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Chapter 2

Introduction to the Consolidation


Process

Learning Objectives Coverage by question


Multiple Choice Exercises Problems

LO1 Explain the guidelines for 1, 2, 12, 13,


determining the existence of
control. 14,15

LO2 Explain the consolidation process


on the date of acquisitions when 37, 38 1
price equals book.

16, 21, 22, 23, 24,


LO3 Explain the consolidation process
25, 27, 28, 29, 30,
on the date of acquisitions when 1, 2, 4, 5 2, 3, 4
31, 32, 33, 34, 35,
price exceeds book.
36, 39, 40

LO4 Explain the measurement of


identifiable assets acquired,
11
liabilities assumed and goodwill
in business combinations.
LO5 Explain when deferred taxes are
recorded in business 3, 4, 5, 6, 9, 10,
combinations and the effect of 3, 6
deferred taxes on the recognition 17, 18, 19, 20
of business combinations.

Appendix 2A Measuring Assets


Acquired and Liabilities Assumed 7, 8, 18, 26
(Advanced).

Cambridge Business Publishers, 2014


Test Bank, Chapter 2 2-1
Chapter 2: Introduction to the Consolidation Process

Multiple Choice

Multiple Choice Theory

Topic: Distinguishing Business Combination from Asset Acquisition


LO: 1
1. All of the following are necessary to distinguish a business combination from a simple asset
acquisition except:
a. The entity has initiated planned activities.
b. The entity has human and material resources, as well as intellectual property.
c. The entity has begun to generate revenues.
d. The entity will be able to obtain access to customers.

Answer: c

Topic: Indicators of Control


LO: 1
2. When an investor is deemed to have "control" over an investee, GAAP requires presentation of
consolidated financial statements. Which of the following would not be considered an indicator of
control?
a. The investor has majority interest in the investee.
b. The investor owns 40% of the investee's stock and the rest is owned by the investee's
founder.
c. The investor owns 40% of the investee's stock and the rest is owned by a large number of
small investors.
d. Instead of owning stock, a company licenses technology to another company in an
agreement allowing the licensor to appoint a majority of the licensee's board of directors.

Answer: b

Topic: Acquisition-Related Costs


LO: 5
3. Acquisition-related costs incurred by the investor for services provided by outside accountants, as
well as the investor's employees, are:
a. Expensed immediately
b. Expensed if indirect, but capitalized if direct
c. Capitalized, subject to impairment testing, but not amortization
d. Capitalized, subject to both amortization and impairment testing

Answer: a

Cambridge Business Publishers, 2014


2-2 Advanced Accounting, 2nd Edition
Topic: Stock Issuance Costs
LO: 5
4. Stock issuance costs are:
a. Treated the same as acquisition-related costs
b. Debited to the Equity Investment account
c. Debited to the Common Stock account
d. Treated as a reduction in additional paid-in capital

Answer: d

Topic: Acquired Research and Development Costs


LO: 5
5. In-process intangible research and development costs incurred in a business combination are:
a. Expensed, consistent with the accounting treatment of a firm's own R & D expenditures
b. Debited to The Equity Investment account
c. Recorded as indefinite-lived intangible assets, subject to amortization
d. Included in the annual Goodwill impairment tests

Answer: d

Topic: Restructuring Costs


LO: 5
6. Often, the investor or investee will adopt a restructuring plan to achieve certain synergies from
the acquisition. Certain restructuring costs are required for implementation of such a plan. Which
of the following statements correctly describes the GAAP treatment of such costs?
a. A liability for restructuring costs expected to be incurred is included in the purchase price
allocation at date of acquisition.
b. If a restructuring plan is not already in place, the liability and related expense must be
recognized subsequent to the acquisition.
c. Costs that the investor is not legally obligated to incur may be accrued at the acquisition date
or expensed as incurred.
d. Recognizing a restructuring obligation at date of acquisition results in early recognition of
expense.

Answer: b

Topic: Preacquisition Contingencies


LO: Appendix
7. Accounting standards require that a portion of the cost of an acquired company be allocated to
investee liabilities. However, often in the case of pre-existing contingent liabilities, the amounts
may be unknown at the acquisition date. What are the general financial reporting requirements
for the consolidated statements at date of acquisition?
a. If the fair value of a pre-existing contingent liability is unknown, the liability should not be
recognized.
b. A contingent liability would not be recognized unless the loss was "probable."
c. Contingencies meeting the "possible" threshold would be disclosed, not accrued.
d. All of the above statements are true.

