Chapter 1 Test Bank
Ethical Issues in Advanced Accounting Multiple Choice Questions
LO1
1.
Resear Rese arch ch and and de deve velo lopm pmen ent t is a dr driv iver er of busi busine ness ss comb combin inat atio ions ns for all of the following reasons except? a. b. c. d.
Lower ope Lower operat rating ing cos costs ts Acquisiti Acqu isition on of intangibl intangible e assets assets Operat Ope rating ing loss loss carryf carryforw orward ards s Redu Re duce ced d bu busi sine ness ss ri risk sk of ac acqu quir irin ing g lines
esta es tabl blis ishe hed d
prod pr oduc uct t
LO2
2.
A busin busines ess s combi combina nati tion on in whic which h a ne new w corpo corpora rati tion on is crea create ted d and two or mor more e exi existi sting ng cor corpor porati ations ons are com combin bined ed int into o the newly created corporation is called a: a. b. c. d.
3.
A busi busine ness ss com combi bina nati tion on occ occur urs s when when a com compa pany ny acq acqui uire res s an equ equit ity y interest in another entity and has: a. b. c. d.
4.
merger. purcha pur chase se tra transa nsacti ction. on. poolin poo ling-o g-of-i f-inte nteres rests. ts. cons co nsol olid idat atio ion. n.
at least least 20% ownership ownership in the the entity. entity. more than 50% owners ownership hip in in the enti entity. ty. 100% 100 % owners ownership hip in in the enti entity. ty. cont co ntro rol l ov over er th the e en enti tity ty, , ir irre resp spec ecti tive ve owned.
of
the th e
perc pe rcen enta tage ge
FASB FA SB fav favor ors s con conso soli lida dati tion on of of two two enti entiti ties es whe when n a. One acquires acquires at at least 20% 20% equity equity ownership ownership of of the other. other. b. One acquires acquires betwe between en 20% and and 50% equity equity ownershi ownership p in the other. c. One acquires acquires two two thirds thirds equity equity ownershi ownership p in the other. other. d. On One e ga gain ins s co cont ntro rol l ov over er th the e en enti tity ty, , ir irre resp spec ecti tive ve of th the e equity percentage owned.
LO3 LO4
1
5.
Michan Mich ange gelo lo Co. Co. pa paid id acco accoun unta tant nts s and lawy lawyer ers s $100, $100,00 000 0 in orde order r to acqu ac quir ire e Flor Fl ore enc nce e Com omp pan any y. Mic ich han ange gel lo wil wi ll tre rea at the th e $100,000: a. an expen expense se for for the curr current ent year year. . b. a prior perio period d adjustmen adjustment t to retained retained earning earnings. s. c. addi additiona tional l cost to investm investment ent of Floren Florence ce on t the he consolidated balance sheet. d. a reduct reduction ion in in paid-i paid-in n capita capital. l.
6.
Picass Pica sso o Co. Co. issu issued ed 10, 10,00 000 0 shar shares es of of its its $1 par par comm common on sto stock ck, , valued valued at $400,000, $400 ,000, to acquire acquire sh shares ares of Bull Company Company in an all-st all -stock ock tra transa nsacti ction. on. Pic Picass asso o pai paid d the inv invest estmen ment t ban banker kers s $35,000. Picasso will treat the investment banker fee as: a. b. c. d.
7.
an expen expense se for for the curr current ent year year. . a prior perio period d adjustmen adjustment t to Retained Retained Earning Earnings. s. additiona addi tional l goodwill goodwill on the consoli consolidated dated balanc balance e sheet. a reduct reduction ion in in paid-i paid-in n capita capital. l.
Durer Dure r Inc acqu acquir ired ed Sea Sea Corpo Corpora rati tion on in a bu busi sine ness ss comb combin inat atio ion n and Sea Corp went out of existence. Sea Corp developed a patent listed as an asset on Sea Corp’s books at the patent office filing cost. In recording the combination: a. fai air r va val lue is not ass ssi ign gne ed to th the e pa pate ten nt be beca cau use th the e research and development costs have been expensed by Sea Corp. b. Sea Corp’s Corp’s prior prior expenses expenses to devel develop op the patent patent are are recorded as an asset by Durer at purchase. c. the patent patent is recorde recorded d as an asset asset at fair fair market market value. value. d. the pa patent tent's 's market market va value lue in increa creases ses go goodwil odwill. l.
