Exam 1: Business Combinations

Under the acquisition method a combination is recorded using the fair-value principle.

Following the accounting concept of a business combination,a business combination occurs when a company acquires an equity interest in another entity and has

Under the provisions of ASC 805-30,in a business combination,when the investment cost exceeds the total fair value of identifiable net assets acquired,which of the following statements is correct?

On January 2,2013,Pilates Inc.paid $700,000 for all of the outstanding common stock of Spinning Company,and dissolved Spinning Company.The carrying values for Spinning Company's assets and liabilities are recorded below. $\begin{array}{ll}\text { Cash } & \$ 200,000 \\\text { Accounts Receivable } & 220,000 \\\text { Copyrights (purchased) } & 400,000 \\\text { Goodwill } & 120,000 \\\text { Liabilities } & \$(180,000) \\\text { Net assets } & \$ 760,000\end{array}$ On January 2,2013,Spinning anticipated collecting $185,000 of the recorded Accounts Receivable.Pilates entered into the acquisition because Spinning had Copyrights that Pilates wished to own,and also unrecorded patents with a fair value of $100,000. Required: Calculate the amount of goodwill that will be recorded on Pilate's balance sheet as of the date of acquisition.Then record the journal entry Pilates would record on their books to record the acquisition.

In an acquisition,if the fair value of identifiable assets acquired over liabilities assumed exceed the cost of the acquired company the gain is recognized as an extraordinary gain by the acquiror.

On December 31,2013,Pandora Incorporated issued 40,000 shares of its $20 par common stock for all the outstanding shares of the Sophocles Company.In addition,Pandora agreed to pay the owners of Sophocles an additional $200,000 if a specific contract achieved the profit levels that were targeted by the owners of Sophocles in their sale agreement.The fair value of this amount,with an agreed likelihood of occurrence and discounted to present value,is $160,000.In addition,Pandora paid $10,000 in stock issue costs,$40,000 in legal fees,and $48,000 to employees who were dedicated to this acquisition for the last three months of the year.Summarized balance sheet and fair value information for Sophocles immediately prior to the acquisition follows. Required: 1.Prepare Pandora's general journal entry for the acquisition of Sophocles assuming that Pandora's stock was trading at $35 at the date of acquisition and Sophocles dissolves as a separate legal entity. 2.Prepare Pandora's general journal entry for the acquisition of Sophocles assuming that Pandora's stock was trading at $35 at the date of acquisition and Sophocles continues as a separate legal entity. 3.Prepare Pandora's general journal entry for the acquisition of Sophocles assuming that Pandora's stock was trading at $25 at the date of acquisition and Sophocles dissolves as a separate legal entity. 4.Prepare Pandora's general journal entry for the acquisition of Sophocles assuming that Pandora's stock was trading at $25 at the date of acquisition and Sophocles survives as a separate legal entity.

Saveed Corporation purchased the net assets of Penny Inc.on January 2,2013 for $1,690,000 cash and also paid $15,000 in direct acquisition costs.Penny dissolved as of the date of the acquisition.Penny's balance sheet on January 2,2013 was as follows: Fair values agree with book values except for inventory,land,and equipment,which have fair values of $640,000,$140,000 and $230,000,respectively.Penny has customer contracts valued at $20,000. Required: Prepare Saveed's general journal entry for the cash purchase of Penny's net assets.

Which of the following is not a reason for a company to expand through a combination,rather than by building new facilities?

Pali Corporation exchanges 200,000 shares of newly issued $10 par value common stock with a fair market value of $40 per share for all the outstanding $5 par value common stock of Shingle Incorporated,which continues on as a legal entity.Fair value approximated book value for all assets and liabilities of Shingle.Pali paid the following costs and expenses related to the business combination: Salaries of Pali's employees whose Required: Prepare the journal entries relating to the above acquisition and payments incurred by Pali,assuming all costs were paid in cash.

