Chapter 1—Business Combinations: New Rules for a Long–
Standing Business Practice Key
1. An economic advantage of a business combination includes
2. One large Midwestern bank’s acquisition of another midwestern bank would be an example of a:
3. A large nation-wide bank’s acquisition of a major investment advisory firm would be an example of a:
4. A building materials company’s acquisition of a television station would be an example of a:
5. A tax advantage of business combination can occur when the existing owner of a company sells out and
receives:
6. A controlling interest in a company implies that the parent company
7. Some advantages of obtaining control by acquiring a controlling interest in stock include all but:
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.
9. Acquisition costs such as the fees of accountants and lawyers that were necessary to negotiate and
consummate the purchase are
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?
11. When determining the fair values of assets acquired in an acquisition, the highest level of measurement per
GAAP is
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
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
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?
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?
16. Which of the following would not be considered an identifiable intangible asset?
17. A contingent liability of an acquiree
18. Goodwill results when:
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
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:
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?
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?
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?
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?
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?
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?
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
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?
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
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?
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
What is the amount of gain or loss on disposal of business should Comb Corp. recognize?
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
31. When an acquisition of another company occurs, FASB requires disclosing all of the following except:
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:
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
34. Which of the following income factors should not be considered in expected future income when estimating
the value of goodwill?
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
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
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.
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
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
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
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