8.
In an an acqu acquis isit itio ion, n, the the com compa pany ny who whose se ass asset ets s are are acqu acquir ired ed: : a. will will go out of exis existen tence. ce. b. will become become a subsidi subsidiary ary of the the acquiring acquiring compan company. y. c. will be dissol dissolved ved along along with the the acquiring acquiring company company to to form a new corporation. d. Non None e of the the above above are are correc correct. t.
9.
Accor Acco rdi din ng to FA FASB SB St Stat ate eme ment nt 14 141, 1, wh whic ich h one of the fo foll llo owi win ng items may not be accounted for as an intangible asset apart from goodwill?
a. b. c. d.
a prod produc ucti tion on bac backl klog og talent tal ented ed employ employee ee workfo workforce rce noncontra nonc ontractua ctual l customer customer relationsh relationships ips employ emp loymen ment t con contra tracts cts 2
10.
When negative calculation,
goodwill
occurs
in
a
business
combination
a. The negative goodwill is considered an impairment. b. The value is allocated first to reduce proportionately (according to market value) non-current assets, then to non-monetary current assets, and any negative remainder is classified as a deferred credit. c. allocated first to reduce proportionately (according to market value) non-current assets, and any negative remainder is classified as an extraordinary gain. d. allocated first to reduce proportionately (according to market value) non-current, depreciable assets to zero, and any negative remainder is classified as a deferred credit. 11.
With respect to goodwill, an impairment a. Will be amortized over the remaining useful life. b. Is a two step process which analyzes each business unit of the entity. c. Is a one step process considering the entire firm. d. Occurs when asset values are adjusted to fair value in a purchase.
Use the following information in answering questions 12 and 13. Manet Corporation exchanges 150,000 shares of newly issued $1 value common stock with a fair market value of $25 per share for of the outstanding $5 par value common stock of Gardner Inc Gardner is then dissolved. Manet paid the following costs expenses related to the business combination: Costs of special shareholders’ meeting to vote on the merger Registering and issuing securities Accounting and legal fees Salaries of Manet’s employees assigned To the implementation of the merger Cost of closing duplicate facilities Costs of special shareholders’ meeting to vote on the merger 12.
par all and and
6,000 $14,000 9,000 15,000 11,000 7,000
In the business combination of Manet and Gardner: a. the costs of registering and issuing the securities are included as part of the purchase price for Gardner. b. only the salaries of Manet's employees assigned to the merger are treated as expenses. c. all of the costs except those of registering and issuing 3
the securities are included in the purchase price of Gardner. d. only the accounting and legal fees are included in the purchase price of Gardner. 13.
In the business combination of Manet and Gardner a. all of the items listed above are treated as expenses. b. all of the items listed above except the cost of registering and issuing the securities are expensed. c. the costs of registering and issuing the securities are deducted from the fair market value of the common stock used to acquire Gardner. d. only the costs of closing duplicate facilities, the salaries of Manet's employees assigned to the merger, and the costs of the shareholders' meeting would be treated as expenses.
LO5
14.
Which of the following methods would does FASB consider best in Statement 142 in the evaluation of goodwill impairment? a. b. c. d.
15.
Raphael Company paid $2,000,000 for the net assets of Paris Corporation and Paris was then dissolved. Paris had no liabilities. The fair values of Paris’ assets were $2,500,000. Paris’s only non-current assets were land and equipment with fair values of $160,000 and $640,000, respectively. At what value will the equipment be recorded by Raphael? a. b. c. d.
16.
Senior executive estimate Financial analyst forecasts Market value Present value of future cash flows discounted at the firm’s cost of capital
$0 $240,000 $400,000 $640,000
According to FASB 141, liabilities acquisition will be valued at: a. b. c. d.
assumed
estimated fair value. historical book value. current replacement cost. present value using market interest rates.
4
in
a
purchase
17.
