(Test Bank) Advanced Accounting

Fischer,Taylor,Cheng, 12

Business

Test Bank

12th Edition

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Test Bank for Advanced Accounting, The downloadable file consists of 676 pages, and the total size of the file is 9.16 MB. Purchase now only for highly discounted price.

Author(s): Fischer, Taylor, Cheng

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Chapter 01—Business Combinations: New Rules for a Long -Standing Business Practice Test Bank for Advanced Accounting, 12e Paul Fischer William Taylor Rita Cheng Multiple Choice 1. An economic advantage of a business combination includes: a. Utilizing duplicative assets. b. Creating separate management teams. c. Shared fixed costs. d. Horizontally combining levels within the marketing chain. ANSWER: c RATIONALE: Business combinations may viewed as a way to take advantage of economies of scale by utilizing common facilities and sharing fixed costs. DIFFICULTY: E LEARNING OBJECTIVES: ADAC.FISC.1 -1 2. One large bank’s acquisition of another bank would be an example of a: a. market extension merger. b. conglomerate merger. c. product extension merger. d. horizontal merger. ANSWER: d RATIONALE: A horizontal merger occurs when two companies offering similar products or services that are likely competitors in the same marketplace merge. DIFFICULTY: M LEARNING OBJECTIVES: ADAC.FISC.1 -1 3. A large nation -wide bank’s acquisition of a major investment advisory firm would be an example of a: a. market extension merger. b. conglomerate merger. c. product extension merger. d. horizontal merger. ANSWER: c RATIONALE: A product extension merger occurs when the acquiring company is expanding its product offerings in the market place in which it sells. DIFFICULTY: M LEARNING OBJECTIVES: OBJ: ADAC.FISC.1 -1 4. A building materials company’s acquisition of a television station would be an example of a: a. market extension merger. b. conglomerate merger. c. product extension merger. d. horizontal merger. ANSWER: b RATIONALE: Because these firms are in unrelated lines of business, this would be a conglomerate merger. DIFFICULTY: M Chapter 01—Business Combinations: New Rules for a Long -Standing Business Practice LEARNING OBJECTIVES: ADAC.FISC.1 -1 5. A tax advantage of business combination can occur when the existing owner of a company sells out and receives: a. cash to defer the taxable gain as a "tax-free reorganization." b. stock to defer the taxable gain as a "tax-free reorganization." c. cash to create a taxable gain. d. stock to create a taxable gain. ANSWER: b RATIONALE: If the owners of a business sell their interests for cash or accept debt instruments, they would have an immediate taxable gain. However, if they accept common stock of another corporation and the transaction is crafted as such, they may accou nt 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. DIFFICULTY: E LEARNING OBJECTIVES: ADAC.FISC.1 -1 6. A controlling interest in a company implies that the parent company a. owns all of the subsidiary's stock. b. has acquired a majority of the subsidiary's common stock. c. has paid cash for a majority of the subsidiary's stock. d. has transferred common stock for a majority of the subsidiary's outstanding bonds and debentures. ANSWER: b RATIONALE: Typically, a controlling interest is over 50% of the company’s voting stock. DIFFICULTY: E LEARNING OBJECTIVES: ADAC.FISC.1 -2 7. Some advantages of obtaining control by acquiring a controlling interest in stock include all but: a. Negotiations are made directly with the acquiree’s management. b. The legal liability of each corporation is limited to its own assets. c. The cost may be lower since only a controlling interest in the assets, not the total assets, is acquired. d. Tax advantages may result from preservation of the legal entities. ANSWER: a RATIONALE: If a company was acquiring a controlling interest in stock, the negotiations would be with the target company’s stockholders. DIFFICULTY: M LEARNING OBJECTIVES: ADAC.FISC.1 -2 8. 