Deck 7: New Basis of Accounting
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Deck 7: New Basis of Accounting
1
Push-down accounting is currently required by _________________________.
Staff Accounting Bulletin No. 54 (or the Securities and Exchange Commission)
2
In applying push-down accounting, the upward revaluation of assets to their current values would require a credit entry to _________________________________.
Revaluation capital
3
The alternative to push-down accounting is ___________________________________.
Non-push-down accounting
4
Push-down accounting is currently not required for ______________________ entities.
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5
In leveraged buyouts, the critical issue is whether or not there has been a change in __________________________________.
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6
In a leveraged buyout transaction, those shareholders whose continuing ownership interest increases are called _________________________________.
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7
In a leveraged buyout transaction, those shareholders whose continuing ownership interest decreases are called ________________________________.
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8
Concerning push-down accounting, the Securities and Exchange Commission has rules pertaining to publicly owned companies, and the FASB has rules pertaining to privately owned companies.
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9
Push-down accounting is an irrelevant issue from a consolidated perspective.
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10
Push-down accounting is less logical than non-push-down accounting.
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11
The consolidation process is more involved if push-down accounting has been applied by the subsidiary.
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12
In applying push-down accounting, the subsidiary's Retained Earnings account is always brought to a zero balance.
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13
In applying push-down accounting, the subsidiary's Accumulated Depreciation account is always brought to a zero balance.
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14
In applying push-down accounting, the subsidiary's Additional Paid-in Capital account is always brought to a zero balance.
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15
In applying push-down accounting, the offsetting entry for adjusting an asset upward to its current value is to the Retained Earnings account.
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16
After applying push-down accounting, the parent's conceptual analysis of the Investment account would not show an excess cost element or a goodwill element.
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17
Push-down accounting could be applied to a leveraged buyout.
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18
Applying push-down accounting does not require any entries on the parent's books.
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19
Applying push-down accounting would be abandoning the historical cost basis of accounting.
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20
In a leveraged buyout, a new basis of accounting can be used only if a change in control has occurred.
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21
In a leveraged buyout, the requirement to create a corporate entity to be used to acquire the common stock of the target company is merely form over substance.
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22
Leveraged buyout transactions must be accounted for using entirely the new basis of accounting or entirely the old basis of accounting-never part new basis and part old basis.
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23
The first step in analyzing a leveraged buyout transaction is to determine whether a change in control has occurred.
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24
In a leveraged buyout transaction, a change in control may not have occurred even though a new group of shareholders owns more than 50% of the common stock.
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25
In a leveraged buyout, if management has more than a 20% ownership interest, the new basis of accounting cannot be used.
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26
In a leveraged buyout, if an existing shareholder(s) obtains more than a 50% interest, the new basis of accounting cannot be used.
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27
In a leveraged buyout in which a change in control has not occurred, cash given to the target company's shareholders that exceeds the book value of the target company's equity results in a charge to equity.
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28
In a leveraged buyout, structuring the transaction to achieve the new basis of accounting to the maximum extent possible is usually of major importance.
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29
In a leveraged buyout in which no continuing ownership occurs, the new basis of accounting is always used in its entirety.
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30
In a leveraged buyout, to the extent that carryover of predecessor basis is required, it is determined using the personal cost basis of the shares owned by these shareholders.
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31
In a leveraged buyout, shareholders whose continuing ownership percentage increases are called "bulls."
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32
In a leveraged buyout, the carryover of predecessor basis is an issue only for "bears"-not "bulls."
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33
In a leveraged buyout, carryover of predecessor basis treatment is not required as long as the continuing ownership percentage does not exceed 20%.
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34
In a leveraged buyout, any Retained Earnings balance at the transaction date is not reported in the consolidated balance sheet.
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35
_____ Push-down accounting is an issue
A) Only when common stock is acquired.
B) Only when assets are acquired.
C) Whether common stock or assets are acquired.
D) Only if the subsidiary is consolidated.
E) None of the above.
A) Only when common stock is acquired.
B) Only when assets are acquired.
C) Whether common stock or assets are acquired.
D) Only if the subsidiary is consolidated.
E) None of the above.
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36
_____ In applying push-down accounting in a situation in which the net assets are undervalued, which of the following accounts would not be adjusted or used?
A) Accumulated Depreciation.
B) Retained Earnings.
C) Revaluation Capital.
D) Additional Paid-in Capital.
E) None of the above.
A) Accumulated Depreciation.
B) Retained Earnings.
C) Revaluation Capital.
D) Additional Paid-in Capital.
E) None of the above.
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37
_____ In applying push-down accounting in a situation in which the net assets are overvalued, which of the following accounts would not be adjusted or used?
A) Accumulated Depreciation.
B) Additional Paid-in Capital.
C) Revaluation Capital.
D) Retained Earnings.
E) None of the above.
A) Accumulated Depreciation.
B) Additional Paid-in Capital.
C) Revaluation Capital.
D) Retained Earnings.
E) None of the above.
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38
_____ The push-down basis of accounting does not make sense if the subsidiary
A) Is 100% owned by the parent.
B) Is not consolidated.
C) Was acquired in a leveraged buyout.
D) Presents its separate financial statements to its lenders.
E) None of the above.
A) Is 100% owned by the parent.
B) Is not consolidated.
C) Was acquired in a leveraged buyout.
D) Presents its separate financial statements to its lenders.
E) None of the above.
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39
_____ Immediately before applying push-down accounting, the subsidiary has the following account balances:
After applying push-down accounting in a situation in which the net assets were neither over- nor undervalued, what would be the proper balance of the Additional Paid-in Capital account?
A) $ -0-
B) $500,000
C) $640,000
D) $760,000
E) $900,000

