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Advanced Accounting

Exercise 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
a. Consolidation
b. Merger –occurs when one corp takes over all the operations of another business entity
and that entity is dissolved
c. Pooling of Interests
d. Acquisition

2. In a business combination, the direct costs of registering and issuing securities are:
a. Added to the parent/investor company’s investment account
b. Charged against other paid-in-capital combined entity
c. Deducted from income in the period of combination
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:
a. Reported as a gain from a bargain purchase
b. Applied to a reduction of noncash assets before negative goodwill may be reported
c. Applied to reduce noncurrent assets other than marketable securities to zero before
negative goodwill may be reported
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)
a. Patents developed by Dart because the costs were expensed under GAAP
b. Dart’s mortgage payable because it is fully secured by land that has a market value far in
excess of the mortgage
c. An asset or liability amount for over- or underfunding of Dart’s defined-benefit
pension plan
d. None of the above
Advanced Accounting

Exercise 1-2

1. Pat Corporation paid $100,000 cash for the net assets of Sag Company, which consisted of the
following:
Fair
Book Value
Value
Current Assets $40,000 $56,000
Plant and Equipment 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 (fair value)
b. $200,000
c. $183,332
d. $180,000

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 $ 160,000.00
Inventory $ 480,000.00
Property and Equipment (net of
accumulated Depreciation of $640,000) $ 960,000.00
Liabilities $(360,000.00)

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
Advanced Accounting

Exercise 1-3

The stockholders equities of Pal Corporation and Sip Corporation at January 1 were as follows ( in
thousands)
Pal Sip
Capital stock, $10 par $ 6,000.00 $ 3,200.00
Other paid in capital $ 800.00 $ 1,600.00
Retained Earnings $ 2,400.00 $ 1,200.00
Stockholders Equity $ 9,200.00 $ 6,000.00

On January 2, Pal issued 600,000 of it’s 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 $20,000 to register and issue shares and $40,000 for
other direct costs combination.

Prepare the stockholder’s equity section of Pal Corporation’s balance sheet immediately after the
acquisition on January 2 (Hint. Prepare the journal entry)

ANSWER
Investment in Sip (+A) 12,000,000 (20ps x 600k shares)
Common Stock (+SE) 6,000,000 (10ps x 600k shares)
Additional paid-in capital (+SE) 6,000,000

Investment expense (E, -SE) 40,000 (other direct costs)


Additional PIC (-SE) 20,000 (register and issue )
Cash (or other net assets) (-A) 60,000 (10ps x 600k shares

stockholder’s equity section of Pal Corporation

Cap Stk, $10 par, 1.2 mil shares $12,000,000


Other PIC $6.780.000
Retained Earnings 2,360,000
Total SE Equity 21,140,000

Exercise 1-4
Advanced Accounting

Pan Company issued 960,000 shares of $10 par common stock with a fair value of $20,400,000 for all
the voting common stock of Set Company. In addition, Pan incurred the following costs:

Legal fees to arrange the business combination $ 200,000.00


Cost of SEC registration, including accounting and legal fees $ 96,000.00
Cost of printing and issuing stock certificates $ 24,000.00
Indirect costs of combining, including allocated overhead and executive salaries $ 160,000.00

Immediately before the acquisition in which Set Company was dissolved, Set’s assets and equities were
as follows:
Book Value Fair Value
Current assets $ 8000.00 $ 8,800.00
Plant assets $ 12,000.00 $ 17,600.00
Liabilities $ 2,400.00 $ 2,400.00
Common Stock $ 16,000.00
Retained Earnings $ 1,600.00

Prepare all journal entries on Pan’s books to record the acquisition

ANSWER
Investment in Set (+A) 20,400 (given)
Common Stock (+SE) 9,600 (10ps x960k shares)
Additional paid-in capital (+SE) 10,800

Investment expense (E, -SE) 160,000 (other direct costs)


Additional PIC (-SE) 320,000 (register and issue )
Cash (or other net assets) (-A) 480,000

Current Assets 8,800 (FV)


