Ch. 1 HW Questions & Exercises

book value of net assets

Total net assets of Son - Current assets of Son.

subsidiary

a company with voting stock that is more than 50% controlled by another company, usually referred to as the parent company or the holding company.

What is a bargain purchase?

an event that occurs when the acquisition price is less than the fair value of the identifiabe net assets acquired.

what are the steps for accounting for combinations as acquisitions?

1) Identify the acquirer 2) Determine acquisition date 3) Measure the fair value of acquiree 4) Measure & recognize the assets acquired & liabilities assumed

problems with pooling of interest method

1) Pooling provides less relevant information to statement users. 2) Pooling ignores economic value exchanged in the transaction and makes subsequent performance evaluation impossible. 3) Comparing firms using the alternative methods is difficult for investors. 4) Pooling creates these problems because it uses historical book values to record combinations, rather than recognizing fair values of net assets at the transaction date. GAAP generally require recording asset acquisitions at fair values.

When do corporations become subsidiaries?

A corporation becomes a subsidiary when another corporation acquires a majority (more than 50 percent) of its outstanding voting stock.

A business combination in which a new corporation is formed to take over the assets and operations of two or more separate business entities, with the previously separate entities being dissolved, is a/ an: (a) Consolidation (b) Merger (c) Pooling of interests (d) Acquisition

A: Consolidation (E + F = D)

Pop Corporation paid $100,000 cash for the net assets of Son Company, which consisted of the following: Current assets: (BV) $40,000 , (FV) $56,000 Plant & equipment: (BV) 160,000 , (FV) 220,000 Liabilities assumed: BV (40,000) , FV(36,000) Totals: (BV)$160,000 , (FV)$240,000 Assume Son Company is dissolved. The plant and equipment acquired in this business combination should be recorded at: (a) $220,000 (b) $200,000 (c) $183,332 (d) $180,000

A: Plant & Equipment should be recorded at the $220,000 Fair value

An excess of the fair value of net assets acquired in a business combination over the price paid is: (a) Reported as a gain from a bargain purchase (b) Applied to a reduction of noncash assets before negative goodwill may be reported (c) Applied to reduce noncurrent assets other than marketable securities to zero before negative goodwill may be reported (d) Applied to reduce goodwill to zero before negative goodwill may be reported

A:Reported as a gain from a bargain purchase

On April 1, Pam Company paid $1,600,000 for all the issued and outstanding common stock of Sun Corporation in a transaction properly accounted for as an acquisition. Sun Corporation is dissolved. The recorded assets and liabilities of Sun Corporation on April 1 follow: Cash - $160,000 Inventory - 480,000 Property and equipment (net of accumulated depreciation of $640,000) - 960,000 Liabilities - (360,000) On April 1, it was determined that the inventory of Sun had a fair value of $380,000, and the property and equipment (net) had a fair value of $1,120,000. What is the amount of goodwill resulting from the acquisition?

Answer: $300,000 Investment cost: $1,600,000 (LESS) Fair value of net assets: ($1,300,000) CASH - 160,000 INVENTORY - 380,000 Property + Equip (NET) - 1,120,000 Liabilities - (360,000) Goodwill: $300,000//

Cork Corporation acquires Dart Corporation in a business combination. Which of the following would be excluded from the process of assigning fair values to assets and liabilities for purposes of recording the acquisition? (Assume Dart Corporation is dissolved.) (a) Patents developed by Dart because the costs were expensed under GAAP (b) Dart's mortgage payable because it is fully secured by land that has a market value far in excess of the mortgage (c) An asset or liability amount for over- or underfunding of Dart's defined-benefit pension plan (d) None of the above

D:None of the above

How is goodwill calculated?

Investment cost - (less) Fair value of net assets: Cash, inventory, property & equipment (net), Liabilities. = Goodwill

is goodwill an identifiable asset?

No. Goodwill is an unidentifiable asset and is valued again after the business combination. Because of this, goodwill on the acquired firm's books are assigned no value.

What are the accounting procedures necessary to record and account for a bargain purchase?

The acquirer records the gain from this event as an ordinary gain during the period of the acquisition. This gain equals the difference between the investment cost and the fair value of the identifiable net assets acquired.

How does goodwill affect reported net income after a business combination?

Under GAAP, goodwill is NOT amortized for financial reporting purposes and will have no effect on net income, unless the goodwill is deemed to be impaired. If goodwill is impaired, a loss will be recognized.

What is the accounting concept of a business combination?

a business combination is a union of business entities in which two or more previously separate and independent companies are brought under control of a single management team. There are 3 situations that establish the control necessary for a business combination: (1) when one or more corporations become subsidiaries, (2) when one company transfers its net assets to another, and (3) when each combining company transfers its net assets to a newly formed corporation.

What are the legal distinctions between a business combination, a merger, and a consolidation?

a business combination occurs when two or more previously separate and independent companies are brought under the control of a single management team. Merger and consolidation in a generic sense are frequently used as synonyms for the term, business combination. In a technical sense, however, a merger is a type of business combination in which all but one of the combining entities are dissolved and a consolidation is a type of business combination in which a new corporation is formed to take over the assets of two or more previously separate companies and all of the combining companies are dissolved.

pooling of interests method

a method of accounting that governed how the balance sheets of two companies were added together during an acquisition or merger; the method allowed assets and liabilities to be transferred from the acquired company to the acquirer at book values. No goodwill could be booked. (FASB ended its use in 2001)

intangible assets

current or noncurrent assets

Is dissolution of all but one of the separate legal entities necessary in order to have a business combination?

the dissolution of all but one of the separate legal entities is NOT necessary for a business combination. An example of one form of business combination in which the separate legal entities are not dissolved is when one corporation becomes a subsidiary of another. In the case of a parent-subsidiary relationship, each combining company continues to exist as a separate legal entity even though both companies are under the control of a single management team.

During an acquisition, the assets and liabilities of a Son company should generally be recorded at:

fair value

acquisitions method

follows the same GAAP for recording a business combination as we follow in recording the purchase of other assets and the incurrence of liabilities. We record the combination using the fair-value principle. In other words, we measure the cost to the purchasing entity of acquiring another company in a business combination by the amount of cash disbursed or by the fair value of other assets distributed or securities issued.

In a business combination, the direct costs of registering and issuing equity securities are: (a) Added to the parent/ investor company's investment account (b) Charged against other paid-in capital of the combined entity (c) Deducted from income in the period of combination (d) None of the above

B:Charged against other paid-in-capital of the combined entity

When does goodwill result from a business combination?

Goodwill arises in a business combination accounted for under the acquisition method when the cost of the investment (fair value of the consideration transferred) exceeds the fair value of identifiable net assets acquired.

What's the calculation of net assets?

Net assets - Net Liabilities