A) $ -0-
B) $500,000
C) $640,000
D) $760,000
E) $900,000
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40
_____ Immediately before applying push-down accounting, the subsidiary has the following account balances:
After applying push-down accounting in a situation in which the net assets were neither over- nor undervalued, what would be the proper balance of the Retained Earnings account.
A) $ -0-
B) $140,000
C) $400,000
D) $640,000
E) $900,000

A) $ -0-
B) $140,000
C) $400,000
D) $640,000
E) $900,000
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41
_____ Immediately before applying push-down accounting, the subsidiary has the following account balances:
After applying push-down accounting in a situation in which the net assets were undervalued by $310,000, what would be the proper balance of the Additional Paid-in Capital account?
A) $ -0-
B) $400,000
C) $650,000
D) $710,000
E) $960,000

A) $ -0-
B) $400,000
C) $650,000
D) $710,000
E) $960,000
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42
_____ Immediately before applying push-down accounting, the subsidiary has the following account balances:
After applying push-down accounting in a situation in which the net assets were undervalued by $310,000, what would be the proper balance of the Retained Earnings account.
A) $ -0-
B) $250,000
C) $560,000
D) $710,000
E) $960,000

A) $ -0-
B) $250,000
C) $560,000
D) $710,000
E) $960,000
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43
_____ In a leveraged buyout, which of the following statements is false concerning the carryover of predecessor basis?
A) It has no effect on the amounts reported on a consolidated basis.
B) It is consistent with the historical cost basis of accounting.
C) It facilitates the recording of the transaction.
D) It is the equivalent of using part purchase and part pooling of interests.
E) None of the above.
A) It has no effect on the amounts reported on a consolidated basis.
B) It is consistent with the historical cost basis of accounting.
C) It facilitates the recording of the transaction.
D) It is the equivalent of using part purchase and part pooling of interests.
E) None of the above.
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44
_____ In a leveraged buyout, which of the following accounts would have a zero balance in the consolidated column immediately after recording the transaction?
A) Goodwill.
B) Retained Earnings.
C) Revaluation Capital.
D) Additional Paid-in Capital.
E) None of the above.
A) Goodwill.
B) Retained Earnings.
C) Revaluation Capital.
D) Additional Paid-in Capital.
E) None of the above.
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45
_____ In a leveraged buyout, a new basis of accounting can be used only if
A) There is no carryover of predecessor basis.
B) The continuing ownership percentage increases.
C) The continuing ownership percentage decreases.
D) There is a change in control.
E) None of the above.
A) There is no carryover of predecessor basis.
B) The continuing ownership percentage increases.
C) The continuing ownership percentage decreases.
D) There is a change in control.
E) None of the above.
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46
_____ In a leveraged buyout, carryover of predecessor basis will not be required if the continuing ownership interest is
A) More than 5%.
B) More than 20%.
C) Not more than 5%.
D) Not more than 20%.
E) None of the above.
A) More than 5%.
B) More than 20%.
C) Not more than 5%.
D) Not more than 20%.
E) None of the above.
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47
_____ In a leveraged buyout, carryover of predecessor basis is not required for the bears if the continuing ownership interest is
A) More than 5%.
B) More than 20%.
C) Not more than 5%.
D) Not more than 20%.
E) None of the above.
A) More than 5%.
B) More than 20%.
C) Not more than 5%.
D) Not more than 20%.
E) None of the above.
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48
_____ In a leveraged buyout, carryover of predecessor basis is not required for the bulls if the continuing ownership interest is
A) More than 5%.
B) More than 20%.
C) Not more than 5%.
D) Not more than 20%.
E) None of the above.
A) More than 5%.
B) More than 20%.
C) Not more than 5%.
D) Not more than 20%.
E) None of the above.
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49
On 6/3/06, Ponex acquired 100% of Sonex's outstanding common stock. At the acquisition date, Sonex had the following account balances:
The only assets or liabilities under- or overvalued at the acquisition date were as follows:
Land-undervalued by $155,000
Patent-overvalued by $40,000
Goodwill paid for in the acquisition was calculated at $75,000.
Required:
Prepare all entries required to achieve the push-down basis of accounting.

