(Test Bank) Advanced Accounting

Fischer,Taylor,Cheng, 9

Business

Test Bank

9th Edition

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Test Bank for Advanced Accounting, The downloadable file consists of 826 pages, and the total size of the file is 1.08 MB. Purchase now only for highly discounted price.

Author(s): Fischer, Taylor, Cheng

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MULTIPLE CHOICE 1. An economic advantage of a business combination includes a. Utilizing duplicative assets. b. Creating separate management teams. c. Coordinated marketing campaigns. d. Horizontally combining levels within the marketing chain. ANS: C 2. 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. ANS: B 3. A controlling interest in a company implies that the parent company a. owns all of the subsidiary's stock. b. has influence over a majority of the subsidiary's assets. 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. ANS: B 4. Which of the following is a potential abuse that may arise when a business combination is accounted for as a pooling of interests? a. Assets of the buyer may be overvalued when the price paid by the investor is allocated among specific assets. b. Earnings of the pooled entity may be increased because of the combination only and not as a result of efficient operations. c. Liabilities may be undervalued when the price paid by the investor is allocated to specific liabilities. d. An undue amount of cost may be assigned to goodwill, thus potentially allowing an understatement of pooled earnings. ANS: B Test Ban k for Advanced Accounting 9e Fisher taylor Chang Chapter 1 — Business Combinations: America's Most Popular Business Activity, Bringing an End to the ControversyChapter 1 1-2 5. Company B acquired the assets (net of liabilities) 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? Plant and Equipment Long-Term Debt a. Fair value S's carrying amount b. Fair value Fair value c. S's carrying amount Fair value d. S's carrying amount S's carrying amount ANS: B DIF: E OBJ: 4 6. Publics Company acquired the net assets of Citizen Company during 20X5. The purchase price was $800,000. On the date of the transaction, Citizen had no long-term investments in marketable equity securities and $400,000 in liabilities. The fair value of Citizen assets on the acquisition date was as follows: Current assets................................. $ 800,000 Noncurrent assets.............................. 600,000 $1,400,000 ========== How should Publics account for the $200,000 difference between the fair value of the net assets acquired, $1,000,000, and the cost, $800,000? a. Retained earnings should be reduced by $200,000. b. Current assets should be recorded at $685,000 and noncurrent assets recorded at $515,000. c. The noncurrent assets should be recorded at $400,000. d. A deferred credit of $200,000 should be set up and subsequently amortized to future net income over a period not to exceed 40 years. ANS: C DIF: M OBJ: 4 7. 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 with a discounted present value of $8,000. Identifiable R & D 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 ANS: B DIF: D OBJ: 4 Chapter 1 1-3 8. Vibe Company purchased the net assets of Atlantic Company in a business combination accounted for as a purchase. As a result, goodwill was recorded. For tax purposes, this combination was considered to be a tax-free merger. Included in the assets is a building with an appraised value of $210,000 on the date of the business combination. This asset had a net book value of $70,000, based on the use of accelerated depreciation for accounting purposes. The building had an adjusted tax basis to Atlantic (and to Vibe as a result of the merger) of $120,000. Assuming a 36% income tax rate, at what amount should Vibe record this building on its books after the purchase? a. $120,000 b. $134,400 c. $140,000 d. $210,000 ANS: D DIF: M OBJ: 4 9. Goodwill represents the excess cost of an acquisition over the a. sum of the fair values assigned to intangible assets less liabilities assumed. b. sum of the fair values assigned to tangible and intangible assets acquired less liabilities assumed. c. sum of the fair values assigned to intangibles acquired less liabilities assumed. d. book value of an acquired company. ANS: B DIF: M OBJ: 5 10. When purchasing a company occurs, FASB recommends disclosing all of the following EXCEPT: a. goodwill related to each reporting segment. b. contingent payment agreements, options, or commitments included in the purchase agreement, including accounting methods to be followed. c. results of operations for the current period if both companies had remained separate. d. amount of in-process R&D purchased and written-off during the period. ANS: C DIF: M OBJ: 5 Chapter 1 1-4 11. 