Ch1 HW Solutions

ACCT 422 Advanced Accounting
Chapter 1 Homework Solutions
Chapter 1
E1-10 Stock Acquisition
McDermott Corporation has been in the midst of a major expansion program. Much of its growth
had been internal, but in 20X1 McDermott decided to continue its expansion through the
acquisition of other companies. The first company acquired was Tippy Inc., a small
manufacturer of inertial guidance systems for aircraft and missiles. On June 10, 20X1,
McDermott issued 17,000 shares of its $25 par common stock for all 40,000 of Tippy’s $10 par
common shares. At the date of combination, Tippy reported additional paid-in capital of
$100,000 and retained earnings of $350,000. McDermott’s stock was selling for $58 per share
immediately prior to the combination. Subsequent to the combination, Tippy operated as a
subsidiary of McDermott.
Present the journal entry or entries that McDermott would make to record the business
combination with Tippy.
Journal entry to record the purchase of Tippy Inc., shares:
Investment in Tippy Inc., Common Stock 986,000

Common Stock 425,000
Additional Paid-In Capital 561,000
$986,000 = $58 x 17,000 shares

$425,000 = $25 x 17,000 shares
$561,000 = ($58 - $25) x 17,000 shares
E1-12 Goodwill Recognition

Spur Corporation reported the following balance sheet amounts on December 31, 20X1:
Balance Sheet Item Historical Cost Fair Value
Cash & Receivables $ 50,000 $ 40,000
Inventory 100,000 150,000
Land 40,000 30,000
Plant & Equipment 400,000 350,000
Less: Accumulated Depreciation (150,000)
Patent 130,000
Total Assets $440,000 $700,000
Accounts Payable $ 80,000 $ 85,000
Retained Earnings 140,000
Total Liabilities & Equities $440,000
Required
Blanket acquired Spur Corporation’s assets and liabilities for $670,000 cash on December 31,
20X1. Give the entry that Blanket made to record the purchase.
Journal entry to record acquisition of Spur Corporation net assets:
Cash and Receivables 40,000

Inventory 150,000
Land 30,000
Plant and Equipment 350,000
Patent 130,000
Goodwill 55,000
Accounts Payable 85,000
Cash 670,000
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Computation of goodwill
Fair value of consideration given $670,000
Fair value of assets acquired $700,000
Fair value of liabilities assumed (85,000)
Fair value of net assets acquired 615,000
Goodwill $ 55,000
E1-14 Bargain Purchase

Fortune Corporation used debentures with a par value of $625,000 to acquire 100 percent of
Sorden Company’s net assets on January 1, 20X2. On that date, the fair value of the bonds
issued by Fortune was $608,000. The following balance sheet data were reported by Sorden:
Inventory 105,000 200,000
Land 60,000 100,000
Plant & Equipment 400,000 300,000
Goodwill 10,000
Total Assets $480,000 $650,000
Total Liabilities & Equities $480,000
Determine the amount Fortune Corporation would record as a gain on bargain purchase and
prepare the journal entry Fortune would record at the time of the exchange if Fortune issued
bonds with a par value of $580,000 and a fair value of $564,000 in completing the acquisition of
Sorden.
Journal entry to record acquisition of Sorden Company net assets:
Cash and Receivables 50,000

Inventory 200,000
Land 100,000
Plant and Equipment 300,000
Discount on Bonds Payable 16,000
Bonds Payable 580,000
Gain on Bargain Purchase of Subsidiary 36,000
Computation of Bargain Purchase Gain

Fair value of assets acquired $650,000
Fair value of liabilities assumed (50,000)
Fair value of net assets acquired 600,000
Bargain Purchase Gain $ 36,000
E1-15 Impairment of Goodwill

Mesa Corporation purchased Kwick Company’s net assets and assigned goodwill of $80,000
to Reporting Division K. The following assets and liabilities are assigned to Reporting
Division K:
Carrying Amount Fair Value

