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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 companys 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. Darts 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 Darts
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:
Book
Fair
Value
Value
$56,00
Current Assets
$40,000
0
Plant and
220,00
160,000
Equipment
0
Liabilities
-40,000 -36,000
assumed
$240,0
$160,000
00
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
Inventory
Property and Equipment (net of
accumulated Depreciation of
$640,000)
Liabilities

$ 160,000.00
$ 480,000.00
$ 960,000.00
$(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

Advanced Accounting
b. $100,000
c. $300,000
d. $360,000

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 its shares with a market value of $20 per share
for all of Sips 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 stockholders equity section of Pal Corporations balance sheet
immediately after the acquisition on January 2 (Hint. Prepare the journal entry)
ANSWER
Investment in Sip (+A)
shares)
Common Stock (+SE)
shares)
Additional paid-in capital (+SE)
Investment expense (E, -SE)
direct costs)
Additional PIC (-SE)
(register and issue )
Cash (or other net assets) (-A)
(10ps x 600k shares

12,000,000

(20ps x 600k
6,000,000 (10ps x 600k
6,000,000

40,000

(other

20,000
60,000

stockholders equity section of Pal Corporation


Cap Stk, $10 par, 1.2 mil shares
Other PIC

$12,000,000
$6.780.000

Advanced Accounting
Retained Earnings
Total SE Equity

2,360,000
21,140,000

Exercise 1-4
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


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

$
200,000.0
0
$
96,000.00
$
24,000.00
$
160,000.0
0

Immediately before the acquisition in which Set Company was dissolved, Sets
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 Pans books to record the acquisition
ANSWER
Investment in Set (+A)
(given)

20,400

Advanced Accounting
Common Stock (+SE)
x960k shares)
Additional paid-in capital (+SE)
Investment expense (E, -SE)
costs)
Additional PIC (-SE)
issue )
Cash (or other net assets) (-A)

9,600

(10ps

10,800
160,000

(other direct

320,000

(register and
480,000

Current Assets
8,800
Plant Assets
17,600
Liabilities
2,400
Investment in Set
20,400
above)
Gain from bargain purchase
3,600
(difference)

(FV)
(FV)
(FV)
(given

Exercise 1-5
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):

Cash
Inventories
Other Current
Assets
Plant assets - net
Total Assets

Pan Book
Value
$
700.00
$
240.00
$
60.00
$
520.00
$
1,520.00

Sis Book
Value

Sis Fair
Value

80.00

$ 80.00

160.00

$ 200.00

40.00

$ 40.00

$
$

360.00
640.00

$ 560.00
$ 880.00

Advanced Accounting

Current liabilities
Other liabilities
Common Stock, $10 par
Retained earnings
Total liabilities and
owners' equity

Pan Book
Value
$
320.00
$
160.00
$
840.00
$
200.00
$

Sis Book
Value

1,520.00

Sis Fair Value

60.00

$ 60.00

100.00

$ 80.00

400.00

80.00

640.00

Prepare all journal entries on Pans books to account for the acquisition
ANSWER
Investment in Set (+A)
stock)
Common Stock (+SE)
shares)
Additional paid-in capital (+SE)
(difference?)
Investment expense (E, -SE)
costs)
Additional PIC (-SE)
(register and issue )
Cash (or other net assets) (-A)
Cash
Inventory
Other Current Asset
Plant Assets
Goodwill
Current liabilities
Other liabilities
Investment in Sis

1,060,000

(cash &
360,000 (10ps x360k
7,000,000

140,000

(other direct

60,000
200,000
80,000

200,000
40,000
560,000
320,000
60, 000
80,000
1,060,000

Problems 1-3
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 Pars stock on January 2, 2011, is $60 per share.

Advanced Accounting
Relevant balance sheet information for Par and Sin Corporation on December 31,
2010, just before the combination, is as follows (in thousands):
Par
Historical
Sin Historical
Cost
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 Sins
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)
stock 60x25)
Common Stock (+SE)
shares)
Additional paid-in capital (+SE)
(difference?)
Investment expense (E, -SE)
direct costs)
Additional PIC (-SE)
(register and issue )
Cash (or other net assets) (-A)

1,500,000

(cash &
25,000 (10ps x25k
1,475,000

60,000

(other

40,000
100,000

Advanced Accounting
Cash

20,000

Inventory
Other Current Asset
Land
Plant & Equipment Assets
Goodwill
Current liabilities
Investment in Sis

120,000
200,000
200,000
700,000
360,000
100,000
1,500,000

2. Assume that Par issues 15,000 shares of its stock for all of Sins
outstanding shares.
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)
stock 60x15)
Common Stock (+SE)
shares)
Additional paid-in capital (+SE)
(difference?)
Investment expense (E, -SE)
direct costs)
Additional PIC (-SE)
(register and issue )
Cash (or other net assets) (-A)
Cash

900,000

(cash &
15,000 (10ps x15k
885,000

60,000

(other

40,000
100,000
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

Advanced Accounting

Problems 1-5
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
Mortgage Payable - 10%
Capital stock, $10 par
Other paid in capital

$
2,000.00
$
10,000.00
$
20,000.00
$
16,000.00

600.00

$ 1,400.00
$ 2,000.00
$ 1,200.00

600.00

$ 1,200.00

Advanced Accounting
$
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.
Retained Earnings

ANSWER
Investment in Set (+A)
stock 100kx50)
Common Stock (+SE)
shares)
Additional paid-in capital (+SE)
(difference?)
Investment expense (E, -SE)
costs)
Additional PIC (-SE)
issue )
Cash (or other net assets) (-A)

Cash
Accounts receivable net
Notes Recv net
Inventories
Other curr assets
Land
Buildings net
Equipment
Total Assets
Accounts Payable
Mtg Payable
Investment in Saw Corporation
Gain from bargain purchase
Total

5,000,000

(cash &
500,000 (10ps x100k
4,500,000

200,000

(other direct

100,000

(register and
300,000

480,000
720,000
600,000
1,000,000
400,000
400,000
2,400,000
1,200,000
7,200,000
600,000
1,200,000
5,000,000
400,000
7,200,000

Advanced Accounting
2. Prepare a balance sheet for Pat Corporation on January 2, 2011, immediately
after the acquisition and dissolution of Saw
Saw
Cash
6,480,000
Accounts receivable net
3,320,000
Notes Recv net
Inventories
Other curr assets
1,800,000
Land
Buildings net
20,600,000
Equipment
Total Assets
67,200,000
Accounts Payable
2,600,000
Mtg Payable
11,400,000
Common Stock
Retained Earnings
Total Equities

Pat
480,000

6,000,000

Combined

720,000

2,600,000

600,000
3,000,000
3,600,000
1,000,000
5,000,000
6,000,000
400,000
1,400,000
400,000
4,000,000
4,400,000
2,400,000 18,200,000
1,200,000 20,000,000
21,200,000
7,200,000 60,000,000
600,000

2,000,000

1,400,000 10,000,000

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