80) On January 1, 2019, Shelley Company paid $650,000 cash for 100% of the outstanding
common stock of SCD Company. SCD’s stockholders’ equity on the date of acquisition was
$500,000. The current fair value of SCD’s plant and equipment was $100,000 in excess of the
equipment’s book value. If the fair value and book value are the same for SCD’s remaining assets
and liabilities, what was the amount of goodwill acquired by Shelley Company?
A) $150,000.
B) $40,000.
C) $50,000.
D) $250,000.
81) On January 1, 2019, Sheldon Company paid $750,000 cash for 100% of the outstanding
common stock of Mullen Company; Mullen’s book value of assets minus liabilities on the date of
acquisition was $550,000. The current fair value of Mullen’s net assets was $70,000 in excess of
their book value. What was the amount of goodwill acquired by Sheldon Company?
A) $200,000.
B) $130,000.
C) $480,000.
D) $270,000.
43
82) The balance sheet of Mini Company was as follows immediately before it was acquired by
Maxi Company:
Mini Company
Balance Sheet
January 1, 2019
$
90,000
50,000
150,000
100,000
$
390,000
$40,000
80,000
155,000
115,000
$
390,000
On January 1, 2019, in a merger transaction, Maxi Company paid $350,000 in
cash for 100% of the outstanding common stock of Mini Company. The fair
value of Mini Company’s plant and equipment was $140,000 on the date of
acquisition.
If the fair value and book value are the same for Mini’s remaining assets and liabilities, what was
the amount of goodwill acquired by Maxi Company?
A) $20,000.
B) $40,000.
C) $50,000.
D) $60,000.
45
83) The balance sheet of Mini Company was as follows immediately before it was acquired by
Maxi Company:
Mini Company
Balance Sheet
January 1, 2019
Cash
$
90,000
Accounts receivable (net)
50,000
Inventory
150,000
Plant and equipment (net)
100,000
Total Assets
$
390,000
Accounts payable
$40,000
Notes payable
80,000
Common stock
155,000
Retained earnings
115,000
Total Liabilities and Stockholders’ Equity
$
390,000
On January 1, 2019, in a merger transaction, Maxi Company paid $350,000 in cash
for 100% of the outstanding common stock of Mini Company. The fair value of Mini
Company’s plant and equipment was $140,000 on the date of acquisition.
If the fair value and book value are the same for Mini’s remaining assets and liabilities, what is
the net increase in Maxi’s assets only, after paying the cash for Mini?
A) $430,000.
B) $470,000.
C) $120,000.
D) $390,000.
84) On April 1, 2020, Paxton Corporation acquired all of the outstanding voting common stock
of Stanley Company and Stanley will remain a separate corporation. Stanley’s year-end is
December 31. How should the assets and liabilities of Stanley be reported on the consolidated
financial statements when Stanley is combined with Paxton on April 1, 2020?
A) At book values at the April 1, 2020 date of acquisition.
B) At fair values at the April 1, 2020 date of the acquisition.
C) At book values at December 31, 2019.
D) At fair values at December 31, 2019 less accumulated depreciation calculated on the
difference between book and fair values since that date.
85) During 2019, Manning Corporation purchased 100% of the outstanding voting common
stock shares of Brady Corporation for $4.0 million. Brady’s assets had a book value of $5.0
million and fair value of $6.5 million. The book value as well as fair value of Brady’s liabilities
equaled $3.2 million. How much was paid for goodwill?
A) $0.
B) $2,200,000.
C) $700,000.
D) $1,000,000.
86) How is goodwill accounted for subsequent to acquisition?
A) It should be written off as soon as possible against retained earnings.
B) It should not be amortized because it has an indefinite life.
C) It should be written off as soon as possible as an expense.
D) It is amortized over its estimated useful life.
87) Which of the following does not properly describe reasons for a retailer of pianos having 30
stores to acquire control of another retailer of pianos having 12 stores?
A) The companies would be vertically integrated to have access across United States markets.
B) The companies would be integrated for horizontal growth by having more retail stores to sell
pianos.
C) The companies would be integrated to experience synergies in delivery costs to customers
because pianos could be shipped from a central warehouse in each geographic territory.
D) The companies would be integrated to share advertising costs.
88) On January 1, 2019, Red Company purchased Patriot Shop for $400,000 cash in a merger
transaction. Red Company received the assets listed below and assumed accounts payable owed
by Patriot to its suppliers in the amount of $30,000.
Book Value per
Patriot’s Books
Fair value
Inventory
$300,000
$280,000
Furniture and fixtures
60,000
73,000
Other assets
10,000
32,000
What amount of goodwill will be recorded in the transaction?
A) $35,000.
B) $60,000.
C) $50,000.
D) $45,000.
