3B - Business Combinations

Question 1

Sayon Co. issues 200,000 shares of $5 par value common stock to acquire Trask Co. in an acquisition-business combination. The market value of Sayon’s common stock is $12. Legal and consulting fees incurred in relationship to the purchase are $110,000. Registration and issuance costs for the common stock are $35,000. What should be recorded in Sayon’s additional paid-in capital account for this business combination?

$1,255,000

$1,365,000

$1,400,000

$1,545,000

Answer 1

Additional paid in capital = $12-5=7
Additional paid-in capital ($7 x 200,000) = 1,400,000

The effect on Additional Paid-in Capital is:

Stock issue $1,400,000
Registration and issuance costs (35,000)
$1,365,000

Question 2

Charles Corporation acquires all of the outstanding stock of Harry Corporation. After the acquisition, the stock of Harry Corporation is retired and the Harry Corporation ceases to exist. This is an example of a:

goodwill acquisition.

statutory consolidation.

statutory merger.

None of the answer choices are correct.

Answer 2

statutory merger

A statutory merger occurs when one entity acquires another entity and the second entity ceases to exist. The acquiring entity remains in existence and continues the operations of the combined businesses.

Question 3

If Company C is established for the merging of Company A and Company B, the business combination is classified as:

statutory consolidation.

statutory merger.

an acquisition of stock.

an acquisition of assets.

Answer 3

statutory consolidation.

The statutory consolidation classification refers to the merging of two enterprises into a newly established enterprise.

Question 4

Rollins Corporation acquired 75% of the outstanding stock of Schauer Corporation. The purchase price of the acquisition was $3,960,000. The book value of Schauer’s net assets was $4,640,000. Schauer had assets whose fair values were greater than their carrying value by the following amounts: Land $120,000, Buildings $280,000. How much goodwill is implied in Rollins’ acquisition of Schauer?

$180,000

$240,000

$80,000

$300,000

Answer 4

$240,000

$3.96M ÷ 75% = $5.28M total fair value
$4,640,000 + $120,000 Land + $280,000 Building = 5,040,000
5.28M − $5.04M = $240,000

Question 5

Bale Co. incurred $100,000 of acquisition costs related to the purchase of the net assets of Dixon Co. The $100,000 should be:

allocated on a pro rata basis to the nonmonetary assets acquired.

capitalized as an other asset and amortized over five years.

capitalized as part of goodwill and tested annually for impairment.

expensed as incurred in the current period.

Answer 5

expensed as incurred in the current period.

The acquisition method is required to account for the acquisition of another company. The acquisition method requires that acquisition-related costs be expensed as incurred. The costs to acquire stock or bonds must be included in the cost of the stock or bonds.

Question 6

In a business combination with goodwill recorded, how should any subsequent impairment of the goodwill be recognized on the income statement or statement of retained earnings?

As a change in accounting principle

As a restatement of beginning retained earnings

As a loss from continuing operations

As a component of other comprehensive income

Answer 6

As a loss from continuing operations

The impairment loss should be recognized in income from continuing operations just as amortization expense would have been recognized in arriving at income from continuing operations. (FASB ASC 350-20-45-1)

Question 7

Grand Corporation acquired all of the outstanding stock of Modest Corporation on February 23, 20X3. The purchase price of the acquisition was $3,680,000. The book value of Modest’s net assets was $3,345,000. In preparing the acquisition, Grand determined that Modest had assets whose book values were $218,000 less than their fair values. How much goodwill will Grand Corporation record as a result of this acquisition?

$335,000

$117,000

$218,000

$101,000

Answer 7

$117,000

Grand will record goodwill of $117,000, computed as follows:

Purchase price less book value of net assets: $3,680,000 – $3,345,000 = $335,000
Purchase price in excess of net assets less undervalued assets equals goodwill: $335,000 – $218,000 = $117,000

Question 8

Park, Inc. acquired 100% of Gravel Co.’s net assets. On the acquisition date, Gravel’s accounting records reflected $50,000 of costs associated with in-process research and development activities. The fair value of the in-process research and development activities was $400,000. Park’s consolidated intangible assets will increase by what amount, if any, as a result of the acquisition of the in-process research and development activities?

$350,000

$400,000

$0

$50,000

Answer 8

$400,000

In-process research and development results are classified as intangible assets with indefinite lives until the research and development phase is complete or the project is abandoned. These assets are originally recorded at fair value (i.e., $400,000) and will be subject to impairment tests.

Question 9

A business combination is accounted for properly as an acquisition. Direct costs of combination, other than registration and issuance costs of equity securities, should be:

included in the acquisition cost to be allocated to identifiable assets according to their fair values.

capitalized as a deferred charge and amortized.

deducted directly from the retained earnings of the combined corporation.

deducted in determining the net income of the combined corporation for the period in which the costs were incurred.

Answer 9

deducted in determining the net income of the combined corporation for the period in which the costs were incurred.

Business combinations accounted for as an acquisition should treat expenses related to the combination as follows:
Out-of-pocket costs such as fees of finders and consultants are expensed.
Issuance costs such as SEC filing fees are charged to the paid-in-capital account.

Question 10

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, K’s carrying amount; Long-term debt, fair value

Plant and equipment, K’s carrying amount; Long-term debt, K’s carrying amount

Plant and equipment, fair value; Long-term debt, fair value

Plant and equipment, fair value; Long-term debt, K’s carrying amount

Answer 10

Plant and equipment, fair value; Long-term debt, fair value

This must be accounted for under the acquisition method. Assets and liabilities are recorded at fair value. Any excess of acquisition price over fair value is recorded as goodwill.

