Reviewer Acctg 7

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.
2. A tax advantage of business combination can occur when the existing owner of a company sells out and receives:
a. cash to defer the taxable gain as a "tax-free reorganization."
b. stock to defer the taxable gain as a "tax-free reorganization."
c. cash to create a taxable gain.
d. stock to create a taxable gain.
3. A controlling interest in a company implies that the parent company

a. owns all of the subsidiary's stock.
b. has influence over a majority of the subsidiary's assets.
c. has paid cash for a majority of the subsidiary's stock.
d. has transferred common stock for a majority of the subsidiary's outstanding bonds and debentures.
4. Which of the following is a potential abuse that may arise when a business combination is accounted for as a pooling
of interests?
a. Assets of the buyer may be overvalued when the price paid by the investor is allocated among specific assets.
b. Earnings of the pooled entity may be increased because of the combination only and not as a result of efficient
operations.
c. Liabilities 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 goodwill, thus potentially allowing an understatement of pooled
earnings.
5. Consolidated financial statements are designed to provide:

a. informative information to all shareholders.
b. the results of operations, cash flow, and the balance sheet in an understandable and informative manor for
creditors.
c. the results of operations, cash flow, and the balance sheet as if there was a single entity.
d. subsidiary information for the subsidiary shareholders.
6. The FASB Exposure Draft assumes consolidation financial statements are appropriate even without a majority of
controlling share if which of the following exists:
a. the subsidiary has the right to appoint member's of the parent company's board of directors.
b. the parent company has the right to appoint a majority of the members of the subsidiary's board of directors
through a large minority voting interest.
c. the subsidiary owns a large minority voting interest in the parent company.
d. The parent company has an ability to assume the role of general partner in a limited partnership with the approval of
the subsidiary's board of directors.
7. The SEC and FASB has recommended that a parent corporation should consolidate the financial statements of the
subsidiary into its financial statements when it exercises control over the subsidiary, even without majority ownership.
In which of the following situations would control NOT be evident?
a. Access to subsidiary assets is available to all shareholders.

b. Dividend policy is set by the parent.
c. The subsidiary does not determine compensation for its main employees.
d. Substantially all cash flows of the subsidiary flow to the controlling shareholders.
8. The goal of the consolidation process is for:

a. asset acquisitions and stock acquisitions to result in the same balance sheet.
b. goodwill to appear on the balance sheet of the consolidated entity.
c. the assets of the noncontrolling interest to be predominately displayed on the balance sheet.
d. the investment in the subsidiary to be properly valued on the consolidated balance sheet.
9. A subsidiary was acquired for cash in a business combination on December 31, 20X1. The purchase price exceeded the
fair value of identifiable net assets. The acquired company owned equipment with a fair value in excess of the book
value as of the date of the combination. A consolidated balance sheet prepared on December 31, 20X1, would
a. report the excess of the fair value over the book value of the equipment as part of goodwill.
b. report the excess of the fair value over the book value of the equipment as part of the plant and equipment
account.
c. reduce retained earnings for the excess of the fair value of the equipment over its book value.
d. make no adjustment for the excess of the fair value of the equipment over book value. Instead, it is an adjustment to
expense over the life of the equipment.
10. Which of the following costs of a business combination are included in the value charged to paid-in-capital in excess
of par?
a. direct and indirect acquisition costs
b. direct acquisition costs
c. direct acquisition costs and stock issue costs if stock is issued as consideration
d. stock issue costs if stock is issued as consideration
The Chan Corporation purchased the net assets (existing liabilities were assumed) of the Don Company for $900,000
cash. The balance sheet for the Don Company on the date of acquisition showed the following:
Assets
Current assets........................................ $ 100,000

Equipment............................................. 300,000
Accumulated depreciation.............................. (100,000)
Plant................................................. 600,000
Accumulated depreciation.............................. (250,000)
Total................................................. $ 650,000
=========
Liabilities and Equity
Bonds payable, 8%..................................... $ 200,000

Common stock, $1 par.................................. 100,000
Paid-in capital in excess of par...................... 200,000
Retained earnings..................................... 150,000
Total................................................. $ 650,000
=========
Required:
The equipment has a fair value of $300,000, and the plant assets have a fair value of $500,000. Assume that the Chan
Corporation has an effective tax rate of 40%. Prepare the entry to record the purchase of the Don Company for each of
the following separate cases with specific added information:
a. The sale is a nontaxable exchange to the seller that limits the buyer to depreciation and amortization on only book
value for tax purposes.
b. The bonds have a current fair value of $190,000. The transaction is a nontaxable exchange.
c. There are $100,000 of prior-year losses that can be used to claim a tax refund. The transaction is a nontaxable
exchange.
d. There are $150,000 of past losses that can be carried forward to future years to offset taxes that will be due. The
transaction is a nontaxable exchange.
ANS:
a. Current Assets.......................... $100,000