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. a. greenmail b. statutory merger c. poison pill d. leveraged buyout ANSWER: d RATIONALE: A leveraged buyout is defensive move against an unfriendly takeover where management of Chapter 01—Business Combinations: New Rules for a Long -Standing Business Practice the target company purchases a controlling interest in the company. Usually, a significant amount of debt is incurred. DIFFICULTY: E LEARNING OBJECTIVES: ADAC.FIS C.1-2 9. Acquisition costs such as the fees of accountants and lawyers that were necessary to negotiate and consummate the purchase are a. recorded as a deferred asset and amortized over a period not to exceed 15 years b. expensed if immaterial but capitalized and amortized if over 2% of the acquisition price c. expensed in the period of the purchase d. included as part of the price paid for the company purchased ANSWER: c RATIONALE: Direct costs of the acquisition, such as professional fees incurred to negotiate and consummate the purchase, are expensed in the 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. DIFFICULTY: M LEARNING OBJECTIVES: ADAC.FISC.1 -3 10. Which of the following costs of a business combination can be deducted from the value assigned to paid-in capital in excess of par? a. Direct and indirect acquisition costs. b. Direct acquisition costs. c. Direct acquisition costs and stock issue costs if stock is issued as consideration. d. Stock issue costs if stock is issued as consideration. ANSWER: d RATIONALE: Stock issue costs can be deducted from the value assigned to paid-in capital in excess of par when stock is issued as consideration. All other direct and indirect acquisition costs are expensed. DIFFICULTY: E LEARNING OBJECTIVES: ADAC.FISC.1 -3 11. When determining the fair values of assets acquired in an acquisition, the highest level of measurement per GAAP is a. adjusted market value based on prices of similar assets. b. unadjusted market values in an actively traded market. c. based on discounted cash flows. d. the entity’s best estimate of an exit or sale value. ANSWER: b RATIONALE: FASB provides a hierarchy of values where the highest level measurement possible should be used. The levels are as follows: Level 1 - Unadjusted quoted market values in an actively traded market. Level 2 - Adjusted market value based on prices of similar assets or on observable other inputs such as interest rates. Level 3 - Fair value based on unobservable inputs such as the entity’s best estimate of an exit value. DIFFICULTY: E LEARNING OBJECTIVES: ADAC.FISC.1 -3 Chapter 01—Business Combinations: New Rules for a Long -Standing Business Practice 12. Larry’s Liquor acquired the net assets of Drake’s Drinks in exchange for cash. The acquisition price exceeds the fair value of the net assets acquired. How should Larry’s Liquor determine the amounts to be reported for the plant and equipment, and for long-term debt of the acquired Drake’s Drinks? Plant and Equipment Long-Term Debt a. Fair value Drake's carrying amount b. Fair value Fair value c. Drake's carrying amount Fair value d. Drake's carrying amount Drake's carrying amount ANSWER: b RATIONALE: All assets acquired and liabilities assumed in an acquisition should be recorded at fair value. DIFFICULTY: M LEARNING OBJECTIVES: ADAC.FISC.1 -4 13. 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 a. face value. b. at a value higher than Sill’s recorded value due to the change in interest rates. c. at a value lower than Sill’s recorded value due to the change in interest rates. d. at Sill’s recorded value. ANSWER: b RATIONALE: All assets acquired and liabilities assumed should be recorded at their fair values. A change in interest rates may result in a market 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. DIFFICULTY: D LEARNING OBJECTIVES: ADAC.FISC.1 -4 14. 