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1. Pale Company was established on January 1, 20X1. Along with other assets, it immediately purchased land for $80,000, a building for $240,000, and equipment for $90,000. On January 1, 20X5, Pale transferred these assets, cash of $21,000, and inventory costing $37,000 to a newly created subsidiary, Bright Company, in exchange for 10,000 shares of Bright’s $6 par value stock. Pale uses straight-line depreciation and useful lives of 40 years and 10 years for the building and equipment, respectively, with no estimated residual values. Required: Prepare the journal entry that Pale recorded when it transferred the assets to Bright, and the entry that Bright recorded for the receipt of assets and issuance of common stock to Pale. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) 1. Record the transfer of assets by Pale Company to Bright Company. 2. Record the receipt of assets by Bright Company from Pale Company.



Event 1



2



General Journal Investment in Bright Company Common Stock Accumulated Depreciation – Buildings Accumulated Depreciation – Equipment Cash Inventory Land Buildings Equipment Cash Inventory Land Buildings Equipment Accumulated Depreciation – Buildings Accumulated Depreciation – Equipment Common Stock, $6 par Additional Paid-In Capital



Debit 408,000 24,000 36,000



Credit



21,000 37,000 80,000 240,000 90,000 21,000 37,000 80,000 240,000 90,000 24,000 36,000 348,000 60,000



NOTES: Investment in Bright Company Stock = Cash + Inventory + Land + Buildings – Accumulated Depreciation-Buildings + Equipment – Accumulated Depreciation-Equipment Straight-Line Depreciation = (Cost / Useful Life) x Years in Service Common Stock = 10,000 x $6 = $60,000



2. Lester Company transferred the following assets to a newly created subsidiary, Mumby Corporation, in exchange for 40,000 shares of its $3 par value stock: Cash Accounts Receivable Inventory Land Buildings Equipment



Cost $ 40,000 75,000 50,000 35,000 160,00 0 240,00 0



Book Value $ 40,000 68,000 50,000 35,000 125,000 180,000



Required: Prepare the journal entry in which Lester recorded the transfer of assets to Mumby Corporation, and the entry in which Mumby recorded for the receipt of assets and issuance of common stock to Lester. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) 1. Record the transfer of assets by Lester Company to Mumby Corporation. 2. Record the receipt of assets by Mumby Corporation from Lester Company



Event 1



2



General Journal Investment in Mumby Corporation Common Stock Accumulated Depreciation-Buildings Accumulated Depreciation-Equipment Allowance for Uncollected Accounts Receivable Cash Accounts Receivable Inventory Land Buildings Equipment Cash Accounts Receivable Inventory Land Buildings Equipment Accumulated Depreciation-Buildings Accumulated Depreciation-Equipment Allowance for Uncollected Accounts Receivable Common Stock, $3 par Additional Paid-In Capital



Debit 498,000 35,000 60,000 7,000



Credit



40,000 75,000 50,000 35,000 160,000 240,000 40,000 75,000 50,000 35,000 160,000 240,000 60,000 35,000 120,000 378,000 7,000



3. McDermott Corporation has been in the midst of a major expansion program. Much of its growth had been internal, but in 20X1 McDermott decided to continue its expansion through the acquisition of other companies. The first company acquired was Tippy Inc., a small manufacturer of inertial guidance systems for aircraft and missiles. On June 10, 20X1, McDermott issued 17,000 shares of its $25 par common stock for all 40,000 of Tippy's $10 par common shares. At the date of combination, Tippy reported additional paid-in capital of $100,000 and retained earnings of $350,000. McDermott's stock was selling for $58 per share immediately prior to the combination. Subsequent to the combination, Tippy operated as a subsidiary of McDermott. Required: Prepare the journal entry or entries that McDermott would make to record the business combination with Tippy. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)



1. Record the purchase of Tippy Inc. Shares Event 1



General Journal Investment in Tippy Inc., Common Stock Common Stock, $25 par Additional Paid-In Capital



NOTES Investment in Tippy Inc., Common Stock: $986,000 = $58 × 17,000 shares Common Stock: $425,000 = $25 × 17,000 shares Additional Paid-In Capital: $561,000 = ($58 – $25) × 17,000 shares



Debit 986,000



Credit 425,000 561,000



4. Elm Corporation and Maple Company have announced terms of an exchange agreement under which Elm will issue 8,700 shares of its $14 par value common stock to acquire all of Maple Company’s assets. Elm shares currently are trading at $58, and Maple $9 par value shares are trading at $22 each. Historical cost and fair value balance sheet data on January 1, 20X2, are as follows: Elm Corporation Balance Sheet Item Book Value Assets Cash & Receivables $ 153,000 Land 106,000 Buildings & 308,000 Equipment (net) Total Assets



Equities Common Stock Additional Paid-In Capital Retained Earnings Total Equities



$ 567,000



Fair Value $



153,000 173,000



Maple Company Book Value $



48,000 64,000



$ 48,000 77,000



171,000



225,000



$



283,000



$ 350,000



$



88,000



416,000 $



742,000



$ 196,000 18,000



9,000



353,000



186,000



$ 567,000



Fair Value



$



283,000



Required: What amount will be reported immediately following the business combination for each of the following items in the combined company’s balance sheet?



