the direct costs of the combination affect Kiefer's balance sheet? Without performing computations, how will HRL's revenues and expenses for 2013 affect the consolidated totals? e. What will be the accounting treatment of the In-process R & D? Answer:

a. Acquisition cost: (5,000 x $75) + 7,500 = $382,500 b. Stock issuance costs reduce Swann's additional paid-in-capital by $2,500. c.

The balance sheet effect of the direct combination costs is a reduction of $18,750 in retained earnings. Such costs are expensed.

d. Only the post-acquisition revenues and expenses of the subsidiary are included in consolidated totals. Therefore, the 2013 revenues and expenses will not affect consolidated totals. e. In-process R & D will be an asset on the consolidated balance sheet, valued at $75,000.



Topic: Acquisition-Date Consolidation when Purchase Price Exceeds Book Value LO: 3 4. On January 2, 2013, McCoy Corporation's stockholders' equity accounts were as follows:

Common Stock, $1 par Additional paid-in- capital Retained Earnings

$50,000 100,000 225,000

McCoy's assets and liabilities had book values equal to market values except for inventory, land and building which were undervalued by $30,000, $20,000, and $25,000, respectively. On January 2, 2013, Express Corp. purchased all of McCoy's common stock for $475,000 cash. There was no contingent consideration in the agreement to combine. Required: Prepare all necessary consolidation entries for a January 2, 2013 balance sheet. Answer:

Allocate acquisition cost to assets: Investment Cost Book Value-Net Assets Excess Allocated as follows: Land Building Inventory Goodwill Total Allocated

$475,000 375,000 $100,000 $ 20,000 25,000 30,000 25,000 $100,000

Consolidation Entries: Common Stock 50,000 Additional paid-in capital 100,000 Retained Earnings 225,000 Equity Investment To eliminate subsidiary's stockholders' equity. Land Building Inventory Goodwill

375,000

20,000 25,000 30,000 25,000

Equity Investment 100,000 To eliminate Equity Investment; bring assets to fair values; with the unallocated cost assigned to goodwill.



Topic: Acquisition-Date Consolidation when Purchase Price Exceeds Book Value LO: 3 5. On January 1, 2014, Prang Corporation acquired 100% of Ridgeline Corporation for $4,100,000

cash. On that date, Ridgeline's total stockholders' equity was $3,200,000. The following assets had fair values different from book values.

Buildings and Land Other Assets Bonds Payable

Book Value $5,000,000 500,000 3,000,000

Fair Value $5,750,000 350,000 2,800,000

Required: Compute the amount of goodwill that would appear on the January 1, 2014 balance

sheet.

Answer:

Compute excess of Investment over book value of net assets: $4,100,000 - 3,200,000 = $900,000 Allocate excess to assets and liabilities: Buildings and Land Other Assets Bonds Payable Total allocation Unallocated--Goodwill Total Excess

$750,000 (150,000) 200,000* $800,000 100.000 $900,000

*For purposes of computing goodwill, an overvalued liability is equivalent t o an undervalued asset.

Topic: Acquisition-Related Costs LO: 5 6. On January 1, 2013, Maxwell Corporation issued 20,000 shares of its $10 par common stock for all of the common stock of Merchants Corp. Maxwell’s's common stock was valued at $30 per

share. Maxwell's costs of the combination consisted of the following: Legal fees Stock issuance costs

$30,000 20,000

Required: Prepare journal entries to record the business combination. Answer:

Equity Investment 600,000 Common Stock Additional paid-in capital To record acquisition of subsidiary's stock.

200,000 400,000

Combination Expenses 30,000 Cash To record direct costs of the combination as expenses.

30,000

Additional paid-in capital 20,000 Cash To record cash payment of stock issuance costs.

20,000



Problems Topic: Acquisition-Date Consolidation LO: 2 1. On January 2, 2013, Illinois Corporation issued 200,000 new shares of its $5 par value common stock valued at $19 a share for all of North Dakota Company’s outstanding common shares. The

fair value and book value of North Dakota's identifiable assets and liabilities were the same. Summarized balance sheet information for both companies just before the acquisition on January 2, 2013 is as follows:

Cash Inventories Other current assets Land Property, plant & equipment Total Assets

Illinois $ 150,000 320,000 500,000 350,000 4,000,000 $5,320,000

North Dakota $ 240,000 800,000 1,000,000 500,000 3,000,000 $5,540,000

Accounts payable Notes payable Common stock, $5 par Additional paid-in capital Retained earnings Total Liabilities & Equities

$1,000,000 1,300,000 2,000,000 1,000,000 20,000 $5,320,000

$ 600,000 1,320,000 1,000,000 200,000 2,420,000 $5,540,000

Required: Prepare a consolidated balance sheet for Illinois Corporation immediately after the

business combination. Answer:

Consolidated Balance Sheet: Cash Inventories Other current assets Land Plant assets-net Goodwill Total Assets Accounts payable Notes payable Common Stock A-P-I-C Retained earnings Total Liabilities and Stockholders' Equity Computation of Goodwill: Acquisition Cost Subsidiary net assets Goodwill Test Bank, Chapter 2

$150,000 + 240,000 = 320,000 + 800,000 = 500,000 + 1,000,000 = 350,000 + 500,000 = 4,000,000 + 3,000,000 =

$ 390,000 1,120,000 1,500,000 850,000 7,000,000 180,000 $11,040,000

$ 1,000,000 + 600,000 = 1,300,000 + 1,320,000 = 2,000,000 + (200,000 x $5) = 1,000,000 + 200,000 x ($19 – 5) =

$1,600,000 2,620,000 3,000,000 3,800,000 20,000

(See Computation)

(Parent's Only) (Parent's Only) (Parent's Only)

$11,040,000

$3,800,000 (3,620,000) $ 180,000 ©Cambridge Business Publishers, 2014 2-17

Topic: Acquisition-Date Consolidation when Purchase Price Exceeds Book Value LO: 3 2. Mendol Corporation purchased 100% of the common stock of Carbury Inc. on January 2, 2014.

