E 1-1

1. A business combination in which a new corporation is formed to take over the assets and operations of
two or more separate business entities, with the previously separate entities being dissolved, is a/an:
1. a Consolidation
2. b Merger
3. c Pooling of interests
4. d Acquisition
2. In a business combination, the direct costs of registering and issuing equity securities are:
1. a Added to the parent/investor company’s investment account
2. b Charged against other paid-in capital of the combined entity
3. c Deducted from income in the period of combination
4. d None of the above
3. An excess of the fair value of net assets acquired in a business combination over the price paid is:
1. a Reported as a gain from a bargain purchase
2. b Applied to a reduction of noncash assets before negative goodwill may be reported
3. c Applied to reduce noncurrent assets other than marketable securities to zero before negative
goodwill
may be reported
4. d Applied to reduce goodwill to zero before negative goodwill may be reported
4. Cork Corporation acquires Dart Corporation in a business combination. Which of the following would be
excluded from the process of assigning fair values to assets and liabilities for purposes of recording
the acquisition? (Assume Dart Corporation is dissolved.)
1. a Patents developed by Dart because the costs were expensed under GAAP
2. b Dart’s mortgage payable because it is fully secured by land that has a market value far in
excess of the mortgage
3. c An asset or liability amount for over- or underfunding of Dart’s de fined-bene fit pension plan
4. d None of the above

Answer:

1 a
2 b
3 a
4 d
E 1-2
[Based on AICPA] General problems
1. Pat Corporation paid $100,000 cash for the net assets of Sag Company, which consisted of the following:
Current assets Plant and equipment Liabilities assumed

Book Value Fair Value

current Assets $40,000 $ 56,000

Plant and Equipments 160,000 220,000

Liabilities Assumed (40,000) (36,000)

$160,000 $240,000
Assume Sag Company is dissolved. The plant and equipment acquired in this business combination should be
recorded at:
a $220,000 b $200,000
c $183,332 d $180,000

Answer: Plant and equipment should be recorded at the $220,000 fair value.

2. On April 1, Par Company paid $1,600,000 for all the issued and outstanding common stock of Son Corporation
in a transaction properly accounted for as an acquisition. Son Corporation is dissolved. The recorded assets
and liabilities of Son Corporation on April 1 follow:
Cash $160,000

Inventory 480,000

Property and equipment (net of

accumulated depreciation of $640,000) 960,000

Liabilities (360,000)
On April 1, it was determined that the inventory of Son had a fair value of $380,000 and the property and
equipment (net) had a fair value of $1,120,000. What is the amount of goodwill resulting from the acquisition?
A) 0 b) $100,000
c) $300,000 d) $360,000
Answer:

Investment cost $1,600,000

Less: Fair value of net assets

Cash $ 160,000
Inventory 380,000
Property and equipment — net 1,120,000
Liabilities (360,000) 1,300,000
Goodwill $ 300,000
E 1-3
Prepare stockholders’ equity section
The stockholders’ equities of Pal Corporation and Sip Corporation at January 1 were as follows (in thousands):

Pal Sip
Capital stock, $10 par $3,000 $1,600

Other paid-in capital 400 800

Retained earnings 1,200 600

Stockholders’ equity $4,600 $3,000

On January 2, Pal issued 300,000 of its shares with a market value of $20 per share for all of Sip’s shares, and
Sip was dissolved. On the same day, Pal paid $10,000 to register and issue the shares and $20,000 for other
direct costs of combination.

R E Q U I R E D : Prepare the stockholders’ equity section of Pal Corporation’s balance sheet

immediately after the acquisition on January 2. (Hint: Prepare the journal entry.)

