Download Full Soluton Manual Advance Accountng 5h Editon by Debra Jeer Click on link o Download : h:!!e"book# e"a$%&co$!roduc! e"a$ %&co$!roduc!%oluton#$anual#adv %oluton#$anual#advance#accountng#5h# ance#accountng#5h# editon#by#debra#'eer! Chapter 2 Accounting for Business Combinations Multiple Choice Choice
1.
SFAS SFAS 141 141R R requ requir ires es tha thatt all all busi busine ness ss com combi bina nati tion onss be acco accoun unte ted d for for usin using g a. the the pooli pooling ng of inte interes rests ts method method.. b. the acquisition method. c. either either the the acquisi acquisition tion or the the pooling pooling of interes interests ts method methods. s. d. neither neither the the acquisiti acquisition on nor nor the pooli pooling ng of inter interests ests method methods. s.
2.
Under Under the the acqu acquisi isitio tion n metho method, d, if if the the fair fair valu values es of of ident identifi ifiabl ablee net net asset assetss ecee eceed d the the value value implie implied d b! the purchase price of the acquired compan!, the ecess should be a. acco accoun unte ted d for for as good good"i "ill ll.. b. allocated to reduce current current and long#lived assets. assets. c. allocated allocated to to reduce current current assets assets and and classif! classif! an! remaind remainder er as an etraordi etraordinar! nar! gain. gain. d. allocated allocated to reduce reduce an! previous previousl! l! recorded recorded good"ill good"ill on the the seller$s seller$s boo%s and classif! classif! an! an! remainder as an ordinar! gain.
&.
'n a period period in "hic "hich h an impair impairmen mentt loss loss occu occurs, rs, SFAS SFAS (o. (o. 142 142 requ require iress each each of of the the follo follo"in "ing g note note disclosures except a. a descripti description on of the the facts and and circumstan circumstances ces leading leading to to the impair impairment. ment. b. the amount of good"ill good"ill b! reporting segment. segment. c. the method method of determin determining ing the the fair value value of the report reporting ing unit. unit. d. the amounts amounts of an! an! ad)ustment ad)ustmentss made to impairme impairment nt estimates estimates from from earlier earlier periods, periods, if significant.
4.
*nce *nce a report reporting ing unit unit is dete determi rmined ned to have have a fair fair valu valuee belo belo" " its its carr!i carr!ing ng value, value, the goo good" d"ill ill impairment loss is computed b! comparing the a. fair value value of the the reporting reporting unit unit and and the fair fair value of of the identifi identifiable able net net assets. assets. b. carr!ing value of the good"ill good"ill to its implied implied fair value. c. fair value value of the the reporting reporting unit unit to its its carr!ing carr!ing amoun amountt +good"il +good"illl included. included. d. carr!ing carr!ing value value of the reportin reporting g unit to the the fair value value of the identif identifiable iable net net assets. assets.
-.
SFAS SFAS 141R 141R requ require iress that that the the acqu acquire irerr discl disclose ose each each of the follo" follo"ing ing for for each each mater material ial bus busine iness ss combination except the a. name and a descri descriptio ption n of of the the acquir acquiree ee acquir acquired. ed. b. percentage of voting equit! equit! instruments acquired. c. fair fair value value of the the conside considerat ration ion tran transfe sferre rred. d.
2#2
Test Bank to Accompany Jeter and Chaney Advanced Accounting
d. each each of the the above above is a requ require ired d disclo disclosur suree .
'n a levera leveraged ged bu! bu!out out,, the the porti portion on of the the net assets assets of the the ne" ne" corp corpora oratio tion n prov provide ided d b! the management group is recorded at a. app apprais raisal al val valu ue. b. boo% value. c. fair va value. d. lo"e lo"err of of cos costt or or mar mar%e %et. t.
Chapter 2 Accounting for Business Business Combinations
/.
0hen 0hen the the acqu acquisi isitio tion n price price of an an acqui acquired red firm firm is less less than than the the fair fair value value of of the the ident identifi ifiabl ablee net net assets, all of the follo"ing are recorded at fair value except a. Assu Assume med d liab liabil ilit itie ies. s. b. urrent assets. c. ong ong#l #liv ived ed asse assets ts.. d. 3ach 3ach of the the above above is reco recorde rded d at fair fair value value..
.
Under SFAS 14 141R, a. both direct direct and indirect indirect costs costs are to be be capital capitali5ed. i5ed. b. both direct and indirect indirect costs are to be epensed. epensed. c. direct direct costs costs are to be capita capitali5ed li5ed and and indirect indirect costs costs are are to be epens epensed. ed. d. indirect indirect costs costs are to to be capitali capitali5ed 5ed and direct direct costs costs are are to be epens epensed. ed.
6.
A busin business ess combin combinati ation on is accoun accounted ted for proper properl! l! as an acquis acquisit ition ion.. 0hich 0hich of the the foll follo"i o"ing ng epenses related to effecting the business combination should enter into the determination of net income of the combined corporation for the period in "hich the epenses are incurred7
a. b. c. d. 19. 19.
Securit! issue costs 8es 8es (o (o
2#&
*verhead al allocated to the merger 8es (o 8es (o
'n a busin business ess comb combina inatio tion, n, "hich "hich of of the fol follo" lo"ing ing cost costss are assi assigne gned d to the the valua valuatio tion n of the the securit!7
a. b. c. d.
:rofessional or consulting fees 8es 8es (o (o
Securit! issue costs 8es (o 8es (o
11.
:arent :arental al omp ompan! an! and Sub ompan ompan! ! "ere "ere comb combine ined d in an acqu acquisi isitio tion n trans transact action ion.. :arent :arental al "as "as able to acquire Sub at a bargain price. ;he sum of the fair values of identifiable assets acquired less the fair value of liabilities assumed eceeded the the cost to :arental. After eliminating previousl! previousl! recorded good"ill, there "as still still some
12. 12.
