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Name Chapter 1--Business Combinations: New Rules for a Long-Standing Business Practice
Description
Instructions Modify
Question One large Midwestern bank’s acquisition of another midwestern bank would be an example of a:
Answer market extension merger.
conglomerate merger.
product extension merger.
horizontal merger.
Correct Feedback A horizontal merger occurs when two companies offering similar products or services that are likely competitors in the same
marketplace merge.
Incorrect A horizontal merger occurs when two companies offering similar products or services that are likely competitors in the same
Feedback marketplace merge.
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Question A large nation-wide bank’s acquisition of a major investment advisory firm would be an example of a:
Answer market extension merger.
conglomerate merger.
product extension merger.
horizontal merger.
Correct Feedback A product extension merger occurs when the acquiring company is expanding its product offerings in the market place in which
it sells.
Incorrect A product extension merger occurs when the acquiring company is expanding its product offerings in the market place in which
Feedback it sells.
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Question A tax advantage of business combination can occur when the existing owner of a company sells out and receives:
Answer cash to defer the taxable gain as a "tax-free reorganization."
stock to defer the taxable gain as a "tax-free reorganization."
cash to create a taxable gain.
stock to create a taxable gain.
Correct If the owners of a business sell their interests for cash or accept debt instruments, they would have an immediate taxable gain.
Feedback However, if they accept common stock of another corporation and the transaction is crafted as such, they may account for the
transaction as a “tax-free reorganization.” If this is the case, no taxes are paid until they sell the shares received in the transaction.
Incorrect If the owners of a business sell their interests for cash or accept debt instruments, they would have an immediate taxable gain.
Feedback However, if they accept common stock of another corporation and the transaction is crafted as such, they may account for the
transaction as a “tax-free reorganization.” If this is the case, no taxes are paid until they sell the shares received in the transaction.
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Question Some advantages of obtaining control by acquiring a controlling interest in stock include all but:
Answer Negotiations are made directly with the acquiree’s management.
The legal liability of each corporation is limited to its own assets.
The cost may be lower since only a controlling interest in the assets, not the total assets, is acquired.
Tax advantages may result from preservation of the legal entities.
Correct Feedback If a company was acquiring a controlling interest in stock, the negotiations would be with the target company’s stockholders.
Incorrect Feedback If a company was acquiring a controlling interest in stock, the negotiations would be with the target company’s stockholders.
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Question A(n) ________________ occurs when the management of the target company purchases a controlling interest in that company and the
company incurs a significant amount of debt as a result.
Answer greenmail
statutory merger
poison pill
leveraged buyout
Correct A leveraged buyout is defensive move against an unfriendly takeover where management of the target company purchases a
Feedback controlling interest in the company. Usually, a significant amount of debt is incurred.
Incorrect A leveraged buyout is defensive move against an unfriendly takeover where management of the target company purchases a
Feedback controlling interest in the company. Usually, a significant amount of debt is incurred.
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Question Acquisition costs such as the fees of accountants and lawyers that were necessary to negotiate and consummate the purchase are
Answer recorded as a deferred asset and amortized over a period not to exceed 15 years
expensed if immaterial but capitalized and amortized if over 2% of the acquisition price
expensed in the period of the purchase
included as part of the price paid for the company purchased
Correct Direct costs of the acquisition, such as professional fees incurred to negotiate and consummate the purchase are expensed in the
Feedback period of purchase. Costs related to the issuance of securities related to the purchase may be deducted from the value assigned to
paid-in capital in excess of par.
Incorrect Direct costs of the acquisition, such as professional fees incurred to negotiate and consummate the purchase are expensed in the
Feedback period of purchase. Costs related to the issuance of securities related to the purchase may be deducted from the value assigned to
paid-in capital in excess of par.
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Question Which of the following costs of a business combination can be deducted from the value assigned to paid-in capital in excess of par?
Answer Direct and indirect acquisition costs.
Direct acquisition costs.
Direct acquisition costs and stock issue costs if stock is issued as consideration.
Stock issue costs if stock is issued as consideration.
Correct Stock issue costs can be deducted from the value assigned to paid-in capital in excess of par when stock is issued as
Feedback consideration. All other direct and indirect acquisition costs are expensed.
Incorrect Stock issue costs can be deducted from the value assigned to paid-in capital in excess of par when stock is issued as
Feedback consideration. All other direct and indirect acquisition costs are expensed.