Medici Corporation acquires all of the voting stock of Zeus Corporation for $900,000 cash. The book values of Zeus’ assets are $850,000, but the fair values are $820,000 because inventory has a fair value below its book value. Zeus has no liabilities. Goodwill from the combination is computed as: a. $900,000 less b. $900,000 less c. $900,000 less book values). d. $900,000 less fair values).
18.
the fair value of Zeus’ net assets. the book value of Zeus net assets. (the assets’ fair values minus the assets’ (the assets’ book values minus the assets’
Goodwill arising from a business combination is: a. charged to Retained Earnings after the acquisition is completed. b. amortized over 40 years or its useful life, whichever is longer. c. amortized over 40 years or its useful life, whichever is shorter. d. never amortized.
19.
The founders of an acquired company are granted a contingent payment for three years after the acquisition based on those years earnings: a. The acquirer typically recognizes the payment as goodwill when the contingency is resolved and payment is given. b. The acquirer typically recognizes the payment as goodwill when the contingency is resolved. c. The acquirer typically includes the expected payments based on future earnings as goodwill at acquisition. d. The acquirer typically amortizes contingencies over the applicable award period.
20.
The first step in assigning the cost of an acquired company is to determine the fair values of all identifiable assets and liabilities. According to FASB Statement 141, the current replacement costs be the values for which of the following: a. b. c. d.
both raw materials and finished goods inventories. plant and equipment and finished goods inventories. plant and equipment and raw materials inventories. land and plant and equipment.
5
Exercises LO2 Exercise 1 On January 2, 2005 Bison Corporation issued 100,000 new shares of its $5 par value common stock valued at $19 a share for all of Deer Corporation’s outstanding common shares. Bison paid $15,000 to register and issue shares. Bison $10,000 for the direct combination costs of the accountants. The fair value and book value of Deer's identifiable assets and liabilities were the same. Summarized balance sheet information for both companies just before the acquisition on January 2, 2005 is as follows: Bison
Deer
Cash Inventories Other current assets Land Plant assets-net Total Assets
$
150,000 320,000 500,000 350,000 4,000,000 $5,320,000
$
120,000 400,000 500,000 250,000 1,500,000 $2,770,000
Accounts payable Notes payable Capital stock, $5 par 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
$
300,000 660,000 500,000 100,000 1,210,000 $2,770,000
Required: 1.
Prepare Bison's general journal entry for the acquisition of Deer assuming that Deer survives as a separate legal entity.
2.
Prepare Bison's general journal entry for the acquisition of Deer assuming that Deer will dissolve as a separate legal entity.
6
LO2
Exercise 2 On January 2, 2005 Altamira Company issued 80,000 new shares of its $2 par value common stock valued at $12 a share for all of Lascaux Corporation’s outstanding common shares. Altamira $5,000 for the direct combination costs of the accountants. Altamira paid $10,000 to register and issue shares. The fair value and book value of Lascaux's identifiable assets and liabilities were the same. Summarized balance sheet information for both companies just before the acquisition on January 2, 2005 is as follows:
Cash Inventories Other current assets Land Plant assets-net Total Assets Accounts payable Notes payable Capital stock, $2 par Paid-in capital Retained Earnings Total Liabilities & Equity
Altamira $ 75,000 160,000 200,000 175,000 1,500,000 $2,110,000
Lascaux $ 60,000 200,000 250,000 125,000 750,000 $1,385,000
$
$
100,000 700,000 600,000 450,000 260,000 $2,110,000
155,000 330,000 250,000 50,000 600,000 $1,385,000
Required: 1.
Prepare Altamira's general journal entry for the acquisition of Lascaux assuming that Lascaux survives as a separate legal entity.
2.
Prepare Altamira's general journal entry for the acquisition of Lascaux assuming that Lascaux will dissolve as a separate legal entity.
