Chapter 2 Homework PDF

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Chapter 2 Homework 1. In an acquisition where 100% control is acquired, how would the land accounts of the parent and the land accounts of the subsidiary be reported on consolidated financial statements?

a) Option B 2. Lisa Co. paid cash for all of the voting common stock of Victoria Corp. Victoria will continue to exist as a separate corporation. Entries for the consolidation of Lisa and Victoria would be recorded in: a. A worksheet. b. Lisa's general journal. c. Victoria's general journal. d. Victoria's secret consolidation journal. e. The general journals of both companies. 3. FASB ASC 805, Business Combinations, provides principles for allocating the fair value of an acquired business. When the collective fair values of the separately identified assets acquired and liabilities assumed exceed the fair value of the consideration transferred, the difference should be: a. Applied pro rata to reduce, but not below zero, the amounts initially assigned to specific noncurrent assets of the acquired firm. b. Treated as negative goodwill to be amortized over the period benefited, not to exceed 40 years. c. Recognized as an ordinary gain from a bargain purchase. d. Treated as goodwill and tested for impairment on an annual basis. 4. What is the appropriate accounting treatment for the value assigned to in-process research and development acquired in a business combination? a. Capitalize as an asset. b. Expense upon acquisition. c. Expense until future economic benefits become certain and then capitalize as an asset. d. Expense if there is no alternative use for the assets used in the research and development and technological feasibility has yet to be reached.

Chapter 2 Homework 5. What is the primary difference between: (i) accounting for a business combination when the subsidiary is dissolved; and (ii) accounting for a business combination when the subsidiary retains its incorporation? a. If the subsidiary is dissolved, it will not be operated as a separate division. b. If the subsidiary is dissolved, assets and liabilities are consolidated at their book values. c. If the subsidiary retains its incorporation, there will be no goodwill associated with the acquisition. d. If the subsidiary retains its incorporation, assets and liabilities are consolidated at their book values. e. If the subsidiary retains its incorporation, the consolidation is not formally recorded in the accounting records of the acquiring company. 6. On July 1, TruData Company issues 10,000 shares of its common stock with a $5 par value and a $40 fair value in exchange for all of Webstat Company’s outstanding voting shares. Webstat’s precombination book and fair values are shown below along with book values for TruData’s accounts.

a. On its acquisition-date consolidated balance sheet, what amount should TruData report as goodwill? i. $15,000

1. b. On its acquisition-date consolidated balance sheet, what amount should TruData report as patented technology (net)? i. $430,000

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7. Bullen Inc. acquired 100% of the voting common stock of Vicker Inc. on January 1, 2018. The book value and fair value of Vicker's accounts on that date (prior to creating the

combination) are as follows, along with the book value of Bullen's accounts: a. Assume that Bullen issued 12,000 shares of common stock, with a $5 par value and a $47 fair value, to obtain all of Vicker's outstanding stock. In this acquisition transaction, how much goodwill should be recognized? i. $104,000 1. Goodwill = Consideration Transferred less Acquisition Date Fair Value of Net Assets Acquired and Liabilities Assumed 2. Consideration Transferred: $47 × 12,000 = $564,000 3. Fair Value of Assets Acquired: 70,000 (cash and receivables) + 210,000 (inventory) + 240,000 (land) + 270,000 (buildings) + 90,000 (equipment) = $880,000 4. Fair Value of Liabilities Assumed: $420,000 5. Consideration Less Net Assets/Liabilities = $880,000 - $420,000 = $460,000 6. Goodwill: $564,000 - $460,000 = $104,000 b. Assume that Bullen issued 12,000 shares of common stock with a $5 par value and a $47 fair value for all of the outstanding stock of Vicker. What is the consolidated balance for Land as a result of this acquisition transaction? i. $520,000 1. $280,000 (Bullen Land) + $240,000 (Vicker Land) = $520,000

Chapter 2 Homework

8. Chapel Hill Company had common stock of $350,000 and retained earnings of $490,000. Blue Town Inc. had common stock of $700,000 and retained earnings of $980,000. On January 1, 2018, Blue Town issued 34,000 shares of common stock with a $12 par value and a $35 fair value for all of Chapel Hill Company's outstanding common stock. This combination was accounted for using the acquisition method. Immediately after the combination, what was the amount of total consolidated net assets? a. $2,870,000 i. Consideration Transferred = Net Fair Value of Assets Acquired and Liabilities Assumed ii. Consideration Transferred: $35 per share × 34,000 shares = $1,190,000 iii. Net Fair Value of Assets/Liabilities: $700,000 + $980,000 = $1,680,000 iv. Total: $1,190,000 + $1,680,000 = $2,870,000 9. In a transaction accounted for using the acquisition method where consideration transferred is less than fair value of net assets acquired, which statement is true? a. Negative goodwill is recorded. b. A deferred credit is recorded. c. A gain on bargain purchase is recorded. d. Long-term assets of the acquired company are reduced in proportion to their fair values. Any excess is recorded as a deferred credit. e. Long-term assets and liabilities of the acquired company are reduced in proportion to their fair values. Any excess is recorded as gain.

Chapter 2 Homework

10. Following are preacquisition financial balances for Padre Company and Sol Company as of December 31. Also included are fair values for Sol Company accounts.

Note: Parentheses indicate a credit balance. On December 31, Padre acquires Sol’s outstanding stock by paying $360,000 in cash and issuing 10,000 shares of its own common stock with a fair value of $40 per share. Padre paid legal and accounting fees of $20,000 as well as $5,000 in stock issuance costs. (a) Determine the value that would be shown in Padre’s consolidated financial statements for each of the accounts listed.

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In acquisitions, the fair values of the subsidiary's assets and liabilities are consolidated (there are a limited number of exceptions). Goodwill is reported at $80,000, the amount that the $760,000 consideration transferred exceeds the $680,000 fair value of Sol’s net assets acquired

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Inventory = $670,000 (Padre's book value plus Sol's fair value) Land = $710,000 (Padre's book value plus Sol's fair value) Buildings and equipment = $930,000 (Padre's book value plus Sol's fair value) Franchise agreements = $440,000 (Padre's book value plus Sol's fair value) Goodwill = $80,000 (calculated above) Revenues = $960,000 (only parent company operational figures are reported at date of acquisition) Additional paid-in capital = $265,000 (Padre's book value adjusted for stock issue less stock issuance costs) Expenses = $940,000 (only parent company operational figures plus acquisitionrelated costs are reported at date of acquisition) Retained earnings, 1/1 = $390,000 (Padre's book value only) Retained earnings, 12/31 = $410,000 (beginning retained earnings plus revenues minus expenses, of Padre only)

Chapter 2 Homework 11. On June 30, 2017, Wisconsin, Inc., issued $300,000 in debt and 15,000 new shares of its $10 par value stock to Badger Company owners in exchange for all of the outstanding shares of that company. Wisconsin shares had a fair value of $40 per share. Prior to the combination, the financial statements for Wisconsin and Badger for the six-month period ending June 30, 2017, were as follows:

Wisconsin also paid $30,000 to a broker for arranging the transaction. In addition, Wisconsin paid $40,000 in stock issuance costs. Badger’s equipment was actually worth $700,000, but its patented technology was valued at only $280,000. (a) What are the consolidated balances for the following accounts?

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Chapter 2 Homework

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