01_Fischer10e_SM_Ch01_final

01_Fischer10e_SM_Ch01_final - CHAPTER 1 UNDERSTANDING THE...

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CHAPTER 1 UNDERSTANDING THE ISSUES 1. (a) Horizontal combination—both are mar- ine engine manufacturers (b) Vertical combination—manufacturer buys distribution outlets (c) Conglomerate—unrelated businesses 2. By accepting cash in exchange for the net assets of the company, the seller would have to recognize an immediate taxable gain. However, if the seller were to accept common stock of another corporation in- stead, the seller could construct the trans- action as a tax-free reorganization. The seller could then account for the transaction as a tax-free exchange. The seller would not pay taxes until the shares received were sold. 3. Identifiable assets (fair value). ...... $600,000 Deferred tax liability ($200,000 × 40%). ...................... (80,000 ) Net assets. ..................................... $520,000 Goodwill Price paid. ...................................... $850,000 Net assets. ..................................... (520,000 ) Goodwill. ........................................ $330,000 4. (a) The net assets and goodwill will be re- corded at their full fair value on the books of the parent on the date of ac- quisition. (b) The net assets will be “marked up” to fair value, and goodwill will be recorded at the end of the fiscal year when the consolidated financial statements are prepared through the use of a consolid- ated worksheet. 5. Puncho will record the net assets at their fair value of $800,000 on its books. Also, Puncho will record goodwill of $100,000 ($900,000 – $800,000) resulting from the excess of the price paid over the fair value. Semos will record the removal of its net as- sets at their book values. Semos will record a gain on the sale of business of $500,000 ($900,000 – $400,000). 1
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6. (a) Value Analysis: Price paid. ............................... $ 800,000 Fair value of net assets. ......... 520,000 Goodwill. ................................. $ 280,000 Current assets (fair value). ..... $ 120,000 Land (fair value). ..................... 80,000 Building & equipment (fair value). ............................ 400,000 Customer list (fair value). ....... 20,000 Liabilities (fair value). .............. (100,000) Goodwill. ................................. 280,000 Total. ....................................... $ 800,000 (b) Value Analysis: Price paid. ............................... $ 450,000 Fair value of net assets. ......... 520,000 Gain. ........................................ $ (70,000 ) Current assets (fair value). ..... $ 120,000 Land (fair value). ..................... 80,000 Building & equipment (fair value). ............................ 400,000 Customer list (fair value). ....... 20,000 Liabilities (fair value). .............. (100,000) Gain. ........................................ (70,000 ) Total. ....................................... $ 450,000 7. The 20X1 financial statements would be re- vised as they are included in the 20X2 – 20X1 comparative statements. The 20X2
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01_Fischer10e_SM_Ch01_final - CHAPTER 1 UNDERSTANDING THE...

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