Test Bank for Advanced Accounting, 13th Edition

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1Advanced Accounting, 13e(Beams et al.)Chapter 1Business Combinations1.1Multiple Choice Questions1) Which of the following is NOT a reason for a company to expand through a combination, rather thanby 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 takeresponsibility for its financial results.Answer: DObjective: LO1.1 Understand the economic motivations underlying business combinations.Difficulty: EasyAACSB: Analytical thinking2) A business merger differs from a business consolidation becauseA) a merger dissolves all but one of the prior entities, but a consolidation dissolves all of the prior entitiesand 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 entitiesjoin.D) a consolidation is created when two entities join, but a merger is created when more than two entitiesjoin.Answer: AObjective: LO1.2 Learn about alternative forms of business combinations, from both the legal and accountingperspectives.Difficulty: EasyAACSB: Analytical thinking3) Following the accounting concept of a business combination, a business combination occurs when acompany acquires an equity interest in another entity and hasA) 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: DObjective: LO1.2 Learn about alternative forms of business combinations, from both the legal and accountingperspectives.Difficulty: EasyAACSB: Analytical thinking

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24) Historically, much of the controversy concerning accounting requirements for business combinationsinvolved the ________ method.A) purchaseB) pooling of interestsC) equityD) acquisitionAnswer: BObjective: LO1.2 Learn about alternative forms of business combinations, from both the legal and accountingperspectives.Difficulty: EasyAACSB: Analytical thinking5) Pitch Co. paid $50,000 in fees to its accountants and lawyers in acquiring Slope Company. Pitch willtreat the $50,000 asA) 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: AObjective: LO1.3 Introduce accounting concepts for business combinations, emphasizing the acquisition method.Difficulty: ModerateAACSB: Application of knowledge6) Picasso Co. issued 5,000 shares of its $1 par common stock, valued at $100,000, to acquire shares ofSeurat Company in an all-stock transaction. Picasso paid the investment bankers $35,000 and will treatthe investment banker fee asA) 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: DObjective: LO1.3 Introduce accounting concepts for business combinations, emphasizing the acquisition method.Difficulty: ModerateAACSB: Application of knowledge7) 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. Inrecording the combination,A) fair value is not assigned to the patent because the research and development costs have beenexpensed 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: CObjective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition.Difficulty: ModerateAACSB: Analytical thinking

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38) 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 assetsacquired.D) The Sarbanes-Oxley Act requires firms to report material aggregate amounts of goodwill as a separatebalance sheet line item.Answer: AObjective: LO1.3 Introduce accounting concepts for business combinations, emphasizing the acquisition method.Difficulty: ModerateAACSB: Analytical thinking9) According to ASC 805-30, which one of the following items may not be accounted for as an intangibleasset apart from goodwill?A) A production backlogB) A valuable employee workforceC) Noncontractual customer relationshipsD) Employment contractsAnswer: BObjective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition.Difficulty: EasyAACSB: Analytical thinking10) Under the provisions of ASC 805-30, in a business combination, when the investment cost exceeds thetotal 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 isassigned to goodwill.B) The difference is allocated first to reduce proportionately (according to market value) non-currentassets, 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-currentassets, 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: AObjective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition.Difficulty: EasyAACSB: Analytical thinking11) With respect to goodwill, an impairmentA) 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: BObjective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition.Difficulty: EasyAACSB: Analytical thinking

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4Use 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 fairmarket value of $20 per share for all of the outstanding $5 par value common stock of Spot Inc. and Spotis then dissolved. Polka paid the following costs and expenses related to the business combination:Costs of special shareholders' meetingto vote on the merger$12,000Registering and issuing securities10,000Accounting and legal fees18,000Salaries of Polka's employees assignedto the implementation of the merger27,000Cost of closing duplicate facilities13,00012) In the business combination of Polka and SpotA) 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 priceof Spot.D) only the accounting and legal fees are included in the purchase price of Spot.Answer: BObjective: LO1.3 Introduce accounting concepts for business combinations, emphasizing the acquisition method.Difficulty: ModerateAACSB: Application of knowledge13) 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 thepurchase price.C) the costs of registering and issuing the securities are deducted from the fair market value of thecommon 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: CObjective: LO1.3 Introduce accounting concepts for business combinations, emphasizing the acquisition method.Difficulty: ModerateAACSB: Analytical thinking14) Which of the following methods does the FASB consider the best indicator of fair values in theevaluation of goodwill impairment?A) Senior executive's estimatesB) Financial analyst forecastsC) Fair valueD) The present value of future cash flows discounted at the firm's cost of capitalAnswer: CObjective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition.Difficulty: EasyAACSB: Analytical thinking