Plant Assets 17,600 (FV)
Liabilities 2,400 (FV)
Investment in Set 20,400 (given above)
Gain from bargain purchase 3,600 (difference)

Exercise 1-5
Advanced Accounting

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 says $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 as follows (in thousands):

Pan Book Value Sis Book Value Sis Fair Value


Cash $ 700.00 $ 80.00 $ 80.00
Inventories $ 240.00 $ 160.00 $ 200.00
Other Current Assets $ 60.00 $ 40.00 $ 40.00
Plant assets - net $ 520.00 $ 360.00 $ 560.00
Total Assets $ 1,520.00 $ 640.00 $ 880.00

Pan Book Value Sis Book Value Sis Fair Value


Current liabilities $ 320.00 $ 60.00 $ 60.00
Other liabilities $ 160.00 $ 100.00 $ 80.00
Common Stock, $10 par $ 840.00 $ 400.00
Retained earnings $ 200.00 $ 80.00
Total liabilities and owners'
equity $ 1,520.00 $ 640.00

Prepare all journal entries on Pan’s books to account for the acquisition

ANSWER
Investment in Set (+A) 1,060,000 (cash & stock)
Common Stock (+SE) 360,000 (10ps x360k shares)
Additional paid-in capital (+SE) 7,000,000 (difference?)

Investment expense (E, -SE) 140,000 (other direct costs)


Additional PIC (-SE) 60,000 (register and issue )
Cash (or other net assets) (-A) 200,000

Cash 80,000
Inventory 200,000
Other Current Asset 40,000
Plant Assets 560,000
Goodwill 320,000
Current liabilities 60, 000
Other liabilities 80,000
Investment in Sis 1,060,000

Problems 1-3
Advanced Accounting

On January 2, 2011, Par Corporation issues its own $10 par common stock for all the outstanding stock
of Sin Corporation in an acquisition. Sin is dissolved. In addition, Par pays $40,000 for registering and
issuing securities and $60,000 for other costs of combination. The market price of Par’s stock on January
2, 2011, is $60 per share. Relevant balance sheet information for Par and Sin Corporation on December
31, 2010, just before the combination, is as follows (in thousands):
Par Historical
Cost Sin Historical Cost Sin Fair Value
Cash $ 240.00 $ 20.00 $ 20.00
Inventories $ 100.00 $ 60.00 $ 120.00
Other Current Assets $ 200.00 $ 180.00 $ 200.00
Land $ 160.00 $ 40.00 $ 200.00
Plant and Equipment-net $ 1,300.00 $ 400.00 $ 700.00
Total Assets $ 2,000.00 $ 700.00 $ 1,240.00

Liabilities $ 400.00 $ 100.00


Common Stock, $10 par $ 1,000.00 $ 200.00
Additional paid-in-capital $ 400.00 $ 100.00
Retained Earnings $ 200.00 $ 300.00
Total liabilities and owner's
equity $ 2,000.00 $ 700.00 $ -
1. Assume that Par issues 25,000 shares of its stock for all of Sin’s outstanding shares.
a. Prepare journal entries to record the acquisition of Sin
b. Prepare a balance sheet for Par Corporation immediately after the acquisition

ANSWER
Investment in Set (+A) 1,500,000 (cash & stock 60x25)
Common Stock (+SE) 25,000 (10ps x25k shares)
Additional paid-in capital (+SE) 1,475,000 (difference?)

Investment expense (E, -SE) 60,000 (other direct costs)


Additional PIC (-SE) 40,000 (register and issue )
Cash (or other net assets) (-A) 100,000

Cash 20,000
Inventory 120,000
Other Current Asset 200,000
Land 200,000
Plant & Equipment Assets 700,000
Goodwill 360,000
Current liabilities 100,000
Investment in Sis 1,500,000

2. Assume that Par issues 15,000 shares of its stock for all of Sin’s outstanding shares.
Advanced Accounting

a. Prepare journal entries to record the acquisitions of Sin


b. Prepare a balance sheet for Par Corporation immediately after the acquisition

ANSWER
Investment in Set (+A) 900,000 (cash & stock 60x15)
Common Stock (+SE) 15,000 (10ps x15k shares)
Additional paid-in capital (+SE) 885,000 (difference?)

