Test Bank for Advanced Accounting, 13th Edition

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Advanced Accounting, 13e (Beams et al.)
Chapter 1 Business Combinations
1.1 Multiple Choice Questions
1) Which of the following is NOT a reason for a company to expand through a combination, rather than
by building new facilities?
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.
Answer: D
Objective: LO1.1 Understand the economic motivations underlying business combinations.
Difficulty: Easy
AACSB: Analytical thinking
2) A business merger differs from a business consolidation because
A) a merger dissolves all but one of the prior entities, but a consolidation dissolves all of the prior entities
and forms a new corporation.
B) a consolidation dissolves all but one of the prior entities, but a merger dissolves all of the prior entities.
C) a merger is created when two entities join, but a consolidation is created when more than two entities
join.
D) a consolidation is created when two entities join, but a merger is created when more than two entities
join.
Answer: A
Objective: LO1.2 Learn about alternative forms of business combinations, from both the legal and accounting
perspectives.
Difficulty: Easy
AACSB: Analytical thinking
3) Following the accounting concept of a business combination, a business combination occurs when a
company acquires an equity interest in another entity and has
A) at least 20% ownership in the entity.
B) more than 50% ownership in the entity.
C) 100% ownership in the entity.
D) control over the entity, irrespective of the percentage owned.
Answer: D
Objective: LO1.2 Learn about alternative forms of business combinations, from both the legal and accounting
perspectives.
Difficulty: Easy
AACSB: Analytical thinking

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4) Historically, much of the controversy concerning accounting requirements for business combinations
involved the ________ method.
A) purchase
B) pooling of interests
C) equity
D) acquisition
Answer: B
Objective: LO1.2 Learn about alternative forms of business combinations, from both the legal and accounting
perspectives.
Difficulty: Easy
AACSB: Analytical thinking
5) Pitch Co. paid $50,000 in fees to its accountants and lawyers in acquiring Slope Company. Pitch will
treat the $50,000 as
A) an expense for the current year.
B) a prior period adjustment to retained earnings.
C) additional cost to investment of Slope on the consolidated balance sheet.
D) a reduction in additional paid-in capital.
Answer: A
Objective: LO1.3 Introduce accounting concepts for business combinations, emphasizing the acquisition method.
Difficulty: Moderate
AACSB: Application of knowledge
6) 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
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.
Answer: D
Objective: LO1.3 Introduce accounting concepts for business combinations, emphasizing the acquisition method.
Difficulty: Moderate
AACSB: Application of knowledge
7) Durer Inc. acquired Sea Corporation in a business combination and Sea Corp. went out of existence.
Sea Corp. developed a patent listed as an asset on Sea Corp.'s books at the patent office filing cost. In
recording the combination,
A) fair value is not assigned to the patent because the research and development costs have been
expensed by Sea Corp.
B) Sea Corp.'s prior expenses to develop the patent are recorded as an asset by Durer at purchase.
C) the patent is recorded as an asset at fair market value.
D) the patent's market value increases goodwill.
Answer: C
Objective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition.
Difficulty: Moderate
AACSB: Analytical thinking

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8) In a business combination, which of the following will occur?
A) All identifiable assets and liabilities are recorded at fair value at the date of acquisition.
B) All identifiable assets and liabilities are recorded at book value at the date of acquisition.
C) Goodwill is recorded if the fair value of the net assets acquired exceeds the book value of the net assets
acquired.
D) The Sarbanes-Oxley Act requires firms to report material aggregate amounts of goodwill as a separate
balance sheet line item.
Answer: A
Objective: LO1.3 Introduce accounting concepts for business combinations, emphasizing the acquisition method.
Difficulty: Moderate
AACSB: Analytical thinking
9) According to ASC 805-30, which one of the following items may not be accounted for as an intangible
asset apart from goodwill?
A) A production backlog
B) A valuable employee workforce
C) Noncontractual customer relationships
D) Employment contracts
Answer: B
Objective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition.
Difficulty: Easy
AACSB: Analytical thinking
10) 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?
A) The excess is first assigned to identifiable net assets according to their fair values; then the rest is
assigned to goodwill.
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.
Answer: A
Objective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition.
Difficulty: Easy
AACSB: Analytical thinking
11) With respect to goodwill, an impairment
A) will be amortized over the remaining useful life.
B) is a two-step process which first compares book value to fair value at the business reporting unit level.
C) is a one-step process considering the entire firm.
D) occurs when asset values are adjusted to fair value in a purchase.
Answer: B
Objective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition.
Difficulty: Easy
AACSB: Analytical thinking

