21 Jul Stonehill BUS 434 Quiz Chapter 1
Intercorporate Acquisitions and Investments in Other Entities
1. On April 1, 2012, Jack Company paid $800,000 for all of Ann Corporation’s issued and outstanding common stock. Ann’s recorded assets and liabilities on April 1, 2012, were as follows:
On April 1, 2012, Ann’s inventory was determined to have a fair value of $190,000 and the property and equipment had a fair value of $560,000. What is the amount of goodwill resulting from the business combination?
a) $0.
b) $50,000.
c) $150,000.
d) $180,000.
Solution
Book Value Fair Value
Cash $80,000 $80,000
Inventory 240,000 190,000
PP&E 480,000 560,000
Liabilities (180,000) (180,000)
Fair Value of Consideration Given $800,000
– Fair Value Net Assets Acquired
(80,000 + 190,000 + 560,000 – 180,000) (650,000)
GOODWILL $150,000
Correct Answer: C
2. Topper Company established a subsidiary and transferred equipment with a fair value of $72,000 to the subsidiary. Topper had purchased the equipment with an expected life of 10 years four years earlier for $100,000 and has used straight-line depreciation with no expected residual value. At the time of the transfer, the subsidiary should record:
a) Equipment at $72,000, and no accumulated depreciation.
b) Equipment at $60,000, and no accumulated depreciation.
c) Equipment at $100,000, and accumulated depreciation of $40,000.
d) Equipment at $120,000, and accumulated depreciation of $48,000.
Solution
• Purchase Price: $100,000
• Residual Value: 0
• Expected Life: 10 years.
• Accumulated Depreciation: [(100,000 – 0) / 10] x 4 → $40,000.
Transfers: Book Value → The subsidiary should record:
• Equipment for $100,000
• Accumulated Depreciation for $40,000
• Correct Answer: C
3. Lead Corporation established a new subsidiary and transferred to it assets with a cost of $90,000 and a book value of $75,000. The assets had a fair value of $100,000 at the time of transfer. The transfer will result in:
a) A reduction of net assets reported by Lead Corporation of $90,000.
b) A reduction of net assets reported by Lead Corporation of $75,000.
c) No change in the reported net assets of Lead Corporation.
d) An increase in the net assets reported by Lead Corporation of $25,000.
Solution:
Transfers: Book Value → Correct Answer: C
4. Tear Company, a newly established subsidiary of Stern Corporation, received assets with an original cost of $260,000, a fair value of $200,000, and a book value of $140,000 from the parent in exchange for 7,000 shares of Tear’s $8 par value common stock. Tear should record:
a) Additional paid-in capital of $0.
b) Additional paid-in capital of $84,000.
c) Additional paid-in capital of $144,000.
d) Additional paid-in capital of $204,000
Solution
Journal Entry recorded by Tear Company:
Assets 260,000
Accumulated Depreciation 120,000
Common Stock (7,000 x 8) 56,000
Additional Paid In Capital (plug in) 84,000
Correct Answer: B
5. Twill Company has a reporting unit with the fair value of its net identifiable assets of $500,000. The carrying value of the reporting unit’s net assets on Twill’s books is $575,000, which includes $90,000 of goodwill. The fair value of the reporting unit is $560,000. Twill should report impairment of goodwill of:
a) $60,000.
b) $30,000.
c) $15,000.
d) $0.
•
Solution
Fair Value Reporting Unit ($560,000) < Carrying Amount Reporting Unit ($575,000)
Goodwill Impairment
Goodwill Impairment $30,000
Carrying Amount RU’s Goodwill $90,000
(Implied Value RU’ Goodwill) (60,000)
Fair Value RU 560,000
Fair Value of Net Assets, excluding Goodwill (500,000)
Correct Answer: B
Following its acquisition of the net assets of Dan Company, Empire Company assigned goodwill of $60,000 to one of the reporting divisions. Information for this division follows:
6. Based on the preceding information, what amount of goodwill will be reported for this division if its fair value is determined to be $200,000?
A. $0
B. $60,000
C. $30,000
D. $10,000
Solution
• Carrying Amount: 20,000 + 35,000 + 125,000 + 60,000 – 30,000 → $210,000
Fair Value Reporting Unit ($200,000) < Carrying Amount Reporting Unit ($210,000)
Goodwill Impairment
Goodwill Impairment $50,000
Carrying Amount RU’s Goodwill $60,000
(Implied Value RU’ Goodwill) (10,000)
Fair Value RU 200,000
Fair Value of Net Assets, excluding Goodwill
(20,000 + 40,000 + 160,000 – 30,000) (190,000)
Amount of Goodwill that will be reported: Carrying Amount Goodwill ($60,000) – Goodwill Impairment ($50,000) → $10,000
Correct Answer: D
7. Based on the preceding information, what amount of goodwill impairment will be recognized for this division if its fair value is determined to be $195,000?
A. $5,000
B. $30,000
C. $60,000
D. $55,000
Solution
Fair Value Reporting Unit ($195,000) < Carrying Amount Reporting Unit ($210,000)
Goodwill Impairment
Goodwill Impairment $55,000
Carrying Amount RU’s Goodwill $60,000
(Implied Value RU’ Goodwill) (5,000)
Fair Value RU 195,000
Fair Value of Net Assets, excluding Goodwill
(20,000 + 40,000 + 160,000 – 30,000) (190,000)
Correct Answer: D
8. Based on the preceding information, what amount of amount of goodwill impairment will be recognized for this division if its fair value is determined to be $245,000?
A. $0
B. $30,000
C. $60,000
D. $55,000
Solution
Fair Value Reporting Unit ($245,000) > Carrying Amount Reporting Unit ($210,000)
No Goodwill Impairment → Correct Answer: A
9. Plummet Corporation reported the book value of its net assets at $400,000 when Zenith Corporation acquired 100 percent ownership. The fair value of Plummet’s net assets was determined to be $510,000 on that date. What amount of goodwill will be reported in consolidated financial statements presented immediately following the combination
if Zenith paid $550,000 for the acquisition?
A. $0
B. $50,000
C. $150,000
D. $40,000
Solution
Fair Value of Consideration Given $550,000
– Fair Value Net Assets Acquired (510,000)
GOODWILL $40,000
Correct Answer: D
10. In a business combination, the fair values of the net identifiable assets acquired exceeds the fair value of the consideration given. The excess should be reported as a:
a) Deferred credit
b) Reduction of the values assigned to current assets and a deferred credit for any unallocated portion.
c) Pro rata reduction of the values assigned to current and noncurrent assets and a deferred credit for any unallocated portion.
d) No answer listed is correct.
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