Pitch Co.paid $50,000 in fees to its accountants and lawyers in acquiring Slope Company.Pitch will treat the $50,000 as

Balance sheet information for Sphinx Company at January 1,2013,is summarized as follows: Sphinx's assets and liabilities are fairly valued except for plant assets that are undervalued by $50,000.On January 2,2013,Pyramid Corporation issues 20,000 shares of its $10 par value common stock for all of Sphinx's net assets and Sphinx is dissolved.Market quotations for the two stocks on this date are: Pyramid common: $\quad$$\quad$$\quad$ $28.00 Sphinx common: $\quad$$\quad$$\quad$ $19.50 Pyramid pays the following fees and costs in connection with the combination: Required: 1.Calculate Pyramid's investment cost of Sphinx Corporation. 2.Calculate any goodwill from the business combination.

On January 2,2013,Pilates Inc.paid $900,000 for all of the outstanding common stock of Spinning Company,and dissolved Spinning Company.The carrying values for Spinning Company's assets and liabilities are recorded below. $\begin{array}{ll}\text { Cash } & \$ 200,000 \\\text { Accounts Receivable } & 220,000 \\\text { Copyrights (purchased) } & 400,000 \\\text { Goodwill } & 120,000 \\\text { Liabilities } & \$(180,000) \\\text { Net assets } & \$ 760,000\end{array}$ On January 2,2013,Spinning anticipated collecting $185,000 of the recorded Accounts Receivable.Pilates entered into the acquisition because Spinning had Copyrights that Pilates wished to own,and also unrecorded patents with a fair value of $100,000. Required: Calculate the amount of goodwill that will be reported on Pilate's balance sheet as of the date of acquisition.

The balance sheets of Palisade Company and Salisbury Corporation were as follows on December 31,2013: Palisade Salisbury Current Assets \ 260,000 \ 120,000 Equipment-net 440,000 480,000 Buildings-net 600,000 200,000 Land Total Assets \ \ Current Liabilities 100,000 120,000 Common Stock, \ 5 par 1,000,000 400,000 Additional paid-in Capital 100,000 280,000 Retained Earnings 200,000 Total Liabilities and Stockholders' equity \ 1,400,000 \ On January 1,2014 Palisade issued 30,000 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 1,2014.

Use the following information to answer the question(s) below. Polka Corporation exchanges 100,000 shares of newly issued $1 par value common stock with a fair market value of $20 per share for all of the outstanding $5 par value common stock of Spot Inc. and Spot is then dissolved. Polka paid the following costs and expenses related to the business combination: Costs of special shareholders' meeting to vote on the merger \ 12,000 Registering and issuing securities 10,000 Accounting and legal fees 18,000 Salaries of Polka's employees assigned to the implementation of the merger 27,000 Cost of closing duplicate facilities 13,000 -In the business combination of Polka and Spot

It is frequently more expensive for a firm to obtain needed facilities through combination than through development.

Pepper Company paid $2,500,000 for the net assets of Salt Corporation and Salt was then dissolved.Salt had no liabilities.The fair values of Salt's assets were $3,750,000.Salt's only non-current assets were land and buildings with book values of $100,000 and $520,000,respectively,and fair values of $180,000 and $730,000,respectively.At what value will the buildings be recorded by Pepper?

A business merger differs from a business consolidation because

Firms should conduct an impairment test for goodwill at least quarterly.

Which of the following methods does the FASB consider the best indicator of fair values in the evaluation of goodwill impairment?

Parrot Incorporated purchased the assets and liabilities of Sparrow Company at the close of business on December 31,2013.Parrot borrowed $2,000,000 to complete this transaction,in addition to the $640,000 cash that they paid directly.The fair value and book value of Sparrow's recorded assets and liabilities as of the date of acquisition are listed below.In addition,Sparrow had a patent that had a fair value of $50,000. Accounts payable \ 1,200,000 \ 1,200,000 Notes payable 2,100,000 2,100,000 Capital stock, \ 5 par 700,000 Additional paid-in capital 1,400,000 Retained Earnings Total Liabilities \& Equities \ 5,890,000 Required: 1.Prepare Parrot's general journal entry for the acquisition of Sparrow,assuming that Sparrow survives as a separate legal entity. 2.Prepare Parrot's general journal entry for the acquisition of Sparrow,assuming that Sparrow will dissolve as a separate legal entity.