Current rules require that a deferred tax asset or liability be recognized for likely differences between the reported values and tax bases of assets and liabilities recognized in business combinations (for example, in exchanges that are nontaxable to the selling shareholders). Does this decision change the amount of consolidated net income reported in years subsequent to the business combination? Explain. (see Appendix 3A online at www.wiley.com/college/jeter)
> Part I. You are working on the valuation of accounts receivable, and bad debt reserves for the current year’s annual report. The CFO stops by and asks you to reduce the reserve by enough to increase the current year’s EPS by 2 cents a share
> There have been several recent cases of a CEO or CFO resigning or being ousted for misrepresenting academic credentials. For instance, during February 2006, the CEO of RadioShack resigned by “mutual agreement” for inflating his educational background. Du
> On October 14, 2005, eBay acquired Skype, paying $1.3 billion in cash plus $1.3 billion in stock. However, approximately 60% of the Skype shareholders opted for a lower cash amount and stock up front for the possibility of receiving a potential performan
> During 2005, eBay acquired four different companies. In the schedule below, the acquired companies are listed with the aggregate purchase price and with the estimated acquisition-related costs (dollars in thousands). Required: 1. What are acquisition-r
> If a parent company elects to use the partial equity method rather than the cost method to record its investments in subsidiaries, what effect will this choice have on the consolidated financial statements? If the parent company elects the complete equit
> When stock is exchanged for stock in a business combination, how is the stock exchange ratio generally expressed?
> Pequity Company purchased 85% of the common stock of Sequity Company on April 1, Year 1. The fair value of the consideration transferred consisted of a cash payment of $545,000 and contingent consideration as described in the earnout agreement below. Und
> Is the recognition of a deferred tax asset or deferred tax liability when allocating the difference between book value and the value implied by the purchase price affected by whether or not the affiliates file a consolidated income tax return? (See onlin
> Business combinations may be classified into three types based upon the relationships among the combining entities (e.g., combinations with suppliers, customers, competitors, etc.). Identify and define these types.
> Meredith Company and Kyle Company were combined in a purchase transaction. Meredith was able to acquire Kyle at a bargain price. The sum of the market or appraised values of identifiable assets acquired less the fair value of liabilities assumed exceeded
> Corporation A purchased the net assets of Corporation B for $80,000. On the date of A’s purchase, Corporation B had no long-term investments in marketable securities and $10,000 (book and fair value) of liabilities. The fair values of Corporation B’s ass
> On a consolidated workpaper for a parent and its partially owned subsidiary, the noncontrolling interest column accumulates the noncontrolling interests’ share of several account balances. What are these accounts?
> Peep Inc. acquired 100% of the outstanding common stock of Shy Inc. for $2,500,000 cash and 15,000 shares of its common stock ($2 par value). The stock’s market value was $40 on the acquisition date. Required: Prepare the journal entry to record the acq
> Polychromasia, Inc. had a number of receivables from subsidiaries at the balance sheet date, as well as several payables to subsidiaries. Of its five subsidiaries, four are consolidated in the financial statements (Green Company, Black Inc., White & Sons
> Define a tender offer and describe its use.
> Why are consolidated workpapers used in preparing consolidated financial statements?
> Accounting textbooks under the former GAAP hierarchy were considered level 4 authoritative. Where do accounting textbooks stand in the Codification?
> Pcost Company purchased 85% of the common stock of Scost Company on April 1, Year 1. The fair value of the consideration transferred consisted of a cash payment of $545,000 and contingent consideration as described in the earnout agreement below. Under t
> Alpha Company is considering the purchase of Beta Company. Alpha has collected the following data about Beta: Cumulative total net cash earnings for the past five years of $850,000 includes extraordinary cash gains of $67,000 and nonrecurring cash loss
> What is the primary legal constraint on business combinations? Why does such a constraint exist?
> What are pro forma financial statements? What is their purpose?
> How should nonconsolidated subsidiaries be reported in consolidated financial statements?
> What is the effect on the noncontrolling share of consolidated income that results from the recording in the consolidated statements workpaper of differences between book value and the value implied by the purchase price (and their allocation to deprecia
> P Company acquired a 100% interest in S Company. On the date of acquisition, the fair value of the assets and liabilities of S Company was equal to their book value except for land that had a fair value of $1,500,000 and a book value of $300,000. At what
> What are the arguments for and against the alternatives for the handling of bargain acquisitions? Why are such acquisitions unlikely to occur with great frequency?