A B C D E F G



Common Stock Cash and Receivables Land Buildings and Equipment (net) Goodwill Additional Paid-In Capital Retained Earnings



Amounts $317,800 201,000 183,000 533,000 154,600 400,800 353,000



NOTES a.Stock Outstanding: $196,000 + ($14 × 8,700 shares) = $317,800



b.Cash and Receivables: $153,000 + $48,000 = $201,000 c. Land: $106,000 + $77,000 = $183,000 d.Buildings and Equipment (net): $308,000 + $225,000 = $533,000 e.Goodwill: ($58 × 8,700) – $350,000 = $154,600 f. Additional Paid-In Capital: $18,000 + [($58 – $14) × 8,700] = $400,800



5. Mesa Corporation purchased Kwick Company's net assets and assigned goodwill of $81,200 to Reporting Division K. The following assets and liabilities are assigned to Reporting Division K:



Cash Inventory Equipment Goodwill Accounts Payable



Carrying Amount Fair Value $ 15,200 $ 15,200 57,200 72,200 182,00 202,000 0 81,200 31,200 31,200



Required: Determine the amount of goodwill to be reported for Division K and the amount of goodwill impairment to be recognized, if any, if Division K's fair value is determined to be a. $352,000, b. $292,000 and c. $272,000.



Amount of Goodwill $81,200 $33,800 $13,800



A B C



Goodwill Impairment $(47,400) $(67,400)



Explanation: STEP 1: FOR GOODWILL IMPAIRMENT TESTING Fair Value of Carrying Value Fair Value – Reporting Unit of Reporting Carrying Value Unit a $352,000 $304,400 $47,600 no impairment indicated b 292,000 304,400 $(12,400) impairment indicated c 272,000 304,400 $(32,400) impairment indicated STEP 2: FOR GOODWILL IMPAIRMENT TESTING Division K Fair Value – Implied Fair Book Value of Fair Value vs. Fair Value Identifiable Value of Goodwill Book Value Assets Goodwill a $352,000 $258,200 $93,800 $81,200 $12,600 b



292,000



258,200



33,800



81,200



$(47,400)



c



272,000



258,200



13,800



81,200



$(67,400)



Reported Goodwill no impairment impairment loss impairment loss



$81,200 33,800 13,800



Note: If the fair value of the reporting unit is greater than the carry value of the reporting unit, impairment is not indicated & Step 2 is not needed. However, if the fair value of the reporting unit is less than the carrying value of the reporting unit, impairment is indicated and Step 2 is required.



6. Double Corporation acquired all of the common stock of Simple Company for $459,000 on January 1, 20X4. On that date, Simple's identifiable net assets had a fair value of $399,000. The assets acquired in the purchase of Simple are considered to be a separate reporting unit of Double. The carrying value of Double’s investment at December 31, 20X4, is $509,000. Required: Determine the amount of goodwill impairment, if any, that should be recognized at December 31, 20X4, if the fair value of the net assets (excluding goodwill) at that date is $449,000 and the fair value of the reporting unit is determined to be a. $521,000, b. $503,000 and c. $459,500.



Goodwill Impairment A B C



$(6,000) $(49,500)



Explanation: STEP 1: FOR GOODWILL IMPAIRMENT TESTING Fair Value of Carrying Value Fair Value – Reporting Unit of Reporting Carrying Value Unit a $521,000 $509,000 $12,000 no impairment indicated b 503,000 509,000 (6,000) impairment indicated c 459,500 509,000 (49,500) impairment indicated



STEP 2: FOR GOODWILL IMPAIRMENT TESTING



a



Fair Value of Fair Value – Reporting Identifiable Unit Assets $521,000 $449,000



b



503,000



449,000



c



459,500



449,000



Implied Fair Book Value of Fair Value vs. Value of Goodwill Book Value Goodwill $72,000 $60,000 $12,000 no impairment 54,000 60,000 (6,000) impairment loss 10,500 60,000 (49,500) impairment loss



Reported Goodwill $60,000 54,000 10,500



Note: If the fair value of the reporting unit is greater than the carry value of the reporting unit, impairment



is not indicated & Step 2 is not needed. However, if the fair value of the reporting unit is less than the carrying value of the reporting unit, impairment is indicated and Step 2 is required.



7. Groft Company purchased Strobe Company's net assets and assigned them to four separate reporting units. Total goodwill of $186,000 is assigned to the reporting units as indicated: Reporting Unit



Carrying value of investment Goodwill included in carrying value Fair value of net identifiable assets at year-end Fair value of reporting unit at year-end



A B 700,00 330,00 $ $ 0 0 60,000 48,000 600,00 300,00 0 0 690,00 335,00 0 0



C 380,00 $ 0 28,000 400,00 0 370,00 0



D 520,00 $ 0 50,000 500,00 0 585,00 0



Required: Determine the amount of goodwill that Groft should report at year-end.