Answer: d

Cambridge Business Publishers, 2014


Test Bank, Chapter 2 2-3
Topic: Contingent Consideration
LO: Appendix
8. Acquisition agreements sometimes include a provision requiring an increase in the cash price
contingent upon investee's profits exceeding a specified level within a certain time period.
Regarding the contingent consideration, acquisition accounting requires at acquisition date:
a. Recognition of a liability in the amount expected to be ultimately paid
b. Recognition of a liability at its fair value, resulting in an increase in goodwill
c. No disclosure of the contingent consideration because of the high degree of uncertainty
d. Recognition of a liability at its fair value, but with no effect on the purchase price

Answer: b

Topic: Measurement of Goodwill


LO: 5
9. Which of the following statements best describes how goodwill is measured?
a. Acquisition price goodwill = fair value of net tangible assets
b. Acquisition price fair value of net tangible assets = goodwill
c. Acquisition price fair value of net tangible assets fair value of identifiable intangible assets
= goodwill.
d. Acquisition price book value of net assets = goodwill

Answer: c

Topic: Intangible Assets


LO: 5
10. Which of the following statements is incorrect regarding the recognition of intangible assets in a
business combination?
a. Intangible assets arising from contractual or legal rights are recognized separately from
goodwill.
b. Intangibles that can be separated from the business and sold, rented or licensed are
recognized separately from goodwill.
c. Separately recognized intangibles are identified as either limited life or indefinite life
intangibles.
d. The acquirer in a business combination does not recognize intangible assets unless they
appear on the investee company's balance sheet.

Answer: d

Topic: GAAP Approaches to Business Combinations


LO: 4
11. Current GAAP identifies three approaches to assigning values to assets acquired in a business
combination. Which of the following is not a recognized valuation technique for allocating the
acquisition price to specific assets?
a. Market Approach
b. Book Value Approach
c. Cost Approach
d. Income Approach

Answer: b

Cambridge Business Publishers, 2014


2-4 Advanced Accounting, 2nd Edition
Topic: Parent and Subsidiary Relationship
LO: 1
12. Which of the following statements best describes the relationship between a parent and its
consolidated subsidiary?
a. In legal form they are separate, but in economic substance they are one.
b. In legal form and economic substance they are one.
c. In legal form they are one, but in economic substance they are separate.
d. In legal form and economic substance they are separate.

Answer: a

Topic: Elimination Entries


LO: 1
13. If Spahn Company acquires all of the common stock of Burdette, Inc. Where will the entries
necessary to arrive at consolidated balances appear?
a. On Spahn's books only
b. On Burdette's books only
c. On a worksheet only
d. On the books of both the parent and the subsidiary

Answer: c

Topic: Indicators of Control


LO: 1
14. Under what circumstances might consolidation of a majority owned investee not be appropriate?
a. The investee is a U. K. company
b. The investee is in bankruptcy
c. The two companies are in different industries
d. The two companies have different accounting periods

Answer: b

Topic: Consolidation Process


LO: 1
15. Why is the consolidation process not just a matter of adding together the financial statements of
the investor and the financial statements of the investee?
a. Such a procedure would result in double counting of investee assets.
b. The subsidiary's stockholders' equity does not represent ownership by those outside the
economic entity.
c. The book values of the parent's assets are combined with the fair values of the subsidiary
resulting in meaningless totals.
d. Both answers a and b are reasons why the consolidation process is complex.

Answer: d

Cambridge Business Publishers, 2014


Test Bank, Chapter 2 2-5
Topic: Acquisition Method of Accounting for a Business Combination
LO: 3
16. Which of the following statements is true regarding the acquisition method of accounting for a
business combination?
a. Assets of the acquired company are recorded at book values.
b. Assets of the acquired company are recorded at fair value, but only if the acquisition cost
equals or exceeds fair value of the subsidiary's net assets.
c. Assets of the acquired company are recorded at fair values regardless of the acquisition cost.
d. Consulting costs related to the combination reduce additional paid-in capital.