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515) 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 wereland and buildings with book values of $100,000 and $520,000, respectively, and fair values of $180,000and $730,000, respectively. At what value will the buildings be recorded by Pepper?A) $730,000B) $520,000C) $210,000D) $0Answer: AObjective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition.Difficulty: ModerateAACSB: Application of knowledge16) According to ASC 810-10, liabilities assumed in an acquisition will be valued at the ________.A) fair valueB) historical book valueC) current replacement costD) present value using market interest ratesAnswer: AObjective: LO1.3 Introduce accounting concepts for business combinations, emphasizing the acquisition method.Difficulty: EasyAACSB: Analytical thinking17) In reference to the FASB disclosure requirements about a business combination in the period in whichthe 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 abusiness combination.D) Firms are not required to disclose the details about step acquisitions.Answer: CObjective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition.Difficulty: EasyAACSB: Analytical thinking18) Under the current GAAP, Goodwill arising from a business combination isA) 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: DObjective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition.Difficulty: EasyAACSB: Analytical thinking

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619) 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 formerger partners. Why?A) Previous rules required immediate write off of goodwill which resulted in a one-time expense thatwas not required under international rules.B) Previous rules required amortization of goodwill which resulted in an ongoing expense that was notrequired under international rules.C) Previous rules did not permit the recording of goodwill, thus resulting in a lower asset base thaninternational counterparts would recognize.D) Previous rules required the immediate write of goodwill to stockholder's equity.Answer: BObjective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition.Difficulty: ModerateAACSB: Analytical thinking20) When considering an acquisition, which of the following is NOT a method by which one companymay 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: DObjective: LO1.2 Learn about alternative forms of business combinations, from both the legal and accountingperspectives.Difficulty: ModerateAACSB: Analytical thinking

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71.2Exercises1) Parrot Incorporated purchased the assets and liabilities of Sparrow Company at the close of businesson 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 andliabilities as of the date of acquisition are listed below. In addition, Sparrow had a patent that had a fairvalue of $50,000.Book ValueFair ValueCash$120,000$120,000Inventories220,000250,000Other current assets630,000600,000Land270,000320,000Plant assets-net4,650,0004,600,000Total Assets$5,890,000Accounts payable$1,200,000$1,200,000Notes payable2,100,0002,100,000Capital stock, $5 par700,000Additional paid-in capital1,400,000Retained Earnings490,000Total Liabilities & Equities$5,890,000Required:1.Prepare Parrot's general journal entry for the acquisition of Sparrow, assuming that Sparrow survivesas a separate legal entity.2.Prepare Parrot's general journal entry for the acquisition of Sparrow, assuming that Sparrow willdissolve as a separate legal entity.

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8Answer:1. General journal entry recorded by Parrot for the acquisition of Sparrow (Sparrow survives as aseparate legal entity):Investment in Sparrow2,640,000Cash640,000Notes Payable2,000,0002. General journal entry recorded by Parrot for the acquisition of Sparrow (Sparrow dissolves as aseparate legal entity):Cash120,000Inventories250,000Other current assets600,000Land320,000Plant assets4,600,000Patent50,000Accounts payable1,200,000Notes payable2,100,000Cash640,000Notes Payable2,000,000Objective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition.Difficulty: ModerateAACSB: Application of knowledge

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92) On January 2, 2013 Piron Corporation issued 100,000 new shares of its $5 par value common stockvalued at $19 a share for all of Seana Corporation's outstanding common shares. Piron paid $15,000 toregister and issue shares. Piron also paid $20,000 for the direct combination costs of the accountants. Thefair value and book value of Seana's identifiable assets and liabilities were the same. Summarized balancesheet information for both companies just before the acquisition on January 2, 2013 is as follows:PironSeanaCash$150,000$120,000Inventories320,000400,000Other current assets500,000500,000Land350,000250,000Plant assets-net4,000,0001,500,000Total Assets$5,320,000$2,770,000Accounts payable$1,000,000$300,000Notes payable1,300,000660,000Capital stock, $5 par2,000,000500,000Additional paid-in capital1,000,000100,000Retained Earnings20,0001,210,000Total Liabilities & Equities$5,320,000$2,770,000Required:1. Prepare Piron's general journal entry for the acquisition of Seana, assuming that Seana survives as aseparate legal entity.2. Prepare Piron's general journal entry for the acquisition of Seana, assuming that Seana will dissolve asa separate legal entity.