Answer:

Entry to record combination

Investment in Son 6,000,000

Capital stock, $10 par 3,000,000
Other paid-in capital 3,000,000

Investment expense 20,000

Other paid-in capital 10,000
Cash 30,000

Check: Net assets per books (book value) $ 7,600,000

(4600+3000 in common stock)
Goodwill and write-up of assets 3,000,000
Less: Expense of direct costs (20,000)
Less: Issuance of stock (10,000)
$10,570,000
Stockholders’ equity — Pop Corporation on January 3

Capital stock, $10 par, 600,000 shares outstanding $ 6,000,000

Other paid-in capital

[$400,000 + $3,000,000 – $10,000] 3,390,000

Retained earnings [$1,200,000 - $20,000] 1,180,000

Total stockholders’ equity $10,570,000
E 1-4
Journal entries to record an acquisition
Pan Company issued 480,000 shares of $10 par common stock with a fair value of $10,200,000 for all the voting
common stock of Set Company. In addition, Pan incurred the following costs:
Legal fees to arrange the business combination $100,000

Cost of SEC registration, including accounting

and legal fees 48,000

Cost of printing and issuing net stock certificates 12,000

Indirect costs of combining, including allocated

overhead and executive salaries 80,000

Immediately before the acquisition in which Set Company was dissolved, Set’s assets and equities were as
follows (in thousands):
Book Value Fair Value

Current assets $4,000 $4,400

Plant assets 6,000 8,800

Liabilities 1,200 1,200

Common stock 8,000

Retained earnings 800

R E Q U I R E D : Prepare all journal entries on Pan’s books to record the acquisition.

Answer:

Journal entries on Pam’s books to record the acquisition

Investment in Sun 10,200,000

Common stock, $10 par 4,800,000
Additional paid-in capital 5,400,000
To record issuance of 480,000 shares of $10 par common stock with a fair value of $10,200,000
for the common stock of Sun in a business combination.

Additional paid-in capital 60,000

Investment expenses 180,000
Other assets (or Cash) 240,000
To record costs of registering and issuing securities as a reduction of paid-in capital, and record
direct and indirect costs of combination as expenses.

Current assets 4,400,000

Plant assets 8,800,000
Liabilities 1,200,000
Investment in Sun 10,200,000
Gain from bargain purchase 1,800,000
To record allocation of the $10,200,000 cost of Sun Company to identifiable assets and
liabilities according to their fair values, and the gain from the bargain purchase,computed
as follows:
Cost $10,200,000
Fair value of net assets acquired 12,000,000
Bargain purchase amount $ 1,800,000
E 1-5
Journal entries to record an acquisition with direct costs and fair value/book value differences
On January 1, Pan Corporation pays $400,000 cash and also issues 36,000 shares of $10
par common stock with a market value of $660,000 for all the outstanding common shares
of Sis Corporation. In addition, Pan pays $60,000 for registering and issuing the 36,000
shares and $140,000 for the other direct costs of the business combination, in which Sis
Corporation is dissolved. Summary balance sheet information for the companies
immediately before the merger is as follows (in thousands):

Pan Book Value Sis Book Value Sis Fair Value

Cash $700 $ 80 $ 80

Inventories 240 160 200

Other assets 60 40 40

Plant assets- net 520 360 560

Total assets $ 1,520 $ 640 $ 880

Current Liabilities $ 320 $ 60 $ 60

Other Liabilities 160 100 80

Common stock, $10 par 840 400

Retained earnings 200 80

Total liabilities &O.E $ 1,520 $ 640

R E Q U I R E D : Prepare all journal entries on Pan’s books to account for the acquisition.
Answer:

Journal entries on the books of Pop Corporation to record merger with Son Corporation

Investment in Son 1,060,000

Common stock, $10 par 360,000
Additional paid-in capital 300,000
Cash 400,000
To record issuance of 36,000 common shares and payment of cash in the acquisition of
Son Corporation in a merger.

Investment expenses 140,000

Additional paid-in capital 60,000
Cash 200,000
To record costs of registering and issuing securities and additional
direct costs of combination.