Amount of Goodwill Explanation:



$158,000 A



Step 1: Fair Value of Reporting Unit Carrying Value of Reporting Unit



B



C



$690,000 700,000



$335,000 330,000



$370,000 380,000



Fair Value – Carrying Value



(10,000)



5,000 no impairment Step 2 not needed



(10,000)



Step 2: Fair Value of Reporting Unit Fair Value – Identifiable Assets



690,000 600,000



370,000 400,000



Implied Fair Value of Goodwill Carrying value of Goodwill



90,000 60,000



(30,000) 28,000



Fair Value – Carrying Value of Goodwill



30,000



(58,000)



no impairment



impairment loss 28,000



D $585,000 520,000 65,000 no impairment Step 2 not needed



Goodwill reported: Goodwill included in carrying value Less: Impairment Loss recognized



$186,000 28,000



Goodwill reported



$158,000



8. The following financial statement information was prepared for Blue Corporation and Sparse Company at December 31, 20X2: Balance Sheets December 31, 20X2 Blue Corporation Assets Cash Accounts Receivable Inventory Land Buildings & Equipment Less: Accumulated Depreciation



$ 140,000 170,000 250,000 80,000 $ 680,000



Liabilities and Equities Accounts Payable Bonds Payable Bond Premium Common Stock Additional Paid-In Capital Retained Earnings Total Liabilities & Equities



$



70,000 110,000 180,000 100,000



$ 450,000



(320,000)



360,000



Goodwill Total Assets



Sparse Company



(230,000)



220,000



70,000



20,000



$1,070,000



$ 700,000



$



120,000 170,000 390,000



$ 195,000 100,000 10,000 150,000 60,000 185,000



$1,070,000



$ 700,000



70,000 320,000



Blue and Sparse agreed to combine as of January 1, 20X3. To effect the merger, Blue paid finder's fees of $30,000 and legal fees of $24,000. Blue also paid $15,000 of audit fees related to the issuance of stock, stock registration fees of $8,000, and stock listing application fees of $6,000. At January 1, 20X3, book values of Sparse Company's assets and liabilities approximated market value except for inventory with a market value of $200,000, buildings and equipment with a market value of $350,000, and bonds payable with a market value of $105,000. All assets and liabilities were



immediately recorded on Blue’s books. Required: Prepare all journal entries that Blue recorded assuming Blue issued 40,000 shares of $8 par value common stock to acquire all of Sparse's assets and liabilities in a business combination. Blue common stock was trading at $14 per share on January 1, 20X3. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)



1. Record the payment of merger fees and stock issuance costs. 2. Record the acquisition of Sparse’s assets and liabilities.



Event 1



2



General Journal



Debit 54,000 29,000



Merger Expense Deferred Stock Issue Costs Cash Cash Accounts Receivable Inventory Land Buildings and Equipment Goodwill Accounts Payable Bonds Payable Bond Premium Common Stock Additional Paid-In Capital Deferred Stock Issue Costs



83,000 70,000 110,000 200,000 100,000 350,000 30,000 195,000 100,000 5,000 320,000 211,000 29,000



Explanation: Computation of goodwill Fair value of consideration given (40,000 × $14) Fair value of assets acquired Fair value of liabilities assumed



$



560,000



$ 830,000 (300,000)



Fair value of net assets acquired Goodwill



(530,000) $



30,000



Computation of additional paid-in capital Number of shares issued



Credit



40,000



Issue price in excess of par value ($14 – $8)



× $



Total Less: Deferred stock issue costs



$ 240,000 (29,000)



Increase in additional paid-in capital



$ 211,000



6



9. Dunyain Company acquired Allsap Corporation on January 1, 20X1, through an exchange of common shares. All of Allsap's assets and liabilities were immediately transferred to Dunyain, which reported total par value of shares outstanding of $218,500 and $340,300 and additional paid-in capital of $370,100 and $718,100 immediately before and after the business combination, respectively. Required: aAssuming that Dunyain's common stock . had a market value of $27 per share at the time of exchange, what number of shares was issued?



Number of Shares Issued



$17,400



bWhat is the par value per share of . Dunyain's common stock?



Par Value per Share



$7



c Assuming that Allsap's identifiable assets . had a fair value of $477,500 and its liabilities had a fair value of $120,100, what amount of goodwill did Dunyain record at the time of the business combination?



Goodwill



$112,400



Explanation: a. 17,400 shares were issued, computed as follows: Par value of shares outstanding following merger Paid-in capital following merger Total par value and paid-in capital Par value of shares outstanding before merger Paid-in capital before merger



$



340,300 718,100



$ 1,058,400 $ 218,500 370,100 (588,600)



Increase in par value and paid-in capital



$ ÷ $



Divide by price per share



469,800 27



Number of shares issued



17,400



b. The par value is $7, computed as follows: Increase in par value of shares outstanding ($340,300 – $218,500) Divide by number of shares issued



$121,800 ÷ 17,400



Par value



$



c. Goodwill of $112,400 was recorded, computed as follows: Increase in par value and paid-in capital Fair value of net assets ($477,500 – $120,100)



$



469,800 (357,400)



Goodwill



$



112,400



7