Exam 2: Consolidation of Financial Information

Direct combination costs and stock issuance costs are often incurred in the process of making a controlling investment in another company. How should those costs be accounted for in a pre-2009 purchase transaction? Direct Combination Costs Stock Issuance Costs A) Increase Investment Decrease Investment B) Increase Investment Decrease Paid-In Capital C) Increase Investment Increase Expenses D) Decrease Paid-In Capital Increase Investment E) Increase Expenses Decrease Investment

Lisa Co. paid cash for all of the voting common stock of Victoria Corp. Victoria will continue to exist as a separate corporation. Entries for the consolidation of Lisa and Victoria would be recorded in

Flynn acquires 100 percent of the outstanding voting shares of Macek Company on January 1, 2013. To obtain these shares, Flynn pays $400 cash (in thousands) and issues 10,000 shares of $20 par value common stock on this date. Flynn's stock had a fair value of $36 per share on that date. Flynn also pays $15 (in thousands) to a local investment firm for arranging the acquisition. An additional $10 (in thousands) was paid by Flynn in stock issuance costs. The book values for both Flynn and Macek as of January 1, 2013 follow. The fair value of each of Flynn and Macek accounts is also included. In addition, Macek holds a fully amortized trademark that still retains a $40 (in thousands) value. The figures below are in thousands. Any related question also is in thousands. Flynn, Ine. Macek Company Book Value Fair Value Cash \ 900 \ 80 \ 80 Receivables 480 180 160 Inventory 660 260 300 Land 300 120 130 Buildings (net) 1,200 220 280 Equipment 360 100 75 Accounts payable 480 60 60 Long-term liabilities 1,140 340 300 Common stock 1,000 80 Additional paid-in capital 200 0 Retained earnings 1,080 480 What amount will be reported for consolidated retained earnings?

Salem Co. had the following account balances as of December 1, 2012: Inventory \ 720,000 Land 600,000 Buildings - net (valued at \ 1,200,000) 1,080,000 Common stock ( \1 0 par value) 960,000 Retained earnings, December 1, 2012 1,320,000 Revenues 720,000 Expenses 600,000 Bellington Inc. transferred $1.7 million in cash and 12,000 shares of its newly issued $30 par value common stock (valued at $90 per share) to acquire all of Salem's outstanding common stock. Assume that Bellington paid cash of $2.8 million. No stock is issued. An additional $50,000 is paid in direct combination costs. Required: For Goodwill, determine what balance would be included in a December 1, 2012 consolidation.

On January 1, 2013, the Moody Company entered into a transaction for 100% of the outstanding common stock of Osorio Company. To acquire these shares, Moody issued $400 in long-term liabilities and 40 shares of common stock having a par value of $1 per share but a fair value of $10 per share. Moody paid $20 to lawyers, accountants, and brokers for assistance in bringing about this acquisition. Another $15 was paid in connection with stock issuance costs. Prior to these transactions, the balance sheets for the two companies were as follows: Moody Osorio Cash \ 180 \ 40 Receivables 810 180 Inventories 1,080 280 Land 600 360 Buildings (net) 1,260 440 Equipment (net) 480 100 Accounts payable (450) Long-term liabilities (1,290) Common stock (\ 1 par ) (330) Common stock (\ 20 par ) (240) Additional paid-in capital (1,080) (340) Retained earnings (1,260) (340) Note: Parentheses indicate a credit balance. In Moody's appraisal of Osorio, three assets were deemed to be undervalued on the subsidiary's books: Inventory by $10, Land by $40, and Buildings by $60. Compute the amount of consolidated land at date of acquisition.

In an acquisition where control is achieved, how would the land accounts of the parent and the land accounts of the subsidiary be combined? Parent Subsidiary A) Book Value Book Value B) Book Value Fair Value C) Fair Value Fair Value D) Fair Value Book Value E) Cost Cost

Elon Corp. obtained all of the common stock of Finley Co., paying slightly less than the fair value of Finley's net assets acquired. How should the difference between the consideration transferred and the fair value of the net assets be treated if the transaction is accounted for as an acquisition?

How would you account for in-process research and development acquired in a business combination accounted for as an acquisition?

The financial balances for the Atwood Company and the Franz Company as of December 31, 2013, are presented below. Also included are the fair values for Franz Company's net assets. Atwood Franz Co Franz Co. (all numbers are in thousands) Book Value Book Value Fair Value Cash \ 870 Receivables 660 600 600 Inventory 1,230 420 580 Land 1,800 260 250 Buildings (net) 1,800 540 650 Equipment (net) 660 380 400 Accounts payable (570) (240) (240) Accrued expenses (270) (60) (60) Long-term liabilities (2,700) (1,020) (1,120) Common stock (\ 20 par) (1,980) Common stock ( \5 par) (420) Additional paid-in capital (210) (180) Retained earnings (1,170) (480) Revenues (2,880) (660) Expenses 2,760 620 Note: Parenthesis indicate a credit balance Assume an acquisition business combination took place at December 31, 2013. Atwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Franz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid. Compute consolidated expenses at the date of the acquisition.