> The parent company’s share of the fair value of the net assets of a subsidiary may exceed acquisition cost. How must this excess be treated in the preparation of consolidated financial statements?
> How do you determine the amount of “the difference between book value and the value implied by the purchase price” to be allocated to a specific asset of a less than wholly owned subsidiary?
> In what account is the difference between book value and the value implied by the purchase price recorded on the books of the investor? In what account is the “excess of implied over fair value” recorded?
> Distinguish among the following concepts: (a) Difference between book value and the value implied by the purchase price. (b) Excess of implied value over fair value. (c) Excess of fair value over implied value. (d) Excess of book value over fair value.
> On April 1, Year 1, Company P purchased 85% of S Company for total consideration of $357,000, which included $30,000 of contingent consideration as measured according to GAAP at fair value. Each company has a December 31 year-end. The complete equity met
> Describe two methods for treating the preacquisition revenue and expense items of a subsidiary purchased during a fiscal period.
> At the date of an 80% acquisition, a subsidiary had common stock of $100,000 and retained earnings of $16,250. Seven years later, at December 31, 2015, the subsidiary’s retained earnings had increased to $461,430. What adjustment will be made on the cons
> Define: Consolidated net income; consolidated retained earnings.
> How is the income reported by the subsidiary reflected on the books of the investor under each of the methods of accounting for investments?
> How are dividends declared and paid by a subsidiary during the year eliminated in the consolidated workpapers under each method of accounting for investments?
> How are liquidating dividends treated on the books of an investor, assuming the investor uses the cost method? Assuming the investor uses the equity method?
> Identify two types of temporary differences that may arise in the consolidated financial statements when the affiliates file separate income tax returns. (See online appendix 4B available at www.wiley.com/college/jeter)
> The FASB elected to require that deferred tax effects relating to unrealized intercompany profits be calculated based on the income tax paid by the selling affiliate rather than on the future tax benefit to the purchasing affiliate. Describe circumstance
> What assumptions must be made about the realization of undistributed subsidiary income when the affiliates file separate income tax returns? Why? (See online appendix 4B available at www.wiley.com/college/jeter)
> What do potential voting rights refer to, and how do they affect the application of the equity method for investments under IFRS? Under U.S. GAAP? What is the term generally used for equity method investments under IFRS?
> On April 1, Year 1, Company P purchased 85% of S Company for total consideration of $357,000, which included $30,000 of contingent consideration as measured according to GAAP at fair value. Each company has a December 31 year-end. The cost method is used
> In the preparation of a consolidated statement of cash flows, what adjustments are necessary because of the existence of a noncontrolling interest? (AICPA adapted)
> A principal limitation of consolidated financial statements is their lack of separate financial information about the assets, liabilities, revenues, and expenses of the individual companies included in the consolidation. Identify some problems that the r
> What effect does a noncontrolling interest have on the amount of intercompany receivables and payables eliminated on a consolidated balance sheet?
> What effect do subsidiary treasury stock holdings have at the time the subsidiary is acquired? How should the treasury stock be treated on consolidated work papers?
> Define noncontrolling (minority) interest. List three methods that might be used for reporting the noncontrolling interest in a consolidated balance sheet, and state which is preferred under current GAAP.
> What aspects of control must exist before a subsidiary is consolidated?
> Why is it often necessary to prepare separate financial statements for each legal entity in a consolidated group even though consolidated statements provide a better economic picture of the combined activities?
> What is the justification for preparing consolidated financial statements when, in fact, it is apparent that the consolidated group is not a legal entity?
> What are the advantages of acquiring the majority of the voting stock of another company rather than acquiring all its voting stock?
> The consolidated income statement for the year December 31, 2014, and comparative balance sheets for 2013 and 2014 for Parks Company and its 90% owned subsidiary SCR, Inc. are as follows: SCR, Inc. declared and paid an $8,000 dividend during 2014. Requ
> What is the difference between net income, or earnings, and comprehensive income?
> How does the FASB’s conceptual framework influence the development of new standards?
> Is the economic entity or the parent concept more consistent with the principles addressed in the FASB’s conceptual framework? Explain your answer.