Answer: c

Multiple Choice Computational

Topic: Acquisition-Related Costs


LO: 5
17. On December 31, 2012, Pelfrey Company issued 15,000 shares of its common stock with a fair
value of $30 per share for all of the outstanding common shares of Santana Company. Stock
issuance costs of $4,500 and direct costs of $3,000 were paid. What amount was debited to
Equity Investment at date of acquisition?
a. $450,000
b. $453,000
c. $454,500
d. $457,500

Answer: a

Topic: Acquisition-Related Costs and Contingent Consideration


LO: 5 and Appendix
18. On December 31, 2012, Sarge Company issued 15,000shares of its common stock with a fair
value of $30 per share for all of the outstanding common shares of Toney Company. Stock
issuance costs of $4,500 and direct costs of $3,000 were paid. In addition, Sarge promised to
pay an additional $1,550 to the former owners if Toney's earnings exceeded a certain amount
during the next year. The fair value of the potential obligation is estimated at $1,500. Compute
the investment to be recorded at date of acquisition.
a. $450,000
b. $451,550
c. $453,000
d. $451,500

Answer: d

Cambridge Business Publishers, 2014


2-6 Advanced Accounting, 2nd Edition
Questions 19 and 20 are based upon the following set of facts:

Leslie acquires 100 percent of the outstanding voting shares of Marcie Company on January 1, 2013. To
obtain these shares, Leslie pays $100,000 cash and issues 5,000 shares of $10 par value common stock
on this date. Leslie's stock had a fair value of $18 per share. Leslie also pays an additional $2,500 in
stock issuance costs. At date of acquisition, the book values and fair values of Marcie's net assets
amounted to $140,000 and $165,000, respectively.

Topic: Acquisition-Related Costs


LO: 5
19. How much additional paid-in capital was recorded as a result of the combination?
a. $ 40,000
b. $ 47,500
c. $ 37,500
d. $90,000

Answer: c

Topic: Measurement of Goodwill


LO: 5
20. What amount was reported for goodwill as a result of this acquisition?
a. $ -0-
b. $25,000
c. $27,500
d. $50,000

Answer: b

Questions 21-30 are based on the following set of facts.

Richland Company acquires Seameyer, Inc., by issuing 20,000 shares of $1 par common stock with a
market price of $25 per share on the acquisition date and paying $100,000 cash. The assets and
liabilities on Seameyer's balance sheet were valued at fair values except equipment that was undervalued
by $175,000. There was also an unrecorded patent valued at $32,500, as well as an unrecorded
trademark valued at $80,000. In addition, the agreement provided for additional consideration, valued at
$60,000, if certain earnings targets were met.

The pre-acquisition balance sheets for the two companies at acquisition date are presented below.
Richland Seameyer
Cash $ 130,550 $ 17,300
Accounts receivable 64,000 116,000
Inventory 97,000 149,000
Property, plant, and equipment 1,611,050 179,350
$1,902,600 $461,650

Accounts payable $ 31,350 $ 21,150


Salaries and taxes payable 24,530 36,800
Notes payable 550,000 100,000
Common stock 110,000 30,000
Additional paid-in capital 850,000 37,500
Retained earnings 336,720 236,200
$1,902,600 $461,650

Cambridge Business Publishers, 2014


Test Bank, Chapter 2 2-7
Topic: Acquisition-Date Consolidation when Purchase Price Exceeds Book Value
LO: 3
21. At what amount is the investment recorded on Richland's books?
a. $120,000
b. $600,000
c. $540,000
d. $660,000

Answer: d

Topic: Acquisition-Date Consolidation when Purchase Price Exceeds Book Value


LO: 3
22. Compute the consolidated balance in Cash.
a. $147,850
b. $ 47,850
c. $ 30,550
d. $ 17,300

Answer: b

Topic: Acquisition-Date Consolidation when Purchase Price Exceeds Book Value


LO: 3
23. Compute consolidated common stock.
a. $130,000
b. $110,000
c. $140,000
d. $160,000

Answer: a

Topic: Acquisition-Date Consolidation when Purchase Price Exceeds Book Value


LO: 3
24. Compute consolidated additional paid-in capital.
a. $ 850,000
b. $1,330,000
c. $ 887,500
d. $1,367,500

