Chapter 5 Business Combinations
23. On March 1, 2006, Pride Corporation paid $400,000 for all the outstanding common
stock of Supra Company in a business combination, for which out-of-pocket costs may be disregarded. The carrying amounts of Supra's identifiable assets and liabilities on March 1, 2006, follow:
Cash $ 40,000 Inventories 120,000 Plant assets (net) 240,000 Liabilities (90,000)
On March 1, 2006, the inventories of Supra had a current fair value of $95,000, and the plant assets (net) had a current fair value of $280,000. The amount recognized as goodwill as a result of the business combination is: A) $0
B) $25,000 C) $75,000 D) $90,000
E) Some other amount
Answer: C
Rationale: [$400,000 – ($310,000 – $25,000 + $40,000) = $75,000]
24. On October 31, 2006, Portugal Corporation acquired 80% of the outstanding common
stock of Spain Company in a business combination. Total cost of the investment,
including direct out-of-pocket costs, was $480,000. The working paper elimination (in journal entry format, explanation omitted) for Portugal Corporation and Subsidiary on October 31, 2006, was as follows:
Common Stock?Spain 100,000 Additional Paid-in Capital?Spain 120,000 Retained Earnings?Spain 180,000 Plant Assets (net)?Spain 50,000 Goodwill?Portugal [$480,000 – ($450,000 x 0.80)] 120,000 Investment in Spain Company Common Stock?Portugal 480,000 Minority Interest in Net Assets of Subsidiary ($450,000 x 0.20) 90,000
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Chapter 5 Business Combinations
If minority interest in net assets of subsidiary had been reflected at carrying amount, rather than at current fair value, of the subsidiary's identifiable net assets, the credit to Minority Interest in Net Assets of Subsidiary in the foregoing elimination would have been:
A) $90,000 B) $120,000 C) $60,000
D) Some other amount
Answer: D
Rationale: ($400,000 x 0.20 = $80,000)
25. On October 31, 2006, Portugal Corporation acquired 80% of the outstanding common
stock of Spain Company in a business combination. Total cost of the investment,
including direct out-of-pocket costs, was $480,000. The working paper elimination (in journal entry format, explanation omitted) for Portugal Corporation and Subsidiary on October 31, 2006, was as follows:
Common Stock?Spain 100,000 Additional Paid-in Capital?Spain 120,000 Retained Earnings?Spain 180,000 Plant Assets (net) ?Spain 50,000 Goodwill?Portugal [$480,000 – ($450,000 x 0.80)] 120,000 Investment in Spain Company Common Stock?Portugal 480,000 Minority Interest in Net Assets of Subsidiary ($450,000 x 0.20) 90,000 If goodwill had been computed based on the implied current fair value of the
subsidiary's total net assets, the debit to Goodwill?Portugal in the foregoing working paper elimination would have been: A) $120,000 B) $150,000 C) $180,000
D) Some other amount
Answer: B
Rationale: [($480,000 ? 0.80) – $450,000 = $150,000]
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Chapter 5 Business Combinations
26. Which of the following is the best theoretical justification for consolidated financial
statements?
A) In form the constituent companies are one economic entity; in substance they are
separate
B) In form the constituent companies are separate; in substance they are one economic
entity
C) In form and substance the constituent companies are one economic entity D) In form and substance the constituent companies are separate
Answer: B
27. In a business combination resulting in a parent company-subsidiary relationship, the
parent company's Investment in Subsidiary Common Stock ledger account balance is:
A) Allocated to individual asset and liability ledger accounts in a parent company
journal entry
B) Eliminated with a working paper elimination for the working paper for consolidated
balance sheet
C) Displayed among noncurrent assets in the consolidated balance sheet D) Used as a basis for adjusting the subsidiary's asset and liability account balances in
the subsidiary's ledger to current fair values
Answer: B
28. Working paper eliminations are entered in: A) Both the parent company's and the subsidiary's accounting records B) Neither the parent company's nor the subsidiary's accounting records C) The parent company's accounting records only D) The subsidiary's accounting records only
Answer: B
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Chapter 5 Business Combinations
29. On the date of a business combination resulting in a parent-subsidiary relationship, the
differences between current fair values and carrying amounts of the subsidiary's identifiable net assets are:
A) Included in a working paper elimination B) Recognized in the applicable asset and liability ledger accounts of the subsidiary C) Recognized in the applicable asset and liability ledger accounts of the parent
company
D) Accounted for in some other manner
Answer: A
30. Consolidated financial statements are intended primarily for the use of: A) Stockholders of the parent company B) Taxing authorities C) Management of the parent company D) Creditors of the parent company
Answer: A
31. How is the minority interest in net assets of subsidiary displayed in a consolidated
balance sheet under the economic unit concept of consolidated financial statements?
A) As a separate item in the liabilities section B) As a deduction from consolidated goodwill, if any C) By means of a note to the consolidated financial statements D) As a separate item in the stockholders' equity section
Answer: D
32. On November 30, 2006, Pegler Corporation paid $500,000 cash and issued 100,000
shares of $1 par common stock with a current fair value of $10 a share for all 50,000 outstanding shares of $5 par common stock (carrying amount $20 a share) of Stadler Company, which became a subsidiary of Pegler. Also on November 30, 2006, Pegler paid $50,000 for finder's, accounting, and legal fees related to the business combination and $80,000 for costs associated with the SEC registration statement for the common stock issued in the combination. The net result of Pegler's journal entries to record the combination is to:
A) Debit Investment in Stadler Company Common stock for $1,000,000 B) Credit Paid-In Capital in Excess of Par for $900,000 C) Debit Expenses of Business Combination for $130,000 D) Credit Cash for $630,000
Answer: D
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Chapter 5 Business Combinations
33. Minority interest in net assets of subsidiary is displayed in the consolidated balance
sheet as:
A) A part of consolidated stockholders' equity under the parent company concept of
consolidated financial statements
B) A liability under the parent company concept of consolidated financial statements C) An offset to investment in subsidiary common stock under the parent company
concept of consolidated financial statements
D) An item between liabilities and stockholders' equity under the economic unit
concept of consolidated financial statements
Answer: B
34. Before the computation of goodwill, the debits in the date-of-business-combination
working paper elimination for the consolidated balance sheet of Promo Corporation and its 80%-owned subsidiary subtotaled $640,000, compared with a $540,000 credit to Investment in Sindow Company Common Stock?Promo. The working paper elimination should be completed with:
A) An allocation of the $100,000 bargain-purchase excess to reduce the amounts
initially assigned to specified assets of Sindow.
B) A $100,000 credit to Minority Interest in Net Assets of Subsidiary C) A $28,000 debit to Goodwill?Promo and a $128,000 credit to Minority Interest in
Net Assets of Subsidiary
D) A $35,000 debit to Goodwill?Promo and a $135,000 credit to Minority Interest in
Net Assets of Subsidiary
Answer: C
76 Larsen, Modern Advanced Accounting, Tenth Edition