fischer--fundamentals of advanced accounting 1e

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Chapter 1 Business Combinations: America's Most Popular

Business Activity, Bringing an End to the Controversy

M!"#P!E C$%#CE

1. An economic advantage of a business combination includes

a. Utilizing duplicative assets.b. Creating separate management teams.c. Coordinated marketing campaigns.d. Horizontally combining levels within the marketing chain.

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). A ta* advantage of business combination can occur when the e*istingowner of a company sells out and receives!a. cash to defer the ta*able gain as a +ta*,free reorganization.+b. stock to defer the ta*able gain as a +ta*,free reorganization.+c. cash to create a ta*able gain.

d. stock to create a ta*able gain.

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-. A controlling interest in a company implies that the parent companya. owns all of the subsidiarys stock.b. has influence over a ma/ority of the subsidiarys assets.c. has paid cash for a ma/ority of the subsidiarys stock.d. has transferred common stock for a ma/ority of the subsidiarys

outstanding bonds and debentures.

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. 2hich of the following is a potential abuse that may arise when abusiness combination is accounted for as a pooling of interests3a. Assets of the buyer may be overvalued when the price paid by the

investor is allocated among specific assets.b. %arnings of the pooled entity may be increased because of the

combination only and not as a result of efficient operations.c. 4iabilities may be undervalued when the price paid by the investor

is allocated to specific liabilities.d. An undue amount of cost may be assigned to goodwill5 thus

potentially allowing an understatement of pooled earnings.

AN! ' "#$! 0 &'(! -5 Appendi* A

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Chapter 1

6. Company ' ac7uired the assets 8net of liabilities9 of Company ine*change for cash. :he ac7uisition price e*ceeds the fair value of thenet assets ac7uired. How should Company ' determine the amounts to bereported for the plant and e7uipment5 and for long,term debt of theac7uired Company 3

;lant and %7uipment 4ong,:erm "ebta. $air value s carrying amountb. $air value $air valuec. s carrying amount $air valued. s carrying amount s carrying amount

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6. :he purchase price was ?@==5===. &n the date of the transaction5Citizen had no long,term investments in marketable e7uity securitiesand ?==5=== in liabilities. :he fair value of Citizen assets on theac7uisition date was as follows!

Current assets................................. ? @==5===Noncurrent assets..............................


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@. Gibe Company purchased the net assets of Atlantic Company in a businesscombination accounted for as a purchase. As a result5 goodwill wasrecorded. $or ta* purposes5 this combination was considered to be ata*,free merger. #ncluded in the assets is a building with an appraisedvalue of ?)1=5=== on the date of the business combination. :his assethad a net book value of ?=5===5 based on the use of accelerateddepreciation for accounting purposes. :he building had an ad/usted ta*basis to Atlantic 8and to Gibe as a result of the merger9 of ?1)=5===.Assuming a -


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11. Cozzi Company is being purchased and has the following balance sheet asof the purchase date!

Current assets.......... ?)==5=== 4iabilities.... ? I=5===$i*ed assets............ 1@=5=== %7uity......... )I=5=== :otal................. ?-@=5=== :otal........ ?-@=5===

:he price paid for Cozzis net assets 8the purchaser assumes theliabilities9 is ?6==5===. :he fi*ed assets have a fair value of?))=5===5 and the liabilities have a fair value of ?11=5===. :he amountof goodwill to be recorded in the purchase is KKKKKKKKKK.a. ?=b. ?6=5===c. ?=5===d. ?I=5===

AN! C "#$! 0 &'(! -5 for each of the twofollowing independent contingency agreements!

a. An additional cash payment would be made on (anuary 15 )=>-e7ual to four times the amount by which average annualearnings of the ;ink Coral "ivision e*ceed ?@=5=== per year)=>1 and )=>). Net income was ?11)5=== in )=>1 and ?1=5=== in)=>).

b. Additional shares would be issued on (anuary 15 )=>- tocompensate for any fall in the value of 'lue Beef common stockbelow ?1< per share. :he settlement would be to cure thedeficiency by issuing added shares based on their fair value

on (anuary 15 )=>-. :he fair price of the shares on (anuary 15)=>- was ?1=.

AN!

a. Joodwill................................. 1@5=== Cash................................... 1@5=== * 8average income of ?1)


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1). :he balance sheet information for Nickel Company is to be used in bothparts 8a9 and 8b95 each of which is an independent case. &n (anuary 15)=>15 a business combination occurred between "ime Co. and Nickel Co.&n this date5 a condensed balance sheet for Nickel showed!

