Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities

Chapter 01
Intercorporate Acquisitions and Investments in Other Entities

Multiple Choice Questions


In order to reduce the risk associated with a new line of business, Conservative Corporation
established pin Compan! as a wholl! owned subsidiar!" It transferred assets and accounts
pa!able to pin in e#chan$e for its common stock" pin recorded the followin$ entr! when
the transaction occurred%


1" &ased on the precedin$ information, what number of shares of '( par value stock did pin
issue to Conservative)
A" 10,000
&" (,000
C" *,000
+" ,-,000

," &ased on the precedin$ information, what was Conservative.s book value of assets
transferred to pin Compan!)
A" ',/0,000
&" ',10,000
C" ',,1,000
+" ',01,000

1-1
Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
0" &ased on the precedin$ information, what amount did Conservative report as its investment
in pin after the transfer of assets and liabilities)
A" '1*1,000
&" ',,1,000
C" ',10,000
+" ',/0,000

/" &ased on the precedin$ information, immediatel! after the transfer,
A" Conservative.s total assets decreased b! ',0,000"
&" Conservative.s total assets decreased b! ',0,000"
C" Conservative.s total assets increased b! '-1,000"
+" Conservative.s total assets remained the same"

+urin$ its inception, +evon Compan! purchased land for '100,000 and a buildin$ for
'1*0,000" After e#actl! 0 !ears, it transferred these assets and cash of '-0,000 to a newl!
created subsidiar!, 2e$an Compan!, in e#chan$e for 1-,000 shares of 2e$an.s '10 par value
stock" +evon uses strai$ht-line depreciation" 3seful life for the buildin$ is 00 !ears, with 4ero
residual value" An appraisal revealed that the buildin$ has a fair value of ',00,000"

-" &ased on the information provided, at the time of the transfer, 2e$an Compan! should
record%
A" &uildin$ at '1*0,000 and no accumulated depreciation"
&" &uildin$ at '11,,000 and no accumulated depreciation"
C" &uildin$ at ',00,000 and accumulated depreciation of ',/,000"
+" &uildin$ at '1*0,000 and accumulated depreciation of '1*,000"

1" &ased on the information provided, what amount would be reported b! +evon Compan! as
investment in 2e$an Compan! common stock)
A" '01,,000
&" '1*0,000
C" '000,000
+" '1-0,000

1-,
Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
(" &ased on the precedin$ information, 2e$an Compan! will report
A" additional paid-in capital of '0"
&" additional paid-in capital of '1-0,000"
C" additional paid-in capital of '11,,000"
+" additional paid-in capital of '1*0,000"

*" &urrou$h Corporation concluded that the fair value of 5el!ar Compan! was '*0,000 and
paid that amount to acquire all of its net assets" 5el!ar reported assets with a book value of
'10,000 and fair value of '6*,000 and liabilities with a book value and fair value of ',0,000
on the date of combination" &urrou$h also paid '0,000 to a search firm for finder.s fees
related to the acquisition" 7hat amount will be recorded as $oodwill b! &urrou$h
Corporation while recordin$ its investment in 5el!ar)
A" '0
&" '-,000
C" '*,000
+" '10,000

8lummet Corporation reported the book value of its net assets at '/00,000 when 9enith
Corporation acquired 100 percent ownership" :he fair value of 8lummet.s net assets was
determined to be '-10,000 on that date"

6" &ased on the precedin$ information, what amount of $oodwill will be reported in
consolidated financial statements presented immediatel! followin$ the combination
if 9enith paid '--0,000 for the acquisition)
A" '0
&" '-0,000
C" '1-0,000
+" '/0,000

10" &ased on the precedin$ information, what amount will be recorded b! 9enith as its
investment in 8lummet, if it paid '-00,000 for the acquisition)
A" '110,000
&" '/00,000
C" '-00,000
+" '-10,000

1-0
Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
11" &ased on the precedin$ information, what amount of $oodwill will be reported in
consolidated financial statements presented immediatel! followin$ the combination
if 9enith paid '-00,000 for the acquisition)
A" '0
&" '-0,000
C" '1-0,000
+" '/0,000

Octane Compan! and &io Compan! have announced terms of an e#chan$e a$reement under
which Octane will issue 10,000 shares of its '- par value common stock to acquire all of &io.s
assets" Octane shares are tradin$ at ',*, and &io.s '10 par value shares are tradin$ at '1-"
5istorical cost and fair value balance sheet data on ;anuar! 1, ,00*, are as follows%