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Question When determining the fair values of assets acquired in an acquisition, the highest level of measurement per GAAP is
Answer adjusted market value based on prices of similar assets.
unadjusted market values in an actively traded market.
based on discounted cash flows.
the entity’s best estimate of an exit or sale value.
Correct Feedback FASB provides a hierarchy of values where the highest level measurement possible should be used. The level is as follows:
Question 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 Crystal Co. purchased all of the common stock of Sill Corp. on January 1 of the current year. Five years prior to the acquisition, Sill Corp.
had issued 30-year bonds bearing an interest rate of 8%. At the time of the acquisition, the prevailing interest rate for similar bonds was 5%. These
bonds should be included in the consolidated balance sheet at
Answer face value.
at a value higher than Sill’s recorded value due to the change in interest rates.
at a value lower than Sill’s recorded value due to the change in interest rates.
at Sill’s recorded value.
Correct All assets acquired and liabilities assumed should be recorded at their fair values. A change in interest rates may result in a market
Feedback value that is different than the recorded value of the bonds. Generally, when interest rates fall, prices on bonds with higher stated
interest rates will increase as investors are generally willing to pay more for the higher rate of return.
Incorrect All assets acquired and liabilities assumed should be recorded at their fair values. A change in interest rates may result in a market
Feedback value that is different than the recorded value of the bonds. Generally, when interest rates fall, prices on bonds with higher stated
interest rates will increase as investors are generally willing to pay more for the higher rate of return.
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Question 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:
Question ABC Co. is acquiring XYZ Inc. XYZ has the following intangible assets:
ABC will record how much for acquired Intangible Assets from the purchase of XYZ Inc?
Answer $168,000
$58,000
$158,000
$150,000
Correct Feedback Amounts to be recorded
Patent $ -
Customer list 50,000
Favorable operating lease 8,000
Identifiable research and development costs 100,000
$158,000
Because the patent is on a product having no useful life, it has no value. It is appropriate to recognize the other intangibles in
an acquisition.
Incorrect Amounts to be recorded
Feedback Patent $ -
Customer list 50,000
Favorable operating lease 8,000
Identifiable research and development costs 100,000
$158,000
Because the patent is on a product having no useful life, it has no value. It is appropriate to recognize the other intangibles in
an acquisition.
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Question Which of the following would not be considered an identifiable intangible asset?
Answer Assembled workforce
Customer lists
Production backlog
Internet domain name
Correct An assembled workforce is specifically stated by FASB as not qualifying as an identifiable intangible asset. Whatever value it has
Feedback would be included in the value recorded for goodwill.
Incorrect An assembled workforce is specifically stated by FASB as not qualifying as an identifiable intangible asset. Whatever value it has
Feedback would be included in the value recorded for goodwill.
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Question Cozzi Company is being purchased and has the following balance sheet as of the purchase date:
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:
Answer $0
$150,000
$170,000
$190,000
Correct Feedback Acquisition price $500,000
Fair value: Current assets $ 200,000
Fixed assets 220,000
Liabilities (110,000) 310,000
Goodwill $190,000
Incorrect Feedback Acquisition price $500,000
Fair value: Current assets $ 200,000
Fixed assets 220,000
Liabilities (110,000) 310,000
Goodwill $190,000
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Question 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, of which the fair value approximated
book value. The fair value of Citizen assets on the acquisition date was as follows:
How should Publics account for the difference between the fair value of the net assets acquired and the acquisition price of $800,000?
Answer Retained earnings should be reduced by $200,000.
A $600,000 gain on acquisition of business should be recognized.
A $200,000 gain on acquisition of business should be recognized.
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.
Correct Feedback Fair value of total assets $1,400,000
Fair value of liabilities 400,000
Fair value of net assets 1,000,000
Acquisition price 800,000
Gain on acquisition of business $ 200,000
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If the acquisition price exceeds the fair value of the identifiable net assets acquired, the price deficiency is a gain.
Incorrect Feedback Fair value of total assets $1,400,000
Fair value of liabilities 400,000
Fair value of net assets 1,000,000
Acquisition price 800,000
Gain on acquisition of business $ 200,000
If the acquisition price exceeds the fair value of the identifiable net assets acquired, the price deficiency is a gain.