0ith ith an an acq acqui uisi siti tion on,, dir direc ectt and and indi indire rect ct epe epens nses es are are a. epens epensed ed in the the peri period od incurr incurred. ed. b. capitali5ed and amorti5ed amorti5ed over a discretionar! discretionar! period. c. considere considered d a part of the the total total cost of of the acquire acquired d compan! compan!.. d. charg charged ed to retain retained ed earni earnings ngs "hen "hen incurr incurred. ed.
2#4
Test Bank to Accompany Jeter and Chaney Advanced Accounting
1&. 1&.
'n a busin business ess comb combina inatio tion n accoun accounted ted for for as an an acquis acquisiti ition, on, ho" ho" shou should ld the the ecess ecess of of fair fair value value of net net assets acquired over the consideration paid be treated7 a. Amorti5ed Amorti5ed as a credit credit to to income income over over a period period not not to eceed eceed fort! fort! !ears. !ears. b. Amorti5ed as a charge charge to epense over a period not not to eceed fort! !ears. c. Amorti5ed Amorti5ed direct directl! l! to retained retained earnings earnings over over a period period not to to eceed eceed fort! fort! !ears. !ears. d. Record Recorded ed as an ordina ordinar! r! gain. gain.
14. 14.
: orpo orporat ration ion issu issued ed 19,99 19,999 9 shares shares of of common common stoc stoc% % "ith "ith a fair fair value value of =2=2- per per share share for for all all the outstanding common stoc% of S ompan! in a business combination properl! accounted for as an acquisition. ;he fair value of S ompan!>s ompan!>s net assets on that date date "as =229,999. : ompan! also also agreed to issue an additional 2,999 shares of common stoc% "ith a fair value of =-9,999 to the former stoc%holders of S ompan! as an earnings contingenc!. contingenc!. Assuming that the contingenc! contingenc! is epected to be met, the =-9,999 fair value of the additional shares to be issued should be treated as a+n a. decrease decrease in noncurre noncurrent nt liabilit liabilities ies of S ompan! ompan! that that "ere assumed assumed b! : ompan! ompan!.. b. decrease in consolidated consolidated retained earnings. earnings. c. increase in consolidated good"ill. d. decrease decrease in conso consolida lidated ted other other contribut contributed ed capita capital. l.
1-. 1-.
*n Febru Februar! ar! -, -, :r!or :r!or orpor orporati ation on paid paid =1,9 =1,99,9 9,999 99 for for all the the issued issued and and outst outstand anding ing comm common on stoc% stoc% of Sha", Sha", 'nc., in a transaction properl! accounted for as an acquisition. ;he boo% values and fair values of Sha">s assets and liabilities on Februar! - "ere as follo"s
ash Receivables +net 'nventor! :lant and equipment +net iabilities (et assets
?oo% @alue = 19,999 19,999 &1-,999 29,999 +&-9,999 =1,12-,999
Fair @alue = 19,999 19,999 &99,999 629,999 +&-9,999 =1,219,999
0hat is the amount of good"ill resulting from the business combination7 a. =#9#. b. =4/-,999. c. =-,999. d. =&69,999. 1. 1.
: omp ompan! an! purch purchase ased d the the net net asset assetss of S ompa ompan! n! for for =22=22-,99 ,999. 9. *n the the date date of :>s :>s purc purchas hase, e, S ompan! had no investments in mar%etable securities and =&9,999 +boo% and fair value of liabilities. ;he fair values of S ompan!>s ompan!>s assets, "hen acquired, acquired, "ere urrent assets (oncurrent assets ;otal
= 129,999 19,999 =&99,999
o" should the =4-,999 difference bet"een the fair value of the net assets acquired +=2/9,999 and the consideration paid +=22-,999 be accounted for f or b! : ompan!7 a. ;he noncurren noncurrentt assets assets shou should ld be be recorded recorded at = 1&-,999. 1&-,999. b. ;he =4-,999 difference difference should be credited credited to retained earnings. earnings. c. ;he current current assets assets should should be recorded recorded at =192,999, =192,999, and the noncurren noncurrentt assets should should be recorded recorded at =1-&,999.
Chapter 2 Accounting for Business Business Combinations
2#-
An ordinar! gain of =4-,999 should be recorded. ' "ould edit as B become ? 'f the the valu valuee impli implied ed b! the purc purchas hasee price price of of an acqu acquire ired d compa compan! n! ece eceeds eds the fair fair values values of identifiable net assets, the ecess should be a. allocated allocated to reduce reduce an! previous previousl! l! recorded recorded good"ill good"ill and and classif! classif! an! remainder remainder as an ordinar! ordinar! gain. b. allocated to reduce current current and long#lived assets. assets. c. alloca allocated ted to to reduce reduce long long#li #lived ved asse assets ts.. d. acco accoun unte ted d for for as goo good" d"il ill. l. d.
1/. 1/.
1. 1.
16. 16.
