11.Par Company and Sub Company were combined in an acquisition transaction. Par was able to acquire Sub at a bargain Pratt. The sum of the fair values of identifiable assets acquired less the fair value of liabilities assumed exceeded the cost to Par. After eliminating previously recorded goodwill, there was still some “negative goodwill.” Proper accounting treatment by Par is to report the amount as
b.a deferred credit, which is amortized.
c.an ordinary gain.
d.an extraordinary gain.
12.With an acquisition, direct and indirect expenses are
a.expensed in the period incurred.
b.capitalized and amortized over a discretionary period.
c.considered a part of the total cost of the acquired company.
d.charged to retained earnings when incurred.
13.In a business combination accounted for as an acquisition, how should the excess of fair value of net assets acquired over the consideration paid be treated?
a.Amortized as a credit to income over a period not to exceed forty years.
b.Amortized as a charge to expense over a period not to exceed forty years.
c.Amortized directly to retained earnings over a period not to exceed forty years.
d.Recorded as an ordinary gain.
14.P Corporation issued 10,000 shares of common stock with a fair value of $25 per share for all the outstanding common stock of S Company in a business combination properly accounted for as an acquisition. The fair value of S Company's net assets on that date was $220,000. P Company also agreed to issue an additional 2,000 shares of common stock with a fair value of $50,000 to the former stockholders of S Company as an earnings contingency. Assuming that the contingency is expected to be met, the $50,000 fair value of the additional shares to be issued should be treated as a(n)
a.decrease in noncurrent liabilities of S Company that were assumed by P Company.
b.decrease in consolidated retained earnings.
c. increase in consolidated goodwill.
d.decrease in consolidated other contributed capital.
15.On February 5, Pryor Corporation paid $1,600,000 for all the issued and outstanding common stock of Shaw, Inc., in a transaction properly accounted for as an acquisition. The book values and fair values of Shaw's assets and liabilities on February 5 were as follows
Book ValueFair Value
Cash $ 160,000 $ 160,000
Receivables (net) 180,000 180,000
Inventory 315,000 300,000
Plant and equipment (net) 820,000 920,000
Liabilities (350,000) (350,000)
Net assets $1,125,000 $1,210,000
What is the amount of goodwill resulting from the business combination?
16.P Company purchased the net assets of S Company for $225,000. On the date of P's purchase, S Company had no investments in marketable securities and $30,000 (book and fair value) of liabilities. The fair values of S Company's assets, when acquired, were
Current assets$ 120,000
Noncurrent assets 180,000
How should the $45,000 difference between the fair value of the net assets acquired ($270,000) and the consideration paid ($225,000) be accounted for by P Company?
a.The noncurrent assets should be recorded at $ 135,000.
b.The $45,000 difference should be credited to retained earnings.
c.The current assets should be recorded at $102,000, and the noncurrent assets should be recorded at $153,000.
- An ordinary gain of $45,000 should be recorded.
17.If the value implied by the purchase price of an acquired company exceeds the fair values of identifiable net assets, the excess should be
- allocated to reduce any previously recorded goodwill and classify any remainder as an ordinary gain.
- allocated to reduce current and long-lived assets.
- allocated to reduce long-lived assets.
- accounted for as goodwill.
18.P Co. issued 5,000 shares of its common stock, valued at $200,000, to the former shareholders of S Company two years after S Company was acquired in an all-stock transaction. The additional shares were issued because P Company agreed to issue additional shares of common stock if the average post combination earnings over the next two years exceeded $500,000. P Company will treat the issuance of the additional shares as a (decrease in)
- consolidated retained earnings.
- consolidated goodwill.
- consolidated paid-in capital.
- non-current liabilities of S Company assumed by P Company.
19.In a business combination in which the total fair value of the identifiable assets acquired over liabilities assumed is greater than the consideration paid, the excess fair value is:
- classified as an extraordinary gain.
- allocated first to eliminate any previously recorded goodwill, and any remaining excess over the consideration paid is classified as an ordinary gain.
- allocated first to reduce proportionately non-current assets then to non-monetary current assets, and any remaining excess over cost is classified as a deferred credit.
- allocated first to reduce proportionately non-current, depreciable assets to zero, and any remaining excess over cost is classified as a deferred credit.
20.The first step in determining goodwill impairment involves comparing the
- implied value of a reporting unit to its carrying amount (goodwill excluded).
- fair value of a reporting unit to its carrying amount (goodwill excluded).
- implied value of a reporting unit to its carrying amount (goodwill included).
- fair value of a reporting unit to its carrying amount (goodwill included).