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Question 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:
Question Jones company acquired Jackson Company for $2,000,000 cash. At that time, the fair value of recorded assets and liabilities was
$1,500,000 and $250,000, respectively. Jackson also had unrecorded copyrights valued at $150,000 and its direct costs related to the acquisition
were $50,000. What was the amount of the goodwill related to the acquisition?
Answer $600,000
$650,000
$550,000
$700,000
Correct Feedback Acquisition price $2,000,000
Fair value: Assets $1,500,000
Copyrights 150,000
Liabilities (250,000) 1,400,000
Goodwill $ 600,000
Direct costs related to the acquisition are expensed in the period the acquisition is made.
Incorrect Feedback Acquisition price $2,000,000
Fair value: Assets $1,500,000
Copyrights 150,000
Liabilities (250,000) 1,400,000
Goodwill $ 600,000
Direct costs related to the acquisition are expensed in the period the acquisition is made.
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Question Jones company acquired Jackson Company for $2,000,000 cash. At that time, the fair value of recorded assets and liabilities was
$1,500,000 and $250,000, respectively. Jackson also had in-process research and development projects valued at $150,000 and its pension plan’s
projected benefit obligation exceeded the plan assets by $50,000. What was the amount of the goodwill related to the acquisition?
Answer $750,000
$50,000
$250,000
$650,000
Correct Feedback Acquisition price $2,000,000
Fair value: Assets $1,500,000
Research and development 150,000
Excess pension liability (50,000)
Liabilities (250,000) 1,350,000
Goodwill $ 650,000
Incorrect Feedback Acquisition price $2,000,000
Fair value: Assets $1,500,000
Research and development 150,000
Excess pension liability (50,000)
Liabilities (250,000) 1,350,000
Goodwill $ 650,000
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Question Orbit Inc. purchased Planet Co. on January 1, 20X3. At that time an existing patent having a 5-year life was not recorded as a separately
identified intangible asset. At the end of fiscal year 20X4, it is determined the patent is valued at $20,000, and goodwill has a book value of
$100,000. How should intangible assets be reported at the beginning of fiscal year 20X5?
Answer Goodwill $100,000 Patent $0
Goodwill $100,000 Patent $20,000
Goodwill $80,000 Patent $20,000
Goodwill $80,000 Patent $16,000
Correct Feedback In no case may the measurement period exceed a year; therefore, goodwill will remain at its $100,000 book value, and the
patent will not be recorded.
Incorrect Feedback In no case may the measurement period exceed a year; therefore, goodwill will remain at its $100,000 book value, and the
patent will not be recorded.
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Question Orbit Inc. purchased Planet Co. on January 1, 20X3. At that time an existing patent having a 5-year estimated life was assigned a
provisional value of $10,000 and goodwill was assigned a value of $100,000. By the end of fiscal year 20X3, better information was available that
indicated the fair value of the patent was $20,000. How should intangible assets be reported at the beginning of fiscal year 20X4?
Answer Goodwill $100,000 Patent $10,000
Goodwill $90,000 Patent $16,000
Goodwill $84,000 Patent $16,000
Goodwill $90,000 Patent $20,000
Correct Feedback Patent:
New estimate $ 20,000
Provisional value 10,000
Adjustment needed $ 10,000
Provisional goodwill 100,000
Adjusted goodwill $ 90,000
Amortization of the patent in 20X3 based on the new estimate should be $20,000 / 5 = $4,000, so the book value of the patent
at December 31, 20X3 would be $16,000 ($20,000 - $4,000)
Incorrect Patent:
Feedback New estimate $ 20,000
Provisional value 10,000
Adjustment needed $ 10,000
Provisional goodwill 100,000
Adjusted goodwill $ 90,000
Amortization of the patent in 20X3 based on the new estimate should be $20,000 / 5 = $4,000, so the book value of the patent
at December 31, 20X3 would be $16,000 ($20,000 - $4,000)
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Question Balter Inc. acquired Jersey Company on January 1, 20X5. When the purchase occurred Jersey Company had the following information
related to fixed assets:
Land $ 80,000
Building 200,000
Accumulated Depreciation (100,000)
Equipment 100,000
Accumulated Depreciation (50,000)
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:
Land $100,000
Building 130,000
Equipment 75,000
What is the 20X5 depreciation expense Balter will record related to purchasing Jersey Company?