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: Book Value Fair Value Current Assets $50,000 $ 50,000 Building 80,000 100,000 Equipment 40,000 50,000 Liabilities 30,000 30,000 What is the amount recorded by ACME for the Building? a. $110,000 b. $20,000 c. $80,000 d. $100,000 ANSWER: d RATIONALE: Identifiable assets and liabilities of the acquiree are recorded at fair value. DIFFICULTY: E LEARNING OBJECTIVES: ADAC.FISC.1 -4 Chapter 01—Business Combinations: New Rules for a Long -Standing Business Practice 15. ABC Co. is acquiring XYZ Inc. XYZ has the following intangible assets: Patent on a product that is deemed to have no useful life $10,000. Customer list with an observable fair value of $50,000. A 5-year operating lease with favorable terms having a discounted present value of $8,000. Identi fiable research and development costs of $100,000. ABC will record how much for acquired Intangible Assets from the purchase of XYZ Inc? a. $168,000 b. $58,000 c. $158,000 d. $150,000 ANSWER: c RATIONALE: 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. DIFFICULTY: D LEARNING OBJECTIVES: ADAC.FISC.1 -4 16. Which of the following would not be considered an identifiable intangible asset? a. Assembled workforce b. Customer lists c. Production backlog d. Internet domain name ANSWER: a RATIONALE: An assembled workforce is specifically stated by FASB as not qualifying as an identifiable intangible asset. Whatever value it has would be included in the value recorded for goodwill. DIFFICULTY: E LEARNING OBJECTIVES: ADAC.FISC.1 -4 17. A contingent liability of an acquiree a. refers to future consideration due that is part of the acquisition agreement. b. is recorded when it is probable that future events will confirm its existence. c. may be recorded beyond the measurement period under certain circumstances. d. should be recorded even if the amount cannot be reasonably estimated. ANSWER: b RATIONALE: Two criteria must be met for an estimate of a contingent liability to be recorded: 1) information available indicates a liability had been incurred at the acquisition date, and 2) the amount of the liability can be reasonably estimated. Examples of a contingen t liability might include pending claims, unfavorable lawsuits or environmental liabilities. Contingent liabilities should not be confused with contingent consideration that is part of the acquisition agreement. Chapter 01—Business Combinations: New Rules for a Long -Standing Business Practice DIFFICULTY: M LEARNING OBJECTIVES: ADA C.FISC.1 -4 18. Goodwill results when: a. a controlling interest is acquired. b. the price of the acquisition exceeds the sum of the fair values of the net identifiable assets acquired. c. the fair value of net assets acquired exceeds the acquisition price. d. the price of the acquisition exceeds the book value of an acquired company. ANSWER: b RATIONALE: If the acquisition price exceeds the sum of the fair value of the net identifiable assets acquired, the excess price is goodwill. DIFFICULTY: E LEARNING OBJECTIVES: ADAC.FISC.1 -4 19. Cozzi Company is being purchased and has the following balance sheet as of the purchase date: Current assets $200,000 Liabilities $ 90,000 Fixed assets 180,000 Equity 290,000 Total $380,000 Total $380,000 The price paid for Cozzi's net assets is $500,000. The fixed assets have a fair value of $220,000, and the liabilities have a fair value of $110,000. The amount of goodwill to be recorded in the purchase is: a. $0 b. $150,000 c. $170,000 d. $190,000 ANSWER: d RATIONALE: Acquisition price $500,000 Fair value: Current assets $ 200,000 Fixed assets 220,000 Liabilities (110,000 ) 310,000 Goodwill $190,000 DIFFICULTY: M LEARNING OBJECTIVES: ADAC.FISC.1 -4 20. Publics Company acquired the net assets of Citizen Company during 2016. 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’s assets on the acquisition date was as follows: Current assets $ 800,000 Noncurrent assets 600,000 $1,400,000 How should Publics account for the difference between the fair value of the net assets acquired and the acquisition price of $800,000? a. Retained earnings should be reduced by $200,000. b. A $600,000 gain on acquisition of business should be recognized. c. A $200,000 gain on acquisition of business should be recognized. d. A deferred credit of $200,000 should be set up and subsequently amortized to future net income over a period Chapter 01—Business Combinations: New Rules for a Long -Standing Business Practice not to exceed 40 years. ANSWER: c RATIONALE: 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. DIFFICULTY: M LEARNING OBJECTIVES: ADAC.FISC.1 -4 21. 