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 (the purchaser assumes the liabilities) 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. $50,000 c. $70,000 d. $90,000 ANS: C DIF: M OBJ: 6 12. Separately identified intangible assets are accounted for by amortizing: a. exclusively by using impairment testing. b. based upon a pattern that reflects the benefits conveyed by the asset. c. over the useful economic life less residual value using only the straight-line method. d. amortizing over a period not to exceed a maximum of 40 years. ANS: B DIF: E OBJ: 6 13. Acme Co. is preparing a pro-forma set of financial statements after an acquisition of Coyote Co. The purchase price is less than the fair value of the assets acquired. However, the purchase price is greater than net book value of the acquired company. a. Acme's goodwill will decrease over time. b. Acme's amortization of intangible assets will increase over time. c. Depreciation expense will be greater than Coyote Company's expense. d. Coyote's loss on the sale of the assets will create a net loss carryforward. ANS: C DIF: D OBJ: 6 Chapter 1 1-5 14. While performing a goodwill impairment test, the company had the following information: Estimated implied fair value of reporting unit (without goodwill) $420,000 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 existing net book value plus goodwill is in excess of the implied fair value, therefore, no adjustment is required. b. The existing net book value plus goodwill is less than the implied fair value plus goodwill, therefore, no adjustment is required. c. The existing net book value plus goodwill is in excess of the implied fair value, therefore, goodwill needs to be decreased. d. The existing net book value is less than the estimated implied fair value; therefore, goodwill needs to be decreased. ANS: C DIF: D OBJ: 6 15. 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? a. $8,000 b. $15,000 c. $28,000 d. $30,000 ANS: C DIF: M OBJ: 6 Chapter 1 1-6 16. In performing the 20X7 impairment test for goodwill, the company had the following 20X6 and 20X7 information is available. 20X6 20X7 Implied fair value of reporting unit $350,000 $400,000 Net book value of reporting unit (including goodwill) $380,000 $360,000 Based upon this information what are the 20X6 and 20X7 adjustment to goodwill, if any? a. 20X6 $0 20X7 $40,000 decrease b. 20X6 $30,000 increase 20X7 $40,000 decrease c. 20X6 $30,000 decrease 20X7 $40,000 decrease d. 20X6 $30,000 decrease 20X7 $0 ANS: D DIF: D OBJ: 7 17. Couples Corporation purchases Players Corporation. The fair value of the net assets of Players is $750,000 and the fair value of priority accounts (including a deduction for depreciation) is $600,000. Which of the following purchase prices would require using allocation procedures? a. $500,000 b. $600,000 c. $700,000 d. $800,000 ANS: B DIF: D OBJ: 7 18. 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. $40,000 b. $60,000 c. $80,000 d. $100,000 ANS: B DIF: D OBJ: 7 19. Which of the following business combination expenses would NOT qualify as a direct acquisition expense for a purchase? a. Fees for purchase audit b. Outside legal fees c. Stock issuance fees d. All are direct acquisition expenses. Chapter 1 1-7 ANS: C DIF: E OBJ: 8 20. Polk issues common stock to acquire all the assets of the Sam Company on January 1, 20X5. There is a contingent share agreement, which states that if the income of the Sam Division exceeds a certain level during 20X5 and 20X6, additional shares will be issued on January 1, 20X7. The impact of issuing the additional shares is to a. increase the price assigned to fixed assets. b. have no effect on asset values, but to reassign the amounts assigned to equity accounts. c. reduce retained earnings. d. record additional goodwill. ANS: D DIF: D OBJ: 8 21. In a purchase, the direct acquisition, indirect acquisition and security issuance costs are accounted for as follows: Direct Acquisition Indirect Acquisition Security Issuance a. Added to price paid Added to price paid Added to price paid b. Added to price paid Expensed Deducted from value of security issued c. Expensed Expensed Deducted from value of security issued d. Expensed Expensed Expensed ANS: B DIF: E OBJ: 9 22. Orbit Inc. purchased Planet Co. in 20X3. At that time an existing patent was not recorded as a separately identified intangible asset. At the end of fiscal year 20X5, the patent is valued at $15,000, and goodwill has a book value of $100,000. How should intangible assets be reported at the beginning of fiscal year 20X6? a. Goodwill $100,000 Patent $0 b. Goodwill $115,000 Patent $0 c. Goodwill $100,000 Patent $15,000 d. Goodwill $85,000 Patent $15,000 ANS: D DIF: M OBJ: 9 23. Which of the following income factors should not be factored into a calculation of goodwill? a. sales for the period b. income tax expense c. extraordinary items d. cost of goods sold ANS: C DIF: M OBJ: 10, Appendix A Chapter 1 1-8 PROBLEM 1. 