LO4
7
Exercise 3 Dolmen Corporation purchased the net assets of Carnac Inc on January 2, 2005 for $280,000 and also paid $10,000 in direct acquisition costs. Carnac's balance sheet on January 2, 2005 was as follows: Accounts receivable-net Inventory Land Building-net Equipment-net Total assets
$ 90,000 180,000 20,000 30,000 40,000 $360,000
Current liabilities Long term debt Common stock ($1 par) Paid-in capital Retained earnings Total liab. & equity
$ 35,000 80,000 10,000 215,000 20,000 $360,000
Fair values agree with book values except for inventory, land, and equipment, that have fair values of $200,000, $25,000 and $35,000, respectively. Carnac has patent rights valued at $10,000. Required: Prepare Dolmen's general journal entry for the cash purchase of Carnac's net assets.
8
LO4
Exercise 4 The balance sheets of Palisade Company and Salisbury Corporation were as follows on December 31, 2004:
Current Assets Equipment-net Buildings-net Land Total Assets Current Liabilities Common Stock, $5 par Paid-in Capital Retained Earnings Total Liabilities and Stockholders' equity
Palisade $ 260,000 440,000 600,000 100,000 $1,400,000 100,000 1,000,000 100,000 200,000 $1,400,000
Salisbury $ 120,000 480,000 200,000 200,000 $1,000,000 120,000 400,000 280,000 200,000 $1,000,000
On January 2, 2005 Palisade issued 60,000 of its shares with a market value of $40 per share in exchange for all of Salisbury's shares, and Salisbury was dissolved. Palisade paid $20,000 to register and issue the new common shares. It cost Palisade $50,000 in direct combination costs. Book values equal market values except that Salisbury’s land is worth $250,000. Required: Prepare a Palisade balance sheet after the business combination on January 1, 2005.
9
LO4
Exercise 5 Paradise Inc purchased the net assets of Sublime Company on January 2, 2005 for $160,000 and also paid $5,000 in direct acquisition costs. Sublime's balance sheet on January 2, 2005 was as follows: Accounts receivable-net Inventory Land Building-net Equipment-net Total assets
$180,000 180,000 30,000 30,000 30,000 $450,000
Current liabilities Long term debt Common stock ($1 par) Paid-in capital Retained earnings Total liab. & equity
$ 25,000 90,000 10,000 225,000 100,000 $450,000
Fair values agree with book values except for inventory, land, and equipment, that have fair values of $200,000, $25,000 and $35,000, respectively. Solitaire has patent rights valued at $10,000. Required: Prepare Paradise's general journal entry for the cash purchase of Sublime's net assets.
LO4
Exercise 6
On January 2, 2005 Tennessee Corporation issued 100,000 new shares of its $5 par value common stock valued at $19 a share for all of Alaska Company’s outstanding common shares in a purchase acquisition. Tennessee paid $15,000 for registering and issuing securities and $10,000 for other direct costs of the business combination. The fair value and book value of Alaska's identifiable assets and liabilities 10
were the companies follows:
same. Summarized balance sheet information for both just before the acquisition on January 2, 2005 is as
Cash Inventories Other current assets Land Plant assets-net Total Assets
Tennessee $ 150,000 320,000 500,000 350,000 4,000,000 $5,320,000
Alaska $ 120,000 400,000 500,000 250,000 1,500,000 $2,770,000
Accounts payable Notes payable Capital stock, $5 par 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
$
300,000 660,000 500,000 100,000 1,210,000 $2,770,000
Required: Prepare a balance sheet for Tennessee Corporation immediately after the business combination. LO4&5
Exercise 7 New York Corp. purchased the net assets of Arizona Company on January 2, 2005 for $200,000 and also paid $5,000 in direct acquisition costs. Arizona's balance sheet on January 2, 2005 was as follows: Accounts receivable-net Inventory Land Building-net Equipment-net Total assets
$ 90,000 180,000 30,000 30,000 30,000 $360,000
Current liabilities Long term debt Common stock ($1 par) Paid-in capital Retained earnings Total liab. & equity
$ 27,000 88,000 15,000 215,000 15,000 $360,000
Fair values agree with book values except for inventory, land, and equipment, that have fair values of $200,000, $25,000 and $35,000, respectively. Arizona has patent rights valued at $10,000. Required: 1.
Prepare an allocation schedule for the purchase of Arizona's net 11
assets. 2. Prepare New York's general journal entry for the cash purchase of Arizona's net assets.