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: Book Value Fair Value Current Assets $50,000 $ 50,000 Building 80,000 100,000 Equipment 40,000 50,000 Liabilities 30,000 30,000 What is the amount of goodwill or gain related to the acquisition? a. Goodwill of $70,000 b. Goodwill of $30,000 c. A gain of $30,000 d. A gain of $70,000 ANSWER: d RATIONALE: Acquisition price $110,000 Fair value of net assets acquired: Current assets $ 50,000 Building 110,000 Equipment 50,000 Liabilities (30,000) 180,000 Gain on acquisition of business $( 70,000 ) DIFFICULTY: M LEARNING OBJECTIVES: ADAC.FISC.1 -4 22. 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? a. $600,000 b. $650,000 c. $550,000 d. $700,000 ANSWER: a RATIONALE: Acquisition price $2,000,000 Fair value: Assets $1,500,000 Copyrights 150,000 Liabilities (250,000 ) 1,400,000 Chapter 01—Business Combinations: New Rules for a Long -Standing Business Practice Goodwill $ 600,000 Direct costs related to the acquisition are expensed in the period the acquisition is made. DIFFICULTY: M LEARNING OBJECTIVES: ADAC.FISC.1 -4 23. 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? a. $750,000 b. $50,000 c. $250,000 d. $650,000 ANSWER: d RATIONALE: 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 DIFFICULTY: D LEARNING OBJECTIVES: ADAC.FISC.1 -4 24. Orbit Inc. purchased Planet Co. on January 1, 2016. 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 2015, 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 2016? a. Good will $100,000 Patent $0 b. Goodwill $100,000 Patent $20,000 c. Goodwill $80,000 Patent $20,000 d. Goodwill $80,000 Patent $16,000 ANSWER: a RATIONALE: 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. DIFFICULTY: D LEARNING OBJECTIVES: ADAC.FISC.1 -4 25. Orbit Inc. purchased Planet Co. on January 1, 2015. 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 2015, 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 2016? a. Goodwill $100,000 Patent $10,000 b. Goodwill $90,000 Patent $16,000 c. Goodwill $84,000 Patent $16,000 d. Goodwill $90,000 Patent $20,000 ANSWER: b RATIONALE: Patent: Chapter 01—Business Combinations: New Rules for a Long -Standing Business Practice 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 2016 based on the new estimate should be $20,000 / 5 = $4,000, so the book value of the patent at December 31, 2016 would be $16,000 ($20,000 - $4,000) DIFFICULTY: D LEARNING OBJECTIVES: ADAC.FISC.1 -4 26. Balter Inc. acquired Jersey Company on January 1, 2016. When the purchase occurred Jersey Company had the following information related to fixed assets: Land $ 80,000 Building 200,000 Accumulated Depreciation (100,000) Equipm ent 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 2016 depreciation expense Balter will record related to purchasing Jersey Company? a. $8,000 b. $15,000 c. $28,000 d. $30,000 ANSWER: c RATIONALE: Building Fair value - $130,000 / 10 years $13,000 Equipment Fair value - $ 75,000 / 5 years 15,000 $28,000 DIFFICULTY: M LEARNING OBJECTIVES: ADAC.FISC.1 -4 27. Polk issues common stock to acquire all the assets of the Sam Company on January 1, 2016. There is a contingent share agreement, which states that if the income of the Sam Division exceeds a certain level during 2016 and 2017, additional shares will be issued on January 1, 2018. The impact of issuing the additional shares is to a. increase the price assigned to fixed assets. b. have no effect on asset values, but to reassign the amounts assigned to equity accounts. c. reduce retained earnings. d. record additional goodwill. ANSWER: b RATIONALE: 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 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 Chapter 01—Business Combinations: New Rules for a Long -Standing Business Practice and decrease Paid-in Capital in Excess of Par. DIFFICULTY: M LEARNING OBJECTIVES: ADAC.FISC.1 -4 28. 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 acquis ition 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? a. $900,000 b. $950,000 c. $850,000 d. $750,000 ANSWER: c RATIONALE: 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. DIFFICULTY: M LEARNING OBJECTIVES: ADAC.FISC.1 -4 29. 