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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
12) In the business combination of Polka and Spot
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.
Answer: B
Objective: LO1.3 Introduce accounting concepts for business combinations, emphasizing the acquisition method.
Difficulty: Moderate
AACSB: Application of knowledge
13) In the business combination of Polka and Spot,
A) all of the items listed above are treated as expenses.
B) all of the items listed above except the cost of registering and issuing the securities are included in the
purchase price.
C) the costs of registering and issuing the securities are deducted from the fair market value of the
common stock used to acquire Spot.
D) only the costs of closing duplicate facilities, the salaries of Polka's employees assigned to the merger,
and the costs of the shareholders' meeting would be treated as expenses.
Answer: C
Objective: LO1.3 Introduce accounting concepts for business combinations, emphasizing the acquisition method.
Difficulty: Moderate
AACSB: Analytical thinking
14) Which of the following methods does the FASB consider the best indicator of fair values in the
evaluation of goodwill impairment?
A) Senior executive's estimates
B) Financial analyst forecasts
C) Fair value
D) The present value of future cash flows discounted at the firm's cost of capital
Answer: C
Objective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition.
Difficulty: Easy
AACSB: Analytical thinking

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15) 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) $730,000
B) $520,000
C) $210,000
D) $0
Answer: A
Objective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition.
Difficulty: Moderate
AACSB: Application of knowledge
16) According to ASC 810-10, liabilities assumed in an acquisition will be valued at the ________.
A) fair value
B) historical book value
C) current replacement cost
D) present value using market interest rates
Answer: A
Objective: LO1.3 Introduce accounting concepts for business combinations, emphasizing the acquisition method.
Difficulty: Easy
AACSB: Analytical thinking
17) 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?
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) Firms are not required to disclose the details about step acquisitions.
Answer: C
Objective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition.
Difficulty: Easy
AACSB: Analytical thinking
18) Under the current GAAP, Goodwill arising from a business combination is
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.
Answer: D
Objective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition.
Difficulty: Easy
AACSB: Analytical thinking

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19) In reference to international accounting for goodwill, U.S. companies have complained that past U.S.
accounting rules for goodwill placed them at a disadvantage in competing against foreign companies for
merger partners. Why?
A) Previous rules required immediate write off of goodwill which resulted in a one-time expense that
was not required under international rules.
B) Previous rules required amortization of goodwill which resulted in an ongoing expense that was not
required under international rules.
C) Previous rules did not permit the recording of goodwill, thus resulting in a lower asset base than
international counterparts would recognize.
D) Previous rules required the immediate write of goodwill to stockholder's equity.
Answer: B
Objective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition.
Difficulty: Moderate
AACSB: Analytical thinking
20) When considering an acquisition, which of the following is NOT a method by which one company
may gain control of another company?
A) Purchase of the majority of outstanding voting stock of the acquired company.
B) Purchase of all assets and liabilities of another company.
C) Purchase of all the outstanding voting stock of the acquired company.
D) Purchase of 25% of outstanding voting stock of the acquired company.
Answer: D
Objective: LO1.2 Learn about alternative forms of business combinations, from both the legal and accounting
perspectives.
Difficulty: Moderate
AACSB: Analytical thinking

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1.2 Exercises
1) 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.
Book Value Fair Value
Cash $120,000 $120,000
Inventories 220,000 250,000
Other current assets 630,000 600,000
Land 270,000 320,000
Plant assets-net 4,650,000 4,600,000
Total Assets $5,890,000
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 490,000
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.