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10Answer:1. General journal entry recorded by Piron for the acquisition of Seana (Seana survives as a separate legalentity):Investment in Seana1,900,000Common stock500,000Additional paid-in capital1,400,000Investment expense20,000Additional paid-in capital15,000Cash35,0002. General journal entry recorded by Piron for the acquisition of Seana (Seana dissolves as a separatelegal entity):Cash85,000Inventories400,000Other current assets500,000Land250,000Plant assets1,500,000Goodwill90,000Investment expense20,000Accounts payable300,000Notes payable660,000Common stock500,000Additional paid-in capital1,385,000Objective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition.Difficulty: DifficultAACSB: Application of knowledge

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113) On December 31, 2013, Pandora Incorporated issued 40,000 shares of its $20 par common stock for allthe outstanding shares of the Sophocles Company. In addition, Pandora agreed to pay the owners ofSophocles an additional $200,000 if a specific contract achieved the profit levels that were targeted by theowners of Sophocles in their sale agreement. The fair value of this amount, with an agreed likelihood ofoccurrence and discounted to present value, is $160,000. In addition, Pandora paid $10,000 in stock issuecosts, $40,000 in legal fees, and $48,000 to employees who were dedicated to this acquisition for the lastthree months of the year. Summarized balance sheet and fair value information for Sophoclesimmediately prior to the acquisition follows.Book ValueFair ValueCash$100,000$100,000Accounts Receivable280,000250,000Inventory520,000640,000Buildings and Equipment (net)750,000870,000Trademarks and Tradenames0500,000Total Assets$1,650,000Accounts Payable$200,000$190,000Notes Payable900,000900,000Retained Earnings550,000Total Liabilities and Equity$1,650,000Required:1.Prepare Pandora's general journal entry for the acquisition of Sophocles assuming that Pandora'sstock 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'sstock 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'sstock 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'sstock was trading at $25 at the date of acquisition and Sophocles survives as a separate legal entity.

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12Answer:1. At $35 per share, assuming Sophocles dissolves as a separate legal entity:Cash$100,000Accounts Receivable250,000Inventory640,000Buildings and Equipment870,000Trademarks/Trade names500,000Goodwill290,000Accounts payable190,000Contingent Liability160,000Notes payable900,000Common stock800,000Additional paid-in capital600,000Investment expense40,000Additional paid-in capital10,000Cash50,000NOTE: Amount paid to employees dedicated to the acquisition would be routinely expensed throughcompany 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 Sophocles1,560,000Contingent Liability160,000Common stock800,000Additional paid-in capital600,000Investment expense40,000Additional paid-in capital10,000Cash50,000NOTE: Amount paid to employees dedicated to the acquisition would be routinely expensed throughcompany payroll and have no separate impact on the acquisition entry.

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133. At $25 per share, assuming Sophocles dissolves as a separate legal entity:Cash$100,000Accounts Receivable250,000Inventory640,000Buildings and Equipment870,000Trademarks/Trade names500,000Accounts payable190,000Contingent Liability160,000Notes payable900,000Gain on bargain purchase110,000Common stock800,000Additional paid-in capital200,000Investment expense40,000Additional paid-in capital10,000Cash50,000NOTE: Amount paid to employees dedicated to the acquisition would be routinely expensed throughcompany 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 Sophocles1,160,000Contingent Liability160,000Common stock800,000Additional paid-in capital200,000Investment expense40,000Additional paid-in capital10,000Cash50,000NOTE: Amount paid to employees dedicated to the acquisition would be routinely expensed throughcompany 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: DifficultAACSB: Application of knowledge