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: Book Value Fair Value Current Assets $50,000 $ 50,000 Building 80,000 100,000 Equipment 40,000 50,000 Liabilities 30,000 30,000 What is the amount of gain or loss on disposal of business should Comb Corp. recognize? a. Gain of $60,000 b. Gain of $60,000 c. Loss of $30,000 d. Loss of $60,000 ANSWER: c RATIONALE: 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 ) DIFFICULTY: M LEARNING OBJECTIVES: ADAC.FISC.1 -4 30. 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 Chapter 01—Business Combinations: New Rules for a Long -Standing Business Practice 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 a. $174,000 $ 0 b. $140,000 $36,000 c. $210,000 $90,000 d. $210,000 $36,000 ANSWER: d RATIONALE: 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 DIFFICULTY: M LEARNING OBJECTIVES: ADAC.FISC.1 -5 31. When an acquisition of another company occurs, FASB requires disclosing all of the following except : a. amounts recorded for each major class of assets and liabilities. b. information concerning contingent consideration including a descriptio n of the arrangements and the range of outcomes. c. results of operations for the current period if both companies had remained separate. d. a qualitative description of factors that make up the goodwill recognized. ANSWER: c RATIONALE: FASB requires revenue and earnings of the acquiree since the acquisition date and proforma revenue and earnings had the 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. DIFFICULTY: M LEARNING OBJECTIVES: ADAC.FISC.1 -6 32. While performing a goodwill impairment test, the company had the following information: Estimated implied fair value of reporting unit $420,000 Fair value of net assets on date of measurement (without goodwill) $400,000 Existing net book value of reporting unit (without goodwill) $380,000 Book value of goodwill $ 60,000 Based upon this information the proper conclusion is: a. The company should recognize a goodwill impairment loss of $20,000. b. Goodwill is not impaired. c. The company should recognize a goodwill impairment loss of $40,000. d. The company should recognize a goodwill impairment loss of $60,000. ANSWER: c RATIONALE: Impairment Test: Estimated implied fair value of the reporting unit $420,000 Existing book values, including goodwill 440,000 Chapter 01—Business Combinations: New Rules for a Long -Standing Business Practice Impairment is indicated since the book value of the unit exceeds the fair value. Impairment Loss Calculation: Estimated implied fair value of the reporting unit $420,000 Less: Fair value of net assets 400,000 Implied fair value of goodwill 20,000 Existing recorded goodwill 60,000 Estimated impairment loss $ 40,000 DIFFICULTY: M LEARNING OBJECTIVES: ADAC.FISC.1 -7 33. In performing the impairment test for goodwill, the company had the following 2016 and 2017 information available. 2016 2017 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 2016 and 2017 adjustment to goodwill, if any? 2016 2017 a. no adjustment $20,000 decrease b. $10,000 increase $20,000 decrease c. $10,000 decrease $20,000 decrease d. $10,000 decrease no adjustment ANSWER: d RATIONALE: Impairment Test 2016: 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 Loss Calculation: Estimated implied fair value of the reporting unit $350,000 Less: Fair value of net assets (360,000 - 50,000) 310,000 Implied fair value of goodwill 40,000 Existing recorded goodwill 50,000 Estimated impairment loss $ 10,000 Impairment Test 2017: Estimated implied fair value of the reporting unit $400,000 Existing book values, including goodwill 380,000 No impairment is indicated in 2017. DIFFICULTY: M LEARNING OBJECTIVES: ADAC.FISC.1 -7 34. Which of the following income factors should not be considered in expected future income when estimating the value of goodwill? a. sales for the period b. income tax expense Chapter 01—Business Combinations: New Rules for a Long -Standing Business Practice c. extraordinary items d. cost of goods sold ANSWER: c RATIONALE: Because a forecast of future income may start by projecting recent years’ incomes into the future, it is important to factor out “one -time” occurrences such as extraordinary items that will not likely recur in the near future. DIFFICULTY: M LEARNING OBJECTIVES: ADAC.FISC.1 -8 35. When measuring the fair value of the acquired company as the price paid by