Answer: b

Topic: Acquisition-Date Consolidation when Purchase Price Exceeds Book Value


LO: 3
25. What amount of goodwill was recorded in the acquisition?
a. $-0-
b. $356,300
c. $ 68,800
d. $ 8,800

Answer: c

Cambridge Business Publishers, 2014


2-8 Advanced Accounting, 2nd Edition
Topic: Contingent Consideration
LO: Appendix
26. Compute consolidated liabilities.
a. $605,880
b. $763,830
c. $157,950
d. $823,830

Answer: d

Topic: Acquisition-Date Consolidation when Purchase Price Exceeds Book Value


LO: 3
27. Compute consolidated property, plant & equipment.
a. $1,965,400
b. $1,790,400
c. $1,611,050
d. $1,997,900

Answer: a

Topic: Acquisition-Date Consolidation when Purchase Price Exceeds Book Value


LO: 3
28. Compute consolidated inventory.
a. $ 97,000
b. $149,500
c. $246,000
d. $326,000

Answer: c

Topic: Acquisition-Date Consolidation when Purchase Price Exceeds Book Value


LO: 3
29. Compute consolidated identifiable intangible assets.
a. $ 32,500
b. $172,500
c. $ 80,000
d. $112,500

Answer: d

Topic: Acquisition-Date Consolidation when Purchase Price Exceeds Book Value


LO: 3
30. What is consolidated retained earnings?
a. $374,220
b. $336,720
c. $572,920
d. $366,720

Answer: b

Cambridge Business Publishers, 2014


Test Bank, Chapter 2 2-9
Questions 31-33 are based on the following set of facts.

On January 1, 2014 Perez Company purchased 100% of the common stock Hinske Enterprises for
$280,000. On that date, Hinske had common stock of $50,000 and retained earnings of $190,000.
Equipment and land were both undervalued by $10,000 on Hinske's books. There was a $5,000
overvaluation of Bonds Payable, as well a $15,000 undervaluation of inventory.

Topic: Acquisition-Date Consolidation when Purchase Price Exceeds Book Value


LO: 3
31. What is the amount of goodwill recorded in connection with this combination?
a. $0
b. $40,000
c. $10,000
d. $ 5,000

Answer: a

Topic: Acquisition-Date Consolidation when Purchase Price Exceeds Book Value


LO: 3
32. The consolidation entries necessary for a date of acquisition balance sheet include all of the
following except:
a. Land debit, $10,000
b. Inventory debit, $15,000
c. Bonds Payable credit, $5,000
d. Equipment debit, $10,000

Answer: c

Topic: Acquisition-Date Consolidation when Purchase Price Exceeds Book Value


LO: 3
33. The combined consolidation entries necessary for a date of acquisition balance sheet include all
of the following except:
a. Common Stock debit, $50,000
b. Retained Earnings credit, $190,000
c. Equity Investment credit, $280,000
d. No debits or credits to goodwill

Answer: b

Topic: Acquisition-Date Consolidation when Purchase Price Exceeds Book Value


LO: 3
34. Maddon Company acquired 100% of Stonebraker by issuing 100,000 shares of its $1 par value
stock. The market value of the stock is $10 per share. Maddon also paid $10,000 in consulting
fees related to the acquisition. Maddon's journal entry to record the acquisition would include:
a. A credit to additional paid-in-capital, $900,000
b. A credit to common stock, $1,000,000
c. A credit to cash, $1,010,000
d. A debit to Equity Investment, $1,010,000

Answer: a

Cambridge Business Publishers, 2014


2-10 Advanced Accounting, 2nd Edition
Topic: Acquisition-Date Consolidation when Purchase Price Exceeds Book Value
LO: 3
35. On July 1, 2013, Watson Co. paid $215,000 for all of the stock of Squire, Inc. On that date, book
values of Squire's assets and liabilities were $200,000 and $45,000, respectively. The fair values
of the assets and liabilities were $210,000 and $35,000, respectively. What is the amount of
goodwill at date of acquisition?
a. $60,000
b. $50,000
c. $40,000
d. $-0-

Answer: c

Topic: Acquisition-Date Consolidation when Purchase Price Exceeds Book Value


LO: 3
36. On December 30, 2012, Whatley Co. acquired 100% of Manster Corporation for $200,000 cash.
The post-combination balance sheets of the two firms showed total assets of $612,500 for the
parent and $157,500 for the subsidiary. Total assets on the consolidated balance sheet would
be:
a. $770,000
b. $570,000
c. $970,000
d. $612,500