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Answer:
1. General journal entry recorded by Parrot for the acquisition of Sparrow (Sparrow survives as a
separate legal entity):
Investment in Sparrow 2,640,000
Cash 640,000
Notes Payable 2,000,000
2. General journal entry recorded by Parrot for the acquisition of Sparrow (Sparrow dissolves as a
separate legal entity):
Cash 120,000
Inventories 250,000
Other current assets 600,000
Land 320,000
Plant assets 4,600,000
Patent 50,000
Accounts payable 1,200,000
Notes payable 2,100,000
Cash 640,000
Notes Payable 2,000,000
Objective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition.
Difficulty: Moderate
AACSB: Application of knowledge

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2) On January 2, 2013 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, 2013 is as follows:
Piron Seana
Cash $150,000 $120,000
Inventories 320,000 400,000
Other current assets 500,000 500,000
Land 350,000 250,000
Plant assets-net 4,000,000 1,500,000
Total Assets $5,320,000 $2,770,000
Accounts payable $1,000,000 $300,000
Notes payable 1,300,000 660,000
Capital stock, $5 par 2,000,000 500,000
Additional paid-in capital 1,000,000 100,000
Retained Earnings 20,000 1,210,000
Total Liabilities & Equities $5,320,000 $2,770,000
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.

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Answer:
1. General journal entry recorded by Piron for the acquisition of Seana (Seana survives as a separate legal
entity):
Investment in Seana 1,900,000
Common stock 500,000
Additional paid-in capital 1,400,000
Investment expense 20,000
Additional paid-in capital 15,000
Cash 35,000
2. General journal entry recorded by Piron for the acquisition of Seana (Seana dissolves as a separate
legal entity):
Cash 85,000
Inventories 400,000
Other current assets 500,000
Land 250,000
Plant assets 1,500,000
Goodwill 90,000
Investment expense 20,000
Accounts payable 300,000
Notes payable 660,000
Common stock 500,000
Additional paid-in capital 1,385,000
Objective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition.
Difficulty: Difficult
AACSB: Application of knowledge

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3) 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.
Book Value Fair Value
Cash $100,000 $100,000
Accounts Receivable 280,000 250,000
Inventory 520,000 640,000
Buildings and Equipment (net) 750,000 870,000
Trademarks and Tradenames 0 500,000
Total Assets $1,650,000
Accounts Payable $200,000 $190,000
Notes Payable 900,000 900,000
Retained Earnings 550,000
Total Liabilities and Equity $1,650,000
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.

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Answer:
1. At $35 per share, assuming Sophocles dissolves as a separate legal entity:
Cash $100,000
Accounts Receivable 250,000
Inventory 640,000
Buildings and Equipment 870,000
Trademarks/Trade names 500,000
Goodwill 290,000
Accounts payable 190,000
Contingent Liability 160,000
Notes payable 900,000
Common stock 800,000
Additional paid-in capital 600,000
Investment expense 40,000
Additional paid-in capital 10,000
Cash 50,000
NOTE: Amount paid to employees dedicated to the acquisition would be routinely expensed through
company payroll and have no separate impact on the acquisition entry.
2. At $35 per share, assuming Sophocles continues as a separate legal entity:
Investment in Sophocles 1,560,000
Contingent Liability 160,000
Common stock 800,000
Additional paid-in capital 600,000
Investment expense 40,000
Additional paid-in capital 10,000
Cash 50,000
NOTE: Amount paid to employees dedicated to the acquisition would be routinely expensed through
company payroll and have no separate impact on the acquisition entry.

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3. At $25 per share, assuming Sophocles dissolves as a separate legal entity:
Cash $100,000
Accounts Receivable 250,000
Inventory 640,000
Buildings and Equipment 870,000
Trademarks/Trade names 500,000
Accounts payable 190,000
Contingent Liability 160,000
Notes payable 900,000
Gain on bargain purchase 110,000
Common stock 800,000
Additional paid-in capital 200,000
Investment expense 40,000
Additional paid-in capital 10,000
Cash 50,000
NOTE: Amount paid to employees dedicated to the acquisition would be routinely expensed through
company payroll and have no separate impact on the acquisition entry.
4. At $25 per share, assuming Sophocles continues as a separate legal entity:
Investment in Sophocles 1,160,000
Contingent Liability 160,000
Common stock 800,000
Additional paid-in capital 200,000
Investment expense 40,000
Additional paid-in capital 10,000
Cash 50,000
NOTE: Amount paid to employees dedicated to the acquisition would be routinely expensed through
company payroll and have no separate impact on the acquisition entry.
Objective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition.
Difficulty: Difficult
AACSB: Application of knowledge

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4) On January 2, 2013 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, 2013 is as follows:
Palta Sudina
Cash $75,000 $60,000
Inventories 160,000 200,000
Other current assets 200,000 250,000
Land 175,000 125,000
Plant assets-net 1,500,000 750,000
Total Assets $2,110,000 $1,385,000
Accounts payable $100,000 $155,000
Notes payable 700,000 330,000
Capital stock, $2 par 600,000 250,000
Additional paid-in capital 450,000 50,000
Retained Earnings 260,000 600,000
Total Liabilities & Equity $2,110,000 $1,385,000
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.