: o. o. issued issued -,99 -,999 9 share sharess of its its common common stoc stoc%, %, value valued d at =299, =299,999 999,, to the the former former shar shareho eholde lders rs of S ompan! t"o !ears after S ompan! "as acquired in an all#stoc% transaction. transaction. ;he additional shares "ere issued because : ompan! agreed to issue additional shares of common stoc% if the average post combination earnings earnings over the net t"o !ears eceeded =-99,999. : ompan! "ill treat the issuance of the additional shares as a +decrease in a. consol consolida idated ted retain retained ed earni earnings ngs.. b. consolidated good"ill. good"ill. c. consol consolida idated ted paid#i paid#in n capita capital. l. d. non#curre non#current nt liabilit liabilities ies of S ompan! ompan! assume assumed d b! : ompan ompan! !. ;he fair fair valu valuee of asset assetss and liab liabili ilitie tiess of the the acqui acquired red ent entit! it! is is to be be reflect reflected ed in the the finan financia ciall statements of the combined entit!. entit!. 0hen the acquisition ta%es place over a period of time rather than all at once, at "hat time is the fair value of the assets and liabilities of the acquired entit! determined under SFAS 141R7 a. the date the interest interest in the the acquir acquiree ee "as "as acquir acquired. ed. b. the date the acquirer obtains obtains control of the the acquiree c. the date date of acquisi acquisition tion of of the larges largestt portion portion of the the interest interest in in the acquire acquiree. e. d. the the date date of the the finan financia ciall state statemen ments. ts.
29. 29.
;he first first step step in dete determi rminin ning g good good"il "illl impai impairme rment nt invo involve lvess compa comparin ring g the the a. implied implied value value of a reporting reporting unit unit to its carr!in carr!ing g amount amount +good"ill +good"ill eclude ecluded. d. b. fair value of a reporting unit to its carr!ing amount +good"ill ecluded. ecluded. c. implied implied value value of a reporting reporting unit unit to its carr!in carr!ing g amount amount +good"ill +good"ill include included. d. d. fair value value of a reporting reporting unit unit to its its carr!ing carr!ing amount amount +good"ill +good"ill includ included. ed.
21. 21.
'f an impai impairme rment nt loss loss is reco recorde rded d on previ previous ousl! l! recog recogni ni5ed 5ed good good"il "illl due to the the trans transiti itiona onall good"i good"ill ll impairment test, the loss should be treated as a+nC a. loss loss from from a change change in acco accoun untin ting g princi principle ples. s. b. etraordinar! loss loss c. loss loss from from conti continui nuing ng operat operation ions. s. d. loss loss from from disco disconti ntinui nuing ng oper operati ations ons..
22. 22.
: omp ompan! an! acqu acquire iress all of the the votin voting g stoc% stoc% of S omp ompan! an! for =6&9 =6&9,99 ,999 9 cash. cash. ;he boo boo% % value valuess of S ompan!$s ompan!$s assets are =99,999, but the fair f air values are =49,999 because land has a fair value above its boo% value. Dood"ill from the combination combination is computed computed asC a. =1&9,999. b. =69,999. c. =49,999. d. =9.
2#
2&.
Test Bank to Accompany Jeter and Chaney Advanced Accounting
Under SFAS SFAS 141R, "hat value of the assets and liabilities is reflected in the financial statements on the acquisition date of a business combination7 a. ar arr!in r!ing g valu valuee b. Fair value c. ?oo% value d. Avera verage ge valu valuee
Use the following information to answer uestions 2! " 2#$
(orth ompan! issued issued 24,999 shares of its =29 =29 par value common stoc% for the net assets of :rairie ompan! in business combination combination under "hich :rairie ompan! "ill be merged into (orth (orth ompan!. ompan!. *n the date of the combination, combination, (orth ompan! common common stoc% had a fair value of =&9 =&9 per share. ?alance sheets for (orth ompan! and :rairie ompan! immediatel! prior to the combination "ere as follo"sC (orth (ort h
:rairie :rai rie
urrent Assets :lant and 3quipment +net ;otal
=1,&14,999 1,/2-,999 =&,9&6,999
=162,999 49,999 =99,999
iabilities ommon Stoc%, =29 par value *ther ontributed apital Retained 3arnings ;otal
= 699,999 1,-9,999 21,999 2/1,999 =&,9&6,999
=1-9,999 249,999 9,999 1-9,999 =99,999
24. 24.
'f the the busine business ss combi combinat nation ion is is treate treated d as an acqui acquisit sition ion and and :rairi :rairiee ompan ompan!$ !$ss net asset assetss have have a fair value of =,499, (orth ompan!$s ompan!$s balance sheet immediatel! after the combination "ill include good"ill of a. =&9,99. b. =&,499. c. =&&,99. d. =-,499.
2-. 2-.
'f the the busine business ss combi combinat nation ion is is treate treated d as an acqui acquisit sition ion and and the the fair fair value value of :rair :rairie ie ompa ompan!$ n!$ss current assets is =2/9,999, its plant and equipment is =/2,999, and its liabilities are =1,999, (orth ompan!$s ompan!$s financial statements statements immediatel! after the combination combination "ill include include a. (egati (egative ve goo good"i d"ill ll of =19 =19,9 ,999 99.. b. :lant and equipment equipment of =2,1&&,999. c. :lant :lant and equipm equipmen entt of =2,&4& =2,&4&,99 ,999. 9. d. An ordina ordinar! r! gain gain of =19 =19,9 ,999 99..
Chapter 2 Accounting for Business Business Combinations
2. 2.
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*n Ea! Ea! 1, 1, 291&, 291&, the the :hil :hil ompa ompan! n! paid paid =1,2 =1,299, 99,999 999 for 9 9 of of the the outst outstand anding ing common common stoc stoc% % of Sage orporation in a transaction properl! accounted accounted for as an acquisition. ;he recorded assets and liabilities of Sage orporation on Ea! 1, 291&, follo"C ash 'nventor! :ro :ropert! ert! G equ equip ipme ment nt +(et +(et of accu accumu mullated ated depre epreci ciat atio ion n iabilities
=199,999 299,999 99 99,999 ,999 +19,999
*n Ea! 1, 291&, it "as determined that the inventor! of Sage had a fair value of =229,999 and the propert! and equipment equipment +net has a fair value of =1,299,999. =1,299,999. 0hat is the amount amount of good"ill resulting from the business combination7 a. =9. b. =112,999. =112,999. c. =149,999. d. =2,999. Use the following information to answer uestions 2% " 2&$
:osch ompan! issued 12,999 shares of its =29 par value common stoc% for the net assets of Sato ompan! in a business combination under under "hich Sato ompan! "ill be merged into :osch ompan!. ompan!. *n the date of the combination, :osch ompan! common stoc% stoc% had a fair value of =&9 per share. ?alance sheets for :osch ompan! and Sato ompan! immediatel! prior to the combination "ere as follo"sC :osch :o sch
Sato Sat o
urrent Assets :lant and 3quipment +net ;otal
= -/,999 &,999 =1,-29,999
= 6,999 294,999 =&99,999
iabilities ommon Stoc%, =29 par value *ther ontributed apital Retained 3arnings ;otal
= 4-9,999 2-,999 196,999 1&,999 =1,-29,999
= /-,999 129,999 &9,999 /-,999 =&99,999
2/. 2/.