Answer: b

Topic: Acquisition-Date Consolidation


LO: 2
37. Krista Company had common stock of $70,000 and retained earnings of $98,000. Storey, Inc.
had common stock of $140,000 and retained earnings of $196,000. On January 1, 2013, Storey
issued 34,000 shares of common stock with a $5 par value and a $18 fair value for all of Krista
Company's outstanding common stock. Immediately after the combination, what were the
consolidated net assets?
a. $ 504,000
b. $ 336,000
c. $1,116,000
d. $ 948,000

Answer: d

Cambridge Business Publishers, 2014


Test Bank, Chapter 2 2-11
Questions 38-40 are based upon the following set of facts.

Hairington Corporation issues 20,000 shares of its common stock for all of the outstanding shares of
Alton, Inc. Hairington shares have a par value of $10 and a market value of $18 per share.

Topic: Acquisition-Date Consolidation


LO: 2
38. What is the increase in consolidated additional paid-in capital resulting from the combination?
a. $360,000
b. $200,000
c. $160,000
d. $-0-

Answer: c

Topic: Acquisition-Date Consolidation when Purchase Price Exceeds Book Value


LO: 3
39. If Alton's net assets have book values and fair values of $240,000 and $300,000, respectively,
what is the resulting amount of goodwill?
a. $360,000
b. $ 60,000
c. $120,000
d. $-0-

Answer: b

Topic: Acquisition-Date Consolidation when Purchase Price Exceeds Book Value


LO: 3
40. If Alton's net assets have book values and fair value of $340,000 and $400,000, respectively,
what is the resulting amount of goodwill?
a. $360,000
b. $ 20,000
c. $ 40,000
d. $-0-

Answer: d

Cambridge Business Publishers, 2014


2-12 Advanced Accounting, 2nd Edition
Exercises

Topic: Acquisition-Date Consolidation when Purchase Price Exceeds Book Value


LO: 3
1. Mackey Corporation exchanges 2,000 shares of $10 par value common stock, with a market
value of $100 per share for all of the shares of Richardson, Inc. On the acquisition date,
Richardson had $100,000 of Common Stock and $50,000 of Retained Earnings. Book values
were equal to fair values except for land which was undervalued by $50,000.

Required:
a. Prepare the entry on Mackeys books to record the purchase.
b. Prepare all necessary consolidation entries.

Answer:
a. Equity Investment 200,000
Common Stock 20,000
Additional paid-in capital 180,000
To record the investment on investor's books.

b. Common Stock 100,000


Retained Earnings 50,000
Equity Investment 150,000
To eliminate subsidiary's stockholders' equity.

Land 50,000
Equity Investment 50,000
To bring Land to fair value and eliminate Equity Investment.

Topic: Acquisition-Date Consolidation when Purchase Price Exceeds Book Value


LO: 3
2. McClellan, Inc. acquires all of the outstanding common stock of Cranston Enterprises for
$150,000 cash. On the acquisition date, the subsidiary had Common Stock of $30,000 and
Retained Earnings of $30,000. A patent unrecorded by Cranston was valued at $60,000.

Required:
a. Prepare the entry on McClellans books to record the purchase.
b. Prepare all necessary consolidation entries.

Answer:
a. Equity Investment 150,000
Cash 150,000
To record the investment on investor's books.

b. Common Stock 30,000


Retained Earnings 30,000
Equity Investment 60,000
To eliminate subsidiary's stockholders' equity.

Patents 60,000
Goodwill 30,000
Equity Investment 90,000
To eliminate Equity Investment and allocate acquisition cost to identifiable assets and
Goodwill.

Cambridge Business Publishers, 2014


Test Bank, Chapter 2 2-13
Topic: Acquisition-Related Costs and Contingent Consideration
LO: 5, Appendix
3. HRL Corporation had the following selected account balances and fair values at December 31,
2013 when it was acquired by Kiefer Enterprises.

