Question

On January 1, 20X1, Prim Inc. acquired all of Scrap Inc.’s outstanding common shares for cash equal to the stock’s book value. The carrying amounts of Scrap’s assets and liabilities approximated their fair values, except that the carrying amount of its building was more than fair value. In preparing Prim’s 20X1 consolidated income statement, which of the following adjustments would be made?a. Decrease depreciation expense and recognize goodwill amortization.b. Increase depreciation expense and recognize goodwill amortization.c. Decrease depreciation expense and recognize no goodwill amortization.d. Increase depreciation expense and recognize no goodwill amortization.2. The first examination of Rudd Corporation’s financial statements was made for the year ended December 31, 20X8. The auditor found that Rudd had acquired another company on January 1, 20X8, and had recorded goodwill of $100,000 in connection with this acquisition. Although a friend of the auditor believes the goodwill will last no more than five years, Rudd’s management has found no impairment of goodwill during 20X8. In its 20X8 financial statements, Rudd should reportAmortization Goodwill Expensea. $ 0 $100,000b. $100,000 $ 0c. $ 20,000 $ 80,000d. $ 0 $ 03. Consolidated financial statements are being prepared for a parent and its four subsidiaries that have intercompany loans of $100,000 and intercompany profits of $300,000. How much of these intercompany loans and profits should be eliminated?Intercompany Loans Profitsa. $ 0 $ 0b. $ 0 $300,000c. $100,000 $ 0d. $100,000 $300,0004. On April 1, 20X8, Plum Inc. paid $1,700,000 for all of Long Corp.’s issued and outstanding common stock. On that date, the costs and fair values of Long’s recorded assets and liabilities were as follows: Cost Fair ValueCash $ 160,000 $ 160,000Inventory 480,000 460,000Property, plant and equipment (net) 980,000 1,040,000Liabilities (360,000) (360,000)Net assets $1,260,000 $1,300,000In Plum’s March 31, 20X9, consolidated balance sheet, what amount of goodwill should be reported as a result of this business combination?a. $360,000.b. $396,000.c. $400,000.d. $440,000.

Answer 1

Answer:

Prima Inc.

1. c. Decrease depreciation expense and recognize no goodwill amortization

Rudd Corporation:

2. The amounts of Amortization and Goodwill Expense to be reported in Rudd's 20X8 financial statements are:

= d. $ 0 $ 0

3. The amount of the intercompany loans and profits that should be eliminated are:

. $100,000 $300,000

4. The amount of goodwill that should be reported as a result of this business combination is:

= c. $400,000.

Explanation:

Data and Calculations:

2. Recorded goodwill = $100,000

Estimated useful life = 5 years

Amortization and Goodwill Expense = $0

3. Intercompany loans = $100,000

Intercompany profits = $300,000

4. Long Corp.'s

                                                                 Cost       Fair Value

Cash                                                    $ 160,000    $ 160,000

Inventory                                               480,000       460,000

Property, plant and equipment (net)   980,000    1,040,000

Liabilities                                              (360,000)    (360,000)

Net assets                                        $1,260,000 $1,300,000

Payment = $1,700,000

Goodwill (acquired) = $400,000 ($1,700,000 - $1,300,000)