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com

Chapter 1--Business Combinations: New Rules for a Long-

Standing Business Practice

Student: ___________________________________________________________________________

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.

2. One large Midwestern bank’s acquisition of another midwestern bank would be an example of a:
A. market extension merger.
B. conglomerate merger.
C. product extension merger.
D. horizontal merger.

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.

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.

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.

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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.

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.

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

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

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.

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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.

12. 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?

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

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.

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

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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.
Identifiable 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

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

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.

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.

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

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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

20. 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:

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 not to exceed 40 years.

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

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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

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

24. 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?
A. Goodwill $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

25. 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?
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

26. 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
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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

27. 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.

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 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?
A. $900,000
B. $950,000
C. $850,000
D. $750,000

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

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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

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 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

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 description 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.

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.

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33. 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
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

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
C. extraordinary items
D. cost of goods sold

35. 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
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

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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.

36. 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.

37. On January 1, 20X5, Zebb and Nottle Companies had condensed balance sheets as shown below:

Zebb Nottle
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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. 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.

38. 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

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 download full file at http://testbankinstant.com
Required:

Record the entry on Honey Bee's books for the acquisition of Green Hornet's net assets.

39. 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 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 50,000
Bonds payable 120,000

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

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40. On January 1, July 1, and December 31, 20X5, a condensed trial balance for Nelson Company showed the
following debits and (credits):

01/01/X5 07/01/X5 12/31/X5

Current Assets $200,000 $260,000 $340,000
Plant and Equipment (net) 500,000 510,000 510,000
Current Liabilities (50,000) (70,000) (60,000)
Long-Term Debt (100,000) (100,000) (100,000)
Common Stock (150,000) (150,000) (150,000)
Other Paid-in Capital (100,000) (100,000) (100,000)
Retained Earnings, January 1 (300,000) (300,000) (300,000)
Dividends Declared 10,000
Revenues (400,000) (900,000)
Expenses 350,000 750,000

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:

Current Assets $280,000

Plant and Equipment (remaining life of 10 years) 600,000

Nelson Company's books were NOT closed on June 30, 20X5.

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.

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41. On January 1, 20X3 the fair values of Pink Coral’s net assets were as follows:

Current Assets 100,000

Equipment 150,000
Land 50,000
Buildings 300,000
Liabilities 80,000

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.

Required: Prepare Blue Reef’s entries:

a) on January 1, 20X3 to record the acquisition
b) on August 1, 20X3 to revise the contingent consideration to $170,000
c) on January 1, 20X5 to settle the contingent consideration clause of the agreement for $175,000

42. 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:

Current Assets 100,000

Equipment 150,000
Land 50,000
Buildings 300,000
Goodwill 100,000
Liabilities 80,000
Common Stock, $1 Par 100,000
Paid-in Capital in Excess of Par 520,000

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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.

43. 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:

Accounts receivable $ 50,000

Inventory 100,000
Equipment 30,000
Land and building 180,000
Customer list 30,000
Bonds payable 100,000

Acquisition costs: $ 10,000

If Poplar paid $300,000 what journal entries would be recorded by both Poplar Corp. and Sapling Company?

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44. 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

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.

45. 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.

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46. 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.

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Chapter 1--Business Combinations: New Rules for a Long-

Standing Business Practice Key

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.

2. One large Midwestern bank’s acquisition of another midwestern bank would be an example of a:
A. market extension merger.
B. conglomerate merger.
C. product extension merger.
D. horizontal merger.

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.

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.

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.

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 download full file at http://testbankinstant.com
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.

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.

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

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

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.

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 download full file at http://testbankinstant.com
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.

12. 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?

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

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.

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

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 download full file at http://testbankinstant.com
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.
Identifiable 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

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

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.

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.

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

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 download full file at http://testbankinstant.com
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

20. 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:

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 not to exceed 40 years.

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

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 download full file at http://testbankinstant.com
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

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

24. 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?
A. Goodwill $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

25. 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?
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

26. 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
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 download full file at http://testbankinstant.com
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

27. 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.

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 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?
A. $900,000
B. $950,000
C. $850,000
D. $750,000

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

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 download full file at http://testbankinstant.com
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

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 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

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 description 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.

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.

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 download full file at http://testbankinstant.com
33. 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
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

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
C. extraordinary items
D. cost of goods sold

35. 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
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

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 download full file at http://testbankinstant.com
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.

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.

36. 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)

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 download full file at http://testbankinstant.com
Required:

Record Brown's purchase of Larson Company's net assets.

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

37. 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

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 download full file at http://testbankinstant.com
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.

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

38. 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

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 download full file at http://testbankinstant.com
Required:

Record the entry on Honey Bee's books for the acquisition of Green Hornet's net assets.