Answer $8,000
$15,000
$28,000
$30,000
Correct Feedback Building Fair value - $130,000 / 10 years $13,000
Equipment Fair value - $ 75,000 / 5 years 15,000
$28,000
Incorrect Feedback Building Fair value - $130,000 / 10 years $13,000
Equipment Fair value - $ 75,000 / 5 years 15,000
$28,000
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Question 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
Answer increase the price assigned to fixed assets.
have no effect on asset values, but to reassign the amounts assigned to equity accounts.
reduce retained earnings.
record additional goodwill.
Correct An agreement to issue added stock upon the occurrence of a future event is considered to be a change in the estimate of the value of
Feedback shares issued. The only entry made is at the date of the added stock issue to reassign the original consideration assigned to the
stock to a greater number of shares. This typically results in an entry to increase the Common Stock account and decrease Paid-in
Capital in Excess of Par.
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Incorrect An agreement to issue added stock upon the occurrence of a future event is considered to be a change in the estimate of the value of
Feedback shares issued. The only entry made is at the date of the added stock issue to reassign the original consideration assigned to the
stock to a greater number of shares. This typically results in an entry to increase the Common Stock account and decrease Paid-in
Capital in Excess of Par.
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Question Jones company acquired Jackson Company for $2,000,000 cash. At that time, the fair value of recorded assets and liabilities was
$1,500,000 and $250,000, respectively. If Jackson meets specified sales targets, Jones is required to pay an additional $200,000 in cash per the
acquisition agreement. Jones estimates the probability of this to be 50%. The direct costs related to the acquisition were $50,000. What was the
amount of the goodwill related to the acquisition?
Answer $900,000
$950,000
$850,000
$750,000
Correct Feedback Acquisition price: Cash at closing $2,000,000
Contingent consideration 100,000
2,100,000
Fair value: Assets $1,500,000
Liabilities (250,000) 1,250,000
Goodwill $ 850,000
Direct costs related to the acquisition are expensed in the period the acquisition is made.
Incorrect Feedback Acquisition price: Cash at closing $2,000,000
Contingent consideration 100,000
2,100,000
Fair value: Assets $1,500,000
Liabilities (250,000) 1,250,000
Goodwill $ 850,000
Direct costs related to the acquisition are expensed in the period the acquisition is made.
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Question 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:
What is the amount of gain or loss on disposal of business should Comb Corp. recognize?
Answer Gain of $60,000
Gain of $60,000
Loss of $30,000
Loss of $60,000
Correct Feedback Acquisition price $110,000
Book values of net assets acquired:
Current assets $ 50,000
Building 80,000
Equipment 40,000
Liabilities (30,000) 140,000
Loss on sale of business $( 30,000)
Incorrect Feedback Acquisition price $110,000
Book values of net assets acquired:
Current assets $ 50,000
Building 80,000
Equipment 40,000
Liabilities (30,000) 140,000
Loss on sale of business $( 30,000)
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Question 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. The building had an adjusted tax
basis to Atlantic (and to Vibe as a result of the merger) of $120,000. Assuming a 40% income tax rate, at what amount should Vibe record this
building on its books after the purchase?
Deferred Tax
Building Liability
Answer $174,000 $ 0
$140,000 $36,000
$210,000 $90,000
$210,000 $36,000
Correct Feedback Fair value of building $210,000
Tax basis of building 120,000
Excess not deductible 90,000
Tax rate x 40%
Deferred tax liability $ 36,000
Incorrect Feedback Fair value of building $210,000
Tax basis of building 120,000
Excess not deductible 90,000
Tax rate x 40%
Deferred tax liability $ 36,000
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Question When an acquisition of another company occurs, FASB requires disclosing all of the following except:
Answer amounts recorded for each major class of assets and liabilities.
information concerning contingent consideration including a description of the arrangements and the range of outcomes.
results of operations for the current period if both companies had remained separate.
A qualitative description of factors that make up the goodwill recognized.
Correct FASB requires revenue and earnings of the acquiree since the acquisition date and proforma revenue and earnings had the
Feedback acquisition occurred at the start of the accounting period, but does not require results of operations for the current period if both
companies had remained separate.
Incorrect FASB requires revenue and earnings of the acquiree since the acquisition date and proforma revenue and earnings had the
Feedback acquisition occurred at the start of the accounting period, but does not require results of operations for the current period if both
companies had remained separate.
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Question While performing a goodwill impairment test, the company had the following information:
Question In performing the impairment test for goodwill, the company had the following 20X6 and 20X7 information available.