1," &ased on the information provided, what amount will be reported immediatel! followin$
the business combination for &uildin$s and Equipment <net= in the combined compan!.s
balance sheet)
A" '000,000
&" '0(0,000
C" '000,000
+" '0/0,000

1-/
Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
10" &ased on the information provided, what amount will be reported for Common tock in
the combined compan!.s balance sheet immediatel! followin$ the business combination)
A" ',00,000
&" ',-0,000
C" '000,000
+" ',10,000

1/" &ased on the information provided, what amount will be reported for Additional 8aid-In
Capital in the combined compan!.s balance sheet immediatel! followin$ the business
combination)
A" '10,000
&" '*0,000
C" '010,000
+" ',60,000

1-" &ased on the information provided, what amount of $oodwill will be reported
immediatel! followin$ the business combination in the combined compan!.s balance sheet)
A" '0
&" '-0,000
C" '/0,000
+" '10-,000

11" &ased on the information provided, what amount will be reported immediatel! followin$
the business combination for 2etained Earnin$s in the combined compan!.s balance sheet)
A" '1(0,000
&" ',,-,000
C" '11-,000
+" ',10,000

1--
Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
1(" :he fair value of net identifiable assets of a reportin$ unit of > Compan! is '000,000" On
> Compan!.s books, the carr!in$ value of this reportin$ unit.s net assets is '0-0,000,
includin$ '10,000 $oodwill" If the fair value of the reportin$ unit is '00-,000, what amount of
$oodwill impairment will be reco$ni4ed for this unit)
A" '0
&" '10,000
C" ',-,000
+" '0-,000

1*" :he fair value of net identifiable assets of a reportin$ unit of ? Compan! is ',(0,000" :he
carr!in$ value of the reportin$ unit.s net assets on ? Compan!.s books is '0,0,000, includin$
'-0,000 $oodwill" If the reported $oodwill impairment for the unit is '10,000, what would be
the fair value of the reportin$ unit)
A" '0,0,000
&" '010,000
C" ',(0,000
+" ',60,000

@ollowin$ its acquisition of the net assets of +an Compan!, Empire Compan! assi$ned
$oodwill of '10,000 to one of the reportin$ divisions" Information for this division follows%


1-1
Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
16" &ased on the precedin$ information, what amount of $oodwill will be reported for this
division if its fair value is determined to be ',00,000)
A" '0
&" '10,000
C" '00,000
+" '10,000

,0" &ased on the precedin$ information, what amount of $oodwill impairment will be
reco$ni4ed for this division if its fair value is determined to be '16-,000)
A" '-,000
&" '00,000
C" '10,000
+" '--,000

,1" &ased on the precedin$ information, what amount of amount of $oodwill impairment will
be reco$ni4ed for this division if its fair value is determined to be ',/-,000)
A" '0
&" '00,000
C" '10,000
+" '--,000

8ublic Equit! Corporation acquired Aenore Compan! throu$h an e#chan$e of common
shares" All of Aenore.s assets and liabilities were immediatel! transferred to 8ublic Equit!"
8ublic.s common stock was tradin$ at ',0 per share at the time of e#chan$e" @ollowin$
selected information is also available"


1-(
Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
,," &ased on the precedin$ information, what number of shares was issued at the time of the
e#chan$e)
A" -,000
&" 1(,-00
C" 1,,-00
+" 10,000

,0" &ased on the precedin$ information, what is the par value of 8ublic.s common stock)
A" '10
&" '1
C" '-
+" '/

,/" &ased on the precedin$ information, what is the fair value of Aenore.s net assets, if
$oodwill of '-1,000 is recorded)
A" '001,000
&" ',//,000
C" '16/,000
+" '000,000

8ursuin$ an inor$anic $rowth strate$!, 7ilson Compan! acquired Benus Compan!.s net
assets and assi$ned them to four separate reportin$ divisions" 7ilson assi$ned total $oodwill
of '10/,000 to the four reportin$ divisions as $iven below%


1-*
Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
,-" &ased on the precedin$ information, what amount of $oodwill will be reported for Alpha
at !ear-end)
A" '0
&" ',0,000
C" '00,000
+" '10,000

,1" &ased on the precedin$ information, what amount of $oodwill will be reported for &eta at
!ear-end)
A" '0
&" '1/,000
C" '0/,000
+" '-0,000

,(" &ased on the precedin$ information, for Camma%
A" no $oodwill should be reported at !ear-end"
&" $oodwill impairment of '00,000 should be reco$ni4ed at !ear-end"
C" $oodwill impairment of ',0,000 should be reco$ni4ed at !ear-end"
+" $oodwill of '00,000 should be reported at !ear-end"

