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1)A parent company exchanges 36,000 shares of its $2 par value common stock, with a fair value of $18/per share, for all of the shares owned by the subsidiary’s shareholders
1)A parent company exchanges 36,000 shares of its $2 par value common stock, with a fair value of $18/per share, for all of the shares owned by the subsidiary’s shareholders. On the acquisition date, the subsidiary reported $180,000 of contributed capital (i.e., common stock) and $270,000 of retained earnings. An examination of the subsidiary’s balance sheet revealed that book values were equal to fair values for all assets except for an unrecorded patent which has a fair value of $198,000. In preparing the consolidated balance sheet on the acquisition date, which of the following is correct regarding the [E] consolidating entry?
A.The [E] entry includes a credit to common stock $180,000
B.The [E] entry includes a credit to Equity Investment $648,000
C.The [E] entry includes a debit to Equity Investment $198,000
D.The [E] entry includes a credit to Equity Investment $450,000
2. On January 1, 2018, the investor company issued 18,000 new shares of the investor company's common stock in exchange for all of the individually identifiable assets and liabilities of the investee company, in a transaction that qualifies as a business combination. On the acquisition date, the investor company's common stock had a traded market value of $42 per share, and the investee company's common stock had a traded market value of $19 per share. The investee company’s net book value was $408,000. In its analysis of the investee company, the investor company determined that the fair value of all identifiable assets less the fair value of all liabilities was $744,000.
Provide the Investor Company's balance (i.e., on the investor's books, before consolidation) for "Goodwill" immediately following the acquisition of the investee's net assets:
A.$12,000
B.$348,000
C.$0
D.$156,000
3. Assume that on January 1, 2019, an investor company acquired 100% of the outstanding voting common stock of an investee company in exchange for $160,000. The transaction is a taxable asset acquisition under the Internal Revenue Code. The following financial statement information is for the investor company and the investee company on January 1, 2019, prepared immediately before this transaction.
| Book Values | ||
|---|---|---|
| Investor | Investee | |
| Current assets | $100,000 | $60,000 |
| Noncurrent assets | 275,000 | 120,000 |
| Total assets | $375,000 | $180,000 |
| Liabilities | $150,000 | $100,000 |
| Common stock ($1 par) | 20,000 | 10,000 |
| Additional paid-in capital | 130,000 | 50,000 |
| Retained earnings | 75,000 | 20,000 |
| Total liabilities & equity | $375,000 | $180,000 |
Assume the fair values of the investee’s net assets approximated the recorded book values of the investee’s net assets, except the fair value of the investee’s identifiable noncurrent assets is $30,000 higher than book value. In addition, the investee’s pre-transaction tax bases in its individual net assets approximate their reported book values. Any book-tax differences relate entirely to tax-deductible items. Assume the marginal tax rate is 20% for the investor and investee. What amount of goodwill should be reported in the investor’s consolidated balance sheet prepared immediately after this business combination?
A.$80,000
B.$160,000
C.$56,000
D.$50,000
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