'f the the busine business ss combi combinat nation ion is is treate treated d as an acqui acquisit sition ion and and Sato Sato ompa ompan!$ n!$ss net asset assetss have have a fair value of =&4&,299, :osch ompan!$s ompan!$s balance sheet immediatel! after the combination "ill include good"ill of a. =1-,&99. b. =16,299. c. =1,99. d. =2,299.
2. 2.
'f the the busine business ss combi combinat nation ion is is treate treated d as an acqui acquisit sition ion and and the the fair fair value value of Sato Sato ompa ompan!$ n!$ss curren currentt assets is =1&-,999, its plant and equipment is =&&,999, and its liabilities are =4,999, :osch ompan!$s ompan!$s financial statements immediatel! after the combination "ill include a. (egati (egative ve goo good"i d"ill ll of =-4 =-4,99 ,999. 9. b. :lant and equipment equipment of =1,22,999. c. :lant :lant and equipm equipmen entt of =1,1/2 =1,1/2,99 ,999. 9. d. An etr etraor aordin dinar! ar! gain gain of =-4 =-4,99 ,999. 9.
2#
Test Bank to Accompany Jeter and Chaney Advanced Accounting
26. Follo"ing its acquisition of the net assets of ?urnt ompan!, ompan!, :rimroseompan! assigned good"ill of =9,999 to one of the reporting divisions. 'nformation for this division follo"sC
ash 'nventor! 3quipment Dood"ill Accounts :a!able
arr!ing Amount = 29,999 &-,999 12-,999 9,999 &9,999
Fair @alue =29,999 49,999 19,999 &9,999
?ased on the preceding information, "hat amount of good"ill "ill be reported for this division if its fair value is determined to be =299,9997 a. =9 b. =9,999 c. =&9,999 d. =19,999 &9.
;he fair value of net identifiable assets eclusive of good"ill of a reporting reporting unit of H ompan! is =&99,999. *n H ompan!>s boo%s, the carr!ing value of this reporting unit>s net assets is =&-9,999, including =9,999 good"ill. good"ill. 'f the fair value of the reporting unit is =&&-,999, "hat amount of good"ill impairment "ill be recogni5ed for this unit7 a. =9 b. =19,999 c. =2-,999 d. =&-,999
&1.
;he fair value of net identifiable assets of a reporting reporting unit eclusive of good"ill of 8 ompan! is =2/9,999. ;he carr!ing value of the reporting unit>s net assets on 8 ompan!>s boo%s is =&29,999, including =-9,999 good"ill. good"ill. 'f the reported good"ill impairment for the unit is =19,999, "hat "ould be the fair value of the reporting reporting unit7 a. =&29,999 b. =&19,999 c. =2/9,999 d. =269,999
&2. :orpoise orporation acquired Sims ompan! through an echange of common shares. All of Sims$ assets and liabilities "ere "ere immediatel! transferred to :orpoise. :orpoise ompan!$s ompan!$s common stoc% "as trading at =29 per share at the time of echange. ;he follo"ing selected information is also availableC 'orpoise Company Before Before Acquisition After Acquisition Acquisition Par value of shares shares outstanding $200,000 $250,000 Additional Paid Paid in Capital 350,000 550,000 0hat number of shares "as issued at the time of the echange7 a. -,999 b. 1/,-99 c. 12,-99 d. 19,999
Chapter 2 Accounting for Business Business Combinations
Probles Probles
2#1
?alanc ?alancee sheet sheet infor informat mation ion for for ope ope orpo orporat ration ion at at Ianuar Ianuar! ! 1, 291&, 291&, is summ summari ari5ed 5ed as foll follo" o"sC sC urrent assets = 629,999 iabilities = 1,299,999 :lant assets 1,99,999 apital stoc% =19 par 99,999 Retained earnings /29,999 =2 =2,/29,999 = 2,/29,999 ope$s ope$s assets and liabilities are fairl! valued ecept for plant assets that are undervalued b! =299,999. *n Ianuar! 2, 291&, Robin orporation issues issues 9,999 shares of its =19 par value common stoc% for all of ope$s ope$s net assets and ope is dissolved. Ear%et quotations for the t"o stoc%s on this date areC Robin commonC=2 ope ope commo commonC nC =16 Robin pa!s the follo"ing fees and costs in connection "ith the combinationC Finder $s fee ost ostss of regi regist ster erin ing g and and issu issuin ing g stoc stoc% % egal and accounting fees
=19,999 -,99 -,999 9 ,999
(euired) A. alculate alculate Robin$ Robin$ss investment investment cost cost of ope orporatio orporation. n.
?. alculate alculate an! an! good"ill good"ill from from the busin business ess combina combination tion..