Book Values Fair Values


Receivables $20,000 $20,000
Customer relationships 25,000 125,000
Patents -0- 350,000
In-process R& D -0- 75,000
Liabilities 100,000 100,000
Common Stock 25,000
Additional paid-in capital 75,000

Kiefer Enterprises acquired all of the common shares of HRL Corporation by issuing 5,000 shares
of its own common stock valued at $75 per share. Kiefer incurred stock issuance costs of $2,500
and paid $18,750 in direct clerical and legal costs of the combination. Kiefer also agreed to pay
an additional $25,000 if HRL achieved certain profit goals within the first three years. The
contingent payment was determined to have a market value of $7,500.

Required:
a. What is the acquisition cost of the combination?
b. How do the stock issuance costs affect Kiefer's balance sheet?
c. How do the direct costs of the combination affect Kiefer's balance sheet?
d. Without performing computations, how will HRL's revenues and expenses for 2013 affect the
consolidated totals?
e. What will be the accounting treatment of the In-process R & D?

Answer:
a. Acquisition cost: (5,000 x $75) + 7,500 = $382,500

b. Stock issuance costs reduce Swann's additional paid-in-capital by $2,500.

c. The balance sheet effect of the direct combination costs is a reduction of $18,750 in retained
earnings. Such costs are expensed.

d. Only the post-acquisition revenues and expenses of the subsidiary are included in
consolidated totals. Therefore, the 2013 revenues and expenses will not affect consolidated
totals.

e. In-process R & D will be an asset on the consolidated balance sheet, valued at $75,000.

Cambridge Business Publishers, 2014


2-14 Advanced Accounting, 2nd Edition
Topic: Acquisition-Date Consolidation when Purchase Price Exceeds Book Value
LO: 3
4. On January 2, 2013, McCoy Corporation's stockholders' equity accounts were as follows:

Common Stock, $1 par $50,000


Additional paid-in- capital 100,000
Retained Earnings 225,000

McCoy's assets and liabilities had book values equal to market values except for inventory, land
and building which were undervalued by $30,000, $20,000, and $25,000, respectively. On
January 2, 2013, Express Corp. purchased all of McCoy's common stock for $475,000 cash.
There was no contingent consideration in the agreement to combine.

Required: Prepare all necessary consolidation entries for a January 2, 2013 balance sheet.

Answer:
Allocate acquisition cost to assets:
Investment Cost $475,000
Book Value-Net Assets 375,000
Excess $100,000
Allocated as follows:
Land $ 20,000
Building 25,000
Inventory 30,000
Goodwill 25,000
Total Allocated $100,000

Consolidation Entries:
Common Stock 50,000
Additional paid-in capital 100,000
Retained Earnings 225,000
Equity Investment 375,000
To eliminate subsidiary's stockholders' equity.

Land 20,000
Building 25,000
Inventory 30,000
Goodwill 25,000
Equity Investment 100,000
To eliminate Equity Investment; bring assets to fair values; with the unallocated cost assigned
to goodwill.

Cambridge Business Publishers, 2014


Test Bank, Chapter 2 2-15
Topic: Acquisition-Date Consolidation when Purchase Price Exceeds Book Value
LO: 3
5. On January 1, 2014, Prang Corporation acquired 100% of Ridgeline Corporation for $4,100,000
cash. On that date, Ridgeline's total stockholders' equity was $3,200,000. The following assets
had fair values different from book values.

Book Value Fair Value


Buildings and Land $5,000,000 $5,750,000
Other Assets 500,000 350,000
Bonds Payable 3,000,000 2,800,000

Required: Compute the amount of goodwill that would appear on the January 1, 2014 balance
sheet.

Answer:
Compute excess of Investment over book value of net assets:
$4,100,000 - 3,200,000 = $900,000

Allocate excess to assets and liabilities:


Buildings and Land $750,000
Other Assets (150,000)
Bonds Payable 200,000*
Total allocation $800,000
Unallocated--Goodwill 100.000
Total Excess $900,000

*For purposes of computing goodwill, an overvalued liability is equivalent to an undervalued asset.

Topic: Acquisition-Related Costs


LO: 5
6. On January 1, 2013, Maxwell Corporation issued 20,000 shares of its $10 par common stock for
all of the common stock of Merchants Corp. Maxwells's common stock was valued at $30 per
share. Maxwell's costs of the combination consisted of the following:

Legal fees $30,000


Stock issuance costs 20,000

Required: Prepare journal entries to record the business combination.

