M4 - Acquisition Method: Part 1

Question 1

Journal Entry to record acquisition for parent common stock:

Answer 1

DR: Investment in Sub
CR: Common Stock (parent at par)
CR: APIC (parent/FV-Par)

The transaction is recorded at the FMV of the stock issued at date transaction closes.

Question 2

Direct costs of combination, other than registration and issuance costs of equity securities, should be:

Answer 2

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

Direct costs are expensed in the period incurred.

Question 3

The general guidelines for assigning amounts to the inventories acquired provide for: finished goods to be valued at estimated selling prices, less both costs of disposal and a reasonable profit allowance. (true or false)

Answer 3

True

With acquisition accounting the net assets acquired are based on FMV. The FV of finished goods and merchandise inventory are based upon selling price less disposal costs and a reasonable profit allowance.

Question 4

The general guidelines for assigning amounts to the inventories acquired provide for the FV of raw materials should be based upon replacement costs. True or false

Answer 4

True

Question 5

Replacement costs are an appropriated measure of FMV for raw materials inventory, but not finished goods. True or false

Answer 5

true

Question 6

P issues 200,000 shares of $5 par value CS to acquire T in an acquisition business combination. Market value of P’s CS is $12. Legal fees incurred in relationship to acquisition are $110,000. Registration and issuance costs for CS are $35,000. Record JE. What should be Additional PIC?

Answer 6

DR: Legal & Consulting Expense 110,000
DR: Investment in T 2,400,000
CR: Cash 145,000
CR: Common Stock 1,000,000
CR: APIC 1,365,000

200,000*12 = 2,400,000
110,000 + 35,000 = 145,000
200,000 * 5 = 1,000,000
[200,000 * (12-5)] - 35,000 = 1,365,000

Question 7

Are both (Fees of finders and consultants) and (registration fees for equity securities issued) expenses as incurred and in should be included in the determination of net income of the combined corporation?

Answer 7

Fees of finders and consultants are expensed in the period incurred. Registration fees for equity securities issued decrease additional paid-in-capital (stockholders’ equity)

Question 8

When the acquisition price exceeds the FV of net assets acquired, assets and liabilities should be presented at FV. (true or false)

Answer 8

true