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Eaple" Eaple"ood ood orp orpora oratio tion n purcha purchased sed the the net net assets assets of of 0est 0est orp orpora oratio tion n on Ianua Ianuar! r! 2, 291& 291& for for =-9,999 and also paid =29,999 in direct acquisition costs. 0est$s balance sheet on Ianuar! 1, 291& "as as follo"sC Accounts receivable#net 'nventor! and ?uilding#net 3quipment#net ;otal assets
= 19,999 &9,999 49,999 9,999 9,999 = /29,999
urrent liabilities = /9,999 ong term debt 19,999 ommon stoc% +=1 par 29,999 :aid#in capital 4&9,999 Retained earnings 49,999 ;otal liab. G equit! = /29,999
Fair values agree "ith boo% values ecept for inventor!, inventor!, land, and equipment, "hich have fair values of =499,999, =-9,999 and =/9,999, respectivel!. respectivel!. 0est has patent rights valued at =29,999. (euired) A. :repare Eaple"ood$s Eaple"ood$s general general )ournal entr! entr! for the cash purchase of 0est$ 0est$ss net assets. assets.
?. Assume Eaple"ood Eaple"ood orporation orporation purchased the net assets of 0est orporation orporation for =-99,999 =-99,999 rather than =-9,999, prepare the general )ournal entr!.
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2#19 Test Bank to Accompany Jeter and Chaney Advanced Accounting 2#&
3dina 3dina ompa ompan! n! acqui acquired red the the assets assets +ec +ecep eptt cash cash and assum assumed ed the the liabi liabilit lities ies of of ?urns ?urns ompan ompan! ! on Ianuar! 1, 291&, pa!ing =2,99,999 cash. 'mmediatel! prior to the acquisition, ?urns ompan!>s balance sheet "as as follo"sC follo"sC
Accounts receivable +net 'nventor! and ?uildings +net ;otal
?**J ?**J @AU3 AU3 = 24 249,999 269,999 69,999 1,929,999 =2,-19,999
FA'R A'R @AU3 AU3 = 22 229,999 &29,999 1,-9,999 1,&62,999 =&,449,999
Accounts pa!able (ote pa!able ommon stoc%, =- par *ther contributed capital Retained earnings ;otal
= 2/9,999 99,999 429,999 49,999 -9,999 =2,-19,999
= 2/9,999 99,999
3dina ompan! agreed to pa! ?urns ompan!>s former stoc%holders =299,999 cash in 2914 if post# combination earnings of the combined compan! reached =1,999,999 during 291&. (euiredC A. :repare the )ournal entr! entr! necessar! for 3dina ompan! to record the acquisition on Ianuar! 1, 291&. 't is epected that the earnings earnings target is li%el! li%el! to be met.
?. :repare the )ournal entr! necessar! necessar! for 3dina ompan! ompan! in 2914 assuming assuming the the earnings contingenc! "as not met.
2#4
onden ondensed sed balanc balancee sheet sheetss for Rich Rich ompa ompan! n! and and Iord Iordan an omp ompan! an! on Ianu Ianuar! ar! 1, 1, 291& 291& are as follo"sC
urrent Assets :lant and 3quipment +net ;otal Assets
Rich Ri ch = 449,999 1,99,999 =1,-29,999
Iord Io rdan an =299,999 &49,999 =-49,999
;otal iabilities ommon Stoc%, =19 par value *ther ontributed apital Retained 3arnings ;otal 3quities
= 2&9,999 49,999 &99,999 1-9,999 =1,-29,999
= 9,999 249,999 1&9,999 69,999 =-49,999
*n Ianuar! 1, 291& the stoc%holders of Rich and Iordan agreed to a consolidation "hereb! a ne" corporation, annon ompan!, ompan!, "ould be formed to consolidate Rich and Iordan. annon ompan! issued /9,999 shares of its =29 par value common stoc% for the net assets of Rich and Iordan. *n the date of consolidation, the fair values of Rich>s and Iordan>s current assets and liabilities "ere equal to their boo% values. values. ;he fair value of plant and equipment equipment for each compan! "asC "asC Rich, =1,2/9,999K Iordan, =&9,999.
Chapter 2 Accounting for Business Business Combinations
2#11
An investment ban%ing house estimated that the fair value of annon ompan!>s common stoc% "as =&- per share. Rich "ill incur =4-,999 of direct acquisition acquisition costs and =1-,999 in stoc% issue costs. (euiredC :repare the )ournal entries to record the consolidation on the boo%s of annon ompan! assuming that the consolidation is accounted for as an acquisition.
2.-
;he stoc stoc%ho %holde lders$ rs$ equiti equities es of :enn :enn orpo orporat ration ion and and Simon Simon orp orpora oratio tion n "ere "ere as follo" follo"ss on Ianua Ianuar! r! 1, 291&C
ommon Stoc%, =1 par *ther ontributed apital Retained 3arnings ;otal Stoc%holders$ 3quit!
:e : enn orp. =1,999,999 2,99,999 99,999 =4,499,999
Simon orp. = 9 99,999 1,199,999 &49,999 =2,949,999
*n Ianuar! 2, 291& :enn orp. issued 199,999 of its shares "ith a mar%et value of =14 per share in echange for all of Simon$s Simon$s shares, and Simon orp. "as dissolved. :enn orp. paid =19,999 to register and issue the ne" common shares. (euired) :repare the stoc%holders$ equit! section of :enn orp. balance sheet after the business combination on Ianuar! 2, 291&.
2#
;he manag managers ers of of Savage Savage omp ompan! an! o"n 19,999 19,999 of its its 199,9 199,999 99 outs outstan tandin ding g commo common n shares shares.. S"ann S"ann ompan! is formed b! the managers of Savage ompan! to ta%e over Savage ompan! in a leveraged bu!out. ;he managers contribute their shares in Savage ompan! and S"ann ompan! ompan! then borro"s =/-,999 to purchase the remaining 69,999 shares of Savage ompan! for =99,999K the remaining =/-,999 is used for "or%ing capital. capital. Savage ompan! is then merged into S"ann ompan! effective Ianuar! 1, 291&. Bata relevant to Savage ompan! immediatel! prior prior to the leveraged bu!out follo"C
urrent Assets :lant Assets iabilities Stoc%holders> 3quit!
