Deck 1: Business Combinations: New Rules for a Long-Standing Business Practice

Question 1

ACME Co. paid $110,000 for the net assets of Comb Corp. At the time of the acquisition the following information was available related to Comb's balance sheet:

Refer to ACME Co. and Comb Corp. What amount of gain (loss) on disposal of a business should Comb Corp. recognize?

A) Gain of $30,000
B) Gain of $60,000
C) Loss of $30,000
D) Loss of $60,000

Answer 1

C

Question 2

When an acquisition of another company occurs, FASB recommends disclosing all of the following EXCEPT:

A) goodwill assigned to each reportable segment.
B) information concerning contingent consideration including a description of the arrangements and the range of outcomes
C) results of operations for the current period if both companies had remained separate.
D) A qualitative description of factors that make up the goodwill recognized

Answer 2

C

Question 3

Acquisition costs such as the fees of accountants and lawyers that were necessary to negotiate and consummate the purchase are

A) recorded as a deferred asset and amortized over a period not to exceed 15 years
B) expensed if immaterial but capitalized and amortized if over 2% of the acquisition price
C) expensed in the period of the purchase
D) included as part of the price paid for the company purchased

Answer 3

C

Question 4

While performing a goodwill impairment test, the company had the following information: $\begin{array}{ll}\text { Estimated implied fair value of reporting unit (without goodwill) } & \$ 420,000 \\\text { Existing net book value of reporting unit (without goodwill) } & \$ 380,000\\\text { Book value of goodwill }&\$60,000\end{array}$ Based upon this information the proper conclusion is:

A) The existing net book value plus goodwill is in excess of the implied fair value, therefore, no adjustment is required.
B) The existing net book value plus goodwill is less than the implied fair value plus goodwill, therefore, no adjustment is required.
C) The existing net book value plus goodwill is in excess of the implied fair value, therefore, goodwill needs to be decreased.
D) The existing net book value is less than the estimated implied fair value; therefore, goodwill needs to be decreased.

Question 5

Company B acquired the net assets of Company S in exchange for cash. The acquisition price exceeds the fair value of the net assets acquired. How should Company B determine the amounts to be reported for the plant and equipment, and for long-term debt of the acquired Company S?

Question 6

Cozzi Company is being purchased and has the following balance sheet as of the purchase date: $\begin{array}{llll}\text { Current assets } & \$ 200,000 & \text { Liabilities } & \$ 90,000 \\\text { Fixed assets } & 180,000 & \text { Equity } & 290,000\\\text { Total }&\$380,000&\text { Total }&\$380,000\end{array}$ The price paid for Cozzi's net assets is $500,000. The fixed assets have a fair value of $220,000, and the liabilities have a fair value of $110,000. The amount of goodwill to be recorded in the purchase is ____.

A) $0
B) $150,000
C) $170,000
D) $190,000

Question 7

Vibe Company purchased the net assets of Atlantic Company in a business combination accounted for as a purchase. As a result, goodwill was recorded. For tax purposes, this combination was considered to be a tax-free merger. Included in the assets is a building with an appraised value of $210,000 on the date of the business combination. This asset had a net book value of $70,000, based on the use of accelerated depreciation for accounting purposes. The building had an adjusted tax basis to Atlantic (and to Vibe as a result of the merger) of $120,000. Assuming a 36% income tax rate, at what amount should Vibe record this building on its books after the purchase?

A) $120,000
B) $134,400
C) $140,000
D) $210,000

Question 8

ACME Co. paid $110,000 for the net assets of Comb Corp. At the time of the acquisition the following information was available related to Comb's balance sheet:

Refer to ACME Co. and Comb Corp. What is the amount recorded by ACME for the Building?

A) $110,000
B) $20,000
C) $80,000
D) $100,000

Question 9

Balter Inc. acquired Jersey Company on January 1, 20X5. When the purchase occurred Jersey Company had the following information related to fixed assets: $\begin{array}{lr}\text { Land } & \$ 80,000 \\\text { Building } & 200,000 \\\text { Accumulated Depreciation } & (100,000) \\\text { Equipment } & 100,000 \\\text { Accumulated Depreciation } & (50,000)\end{array}$ The building has a 10-year remaining useful life and the equipment has a 5-year remaining useful life. The fair value of the assets on that date were:
$\begin{array}{lr}\text { Land } & \$ 100,000 \\\text { Building } & 130,000 \\\text { Equipment } & 75,000\end{array}$ What is the 20X5 depreciation expense Balter will record related to purchasing Jersey Company?