> Under the economic entity concept, the net assets of the subsidiary are included in the consolidated financial statements at the total fair value that is implied by the price paid by the parent company for its controlling interest. What practical or conc
> Contrast the consolidated effects of the parent company concept and the economic entity concept in terms of: (a) The treatment of noncontrolling interests. (b) The elimination of intercompany profits. (c) The valuation of subsidiary net assets in the con
> Describe the difference between the economic entity concept and the parent company concept approaches to the reporting of subsidiary assets and liabilities in the consolidated financial statements on the date of the acquisition.
> Explain the difference between an accretive and a dilutive acquisition.
> Explain the potential advantages of a stock acquisition over an asset acquisition.
> Define some defensive measures used by target firms to avoid a takeover. Are these measures beneficial for shareholders?
> Give several reasons why a parent company would be willing to pay more than book value for subsidiary stock acquired.
> A consolidated income statement for 2013 and comparative consolidated balance sheets for 2012 and 2013 for P Company and its 80% owned subsidiary follow: Other information: 1. Equipment depreciation was $95,000. 2. Equipment was purchased during the
> When contingent consideration in an acquisition is based on the acquirer issuing its shares to the seller, how should this contingency be reflected on the acquisition date?
> Distinguish among a statutory merger, a statutory consolidation, and a stock acquisition.
> AOL announced that because of an accounting change (FASB Statements Nos. 141R [ASC 805] and 142 [ASC 350]), earnings would be increasing over the next 25 years by $5.9 billion a year. What change(s) required by FASB (in SFAS Nos. 141R and 142) resulted i
> How would a company determine whether goodwill has been impaired?
> List four advantages of a business combination as compared to internal expansion.
> Distinguish between internal and external expansion of a firm.
> On January 1, 2014, Pump Company acquired all the outstanding common stock of Sound Company for $556,000 in cash. Financial data relating to Sound Company on January 1, 2014, are presented here: Sound Company would expect to pay 10% interest to borrow
> Patten Corporation acquired an 85% interest in Savage Company for $3,100,000 on January 1, 2014. On this date, the balances in Savage Company’s capital stock and retained earnings accounts were $2,000,000 and $700,000, The remaining use
> On January 1, 2014, Pueblo Corporation purchased a 75% interest in Sanchez Company for $900,000. A summary of Sanchez Company’s balance sheet at date of purchase follows: The equipment had an original life of 15 years and remaining us
> On January 1, 2014, Perini Company purchased an 85% interest in Silvas Company for $400,000. On this date, Silvas Company had common stock of $90,000 and retained earnings of $210,000. An examination of Silvas Company’s assets and liabi
> Pillow Company purchased 90% of the common stock of Satin Company on May 1, 2011, for a cash payment of $474,000. December 31, 2011, trial balances for Pillow and Satin were: Satin Company declared a $60,000 cash dividend on December 20, 2011, payable
> On January 1, 2014, Palmer Company acquired a 90% interest in Stevens Company at a cost of $1,000,000. At the purchase date, Stevens Company’s stockholders’ equity consisted of the following: Common stock â€
> On January 1, 2013, Porter Company purchased an 80% interest in the capital stock of Salem Company for $850,000. At that time, Salem Company had capital stock of $550,000 and retained earnings of $80,000. Differences between the fair value and the book v
> Perke Corporation purchased 80% of the stock of Superstition Company for $1,970,000 on January 1, 2015. On this date, the fair value of the assets and liabilities of Superstition Company was equal to their book value except for the inventory and equipmen
> On January 1, 2014, Paxton Company purchased a 70% interest in Sagon Company for $1,300,000, at which time Sagon Company had retained earnings of $500,000 and capital stock of $1,000,000. On January 1, 2014, the fair value of the assets and liabilities o
> The Mcquire Company is considering acquiring 100% of the Sosa Company. The management of Mcquire fears that the acquisition price may be too high. Condensed financial statements for Sosa Company for the current year are as follows: You believe that Sos
> On January 1, 2014, Palmer Company acquired a 90% interest in Stevens Company at a cost of $1,000,000. At the purchase date, Stevens Company’s stockholders’ equity consisted of the following: Common stock â€
> (Note that this is the same problem as Problem 5-4 and Problem 5-11, but assuming the use of the complete equity method.) On January 1, 2013, Porter Company purchased an 80% interest in the capital stock of Salem Company for $850,000. At that time, Salem