?oo% @alue = 69,999 2--,999 +4-,999 =&99,999
Fair @alue = 69,999 -2-,999 +4-,999 =-/9,999
(euiredC A. :repare )ournal entries on S"ann ompan!>s ompan!>s boo%s to reflect the effects of the leveraged leveraged bu!out. ?. Betermine Betermine the the balance balance of each of the follo"ing follo"ing immediate immediatel! l! after the merger mergerCC 1. ur urrent rent Asset ssetss 2. :lant As Assets &. (ote :a :a!able 4. ommo mon n St Stoc%
2#12 Test Bank to Accompany Jeter and Chaney Advanced Accounting 2#/
*n Ianua Ianuar! r! 1, 2919, 2919, ?rig ?righto hton n ompan ompan! ! acqui acquired red the the net asset assetss of Ba%ota Ba%ota omp ompan! an! for for =1,- =1,-9,9 9,999 99 cash. ;he fair value of Ba%ota$s Ba%ota$s identifiable identifiable net assets "as "as =1,&19,999 on his date. date. ?righton ompan! decided to measure good"ill impairment using the present value of future cash flo"s to estimate the fair value of the reporting unit +Ba%ota. +Ba%ota. ;he information for these subsequent subsequent !ears is as follo"sC
Present value value
Carr!ing value of a%ota&s a%ota&s 'dentifiable
(ear
of "uture Cash "lo)s
*et Assets+
"air #alue a%ota&s a%ota&s 'dentifiable *et Assets
291& 2914
=1,499,999 =1,499,999
=1,19,999 =1,129,999
=1,169,999 =1,219,999
L 'dentifiable net assets do not include good"ill. (euired) AC For each !ear determine the amount of good"ill impairment, if an!. BC :repare the )ournal entries needed each !ear to record the good"ill impairment +if an! on ?righton$s boo%s. 2#
;he foll follo"i o"ing ng bala balance nce shee sheets ts "ere "ere repor reported ted on on Ianuar Ianuar! ! 1, 291&, 291&, for for 0ood 0ood omp ompan! an! and and Rose Rose ompan!C
ash 'nventor! 3quipment +net ;otal
0ood 0oo d = 1-9,999 4-9,999 1,&29,999 =1,629,999
Rose = &9,999 1-9,999 -/9,999 =/-9,999
;otal liabilities ommon stoc%, =29 par value *ther contributed capital Retained earnings ;otal
= 44-9,999 99,999 &/-,999 46-,999 =1,629,999
=1-9,999 &99,999 19-,999 16-,999 =/-9,999
(euired) Appraisals reveal that the inventor! has a fair value =19,999, and the equipment has a current value of =1-,999. ;he boo% value and fair fair value of liabilities are the same. Assuming that 0ood ompan! "ishes to acquire Rose for cash in an asset acquisition, determine the follo"ing cutoff amountsC A. ;he purchase purchase price price above "hich "hich 0ood 0ood "ould "ould record good"i good"ill. ll. ?. ;he purchas purchasee price at "hich "hich 0ood 0ood "ould "ould record record a =-9,999 =-9,999 gain. . ;he purchase purchase price price belo" "hich "hich 0ood 0ood "ould "ould obtain obtain a Mbargain.N Mbargain.N B. ;he purchase purchase price price at "hich 0ood 0ood "ould "ould record =/-,999 =/-,999 of good"il good"ill. l.
hort Ans)er
1.
SFAS SFAS (o. (o. 142 142 requir requires es that that good good"il "illl impai impairmen rmentt be tested tested annual annuall! l! for for each each report reporting ing unit. unit. Biscus Biscusss the necessar! steps of the good"ill impairment test.
Chapter 2 Accounting for Business Business Combinations
2#1&
2. ?riefl! describe the different different treatment under SFAS SFAS 141 vs. SFAS SFAS 141R for the follo"ing issuesC issuesC ?usiness definition Acquisition costs 'n#process RGB ontingent consideration
*hort Answer +uestions from the Textbook
1. 0hen contingent contingent consideration consideration in an acquisition is based on securit! securit! prices, prices, ho" should this this contingenc! be reflected on the acquisition date7 'f the estimate changes during the measurement period, ho" is this handled7 handled7 'f the estimate changes changes after the end of the measurement period, ho" is this ad)ustment handled7 0h!7 2. 0hat are are pro forma forma financia financiall statement statements7 s7 0hat 0hat is their their purpose purpose77 &. o" "ould "ould a compan! compan! deter determine mine "hethe "hetherr good"ill good"ill has has been impaire impaired7 d7 4. A* announced that that because of an accounting accounting change +FAS? +FAS? Statements (os. 141R OAS OAS 9-P and142 and142 OAS &-9P, earnings "ould be increasing over the net 2- !ears b! =-.6 billion a !ear. !ear. 0hat change+s required b! FAS? +in SFAS (os. 141Rand 142 resulted in an increase in A*$s in#comeincome7 0ould !ou epect this increase in earnings to have a positive impact on A*$s stoc% price7 0h! or "h! not7
Business ,thics +uestion from Textbook ;here have been several recent cases of a 3* or F* resigning or being ousted for misrepresenting academic credentials. For instance, during Februar! 299,the 3* of RadioShac% resigned b! Qmutual agreement$ for inflating his educational bac%ground. Buring 2992, @eritas Soft"are orporation$s F* resigned after claiming to have an E?A from Stanford Universit!. Universit!. *n the other hand, ?ausch G omb 'nc.$s board refused the 3*$s offer to resign follo"ing a questionable claim to have an E?A. Suppose !ou have been retained b! the board of a compan! "here the 3* has Qoverstated$ credentials. ;his compan! has a code of ethics and conduct "hich states that the emplo!ee should al"a!s do Mthe right thing.N+a 0hat is the board of directors$ responsibilit! responsibilit! in such matters7+b 0hat arguments "ould !ou ma%e to as% the 3* to resign7 0hat damage might be caused if the decision decision is made to retain the current 3*7
2#14 Test Bank to Accompany Jeter and Chaney Advanced Accounting
A-*.,( /,0
Multiple Choice Choice
1. 2. &. 4. -. . /. . 6.