Answer:
Equity Investment 600,000
Common Stock 200,000
Additional paid-in capital 400,000
To record acquisition of subsidiary's stock.

Combination Expenses 30,000


Cash 30,000
To record direct costs of the combination as expenses.

Additional paid-in capital 20,000


Cash 20,000
To record cash payment of stock issuance costs.

Cambridge Business Publishers, 2014


2-16 Advanced Accounting, 2nd Edition
Problems

Topic: Acquisition-Date Consolidation


LO: 2
1. On January 2, 2013, Illinois Corporation issued 200,000 new shares of its $5 par value common
stock valued at $19 a share for all of North Dakota Companys outstanding common shares. The
fair value and book value of North Dakota's identifiable assets and liabilities were the same.
Summarized balance sheet information for both companies just before the acquisition on January
2, 2013 is as follows:

Illinois North Dakota


Cash $ 150,000 $ 240,000
Inventories 320,000 800,000
Other current assets 500,000 1,000,000
Land 350,000 500,000
Property, plant & equipment 4,000,000 3,000,000
Total Assets $5,320,000 $5,540,000

Accounts payable $1,000,000 $ 600,000


Notes payable 1,300,000 1,320,000
Common stock, $5 par 2,000,000 1,000,000
Additional paid-in capital 1,000,000 200,000
Retained earnings 20,000 2,420,000
Total Liabilities & Equities $5,320,000 $5,540,000

Required: Prepare a consolidated balance sheet for Illinois Corporation immediately after the
business combination.

Answer:
Consolidated Balance Sheet:
Cash $150,000 + 240,000 = $ 390,000
Inventories 320,000 + 800,000 = 1,120,000
Other current assets 500,000 + 1,000,000 = 1,500,000
Land 350,000 + 500,000 = 850,000
Plant assets-net 4,000,000 + 3,000,000 = 7,000,000
Goodwill 180,000 (See Computation)
Total Assets $11,040,000

Accounts payable $ 1,000,000 + 600,000 = $1,600,000


Notes payable 1,300,000 + 1,320,000 = 2,620,000
Common Stock 2,000,000 + (200,000 x $5) = 3,000,000 (Parent's Only)
A-P-I-C 1,000,000 + 200,000 x ($19 5) = 3,800,000 (Parent's Only)
Retained earnings 20,000 (Parent's Only)
Total Liabilities and
Stockholders' Equity $11,040,000

Computation of Goodwill:
Acquisition Cost $3,800,000
Subsidiary net assets (3,620,000)
Goodwill $ 180,000

Cambridge Business Publishers, 2014


Test Bank, Chapter 2 2-17
Topic: Acquisition-Date Consolidation when Purchase Price Exceeds Book Value
LO: 3
2. Mendol Corporation purchased 100% of the common stock of Carbury Inc. on January 2, 2014.
Carnac's balance sheet on January 2, 2014 was as follows:

Accounts receivable-net $ 180,000 Current liabilities $ 70,000


Inventory 360,000 Long term debt 160,000
Land 40,000 Common stock ($1 par) 20,000
Building-net 60,000 Paid-in capital 430,000
Equipment-net 80,000 Retained earnings 40,000
Total Assets $720,000 Total Liabilities & Equity $720,000

Fair values agree with book values except for inventory, land, and equipment that have fair
values of $400,000, $50,000 and $70,000, respectively. Carbury has unrecorded patent rights
valued at $20,000.

Required:
a. Prepare a schedule to allocate the purchase price to Carburys assets and liabilities
assuming Mendol paid $560,000 cash for the acquisition.
b. Prepare the consolidation entries for a January 2, 2014 consolidated balance sheet.

Answer:
a. Acquisition price $ 560,000
Book Value-Net Assets (490,000)
Excess $ 70,000

Allocation of Excess:
Inventory $40,000
Land 10,000
Equipment (10,000)
Patent 20,000
$60,000
Unallocated-Goodwill 10,000
$70,000

b. Consolidation entries - Acquisition price: $ 560,000

Common Stock 20,000


A-P-I-C 430,000
Retained Earnings 40,000
Equity Investment 490,000
To eliminate subsidiary's stockholders' equity.

Goodwill 10,000
Inventory 40,000
Land 10,000
Patent 20,000
Equipment 10,000
Equity Investment 70,000
To eliminate Equity Investment and adjust assets to fair values.