,*" &ased on the precedin$ information, for +elta%
A" no $oodwill should be reported at !ear-end"
&" $oodwill impairment of '1-,000 should be reco$ni4ed at !ear-end"
C" $oodwill impairment of ',0,000 should be reco$ni4ed at !ear-end"
+" $oodwill of '00,000 should be reported at !ear-end"

,6" &ased on the precedin$ information, what would be the total amount of $oodwill that
7ilson should report at !ear-end)
A" '0
&" '16,000
C" '(6,000
+" '6/,000

1-6
Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
2ivendell Corporation and @oster Compan! mer$ed as of ;anuar! 1, ,006" :o effect the
mer$er, 2ivendell paid finder.s fees of '/0,000, le$al fees of '10,000, audit fees related to the
stock issuance of '10,000, stock re$istration fees of '-,000, and stock listin$ application fees
of '/,000"

00" &ased on the precedin$ information, under the acquisition method, what amount relatin$
to the business combination would be e#pensed)
A" '(,,000
&" '16,000
C" '-0,000
+" '10,000

01" &ased on the precedin$ information, under the acquisition method%
A" '(,,000 of stock issue costs are treated as $oodwill"
&" '16,000 of stock issue costs are treated as a reduction in the issue price"
C" '16,000 of stock issue costs are e#pensed"
+" '(,,000 of stock issue costs are e#pensed"

0," 3sin$ the precedin$ information, what amount would have been e#pensed if the purchase
method of accountin$ was used)
A" '0
&" '16,000
C" '-0,000
+" '(,,000

00" 3sin$ the precedin$ information, what amount would have been e#pensed if the poolin$-
of-interests method of accountin$ was used)
A" '0
&" '16,000
C" '-0,000
+" '(,,000

1-10
Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
0/" 7hich of the followin$ observations is <are= consistent with the acquisition method of
accountin$ for business combinations)

I" E#penses related to the business combination are e#pensed"
II" tock issue costs are treated as a reduction in the issue price"
III" All mer$er and stock issue costs are e#pensed"
IB" Do $oodwill is ever recorded"
A" III
&" IB
C" I and II
+" I, II, and IB

0-" 7hich of the followin$ situations best describes a business combination to be accounted
for as a statutor! mer$er)
A" &oth companies in a combination continue to operate as separate, but related, le$al entities"
&" Onl! one of the combinin$ companies survives and the other loses its separate identit!"
C" :wo companies combine to form a new third compan!, and the ori$inal two companies are
dissolved"
+" One compan! transfers assets to another compan! it has created"

01" A statutor! consolidation is a t!pe of business combination in which%
A" one of the combinin$ companies survives and the other loses its separate identit!"
&" one compan! acquires the votin$ shares of the other compan! and the two companies
continue to operate as separate le$al entities"
C" two publicl! traded companies a$ree to share a board of directors"
+" each of the combinin$ companies is dissolved and the net assets of both companies are
transferred to a newl! created corporation"

0(" 7hich of the followin$ observations refers to the term differential)
A" E#cess of consideration e#chan$ed over fair value of net identifiable assets"
&" E#cess of fair value over book value of net identifiable assets"
C" E#cess of consideration e#chan$ed over book value of net identifiable assets"
+" E#cess of fair value over historical cost of net identifiable assets"

1-11
Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
0*" 7hich of the followin$ observations concernin$ E$oodwillE is DO: correct)
A" Once written down, it ma! be written up for recoveries"
&" It must be tested for impairment at least annuall!"
C" Coodwill impairment losses are reco$ni4ed in income from continuin$ operations or
income before e#traordinar! $ains and losses"
+" It must be reported as a separate line item in the balance sheet"

06" Assumin$ no impairment in value prior to transfer, assets transferred b! a parent compan!
to another entit! it has created should be recorded b! the newl! created entit! at the assets.%
A" cost to the parent compan!"
&" book value on the parent compan!.s books at the date of transfer"
C" fair value at the date of transfer"
+" fair value of consideration e#chan$ed b! the newl! created entit!"