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Answer:
1. General journal entry recorded by Palta for the acquisition of Sudina (Sudina survives as a separate
legal entity):
Investment in Sudina 960,000
Common stock 400,000
Additional paid-in capital 560,000
Investment expense 5,000
Additional paid-in capital 18,000
Cash 23,000
2. General journal entry recorded by Palta for the acquisition of Sudina (Sudina dissolves as a separate
legal entity):
Cash 37,000
Inventories 200,000
Other current assets 250,000
Land 125,000
Plant assets 750,000
Goodwill 60,000
Investment expense 5,000
Accounts payable 155,000
Notes payable 330,000
Common stock 400,000
Additional paid-in capital 542,000
Objective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition.
Difficulty: Moderate
AACSB: Application of knowledge

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5) 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:
Accounts receivable-net $190,000 Current liabilities $235,000
Inventory 480,000 Long term debt 650,000
Land 110,000 Common stock ($1 par) 25,000
Building-net 630,000 Paid-in capital 150,000
Equipment-net 240,000 Retained earnings 590,000
Total assets $1,650,000 Total liab. & equity $1,650,000
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.
Answer: General journal entry for the purchase of Penny's net assets:
Accounts receivable 190,000
Inventory 640,000
Land 140,000
Building 630,000
Equipment 230,000
Customer contracts 20,000
Goodwill 725,000
Investment expense 15,000
Current liabilities 235,000
Long-term debt 650,000
Cash 1,705,000
Objective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition.
Difficulty: Moderate
AACSB: Application of knowledge

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6) Bigga Corporation purchased the net assets of Petit, Inc. on January 2, 2013 for $380,000 cash and also
paid $15,000 in direct acquisition costs. Petit, Inc. was dissolved on the date of the acquisition. Petit's
balance sheet on January 2, 2013 was as follows:
Accounts receivable-net $90,000 Current liabilities $75,000
Inventory 220,000 Long term debt 80,000
Land 30,000 Common stock ($1 par) 10,000
Building-net 20,000 Addtl. paid-in capital 215,000
Equipment-net 40,000 Retained earnings 20,000
Total assets $400,000 Total liab. & equity $400,000
Fair values agree with book values except for inventory, land, and equipment, which have fair values of
$260,000, $35,000 and $35,000, respectively. Petit has patent rights with a fair value of $20,000.
Required:
Prepare Bigga's general journal entry for the cash purchase of Petit's net assets.
Answer: General journal entry for the purchase of Petit's net assets:
Accounts receivable 90,000
Inventory 260,000
Land 35,000
Building 20,000
Equipment 35,000
Patent 20,000
Goodwill 75,000
Investment expense 15,000
Current liabilities 75,000
Long-term debt 80,000
Cash 395,000
Objective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition.
Difficulty: Moderate
AACSB: Application of knowledge

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7) 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 100,000 200,000
Total Assets $1,400,000 $1,000,000
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 200,000 200,000
Total Liabilities and
Stockholders' equity $1,400,000 $1,000,000
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.
Answer: The balance sheet for Palisade Corporation subsequent to its acquisition of Salisbury
Corporation on January 1, 2014 will appear as follows:
Current Assets $310,000
Equipment-net 920,000
Buildings-net 800,000
Land 350,000
Goodwill 270,000
Total Assets $2,650,000
Current Liabilities 220,000
Common Stock, $5 par 1,150,000
Additional paid-in Capital 1,130,000
Retained Earnings 150,000
Total Liabilities and
Stockholders' equity $2,650,000
Note that Current Assets of $310,000 results from the two companies contributing $260,000 and $120,000,
less the cash paid out during the acquisition process of $70,000. Retained Earnings of the parent is
reduced for the Investment Expense incurred in the process of $50,000.
Objective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition.
Difficulty: Moderate
AACSB: Application of knowledge