A) $8,000
B) $15,000
C) $28,000
D) $30,000

Question 10

Polk issues common stock to acquire all the assets of the Sam Company on January 1, 20X5. There is a contingent share agreement, which states that if the income of the Sam Division exceeds a certain level during 20X5 and 20X6, additional shares will be issued on January 1, 20X7. The impact of issuing the additional shares is to

A) increase the price assigned to fixed assets.
B) have no effect on asset values, but to reassign the amounts assigned to equity accounts.
C) reduce retained earnings.
D) record additional goodwill.

Question 11

Publics Company acquired the net assets of Citizen Company during 20X5. The purchase price was $800,000. On the date of the transaction, Citizen had no long-term investments in marketable equity securities and $400,000 in liabilities. The fair value of Citizen assets on the acquisition date was as follows: $\begin{array}{ll}\text { Current assets } & \$ 800,000 \\\text { Noncurrent assets } & 600,000 \\&\$1,400,000\end{array}$ How should Publics account for the $200,000 difference between the fair value of the net assets acquired, $1,000,000, and the cost, $800,000?

A) Retained earnings should be reduced by $200,000.
B) Current assets should be recorded at $685,000 and noncurrent assets recorded at $515,000.
C) A $200,000 gain on acquisition of business should be recognized
D) A deferred credit of $200,000 should be set up and subsequently amortized to future net income over a period not to exceed 40 years.

Question 12

Goodwill represents the excess cost of an acquisition over the

A) sum of the fair values assigned to intangible assets less liabilities assumed.
B) sum of the fair values assigned to tangible and identifiable intangible assets acquired less liabilities assumed.
C) sum of the fair values assigned to intangibles acquired less liabilities assumed.
D) book value of an acquired company.

Question 13

A controlling interest in a company implies that the parent company

A) owns all of the subsidiary's stock.
B) has acquired a majority of the subsidiary's common stock.
C) has paid cash for a majority of the subsidiary's stock.
D) has transferred common stock for a majority of the subsidiary's outstanding bonds and debentures.

Question 14

Which of the following income factors should not be factored into an estimation of goodwill?

A) sales for the period
B) income tax expense
C) extraordinary items
D) cost of goods sold

Question 15

Separately identified intangible assets are accounted for by amortizing:

A) exclusively by using impairment testing.
B) based upon a pattern that reflects the benefits conveyed by the asset.
C) over the useful economic life less residual value using only the straight-line method.
D) over a period not to exceed a maximum of 40 years.

Question 16

A tax advantage of business combination can occur when the existing owner of a company sells out and receives:

A) cash to defer the taxable gain as a "tax-free reorganization."
B) stock to defer the taxable gain as a "tax-free reorganization."
C) cash to create a taxable gain.
D) stock to create a taxable gain.

Question 17

An economic advantage of a business combination includes

A) Utilizing duplicative assets.
B) Creating separate management teams.
C) Coordinated marketing campaigns.
D) Horizontally combining levels within the marketing chain.

Question 18

Internet Corporation is considering the acquisition of Homepage Corporation and has obtained the following audited condensed balance sheet:
Internet also acquired the following fair values for Homepage's assets and liabilities:
Internet and Homepage agree on a price of $280,000 for Homepage's net assets. Prepare the necessary journal entry to record the purchase given the following scenarios:
a.
Internet pays cash for Homepage Corporation and incurs $5,000 of acquisition costs.
b.
Internet issues its $5 par value stock as consideration. The fair value of the stock at the acquisition date is $50 per share. Additionally, Internet incurs $5,000 of security issuance costs.

Question 19

In performing impairment test for goodwill, the company had the following 20X6 and 20X7 information available. Assume that the carry value of the identifiable assets are a reasonable approximation of their fair values. Based upon this information what are the 20X6 and 20X7 adjustment to goodwill, if any?

Question 20

Orbit Inc. purchased Planet Co. in 20X3. At that time an existing patent was not recorded as a separately identified intangible asset. At the end of fiscal year 20X4, the patent is valued at $15,000, and goodwill has a book value of $100,000. How should intangible assets be reported at the beginning of fiscal year 20X5?

Question 21

The Chan Corporation purchased the net assets (existing liabilities were assumed) of the Don Company for $900,000 cash. The balance sheet for the Don Company on the date of acquisition showed the following:
Required:
The equipment has a fair value of $300,000, and the plant assets have a fair value of $500,000. Assume that the Chan Corporation has an effective tax rate of 40%. Prepare the entry to record the purchase of the Don Company for each of the following separate cases with specific added information:
a.
The sale is a nontaxable exchange to the seller that limits the buyer to depreciation and amortization on only book value for tax purposes.
b.
The bonds have a current fair value of $190,000. The transaction is a taxable exchange.
c.
There are $100,000 of prior-year losses that can be used to claim a tax refund. The transaction is a taxable exchange.
d.
There are $150,000 of past losses that can be carried forward to future years to offset taxes that will be due. The transaction is a nontaxable exchange.