On January 1, 2013, the Moody Company entered into a transaction for 100% of the outstanding common stock of Osorio Company. To acquire these shares, Moody issued $400 in long-term liabilities and 40 shares of common stock having a par value of $1 per share but a fair value of $10 per share. Moody paid $20 to lawyers, accountants, and brokers for assistance in bringing about this acquisition. Another $15 was paid in connection with stock issuance costs. Prior to these transactions, the balance sheets for the two companies were as follows: Moody Osorio Cash \ 180 \ 40 Receivables 810 180 Inventories 1,080 280 Land 600 360 Buildings (net) 1,260 440 Equipment (net) 480 100 Accounts payable (450) Long-term liabilities (1,290) Common stock (\ 1 par ) (330) Common stock (\ 20 par ) (240) Additional paid-in capital (1,080) (340) Retained earnings (1,260) (340) Note: Parentheses indicate a credit balance. In Moody's appraisal of Osorio, three assets were deemed to be undervalued on the subsidiary's books: Inventory by $10, Land by $40, and Buildings by $60. Compute the amount of consolidated additional paid-in capital at date of acquisition.

The financial statements for Goodwin, Inc. and Corr Company for the year ended December 31, 2013, prior to Goodwin's acquisition business combination transaction regarding Corr, follow (in thousands): $\begin{array}{lrr}&\text { Goodwin } &\text { Corr }\\\text { Revenues } & \$ 2,700 & \$ 600 \\\text { Expenses } & \underline{1.980} & \underline{400} \\\text { Net income } & \$ 720 & \$ 200\\\\\text { Retained earnings } 1 / 1 & \$ 2,400 & \$ 400 \\\text { Net income } & 720 & 200 \\\text { Dividends } & (270) & (0)\\\text { Retained earnings, } 12 / 31&\$2,850&\$600\\\\\text { Cash } & {\$ 240} & \$ 220 \\\text { Receivables and inventory } & 1,200 & 340 \\\text { Buildings (net) } & 2,700 & 600 \\\text { Equipment (net) } & \underline{2,100} & \underline{1,200} \\\quad \text { Total assets } & \${\underline{\underline{6,240}}} & \$ \underline{\underline{2,360}}\\\\\text { Liabilities } & \$ 1,500 & \$ 820 \\\text { Common stock } & 1,080 & 400 \\\text { Additional paid-in capital } & 810 & 540 \\\text { Retained earnings } & 2,850 & 600 \\\quad \text { Total liabilities \& stockholders' equity } & \$ \underline{6,240} & \$ {\underline{6,360}}\end{array}$ On December 31, 2013, Goodwin issued $600 in debt and 30 shares of its $10 par value common stock to the owners of Corr to acquire all of the outstanding shares of that company. Goodwin shares had a fair value of $40 per share. Goodwin paid $25 to a broker for arranging the transaction. Goodwin paid $35 in stock issuance costs. Corr's equipment was actually worth $1,400 but its buildings were only valued at $560. Compute the consolidated cash account at December 31, 2013.

A statutory merger is a(n)

Bullen Inc. acquired 100% of the voting common stock of Vicker Inc. on January 1, 2013. The book value and fair value of Vicker's accounts on that date (prior to creating the combination) follow, along with the book value of Bullen's accounts: Bullen Vicker Vicker Book Book Fair Value Value Value Retained earnings, 1/1/15 Cash and receivables 170,000 70,000 Inventory 230,000 170,000 210,000 Land 280,000 220,000 240,000 Buildings (net) 480,000 240,000 270,000 Equipment (net) 120,000 90,000 90,000 Liabilities 650,000 430,000 420,000 Common stock 360,000 80,000 Additional paid-in capital 20,000 40,000 Assume that Bullen issued 12,000 shares of common stock with a $5 par value and a $42 fair value for all of the outstanding shares of Vicker. What will be the consolidated Additional Paid-In Capital and Retained Earnings (January 1, 2013 balances) as a result of this acquisition transaction?

The financial statements for Jode Inc. and Lakely Corp., just prior to their combination, for the year ending December 31, 2012, follow. Lakely's buildings were undervalued on its financial records by $60,000. On December 31, 2012, Jode issued 54,000 new shares of its $10 par value stock in exchange for all the outstanding shares of Lakely. Jode's shares had a fair value on that date of $35 per share. Jode paid $34,000 to an investment bank for assisting in the arrangements. Jode also paid $24,000 in stock issuance costs to effect the acquisition of Lakely. Lakely will retain its incorporation. Prepare the journal entries to record (1) the issuance of stock by Jode and (2) the payment of the combination costs.