Cambridge Business Publishers, 2014


2-18 Advanced Accounting, 2nd Edition
Topic: Acquisition-Date Consolidation when Purchase Price Exceeds Book Value
LO: 3
3. On January 1, 2013, Parent Company purchased all of the common stock of Subsidiary Company
for $700,000 cash. On that date, Subsidiary had common stock of $40,000, additional paid-in
capital of $160,000, and retained earnings of $300,000. The difference between the cost of the
purchase and the book value of Subsidiarys net assets was at least partly due to under or
overvalued assets and liabilities. Inventory was undervalued by $10,000. Land was undervalued
by $40,000. Buildings and Equipment were undervalued by $60,000. Bonds Payable was
overvalued by $10,000. Any unexplained difference is due to Goodwill.

Required: Prepare all necessary entries for a January 1, 2013, consolidated balance sheet.

Answer:
Compute excess of acquisition price over book value of subsidiary's net assets:

Acquisition Cost $700,000


Book Value-Net Assets 500,000
Excess $200,000

Allocation of Excess:
Inventory $ 10,000
Land 40,000
Building/Equipment 60,000
Bonds Payable 10,000
Goodwill 80,000
Total $200,000

Consolidation Entries:

Common Stock 40,000


A-P-I-C 160,000
Retained Earnings 300,000
Equity Investment 500,000
To eliminate subsidiary's stockholders' equity.

Inventory 10,000
Land 40,000
Buildings/Equipment 60,000
Bonds Payable 10,000
Goodwill 80,000
Equity Investment 200,000
To eliminate investment and allocate to assets and liabilities.

Cambridge Business Publishers, 2014


Test Bank, Chapter 2 2-19
Topic: Acquisition-Date Consolidation when Purchase Price Exceeds Book Value
LO: 3
4. Parent Company acquires a subsidiary by issuing 55,000 common shares with a market value of
$20 per share for all of the subsidiary's common stock. The subsidiary's assets and liabilities
were recorded at fair values with the exception of equipment undervalued by $250,000. In
addition, there were two unrecorded assets: a secret formula valued at $125,000 and a customer
list valued by the subsidiary at $50,000. The balance sheets of the parent and subsidiary
immediately after the acquisition are presented below:

Parent Subsidiary
Cash $ 455,250 $ 201,600
Accounts Receivable 192,000 417,600
Inventory 791,000 536,400
Equity Investment 2,200,000
Property, plant and equipment (net) 899,800 992,400
$4,538,050 $2,148,000
Accounts payable $ 94,050 $ 127,000
Salaries payable 110,400 221,000
Long-Term Notes Payable 500,000 600,000
Common Stock 110,000 120,000
Additional paid-in capital 2,970,000 150,000
Retained earnings 753,600 930,000
$4,538,050 $2,148,000

Required: At what amounts will each of the following appear on the consolidated balance sheet?
a. Inventory
b. Equity Investment
c. Property, plant and equipment (net of accumulated depreciation)
d. Goodwill
e. Common Stock
f. Additional paid-in capital
g. Retained Earnings
h. Total Intangible Assets

continued next page

Cambridge Business Publishers, 2014


2-20 Advanced Accounting, 2nd Edition
Answer:
Computation of Goodwill:
Acquisition Cost (55,000 x $20) $2,200,000
Book Value-Net Assets 1,200,000
Excess $ 1,000,000

Allocation of Excess:
Equipment 500,000
Secret Formula 250,000
Customer List 100,000
850,000
Goodwill 150,000
Total Allocation 1,000,000

a. Inventory: $791,000 + 536,400 = $1,327,400

b. Equity Investment: ZERO (Eliminated)

c. Property, plant and equipment: $899,800 + 992,400 + 500,000 = $2,392,200

d. Goodwill: $150,000 (Computed Above)

e. Common Stock: $110,000 (Parent's Only)

f. Additional paid-in capital: $2,970,000 (Parent's Only)

g. Retained Earnings: $753,600 (Parent's Only)

h. Total Intangible Assets:


Secret Formula $250,000
Customer List 100,000
Goodwill 150,000
Total $500,000

Cambridge Business Publishers, 2014


Test Bank, Chapter 2 2-21