When the implied value exceeds the aggregate fair values of identifiable net assets, the residual difference is accounted for as a.. The fair value of Stork's identifiable net assets wer
Trang 1Chapter 5 Allocation and Depreciation of Differences Between Implied and Book Value
Multiple Choice
1 When the implied value exceeds the aggregate fair values of identifiable net assets, the residual
difference is accounted for as
a excess of implied over fair value
3 On January 1, 2010, Lester Company purchased 70% of Stork Corporation's $5 par common stock
for $600,000 The book value of Stork net assets was $640,000 at that time The fair value of Stork's identifiable net assets were the same as their book value except for equipment that was $40,000 in excess of the book value In the January 1, 2010, consolidated balance sheet, goodwill would be reported at
a $152,000
b $177,143
c $80,000
d $0
4 When the value implied by the purchase price of a subsidiary is in excess of the fair value of
identifiable net assets, the workpaper entry to allocate the difference between implied and book value includes a
1 debit to Difference Between Implied and Book Value
2 credit to Excess of Implied over Fair Value
3 credit to Difference Between Implied and Book Value
a 1
b 2
c 3
d Both 1 and 2
5 If the fair value of the subsidiary's identifiable net assets exceeds both the book value and the value
implied by the purchase price, the workpaper entry to eliminate the investment account
a debits Excess of Fair Value over Implied Value
b debits Difference Between Implied and Fair Value
c debits Difference Between Implied and Book Value
d credits Difference Between Implied and Book Value
Trang 26 The entry to amortize the amount of difference between implied and book value allocated to an
unspecified intangible is recorded
1 on the subsidiary's books
2 on the parent's books
3 on the consolidated statements workpaper
a 1
b 2
c 3
d Both 2 and 3
7 The excess of fair value over implied value must be allocated to reduce proportionally the fair
values initially assigned to
a current assets
b noncurrent assets
c both current and noncurrent assets
d none of the above
8 The SEC requires the use of push down accounting when the ownership change is greater than
b debit to Revaluation Capital
c credit to Revaluation Capital
d debit to Revaluation Assets
10 In a business combination accounted for as an acquisition, how should the excess of fair value of
identifiable net assets acquired over implied value be treated?
a Amortized as a credit to income over a period not to exceed forty years
b Amortized as a charge to expense over a period not to exceed forty years
c Amortized directly to retained earnings over a period not to exceed forty years
d Recognized as an ordinary gain in the year of acquisition
11 On November 30, 2010, Pulse Incorporated purchased for cash of $25 per share all 400,000 shares
of the outstanding common stock of Surge Company Surge 's balance sheet at November 30, 2010, showed a book value of $8,000,000 Additionally, the fair value of Surge's property, plant, and equipment on November 30, 2010, was $1,200,000 in excess of its book value What amount, if any, will be shown in the balance sheet caption "Goodwill" in the November 30, 2010, consolidated balance sheet of Pulse Incorporated, and its wholly owned subsidiary, Surge Company?
a $0
b $800,000
c $1,200,000
d $2,000,000
Trang 312 Goodwill represents the excess of the implied value of an acquired company over the
a aggregate fair values of identifiable assets less liabilities assumed
b aggregate fair values of tangible assets less liabilities assumed
c aggregate fair values of intangible assets less liabilities assumed
d book value of an acquired company
13 Scooter Company, a 70%-owned subsidiary of Pusher Corporation, reported net income of $240,000
and paid dividends totaling $90,000 during Year 3 Year 3 amortization of differences between current fair values and carrying amounts of Scooter's identifiable net assets at the date of the
business combination was $45,000 The noncontrolling interest in net income of Scooter for Year 3 was
a $58,500
b $13,500
c $27,000
d $72,000
14 Porter Company acquired an 80% interest in Strumble Company on January 1, 2010, for $270,000
cash when Strumble Company had common stock of $150,000 and retained earnings of $150,000 All excess was attributable to plant assets with a 10-year life Strumble Company made $30,000 in
2010 and paid no dividends Porter Company’s separate income in 2010 was $375,000 Controlling interest in consolidated net income for 2010 is:
a $405,000
b $399,000
c $396,000
d $375,000
15 In preparing consolidated working papers, beginning retained earnings of the parent company will
be adjusted in years subsequent to acquisition with an elimination entry whenever:
a a noncontrolling interest exists
b it does not reflect the equity method
c the cost method has been used only
d the complete equity method is in use
16 Dividends declared by a subsidiary are eliminated against dividend income recorded by the parent
Trang 4Use the following information to answer questions 17 through 20
On January 1, 2010, Pandora Company purchased 75% of the common stock of Saturn Company Separate balance sheet data for the companies at the combination date are given below:
Saturn Co Saturn Co Pandora Co Book Values Fair Values
Total liabilities & equities $960,000 $405,000
Determine below what the consolidated balance would be for each of the requested accounts on January 2,
Trang 521 Sensible Company, a 70%-owned subsidiary of Proper Corporation, reported net income of
$600,000 and paid dividends totaling $225,000 during Year 3 Year 3 amortization of differences between current fair values and carrying amounts of Sensible's identifiable net assets at the date of the business combination was $112,500 The noncontrolling interest in consolidated net income of Sensible for Year 3 was
a $146,250
b $33,750
c $67,500
d $180,000
22 Primer Company acquired an 80% interest in SealCoat Company on January 1, 2010, for $450,000
cash when SealCoat Company had common stock of $250,000 and retained earnings of $250,000 All excess was attributable to plant assets with a 10-year life SealCoat Company made $50,000 in
2010 and paid no dividends Primer Company’s separate income in 2010 was $625,000 The
controlling interest in consolidated net income for 2010 is:
a $675,000
b $665,000
c $660,000
d $625,000
Use the following information to answer questions 23 through 25
On January 1, 2010, Poole Company purchased 75% of the common stock of Swimmer Company Separate balance sheet data for the companies at the combination date are given below:
Swimmer Co Swimmer Co
Total liabilities & equities $1,278,000 $542,000
Determine below what the consolidated balance would be for each of the requested accounts on January 2,
Trang 624 What amount of goodwill will be reported?