Land-undervalued by $155,000
Patent-overvalued by $40,000
Goodwill paid for in the acquisition was calculated at $75,000.
Required:
Prepare all entries required to achieve the push-down basis of accounting.
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50
On 8/5/06 Pellax acquired 100% of Sellax's outstanding common stock. At the acquisition date, Sellax had the following account balances:
The only assets or liabilities under- or overvalued at the acquisition date were as follows:
Building-undervalued by $250,000
Inventory-overvalued by $30,000
Goodwill paid for in the acquisition was calculated at $320,000.
Required:
Prepare all entries required to achieve the push-down basis of accounting.

Building-undervalued by $250,000
Inventory-overvalued by $30,000
Goodwill paid for in the acquisition was calculated at $320,000.
Required:
Prepare all entries required to achieve the push-down basis of accounting.
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51
On 5/5/06, a leveraged buyout occurred for Oldco, whereby it became a subsidiary of Newco. Information concerning the leveraged buyout follows:
a. Management, which owned 10% of Oldco before the leveraged buyout (at a collective individual cost of $17,000) exchanged all its shares in exchange for 1,000 shares of Newco common stock (giving management a 50% ownership interest in Newco).
b. An investment firm contributed $100,000 cash in exchange for 1,000 shares of Newco common stock.
c. Newco borrowed $400,000 from a financial institution.
d. Newco paid $500,000 cash to the nonmanagement shareholders of Oldco for the shareholders' entire 90% interest in Oldco.
e. Oldco's fixed assets are undervalued by $300,000.
f. Oldco's stockholders' equity just before the leveraged buyout was $150,000.
Required:
a. Calculate Newco's total cost of its investment in Oldco.
b. Calculate the change in basis for the fixed assets.
c. Calculate the goodwill paid for.
a. Management, which owned 10% of Oldco before the leveraged buyout (at a collective individual cost of $17,000) exchanged all its shares in exchange for 1,000 shares of Newco common stock (giving management a 50% ownership interest in Newco).
b. An investment firm contributed $100,000 cash in exchange for 1,000 shares of Newco common stock.
c. Newco borrowed $400,000 from a financial institution.
d. Newco paid $500,000 cash to the nonmanagement shareholders of Oldco for the shareholders' entire 90% interest in Oldco.
e. Oldco's fixed assets are undervalued by $300,000.
f. Oldco's stockholders' equity just before the leveraged buyout was $150,000.
Required:
a. Calculate Newco's total cost of its investment in Oldco.
b. Calculate the change in basis for the fixed assets.
c. Calculate the goodwill paid for.
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52
On 12/12/06, a leveraged buyout occurred for Oldco, whereby it became a subsidiary of Newco. Information concerning the leveraged buyout follows:
a. Oldco has 10,000 shares of common stock outstanding.
b. Management, which owned 500 shares of Oldco before the leveraged buyout (at a collective individual cost of $14,000) exchanged all its shares in exchange for 1,000 shares of Newco common stock (giving management a 40% ownership interest in Newco).
c. An investment firm contributed $100,000 cash in exchange for 1,000 shares of Newco common stock.
d. Newco borrowed $500,000 from a financial institution.
e. Newco gave $600,000 cash and 500 shares of Newco common stock to the nonmanagement shareholders of Oldco for the shareholders' entire ownership interest in Oldco (9,500 shares).
f. Oldco's fixed assets are undervalued by $400,000.
g. Oldco's stockholders' equity was $100,000 just before the leveraged buyout.
Required:
a. Calculate Newco's total cost of its investment in Oldco.
b. Calculate the change in basis for the fixed assets.
c. Calculate the goodwill paid for.
a. Oldco has 10,000 shares of common stock outstanding.
b. Management, which owned 500 shares of Oldco before the leveraged buyout (at a collective individual cost of $14,000) exchanged all its shares in exchange for 1,000 shares of Newco common stock (giving management a 40% ownership interest in Newco).
c. An investment firm contributed $100,000 cash in exchange for 1,000 shares of Newco common stock.
d. Newco borrowed $500,000 from a financial institution.
e. Newco gave $600,000 cash and 500 shares of Newco common stock to the nonmanagement shareholders of Oldco for the shareholders' entire ownership interest in Oldco (9,500 shares).
f. Oldco's fixed assets are undervalued by $400,000.
g. Oldco's stockholders' equity was $100,000 just before the leveraged buyout.
Required:
a. Calculate Newco's total cost of its investment in Oldco.
b. Calculate the change in basis for the fixed assets.
c. Calculate the goodwill paid for.
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