Cash $ 14,000 $ 14,000
Inventory 56,000 71,000
Equipment 170,000 190,000
Goodwill 80,000
Accounts Payable 30,000 30,000
Required
Determine the amount of goodwill to be reported for Division K and the amount of goodwill
impairment to be recognized, if any, if Division K’s fair value is determined to be
a. $340,000.
b. $280,000.
c. $260,000.
a. Goodwill of $80,000 will be reported. The fair value of the reporting unit ($340,000) is
greater than the carrying amount of the investment ($290,000) and the goodwill
does not need to be tested for impairment. As a result, no loss will be recorded.
b. Goodwill of $35,000 will be reported (fair value of reporting unit of $280,000 - fair value
of net assets of $245,000). An impairment loss of $45,000 ($80,000 - $35,000) will
be recognized.
c. Goodwill of $15,000 will be reported (fair value of reporting unit of $260,000 - fair value
of net assets of $245,000). An impairment loss of $65,000 ($80,000 - $15,000) will
be recognized.
E1-18 Goodwill Measurement

Washer Company has a reporting unit resulting from an earlier business combination. The
reporting unit’s current assets and liabilities are
Carrying Amount Fair Value
Cash $ 30,000 $ 30,000
Inventory 70,000 100,000
Land 30,000 60,000
Buildings 210,000 230,000
Equipment 160,000 170,000
Goodwill 150,000
Notes Payable 100,000 100,000
Required
Determine the amount of goodwill to be reported and the amount of goodwill impairment, if any,
if the fair value of the reporting unit is determined to be
a. $580,000.
b. $540,000.
c. $500,000.
d. $460,000.
a. Goodwill of $150,000 will be reported. The fair value of the reporting unit ($580,000) is
greater than the carrying value of the investment ($550,000) and goodwill does not
need to be tested for impairment. No loss will be recorded.
b. Goodwill of $50,000 will be reported. The implied value of goodwill is $50,000 (fair
value of reporting unit of $540,000 - fair value of net assets of $490,000). Thus, an
impairment of goodwill of $100,000 ($150,000 - $50,000) must be recognized.
c. Goodwill of $10,000 will be reported. The implied value of goodwill is $10,000 (fair value
of reporting unit of $500,000 - fair value of net assets of $490,000). Thus, an
impairment loss of $140,000 ($150,000 - $10,000) must be recognized.
d. No goodwill will be reported. The fair value of the net assets ($490,000) exceeds the
fair value of the reporting unit ($460,000). Thus, the implied value of goodwill is $0
and an impairment loss of $150,000 ($150,000 - $0) must be recognized.
P1-28 Journal Entries to Record a Business Combination

On January 1, 20X2, Frost Company acquired all of TKK Corporation’s assets and liabilities by
issuing 24,000 shares of its $4 par value common stock. At that date, Frost shares were selling
at $22 per share. Historical cost and fair value balance sheet data for TKK at the time of
acquisition were as follows:
Inventory 94,000 122,000
Buildings & Equipment 600,000 470,000
Total Assets $ 482,000 $620,000
Notes Payable 65,000 63,000
Common Stock ($10 par value) 160,000
Total Liabilities & Equities $ 482,000
Frost paid legal fees for the transfer of assets and liabilities of $14,000. Frost also paid audit
fees of $21,000 and listing application fees of $7,000, both related to the issuance of new
shares.
Required
Prepare the journal entries made by Frost to record the business combination.
Journal entries to record acquisition of TKK net assets:
(1) Merger Expense 14,000

Cash 14,000
Record payment of legal fees.
(2) Deferred Stock Issue Costs 28,000

Cash 28,000
Record costs of issuing stock.
(3) Cash and Receivables 28,000

Inventory 122,000
Buildings and Equipment 470,000
Goodwill 12,000
Notes Payable 63,000
Common Stock 96,000
Deferred Stock Issue Costs 28,000
Record purchase of TKK Corporation.
Fair value of consideration given (24,000 x $22) $528,000
Fair value of net assets acquired
($620,000 - $104,000) (516,000)
Goodwill $ 12,000
Computation of additional paid-in capital

