ACCT 4030 Adv Acct: Chapter 1

Statutory Consolidation

Neither of the combining companies remains in existence

A subsidiary is a corporation that another corporation, referred to as a parent company, controls, usually through majority ownership of its common stock.

True

A subsidiary is a separate legal entity, so the parent company's risk associated with the subsidiary's activities in limited.

True

Heal Cycle Corp created a subsidiary, Clouds corp. The parent company transfers cash, inventory, and land to Clouds corp in exchange for common shares of stock. Which of the following accounts is debited on the books of the parent company in recording the creation of a subsidiary company?

Investment in Clouds Corp Common Stock

Which of the following is true of a split-off?

It occurs when a subsidiary's shares are exchanged for shares of the parent

Companies might establish other entities not to expand, but to dispose of a portion of their existing operations through outright sale or transfer or ownership.

True

Current liabilities are often vies as having fair values equal to their book values because they will be paid at face amount within a short time

True

Enron established many special-purpose entities, some of which were intended to manipulate financial reporting

True

In a noncontrolling ownership, the purchase of a less-than-majority interest in another corporation does not usually result in a business combination or controlling situation

True

Some companies dispose of a segment of operations that no longer fits well with the overall mission of the company

True

Some companies dispose of a segment of unprofitable operations by establishing new entities

True

Some companies gain shareholder approval of a proposed merger with another company by disposing of a portion of their existing operations.

True

The relationship that is created in a stock acquisition is referred to as a parent-subsidiary relationship

True

The shares of an acquired company not held by the controlling shareholder are called the noncontrolling interest

True

The shares of the acquired company are recorded on the books of the acquiring company as an

asset

When companies expand or change organizational structure by acquiring other companies or through internal division, the new structure must be examined to determine the appropriate financial reporting procedures. Several approaches are possible, depending on the circumstances

True

A spin-off occurs when the ownership of a newly created or existing subsidiary is distributed to the parent's stockholders without the stockholders surrendering any of their stock to the parent company

True.

Summary of spin-off

The company divests itself of the subsidary because it is owned by the company's shareholders after the spin-off

A business combination in which the management of one of the companies makes a tender offer directly to the shareholders of the other company to exchange their shares for securities or assets of the acquiring company is known as

hostile takeover

What are the reasons for creating or acquiring a subsidiary?

realize tax benefits, outsource receivables, etc.

8. Which of the following is the appropriate basis for valuing fixed assets acquired in a business combination carried out by exchanging cash for common stock?

Fair value

An asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized is defined as

Goodwill

1. Growth in the complexity of the U.S. business environment

Has led to increasingly complex organizational structures as management has attempted to achieve its business objectives.

Stock Acquisition

Neither of the combining companies is liquidated

13. On April 1, 20X2, Pack Company paid $800,000 for all of Sack Corporation's issued and outstanding common stock. Sack's recorded assets and liabilities on April 1, 20X2, were as follows: Cash $80,000 Inventory 240,000 Property & equipment 480,000 (net of accumulated depreciation of $320,000) Liabilities (180,000) On April 1, 20X2, Sack'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?

$150,000.

11. On December 31, 20X3, Saxe Corporation was merged into Poe Corporation. In the business combination, Poe issued 200,000 shares of its $10 par common stock, with a market price of $18 a share, for all of Saxe's common stock. Poe Saxe Common Stock $3,000,000 $1,500,000 Additional Paid-In Capital 1,300,000 150,000 Retained Earnings 2,500,000 850,000 $6,800,000 $2,500,000 The stockholders' equity section of each company's balance sheet immediately before the combination was:

$2,900,000

Gold Circle Cop acquired all of the assets and assumes all of the liabilities of Diamond Corp. The fair value of the consideration given by Gold Circle Corp is $480,000 and the fair value of Diamond Corp's net identifiable assets is $370,000. The book value of net identifiable assets is $250,000. Calculate the total differential.

$230,000 Fair value of the consideration minus book value of the net identifiable asset

Ruth Corporation acquired all of ALice Corporation's common stock at book value of January 1 2021 by issuing 10,000 shares. Ruth Corporation's seprate income, excluding any income for Alice Corp, for the year 2021 is $200,000. Alice Corp's net income for 2021 was $50,000. Net income reported by Ruth Corp in its financial statements for year 2021 was what?

$250,000 $200,000 of Ruth's income plus $50,000 of Alice's income

Michael Corp acquired all of Veda Corp's common shared at book value in the middle of 2021 by issuing 20,000 shares of its own shares. Michael Corp's separate income, excluding any income for Verda Corp, for the year 2021 was $320,000. Net income of Verda Corp for the year 2021 was $80,000. Verda Corp earned $44,000 before the business combination. Michael Corp's total net income for 2021 would be 0.