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8) 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.
Cash $200,000
Accounts Receivable 220,000
Copyrights (purchased) 400,000
Goodwill 120,000
Liabilities (180,000)
Net assets $760,000
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.
Answer: Goodwill is calculated as follows:
Purchase price $900,000
Fair value of net assets:
Cash $200,000
Accounts Receivable 185,000
Copyrights 400,000
Patents 100,000
Liabilities (180,000)
Total (705,000)
Purchase price in excess of
fair value of net assets: $195,000
Pilates would report $195,000 for Goodwill as a result of the acquisition.
Objective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition.
Difficulty: Moderate
AACSB: Application of knowledge

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9) 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.
Cash $200,000
Accounts Receivable 220,000
Copyrights (purchased) 400,000
Goodwill 120,000
Liabilities (180,000)
Net assets $760,000
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.
Answer: Goodwill is calculated as follows:
Purchase price $700,000
Fair value of net assets:
Cash $200,000
Accounts Receivable 185,000
Copyrights 400,000
Patents 100,000
Liabilities (180,000)
Total (705,000)
Fair value of net assets in
excess of Purchase price: $(5,000)
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:
Cash 200,000
Accounts receivable 185,000
Copyrights 400,000
Patents 100,000
Liabilities 180,000
Bargain purchase gain 5,000
Cash 700,000
Objective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition.
Difficulty: Moderate
AACSB: Application of knowledge

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10) 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:
Registering and issuing securities 19,000
Accounting and legal fees 150,000
Salaries of Pali's employees whose
time was dedicated to the merger 86,000
Cost of closing duplicate facilities 223,000
Required: Prepare the journal entries relating to the above acquisition and payments incurred by Pali,
assuming all costs were paid in cash.
Answer:
Investment in Shingle 8,000,000
Common Stock 2,000,000
Additional Paid in Capital 6,000,000
Additional Paid in Capital 19,000
Cash 19,000
Investment Expense (fees) 150,000
Cash 150,000
Salary expense 86,000
Cash 86,000
Plant closure expense 223,000
Cash 223,000
Objective: LO1.3 Introduce accounting concepts for business combinations, emphasizing the acquisition method.
Difficulty: Moderate
AACSB: Application of knowledge

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11) Samantha's Sporting Goods had net assets consisting of the following:
Book Value Fair Value
Cash $150,000 $150,000
Inventory 820,000 960,000
Building and Fixtures 330,000 310,000
Liabilities (90,000) (88,000)
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.
Answer:
Requirement 1:
Cash* 150,000
Inventory 960,000
Building and Fixtures 310,000
Liabilities 88,000
Gain on Bargain Purchase 332,000
Cash* 1,000,000
*Cash entries may be recorded net on single line entry.
Requirement 2:
Cash* 150,000
Inventory 960,000
Building and Fixtures 310,000
Goodwill 168,000
Liabilities 88,000
Cash* 1,500,000
*Cash entries may be recorded net on single line entry.
Objective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition.
Difficulty: Moderate
AACSB: Application of knowledge

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12) On January 2, 2013 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, 2013 is as follows:
Carolina Dakota
Cash $150,000 $120,000
Inventories 320,000 400,000
Other current assets 500,000 500,000
Land 350,000 250,000
Plant assets-net 4,000,000 1,500,000
Total Assets $5,320,000 $2,770,000
Accounts payable $1,000,000 $300,000
Notes payable 1,300,000 660,000
Capital stock, $5 par 2,000,000 500,000
Additional paid-in capital 1,000,000 100,000
Retained Earnings 20,000 1,210,000
Total Liabilities & Equities $5,320,000 $2,770,000
Required:
Prepare a balance sheet for Carolina Clothing immediately after the business combination.
Answer: Carolina Clothing
Balance Sheet
January 2, 2013
Assets: Liabilities:
Cash $245,000 Accounts payable $1,300,000
Inventory 720,000 Notes payable 1,960,000
Other current assets 1,000,000 Total liabilities 3,260,000
Total current assets 1,965,000
Land 600,000 Equity:
Plant assets-net 5,500,000 Common stock ($5 par) 2,500,000
Goodwill 90,000 Additional paid-in
Total Long-term Assets 6,190,000 capital 2,385,000
Retained earnings 10,000
Total equity 4,895,000
Total assets $8,155,000 Total liab. & equity $8,155,000
Objective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition.
Difficulty: Difficult
AACSB: Application of knowledge