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144) On January 2, 2013 Palta Company issued 80,000 new shares of its $5 par value common stock valuedat $12 a share for all of Sudina Corporation's outstanding common shares. Palta paid $5,000 for the directcombination costs of the accountants. Palta paid $18,000 to register and issue shares. The fair value andbook value of Sudina's identifiable assets and liabilities were the same. Summarized balance sheetinformation for both companies just before the acquisition on January 2, 2013 is as follows:PaltaSudinaCash$75,000$60,000Inventories160,000200,000Other current assets200,000250,000Land175,000125,000Plant assets-net1,500,000750,000Total Assets$2,110,000$1,385,000Accounts payable$100,000$155,000Notes payable700,000330,000Capital stock, $2 par600,000250,000Additional paid-in capital450,00050,000Retained Earnings260,000600,000Total Liabilities & Equity$2,110,000$1,385,000Required:1.Prepare Palta's general journal entry for the acquisition of Sudina assuming that Sudina survives as aseparate legal entity.2.Prepare Palta's general journal entry for the acquisition of Sudina assuming that Sudina will dissolveas a separate legal entity.

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15Answer:1. General journal entry recorded by Palta for the acquisition of Sudina (Sudina survives as a separatelegal entity):Investment in Sudina960,000Common stock400,000Additional paid-in capital560,000Investment expense5,000Additional paid-in capital18,000Cash23,0002. General journal entry recorded by Palta for the acquisition of Sudina (Sudina dissolves as a separatelegal entity):Cash37,000Inventories200,000Other current assets250,000Land125,000Plant assets750,000Goodwill60,000Investment expense5,000Accounts payable155,000Notes payable330,000Common stock400,000Additional paid-in capital542,000Objective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition.Difficulty: ModerateAACSB: Application of knowledge

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165) Saveed Corporation purchased the net assets of Penny Inc. on January 2, 2013 for $1,690,000 cash andalso paid $15,000 in direct acquisition costs. Penny dissolved as of the date of the acquisition. Penny'sbalance sheet on January 2, 2013 was as follows:Accounts receivable-net$190,000Current liabilities$235,000Inventory480,000Long term debt650,000Land110,000Common stock ($1 par)25,000Building-net630,000Paid-in capital150,000Equipment-net240,000Retained earnings590,000Total assets$1,650,000Total liab. & equity$1,650,000Fair 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 receivable190,000Inventory640,000Land140,000Building630,000Equipment230,000Customer contracts20,000Goodwill725,000Investment expense15,000Current liabilities235,000Long-term debt650,000Cash1,705,000Objective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition.Difficulty: ModerateAACSB: Application of knowledge

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176) Bigga Corporation purchased the net assets of Petit, Inc. on January 2, 2013 for $380,000 cash and alsopaid $15,000 in direct acquisition costs. Petit, Inc. was dissolved on the date of the acquisition. Petit'sbalance sheet on January 2, 2013 was as follows:Accounts receivable-net$90,000Current liabilities$75,000Inventory220,000Long term debt80,000Land30,000Common stock ($1 par)10,000Building-net20,000Addtl. paid-in capital215,000Equipment-net40,000Retained earnings20,000Total assets$400,000Total liab. & equity$400,000Fair 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 receivable90,000Inventory260,000Land35,000Building20,000Equipment35,000Patent20,000Goodwill75,000Investment expense15,000Current liabilities75,000Long-term debt80,000Cash395,000Objective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition.Difficulty: ModerateAACSB: Application of knowledge

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187) The balance sheets of Palisade Company and Salisbury Corporation were as follows on December 31,2013:PalisadeSalisburyCurrent Assets$260,000$120,000Equipment-net440,000480,000Buildings-net600,000200,000Land100,000200,000Total Assets$1,400,000$1,000,000Current Liabilities100,000120,000Common Stock, $5 par1,000,000400,000Additional paid-in Capital100,000280,000Retained Earnings200,000200,000Total Liabilities andStockholders' equity$1,400,000$1,000,000On January 1, 2014 Palisade issued 30,000 of its shares with a market value of $40 per share in exchangefor all of Salisbury's shares, and Salisbury was dissolved. Palisade paid $20,000 to register and issue thenew common shares. It cost Palisade $50,000 in direct combination costs. Book values equal marketvalues 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 SalisburyCorporation on January 1, 2014 will appear as follows:Current Assets$310,000Equipment-net920,000Buildings-net800,000Land350,000Goodwill270,000Total Assets$2,650,000Current Liabilities220,000Common Stock, $5 par1,150,000Additional paid-in Capital1,130,000Retained Earnings150,000Total Liabilities andStockholders' equity$2,650,000Note 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 isreduced 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: ModerateAACSB: Application of knowledge