$356,000 Michael Corp acquired Verda corp in the middle of 2021, so Michael Corp would include only Verda's earnings subsequent to the acqusition on its income statement. Verda's earnings after the business combination are $80,000 - $44,000 = $36,000. So, total net income is $320,000 + $36,000 = $356,000

14. Pickle Corporation issued nonvoting preferred stock with a fair market value of $4,000,000 in exchange for all the outstanding common stock of Sickle Corporation. On the date of the exchange, Sickle had tangible net assets with a book value of $2,000,000 and a fair value of $2,500,000. In addition, Pickle issued preferred stock valued at $400,000 to an individual as a finder's fee in arranging the transaction. As a result of this transaction, Pickle should record an increase in net assets of

$4,000,000.

Renee Corp acquires Charles Corp by providing consideration with a fair value of $660,000. Fair value of net identifiable assets is $440,000. Charles Corp's net identifiable assets on its books are $220,000. Calculate the total differential.

$440,000 Total differential = $660,000 Fair value of consideration minus $220,000 book value of the net identifiable asset

12. On January 1, 20X1, Portland Corporation issued 10,000 shares of common stock in exchange for all of Stockton Corporation's outstanding stock. Condensed balance sheets of Portland and Stockton immediately before the combination follow: Portland Stockton Total Assets $1,000,000 $500,000 Liabilities $300,000 $150,000 Common Stock ($10 par) 200,000 100,000 Retained Earnings 500,000 250,000 Total Liabilities & Equities $1,000,000 $500,000 Portland's common stock had a market price of $60 per share on January 1, 20X1. The market price of Stockton's stock was not readily determinable. The fair value of Stockton's net identifiable assets was determined to be $570,000. Portland's investment in Stockton's stock will be stated in Portland's balance sheet immediately after the combination in the amount of

$600,000.

10. A and B Companies have been operating separately for five years. Each company has a minimal amount of liabilities and a simple capital structure consisting solely of voting common stock. In exchange for 40 percent of its voting stock, A Company acquires 80 percent of the common stock of B Company. This is a "tax-free" stock-for-stock exchange for tax purposes. B Company's identifiable assets have a total net fair market value of $800,000 and a total net book value of $580,000. The fair market value of the A stock used in the exchange is $700,000, and the fair value of the noncontrolling interest is $175,000. The goodwill reported following the acquisition would be?

$75,000

On January 1, 2021, Javier Corp acquired 80% of the common stock of Carol Corp. The fair value of consideration transferred is $800,000. The fair value of the noncontrolling interest is $200,000 and the fair value of Carol's net identifiable assets is $950,000. Calculate goodwill.

$800,000 controlling interest plus $200,000 noncontrolling interest minus $950,000 net identifiable asset equals $50,000 goodwill.

Which of the following accounts are generally credited on the books of an acquiring company in recording stock acquisition of a subsidiary?

- Common Stock - Additional Paid-in Capital

Which of the following accounts is credited on the books of an acquiring company to record the revaluation of its original investment in the acquiree on the date of a subsequent acquisition when the fair value is more than the book value?

- Gain on Revaluation of Acquiree Stock

Arch Chemical acquires all of the assets and liabilities of Innovation Chemical for $580,000 cash when the fair value of Innovation Chemical's net identifiable asset is estimated to be $600,000j. Innovation Chemical has cash, receivables, inventory, buildings, equipment, and current liabilities. Which of the following accounts is credited in the books of Arch Chemical Corp while recording the acquisition?

- Gains on bargain purchase of innovation

Which of the following is true regarding subsequent accounting for goodwill arising in a merger?

- Goodwill is accounted for in accordance with ASC350 - Goodwill must be tested for impairment at least annually - Goodwill must be reported as a separate line item in the balance sheet

Smart Venture Corp acquired all of the assets and liabilities of Food Online Corp for $450,000 cash when the fair value of Food Online Corp's net identifiable asset is estimated to be $460,000. Food Online Corp has cash, receivables, inventory, building and equipment, and current liabilities. Which of the following accounts is debited in the books of Smart Venture Corp is recording the acquisition?

- Inventory - Buildings and Equipment - Cash and Receivables

Star Work Corp, a parent company, transfers cash, inventory, and equipment to vertical corp, a subsidiary, in exchange for common shares. Which of the following accounts is debited in the books of vertical corp while recording the receipt of assets and the issuance of shares?

- Inventory - Equipment

Why do companies transfer their receivables to subsidiaries?

- It allows the subsidiary to use the receivables as collateral for bonds issued to other entities - It allows transferring companies to share the risk associates with the receivables - It leads to tax benefits for the transferring companies

Which of the following is true of a subsidiary company?

- It is controlled by a parent company, usually through majority ownership of its common stock - It is a separate legal entity

Which of the following should a company do to reduce its risk of collecting receivables?

- It should create or acquire a subsidiary and transfer its receivables to a subsidiary - It should transfer its receivables to a special-purpose entity

Based on current business combination standards, which of the following are valued at fair value?