Investment expense (E, -SE) 60,000 (other direct costs)


Additional PIC (-SE) 40,000 (register and issue )
Cash (or other net assets) (-A) 100,000

Cash 20,000
Inventory 120,000
Other Current Asset 200,000
Land 200,000
Plant & Equipment Assets 700,000
Current liabilities 100,000
Investment in Sis 900,000
Gain from bargain purchase 240,000

Problems 1-5
Advanced Accounting

Pat Corporation paid $5,000,000 for Saw Corporations voting common stock on January 2, 2011, and
Saw was dissolved. The purchase prices consisted of $100,000 for registering and issuing the 100,000
shares of common stock and $200,000 for other costs of combination. Balance sheet information for the
companies immediately before the acquisition is summarized as follows (in thousands)
Pat Sin
Book value Book Value Fair Value
Cash $ 6,000.00 $ 480.00 $ 480.00
Accounts Receivable - net $ 2,600.00 $ 720.00 $ 720.00
Notes receivable - net $ 3,000.00 $ 600.00 $ 600.00
Inventories $ 5,000.00 $ 840.00 $ 1,000.00
Other current assets $ 1,400.00 $ 360.00 $ 400.00
Land $ 4,000.00 $ 200.00 $ 400.00
Buildings - net $ 18,000.00 $ 1,200.00 $ 2,400.00
Equipment - net $ 20,000.00 $ 1,600.00 $ 1,200.00
Total Assets $ 60,000.00 $ 6,000.00 $ 7,200.00

Accounts payable $ 2,000.00 $ 600.00 $ 600.00


Mortgage Payable - 10% $ 10,000.00 $ 1,400.00 $ 1,200.00
Capital stock, $10 par $ 20,000.00 $ 2,000.00
Other paid in capital $ 16,000.00 $ 1,200.00
Retained Earnings $ 12,000.00 $ 800.00
Total Equities $ 60,000.00 $ 6,000.00
1. Prepare Journal Entries for Pat Corporation to record its acquisition of Saw Corporation,
including all allocations to individual asset and liability accounts.

ANSWER
Investment in Set (+A) 5,000,000 (cash & stock 100kx50)
Common Stock (+SE) 500,000 (10ps x100k shares)
Additional paid-in capital (+SE) 4,500,000 (difference?)

Investment expense (E, -SE) 200,000 (other direct costs)


Additional PIC (-SE) 100,000 (register and issue )
Cash (or other net assets) (-A) 300,000

Cash 480,000
Accounts receivable –net 720,000
Advanced Accounting

Notes Recv –net 600,000


Inventories 1,000,000
Other curr assets 400,000
Land 400,000
Buildings –net 2,400,000
Equipment 1,200,000
Total Assets 7,200,000

Accounts Payable 600,000


Mtg Payable 1,200,000
Investment in Saw Corporation 5,000,000
Gain from bargain purchase 400,000
Total 7,200,000

2. Prepare a balance sheet for Pat Corporation on January 2, 2011, immediately after the
acquisition and dissolution of Saw

Saw Pat Combined


Cash 480,000 6,000,000 6,480,000
Accounts receivable –net 720,000 2,600,000 3,320,000
Notes Recv –net 600,000 3,000,000 3,600,000
Inventories 1,000,000 5,000,000 6,000,000
Other curr assets 400,000 1,400,000 1,800,000
Land 400,000 4,000,000 4,400,000
Buildings –net 2,400,000 18,200,000 20,600,000
Equipment 1,200,000 20,000,000 21,200,000
Total Assets 7,200,000 60,000,000 67,200,000

Accounts Payable 600,000 2,000,000 2,600,000


Mtg Payable 1,400,000 10,000,000 11,400,000
Common Stock
Retained Earnings
Total Equities