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 Assets Liabilities and Equity Current assets.... $ 40,000 Current Liabilities.......... $ 60,000 Land.............. 20,000 Capital Stock (50,000 shares, Buildings (net)... 80,000 $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 direct 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. Chapter 1 1-9 ANS: a. Current assets.......................... $55,000 Land.................................... 60,000 Buildings............................... 90,000 Equipment............................... 75,000 Goodwill................................ 65,000 Current Liabilities.................... $ 60,000 Cash................................... 285,000 b. Current assets.......................... $55,000 Land.................................... 60,000 Buildings............................... 90,000 Equipment............................... 75,000 Goodwill................................ 65,000 Current Liabilities................... $ 60,000 Common Stock.......................... 28,000 Other Paid-in Capital................. 252,000 Cash.................................. 5,000 DIF: M OBJ: 5 2. On January 1, 20X5, Brown Inc. acquired Larson Company's net assets in exchange for Brown’s common stock with a par value of $100,000 and a fair value of $800,000. Brown also paid $10,000 in direct acquisition costs and $15,000 in stock issuance costs. On this date, Larson’s condensed account balances showed the following: 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 on the books of Brown Inc. Chapter 1 1-10 ANS: Debit Credit Current Assets............... $370,000 Plant and Equipment.......... 480,000 Intangibles - Patents........ 120,000 Intangibles - Goodwill....... 90,000 Current Liabilities........ $140,000 Long-term Debt............. 110,000 Common Stock............... 100,000 Other Paid-in Capital...... 685,000 Cash....................... 25,000 To record the acquisition of Larson’s net asset. DIF: M OBJ: 3, 11, 12, Appendix B 3. 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 ========= Liabilities and Equity Bonds payable, 8%..................................... $ 200,000 Common stock, $1 par.................................. 100,000 Paid-in capital in excess of par...................... 200,000 Retained earnings..................................... 150,000 Total................................................. $ 650,000 ========= Chapter 1 1-11 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 nontaxable exchange. c. There are $100,000 of prior-year losses that can be used to claim a tax refund. The transaction is a nontaxable exchange. d. There are $150,000 of past losses that can be carried forward to future years to offset taxes that will be due. The transaction is a nontaxable exchange. ANS: a. Current Assets.......................... $100,000 Equipment............................... 300,000 Plant................................... 500,000 Goodwill ($300,000 x .6)................ 500,000 Deferred Tax Liability*............... $300,000 Bonds Payable......................... 200,000 Cash.................................. 900,000 * .4 x ($800,000 Fair Value - $550,000 Book Value of fixed assets) + .4 x $500,000 Goodwill b. Current Assets.......................... $100,000 Equipment............................... 300,000 Plant................................... 500,000 Goodwill................................ 190,000 Bonds Payable......................... $190,000 Cash.................................. 900,000 c. Current Assets.......................... $100,000 Equipment............................. 300,000 Plant ................................ 500,000 Tax Refund Receivable............. 40,000 Goodwill.............................. 160,000 Bonds Payable.................... $200,000 Cash................................ 900,000 d. Current Assets.......................... $100,000 Equipment............................... 300,000 Plant................................... 