Price paid
$280,000 + $73,000 + $32,000
Goodwill
45,000
89) Which of the following accounts is only created as the result of acquiring a controlling
interest in another company?
A) Patents
B) Goodwill
C) Acquisition expense
D) Acquisition revenue
90) Piano Company owns 55% of the voting common stock shares of Keys Corporation. Which
of the following is true?
A) The investment would be accounted for using the equity method.
B) The investment would be accounted for by consolidation.
C) The investment would be accounted for under the fair value method.
D) The investment would be accounted for under the amortized cost method.
91) Miller Corp. purchased $1,000,000 of bonds at 95 when the market yield was 10%. The
bonds pay interest at the rate of 8%. Miller intends to hold these bonds to maturity and will not
need to sell the bonds before that date. Which of the following statements is false?
A) Since the bonds were issued at a discount, the cash interest will be based on the 8% rate.
B) Since the bonds were issued at a discount, the book value of the bond investment will increase
toward its maturity value.
C) The company would recognize unrealized gains or losses on the bonds as the discount is
amortized.
D) The bonds will be classified and accounted for as a held-to-maturity investment.
92) Trent Corp. purchased $1,000,000 of bonds at 96 when the market yield was 8%. The bonds
pay interest at the rate of 6%. Trent intends to hold these bonds to maturity and will not need to
sell the bonds before that date.
Which of the following statements is not correct?
A) Since the bonds were purchased at a discount, the cash interest will be less than interest
revenue.
B) Since the bonds were purchased at a discount, the book value of the bond investment will
increase toward its maturity value.
C) Since the bonds were purchased at a discount, the bond investment will be classified and
accounted for as a trading security.
D) The company would recognize a gain or loss on the bonds if they are sold prior to their
maturity date.
93) Trent Corp. purchased $1,000,000 of bonds at 96 when the market yield was 8%. The bonds
pay interest at the rate of 6%. Trent intends to hold these bonds to maturity and will not need to
sell the bonds before that date.
Which of the following statements is correct?
A) Since the bonds were purchased at a discount, the cash interest will be more than interest
revenue.
B) Since the bonds were purchased at a discount, the book value of the bond investment will
increase toward its maturity value.
C) The bond investment will be classified as available-for-sale.
D) The company will recognize unrealized gains or losses on the bonds at each balance sheet
date when the bonds are adjusted to fair value.
94) Complete the following matrix by writing a brief explanation in each cell to indicate the
appropriate approach for long-term investments.
Measurement and
Reporting Method
Outstanding
Common Stock
Owned (%)
Level of Ownership:
Degrees of Influence
or Control
A.
Fair value
B.
Equity
C.
Consolidated
statements
Reporting Method
Owned (%)
or Control
A.
Fair value
Less than 20%
No significant influence
or control
B.
Equity
20% or over but no more
than 50%
Significant influence but
no control
C.
Consolidated statements
More than 50%
Control
95) A. Discuss the similarities of accounting for available-for-sale and trading debt securities
portfolios.
B. Discuss the differences encountered in accounting for available-for-sale and trading debt
securities portfolios.
96) On January 1, 2019, Heitzman Company purchased the following shares of stock as a long-
term investment:
Corporation
Shares
Percent
Outstanding
Cost per
Share
Maars
10,000 common (no par)
5%
$25
Nassif
2,000 preferred (par $10)
2%
$50
The fair values of the stocks subsequently were as follows:
Dec. 31, 2019
Dec. 31, 2020
Maars Corporation common stock
$24.00
$27.50
Nassif Corporation preferred
stock
51.00
50.50
Calculate the amount of unrealized gain or loss Heitzman would report on its income statement
at both December 31, 2019 and December 31, 2020.
2,000
2,000
97) On January 1, 2019, as a long-term investment, John Company purchased 1,000 of the
10,000 outstanding voting common shares of Wayne Corporation at $9 per share. Wayne
reported 2019 net income of $30,000 and declared and paid cash dividends of $20,000. The
market price of the Wayne stock at the end of 2019 was $10 per share. Calculate the carrying
value of John’s investment at the end of 2019.
98) On January 31, 2018, McBurger Corporation purchased the following shares of voting
common stock as long-term investments. None of these holdings amounted to more than 5% of
the respective company’s outstanding voting shares. The accounting period ends December 31.
Stock
Cost
Market
Dec. 31, 2018
Market
Dec. 31, 2019
Orange
Corporation
$15,000
$12,000
$14,000
Bailey
Corporation
$13,000
$12,000
$13,000
All of the Bailey Corporation stock was sold for $13,500 on January 12, 2020.
Prepare the required journal entries at the following dates: January 31, 2018, December 31, 2018,
December 31, 2019 and January 12, 2020.
Investments
Cash
Unrealized loss
Investments
Stock
Orange
Bailey
Investments
Unrealized gain
3,000
Stock
Orange
Bailey