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13) Balance sheet information for Sphinx Company at January 1, 2013, is summarized as follows:
Current assets $230,000 Liabilities $300,000
Plant assets 450,000 Capital stock $10 par 200,000
________ Retained earnings 180,000
$680,000 $680,000
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: $28.00
Sphinx common: $19.50
Pyramid pays the following fees and costs in connection with the combination:
Finder's fee $10,000
Legal and accounting fees 6,000
Required:
1. Calculate Pyramid's investment cost of Sphinx Corporation.
2. Calculate any goodwill from the business combination.
Answer:
Requirement 1
FMV of shares issued by Pyramid: 20,000 × $28.00= $560,000
Requirement 2
Investment cost from above: $560,000
Less: Fair value of Sphinx's net assets ($680,000 of
total assets plus $50,000 of undervalued plant assets
minus $300,000 of debt) 430,000
Equals: Goodwill from investment in Sphinx $ 130,000
Objective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition.
Difficulty: Moderate
AACSB: Application of knowledge

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14) On December 31, 2013, Peris Company acquired Shanta Company's outstanding stock by paying
$400,000 cash and issuing 10,000 shares of its own $30 par value common stock, when the market price
was $32 per share. Peris paid legal and accounting fees amounting to $35,000 in addition to stock issuance
costs of $8,000. Shanta is dissolved on the date of the acquisition. Balance sheet information for Peris and
Shanta immediately preceding the acquisition is shown below, including fair values for Shanta's assets
and liabilities.
Peris Shanta Shanta
Book Value Book Value Fair Value
Cash $490,000 $140,000 $140,000
Accounts Receivable 560,000 280,000 280,000
Inventory 520,000 200,000 260,000
Land 460,000 150,000 140,000
Plant Assets — Net 980,000 325,000 355,000
Construction Permits 380,000 170,000 190,000
Accounts Payable (460,000) (140,000) (140,000)
Other accrued expenses (160,000) (45,000) (45,000)
Notes Payable (800,000) (460,000) (460,000)
Common Stock ($30 par) (960,000)
Common Stock ($20 par) (200,000)
Additional P.I.C (192,000) (80,000)
Retained Earnings (818,000) (340,000)
Required: Determine the consolidated balances which Peris would present on their consolidated balance
sheet for the following accounts.
Cash
Inventory
Construction Permits
Goodwill
Notes Payable
Common Stock
Additional Paid in Capital
Retained Earnings
Answer: Cash = $490,000 + $140,000 - $400,000 - $35,000 - $8,000 = $187,000
Inventory = $520,000 + $260,000 = $780,000
Construction Permits = $380,000 + $190,000 = $570,000
Goodwill = $720,000 (Paid $400,000 + $320,000) - $720,000 (Fair Value of Net Assets) = 0
Notes Payable = $800,000 + $460,000 = $1,260,000
Common Stock = $960,000 + $300,000 (10,000 shares issued × $30 par) = $1,260,000
Additional Paid in Capital = $192,000 + $20,000 (10,000 shares issued × $2 excess over par per share) -
$8,000 (cost of issuance) = $204,000
Retained Earnings = $818,000 - $35,000 (investment expense) = $783,000
Objective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition.
Difficulty: Difficult
AACSB: Application of knowledge

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15) On June 30, 2013, Stampol Company ceased operations and all of their assets and liabilities were
purchased by Postoli Incorporated. Postoli paid $40,000 in cash to the owner of Stampol, and signed a
five-year note payable to the owners of Stampol in the amount of $200,000. Their closing balance sheets as
of June 30, 2013 are shown below. In the purchase agreement, both parties noted that Inventory was
undervalued on the books by $10,000, and Pistoli would also take possession of a customer list with a fair
value of $18,000. Pistoli paid all legal costs of the acquisition, which amounted to $7,000.
Postoli Stampol
Cash $150,000 $17,000
Inventory 260,000 120,000
Other current assets 420,000 60,000
Land 60,000 0
Plant assets-net 590,000 190,000
Total Assets $1,480,000 $387,000
Accounts payable $440,000 $127,000
Notes payable 160,000 80,000
Capital stock, $5 par 20,000 50,000
Additional paid-in capital 60,000 0
Retained Earnings 800,000 130,000
Total Liabilities & Equities $1,480,000 $387,000
Required:
1. Prepare the journal entry Postoli would record at the date of acquisition.
2. Prepare the journal entry Stampol would record at the date of acquisition.