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198) On January 2, 2013, Pilates Inc. paid $900,000 for all of the outstanding common stock of SpinningCompany, and dissolved Spinning Company. The carrying values for Spinning Company's assets andliabilities are recorded below.Cash$200,000Accounts Receivable220,000Copyrights (purchased)400,000Goodwill120,000Liabilities(180,000)Net assets$760,000On January 2, 2013, Spinning anticipated collecting $185,000 of the recorded Accounts Receivable. Pilatesentered into the acquisition because Spinning had Copyrights that Pilates wished to own, and alsounrecorded 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 ofacquisition.Answer: Goodwill is calculated as follows:Purchase price$900,000Fair value of net assets:Cash$200,000Accounts Receivable185,000Copyrights400,000Patents100,000Liabilities(180,000)Total(705,000)Purchase price in excess offair value of net assets:$195,000Pilates 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: ModerateAACSB: Application of knowledge

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209) On January 2, 2013, Pilates Inc. paid $700,000 for all of the outstanding common stock of SpinningCompany, and dissolved Spinning Company. The carrying values for Spinning Company's assets andliabilities are recorded below.Cash$200,000Accounts Receivable220,000Copyrights (purchased)400,000Goodwill120,000Liabilities(180,000)Net assets$760,000On January 2, 2013, Spinning anticipated collecting $185,000 of the recorded Accounts Receivable. Pilatesentered into the acquisition because Spinning had Copyrights that Pilates wished to own, and alsounrecorded 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 ofacquisition. Then record the journal entry Pilates would record on their books to record the acquisition.Answer: Goodwill is calculated as follows:Purchase price$700,000Fair value of net assets:Cash$200,000Accounts Receivable185,000Copyrights400,000Patents100,000Liabilities(180,000)Total(705,000)Fair value of net assets inexcess of Purchase price:$(5,000)Because Pilates paid less than the fair value of the net assets, they are considered to have made a bargainpurchase, and would thus record a Gain on Bargain Purchase in the amount of $5,000 at the time ofacquisition.The following journal entry would be prepared:Cash200,000Accounts receivable185,000Copyrights400,000Patents100,000Liabilities180,000Bargain purchase gain5,000Cash700,000Objective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition.Difficulty: ModerateAACSB: Application of knowledge

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2110) Pali Corporation exchanges 200,000 shares of newly issued $10 par value common stock with a fairmarket 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 ofShingle. Pali paid the following costs and expenses related to the business combination:Registering and issuing securities19,000Accounting and legal fees150,000Salaries of Pali's employees whosetime was dedicated to the merger86,000Cost of closing duplicate facilities223,000Required: Prepare the journal entries relating to the above acquisition and payments incurred by Pali,assuming all costs were paid in cash.Answer:Investment in Shingle8,000,000Common Stock2,000,000Additional Paid in Capital6,000,000Additional Paid in Capital19,000Cash19,000Investment Expense (fees)150,000Cash150,000Salary expense86,000Cash86,000Plant closure expense223,000Cash223,000Objective: LO1.3 Introduce accounting concepts for business combinations, emphasizing the acquisition method.Difficulty: ModerateAACSB: Application of knowledge

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2211) Samantha's Sporting Goods had net assets consisting of the following:Book ValueFair ValueCash$150,000$150,000Inventory820,000960,000Building and Fixtures330,000310,000Liabilities(90,000)(88,000)Pedic Incorporated purchased Samantha's Sporting Goods, and immediately dissolved Samantha's as aseparate 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*150,000Inventory960,000Building and Fixtures310,000Liabilities88,000Gain on Bargain Purchase332,000Cash*1,000,000*Cash entries may be recorded net on single line entry.Requirement 2:Cash*150,000Inventory960,000Building and Fixtures310,000Goodwill168,000Liabilities88,000Cash*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: ModerateAACSB: Application of knowledge