Trang 7Problems
5-1 Phillips Company purchased a 90% interest in Standards Corporation for $2,340,000 on January 1,
2010 Standards Corporation had $1,650,000 of common stock and $1,050,000 of retained earnings
on that date
The following values were determined for Standards Corporation on the date of purchase:
Book Value Fair Value
5-2 Pullman Corporation acquired a 90% interest in Sleeper Company for $6,500,000 on January 1
2010 At that time Sleeper Company had common stock of $4,500,000 and retained earnings of
$1,800,000 The balance sheet information available for Sleeper Company on January 1, 2010, showed the following:
Book Value Fair Value Inventory (FIFO) $1,300,000 $1,500,000
5-3 On January 1, 2010, Preston Corporation acquired an 80% interest in Spiegel Company for
$2,400,000 At that time Spiegel Company had common stock of $1,800,000 and retained earnings
of $800,000 The book values of Spiegel Company's assets and liabilities were equal to their fair values except for land and bonds payable The land's fair value was $120,000 and its book value was
$100,000 The outstanding bonds were issued on January 1, 2005, at 9% and mature on January 1,
2015 The bond principal is $600,000 and the current yield rate on similar bonds is 8%
Required:
Prepare the workpaper entries necessary on December 31, 2010, to allocate, amortize, and
depreciate the difference between implied and book value
Trang 8Present Value Present value of 1 of Annuity of 1
5-4 Pennington Corporation purchased 80% of the voting common stock of Stafford Corporation for
$3,200,000 cash on January 1, 2010 On this date the book values and fair values of Stafford
Corporation's assets and liabilities were as follows:
Book Value Fair Value
5-5 Perez Corporation acquired a 75% interest in Schmidt Company on January 1, 2010, for $2,000,000
The book value and fair value of the assets and liabilities of Schmidt Company on that date were as follows:
Book Value Fair Value Current Assets $ 600,000 $ 600,000
Property & Equipment (net) 1,400,000 1,800,000
Required:
Prepare, in general journal form, the December 31, 2010, workpaper entries necessary to:
A Eliminate the investment account
B Allocate and amortize the difference between implied and book value
Trang 95-6 On January 1, 2010, Page Company acquired an 80% interest in Schell Company for $3,600,000
On that date, Schell Company had retained earnings of $800,000 and common stock of $2,800,000 The book values of assets and liabilities were equal to fair values except for the following:
Book Value Fair Value
The equipment had an estimated remaining useful life of 8 years One-half of the inventory was sold
in 2010 and the remaining half was sold in 2011 Schell Company reported net income of $240,000
in 2010 and $300,000 in 2011 No dividends were declared or paid in either year Page Company uses the cost method to record its investment in Schell Company
Required:
Prepare, in general journal form, the workpaper eliminating entries necessary in the consolidated statements workpaper for the year ending December 31, 2011
5-7 Paddock Company acquired 90% of the stock of Spector Company for $6,300,000 on January 1,
2010 On this date, the fair value of the assets and liabilities of Spector Company was equal to their book value except for the inventory and equipment accounts The inventory had a fair value of
$2,300,000 and a book value of $1,900,000 The equipment had a fair value of $3,300,000 and a book value of $2,800,000
The balances in Spector Company's capital stock and retained earnings accounts on the date of acquisition were $3,700,000 and $1,900,000, respectively
B values are allocated on the basis of the proportional interest acquired by Paddock Company
5-8 Pruitt Corporation acquired all of the voting stock of Soto Corporation on January 1, 2010, for
$210,000 when Soto had common stock of $150,000 and retained earnings of $24,000 The excess of implied over book value was allocated $9,000 to inventories that were sold in 2010, $12,000 to equipment with a 4-year remaining useful life under the straight-line method, and the remainder to goodwill
Financial statements for Pruitt and Soto Corporations at the end of the fiscal year ended December
31, 2011 (two years after acquisition), appear in the first two columns of the partially completed consolidated statements workpaper Pruitt Corp has accounted for its investment in Soto using the partial equity method of accounting
Trang 10Corp
Soto Corp Debit Credit
Consolidated Balances
90,000 36,000 Pruitt Retained Earnings
1/1
72,000 Soto Retained Earnings
1/1
3,000 Add: Net Income
90,000 36,000 Less: Dividends
(60,000) (12,000) Retained Earnings 12/31
102,000 54,000 BALANCE SHEET
Cash
42,000 21,000 Inventories
63,000 45,000 Land
33,000 18,000 Equipment and
Buildings-net 192,000 165,000
Investment in Soto Corp 240,000
Total Assets