500,000 Deferred Tax Expense ($150,000 x .4).. 60,000 Goodwill ($240,000 ÷ .6)................ 400,000 Bonds Payable......................... $200,000 Cash.................................. 900,000 Deferred Tax Liability ($250,000 x .4) + ($400,000 x .4)... 260,000 Chapter 1 1-12 DIF: D OBJ: 8 4. 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 ========== ========== Current Liabilities...................... $ 200,000 $ 100,000 Long-Term Debt........................... 300,000 300,000 Common Stock, $10 par..................... 1,400,000 400,000 Paid-in Capital in Excess of Par.......... 0 100,000 Retained Earnings......................... 600,000 500,000 $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. Direct acquisition costs of $50,000 and stock issuance costs of $20,000 were paid-in cash. The combination is accounted for as a purchase. 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. ANS: Current Assets.......................... $650,000 Plant and Equipment................. 900,000 Goodwill.................................. 180,000 Current Liabilities..................... $100,000 Long-Term Debt........................ 330,000 Common Stock.......................... 300,000 Paid-in Capital in Excess of Par (1) 430,000 Cash (2)................................... 570,000 (1) 30,000 x ($25 - 10) - $20,000 (2) $500,000 + 70,000 = $570,000 DIF: M OBJ: 5 Chapter 1 1-13 5. 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 ========== Current Liabilities........................ $ 300,000 $300,000 Long-Term Debt............................. 550,000 600,000 Common Stock (no-par)...................... 300,000 Retained Earnings.......................... 350,000 $1,500,000 ========== Required: Record the entry on Honey Bee's books for the acquisition of Green Hornet's net assets. Prepare supporting schedules as necessary. ANS: Current Assets............................. $800,000 Long-Term Investments in Securities........ 150,000 Land....................................... 580,000 Building................................... 870,000 Current Liabilities.................. $ 300,000 Long-Term Debt....................... 600,000 Cash................................. 1,500,000 Remaining amount assignable to Land and Building: Fair Percent of Total Total Cost Assigned Value Fair Value Assignable Value Land....... $ 600,000 40% $1,450,000 $ 580,000 Building... 900,000 60% 1,450,000 870,000 Total...... $1,500,000 $1,450,000 DIF: M OBJ: 7 Chapter 1 1-14 6. Poplar Corp. acquires the net assets of Sapling Company, which has the following balance sheet: Accounts Receivable $ 50,000 Inventory 80,000 Equipment, Net 50,000 Land & Building, Net 120,000 Total Assets $300,000 ======== Bonds Payable $ 90,000 Common Stock 100,000 Retained Earnings 110,000 Total Liabilities and Stockholders' Equity $300,000 ======== Fair values on the date of acquisition: Inventory $100,000 Equipment 30,000 Land & Building 180,000 Customer List 30,000 Bonds Payable 100,000 Direct acquisition costs: $10,000 If Poplar paid $300,000 what journal entries would be recorded by both Poplar Corp. and Sapling Company? ANS: Poplar Corp: Accounts Receivable $ 50,000 Inventory 100,000 Equipment 30,000 Land & Building 180,000 Customer List 30,000 Goodwill 20,000 Bonds Payable $ 90,000 Premium on Bonds Payable 10,000 Cash (for direct acquisition costs) 10,000 Cash 300,000 Price paid (including direct acquisition costs) $310,000 Fair value of current assets less liabilities $ 50,000 Fair value of recorded fixed assets 210,000 260,000 Excess attributable to Intangible Assets $ 50,000 Fair value of Customer List 30,000 Goodwill $ 20,000 ======== Chapter 1 1-15 Sapling Company: Cash $300,000 Bonds Payable 90,000 Accounts Receivable $ 50,000 Inventory 80,000 Equipment 50,000 Land & Building 120,000 Gain on Sale of Business 90,000 Cash Received: $300,000 Net Asset value sold 210,000 Gain $ 90,000 ======== DIF: M OBJ: 6 7. Diamond acquired Heart's net assets. At the time of the acquisition Heart's Balance sheet was as follows: Accounts Receivable $130,000 Inventory 70,000 Equipment, Net 50,000 Building, Net 250,000 Land & Building, Net 100,000 Total Assets $600,000 ======== Bonds Payable $100,000 Common Stock 50,000 Retained Earnings 450,000 Total Liabilities and Stockholders' Equity $600,000 ======== Fair values on the date of acquisition: Inventory $100,000 Equipment 30,000 Building 350,000 Land 120,000 Brand name copyright 50,000 Bonds payable 120,000 Direct acquisition costs: $5,000 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 c. $100,000