Question 11

Nelson Corp. paid $1,000,000 cash to purchase 100% of the outstanding common stock of Orange Corp. on April 1 of the current year. Examination of Orange’s assets and liabilities reveals the following:

                      Book Value   Fair Value on April 1   Cash                     $100,000         $100,000   Marketable securities     200,000          250,000   Land                       50,000          300,000   Accounts payable           75,000           75,000   Stockholder equity        275,000 Nelson should record what amount of goodwill as a result of this acquisition?

$1,000,000

$425,000

$350,000

$725,000

Answer 11

$425,000

Goodwill is the difference between the purchase price and the fair value of the net identifiable assets (assets less liabilities). The fair value of net assets is $575,000 ($100,000 + $250,000 + $300,000 − $75,000). The company paid $1,000,000 for Orange Corp. Goodwill is $425,000, the difference between the purchase price ($1,000,000) and the fair value of the net assets ($575,000).

Question 12

A company acquires another company for $3,000,000 in cash, $10,000,000 in stock, and the following contingent consideration: $1,000,000 after year 1, $1,000,000 after year 2, and $500,000 after year 3, if earnings of the subsidiary exceed $10,000,000 in each of the three years. The fair value of the contingent-based consideration portion is $2,100,000. What is the total consideration transferred for this business combination?

$5,100,000

$13,000,000

$15,500,000

$15,100,000

Answer 12

$15,100,000

A contingent consideration is an obligation of the acquiring entity to transfer additional assets or equity interests to the former owners of an acquired entity only if certain specified future events occur or conditions are met. The amount of contingent consideration paid is recorded at its fair value. Total consideration would be $15,100,000 ($3,000,000 cash + $10,000,000 in stock + $2,100,000 contingent-based consideration).

Question 13

Which of the following expenses related to the business combination should be included, in total, in the determination of net income of the combined corporation for the period in which the expenses are incurred?

Fees of finders and consultants: Yes; Issuance fees for equity securities issues: Yes

Fees of finders and consultants: No; Issuance fees for equity securities issues: No

Fees of finders and consultants: No; Issuance fees for equity securities issues: Yes

Fees of finders and consultants: Yes; Issuance fees for equity securities issues: No

Answer 13

Fees of finders and consultants: Yes; Issuance fees for equity securities issues: No

Business combinations accounted for as an acquisition should treat expenses related to the combination as follows:

Out-of-pocket costs such as fees of finders and consultants are expensed.
Issuance costs such as SEC filing fees are charged to the paid-in-capital account.

Question 14

Brower Corporation acquired all of the outstanding stock of Jordon Corporation. The purchase price of the acquisition was $1,960,000. The book value of Jordon’s net assets was $2,172,000. Jordon had assets whose fair values were greater than their carrying value by $58,000. How much gain is implied in Brower’s acquisition of Jordon?

$58,000

$200,000

$270,000

$212,000

Answer 14

$270,000

Brower will record a gain of $270,000, computed as follows:

Purchase price less book value of purchased share of net assets: $1,960,000 – $2,172,000 = $(212,000)

Question 15

How should the acquirer recognize a bargain purchase in a business acquisition?

As a gain in earnings at the acquisition date

As a deferred gain that is amortized into earnings over the estimated future periods benefited

As goodwill in the statement of financial position

As negative goodwill in the statement of financial position

Answer 15

As a gain in earnings at the acquisition date

In a business acquisition, the acquiring corporation must recognize the assets and liabilities acquired at fair value. If the net assets acquired exceed the purchase price—a bargain purchase—the excess must be recognized as a gain in earnings at the date of the acquisition.

Question 16

A combination is accounted for as an acquisition. Which of the following would be considered part of the acquisition cost of an acquired entity in a business combination?

Costs incurred by the acquiring entity that are directly related to the acquisition
Costs incurred by the acquired entity that are directly related to the acquisition
Indirect acquisition costs incurred by the acquiring entity

I and II only

I and III only

I only

None of these items would be part of the acquisition cost.

Answer 16

None of these items would be part of the acquisition cost.

FASB ASC 805-10-25-21 requires that acquisition-related costs be charged to expense. All of these costs are acquisition-related costs and should be expensed in the period incurred.

Question 17

In its financial statements, Pare, Inc., uses the cost method of accounting for its 15% ownership of Sabe Co. On December 31, 20X1, Pare has a receivable from Sabe. How should the receivable be reported in Pare’s December 31, 20X1, balance sheet?

Eighty-five percent (85%) of the receivable should be reported separately, with the balance offset against Sabe’s payable to Pare.

The total receivable should be offset against Sabe’s payable to Pare, without separate disclosure.

The total receivable should be included as part of the investment in Sabe, without separate disclosure.

The total receivable should be reported separately.

Answer 17

The total receivable should be reported separately.

The total receivable should be reported separately. The equity method would be used at the 20% ownership level but would not change the requirement to report the receivable separately. At the 50%-plus level of ownership, consolidation would require elimination of the receivable as an intercompany item.

Question 18

A company incurred the following costs to complete a business combination in the current year:

  Issuing debt securities        $30,000
  Registering debt securities     25,000
  Legal fees                      10,000
  Due diligence costs              1,000
What amount should be reported as current-year expenses, not subject to amortization?

$1,000

$66,000

$36,000

$11,000

Answer 18

$11,000

A business combination occurs when two or more business enterprises are brought under common control and into one accounting entity (e.g., mergers, consolidations, or acquisitions). Acquisition costs and restructuring costs must be recognized separately from the acquisition itself in the acquirer’s post-combination financial statements in accordance with GAAP—usually expensed. The legal fees and due diligence costs that total $11,000 are considered acquisition costs and should be expensed in the current year. Debt issuance and debt registration costs are part of the consideration given, and recorded in conjunction with the debt itself.