- Noncontrolling interest in the acquiree -Consideration exchanged -Individual assets and liabilities acquired

Which of the following was true of the purchase method of accounting for business combinations?

- The difference between the total purchase price and the fair value of the net identifiable assets acquired was recorded as goodwill - Individual assets and liabilities of the acquired company were valued at their fair values

Which of the following are true of special-purpose entities (SPEs)?

- They are usually created for a single, specified purpose - They have been used to manipulate financial reporting and hide debt - They may be in the form of corporations, trusts, or partnerships

Controlling Ownership

A business combination in which the acquired company remains as a separate legal entity with a majority of its common stock owned by the purchasing company leads to a parent-subsidiary relationship. Accounting standards normally require that the financial statements of the parent and subsidiary be consolidated for general-purpose reporting so the companies appear as a single entity. The treatment is the same if the subsidiary is created rather than purchased. The treatment is also the same when the other entity is unincorporated and the investor company has control and majority ownership.

Subsidiary

A corporation that another corporation, referred to as a parent company, controls. It's usually controlled through majority ownership of its common stock.

Special-purpose entity

A financing vehicle that is not a substantive operating entity, usually one created for a single specified purpose. SPEs may be in the form of a corporation, trust, or partnership.

Merger

A merger is a business combination in which the acquired business's assets and liabilities are combined with those of the acquiring company. Thus, two companies are merged into a single entity. In essence, the acquiring company "swallows" the acquired business. When the two companies merge, one of them ceases to exist as a separate entity and the name of the acquiring company continues.

Vision Systems Corp. creates a subsidiary, Impact Corp. Vision System Corp transfers cash, a building, and equipment to Impact Corp in exchange for common shares of Impact Corp. Which of the following accounts would most likely be credited on the books of Impact Corp in recording the receipt of assets and the issuance of shares?

Additional Paid-In Capital

Meetechnology Corp acquired all of the assets and liabilities of Technologyant Corp in a statutory merger by issuing 10,000 shares of $5 par common stock to Technologyant. Technologyant has cash, inventory, land, buildings and equipment, and current liabilities. Which of the following accounts is credited in the books of Meetechnology Corp in recording the acquisition on the date of combination?

Common Stock

Diamond Corp acquired land in a business combination at its estimated fair value. During the measurement period, Diamond Corp received an appraisal of the value of the land at the acquisition date. During the same accounting period, it was determined that the value of the land had declined. Which of the following journal entries would be correct to record the decline in the value of the land?

Debit impairment loss, Credit land

9. In a business combination in which an acquiring company purchases 100% of the outstanding common stock of another company, if the fair value of the net identifiable assets acquired exceeds the fair value of the consideration given. The excess should be reported as a?

No answer listed is correct.

Other Beneficial Interest

One company may have a beneficial interest in another entity even without a direct ownership interest. The beneficial interest may be defined by the agreement establishing the entity or by an operating or financing agreement. When the Page 8beneficial interest is based on contractual arrangements instead of majority stock ownership, the reporting rules may be complex and depend on the circumstances.

Statutory Merger

One of the combining companies survives and the other loses its separate identity

3. Which of the following actions is likely to result in recording goodwill?

Poker acquires Spade Corporation in a business combination recorded as a merger.

7. In a business combination, costs of registering equity securities to be issued by the acquiring company are a(n)

Reduction of the recorded value of the securities.

The total difference at the acquisition date between the fair value of the consideration exchanged and the book value of the net identifiable assets acquired is referred to as what?

Referred to as the differential.

6. Goodwill represents the excess of the sum of the fair value of the (1) consideration given, (2) shares already owned, and (3) the noncontrolling interest over the

Sum of the fair values assigned to identifiable assets acquired less liabilities assumed.

5. When a company assigns goodwill to a reporting unit acquired in a business combination, it must record an impairment loss if

The fair value of the reporting unit is less than its carrying value.

Under the acquisition method, which of the following best describes the role that fair value plays in the acquisition method?

The full acquisition-date fair values of assets acquired and liabilities assumed in a business combination are recognized by the consolidated entity

4. When an existing company creates a new subsidiary and transfers a portion of its assets and liabilities to the new entity

The new entity records both the assets and liabilities it received at the carrying values of the original company.

2. Which of the following is not an appropriate reason for establishing a subsidiary?

The parent wishes to be able to increase its reported sales by transferring products to the subsidiary at the end of the fiscal year.

Noncontrolling Ownership

The purchase of a less-than-majority interest in another corporation does not usually result in a business combination or controlling situation. A similar situation arises when a company creates another entity and holds less than a controlling position in it or purchases a less-than-controlling interest in an existing partnership. In its financial statements, the investor company reports its interest in the investee as an investment with the specific method of accounting (cost method, equity method, consolidation) dictated by the circumstances.