20X6 20X7
Fair value of the reporting unit $350,000 $400,000
Net book value (including $50,000 goodwill) $360,000 $380,000
Assume that the carrying 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?
20X6 20X7
Answer no adjustment $20,000 decrease
$10,000 increase $20,000 decrease
$10,000 decrease $20,000 decrease
$10,000 decrease no adjustment
Correct Feedback Impairment Test 20X6:
Estimated implied fair value of the reporting unit $350,000
Existing book values, including goodwill 360,000
Impairment is indicated since the book value of the unit exceeds the fair
value.
Impairment is indicated since the book value of the unit exceeds the fair
value.
Question Which of the following income factors should not be considered in expected future income when estimating the value of goodwill?
Answer sales for the period
income tax expense
extraordinary items
cost of goods sold
Correct Because a forecast of future income may start by projecting recent years’ incomes into the future, it is important to factor out
Feedback “one-time” occurrences such as extraordinary items that will not likely recur in the near future.
Incorrect Because a forecast of future income may start by projecting recent years’ incomes into the future, it is important to factor out
Feedback “one-time” occurrences such as extraordinary items that will not likely recur in the near future.
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Question Internet Corporation is considering the acquisition of Homepage Corporation and has obtained the following audited condensed balance
sheet:
Homepage Corporation
Balance Sheet
December 31, 20X5
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.
Answer Debit Credit
a. Current assets 55,000
Land 60,000
Buildings 90,000
Equipment 75,000
Goodwill ($280,000 - $220,000) 60,000
Acquisition expense 5,000
Current liabilities 60,000
Cash 285,000
Debit Credit
b. Current assets 55,000
Land 60,000
Buildings 90,000
Equipment 75,000
Goodwill 60,000
Current liabilities 60,000
Common stock 28,000
Paid-in capital in excess of par 252,000
Question 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.
Required:
Debit Credit
Current Assets $370,000
Plant and Equipment 480,000
Intangibles – Patents 120,000
Intangibles – Goodwill 80,000
Current Liabilities $140,000
Long-term Debt 110,000
Common Stock 100,000
Paid-in Capital in Excess of Par 700,000
Question On January 1, 20X5, Zebb and Nottle Companies had condensed balance sheets as shown below:
Zebb Nottle
Company Company
Current Assets $1,000,000 $ 600,000
Plant and Equipment 1,500,000 800,000
$2,500,000 $1,400,000
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.
Answer Current Assets 650,000
Plant and Equipment 900,000
Goodwill** 130,000
Acquisition Expenses* 70,000
Current Liabilities 100,000
Long-Term Debt 330,000
Common Stock 300,000
Paid-in Capital in Excess of Par 450,000
Cash ($500,000 + 70,000) 570,000
*alternative treatment: debit Paid-in Capital in Excess of Par for issue costs
** Calculation of goodwill
Acquisition price:
Cash $ 500,000
Common stock issued (30,000 shares x $25) 750,000
$1,250,000
Fair value of acquired net assets:
Current assets $650,000
Plant and equipment 900,000
Current liabilities (100,000)
Long-term debt (330,000) 1,120,000
Goodwill $ 130,000
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Question 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:
Book Fair
Value Value
Current Assets $ 500,000 $800,000
Long-Term Investments in Securities 200,000 150,000
Land 100,000 600,000
Buildings (net) 700,000 900,000
$1,500,000
Required:
Record the entry on Honey Bee's books for the acquisition of Green Hornet's net assets.
Answer Acquisition price $1,500,000
Fair value of acquired net assets:
Current assets $800,000
Long-term investments in securities 150,000
Land 600,000
Buildings 900,000
Current liabilities (300,000)
Long-term debt (600,000) 1,550,000
Gain on acquisition of business $ 50,000
Question Diamond acquired Heart's net assets. At the time of the acquisition Heart's Balance sheet was as follows:
Inventory $100,000
Equipment 30,000
Building 350,000
Land 120,000
Brand Name 50,000
Bonds payable 120,000
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
Answer Fair value of acquired net assets:
Accounts receivable $130,000
Inventory 100,000
Equipment 30,000
Buildings 350,000
Land 120,000
Brand name 50 000
Bonds payable (120,000)
Total $660,000
Question 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:
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.
