# Stonehill bus 434 quiz chapter 1

Stonehill BUS 434 Quiz Chapter 1

CHAPTER 1

Intercorporate Acquisitions and Investments in Other Entities

1. On April 1, 2012, Jack Company paid \$800,000 for all of Ann Corporation’s issued and outstanding common stock. Ann’s recorded assets and liabilities on April 1, 2012, were as follows:

On April 1, 2012, Ann’s inventory was determined to have a fair value of \$190,000 and the property and equipment had a fair value of \$560,000. What is the amount of goodwill resulting from the business combination?
a) \$0.
b) \$50,000.
c) \$150,000.
d) \$180,000.
Solution
Book Value Fair Value
Cash \$80,000 \$80,000
Inventory 240,000 190,000
PP&E 480,000 560,000
Liabilities (180,000) (180,000)

Fair Value of Consideration Given \$800,000
– Fair Value Net Assets Acquired
(80,000 + 190,000 + 560,000 – 180,000) (650,000)
GOODWILL \$150,000

2. Topper Company established a subsidiary and transferred equipment with a fair value of \$72,000 to the subsidiary. Topper had purchased the equipment with an expected life of 10 years four years earlier for \$100,000 and has used straight-line depreciation with no expected residual value. At the time of the transfer, the subsidiary should record:
a) Equipment at \$72,000, and no accumulated depreciation.
b) Equipment at \$60,000, and no accumulated depreciation.
c) Equipment at \$100,000, and accumulated depreciation of \$40,000.
d) Equipment at \$120,000, and accumulated depreciation of \$48,000.
Solution
• Purchase Price: \$100,000
• Residual Value: 0
• Expected Life: 10 years.
• Accumulated Depreciation: [(100,000 – 0) / 10] x 4 → \$40,000.
Transfers: Book Value → The subsidiary should record:
• Equipment for \$100,000
• Accumulated Depreciation for \$40,000

3. Lead Corporation established a new subsidiary and transferred to it assets with a cost of \$90,000 and a book value of \$75,000. The assets had a fair value of \$100,000 at the time of transfer. The transfer will result in:
a) A reduction of net assets reported by Lead Corporation of \$90,000.
b) A reduction of net assets reported by Lead Corporation of \$75,000.
c) No change in the reported net assets of Lead Corporation.
d)  An increase in the net assets reported by Lead Corporation of \$25,000.
Solution:
Transfers: Book Value → Correct Answer: C

4. Tear Company, a newly established subsidiary of Stern Corporation, received assets with an original cost of \$260,000, a fair value of \$200,000, and a book value of \$140,000 from the parent in exchange for 7,000 shares of Tear’s \$8 par value common stock. Tear should record:
a) Additional paid-in capital of \$0.
b) Additional paid-in capital of \$84,000.
c) Additional paid-in capital of \$144,000.
d) Additional paid-in capital of \$204,000
Solution
Journal Entry recorded by Tear Company:
Assets 260,000
Accumulated Depreciation  120,000
Common Stock (7,000 x 8)  56,000
Additional Paid In Capital (plug in)  84,000

5. Twill Company has a reporting unit with the fair value of its net identifiable assets of \$500,000. The carrying value of the reporting unit’s net assets on Twill’s books is \$575,000, which includes \$90,000 of goodwill. The fair value of the reporting unit is \$560,000. Twill should report impairment of goodwill of:
a) \$60,000.
b) \$30,000.
c) \$15,000.
d) \$0.

•
Solution

Fair Value Reporting Unit (\$560,000) < Carrying Amount Reporting Unit (\$575,000)

Goodwill Impairment

Goodwill Impairment \$30,000
Carrying Amount RU’s Goodwill \$90,000
(Implied Value RU’ Goodwill) (60,000)
Fair Value RU 560,000
Fair Value of Net Assets, excluding Goodwill (500,000)

Following its acquisition of the net assets of Dan Company, Empire Company assigned goodwill of \$60,000 to one of the reporting divisions. Information for this division follows:

6. Based on the preceding information, what amount of goodwill will be reported for this division if its fair value is determined to be \$200,000?
A. \$0
B. \$60,000
C. \$30,000
D. \$10,000
Solution

• Carrying Amount: 20,000 + 35,000 + 125,000 + 60,000 – 30,000 → \$210,000

Fair Value Reporting Unit (\$200,000) < Carrying Amount Reporting Unit (\$210,000)

Goodwill Impairment

Goodwill Impairment \$50,000
Carrying Amount RU’s Goodwill \$60,000
(Implied Value RU’ Goodwill) (10,000)
Fair Value RU 200,000
Fair Value of Net Assets, excluding Goodwill
(20,000 + 40,000 + 160,000 – 30,000) (190,000)

Amount of Goodwill that will be reported: Carrying Amount Goodwill (\$60,000) – Goodwill Impairment (\$50,000) → \$10,000

7. Based on the preceding information, what amount of goodwill impairment will be recognized for this division if its fair value is determined to be \$195,000?
A. \$5,000
B. \$30,000
C. \$60,000
D. \$55,000

Solution

Fair Value Reporting Unit (\$195,000) < Carrying Amount Reporting Unit (\$210,000)

Goodwill Impairment

Goodwill Impairment \$55,000
Carrying Amount RU’s Goodwill \$60,000
(Implied Value RU’ Goodwill) (5,000)
Fair Value RU 195,000
Fair Value of Net Assets, excluding Goodwill
(20,000 + 40,000 + 160,000 – 30,000) (190,000)

8. Based on the preceding information, what amount of amount of goodwill impairment will be recognized for this division if its fair value is determined to be \$245,000?
A. \$0
B. \$30,000
C. \$60,000
D. \$55,000
Solution

Fair Value Reporting Unit (\$245,000) > Carrying Amount Reporting Unit (\$210,000)

No Goodwill Impairment → Correct Answer: A
9. Plummet Corporation reported the book value of its net assets at \$400,000 when Zenith Corporation acquired 100 percent ownership. The fair value of Plummet’s net assets was determined to be \$510,000 on that date. What amount of goodwill will be reported in consolidated financial statements presented immediately following the combination
if Zenith paid \$550,000 for the acquisition?
A. \$0
B. \$50,000
C. \$150,000
D. \$40,000
Solution
Fair Value of Consideration Given \$550,000
– Fair Value Net Assets Acquired (510,000)
GOODWILL \$40,000