570,000 249,000 LIA & EQUITIES
Liabilities
168,000 45,000 Common Stock
300,000 150,000 Retained Earnings
102,000 54,000 Total Equities
570,000 249,000
Trang 115-9 On January 1, 2010, Prescott Company acquired 80% of the outstanding capital stock of Sherlock
Company for $570,000 On that date, the capital stock of Sherlock Company was $150,000 and its retained earnings were $450,000
On the date of acquisition, the assets of Sherlock Company had the following values:
Fair Market
Inventories $ 90,000 $165,000 Plant and equipment 150,000 180,000 All other assets and liabilities had book values approximately equal to their respective fair market values The plant and equipment had a remaining useful life of 10 years from January 1, 2010, and Sherlock Company uses the FIFO inventory cost flow assumption
Sherlock Company earned $180,000 in 2010 and paid dividends in that year of $90,000
Prescott Company uses the complete equity method to account for its investment in S Company
Required:
A Prepare a computation and allocation schedule
B Prepare the balance sheet elimination entries as of December 31, 2010
C Compute the amount of equity in subsidiary income recorded on the books of Prescott Company
on December 31, 2010
D Compute the balance in the investment account on December 31, 2010
Short Answer
1 When the value implied by the acquisition price is below the fair value of the identifiable net assets
the residual amount will be negative (bargain acquisition) Explain the difference in accounting for bargain acquisition between past accounting and proposed accounting requirements
2 Push down accounting is an accounting method required for the subsidiary in some instances such
as the banking industry Briefly explain the concept of push down accounting
Trang 12Questions from the Textbook
1 Distinguish among the following concepts:(a)Difference between book value and the value implied
by the purchase price.(b)Excess of implied value over fair value.(c)Excess of fair value over implied value.(d)Excess of book value over fair value
2 In what account is the difference between book value and the value implied by the purchase
price recorded on the books of the investor? In what account is the “excess of implied over fair value” recorded?
3 How do you determine the amount of “the difference between book value and the value implied by the purchase price” to be allocated to a specific asset of a less than wholly owned subsidiary?
4 The parent company’s share of the fair value of the net assets of a subsidiary may exceed acquisition cost How must this excess be treated in the preparation of consolidated financial statements?
5 What are the arguments for and against the alternatives for the handling of bargain acquisitions? Why are such acquisitions unlikely to occur with great frequency?
6 P Company acquired a 100% interest in S Company On the date of acquisition the fair value of the
assets and liabilities of S Company was equal to their book value except for land that had a fair
value of $1,500,000 and a book value of $300,000
At what amount should the land of S Company be included in the consolidated balance sheet?
At what amount should the land of S Company be included in the consolidated balance sheet if P
Company acquired an80% interest in S Company rather than a 100%interest?
Business Ethics Question from the Textbook
Consider the following: Many years ago, a student in a consolidated financial statements class came to me and said that Grand Central (a multi-store grocery and variety chain in Salt Lake City and surrounding towns and cities) was going to be acquired and that I should try to buy the stock and make lots of money I asked him how he knew and he told me that he worked part-time for Grand Central and heard that Fred Meyer was going to acquire it I did not know whether the student worked in the accounting department at Grand Central or was a custodian at one of the stores I thanked him for the information but did not buy the stock Within a few weeks, the announcement was made that Fred Meyer was acquiring Grand Central and the stock price shot up, almost doubling It was clear that I had missed an opportunity to make a lot of money
I don’t know to this day whether or not that would have been insider trading How-ever, I have never gone home at night and asked my wife if the SEC called From “Don’t go to jail and other good advice for accountants,” by Ron Mano, Accounting Today, October 25, 1999
Question: Do you think this individual would have been guilty of insider trading if he had purchased the stock in Grand Central based on this advice? Why or why not? Are there ever instances where you think it would be wise to miss out on an opportunity to reap benefits simply because the behavior necessitated would have been in a gray ethical area, though not strictly illegal? Defend your position