LO5
Exercise 8 Book values and fair values of Portrait Corporation’s assets and liabilities at January 2, 2005, are shown below:
Assets Other current assets Inventories Land Buildings-net Equipment-net
Liabilities and Equities Current liabilities 7% Bonds payable Common stock Retained earnings
Book Values $ 250,000 300,000 200,000 600,000 460,000 $1,810,000
Fair Values $ 250,000 380,000 400,000 480,000 460,000 $1,970,000
$ 190,000 600,000 1,000,000 20,000 $1,810,000
$ 190,000 540,000
$1,970,000
Palette Corporation acquires all of the outstanding common voting stock of Portrait for $1,400,000 cash and Portrait Corporation then goes out of existence. Required: Prepare a schedule to allocate the $1,400,000 investment Portrait’s assets and liabilities on January 2, 2005.
12
cost
to
LO5
Exercise 9 In a business combination on January 2, 2005 Horus Inc issues 20,000 shares of its $5 par common for all of the outstanding stock of Namar. Namar is dissolved. Horus pays $60,000 for direct combination costs and $40,000 to register its securities. Horus’ stock has a market price of $60 on January 2, 2005. Balance sheet information for both firms on January 2, 2005 is as follows
Horus Cost $ 240,000 100,000 200,000 160,000 1,350,000 $2,000,000
Cash Inventories Accounts receivable Land Plant assets-net Total assets Notes payable Capital stock, $5 par Paid-in capital Retained earnings Total Liabilities & Equities
$
400,000 1,000,000 400,000 200,000 $2,000,000
Namar Namar Cost Fair Value $ 20,000 $ 20,000 60,000 60,000 180,000 200,000 40,000 200,000 400,000 700,000 $700,000 $
100,000 200,000 100,000 300,000 $700,000
$
50,000
Required: Prepare journal entries to record the business combination.
LO 5 Exercise 10 Balance sheet information for Sphinx Company at January 1, 2005, is summarized as follows: Current assets Plant assets
$
230,000 450,000
$
680,000
Liabilities $ Capital stock $10 par Retained earnings $
300,000 200,000 180,000 680,000
Sphinx’s assets and liabilities are fairly valued except for plant assets that are undervalued by $50,000. On January 2, 2005, Pyramid Corporation issues 20,000 shares of its $10 par value common stock 13
for all of Sphinx’s net assets and Sphinx is quotations for the two stocks on this date are: Pyramid common: Sphinx common: Butler pays the combination:
dissolved.
Market
$28.00 $19.50
following
fees
and
costs
Finder’s fee Costs of registering and issuing stock Legal and accounting fees
in
connection
with
$10,000 5,000 6,000
Required: 1. Calculate Pyramid’s investment cost of Sphinx Corporation. 2. Calculate any goodwill from the business combination.
14
the
15
Solutions:
Multiple Choice Questions 1 6 11 16
A D B D
2 7 12 17
d b b c
3 8 13 18
d d c d
4 9 14 19
b b c a
5 10 15 20
c d b c
Exercise 1
1.
General journal entry recorded by Bison for the acquisition of Deer (Deer survives as a separate legal entity): Investment in Roger Common stock Paid-in capital Investment in Roger Paid-in capital Cash
2.
1,900,000 500,000 1,400,000 10,000 15,000 25,000
General journal entry recorded by Bison for the acquisition of Deer (Deer dissolves as a separate legal entity): Cash Inventories Other current assets Land Plant assets Goodwill Accounts payable Notes payable Common stock Paid-in capital
95,000 400,000 500,000 250,000 1,500,000 100,000 300,000 660,000 500,000 1,385,000
Exercise 2 1.
General journal entry recorded by Altamira for the acquisition of Lascaux (Lascaux survives as a separate legal entity): Investment in Lascaux Common stock Paid-in capital Investment in Lascaux Paid-in capital
960,000 100,000 860,000 5,000 10,000 16
Cash 3.
