Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities
E1-2 Multiple-Choice Questions on Recording Business Combinations
[AICPA Adapted]
1. a – The excess sum of the consideration given over the sum of the fair value of identifiable
assets less liabilities equals goodwill.
(b) Incorrect. Assets considered only need be identifiable, not just tangible. For example,
patents would be identifiable, but not tangible.
(c) Incorrect. Assets considered only have to be identifiable. This includes both tangible
and intangible identifiable assets.
(d) Incorrect. The calculation of goodwill requires a remeasurement of the assets and
liabilities at fair value, not book value.
Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities
E1-3 Multiple-Choice Questions on Reported Balances [AICPA Adapted]
1. d – $2,900,000. New APIC Balance = existing APIC on Poe’s books + APIC from new stock
issuance. (200,000*($18-$10) + $1,300,000 = $2,900,000)
E1-4 Multiple-Choice Questions Involving Account Balances
1. c – When the parent creates the subsidiary, the equipment is transferred at cost with the
accompanying accumulated depreciation (which in effect is the book value).
($100,000/10 = $10,000 per year * 4 = $40,000.)
(a) Incorrect. When a subsidiary is created internally, the assets are transferred as they
were on the parent’s books (carrying value). Fair value is not considered.
(b) Incorrect. This is the proper carrying value of the asset, but it should be recorded at
cost with the accompanying accumulated depreciation.
(d) Incorrect. When a subsidiary is created internally, the assets are transferred as they
were on the parent’s books (carrying value).
E1-5 Asset Transfer to Subsidiary
a. Journal entry recorded by Pale Company for transfer of assets to Bright Company:
Investment in Bright Company Common Stock
408,000
Accumulated Depreciation – Buildings
24,000
Accumulated Depreciation – Equipment
36,000
Cash
21,000
Inventory
37,000
Land
80,000
Buildings
240,000
Equipment
90,000
b. Journal entry recorded by Bright Company for receipt of assets from Pale Company:
Cash
21,000
Inventory
37,000
Land
80,000
Buildings
240,000
Equipment
90,000
Accumulated Depreciation – Buildings
24,000
Accumulated Depreciation – Equipment
36,000
Common Stock
60,000
Additional Paid-In Capital
348,000
E1-6 Creation of New Subsidiary
a. Journal entry recorded by Lester Company for transfer of assets to Mumby Corporation:
Investment in Mumby Corporation Common Stock
498,000
Allowance for Uncollectible Accounts Receivable
7,000
Accumulated Depreciation – Buildings
35,000
Accumulated Depreciation – Equipment
60,000
Cash
40,000
Accounts Receivable
75,000
Inventory
50,000
Land
35,000
Buildings
160,000
Equipment
240,000
b. Journal entry recorded by Mumby Corporation for receipt of assets from Lester Company:
Cash
40,000
Accounts Receivable
75,000
Inventory
50,000
Land
35,000
Buildings
160,000
Equipment
240,000
Allowance for Uncollectible
Accounts Receivable
7,000
Accumulated Depreciation – Buildings
35,000
Accumulated Depreciation – Equipment
60,000
Common Stock
120,000
Additional Paid-In Capital
378,000
E1-7 Balance Sheet Totals of Parent Company
a. Journal entry recorded by Foster Corporation for transfer of assets and accounts payable to
Kline Company:
Investment in Kline Company Common Stock
66,000
Accumulated Depreciation
28,000
Accounts Payable
22,000
Cash
15,000
Accounts Receivable
24,000
Inventory
9,000
Land
3,000
Depreciable Assets
65,000
b. Journal entry recorded by Kline Company for receipt of assets and accounts payable from
Foster Corporation:
Cash
15,000
Accounts Receivable
24,000
Inventory
9,000
Land
3,000
Depreciable Assets
65,000
Accumulated Depreciation
28,000
Accounts Payable
22,000
Common Stock
48,000
Additional Paid-In Capital
18,000
E1-8 Acquisition of Net Assets
Sun Corporation will record the following journal entries:
Assets
71,000
Goodwill
9,000
Liabilities
20,000
Cash
60,000
Merger Expense
4,000
Cash
4,000
E1-9 Reporting Goodwill
a. Goodwill: $120,000 = $310,000 – $190,000
E1-10 Stock Acquisition
Journal entry to record the purchase of Tippy Inc., shares:
Investment in Tippy Inc., Common Stock
986,000
Common Stock
425,000
Additional Paid-In Capital
561,000
$986,000 = $58 x 17,000 shares
$425,000 = $25 x 17,000 shares
$561,000 = ($58 – $25) x 17,000 shares
Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities
E1-11 Balances Reported Following Combination
a.