Answer 1. Debit Credit
Current Assets 280,000
Plant and Equipment 600,000
Goodwill * 40,000
Current Liabilities 70,000
Long-Term Debt 100,000
Cash 750,000
Question On January 1, 20X3 the fair values of Pink Coral’s net assets were as follows:
On January 1, 20X3, 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, 20X5, if the average
income during the 2-year period of 20X3-20X4 exceeded $80,000 per year. The expected value of this consideration was calculated as $184,000;
the measurement period is one year. Blue Reef paid $15,000 in professional fees to negotiate the purchase and construct the acquisition agreement
and $10,000 in stock issuance costs.
The adjustment is made to goodwill since this entry was made within the measurement period.
Question 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.
Answer Paid-in Capital in Excess of Par 60,000
Common Stock, $1 par 60,000
Question Poplar Corp. acquires the net assets of Sapling Company, which has the following balance sheet:
If Poplar paid $300,000 what journal entries would be recorded by both Poplar Corp. and Sapling Company?
Answer Poplar Corp:
Accounts Receivable 50,000
Inventory 100,000
Equipment 30,000
Land & Building 180,000
Customer List 30,000
Goodwill ($300,000 - $290,000) 10,000
Acquisition Expenses 10,000
Bonds Payable 90,000
Premium on Bonds Payable 10,000
Cash ($300,000 + $10,000) 310,000
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Sapling Company:
Cash 300,000
Bonds Payable 90,000
Accounts Receivable 50,000
Inventory 80,000
Equipment 50,000
Land and Building 120,000
Gain on Sale of Business ($300,000 - $100,000 - $110,000) 90,000
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Question 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:
Assets
Current assets $100,000
Equipment 300,000
Accumulated depreciation (100,000)
Plant 600,000
Accumulated depreciation (250,000)
Total $650,000
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 taxable
exchange.
Answer a. Current Assets 100,000
Equipment 300,000
Plant 500,000
Goodwill 300,000
Deferred Tax Liability* 100,000
Bonds Payable 200,000
Cash 900,000
Question 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.
Answer GREENMAIL: A strategy is which the target company pays a premium price to purchase treasury shares. The shares purchased are owned
by the hostile acquirer or shareholders who might sell to the hostile acquirer.
WHITE KNIGHT: A strategy in which the target company locates a different company to take it over, a company that is more likely to keep
current management and employees in place.
SELLING THE CROWN JEWELS: A strategy in which the target company sells off vital assets in order to make the company less attractive
to prospective acquirers.
POISON PILL: A strategy in which the target company issues stock rights to existing shareholders at a price far below fair value. The rights
are only exercisable if an acquirer makes a bid for the target company. The resulting new shares make the acquisition more expensive.
LEVERAGED BUYOUT: A strategy in which the management of the target company attempts to purchase a controlling interest in the target
company, in order to continue control of the company.
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Question 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.
Answer Goodwill arises when a company is purchased and the value assigned to identifiable assets, including intangible assets, is in excess of the
price paid. As such goodwill represents the value of intangible assets that could not be valued individually.
During a purchase some intangible assets such as patents, customer lists, brand names, and favorable lease agreements may exist but
have not been recorded. The fair value of these intangible assets should be determined and recorded separate from the value of goodwill
associated with the purchase.
Intangible assets other than goodwill will be amortized over their economic lives. The amortization method should reflect the pattern of
benefits conveyed by the asset, so that a straight-line method is to be used unless another systematic method is appropriate.
Intangible assets may be reported individually, in groups, or in the aggregate on the balance sheet after fixed assets and are displayed net
of cumulative amortization. Details for current and cumulative amortization, along with significant residual values, are shown in the
footnotes to the balance sheet.
Goodwill is subject to impairment procedures. These concerns must be addressed related to goodwill:
1. Goodwill must be allocated to reporting units if the purchased company contains more than one reporting unit.
2. A reporting unit valuation plan must be established within one year of a purchase. This will be used as the measurement process in
future periods.
3. Impairment testing is normally done on an annual basis.
4. The procedure for determining impairment must be established.
5. The procedure for determining the amount of the impairment loss, which is also the decrease in the goodwill amount recorded, must
be established.
Goodwill is considered impaired when the implied fair value of reporting unit is less than the carrying value of the reporting unit's net assets.
Once goodwill is written down, it cannot be adjusted to a higher amount.
Changes to goodwill must be disclosed. The disclosure would include the amount of goodwill acquired, the goodwill impairment losses, and
the goodwill written off as part of a disposal of a reporting unit.
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