Carnac's balance sheet on January 2, 2014 was as follows: Accounts receivable-net Inventory Land Building-net Equipment-net Total Assets

$ 180,000 360,000 40,000 60,000 80,000 $720,000

Current liabilities Long term debt Common stock ($1 par) Paid-in capital Retained earnings Total Liabilities & Equity

$ 70,000 160,000 20,000 430,000 40,000 $720,000

Fair values agree with book values except for inventory, land, and equipment that have fair values of $400,000, $50,000 and $70,000, respectively. Carbury has unrecorded patent rights valued at $20,000. Required:

a. Prepare a schedule to allocate the purchase price to Carbury’s assets and liabilities assuming Mendol paid $560,000 cash for the acquisition. b. Prepare the consolidation entries for a January 2, 2014 consolidated balance sheet. Answer:

a. Acquisition price Book Value-Net Assets Excess Allocation of Excess: Inventory Land Equipment Patent Unallocated-Goodwill

$ 560,000 (490,000) $ 70,000 $40,000 10,000 (10,000) 20,000 $60,000 10,000 $70,000

b. Consolidation entries - Acquisition price: $ 560,000 Common Stock 20,000 A-P-I-C 430,000 Retained Earnings 40,000 Equity Investment To eliminate subsidiary's stockholders' equity. Goodwill Inventory Land Patent

490,000

10,000 40,000 10,000 20,000

Equipment 10,000 Equity Investment 70,000 To eliminate Equity Investment and adjust assets to fair values.



Topic: Acquisition-Date Consolidation when Purchase Price Exceeds Book Value LO: 3 3. On January 1, 2013, Parent Company purchased all of the common stock of Subsidiary Company

for $700,000 cash. On that date, Subsidiary had common stock of $40,000, additional paid-in capital of $160,000, and retained earnings of $300,000. The difference between the cost of the purchase and the book value of Subsidiary’s net assets was at least partly due to under or

overvalued assets and liabilities. Inventory was undervalued by $10,000. Land was undervalued by $40,000. Buildings and Equipment were undervalued by $60,000. Bonds Payable was overvalued by $10,000. Any unexplained difference is due to Goodwill. Required: Prepare all necessary entries for a January 1, 2013, consolidated balance sheet. Answer:

Compute excess of acquisition price over book value of subsidiary's net assets: Acquisition Cost Book Value-Net Assets Excess

$700,000 500,000 $200,000

Allocation of Excess: Inventory Land Building/Equipment Bonds Payable Goodwill Total

$ 10,000 40,000 60,000 10,000 80,000 $200,000

Consolidation Entries: Common Stock A-P-I-C Retained Earnings Equity Investment To eliminate subsidiary's stockholders' equity.

40,000 160,000 300,000

Inventory 10,000 Land 40,000 Buildings/Equipment 60,000 Bonds Payable 10,000 Goodwill 80,000 Equity Investment To eliminate investment and allocate to assets and liabilities.


500,000

200,000


Topic: Acquisition-Date Consolidation when Purchase Price Exceeds Book Value LO: 3 4. Parent Company acquires a subsidiary by issuing 55,000 common shares with a market value of

$20 per share for all of the subsidiary's common stock. The subsidiary's assets and liabilities were recorded at fair values with the exception of equipment undervalued by $250,000. In addition, there were two unrecorded assets: a secret formula valued at $125,000 and a customer list valued by the subsidiary at $50,000. The balance sheets of the parent and subsidiary immediately after the acquisition are presented below:

Cash Accounts Receivable Inventory Equity Investment Property, plant and equipment (net) Accounts payable Salaries payable Long-Term Notes Payable Common Stock Additional paid-in capital Retained earnings

Parent $ 455,250 192,000 791,000 2,200,000 899,800 $4,538,050 $ 94,050 110,400 500,000 110,000 2,970,000 753,600 $4,538,050

Subsidiary $ 201,600 417,600 536,400 992,400 $2,148,000 $ 127,000 221,000 600,000 120,000 150,000 930,000 $2,148,000

Required: At what amounts will each of the following appear on the consolidated balance sheet?

a. b. c. d. e. f. g. h.

Inventory Equity Investment Property, plant and equipment (net of accumulated depreciation) Goodwill Common Stock Additional paid-in capital Retained Earnings Total Intangible Assets

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Answer:

Computation of Goodwill: Acquisition Cost (55,000 x $20) Book Value-Net Assets Excess

$2,200,000 1,200,000 $ 1,000,000

Allocation of Excess: Equipment Secret Formula Customer List Goodwill Total Allocation

500,000 250,000 100,000 850,000 150,000 1,000,000

a. Inventory: $791,000 + 536,400 = $1,327,400 b. Equity Investment: ZERO (Eliminated) c.

Property, plant and equipment: $899,800 + 992,400 + 500,000 = $2,392,200

d. Goodwill: $150,000 (Computed Above) e. Common Stock: $110,000 (Parent's Only) f.

Additional paid-in capital: $2,970,000 (Parent's Only)

g. Retained Earnings: $753,600 (Parent's Only) h. Total Intangible Assets: Secret Formula Customer List Goodwill Total


$250,000 100,000 150,000 $500,000


aa2e_hal_testbank_ch02.docx

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