Cash 80,000
Inventories 200,000
Other current assets 40,000
Plant assets — net 560,000
Goodwill 320,000
Current liabilities 60,000
Other liabilities 80,000
Investment in Son 1,060,000
To record allocation of cost to assets received and liabilities assumed on the basis of their
fair values and to goodwill computed as follows:

Cost of investment $1,060,000

Fair value of net assets acquired 740,000
Goodwill $ 320,000
1) Which of the following is NOT a reason for a company to expand through a combination,
rather than by building new facilities?
A) A combination might provide cost advantages.
B) A combination might provide fewer operating delays.
C) A combination might provide easier access to intangible assets.
D) A combination might provide an opportunity to invest in a company without having to take
responsibility for its fnancial results.

2) A business merger differs from a business consolidation because:

A) a merger dissolves all but one of the prior entities, but a consolidation dissolves all of the
prior entities and forms a new corporation.
B) a consolidation dissolves all but one of the prior entities, but a merger dissolves all of the
prior entities.
C)a merger is created when two entities join, but a consolidation is created when more than two
entities join.
D) a consolidation is created when two entities join, but a merger is created when more than
two entities join.

3) Following the accounting concept of a business combination, a business combination occurs

when a company acquires an equity interest in another entity and has
A) at least 20% ownership in the entity.
B) more than 50% ownership in the entity.
C)100% ownership in the entity.
D) control over the entity, irrespective of the percentage owned.

4) Pitch Co. paid $50,000 in fees to its accountants and lawyers in acquiring Slope Company.
Pitch will treat the $50,000 as
A) an expense for the current year.
B) a prior period adjustment to retained earnings.
C) additional cost to investment of Slope on the consolidated balance sheet.
D) a reduction in additional paid-in capital.

5) Pepper Company paid $2,500,000 for the net assets of Salt Corporation and Salt was then
dissolved. Salt had no liabilities. The fair values of Salt's assets were $3,750,000. Salt's only non-
current assets were land and buildings with book values of $100,000 and $520,000, respectively,
and fair values of $180,000 and $730,000, respectively. At what value will the buildings be
recorded by Pepper?
A) $730,000
B) $520,000
C) $210,000
D) $0
3) On December 31, 2013, Pandora Incorporated issued 40,000 shares of its $20 par common stock for all
the outstanding shares of the Sophocles Company. In addition, Pandora agreed to pay the owners of
Sophocles an additional $200,000 if a specifc contract achieved the proft levels that were targeted by the
owners of Sophocles in their sale agreement. The fair value of this amount, with an agreed likelihood of
occurrence and discounted to present value, is $160,000. In addition, Pandora paid $10,000 in stock issue
costs, $40,000 in legal fees, and $48,000 to employees who were dedicated to this acquisition for the last
three months of the year. Summarized balance sheet and fair value information for Sophocles
immediately prior to the acquisition follows.

Book Value Fair Value

Cash $100,000 $ 100,000

Accounts Receivable 280,000 250,000

Inventory 520,000 640,000

Buildings and Equipment (net) 750,000 870,000

Trademarks and Tradenames 0 500,000

Total Assets $ 1,650,000

Accounts Payable $ 200,000 $ 190,000

Notes Payable 900,000 900,000

Retained Earnings 550,000

Total Liabilities and Equity $ 1,650,000

Required:

1. Prepare Pandora's general journal entry for the acquisition of Sophocles assuming that Pandora's stock
was trading at $35 at the date of acquisition and Sophocles dissolves as a separate legal entity.

2. Prepare Pandora's general journal entry for the acquisition of Sophocles assuming that Pandora's stock
was trading at $35 at the date of acquisition and Sophocles continues as a separate legal entity.

3. Prepare Pandora's general journal entry for the acquisition of Sophocles assuming that Pandora's stock
was trading at $25 at the date of acquisition and Sophocles dissolves as a separate legal entity.

4. Prepare Pandora's general journal entry for the acquisition of Sophocles assuming that Pandora's stock
was trading at $25 at the date of acquisition and Sophocles survives as a separate legal entity.