15,000
General journal entry recorded by Altamira for the acquisition of Lascaux (Lascaux dissolves as a separate legal entity): Cash Inventories Other current assets Land Plant assets Goodwill Accounts payable Notes payable Common stock Paid-in capital
60,000 200,000 250,000 125,000 750,000 55,000 155,000 330,000 100,000 850,000
Exercise 3 General journal entry for the purchase of Carnac's net assets: Accounts receivable Inventory Land Building Equipment Patent Goodwill Current liabilities Long-term debt Cash
90,000 200,000 25,000 30,000 35,000 10,000 15,000 35,000 80,000 290,000
Exercise 4 The stockholders' equity section for Palisade Corporation subsequent to its acquisition of Salisbury Corporation on January 1, 2005 will appear as follows: Palisade Corporation Balance Sheet January 1, 2005 Current Assets Equipment-net Buildings-net Land Goodwill Total Assets Current Liabilities Common Stock, $5 par Paid-in Capital
$
310,000 920,000 800,000 350,000 180,000 $2,460,000 220,000 1,150,000 890,000 17
Retained Earnings Total Liabilities and Stockholders' equity
200,000 $2,460,000
Exercise 5 General journal entry for the purchase of Sublime's net assets: Accounts receivable Inventory Current liabilities Long-term debt Cash Extraordinary gain
90,000 200,000 35,000 80,000 165,000 10,000
Exercise 6 Tennessee Corporation Balance Sheet January 1, 2005 Assets: Cash $ 245,000 Inventory 720,000 Other current assets 1,000,000 Total current assets 1,965,000 Land Plant assets-net Goodwill Total L.T. assets Total assets
Liabilities: Accounts payable Notes payable Total liabilities
600,000 5,500,000 100,000 6,200,000
Equity: Common stock ($5 par) 2,500,000 Paid-in capital 2,385,000 Retained earnings 20,000 Total equity 4,905,000 Total liab.& eq. $8,165,000
$8,165,000
Exercise 7 1.
$1,300,000 1,960,000 3,260,000
Allocation schedule for Arizona's net assets.
Total purchase price Fair value of current assets $290,000 Less: fair value of all liabilities 115,000 Net difference Amount allocable to non-current assets
$205,000
175,000 $ 30,000
Allocation Schedule for Non-current Assets 18
Non-current Asset Land Building Equipment Patent Total
2.
Fair Value $ 25,000 30,000 35,000 10,000 100,000
% of Total Fair Value 25 30 35 10 100
Allocable $ Amount 30,000 30,000 30,000 30,000 30,000
$ Amount Allocated 7,500 9,000 10,500 3,000 30,000
General journal entry for the purchase of Arizona's net assets:
Accounts receivable Inventory Land Building Equipment Patent Current liabilities Long-term debt Cash
90,000 200,000 7,500 9,000 10,500 3,000 27,000 88,000 205,000
Exercise 8
Item Purchase Cost Book Value Cost in excess of book
Allocated Fair Value 1,400,000 1,020,000 380,000
Market in excess of book Inventory Land Building net 7% Bonds Identifiable Differences
80,000 200,000 -120,000 60,000 220,000
Goodwill
160,000
Exercise 9
Item Purchase Cost Book Value Cost in excess of book
Allocated Fair Value 1,260,000 600,000 660,000
Market in excess of book Accounts Receivable Land Plant Assets net
20,000 160,000 300,000 19
Notes Payable Identifiable Differences
50,000 530,000
Goodwill
130,000
Investment Paid-in capital Common stock Paid-in capital Cash
Cash Inventories Accounts Receivable Land Plant assets Goodwill Notes payable Investment
1,260,000 40,000 100,000 1,100,000 100,000
20,000 60,000 200,000 200,000 700,000 130,000 50,000 1,260,000
Exercise 10 Requirement 1 FMV of shares issued by Pyramid: 20,000 x $28.00= Finder’s fees Legal and accounting fees Total acquisition cost for Sphinx Corporation:
$
$
560,000 10,000 6,000 576,000
$
576,000
$
430,000 146,000
Requirement 2 Investment cost from above: Less: Fair value of Sphinx’s net assets ($680,000 of total assets plus $50,000 of undervalued plant assets minus $300,000 of debt) Equals: Goodwill from investment in Sphinx:
20
