Kennedy Company is acquiring Ross Company in an
acquisition. What date should be used as the acquisition date for
(b) The acquisition date is the date the acquirer obtains
control of the acquiree. Answer (a) is incorrect because the date
a contract is signed usually does not correspond with the date
control is acquired. Answer (c) is incorrect because the acquisition
may occur before all contingencies are resolved. Answer (d)
is incorrect because control constitutes owning more than 50% of
the shares of stock outstanding.
Lebow Corp. acquired control of Wilson Corp. by purchasing
stock in steps. Which of the following regarding this type of
acquisition is true?
(c) Any previously held shares should be remeasured at
fair value as of the date control is acquired, and the gain is recognized
in earnings of the period. If an unrealized gain was previously
recognized in other comprehensive income, the amount
recognized in other comprehensive income should also be recognized
as a gain in the current period. Answer (a) is incorrect
because previously held shares are remeasured to fair value on
the acquisition date. Answer (b) is incorrect because any gain is
recognized in earnings of the period. Answer (d) is incorrect
because the previously issued shares must be revalued at the
acquisition date and included as part of the cost of the acquisition.
In accounting for a business combination, which of the following
intangibles should not be recognized as an asset apart
(c) Intangibles are recognized as assets apart from goodwill
if they arise from contractual or legal rights, regardless of
whether those rights are transferable or separable from the acquired
entity or from other rights and obligations. If an intangible
asset does not arise from contractual or other legal rights, it is
recognized as an asset apart from goodwill only if it is separable
(i.e., capable of being sold, transferred, or licensed). Trademarks,
lease agreements, and patents all arise from contractual or legal
rights. Employee quality does not and is not separable.
With respect to the allocation of the cost of a business acquisition,
ASC Topic 805 (SFAS 141[R]) requires
(b) The acquisition method is required for all business
combinations. In applying the acquisition method, the acquisition
cost is allocated to acquired assets and liabilities based on
their relative fair values. Any excess of cost over the fair value of
net identifiable assets is allocated to goodwill.
On November 30, year 1, Parlor, Inc. purchased for cash at
$15 per share all 250,000 shares of the outstanding common
stock of Shaw Co. At November 30, year 1, Shaw’s balance sheet
showed a carrying amount of net assets of $3,000,000. At that
date, the fair value of Shaw’s property, plant and equipment exceeded
its carrying amount by $400,000. In its November 30,
year 1 consolidated balance sheet, what amount should Parlor
report as goodwill?
(c) In an acquisition, the net assets of the acquired firm
are recorded at their FV. The excess of the cost of the investment
over the FV of the net assets acquired is allocated to goodwill.
The cost of this investment is $3,750,000 (250,000 shares ×
$15), and the FV of the net assets acquired, excluding goodwill
is $3,400,000 ($3,000,000 + $400,000). Therefore, the amount
allocated to goodwill is $350,000 ($3,750,000 – $3,400,000).
On April 1, year 1, Parson Corp. purchased 80% of the outstanding
stock of Sloan Corp. for $700,000 cash. Parson determined
that the fair value of the net identifiable assets was
$800,000 on the date of acquisition. The fair value of Sloan’s
stock at date of acquisition was $18 per share. Sloan had a total
of 50,000 shares of stock issued and outstanding prior to the
acquisition. What is the amount of goodwill that should be recorded
by Parson at date of acquisition?
(c) The correct answer is calculated as illustrated below.
Assets transferred $ 700,000
Plus: Noncontrolling interest in Sloan
10,000 shares × $18 180,000
Less: Fair value of net identifiable assets of
Goodwill recognized $ 80,000
A subsidiary, acquired for cash in a business combination,
owned inventories with a market value greater than the book
value as of the date of combination. A consolidated balance sheet
prepared immediately after the acquisition would include this
difference as part of
(c) The assets acquired would be revalued to their fair
market value. Answer (c) is correct because the inventory account
would then include the difference between the market
value and book value. Answer (a) is incorrect because a deferred
credit is never recorded. Answer (b) is incorrect because goodwill
represents the excess of cost plus the fair value of previously
held interests plus the fair value of noncontrolling interest less
the fair value of net identifiable assets. Answer (d) is incorrect
because the retained earnings account is not affected by this
transaction when acquisition accounting is used.
Company J acquired all of the outstanding common stock of
Company K in exchange for cash. The acquisition price exceeds
the fair value of net assets acquired. How should Company J
determine the amounts to be reported for the plant and equipment
and long-term debt acquired from Company K?
Plant and equipment Long-term debt
(d) Answer (d) is correct because all assets and liabilities
(including plant and equipment and long-term debt) should
be reported at fair value.
In a business combination accounted for as an acquisition
the appraised values of the identifiable assets acquired exceeded
the acquisition price. How should the excess appraised value be
(d) When the fair value of identifiable assets acquired in
a business acquisition exceeds the sum of the consideration given
and the fair value of previously held interest plus the fair value of
noncontrolling interests, the difference is recorded as a bargain
purchase. Answer (d) is correct because a gain is recognized on
the income statement in the current period. Answer (a) is incorrect
because negative goodwill is not recorded. Answer (b) is
incorrect because the difference is not treated as a part of additional
paid-in capital. Answer (c) is incorrect because it describes
the accounting treatment no longer allowed.
Shep Co. has a receivable from its parent, Pep Co. Should
this receivable be separately reported in Shep’s balance sheet and
in Pep’s consolidated balance sheet?
Shep’s balance sheet
Pep’s consolidated balance sheet
(a) When a subsidiary prepares separate financial statements,
intercompany receivables (and payables) should be reported
in the balance sheet as a separate line item. When consolidated
financial statements are prepared by the parent
company, all intercompany receivables (and payables) should be
eliminated to avoid overstating assets and liabilities.