the acquirer, the price calculation needs to consider the following EXCEPT for: a. the estimated value of contingent consideration like assets or stock at a later date if specified events occur like targeted sales or income performance b. the costs of accomplishing the acquisition, such as accounting and legal fees c. common agreements like targeted sales or income performance by the acquire company are acceptable for valuation d. issue costs from the stock of the acquirer may be expensed or they can be deducted from the value assigned to paid -in capital in excess of par only ANSWER: b RATIONALE: these costs are expensed and not included in the price of the company acquired DIFFICULTY: E LEARNING OBJECTIVES: ADAC.FISC.1 -3 36. Rugby, Inc. issues 20,000 shares of $10 par value common stock with a market value of $15 each for Soccer Company. Rugby, Inc. pays related acquisition costs of $50,000. The total fair value of net assets acquired from Soccer Company is $450,000. Which of the following is true related to recording the purchase and related costs: a. Debit a loss for $150,000 on the acquisition of the business b. Debit goodwill for $250,000 above par value on the acquisition of the business c. Credit a gain for $150,000 on the acquisition of the business and capitalize the $55,000 of acquisition costs d. Credit a gain for $150,000 on the acquisition of the business and expense the acquisition costs. ANSWER: d RATIONALE: Compare the total fair value of the net assets acquired to the exchange price of the stock based on its market value. If the total price paid is less than the sum of the fair value of the net identifiable assets acquired, the price deficiency is a gain. If the total price paid is more than the sum of the fair value of the net identifiable assets acquired, then goodwill results. Ignore par value. All acquisition costs are expensed. DIFFICULTY: E LEARNING OBJECTIVES: ADAC.FISC.1 -3 Subjective Short Answer 37. Internet Corporation is considering the acquisition of Homepage Corporation and has obtained the following audited condensed balance sheet: Homepage Corporation Balance Sheet December 31, 2016 Assets Liabilities and Equity Chapter 01—Business Combinations: New Rules for a Long -Standing Business Practice Current assets $ 40,000 Current Liabilities $ 60,000 Land 20,000 Capital Stock (50,000 Buildings (net) 80,000 shares, $1 par value) 50,000 Equipment (net) 60,000 Other Paid-in Capital 20,000 Retained Earnings 70,000 $200,000 $200,000 Internet also acquired the following fair values for Homepage's assets and liabilities: Current assets $ 55,000 Land 60,000 Buildings (net) 90,000 Equipment (net) 75,000 Current Liabilities (60,000 ) $220,000 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 Paid-in capital in excess of par * 5,000 Cash 5,000 *Alternatively, this amount could be charged to Acquisition Expense. DIFFICULTY: M LEARNING OBJECTIVES: ADAC.FISC.1 -3 ADAC.FISC.1 -4 38. On January 1, 16 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. Chapter 01—Business Combinations: New Rules for a Long -Standing Business Practice On this date, Larson's condensed account balances showed the following: Book Value Fair Value Current Assets $280,000 $370,000 Plant and Equipment 440,000 480,000 Accumulated Depreciation (100,000) Intangibles – Patents 80,000 120,000 Current Liabilities (140,000) (140,000) Long -Term Debt (100,000) (110,000) Common Stock (200,000) Other Paid-in Capital (120,000) Retained Earnings (140,000) Required: Record Brown's purchase of Larson Company's net assets. ANSWER: Acquisition price $800,000 Fair value of acquired net assets: Current assets $370,000 Plant and equipment 480,000 Intangibles - patents 120,000 Current liabilities (140,000) Long -term debt (110,000 ) 720,000 Goodwill $ 80,000 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 Acquisition expenses* 25,000 Cash 25,000 *alternative treatment: debit Paid-In Capital in Excess of Par for issue costs DIFFICULTY: M LEARNING OBJECTIVES: ADAC.FISC.1 -3 ADAC.FISC.1 -4 39. On January 1, 2016, 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 Current Liabilities $ 200,000 $ 100,000 Long -Term Debt 300,000 300,000 Common Stock, $10 par 1,400,000 400,000