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2312) On January 2, 2013 Carolina Clothing issued 100,000 new shares of its $5 par value common stockvalued 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 thebusiness combination. The fair value and book value of Dakota's identifiable assets and liabilities werethe same. Assume Dakota Company is dissolved on the date of the acquisition. Summarized balancesheet information for both companies just before the acquisition on January 2, 2013 is as follows:CarolinaDakotaCash$150,000$120,000Inventories320,000400,000Other current assets500,000500,000Land350,000250,000Plant assets-net4,000,0001,500,000Total Assets$5,320,000$2,770,000Accounts payable$1,000,000$300,000Notes payable1,300,000660,000Capital stock, $5 par2,000,000500,000Additional paid-in capital1,000,000100,000Retained Earnings20,0001,210,000Total Liabilities & Equities$5,320,000$2,770,000Required:Prepare a balance sheet for Carolina Clothing immediately after the business combination.Answer:Carolina ClothingBalance SheetJanuary 2, 2013Assets:Liabilities:Cash$245,000Accounts payable$1,300,000Inventory720,000Notes payable1,960,000Other current assets1,000,000Total liabilities3,260,000Total current assets1,965,000Land600,000Equity:Plant assets-net5,500,000Common stock ($5 par)2,500,000Goodwill90,000Additional paid-inTotal Long-term Assets6,190,000capital2,385,000Retained earnings10,000Total equity4,895,000Total assets$8,155,000Total liab. & equity$8,155,000Objective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition.Difficulty: DifficultAACSB: Application of knowledge

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2413) Balance sheet information for Sphinx Company at January 1, 2013, is summarized as follows:Current assets$230,000Liabilities$300,000Plant assets450,000Capital stock $10 par200,000________Retained earnings180,000$680,000$680,000Sphinx's assets and liabilities are fairly valued except for plant assets that are undervalued by $50,000. OnJanuary 2, 2013, Pyramid Corporation issues 20,000 shares of its $10 par value common stock for all ofSphinx's net assets and Sphinx is dissolved. Market quotations for the two stocks on this date are:Pyramid common:$28.00Sphinx common:$19.50Pyramid pays the following fees and costs in connection with the combination:Finder's fee$10,000Legal and accounting fees6,000Required:1.Calculate Pyramid's investment cost of Sphinx Corporation.2.Calculate any goodwill from the business combination.Answer:Requirement 1FMV of shares issued by Pyramid: 20,000 × $28.00=$560,000Requirement 2Investment cost from above:$560,000Less: Fair value of Sphinx's net assets ($680,000 oftotal assets plus $50,000 of undervalued plant assetsminus $300,000 of debt)430,000Equals: Goodwill from investment in Sphinx$ 130,000Objective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition.Difficulty: ModerateAACSB: Application of knowledge

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2514) 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 pricewas $32 per share. Peris paid legal and accounting fees amounting to $35,000 in addition to stock issuancecosts of $8,000. Shanta is dissolved on the date of the acquisition. Balance sheet information for Peris andShanta immediately preceding the acquisition is shown below, including fair values for Shanta's assetsand liabilities.PerisShantaShantaBook ValueBook ValueFair ValueCash$490,000$140,000$140,000Accounts Receivable560,000280,000280,000Inventory520,000200,000260,000Land460,000150,000140,000Plant Assets—Net980,000325,000355,000Construction Permits380,000170,000190,000Accounts 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 balancesheet for the following accounts.CashInventoryConstruction PermitsGoodwillNotes PayableCommon StockAdditional Paid in CapitalRetained EarningsAnswer: Cash = $490,000 + $140,000 - $400,000 - $35,000 - $8,000 = $187,000Inventory = $520,000 + $260,000 = $780,000Construction Permits = $380,000 + $190,000 = $570,000Goodwill = $720,000 (Paid $400,000 + $320,000) - $720,000 (Fair Value of Net Assets) = 0Notes Payable = $800,000 + $460,000 = $1,260,000Common Stock = $960,000 + $300,000 (10,000 shares issued × $30 par) = $1,260,000Additional Paid in Capital = $192,000 + $20,000 (10,000 shares issued × $2 excess over par per share) -$8,000 (cost of issuance) = $204,000Retained Earnings = $818,000 - $35,000 (investment expense) = $783,000Objective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition.Difficulty: DifficultAACSB: Application of knowledge

