Special Appendix – Analysis of FASB Exposure Drafts for
Business Combinations by Impact on Chapters 1–5
MULTIPLE CHOICE
1. Publics Company acquired the net assets of Citizen Company during 2005.
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.
A gain should be recorded at $200,000.
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.
2. 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.
record additional goodwill on January 1, 20X7.
d.
The contingent liability is recorded at the date of combination.
Special Appendix CH 1-5
3. Parr Company purchased 100% of the voting common stock of Super Company
for $2,000,000. There are no liabilities. The following book and fair
values are available:
Book Value Fair Value
Current assets…………………. $300,000 $600,000
Land and building…………….. 600,000 900,000
Machinery……………………… 500,000 600,000
The machinery will appear on the consolidated balance sheet at
________.
a.
$560,000
b.
$860,000
c.
$600,000
d.
$900,000
4. On June 30, 20X1, Naeder Corporation purchased for cash at $10 per
share all 100,000 shares of the outstanding common stock of the Tedd
Company. The total fair value of all identifiable net assets of Tedd
was $1,400,000. The only noncurrent asset is property with a fair value
of $350,000. The consolidated balance sheet of Naeder and its wholly
owned subsidiary on June 30, 20X1, should reflect
a.
an extraordinary gain of $50,000.
b.
goodwill of $50,000.
c.
an extraordinary gain of $350,000.
d.
A non-extraordinary gain of $400,000.
5. When a subsequent block of an existing subsidiary’s stock is purchased
to achieve control, the determination and distribution of excess
schedule
a.
is not independent of the appraisals made during previous
acquisitions.
b.
Is only for the new block acquired.
c.
must take into account all previous appraisals.
d.
will include the newly determined fair value of the earlier
investment along with the new investment.
6. When a parent sells part of its subsidiary interest, thereby losing
control, the parent
a.
First revalues the entire controlling interest held.
b.
Continues to amortize the original excess.
c.
Treats the transaction as a T-Stock transaction and the gain or
loss effect as an additional paid in capital item.
d.
Creates a discontinues operation item for income statement
purposes.
Special Appendix CH 1-5
PROBLEM
1. 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.
Special Appendix CH 1-5
2. Saturn Company had the following summarized balance sheet on December
31, 20X1:
Assets
Accounts receivable……………………………… $ 180,000
Inventory……………………………………….
500,000
Property and plant (net)…………………………. 600,000
Goodwill……………………………………….. 120,000
Total………………………………………… $1,400,000
==========
Liabilities and Equity
Notes payable…………………………………… $ 600,000
Common stock, $5 par…………………………… 300,000
Paid-in capital in excess of par………………… 400,000
Retained earnings……………………………….. 100,000
Total………………………………………… $1,400,000
==========
The fair value of the inventory and property and plant is $600,000 and
$850,000, respectively.
Required:
a.
Assume that Return Corporation purchases 80% of the common
stock of Saturn Company for $600,000. What value will be
assigned to the following accounts of the Saturn Company when
preparing a consolidated balance sheet on December 31, 20X1?
(1) Inventory _________
(2) Property and plant _________
(3) Goodwill _________
(4) Noncontrolling interest _________
b.
Prepare a supporting determination and distribution of excess
schedule.
Special Appendix CH 1-5
3. Peter Company purchased an 80% interest in Sandi Company on January 1,
20X5, for $260,000. On that date, Sandi Company had the following
information available:
Common stock outstanding ($10 par)………………… $100,000
Retained earnings, January 1, 20X5………………… 120,000
Equipment is undervalued by $30,000 and has a 6-year remaining life.
Any remaining excess is attributable to Goodwill.
Required:
a.
Prepare a determination and distribution of excess schedule.
b.
Make the December 31, 20X6 Consolidation Worksheet entries for
the excess in general journal form.