Essay Questions

/0" On ;anuar! 1, ,00*, Aine Corporation acquired all of the common stock of taff Compan!
for '000,000" On that date, taff.s identifiable net assets had a fair value of ',-0,000" :he
assets acquired in the purchase of taff are considered to be a separate reportin$ unit of Aine
Corporation" :he carr!in$ value of taff.s investment at +ecember 01, ,00*, is '010,000" :he
fair value of the net assets <e#cludin$ $oodwill= at that date is ',,0,000 and the fair value of
the reportin$ unit is determined to be ,10,000"

2equired%
1= E#plain how $oodwill is tested for impairment for a reportin$ unit"
,= +etermine the amount, if an!, of impairment loss to be reco$ni4ed at +ecember 01, ,00*"




1-1,
Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
/1" 5a!nes Corporation entered into an a$reement with +ie$o Compan! to establish 5F+
8artnership" 5a!nes a$reed to transfer the followin$ assets to 5F+ for *0 percent ownership,
and +ie$o a$reed to transfer '1,0,000 cash to the partnership for ,0 percent ownership"


2equired% 1" Cive the Gournal entries that 5a!nes Corporation and +ie$o Compan! recorded
for their transfer of assets and accounts pa!able to 5F+ 8artnership"
Cive the Gournal entries that 5F+ recorded for its receipt of assets and accounts pa!able from
5a!nes and +ie$o"




1-10
Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
/," Envire Corporation acquired all the assets and liabilities of C@C Corporation b! issuin$
shares of its common stock On ;anuar! 1, ,006" 8artial balance sheet data for the companies
prior to the business combination and immediatel! followin$ the combination is provided%


2equired%
7hat number of shares did Envire issue for this acquisition)

At what price was Envire stock tradin$ when stock was issued for this acquisition)

7hat was the fair value of the net assets held b! C@C at the date of combination)

7hat amount of $oodwill will be reported b! the combined entit! immediatel! followin$ the
combination)

7hat balance in retained earnin$s will the combined entit! report immediatel! followin$ the
combination)




1-1/
Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
/0" On ;anuar! 1, ,00*, Alaska Corporation acquired Hercantile Corporation.s net assets b!
pa!in$ '110,000 cash" &alance sheet data for the two companies and fair value information
for Hercantile Corporation immediatel! before the business combination are $iven below%


2equired%
8repare a combined balance sheet immediatel! followin$ the acquisition"




1-1-
Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
//" eaAine Corporation is involved in the distribution of processed marine products" :he fair
values of assets and liabilities held b! three reportin$ units and other information related to
the reportin$ units owned b! eaAine are as follows%


2equired% +etermine the amount of $oodwill that eaAine should report in its current
financial statements"




1-11
Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
Chapter 01 Intercorporate Acquisitions and Investments in Other Entities
Answer Ie!


Multiple Choice Questions

1-1(
Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities

In order to reduce the risk associated with a new line of business, Conservative Corporation
established pin Compan! as a wholl! owned subsidiar!" It transferred assets and accounts
pa!able to pin in e#chan$e for its common stock" pin recorded the followin$ entr! when
the transaction occurred%


1" &ased on the precedin$ information, what number of shares of '( par value stock did pin
issue to Conservative)
A" 10,000
&" (,000
C. *,000
+" ,-,000

AACSB: Analytic
AICPA: Measurement

," &ased on the precedin$ information, what was Conservative.s book value of assets
transferred to pin Compan!)
A" ',/0,000
&" ',10,000
C" ',,1,000
D. ',01,000

AACSB: Analytic
AICPA: Measurement

1-1*
Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
0" &ased on the precedin$ information, what amount did Conservative report as its investment
in pin after the transfer of assets and liabilities)
A. '1*1,000
&" ',,1,000
C" ',10,000
+" ',/0,000

AACSB: Analytic
AICPA: Measurement

/" &ased on the precedin$ information, immediatel! after the transfer,
A" Conservative.s total assets decreased b! ',0,000"
B. Conservative.s total assets decreased b! ',0,000"
C" Conservative.s total assets increased b! '-1,000"
+" Conservative.s total assets remained the same"

AACSB: Analytic
AICPA: Measurement

+urin$ its inception, +evon Compan! purchased land for '100,000 and a buildin$ for
'1*0,000" After e#actl! 0 !ears, it transferred these assets and cash of '-0,000 to a newl!
created subsidiar!, 2e$an Compan!, in e#chan$e for 1-,000 shares of 2e$an.s '10 par value
stock" +evon uses strai$ht-line depreciation" 3seful life for the buildin$ is 00 !ears, with 4ero
residual value" An appraisal revealed that the buildin$ has a fair value of ',00,000"