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2615) On June 30, 2013, Stampol Company ceased operations and all of their assets and liabilities werepurchased by Postoli Incorporated. Postoli paid $40,000 in cash to the owner of Stampol, and signed afive-year note payable to the owners of Stampol in the amount of $200,000. Their closing balance sheets asof June 30, 2013 are shown below. In the purchase agreement, both parties noted that Inventory wasundervalued on the books by $10,000, and Pistoli would also take possession of a customer list with a fairvalue of $18,000. Pistoli paid all legal costs of the acquisition, which amounted to $7,000.PostoliStampolCash$150,000$17,000Inventory260,000120,000Other current assets420,00060,000Land60,0000Plant assets-net590,000190,000Total Assets$1,480,000$387,000Accounts payable$440,000$127,000Notes payable160,00080,000Capital stock, $5 par20,00050,000Additional paid-in capital60,0000Retained Earnings800,000130,000Total Liabilities & Equities$1,480,000$387,000Required: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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27Answer: Postoli's journal entry:Inventory130,000Other Current Assets60,000Plant Assets—net190,000Customer List18,000Goodwill32,000Cash*23,000Accounts Payable127,000Notes Payable**280,000Investment Expense7,000Cash7,000*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$127,000Notes Payable80,000Capital Stock50,000Retained Earnings130,000Cash$17,000Inventory120,000Other Current Assets60,000Plant assets—net190,000Objective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition.Difficulty: ModerateAACSB: Application of knowledge

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2816) Pony acquired Spur Corporation's assets and liabilities for $500,000 cash on December 31, 2013. Spurdissolved on the date of the acquisition. Spur's balance sheet and related fair values are shown as of thatdate, below.Book ValueFair ValueCash$20,000$20,000Accounts Receivable40,00038,000Land45,00050,000Plant and Equipment—net460,000410,000Franchise Agreement0160,000Total Assets$565,000Accounts Payable$70,000$70,000Other Liabilities120,000110,000Common Stock180,000Additional Paid in Capital40,000Retained Earnings155,000Total Liabilities and Equity$565,000Required: Prepare the journal entry recorded by Pony as a result of this transaction.Answer: Accounts Receivable38,000Land50,000Plant and Equipment—net410,000Franchise agreement160,000Goodwill2,000Accounts Payable70,000Other Liabilities110,000Cash*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: ModerateAACSB: Application of knowledge

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291.3True/False1) It is frequently more expensive for a firm to obtain needed facilities through combination than throughdevelopment.Answer: FALSEExplanation: It is frequently less expensiveObjective: LO1.1 Understand the economic motivations underlying business combinations.Difficulty: EasyAACSB: Analytical thinking2) The U.S. Department of Justice and the Federal Trade Commission have primary responsibility forenforcing federal antitrust laws.Answer: TRUEObjective: LO1.1 Understand the economic motivations underlying business combinations.Difficulty: EasyAACSB: Analytical thinking3) A merger occurs when one corporation takes over all the operations of another business entity, andthat entity is dissolved.Answer: TRUEObjective: LO1.2 Learn about alternative forms of business combinations, from both the legal and accountingperspectives.Difficulty: ModerateAACSB: Analytical thinking4) In August 1999, the Financial Accounting Standards Board issued a report supporting its proposeddecision to eliminate the pooling of interests method to account for business combinations.Answer: TRUEObjective: LO1.2 Learn about alternative forms of business combinations, from both the legal and accountingperspectives.Difficulty: ModerateAACSB: Analytical thinking5) Under the acquisition method a combination is recorded using the fair-value principle.Answer: TRUEObjective: LO1.3 Introduce accounting concepts for business combinations, emphasizing the acquisition method.Difficulty: ModerateAACSB: Analytical thinking6) The first step in recording an acquisition is to determine the fair values of all identifiable tangible andintangible assets acquired and actual value of liabilities assumed in the combination.Answer: FALSEObjective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition.Difficulty: DifficultAACSB: Analytical thinking7) Firms should conduct an impairment test for goodwill at least quarterly.Answer: FALSEObjective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition.Difficulty: ModerateAACSB: Analytical thinking

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308) The GAAP defines the accounting concept of a business combination as a transaction or other event inwhich an acquirer obtains control of one or more businesses.Answer: TRUEObjective: LO1.2 Learn about alternative forms of business combinations, from both the legal and accountingperspectives.Difficulty: EasyAACSB: Analytical thinking9) For intangibles to be recognizable they must meet both a separability criterion and a contractual-legalcriterion.Answer: FALSEObjective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition.Difficulty: DifficultAACSB: Analytical thinking10) In an acquisition, if the fair value of identifiable assets acquired over liabilities assumed exceed thecost of the acquired company the gain is recognized as an extraordinary gain by the acquiror.Answer: FALSEObjective: LO1.4 See how firms record fair values of assets and liabilities in an acquisition.Difficulty: DifficultAACSB: Analytical thinking

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