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

Current Assets 800,000

Long-Term Investments in Securities 150,000
Land 600,000
Building 900,000
Current Liabilities 300,000
Long-Term Debt 600,000
Gain on Acquisition of Business 50,000
Cash 1,500,000

39. 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 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 50,000
Bonds payable 120,000

Acquisition costs: $ 5,000

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 download full file at http://testbankinstant.com
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

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

a. Accounts Receivable 130,000

Inventory 100,000
Equipment 30,000
Building 350,000
Land 120,000
Brand Name 50,000
Goodwill ($700,000 - $660,000) 40,000
Acquisition Expenses 5,000
Bonds Payable 100,000
Premium on Bonds Payable 20,000
Cash ($700,000 + $5,000) 705,000

b. Accounts Receivable 130,000

Inventory 100,000
Equipment 30,000
Building 350,000
Land 120,000
Brand Name 50,000
Acquisition Expenses 5,000
Bonds Payable 100,000
Premium on Bonds Payable 20,000
Gain on Acquisition of Business ($300,000 - $660,000) 360,000
Cash ($300,000 + $5,000) 305,000

40. On January 1, July 1, and December 31, 20X5, a condensed trial balance for Nelson Company showed the
following debits and (credits):

01/01/X5 07/01/X5 12/31/X5

Current Assets $200,000 $260,000 $340,000
Plant and Equipment (net) 500,000 510,000 510,000
Current Liabilities (50,000) (70,000) (60,000)
Long-Term Debt (100,000) (100,000) (100,000)
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 download full file at http://testbankinstant.com
Common Stock (150,000) (150,000) (150,000)
Other Paid-in Capital (100,000) (100,000) (100,000)
Retained Earnings, January 1 (300,000) (300,000) (300,000)
Dividends Declared 10,000
Revenues (400,000) (900,000)
Expenses 350,000 750,000

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:

Current Assets $280,000

Plant and Equipment (remaining life of 10 years) 600,000

Nelson Company's books were NOT closed on June 30, 20X5.

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.

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

* Goodwill is calculated as follows:

Acquisition price $750,000
Fair value of acquired net assets:
Current assets $280,000
Plant and equipment 600,000
Current liabilities (70,000)
Long-term debt (100,000) 710,000
Goodwill $ 40,000

41. On January 1, 20X3 the fair values of Pink Coral’s net assets were as follows:

Current Assets 100,000

Equipment 150,000
Land 50,000
Buildings 300,000
Liabilities 80,000

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 download full file at http://testbankinstant.com
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.

Required: Prepare Blue Reef’s entries:

a) on January 1, 20X3 to record the acquisition
b) on August 1, 20X3 to revise the contingent consideration to $170,000
c) on January 1, 20X5 to settle the contingent consideration clause of the agreement for $175,000

a. Current Assets 100,000

Equipment 150,000
Land 50,000
Buildings 300,000
Goodwill * 284,000
Liabilities 80,000
Estimated Liability for Contingent Consideration 184,000
Common stock, $1 Par ($1 x 100,000 shares) 100,000
Paid-in Capital in Excess of Par ($620,000 - $100,000) 520,000

Acquisition Expense 15,000

Paid-in Capital in Excess of Par ** 10,000
Cash 25,000

** Alternatively, this amount could be charged to acquisition expense.

* Goodwill is calculated as follows:

Acquisition price:
Fair value of common stock issued ($6.20 x 100,000 shares) $620,000
Contingent consideration 184,000
804,000
Fair value of acquired net assets:
Current assets $100,000
Equipment 150,000
Land 50,000
Buildings 300,000
Liabilities ( 80,000) 520,000
Goodwill $ 284,000

b. Estimated Liability for Contingent Consideration 14,000

Goodwill 14,000

The adjustment is made to goodwill since this entry was made within the measurement period.

c. Estimated Liability for Contingent Consideration 170,000

Loss on Estimated Contingent Consideration 5,000
Cash 175,000

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 download full file at http://testbankinstant.com
42. 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:

Current Assets 100,000

Equipment 150,000
Land 50,000
Buildings 300,000
Goodwill 100,000
Liabilities 80,000
Common Stock, $1 Par 100,000
Paid-in Capital in Excess of Par 520,000

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.

Paid-in Capital in Excess of Par 60,000

Common Stock, $1 par 60,000

Deficiency: ($16 - $10) ´ 100,000 shares issued to acquire $600,000

Divide by $10 fair value $10.00
Added number of shares to issue 60,000

43. 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:

Accounts receivable $ 50,000

Inventory 100,000
Equipment 30,000
Land and building 180,000
Customer list 30,000
Bonds payable 100,000

Acquisition costs: $ 10,000

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 download full file at http://testbankinstant.com
If Poplar paid $300,000 what journal entries would be recorded by both Poplar Corp. and Sapling Company?

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

Fair value of acquired net assets:

Accounts receivable $ 50,000
Inventory 100,000
Equipment 30,000
Land and building 180,000
Customer list 30,000
Liabilities (100,000)
$290,000

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

44. 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

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 download full file at http://testbankinstant.com
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.

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

* 40% ´ ($800,000 Fair Value $550,000 Book Value of fixed assets)

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 ($100,000 x 40%) 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 Asset ($150,000 ´ 40%) 60,000
Goodwill 140,000
Bonds Payable 200,000
Cash 900,000

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 download full file at http://testbankinstant.com
45. 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.

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.

46. 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.

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.

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 download full file at http://testbankinstant.com

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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