Stock Outstanding: $200,000 + ($10 x 8,000 shares)
$280,000
b.
Cash and Receivables: $150,000 + $40,000
190,000
c.
Land: $100,000 + $85,000
185,000
d.
Buildings and Equipment (net): $300,000 + $230,000
530,000
e.
Goodwill: ($50 x 8,000) – $355,000
45,000
f.
Additional Paid-In Capital:
$20,000 + [($50 – $10) x 8,000]
340,000
g.
Retained Earnings
330,000
E1-12 Goodwill Recognition
Journal entry to record acquisition of Spur Corporation net assets:
Cash and Receivables
40,000
Inventory
150,000
Land
30,000
Plant and Equipment
350,000
Patent
130,000
Goodwill
55,000
Accounts Payable
85,000
Cash
670,000
Computation of goodwill
Fair value of consideration given
$670,000
Fair value of assets acquired
$700,000
Fair value of liabilities assumed
(85,000)
Fair value of net assets acquired
615,000
Goodwill
$ 55,000
Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities
E1-13 Acquisition Using Debentures
Journal entry to record acquisition of Sorden Company net assets:
Cash and Receivables
50,000
Inventory
200,000
Land
100,000
Plant and Equipment
300,000
Discount on Bonds Payable
17,000
Goodwill
8,000
Accounts Payable
50,000
Bonds Payable
625,000
Computation of goodwill
Fair value of consideration given
$608,000
Fair value of assets acquired
$650,000
Fair value of liabilities assumed
(50,000)
Fair value of net assets acquired
600,000
Goodwill
$ 8,000
E1-14 Bargain Purchase
Journal entry to record acquisition of Sorden Company net assets:
Cash and Receivables
50,000
Inventory
200,000
Land
100,000
Plant and Equipment
300,000
Discount on Bonds Payable
16,000
Accounts Payable
50,000
Bonds Payable
580,000
Gain on Bargain Purchase of Subsidiary
36,000
Fair value of consideration given
$564,000
Fair value of assets acquired
$650,000
Fair value of liabilities assumed
(50,000)
Fair value of net assets acquired
600,000
Bargain Purchase Gain
$ 36,000
E1-15 Impairment of Goodwill
a. Goodwill of $80,000 will be reported. The fair value of the reporting unit ($340,000) is
greater than the carrying amount of the investment ($290,000) and the goodwill
E1-16 Assignment of Goodwill
a. No impairment loss will be recognized. The fair value of the reporting unit ($530,000) is
greater than the carrying value of the investment ($500,000) and goodwill does not
E1-17 Goodwill Assigned to Reporting Units
Goodwill of $158,000 ($60,000 + $48,000 + $0 + $50,000) should be reported, computed
as follows:
Reporting Unit A: Goodwill of $60,000 should be reported. The implied value of
E1-18 Goodwill Measurement
a. Goodwill of $150,000 will be reported. The fair value of the reporting unit ($580,000) is
greater than the carrying value of the investment ($550,000) and goodwill does not
need to be tested for impairment. No loss will be recorded.
E1–19 Computation of Fair Value
Amount paid
$517,000
Book value of assets
$624,000
Book value of liabilities
(356,000)
Book value of net assets
$268,000
Adjustment for research and development costs
(40,000)
Adjusted book value
$228,000
Fair value of patent rights
120,000
Goodwill recorded
93,000
(441,000)
Fair value increment of buildings and equipment
$ 76,000
Book value of buildings and equipment
341,000
Fair value of buildings and equipment
$417,000