Equipment............................... 300,000
Plant................................... 500,000
Goodwill ($300,000 x .6)................ 500,000
Deferred Tax Liability*............... $300,000
Bonds Payable......................... 200,000
Cash.................................. 900,000
* .4 x ($800,000 Fair Value - $550,000 Book Value of fixed assets) + .4 x $500,000 Goodwill
b. Current Assets.......................... $100,000

Equipment............................... 300,000
Plant................................... 500,000
Goodwill................................ 190,000
Bonds Payable......................... $190,000
Cash.................................. 900,000
c. Current Assets.......................... $100,000

Equipment............................. 300,000
Plant ................................ 500,000
Tax Refund Receivable............. 40,000
Goodwill.............................. 160,000
Bonds Payable.................... $200,000
Cash................................ 900,000
d. Current Assets.......................... $100,000

Equipment............................... 300,000
Plant................................... 500,000
Deferred Tax Expense ($150,000 x .4).. 60,000
Goodwill ($240,000 .6)................ 400,000
Bonds Payable......................... $200,000
Cash.................................. 900,000
Deferred Tax Liability ($250,000 x .4) + ($400,000 x .4)... 260,000
Dolmen Corporation purchased the net assets of Carnac Inc on January 2, 2005 for
$280,000 and also paid $10,000 in direct acquisition costs. Carnac's balance
sheet on January 2, 2005 was as follows:
Accounts receivable-net $ 90,000 Current liabilities $ 35,000

Inventory 180,000 Long term debt 80,000
Land 20,000 Common stock ($1 par) 10,000
Building-net 30,000 Paid-in capital 215,000
Equipment-net 40,000 Retained earnings 20,000
Total assets $360,000 Total liab. & equity $360,000
Fair values agree with book values except for inventory, land, and equipment,
that have fair values of $200,000, $25,000 and $35,000, respectively. Carnac has
patent rights valued at $10,000.
Required:
Prepare Dolmen's general journal entry for the cash purchase of Carnac's net
assets.
General journal entry for the purchase of Carnac's net assets:
Accounts receivable 90,000

Inventory 200,000
Land 25,000
Building 30,000
Equipment 35,000
Patent 10,000
Goodwill 15,000
Current liabilities 35,000
Long-term debt 80,000
Cash 290,000
The balance sheets of Palisade Company and Salisbury Corporation were as follows
on December 31, 2004:
Palisade Salisbury
Current Assets $ 260,000 $ 120,000
Equipment-net 440,000 480,000
Buildings-net 600,000 200,000
Land 100,000 200,000
Total Assets $1,400,000 $1,000,000
Current Liabilities 100,000 120,000
Common Stock, $5 par 1,000,000 400,000
Paid-in Capital 100,000 280,000
Retained Earnings 200,000 200,000
Total Liabilities and $1,400,000 $1,000,000
Stockholders' equity
On January 1, 2005 Palisade issued 30,000 of its shares with a market value of
$40 per share in exchange for all of Salisbury's shares, and Salisbury was
dissolved. Palisade paid $20,000 to register and issue the new common shares. It
cost Palisade $50,000 in direct combination costs. Book values equal market
values except that Salisburys land is worth $250,000.
Required:
Prepare a Palisade balance sheet after the business combination on January 1,

2005.
The stockholders' equity section for Palisade Corporation subsequent to its

acquisition of Salisbury Corporation on January 1, 2005 will appear as follows:
Palisade Corporation
Balance Sheet
January 1, 2005
Current Assets $ 310,000
Equipment-net 920,000
Buildings-net 800,000
Land 350,000
Goodwill 320,000
Total Assets $2,270,000
Current Liabilities 220,000
Common Stock, $5 par 1,150,000
Paid-in Capital 1,130,000
Retained Earnings 200,000
Total Liabilities and $2,700,000
Stockholders' equity

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1.

An economic advantage of a business combination includes

3. A controlling interest in a company implies that the parent company

5. Consolidated financial statements are designed to provide:

a. Access to subsidiary assets is available to all shareholders.

8. The goal of the consolidation process is for:

Current assets........................................ $ 100,000

Liabilities and Equity

Bonds payable, 8%..................................... $ 200,000

a. Current Assets.......................... $100,000

b. Current Assets.......................... $100,000

c. Current Assets.......................... $100,000

d. Current Assets.......................... $100,000

Accounts receivable-net $ 90,000 Current liabilities $ 35,000

General journal entry for the purchase of Carnac's net assets:

Accounts receivable 90,000

Prepare a Palisade balance sheet after the business combination on January 1,

The stockholders' equity section for Palisade Corporation subsequent to its

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