-" &ased on the information provided, at the time of the transfer, 2e$an Compan! should
record%
A" &uildin$ at '1*0,000 and no accumulated depreciation"
&" &uildin$ at '11,,000 and no accumulated depreciation"
C" &uildin$ at ',00,000 and accumulated depreciation of ',/,000"
D. &uildin$ at '1*0,000 and accumulated depreciation of '1*,000"

AACSB: Analytic
AICPA: Measurement

1-16
Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
1" &ased on the information provided, what amount would be reported b! +evon Compan! as
investment in 2e$an Compan! common stock)
A. '01,,000
&" '1*0,000
C" '000,000
+" '1-0,000

AACSB: Analytic
AICPA: Measurement

(" &ased on the precedin$ information, 2e$an Compan! will report
A" additional paid-in capital of '0"
&" additional paid-in capital of '1-0,000"
C. additional paid-in capital of '11,,000"
+" additional paid-in capital of '1*0,000"

AACSB: Analytic
AICPA: Measurement

*" &urrou$h Corporation concluded that the fair value of 5el!ar Compan! was '*0,000 and
paid that amount to acquire all of its net assets" 5el!ar reported assets with a book value of
'10,000 and fair value of '6*,000 and liabilities with a book value and fair value of ',0,000
on the date of combination" &urrou$h also paid '0,000 to a search firm for finder.s fees
related to the acquisition" 7hat amount will be recorded as $oodwill b! &urrou$h
Corporation while recordin$ its investment in 5el!ar)
A" '0
B. '-,000
C" '*,000
+" '10,000

AACSB: Analytic
AICPA: Measurement

8lummet Corporation reported the book value of its net assets at '/00,000 when 9enith
Corporation acquired 100 percent ownership" :he fair value of 8lummet.s net assets was
determined to be '-10,000 on that date"

1-,0
Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
6" &ased on the precedin$ information, what amount of $oodwill will be reported in
consolidated financial statements presented immediatel! followin$ the combination
if 9enith paid '--0,000 for the acquisition)
A" '0
&" '-0,000
C" '1-0,000
D. '/0,000

AACSB: Analytic
AICPA: Measurement

10" &ased on the precedin$ information, what amount will be recorded b! 9enith as its
investment in 8lummet, if it paid '-00,000 for the acquisition)
A" '110,000
&" '/00,000
C" '-00,000
D. '-10,000

AACSB: Analytic
AICPA: Measurement

11" &ased on the precedin$ information, what amount of $oodwill will be reported in
consolidated financial statements presented immediatel! followin$ the combination
if 9enith paid '-00,000 for the acquisition)
A. '0
&" '-0,000
C" '1-0,000
+" '/0,000

AACSB: Analytic
AICPA: Measurement

1-,1
Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
Octane Compan! and &io Compan! have announced terms of an e#chan$e a$reement under
which Octane will issue 10,000 shares of its '- par value common stock to acquire all of &io.s
assets" Octane shares are tradin$ at ',*, and &io.s '10 par value shares are tradin$ at '1-"
5istorical cost and fair value balance sheet data on ;anuar! 1, ,00*, are as follows%


1," &ased on the information provided, what amount will be reported immediatel! followin$
the business combination for &uildin$s and Equipment <net= in the combined compan!.s
balance sheet)
A" '000,000
&" '0(0,000
C. '000,000
+" '0/0,000

AACSB: Analytic
AICPA: Measurement

10" &ased on the information provided, what amount will be reported for Common tock in
the combined compan!.s balance sheet immediatel! followin$ the business combination)
A. ',00,000
&" ',-0,000
C" '000,000
+" ',10,000

AACSB: Analytic
AICPA: Measurement

1-,,
Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
1/" &ased on the information provided, what amount will be reported for Additional 8aid-In
Capital in the combined compan!.s balance sheet immediatel! followin$ the business
combination)
A" '10,000
&" '*0,000
C" '010,000
D. ',60,000

AACSB: Analytic
AICPA: Measurement

1-" &ased on the information provided, what amount of $oodwill will be reported
immediatel! followin$ the business combination in the combined compan!.s balance sheet)
A" '0
&" '-0,000
C. '/0,000
+" '10-,000

AACSB: Analytic
AICPA: Measurement

11" &ased on the information provided, what amount will be reported immediatel! followin$
the business combination for 2etained Earnin$s in the combined compan!.s balance sheet)
A. '1(0,000
&" ',,-,000
C" '11-,000
+" ',10,000