> On January 1, 2012, Push Company purchased an 80% interest in the capital stock of Way-Down Company for $820,000. At that time, WayDown Company had capital stock of $500,000 and retained earnings of $100,000. Differences between the fair value and the bo
> On January 2, 2014, Press Company purchased on the open market 90% of the outstanding common stock of Sensor Company for $800,000 cash. Balance sheets for Press Company and Sensor Company on January 1, 2014, just before the stock acquisition by Press Com
> (Note that this is the same problem as Problem 5-5, but assuming the use of the partial equity method.) On January 1, 2014, Palmer Company acquired a 90% interest in Stevens Company at a cost of $1,000,000. At the purchase date, Stevens Companyâ
> Punca Company purchased 85% of the common stock of Surrano Company on July 1, 2012, for a cash payment of $590,000. December 31, 2012, trial balances for Punca and Surrano were: Surrano Company declared a $50,000 cash dividend on December 20, 2012, pay
> (Note that this is the same problem as Problem 5-4, but assuming the use of the partial equity method.) On January 1, 2013, Porter Company purchased an 80% interest in the capital stock of Salem Company for $850,000. At that time, Salem Company had capit
> Pearson Company purchased a 100% interest in Sanders Company and a 90% interest in Taylor Company on January 2, 2014, for $800,000 and $1,300,000, respectively. The account balances and fair values of the acquired companies on the acquisition date were a
> On January 1, 2014, Palmero Company purchased an 80% interest in Santos Company for $2,800,000, at which time Santos Company had retained earnings of $1,000,000 and capital stock of $500,000. On the date of acquisition, the fair value of the assets and l
> (This is a continuation of Problem 4-21) Pequity Company purchased 85% of the common stock of Sequity Company on April 1, Year 1 for total consideration of $545,000 cash plus $50,000 of contingent consideration as measured according to GAAP at fair value
> (This is a continuation of Problem 4-20.) Pcost Company purchased 85% of the common stock of Scost Company on April 1, Year 1 for total consideration of $545,000 cash plus $50,000 of contingent consideration as measured according to GAAP at fair value.
> On January 1, 2015, Pruitt Company issued 25,500 shares of its common stock ($2 par) in exchange for 85% of the outstanding common stock of Shah Company. Pruitt’s common stock had a fair value of $28 per share at that time. Pruitt Compa
> Balance sheets for Prego Company and Sprague Company as of December 31, 2013, follow: The fair values of Sprague Company’s assets and liabilities are equal to their book values. Required: Prepare a consolidated balance sheet as of
> On July 31, 2014, Ping Company purchased 90% of Santos Company’s common stock for $2,010,000 cash. Immediately after the acquisition, the two companies’ balance sheets were as follows: Santos Company has not yet rec
> On January 1, 2014, Pat Company purchased 90% of the outstanding common stock of Solo Company for $236,000 cash. The balance sheet for Pat Company just before the acquisition of Solo Company stock, along with the consolidated balance sheet prepared at th
> On January 2, 2014, Phillips Company purchased 80% of Sanchez Company and 90% of Thomas Company for $225,000 and $168,000, respectively. Immediately before the acquisitions, the balance sheets of the three companies were as follows: The note receivab
> (Note that this problem is the same as Problem 4-9, but assuming the use of the partial equity method.) December 31, 2014, trial balances for Pledge Company and its subsidiary Stom Company follow: Pledge Company purchased 72,000 shares of Stom Company&
> Balance sheets for P Company and S Company on August 1, 2014, are as follows: Required: Prepare a workpaper for a consolidated balance sheet for P Company and its subsidiary on August 1, 2014, taking into consideration the following: 1. P Company acqui
> On January 1, 2014, Perry Company purchased 8,000 shares of Soho Company’s common stock for $120,000. Immediately after the stock acquisition, the statements of financial position of Perry and Soho appeared as follows: Required: A. Ca
> The two following separate cases show the financial position of a parent company and its subsidiary company on November 30, 2014, just after the parent had purchased 90% of the subsidiary’s stock: Required: A. Prepare a November 30, 2
> On January 1, 2015, Pruitt Company issued 25,500 shares of its common stock in exchange for 85% of the outstanding common stock of Shah Company. Pruitt’s common stock had a fair value of $28 per share at that time (par value of $2 per s
> On January 1, 2015, Pope Company purchased 90% of Sun Company’s common stock for $5,800,000 cash. Immediately after the acquisition, the two companies’ balance sheets were as follows: Sun Company’s
