Chapter 2 - Adv Acct

Describe the different types of legal arrangements that can take place to create a business combination.

1. Statutory merger asset acquisition. Acquisition of substantially all of an enterprise's assets. Statutory merger of 2 or more companies forming a business combination and 1 remains existence as an identifiable entity. 2. statutory merger capital stock. If acquired company transfers assets and liabilities to buyer then legally dissolves as a corporation 3. statutory consolidation capital stock/asset. 2 or more companies transfer all of their assets or capital stock to a newly formed corporation 4. business combination. Control interest. Formed when 1 company gains control over another through acquisition of outstanding voting stock

Within the consolidation process, what is the purpose of a worksheet?

Allows a simulated consolidation to be carried out on a regular periodic basis without affecting the financial records of the various component companies

Morgan Company acquires all of the outstanding shares of Jennings, Inc., for cash. Morgan transfers consideration more than the fair value of the company's net assets. How should the payment in excess of fair value be accounted for in the consolidation process?

Any amount paid by the parent company in excess of the subsidiary's fair market value is reported as goodwill in general

What is the appropriate accounting treatment for the value assigned to in-process research and development acquired in a business combination? A. expense upon acquisition B. capitalize as an asset C. expense if there is no alternative use for the assets used in the research and development and technological feasibility has yet to be reached D. expense until future economic benefits become certain and then capitalize as an asset

B. capitalize as an asset

According to the acquisition method of accounting for business combinations, costs paid to attorneys and accountants for services in arranging a merger should be A. capitalized as part of the overall fair value acquired in the merger B. recorded as an expense in the period the merger takes place C. included in recognized goodwill D. written off over five-year maximum useful life

B. recorded as an expense in the period the merger takes place

What is a business combination?

The process of forming a single economic entity by the uniting of 2 or more organizations under common ownership

Sloane, Inc., issues 25,000 shares of its own common stock in exchange for all of the outstanding shares of Benjamin Company. Benjamin will remain a separately incorporated operation. How does Sloane record the issuance of these shares?

When shares are issued in purchase they are recorded at fair market value as if the stock had been sold with the money obtained being used to acquire the subsidiary. Common stock account is recorded at par value of the shares with any excess amount attributed to additional paid-in capital. Increase share at par value.

FASB ASC 805. "Business Combinations," provides principles for allocating the fair value of an acquired business. When the collective fair values of the separately identified assets acquired and liabilities assumed exceed the fair value of the consideration transferred, the difference should be: A. recognized as an ordinary gain from a bargain purchase B. treated as negative goodwill to be amortized over the period benefited, not to exceed 40 years C. treated as goodwill and tested for impairment on an annual basis D. applied pro rata to reduce, but not below zero, the amounts initially assigned to specific non-current assets of the acquired firm

A. recognized as an ordinary gain from a bargain purchase Goodwill

When negotiating a business acquisition, buyers sometimes agree to pay extra amounts to sellers in the future if performance metrics are achieved over specified time horizons. How should buyers account for such contingent consideration in recording an acquisition? A. the amount ultimately paid under the contingent consideration agreement is added to goodwill when and if the performance metrics are met B. the fair value of the contingent consideration is expensed immediately at acquisition date C. the fair value of the contingent consideration is included in the overall fair value of the consideration transferred, and a liability or additional owners' equity is recognized D. the fair value of the contingent consideration is recorded as a reduction of the otherwise determinable fair value of the acquired firm

C. the fair value of the contingent consideration is included in the overall fair value of the consideration transferred and a liability or additional owners' equity is recognized

An acquired firm's financial records sometimes show goodwill from previous business combinations. How does a parent company account for the preexisting goodwill of its newly acquired subsidiary? A. the parent tests the preexisting goodwill for impairment before recording the goodwill as part f the acquisition B. the parent includes the preexisting goodwill as an identified intangible asset acquired C. the parent ignores preexisting subsidiary goodwill and allocates the subsidiary's fair value among the separately identifiable assets acquired and liabilities assumed D. preexisting goodwill is excluded from the identifiable assets acquired unless the subsidiary can demonstrate its continuing value

C. the parent ignores preexisting goodwill and allocates the subsidiary's fair value among the separately identifiable assets acquired and liabilities assumed

What is the accounting valuation basis for consolidating assets and liabilities in a business combination?

Complete ownership: acquisition method allocates fair value of the consideration transferred to separately recognized assets acquired and liabilities assumed based on their individual fair values Allocates fair value

How should a parent consolidate its subsidiary's revenues and expenses?

Consolidated from the date of the acquisition forward within the worksheet consideration process. Operations of subsidiary are only applicable to the business combination if earned subsequent to its creation Don't do anything with it

What is a statutory merger? A. a merger approved by the securities and exchange commission B. an acquisition involving the purchase if both stock and assets C. a takeover completed within one year of the initial tender offer D. a business combination in which only one company continues to exist as a legal entity

D. a business combination in which only one company continues to exist as a legal entity

Which of the following doesn't represent a primary motivation for business combinations? A. combinations are often a vehicle to accelerate growth and competitiveness B. cost savings can be achieved through elimination of duplicate facilities and staff C. synergies may be available through quick entry for new and existing products into markets D. larger firms are less likely to fail

D. larger firms are less likely to fail

To obtain all of the stock of Molly, Inc., Harrison Corporation issued its own common stock. Harrison had to pay $98,000 to lawyers, accountants, and a stock brokerage firm in connection with services rendered during the creation of this business combination. In addition, Harrison paid $56,000 in costs associated with the stock issuance. How will these two costs be recorded?

Direct combination costs $98,000 is allocated to expense in the period in which they occur. Stock issue costs $56,000 is treated as a reduction of additional paid in capital (APIC)

Catron Corporation is having liquidity problems, and as a result, it sells all of its outstanding stock to Lambert, Inc., for cash. Because of Catron's problems, Lambert is able to acquire this stock at less than the fair value of the company's net assets. How is this reduction in price accounted for within the consolidation process?

If fair value of the consideration transferred is less than total net fair value assigned to the assets acquired and liabilities assumed then ordinary gain on bargain purchase is recognized for the difference

Jones Company obtains all of the common stock of Hudson, Inc., by issuing 50,000 shares of its own stock. Under these circumstances, why might the determination of a fair value for the consideration transferred be difficult?

Quoted figure at any specific point in time may not be an adequate or representative value for long-term accounting purposes. Examples: Shares may be newly issued so that no accurate value has been established. Jones may be closely held corporation so that no fair value is available for its share. The number of newly issued shares may cause the price of the stock to fluctuate widely so that no accurate fair value can be determined during a reasonable period of time. Jones' stock may have historically experienced drastic swings in price.

What does the term consolidated financial statements mean?

Represent accounting information gathered from 2 or more separate companies