AACSB: Analytic
AICPA: Measurement

1-,0
Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
1(" :he fair value of net identifiable assets of a reportin$ unit of > Compan! is '000,000" On
> Compan!.s books, the carr!in$ value of this reportin$ unit.s net assets is '0-0,000,
includin$ '10,000 $oodwill" If the fair value of the reportin$ unit is '00-,000, what amount of
$oodwill impairment will be reco$ni4ed for this unit)
A" '0
&" '10,000
C. ',-,000
+" '0-,000

AACSB: Analytic
AICPA: Measurement

1*" :he fair value of net identifiable assets of a reportin$ unit of ? Compan! is ',(0,000" :he
carr!in$ value of the reportin$ unit.s net assets on ? Compan!.s books is '0,0,000, includin$
'-0,000 $oodwill" If the reported $oodwill impairment for the unit is '10,000, what would be
the fair value of the reportin$ unit)
A" '0,0,000
B. '010,000
C" ',(0,000
+" ',60,000

AACSB: Analytic
AICPA: Measurement

@ollowin$ its acquisition of the net assets of +an Compan!, Empire Compan! assi$ned
$oodwill of '10,000 to one of the reportin$ divisions" Information for this division follows%


1-,/
Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
16" &ased on the precedin$ information, what amount of $oodwill will be reported for this
division if its fair value is determined to be ',00,000)
A" '0
&" '10,000
C" '00,000
D. '10,000

AACSB: Analytic
AICPA: Measurement

,0" &ased on the precedin$ information, what amount of $oodwill impairment will be
reco$ni4ed for this division if its fair value is determined to be '16-,000)
A" '-,000
&" '00,000
C" '10,000
D. '--,000

AACSB: Analytic
AICPA: Measurement

,1" &ased on the precedin$ information, what amount of amount of $oodwill impairment will
be reco$ni4ed for this division if its fair value is determined to be ',/-,000)
A. '0
&" '00,000
C" '10,000
+" '--,000

AACSB: Analytic
AICPA: Measurement

1-,-
Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
8ublic Equit! Corporation acquired Aenore Compan! throu$h an e#chan$e of common
shares" All of Aenore.s assets and liabilities were immediatel! transferred to 8ublic Equit!"
8ublic.s common stock was tradin$ at ',0 per share at the time of e#chan$e" @ollowin$
selected information is also available"


,," &ased on the precedin$ information, what number of shares was issued at the time of the
e#chan$e)
A" -,000
&" 1(,-00
C. 1,,-00
+" 10,000

AACSB: Analytic
AICPA: Measurement

,0" &ased on the precedin$ information, what is the par value of 8ublic.s common stock)
A" '10
&" '1
C" '-
D. '/

AACSB: Analytic
AICPA: Measurement

,/" &ased on the precedin$ information, what is the fair value of Aenore.s net assets, if
$oodwill of '-1,000 is recorded)
A" '001,000
&" ',//,000
C. '16/,000
+" '000,000

AACSB: Analytic
AICPA: Measurement

1-,1
Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
8ursuin$ an inor$anic $rowth strate$!, 7ilson Compan! acquired Benus Compan!.s net
assets and assi$ned them to four separate reportin$ divisions" 7ilson assi$ned total $oodwill
of '10/,000 to the four reportin$ divisions as $iven below%


,-" &ased on the precedin$ information, what amount of $oodwill will be reported for Alpha
at !ear-end)
A" '0
B. ',0,000
C" '00,000
+" '10,000

AACSB: Analytic
AICPA: Measurement

,1" &ased on the precedin$ information, what amount of $oodwill will be reported for &eta at
!ear-end)
A" '0
&" '1/,000
C. '0/,000
+" '-0,000

AACSB: Analytic
AICPA: Measurement

1-,(
Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
,(" &ased on the precedin$ information, for Camma%
A. no $oodwill should be reported at !ear-end"
&" $oodwill impairment of '00,000 should be reco$ni4ed at !ear-end"
C" $oodwill impairment of ',0,000 should be reco$ni4ed at !ear-end"
+" $oodwill of '00,000 should be reported at !ear-end"

AACSB: Analytic
AICPA: Measurement

,*" &ased on the precedin$ information, for +elta%
A" no $oodwill should be reported at !ear-end"
B. $oodwill impairment of '1-,000 should be reco$ni4ed at !ear-end"
C" $oodwill impairment of ',0,000 should be reco$ni4ed at !ear-end"
+" $oodwill of '00,000 should be reported at !ear-end"