Carnes has the following account balances as of May 1, 2012 before an acquisition transaction takes place. Inventory \ 100,000 Land 400,000 Buildings (net) 500,000 Common stock ( \1 0 par) 600,000 Additional paid-in capital 200,000 Retained Earnings 200,000 Revenues 450,000 Expenses 250,000 The fair value of Carnes' Land and Buildings are $650,000 and $550,000, respectively. On May 1, 2012, Riley Company issues 30,000 shares of its $10 par value ($25 fair value) common stock in exchange for all of the shares of Carnes' common stock. Riley paid $10,000 for costs to issue the new shares of stock. Before the acquisition, Riley has $700,000 in its common stock account and $300,000 in its additional paid-in capital account. On May 1, 2012, what value is assigned to Riley's investment account?

Flynn acquires 100 percent of the outstanding voting shares of Macek Company on January 1, 2013. To obtain these shares, Flynn pays $400 cash (in thousands) and issues 10,000 shares of $20 par value common stock on this date. Flynn's stock had a fair value of $36 per share on that date. Flynn also pays $15 (in thousands) to a local investment firm for arranging the acquisition. An additional $10 (in thousands) was paid by Flynn in stock issuance costs. The book values for both Flynn and Macek as of January 1, 2013 follow. The fair value of each of Flynn and Macek accounts is also included. In addition, Macek holds a fully amortized trademark that still retains a $40 (in thousands) value. The figures below are in thousands. Any related question also is in thousands. Flynn, Ine. Macek Company Book Value Fair Value Cash \ 900 \ 80 \ 80 Receivables 480 180 160 Inventory 660 260 300 Land 300 120 130 Buildings (net) 1,200 220 280 Equipment 360 100 75 Accounts payable 480 60 60 Long-term liabilities 1,140 340 300 Common stock 1,000 80 Additional paid-in capital 200 0 Retained earnings 1,080 480 By how much will Flynn's additional paid-in capital increase as a result of this acquisition?

On January 1, 2013, the Moody Company entered into a transaction for 100% of the outstanding common stock of Osorio Company. To acquire these shares, Moody issued $400 in long-term liabilities and 40 shares of common stock having a par value of $1 per share but a fair value of $10 per share. Moody paid $20 to lawyers, accountants, and brokers for assistance in bringing about this acquisition. Another $15 was paid in connection with stock issuance costs. Prior to these transactions, the balance sheets for the two companies were as follows: Moody Osorio Cash \ 180 \ 40 Receivables 810 180 Inventories 1,080 280 Land 600 360 Buildings (net) 1,260 440 Equipment (net) 480 100 Accounts payable (450) Long-term liabilities (1,290) Common stock (\ 1 par ) (330) Common stock (\ 20 par ) (240) Additional paid-in capital (1,080) (340) Retained earnings (1,260) (340) Note: Parentheses indicate a credit balance. In Moody's appraisal of Osorio, three assets were deemed to be undervalued on the subsidiary's books: Inventory by $10, Land by $40, and Buildings by $60. Compute the amount of consolidated cash after recording the acquisition transaction.

Bullen Inc. acquired 100% of the voting common stock of Vicker Inc. on January 1, 2013. The book value and fair value of Vicker's accounts on that date (prior to creating the combination) follow, along with the book value of Bullen's accounts: Bullen Vicker Vicker Book Book Fair Value Value Value Retained earnings, 1/1/15 Cash and receivables 170,000 70,000 Inventory 230,000 170,000 210,000 Land 280,000 220,000 240,000 Buildings (net) 480,000 240,000 270,000 Equipment (net) 120,000 90,000 90,000 Liabilities 650,000 430,000 420,000 Common stock 360,000 80,000 Additional paid-in capital 20,000 40,000 Assume that Bullen issued preferred stock with a par value of $240,000 and a fair value of $500,000 for all of the outstanding shares of Vicker in an acquisition business combination. What will be the balance in the consolidated Inventory and Land accounts?

The financial balances for the Atwood Company and the Franz Company as of December 31, 2013, are presented below. Also included are the fair values for Franz Company's net assets. Atwood Franz Co Franz Co. (all numbers are in thousands) Book Value Book Value Fair Value Cash \ 870 Receivables 660 600 600 Inventory 1,230 420 580 Land 1,800 260 250 Buildings (net) 1,800 540 650 Equipment (net) 660 380 400 Accounts payable (570) (240) (240) Accrued expenses (270) (60) (60) Long-term liabilities (2,700) (1,020) (1,120) Common stock (\ 20 par) (1,980) Common stock ( \5 par) (420) Additional paid-in capital (210) (180) Retained earnings (1,170) (480) Revenues (2,880) (660) Expenses 2,760 620 Note: Parenthesis indicate a credit balance Assume an acquisition business combination took place at December 31, 2013. Atwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Franz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid. Compute fair value of the net assets acquired at the date of the acquisition.