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Answer: Postoli's journal entry:
Inventory 130,000
Other Current Assets 60,000
Plant Assets — net 190,000
Customer List 18,000
Goodwill 32,000
Cash* 23,000
Accounts Payable 127,000
Notes Payable** 280,000
Investment Expense 7,000
Cash 7,000
*Cash payment of $40,000 is shown net of the $17,000 received in the acquisition.
**Notes Payable signed for $200,000 is shown in addition to the $80,000 purchased in the acquisition.
Stampol's journal entry:
Accounts Payable $127,000
Notes Payable 80,000
Capital Stock 50,000
Retained Earnings 130,000
Cash $17,000
Inventory 120,000
Other Current Assets 60,000
Plant assets — net 190,000
Objective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition.
Difficulty: Moderate
AACSB: Application of knowledge

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16) Pony acquired Spur Corporation's assets and liabilities for $500,000 cash on December 31, 2013. Spur
dissolved on the date of the acquisition. Spur's balance sheet and related fair values are shown as of that
date, below.
Book Value Fair Value
Cash $20,000 $20,000
Accounts Receivable 40,000 38,000
Land 45,000 50,000
Plant and Equipment — net 460,000 410,000
Franchise Agreement 0 160,000
Total Assets $565,000
Accounts Payable $70,000 $70,000
Other Liabilities 120,000 110,000
Common Stock 180,000
Additional Paid in Capital 40,000
Retained Earnings 155,000
Total Liabilities and Equity $565,000
Required: Prepare the journal entry recorded by Pony as a result of this transaction.
Answer: Accounts Receivable 38,000
Land 50,000
Plant and Equipment — net 410,000
Franchise agreement 160,000
Goodwill 2,000
Accounts Payable 70,000
Other Liabilities 110,000
Cash* 480,000
*Cash payment is shown net of cash received in acquisition.
Objective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition.
Difficulty: Moderate
AACSB: Application of knowledge

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29
1.3 True/False
1) It is frequently more expensive for a firm to obtain needed facilities through combination than through
development.
Answer: FALSE
Explanation: It is frequently less expensive
Objective: LO1.1 Understand the economic motivations underlying business combinations.
Difficulty: Easy
AACSB: Analytical thinking
2) The U.S. Department of Justice and the Federal Trade Commission have primary responsibility for
enforcing federal antitrust laws.
Answer: TRUE
Objective: LO1.1 Understand the economic motivations underlying business combinations.
Difficulty: Easy
AACSB: Analytical thinking
3) A merger occurs when one corporation takes over all the operations of another business entity, and
that entity is dissolved.
Answer: TRUE
Objective: LO1.2 Learn about alternative forms of business combinations, from both the legal and accounting
perspectives.
Difficulty: Moderate
AACSB: Analytical thinking
4) In August 1999, the Financial Accounting Standards Board issued a report supporting its proposed
decision to eliminate the pooling of interests method to account for business combinations.
Answer: TRUE
Objective: LO1.2 Learn about alternative forms of business combinations, from both the legal and accounting
perspectives.
Difficulty: Moderate
AACSB: Analytical thinking
5) Under the acquisition method a combination is recorded using the fair-value principle.
Answer: TRUE
Objective: LO1.3 Introduce accounting concepts for business combinations, emphasizing the acquisition method.
Difficulty: Moderate
AACSB: Analytical thinking
6) The first step in recording an acquisition is to determine the fair values of all identifiable tangible and
intangible assets acquired and actual value of liabilities assumed in the combination.
Answer: FALSE
Objective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition.
Difficulty: Difficult
AACSB: Analytical thinking
7) Firms should conduct an impairment test for goodwill at least quarterly.
Answer: FALSE
Objective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition.
Difficulty: Moderate
AACSB: Analytical thinking

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8) The GAAP defines the accounting concept of a business combination as a transaction or other event in
which an acquirer obtains control of one or more businesses.
Answer: TRUE
Objective: LO1.2 Learn about alternative forms of business combinations, from both the legal and accounting
perspectives.
Difficulty: Easy
AACSB: Analytical thinking
9) For intangibles to be recognizable they must meet both a separability criterion and a contractual-legal
criterion.
Answer: FALSE
Objective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition.
Difficulty: Difficult
AACSB: Analytical thinking
10) 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.
Answer: FALSE
Objective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition.
Difficulty: Difficult
AACSB: Analytical thinking

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Test Bank for Advanced Accounting, 13th Edition

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