Question 1

Under the provisions of FASB Statement No.141R,in a business combination,when the fair value of identifiable net assets acquired exceeds the investment cost,which of the following statements is correct?

Accepted Answer

A)  A gain from a bargain purchase is recognized for the amount that the fair value of the identifiable net assets acquired exceeds the acquisition price.
B)  The difference 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)  The difference is allocated first to reduce proportionately (according to market value) non-current assets,and any negative remainder is classified as an extraordinary gain.
D)  The difference is 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. A

Question 2

On January 2,2011,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.
  On January 2,2011,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.

Accepted Answer

Goodwill is calculated as follows:
  Pilates would record $195,000 for Goodwill as a result of the acquisition.

Question 3

On January 2,2011,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.
  On January 2,2011,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.

Accepted Answer

Goodwill is calculated as follows:
  
Because Pilates paid less than the fair value of the net assets,they are considered to have made a bargain purchase,and would thus record a Gain on Bargain Purchase in the amount of $5,000 at the time of acquisition.
The following journal entry would be prepared:

Question 4

On January 2,2010 Carolina Clothing issued 100,000 new shares of its $5 par value common stock valued at $19 a share for all of Dakota Dressing Company's outstanding common shares in an acquisition.Carolina 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 Dakota's identifiable assets and liabilities were the same.Assume Dakota Company is dissolved on the date of the acquisition.Summarized balance sheet information for both companies just before the acquisition on January 2,2010 is as follows:
  Required:
Prepare a balance sheet for Carolina Clothing immediately after the business combination.

Accepted Answer

The answer of On January 2,2010 Carolina Clothing issued 100,000...

Question 5

Saveed Corporation purchased the net assets of Penny Inc.on January 2,2011 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 2,2011 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.

Accepted Answer

The answer of Saveed Corporation purchased the net assets of...

Question 6

Balance sheet information for Sphinx Company at January 1,2011,is summarized as follows:
  Sphinx's assets and liabilities are fairly valued except for plant assets that are undervalued by $50,000.On January 2,2011,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 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.

Accepted Answer

The answer of Balance sheet information for Sphinx Company at...

Question 7

On January 2,2011 Palta Company issued 80,000 new shares of its $5 par value common stock valued at $12 a share for all of Sudina Corporation's outstanding common shares.Palta paid $5,000 for the direct combination costs of the accountants.Palta paid $18,000 to register and issue shares.The fair value and book value of Sudina's identifiable assets and liabilities were the same.Summarized balance sheet information for both companies just before the acquisition on January 2,2011 is as follows:
  Required:
1.Prepare Palta's general journal entry for the acquisition of Sudina assuming that Sudina survives as a separate legal entity.
2.Prepare Palta's general journal entry for the acquisition of Sudina assuming that Sudina will dissolve as a separate legal entity.

Accepted Answer

The answer of On January 2,2011 Palta Company issued 80,000...

Question 8

According to FASB Statement 141R,which one of the following items may not be accounted for as an intangible asset apart from goodwill?

Accepted Answer

A)  A production backlog
B)  A talented employee workforce
C)  Noncontractual customer relationships
D)  Employment contracts

Question 9

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
 
-In the business combination of Polka and Spot

Accepted Answer

A)  the costs of registering and issuing the securities are included as part of the purchase price for Spot.
B)  the salaries of Polka's employees assigned to the merger are treated as expenses.
C)  all of the costs except those of registering and issuing the securities are included in the purchase price of Spot.
D)  only the accounting and legal fees are included in the purchase price of Spot.

Question 10

Goodwill arising from a business combination is

Accepted Answer

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.

Question 11

According to FASB Statement No.141,liabilities assumed in an acquisition will be valued at the ________.

Accepted Answer

A)  estimated fair value
B)  historical book value
C)  current replacement cost
D)  present value using market interest rates

Question 12

Pony acquired Spur Corporation's assets and liabilities for $500,000 cash on December 31,2010.Spur dissolved on the date of the acquisition.Spur's balance sheet and related fair values are shown as of that date,below.
  Required: Prepare the journal entry recorded by Pony as a result of this transaction.

Accepted Answer

The answer of Pony acquired Spur Corporation's assets and liabilities...

Question 13

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

Accepted Answer

A)  A combination might provide cost advantages.
B)  A combination might provide fewer operating delays.
C)  A combination might provide easier access to intangible assets.
D)  A combination might provide an opportunity to invest in a company without having to take responsibility for its financial results.

Question 14

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?

Accepted Answer

A)  $730,000
B)  $520,000
C)  $210,000
D)  $0

Question 15

Samantha's Sporting Goods had net assets consisting of the following:
  Pedic Incorporated purchased Samantha's Sporting Goods,and immediately dissolved Samantha's as a separate legal entity.
Requirement 1: If Samantha's was purchased for $1,000,000 cash,prepare the entry recorded by Pedic.
Requirement 2: If Samantha's was purchased for $1,500,000 cash,prepare the entry recorded by Pedic.

Accepted Answer

The answer of Samantha's Sporting Goods had net assets consisting...

Question 16

On January 2,2011 Piron Corporation issued 100,000 new shares of its $5 par value common stock valued at $19 a share for all of Seana Corporation's outstanding common shares.Piron paid $15,000 to register and issue shares.Piron also paid $20,000 for the direct combination costs of the accountants.The fair value and book value of Seana's identifiable assets and liabilities were the same.Summarized balance sheet information for both companies just before the acquisition on January 2,2011 is as follows:
  Required:
1.Prepare Piron's general journal entry for the acquisition of Seana,assuming that Seana survives as a separate legal entity.
2.Prepare Piron's general journal entry for the acquisition of Seana,assuming that Seana will dissolve as a separate legal entity.

Accepted Answer

The answer of On January 2,2011 Piron Corporation issued 100,000...

Question 17

Picasso Co.issued 5,000 shares of its $1 par common stock,valued at $100,000,to acquire shares of Seurat Company in an all-stock transaction.Picasso paid the investment bankers $35,000 and will treat the investment banker fee as

Accepted Answer

A)  an expense for the current year.
B)  a prior period adjustment to Retained Earnings.
C)  additional goodwill on the consolidated balance sheet.
D)  a reduction to additional paid-in capital.

Question 18

In reference to the FASB disclosure requirements about a business combination in the period in which the combination occurs,which of the following is correct?

Accepted Answer

A)  Firms are not required to disclose the name of the acquired company.
B)  Firms are not required to disclose the business purpose for a combination.
C)  Firms are required to disclose the nature,terms and fair value of consideration transferred in a business combination.
D)  All of the above are correct.

Question 19

Historically,much of the controversy concerning accounting requirements for business combinations involved the ________ method.

Accepted Answer

A)  purchase
B)  pooling of interests
C)  equity
D)  acquisition

Question 20

With respect to goodwill,an impairment

Accepted Answer

A)  will be amortized over the remaining useful life.
B)  is a two-step process which analyzes each business reporting 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.

Exam 1: Business Combinations