'ook GalueCurrent Assets.......................... ? 6==5===;lant and %7uipment 8net9............... I==5===#ntangibles , ;atent.................... 16=5=== ?1566=5===

Current 4iabilities..................... ? 65===4ong,:erm "ebt.......................... ))65===Common tock............................ ==5===;aid,in Capital in %*cess of ;ar........ -==5===Betained %arning........................ 66=5=== ?1566=5===

Be7uired!

a. Assume the combination was an asset ac7uisition in which "imepurchased all of the net assets of Nickel for ?15)65=== cash.Nickels current assets were undervalued ?=5===L plant ande7uipment were undervalued ?16=5===L the patent wasundervalued ?@=5===L and long,term debt was overvalued?65===.

Becord the entry or entries on "imes books to carry out theac7uisition of the net assets of Nickel.

b. Assume that5 in the combination5 "ime ac7uired Nickels netassets by issuance of new "ime common stock with a par valueof ?)==5=== and a fair value of ?156=5===. #n addition5 "imeincurred stock issuance costs of ?-=5===. $or financialaccounting purposes5 the combination is to be accounted for asa purchase. $or ta* purposes5 the combination is ta*,free tothe shareholders of Nickel Company. Assume a ta* rate of -).Current assets of Nickel are undervalued by ?=5===. :he fairvalue of Nickels plant and e7uipment was ?15=6=5===. :heintangible is a patent with a fair value e7ual to book value.

Becord the entry or entries on "imes books to carry out the

ac7uisition of the net assets of Nickel. ;rovide supportingcalculations.

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AN!

a. Current Assets.......................... ? 6=5=== ;lant and %7uipment..................... 15=6=5=== #ntangibles , ;atents................... )-=5=== #ntangibles , Joodwill.................. 1-=5=== Current 4iabilities................... ? 65=== 4ong,:erm "ebt........................ 1@=5=== Cash.................................. 15)65===

Joodwill ?15)65=== price , ?156I65=== sum of net asset fair value.

b. ;rice paid.............................. ?156=5===

Current assets........................ ? 6=5=== "eferred ta* liability................ 8))5==9 -) * 8?6=5=== , 6==5===9 ;lant and e7uipment................... 15=6=5=== "eferred ta* liability................ 8@5===9

-) * 8?15=6=5=== , I==5===9 #ntangibles , ;atents................. 16=5=== Current liabilities................... 865===9 4ong,term debt........................ 8))65===9 15-II5


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EA(

1. Joodwill is an intangible asset. :here are a variety of recommendationsabout how intangible assets should be included in the financialstatements. "iscuss the recommendations for proper disclosure ofgoodwill. #nclude a comparison with disclosure of other intangible

assets.

AN!

Joodwill arises when a company is purchased and the value assigned toidentifiable assets5 including intangible assets5 is in e*cess of theprice paid. As such goodwill represents the value of intangible assetsthat could not be valued individually.

"uring a purchase some intangible assets such as patents5 customerlists5 brand names5 and favorable lease agreements may e*ist but havenot been recorded. :he fair value of these intangible assets should bedetermined and recorded separate from the value of goodwill associated

with the purchase.

#ntangible assets other than goodwill will be amortized over theireconomic lives. :he amortization method should reflect the pattern ofbenefits conveyed by the asset5 so that a straight,line method is to beused unless another systematic method is appropriate.

#ntangible assets may be reported individually5 in groups5 or in theaggregate on the balance sheet after fi*ed assets and are displayed netof cumulative amortization. "etails for current and cumulativeamortization5 along with significant residual values5 are shown in thefootnotes to the balance sheet.

Joodwill is sub/ect to impairment procedures. :hese concerns must beaddressed related to goodwill!1. Joodwill must be allocated to reporting units if the purchased

company contains more than one reporting unit.). A reporting unit valuation plan must be established within one year

of a purchase. :his will be used as the measurement process infuture periods.

-. #mpairment testing is normally done on an annual basis.. :he procedure for determining impairment must be established.6. :he procedure for determining the amount of the impairment loss5

which is also the decrease in the goodwill amount recorded5 must beestablished.

Joodwill is considered impaired when the implied fair value ofreporting unit is less than the carrying value of the reporting unitsnet assets. &nce goodwill is written down5 it cannot be ad/usted to ahigher amount.

Changes to goodwill must be disclosed. :he disclosure would include theamount of goodwill ac7uired5 the goodwill impairment losses5 and thegoodwill written off as part of a disposal of a reporting unit.

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fischer--fundamentals of advanced accounting 1e

Documents

subsidiarys assets

specific assets

duplicative assets

noncurrent assets

net assets of atlantic

fair value of citizen

fair value of thenet

company ine