AACSB: Analytic
AICPA: Measurement

,6" &ased on the precedin$ information, what would be the total amount of $oodwill that
7ilson should report at !ear-end)
A" '0
B. '16,000
C" '(6,000
+" '6/,000

AACSB: Analytic
AICPA: Measurement

2ivendell Corporation and @oster Compan! mer$ed as of ;anuar! 1, ,006" :o effect the
mer$er, 2ivendell paid finder.s fees of '/0,000, le$al fees of '10,000, audit fees related to the
stock issuance of '10,000, stock re$istration fees of '-,000, and stock listin$ application fees
of '/,000"

1-,*
Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
00" &ased on the precedin$ information, under the acquisition method, what amount relatin$
to the business combination would be e#pensed)
A" '(,,000
&" '16,000
C. '-0,000
+" '10,000

AACSB: Analytic
AICPA: Measurement

01" &ased on the precedin$ information, under the acquisition method%
A" '(,,000 of stock issue costs are treated as $oodwill"
B. '16,000 of stock issue costs are treated as a reduction in the issue price"
C" '16,000 of stock issue costs are e#pensed"
+" '(,,000 of stock issue costs are e#pensed"

AACSB: Analytic
AICPA: Measurement

0," 3sin$ the precedin$ information, what amount would have been e#pensed if the purchase
method of accountin$ was used)
A. '0
&" '16,000
C" '-0,000
+" '(,,000

AACSB: Analytic
AICPA: Measurement

00" 3sin$ the precedin$ information, what amount would have been e#pensed if the poolin$-
of-interests method of accountin$ was used)
A" '0
&" '16,000
C" '-0,000
D. '(,,000

AACSB: Analytic
AICPA: Measurement

1-,6
Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
0/" 7hich of the followin$ observations is <are= consistent with the acquisition method of
accountin$ for business combinations)

I" E#penses related to the business combination are e#pensed"
II" tock issue costs are treated as a reduction in the issue price"
III" All mer$er and stock issue costs are e#pensed"
IB" Do $oodwill is ever recorded"
A" III
&" IB
C. I and II
+" I, II, and IB

AACSB: Reflective Thinking
AICPA: Reporting

0-" 7hich of the followin$ situations best describes a business combination to be accounted
for as a statutor! mer$er)
A" &oth companies in a combination continue to operate as separate, but related, le$al entities"
B. Onl! one of the combinin$ companies survives and the other loses its separate identit!"
C" :wo companies combine to form a new third compan!, and the ori$inal two companies are
dissolved"
+" One compan! transfers assets to another compan! it has created"

AACSB: Reflective Thinking
AICPA: ecision Making

01" A statutor! consolidation is a t!pe of business combination in which%
A" one of the combinin$ companies survives and the other loses its separate identit!"
&" one compan! acquires the votin$ shares of the other compan! and the two companies
continue to operate as separate le$al entities"
C" two publicl! traded companies a$ree to share a board of directors"
D. each of the combinin$ companies is dissolved and the net assets of both companies are
transferred to a newl! created corporation"

AACSB: Reflective Thinking
AICPA: ecision Making

1-00
Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
0(" 7hich of the followin$ observations refers to the term differential)
A" E#cess of consideration e#chan$ed over fair value of net identifiable assets"
&" E#cess of fair value over book value of net identifiable assets"
C. E#cess of consideration e#chan$ed over book value of net identifiable assets"
+" E#cess of fair value over historical cost of net identifiable assets"

AACSB: Reflective Thinking
AICPA: Reporting

0*" 7hich of the followin$ observations concernin$ E$oodwillE is DO: correct)
A. Once written down, it ma! be written up for recoveries"
&" It must be tested for impairment at least annuall!"
C" Coodwill impairment losses are reco$ni4ed in income from continuin$ operations or
income before e#traordinar! $ains and losses"
+" It must be reported as a separate line item in the balance sheet"

AACSB: Reflective Thinking
AICPA: Reporting

06" Assumin$ no impairment in value prior to transfer, assets transferred b! a parent compan!
to another entit! it has created should be recorded b! the newl! created entit! at the assets.%
A" cost to the parent compan!"
B. book value on the parent compan!.s books at the date of transfer"
C" fair value at the date of transfer"
+" fair value of consideration e#chan$ed b! the newl! created entit!"