b d b b d b d b c
19. 11. 12. 1&. 14. 1-. 1. 1/. 1.
c c a d c d dsee note on p& d c
16. 29. 21. 22. 2&. 24. 2-. 2. 2/.
b d a b b c d c c
2. b 26. d &9. c &1. b &2. c
Probles Probles
2#1 2#1
A. FE@ FE@ of shar shares es issu issued ed b! Robi Robin n +9, +9,99 999 9 sh =2 =2
=2,2 =2,249 49,9 ,999 99
?. 'nvestment cost from :art A =2,249,999 essC Fair value of ope$s ope$s net assets assets +=2,/29,999T=299,999=1,29 +=2,/29,999T=299,999=1,299,999 9,999 1,/29,999 Dood"ill from investment = -29,999 2#2
A. Accounts Receivable 'nventor! and ?uilding 3quipment :atent Dood"ill Acquisition 3pense urrent iabilities ong#term Bebt ash
19,999 499,999 -9,999 9,999 /9,999 29,999 19,999 29,999
?. Acquisition 3pense Accounts Receivable 'nventor! and ?uilding 3quipment :atent urrent iabilities ong#term Bebt ash Dain on Acquisition
29,999 19,999 499,999 -9,999 9,999 /9,999 29,999
/9,999 19,999 -9,999
/9,999 19,999 -29,999 -9,999
Chapter 2 Accounting for Business Business Combinations
2#&
A. Accounts Receivable 'nventor! and ?uildings Dood"ill Allo"ance for Uncollectible Accounts Accounts :a!able (ote :a!able ash
249,999 &29,999 1,-9,999 1,&62,999 &9,999
Dood"ill iabilit! for ontingent onsideration
299,999
ost of acquisition Fair value of net assets acquired +=&,449,999 =/9,999 Dood"ill
2#-
299,999
=2,99,999 2,-/9,999 = &9,999
?. iabilit! fo for o ontingent onsideration 'ncome from hange in 3stimate
2#4
29,999 2/9,999 99,999 2,99,999
299,99 ,999 299,999
urrent Assets +=449,999 T =299,999 49,999 :lant and 3quipment +=1,2/9,999 +=1,2/9,999 T =&9,999 1,&9,999 Dood"ill 469,999 iabilities +=2&9,999 T =9,999 ommon Stoc% +/9,999 shares V =29Wshare *ther ontributed apital +/9,999 +=&- =29 Acquisition 3pense ash
4-,999
*ther ontributed apital ash
1-,999
Stoc%holders$ 3q 3quit!C ommon Stoc%, =1 par *ther ontributed apital Re Retained 3arnings ;otal stoc%holders$ 3quit!
&19,999 1,499,999 1,9-9,999
4-,999
1-,999
=1,199,999 4,969,999 O=2,99,999 T +199,999 =1& =19,999P 99,999 = -,/69,99 ,999
2#1-
2#1 Test Bank to Accompany Jeter and Chaney Advanced Accounting 2#
A 'nvestment 'nvestment in Savage Savage ompan! +=&99,99 +=&99,999 9 .19 &9,999 &9,999 ommon Stoc%
&9,999
ash (ote :a!able
/-,999
'nvestment in Savage ompan! ash
99,999
urrent Assets :lant Assets +1 Dood"ill +2 iabilities 'nvestment in Savage
69,999 46,999 /,999
/-,999
99,999
4-,999 &9,999
+1 =2--,999 =2--,999 T O.69 +=-2-,999 +=-2-,999 =2--,999 =2--,999PP =46,999 +2 ost of shares ?oo% value of net assets +.69 .69 =&99,999 Bifference be bet"een co cost an and bo boo% va value Allocated toC :lan :lantt asse assets ts +.69 +.69 +=+=-22-,9 ,999 99 =2=2--, -,99 999 9 Dood"ill ? 1. 2. &. 4. 2#/
urrent Assets +=69,999 T =/-,999 :lant Assets +=2--,999 T =24&,999 (o (ote :a!able o ommon Stoc%
A. 291&C
=99,999 2/9,99 ,999 =&&9,999 24&, 24&,99 999 9 /,999
1-,999 46,999 /-,999 &9,999
*tep 1) Fair value of the reporting unit arr!ing value of unitC arr!ing value of identifiable net assets =1,19,999 arr!i arr!ing ng value value of goo good" d"ill ill +=1,- +=1,-9,9 9,999 99 =1,& =1,&19, 19,999 999 2/9,999 2/9,99 9
3cess of carr!ing value over fair value ;he ecess of carr!ing value over fair value means that step 2 is required.
2914C
=1,499,999
1,4&9,999 =&9,999
*tep 2) Fair value of the reporting unit Fair value of identifiable net assets 'mplied value of good"ill Recorded value of good"ill +=1,-9,999 =1,&19,999 'mpairment loss
=1,499,999 1,169,999 219,999 2/9,999 =9,999
*tep 1) Fair value of the reporting unit arr!ing value of unitC arr!ing va value of id identifiable ne net as assets arr arr!i !ing ng valu valuee of good good"i "ill ll +=2/ +=2/9, 9,99 999 9 =49, =49,99 999 9
=1,499,999 =1,129,999 2&9, 2&9,99 999 9 1,&-9,999
2#1/
Chapter 2 Accounting for Business Business Combinations
3cess of Fair value over arr!ing value
= -9,999
;he ecess of fair value over carr!ing value means that step 2 is not required. ?. 291&C
2914C 2#
a.
