Advanced Financial Accounting 12th Edition by Theodore Christensen solution manual

          [AICPA Adapted]
 
1. a –  Goodwill equals the excess sum of the consideration given over the sum of the fair value of identifiable assets less liabilities.
 
(b) Incorrect. Assets considered only need be identifiable, not just tangible.  For example, patents would be identifiable, but not tangible.
(c) Incorrect. Assets considered only have to be identifiable. This includes both tangible and intangible identifiable assets.
(d) Incorrect. The calculation of goodwill requires a remeasurement of the assets and liabilities at fair value, not book value.
 
2. c – “Costs of issuing equity securities used to acquire the acquire are treated in the same manner as stock issue costs are normally treated, as a reduction in the paid-in capital associated with the securities” A reduction to the paid-in capital account results in a reduction in the fair value of the securities issued.
 
(a) Incorrect. Stock issue costs are not expensed but are charged as a reduction in paid-in capital.
(b) Incorrect. Stock issue costs result in a reduction of stockholder’s equity, not an increase.
(d) Incorrect. Stock issue costs result in a reduction of equity, and are not capitalized. They are not added to goodwill.
 
3. d – When a new company is acquired, the assets and liabilities are recorded at fair value.
 
(a) Incorrect. Historical cost is not always reflective of actual value, thus fair values are used.
(b) Incorrect. Book value is often different than fair value, thus fair value is the appropriate basis.
(c) Incorrect. This method is also unacceptable. Fair value is the appropriate basis.
 
4. d – This combination would result in a bargain purchase.
 
(a) Incorrect. Deferred credits do not arise as a result of fair value of identifiable assets exceeding fair value of the consideration.
(b) Incorrect. The fair value is not reduced, and deferred credits do not arise in this situation.
(c) Incorrect. The fair value is not reduced, and deferred credits do not arise in this situation.
 
5. c – $875,000 – $800,000 = $75,000. Total consideration given – FV of net assets = Goodwill
 

E1-3  Multiple-Choice Questions on Reported Balances [AICPA Adapted]
 
1. d – $2,900,000. New APIC Balance = existing APIC on Poe’s books + APIC from new stock issuance. (200,000*($18-$10) + $1,300,000 = $2,900,000)
 
2. d – $600,000. The total balance in the investment account is equal to the total consideration given in the combination. (10,000 *$60 per share = $600,000)
 
3. c – $150,000. Goodwill = Consideration given –  FV of net assets acquired. FV of Net Assets: $80,000 + $190,000 + $560,000 - $180,000 = $650,000. (800,000 – 650,000 = 150,000)
 
4. c – $4,000,000. The increase in net assets is solely attributable to the FV of the consideration given, the nonvoting preferred stock.
 
(a) Incorrect. This answer only reflects the book value of Master’s net assets.
(b) Incorrect. This answer only reflects the fair value of Master’s net assets.
(d) Incorrect. The additional stock related to the finder’s fee is not capitalized, but rather expensed.
 
E1-4  Multiple-Choice Questions Involving Account Balances
 
1. c – When the parent creates the subsidiary, the equipment is transferred at cost with the accompanying accumulated depreciation (which in effect is the book value).  ($100,000/10 = $10,000 per year * 4 = $40,000.)
 
(a) Incorrect. When a subsidiary is created internally, the assets are transferred as they were on the parent’s books (carrying value). Fair value is not considered.
(b) Incorrect. This is the proper carrying value of the asset, but it should be recorded at cost with the accompanying accumulated depreciation.
(d) Incorrect. When a subsidiary is created internally, the assets are transferred as they were on the parent’s books (carrying value).
 
2. c – The assets are transferred at the carrying value on Pead’s books, and thus no change in reported net assets occurs.
 
(a) Incorrect. No change occurs.
(b) Incorrect. No change occurs. 
(d) Incorrect. No change occurs.
 
3. b – APIC = $140,000 (BV) – 7,000 * $8 = $84,000.
 
4. b – $35,000. Since the carrying value of the reporting unit ($330,000) is lower than the fair value of the reporting unit’s net assets ($350,000), the goodwill of the reporting unit is not impaired and will remain at its carrying value of $35,000