Question 22

On January 1, 20X5, Brown Inc. acquired Larson Company's net assets in exchange for Brown's common stock with a par value of $100,000 and a fair value of $800,000. Brown also paid $10,000 in direct acquisition costs and $15,000 in stock issuance costs.
On this date, Larson's condensed account balances showed the following:
Required:
Record Brown's purchase of Larson Company's net assets.

Question 23

On January 1, 20X5, Zebb and Nottle Companies had condensed balance sheets as shown below:
Required:
Record the acquisition of Nottle's net assets, the issuance of the stock and/or payment of cash, and payment of the related costs. Assume that Zebb issued 30,000 shares of new common stock with a fair value of $25 per share and paid $500,000 cash for all of the net assets of Nottle. Acquisition costs of $50,000 and stock issuance costs of $20,000 were paid in cash. Current assets had a fair value of $650,000, plant and equipment had a fair value of $900,000, and long-term debt had a fair value of $330,000.

Question 24

On January 1, 20X1, Honey Bee Corporation purchased the net assets of Green Hornet Company for $1,500,000. On this date, a condensed balance sheet for Green Hornet showed:
Required:
Record the entry on Honey Bee's books for the acquisition of Green Hornet's net assets.

Question 25

While acquisitions are often friendly, there are numerous occasions when a party does not want to be acquired. Discuss possible defensive strategies that firms can implement to fend off a hostile takeover attempt.

Question 26

The Blue Reef Company purchased the net assets of the Pink Coral Company on January 1, 20X1, and made the following entry to record the purchase:
Required:
Make the required entry on January 1, 20X3, assuming that additional shares would be issued on that date to compensate for any fall in the value of Blue Reef common stock below $16 per share. The settlement would be to cure the deficiency by issuing added shares based on their fair value on January 1, 20X3. The fair price of the shares on January 1, 20X3 was $10.

Question 27

Mans Company is about to purchase the net assets of Eagle Incorporated, which has the following balance sheet:
Mans has secured the following fair values of Eagle's accounts:
Acquisition costs were $20,000.
Required:
Record the entry for the purchase of the net assets of Eagle by Mans at the following cash prices:
a.
$450,000
b.
$310,000
c.
$480,000

Question 28

Goodwill is an intangible asset. There are a variety of recommendations about how intangible assets should be included in the financial statements. Discuss the recommendations for proper disclosure of goodwill. Include a comparison with disclosure of other intangible assets.

Question 29

On January 1, 20X1 the fair values of Pink Coral's net assets were as follows:
On January 1, 20X1, Blue Reef Company purchased the net assets of the Pink Coral Company by issuing 100,000 shares of its $1 par value stock when the fair value of the stock was $6.20. It was further agreed that Blue Reef would pay an additional amount on January 1, 20X3, if the average income during the 2-year period of 20X1-20X2 exceeded $80,000 per year. The expected value of this consideration was calculated as $184,000; the measurement period is one year.
Required: Prepare Blue Reef's entries:
a) on January 1, 20X1 to record the acquisition
b) on August 1, 20X1 to revise the contingent consideration to $170,000
c) on January 1, 20X3 to settle the contingent consideration clause of the agreement for $175,000

Question 30

Diamond acquired Heart's net assets. At the time of the acquisition Heart's Balance sheet was as follows:
Fair values on the date of acquisition:
Required:
Record the entry for the purchase of the net assets of Heart by Diamond at the following cash prices:
a.
$700,000
b.
$300,000

Question 31

Poplar Corp. acquires the net assets of Sapling Company, which has the following balance sheet:
Fair values on the date of acquisition:
If Poplar paid $300,000 what journal entries would be recorded by both Poplar Corp. and Sapling Company?

Question 32

On January 1, July 1, and December 31, 20X5, a condensed trial balance for Nelson Company showed the following debits and (credits):
Assume that, on July 1, 20X5, Systems Corporation purchased the net assets of Nelson Company for $750,000 in cash. On this date, the fair values for certain net assets were:
Nelson Company's books were NOT closed on June 30, 20X5.
For all of 20X5, Systems' revenues and expenses were $1,500,000 and $1,200,000, respectively.
Required:
(1)
Record the entry on Systems' books for the July 1, 20X5 purchase of Nelson.