'mpairment ossXDood"ill Dood"ill
9,999 9,999
(o entr!
Fair @a @alue of of 'd 'dentifiable (e (et Assets ?oo% values =/-9,999 =1-9,999 0rite up of 'nventor! and 3quipmentC +=&9,999 T =4-,999 :urchase price above "hich good"ill "ould result
=99,999 /-,999 =/-,999
b. An! eisting good"ill good"ill "ould be eliminated eliminated before recording recording a gainC =/-,999 Fair @alue of 'dentifiable (et Assets =-9,999 Dain =2-,999. c. An!thing An!thing belo" belo" =/-,999 =/-,999 is is technici techniciall! all! consi considered dered a bargain. bargain. d. Dood"ill Dood"ill "ould "ould be =/-,99 =/-,999 9 at a purchase purchase price price of =/-9,999 =/-9,999 or +=/-,99 +=/-,999 9 T =/-,999. =/-,999. hort Ans)er
1.
'n the the firs firstt step step of of the the good" good"ill ill impair impairmen mentt test, test, the fair fair value value of the the repo reporti rting ng unit unit is comp compare ared d to its carr!ing amount. 'f the fair value is less than the carr!ing amount, then the carr!ing value of the good"ill is compared to its implied fair value. value. A loss is recogni5ed recogni5ed "hen the carr!ing value of good"ill is higher than its fair value.
2. 'ssue ?usiness definition
SFAS (o. 141 A business is defined as a self#sustaining integrated set of activities and assets conducted and managed for the purpose of providing a return to investors. investors. ;he definition "ould eclude earl!#stage development entities. apitali5e the costs.
SFAS (o. 141R A business or a group of assets no longer must be self#sustaining. self#sustaining. ;he business or group of assets must be capable of generating a revenue stream. ;his definition "ould include earl!#stage development entities. 3pense as incurred.
'n#process RGB
'ncluded as part of purchase price, but then immediatel! epensed.
'ncluded as part of purchase price, treated as an asset.
ontingent consideration
Record "hen determinable and reflect subsequent changes in the purchase price.
Record at fair value on the acquisition date "ith subsequent changes recorded on the income statement.
Acquisition costs
*hort Answer +uestions from the Textbook Textbook *olutions
2#1 Test Bank to Accompany Jeter and Chaney Advanced Accounting
1.
At the acqui acquisitio sition n date, the the informati information on available available +and +and through through the the end of the the measuremen measurementt period period is used to estimate the epected total total consideration at fair value. 'f the subsequent stoc% issue issue valuation differs from this assessment, the -.posure -.posure raft /"A /"A 20100 epected to replace "AB "AB tateent *o4 1 specifies that equit! should not be ad)usted. ad)usted. ;he reason is that the valuation "as determined at the date of the echange, and thus the impact on the firm$s equit! "as measured at that point based on the best information available then.
2.
:ro forma forma financ financial ial statem statement entss +somet +sometime imess referr referred ed to as Mas ifN statem statement ents s are financ financial ial statem statement entss that are prepared to sho" the effect of planned or contemplated transactions.
&.
For purpos purposes es of the good" good"ill ill impairm impairment ent test, test, all good"i good"ill ll must must be assigned assigned to to a reporting reporting unit. unit. Dood"ill impairment impairment for each reporting unit should be tested in a t"o#step process. 'n the first step, the fair value of a reporting unit is compared to its carr!ing amount +good"ill included at the date of the periodic revie". revie". ;he fair value of the unit ma! be based on quoted mar%et prices, prices of comparable businesses, businesses, or a present value or other valuation technique. 'f the fair value at the revie" date is less than the carr!ing amount, then the second step is necessar! necessar!.. 'n the second step, the carr!ing value of the good"ill is compared to its implied fair fair value. +;he calculation of the implied fair value of good"ill used in the impairment test is similar to the method illustrated throughout this chapter for valuing the good"ill at the date of the combination.
4.
;he epect epected ed increase increase "as due to the the elimin eliminati ation on of goo good"i d"ill ll amorti5a amorti5atio tion n epense. epense. o"eve o"ever, r, the impairment loss under the ne" rules "as potentiall! larger than a periodic amorti5ation charge, and this is in fact "hat materiali5ed "ithin "ithin the first !ear after adoption +a large impairment loss. loss. 'f there "as an! initial stoc% price impact from elimination of good"ill amorti5ation, it "as onl! a short#term or momentum effect. Another issue is ho" the stoc% mar%et responds to the good"ill good"ill impairment charge. Some users claim that this charge is a non#cash charge and should be disregarded b! the mar%et. o"ever, o"ever, others argue that the charge is an admission that the price paid "as too high, and might result in a stoc% price decline +unless the mar%et had alread! ad)usted for this overpa!ment prior to the actual "rite do"n.
ANSWERS TO BUSINESS ETHICS CASE
a and b. ;he board has responsibilit! to investigate an!thing that might suggest malfeasance or inappropriate conduct. Such incidents suggest broader problems "ith integrit!, integrit!, honest!, honest!, and )udgment. 'n other "ords, can !ou trust an! reports from the 3* that lied on his resume7 'f ' f the 3* is not fired, "hat %ind of message does this send to other emplo!ees7 3mplo!ees "ill feel that top eecutives are not sub)ect to the same standards of ethical conduct as the! are.