AACSB: Reflective Thinking
AICPA: ecision Making


Essay Questions

1-01
Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
/0" On ;anuar! 1, ,00*, Aine Corporation acquired all of the common stock of taff Compan!
for '000,000" On that date, taff.s identifiable net assets had a fair value of ',-0,000" :he
assets acquired in the purchase of taff are considered to be a separate reportin$ unit of Aine
Corporation" :he carr!in$ value of taff.s investment at +ecember 01, ,00*, is '010,000" :he
fair value of the net assets <e#cludin$ $oodwill= at that date is ',,0,000 and the fair value of
the reportin$ unit is determined to be ,10,000"

2equired%
1= E#plain how $oodwill is tested for impairment for a reportin$ unit"
,= +etermine the amount, if an!, of impairment loss to be reco$ni4ed at +ecember 01, ,00*"
1= :o test for the impairment of $oodwill, the fair value of the reportin$ unit is compared with
its carr!in$ amount" If the fair value of the reportin$ unit e#ceeds its carr!in$ amount, the
$oodwill of that reportin$ unit is considered unimpaired" On the other hand, if the carr!in$
amount of the reportin$ unit e#ceeds its fair value, an impairment of the reportin$ unit.s
$oodwill is implied" :he amount of the reportin$ unit.s $oodwill impairment is measured as
the e#cess of the carr!in$ amount of the unit.s $oodwill over the implied value of its $oodwill"
:he implied value of its $oodwill is determined as the e#cess of the fair value of the reportin$
unit over the fair value of its net assets e#cludin$ $oodwill"
," :he '010,000 carr!in$ value e#ceeds the ',10,000 fair value, impl!in$ impairment"
Implied $oodwill J ',10,000 - ',,0,000 J '/0,000"
Impairment loss J '-0,000 - '/0,000 J '10,000"

AACSB: Analytic! Communication
AICPA: Measurement

1-0,
Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
/1" 5a!nes Corporation entered into an a$reement with +ie$o Compan! to establish 5F+
8artnership" 5a!nes a$reed to transfer the followin$ assets to 5F+ for *0 percent ownership,
and +ie$o a$reed to transfer '1,0,000 cash to the partnership for ,0 percent ownership"


2equired% 1" Cive the Gournal entries that 5a!nes Corporation and +ie$o Compan! recorded
for their transfer of assets and accounts pa!able to 5F+ 8artnership"
Cive the Gournal entries that 5F+ recorded for its receipt of assets and accounts pa!able from
5a!nes and +ie$o"
1-00
Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
1" ;ournal Entr! K 5a!nes

;ournal Entr! K +ie$o

," ;ournal entr! recorded b! 5F+ partnership for receipt of assets and accounts pa!able%


AACSB: Analytic
AICPA: Measurement

1-0/
Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
/," Envire Corporation acquired all the assets and liabilities of C@C Corporation b! issuin$
shares of its common stock On ;anuar! 1, ,006" 8artial balance sheet data for the companies
prior to the business combination and immediatel! followin$ the combination is provided%


2equired%
7hat number of shares did Envire issue for this acquisition)

At what price was Envire stock tradin$ when stock was issued for this acquisition)

7hat was the fair value of the net assets held b! C@C at the date of combination)

7hat amount of $oodwill will be reported b! the combined entit! immediatel! followin$ the
combination)

7hat balance in retained earnin$s will the combined entit! report immediatel! followin$ the
combination)
1" Dumber of shares J 00,000 <110,000 K 100,000 J 10,000L 10,000M', par=
," tock price J '* <Increase in par value and paid-in capital J ,/0,000L ,/0,000M00,000
shares=
0" @air value of net assets J ',,(,000 <',-,000 N ',,,000 N '--,000 N ',-0,000= - <',-,000
N '100,000=
/" Coodwill J '10,000 <',/0,000 - ',,(,000=
-" 2etained earnin$s balance J '10-,000
1-0-
Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities

AACSB: Analytic
AICPA: Measurement

1-01
Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
/0" On ;anuar! 1, ,00*, Alaska Corporation acquired Hercantile Corporation.s net assets b!
pa!in$ '110,000 cash" &alance sheet data for the two companies and fair value information
for Hercantile Corporation immediatel! before the business combination are $iven below%


2equired%
8repare a combined balance sheet immediatel! followin$ the acquisition"

1-0(
Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities

AACSB: Analytic
AICPA: Measurement

//" eaAine Corporation is involved in the distribution of processed marine products" :he fair
values of assets and liabilities held b! three reportin$ units and other information related to
the reportin$ units owned b! eaAine are as follows%


2equired% +etermine the amount of $oodwill that eaAine should report in its current
financial statements"

:otal Coodwill reported J '(0,000

AACSB: Analytic
AICPA: Measurement

1-0*