Number of shares issued 24,000
Issue price in excess of par value ($22 - $4) x $18
Total $432,000
Less: Deferred stock issue costs (28,000)
Increase in additional paid-in capital $404,000
P1-30 Business Combination with Goodwill

Anchor Corporation paid cash of $178,000 to acquire Zink Company’s net assets on February 1,
20X3. The balance sheet data for the two companies and fair value information for Zink
immediately before the business combination were:
Anchor Corporation Zink Company
Balance Sheet Item Book Value Book Value Fair Value
Cash $ 240,000 $ 20,000 $ 20,000
Accounts Receivable 140,000 35,000 35,000
Inventory 170,000 30,000 50,000
Patents 80,000 40,000 60,000
Buildings & Equipment 380,000 310,000 150,000
Less: Accumulated Depreciation (190,000) (200,000)
Total Assets $ 820,000 $ 235,000 $315,000
Accounts Payable $ 85,000 $ 55,000 $ 55,000
Notes Payable 150,000 120,000 120,000
Common Stock:
$10 par value 200,000
$6 par value 18,000
Additional Paid-In Capital 160,000 10,000
Retained Earnings 225,000 32,000
Total Liabilities & Equities $ 820,000 $ 235,000
Required
a. Give the journal entry recorded by Anchor Corporation when it acquired Zink’s net assets.
b. Prepare a balance sheet for Anchor immediately following the acquisition.
c. Give the journal entry to be recorded by Anchor if it acquires all of Zink’s common stock
(instead of Zink’s net assets) for $178,000.
a. Journal entry to record acquisition of Zink Company net assets:
Cash 20,000
Accounts Receivable 35,000
Inventory 50,000
Patents 60,000
Buildings and Equipment 150,000
Goodwill 38,000
Notes Payable 120,000
Cash 178,000
b. Balance sheet immediately following acquisition:
Anchor Corporation and Zink Company

Combined Balance Sheet
February 1, 20X3
Cash $ 82,000 Accounts Payable $140,000

Accounts Receivable 175,000 Notes Payable 270,000
Inventory 220,000 Common Stock 200,000
Patents 140,000 Additional Paid-In
Buildings and Equipment 530,000 Capital 160,000
Less: Accumulated Retained Earnings 225,000
Depreciation (190,000)
Goodwill 38,000
$995,000 $995,000
c. Journal entry to record acquisition of Zink Company stock:
Investment in Zink Company Common Stock 178,000

Cash 178,000
Fair value of net assets acquired
($20,000 + $35,000 + $50,000 + $60,000
+ $150,000 - $55,000 -$120,000) (140,000)
Goodwill $ 38,000
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ACCT 422 Advanced Accounting

Chapter 1 Homework Solutions

Investment in Tippy Inc., Common Stock 986,000

$986,000 = $58 x 17,000 shares

E1-12 Goodwill Recognition

Cash and Receivables 40,000

E1-14 Bargain Purchase

Cash and Receivables 50,000

Computation of Bargain Purchase Gain

Fair value of consideration given $564,000

E1-15 Impairment of Goodwill

Carrying Amount Fair Value

E1-18 Goodwill Measurement

P1-28 Journal Entries to Record a Business Combination

(1) Merger Expense 14,000

(2) Deferred Stock Issue Costs 28,000

(3) Cash and Receivables 28,000

Computation of additional paid-in capital

P1-30 Business Combination with Goodwill

b. Balance sheet immediately following acquisition:

Anchor Corporation and Zink Company

Cash $ 82,000 Accounts Payable $140,000

c. Journal entry to record acquisition of Zink Company stock:

Investment in Zink Company Common Stock 178,000

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