3.On August 31, 2011, Wood Corp.

issued 100,000 shares of its $20 par value common stock for the
net assets of Pine, Inc., in a business combination accounted for by the acquisition method. The
market value of Wood’s common stock on August 31 was $36 per share. Wood paid a fee of
$160,000 to the consultant who arranged this acquisition. Costs of registering and issuing the
equity securities amounted to $80,000. No goodwill was involved in the acquisition. What
amount should Wood capitalize as the cost of acquiring Pine’s net assets?

a $3,600,000
.

b $3,680,000
.

c $3,760,000
.

d $3,840,000
.

ANS: A

In a business combination accounted for as an acquisition, the fair market value of the net assets
is used as the valuation basis for the combination. In this case, the net assets of the subsidiary
have an implied fair market value of $3,600,000 which is the value of the common stock issued
to Pine’s shareholders (100,000 shares × $36). The direct cost of acquisition should not be
included as part of the cost of a company acquired, and the cost of registering equity securities
should be a reduction of the issue price of the securities (i.e., additional paid-in capital). Thus,
the $160,000 paid for a consultant who arranged the acquisition should be expensed, and the
$80,000 cost for registering and issuing the equity securities should be treated as a reduction of
additional paid-in capital. Answer (a) is correct because the total amount to be capitalized is
$3,600,000.

PTS: 1

4. Items 4 and 5 are based on the following:

On December 31, 2011, Saxe Corporation was acquired by Poe Corporation. In the business
combination, Poe issued 200,000 shares of its $10 par common stock, with a market price of
$18 a share, for all of Saxe’s common stock. The stockholders’ equity section of each
company’s balance sheet immediately before the combination was

In the December 31, 2011 consolidated balance sheet, additional paid-in capital should be
reported at

a $ 950,000
.

b $1,300,000
.

c $1,450,000
.

d $2,900,000
.

ANS: D
In a business combination accounted for as an acquisition, the fair market value of the net assets
is used as the valuation basis for the combination. In this case, the net assets of the subsidiary
have an implied fair market value of $3,600,000 which is the value of the common stock issued
to Saxe’s shareholders (200,000 × $18). Since $3,600,000 is the basis for recording this
purchase, the common stock issued is recorded at $2,000,000 (200,000 shares × $10 par value
per share) and additional paid-in capital is recorded at $1,600,000 ($3,600,000 – $2,000,000).
Therefore, answer (d) is correct because additional paid-in capital should be reported at
$2,900,000 ($1,300,000 + $1,600,000).

PTS: 1

5. In the December 31, 2011 consolidated balance sheet, common stock should be
reported at

a $3,000,000
.

b $3,500,000
.

c $4,000,000
.

d $5,000,000
.

ANS: D

In a business combination, the common stock account of the combined entity is the number of
shares outstanding multiplied by the par value of the stock. The total common stock account of
the combined entity is equal to $5,000,000, the $3,000,000 originally outstanding plus the total
par value of the stock issued in the acquisition, $2,000,000 (200,000 × $10).
PTS: 1

6. On December 31, 2011, Neal Co. issued 100,000 shares of its $10 par value common
stock in exchange for all of Frey Inc.’s outstanding stock. The fair value of Neal’s common
stock on December 31, 2011, was $19 per share. The carrying amounts and fair values of Frey’s
assets and liabilities on December 31, 2011, were as follows:

a $175,000
.

b $105,000
.

c $ 70,000
.

d $0
.

ANS: C

In a business combination accounted for as an acquisition, the fair market value of the net assets
is used as the valuation basis for the combination. In this case, Frey’s assets have an implied fair
market value of $1,900,000 which is the market value of the common stock issue (100,000
shares × $19). The value assigned to goodwill is $70,000, which is the value of the stock minus
the fair value of Frey’s identifiable assets ($1,900,000 – $1,830,000).
PTS: 1

7. Consolidated financial statements are typically prepared when one company has a
controlling financial interest in another unless

a The subsidiary is a finance company.

.

b The fiscal year-ends of the two companies are more than three months apart.
.

c The investee is in bankruptcy.

.

d The two companies are in unrelated industries, such as manufacturing and real estate.
.

ANS: C

A subsidiary should not be consolidated when it is in bankruptcy. Consolidation of all

majority-owned subsidiaries is required regardless of the industry or business of the subsidiary.
A difference in fiscal periods of a parent and a subsidiary does not of itself justify the exclusion
of the subsidiary from consolidation.

PTS: 1
 8. On January 1, 2011, Lake Corporation acquired 100% of the outstanding common
stock of Shore Corporation for $800,000. On the date of acquisition, the fair value of Shore’s
net identifiable assets is $820,000. The book value of Shore Corporation’s net assets is
$760,000. In Lake’s 2011 financial statements, Lake should recognize

a Goodwill on the balance sheet.

.

b A gain from bargain purchase.

.

c A reduction in certain noncurrent assets on the balance sheet.

.

d An extraordinary gain.
.

ANS: B

The consideration paid plus the fair value of the noncontrolling interest plus the fair value of
any previous purchases of common stock is less than the fair value of the net identifiable assets
acquired, the acquirer should recognize a gain from bargain purchase on the income statement.
The gain would be equal to $20,000 ($820,000 – 800,000). Answer (a) is incorrect because
goodwill is only recognized when the purchase price is greater than the fair value of the
recorded assets. Answer (c) is incorrect because it describes an inappropriate method. Answer
(d) is incorrect because the gain is not treated as extraordinary.

PTS: 1

9. A business combination is accounted for appropriately as an acquisition. Which of the

following should be deducted in determining the combined corporation’s net income for the
current period?
 Direct costs General expenses

of acquisition related to acquisition

a Yes No
.

b Yes Yes
.

c No Yes
.

d No No
.

ANS: B

The direct costs of acquisition should be an expense of the period in a business combination
accounted for by the acquisition method. General expenses related to the acquisition are also
deducted as incurred in determining the combined corporation’s net income for the current
period.

PTS: 1

10. Which of the following situations would require the use of the acquisition method in a
business combination?

a The acquisition of a group of assets.

.

b The formation of a joint venture .

.

c The purchase of more than 50% of a business.

.

d All of the above would require the use of the acquisition method.
.

of bond issues.

3. Describe the accounting valuation for bonds at date of issuance.

4. Apply the methods of bond discount and premium amortization.

5. Explain the accounting for long-term notes payable.

6. Describe the accounting for the extinguishment of non-current liabilities.

7. Describe the accounting for the fair value option.

8. Explain the reporting of off-balance-sheet financing arrangements.

9. Indicate how to present and analyze non-current liabilities.