ACC 405 Module 1 Project Solutions (2026) | Practice Problems PDF, Exams of Accounting

Download ACC 405 Module 1 Project Solutions (2026) | Practice Problems PDF and more Exams Accounting in PDF only on Docsity!

ACC 405

Module 1 Project

Practice Problems and Solutions

Southern New Hampshire University

ACC-

Module 1 Practice Problems and Solutions

Problem 1. Plantation Homes Company is considering the acquisition of Condominiums, Inc. early in

1. To assess the amount it might be willing to pay, Plantation Homes makes the following computations and assumptions.

Condominiums, Inc. has identifiable assets with a total fair value of $15,000,000 and liabilities of $8,800,000. The assets include office equipment with a fair value approximating book value, buildings with a fair value 30% higher than book value, and land with a fair value 75% higher than book value. The remaining lives of the assets are deemed to be approximately equal to those used by Condominiums, Inc. Condominiums, Inc.'s pretax incomes for the years 2017 through 2019 were $1,200,000, $1,500,000, and $950,000, respectively. Plantation Homes believes that an average of these earnings represents a fair estimate of annual earnings for the indefinite future. However, it may need to consider adjustments to the following items included in pretax earnings:

Depreciation on buildings (each year) 960, Depreciation on equipment (each year) 50, Extraordinary loss (year 2019) 300, Sales commissions (each year) 250,

The normal rate of return on net assets for the industry is 15%.

Required: Assume further that Plantation Homes feels that it must earn a 25% return on its investment and that goodwill is determined by capitalizing excess earnings. Based on these assumptions, calculate a reasonable offering price for Condominiums, Inc. Indicate how much of the price consists of goodwill. Ignore tax effects. Assume that Plantation Homes feels that it must earn a 15% return on its investment, but that average excess earnings are to be capitalized for three years only. Based on these assumptions, calculate a reasonable offering price for Condominiums, Inc. Indicate how much of the price consists of goodwill. Ignore tax effects.

Solution

Part A Normal earnings for similar firms = ($15,000,000 - $8,800,000) x 15% =

$930,000 Expected earnings of target: Pretax income of Condominiums, Inc., 2017 $1,200,

Subtract: Additional depreciation on building ($960,000 ฀30%) (288,000)

Target’s adjusted earnings, 2017 912,

Pretax income of Condominiums, Inc., 2018 $1,500,

Subtract: Additional depreciation on building (288,000)

Target’s adjusted earnings, 2018 1,212,

Pretax income of Condominiums, Inc., 2019 $950,

Required: A. Assume that Hopkins feels that it must earn a 20% return on its investment, and that goodwill is determined by capitalizing excess earnings. Based on these assumptions, calculate a reasonable offering price for Richfield, Inc. Indicate how much of the price consists of goodwill. B. Assume that Hopkins feels that it must earn a 15% return on its investment, but that average excess earnings are to be capitalized for five years only. Based on these assumptions, calculate a reasonable offering price for Richfield, Inc. Indicate how much of the price consists of goodwill.

Answer: A. Normal earnings for similar firms = ($6,000,000 - $3,700,000) × 15% = $345,

Expected earnings of target: Pretax income of Richfield, Inc., 2020 (^) $470, Subtract: Additional depreciation on buildings ($380,000 × .25) (95,000) Target's adjusted earnings, 2020 375,

Pretax income of Richfield, Inc., 2021 $570, Subtract: Additional depreciation on buildings Target's adjusted earnings, 2021

Pretax income of Richfield, Inc., 2022 $370, Add: Extraordinary loss 130, Subtract: Additional depreciation on buildings Target's adjusted earnings, 2022

Target's three year total adjusted earnings 1,255, Target's three year average adjusted earnings 418,

Excess earnings of target = $418,333 – $345,000 = $73,333 per year

$73, Present value of excess earnings (perpetuity) at 20%: 20% = $366,665 (Estimated Goodwill)

Implied offering price = Fair value of assets - Fair value of liabilities + Estimated goodwill Implied offering price = $6,000,000 - $3,700,000 + $366,665 = 2,666,665.

B. Excess earnings of target (same as in A): $73,

Present value of excess earnings (ordinary annuity) for five years at 15%; $73,333 × 3.35216 = $245,

Implied offering price = $6,000,000 - $3,700,000 + $245,824 = $2,545,824.

Note: The salary expense and depreciation on equipment are expected to continue at the same rate, and thus do not necessitate adjustments.

Problem 5. Park Company acquired an 80% interest in the common stock of Southdale Company for $1,540,000 on July 1, 2022. Southdale Company's stockholders' equity on that date consisted of:

Common stock $800, Other contributed capital 400, Retained earnings 330,

Required: Compute the total noncontrolling interest to be reported in the consolidated balance sheet assuming the: (1) parent company concept. (2) economic unit concept.

Answer:

Total book value of Southdale's net assets ($800,000 + $400,000 + $330,000)

Noncontrolling interest % ×. Noncontrolling interest in net assets $306,

Total fair value of Southdale's net assets ($1,540,000/.8)

Noncontrolling interest % ×. Noncontrolling interest in net assets $385,

Problem 6. The following balances were taken from the records of S Company:

Common stock (1/1/20 and 12/31/20) $720, Retained earnings 1/1/20 $160, Net income for 2023 180, Dividends declared in 2023 Retained earnings, 12/31/

Total stockholders' equity on 12/31/20 $1,020,

P Company purchased 75% of S Company's common stock on January 1, 2021 for $900,000. The difference between implied value and book value is attributable to assets with a remaining useful life on January 1, 2023 of ten years.

Required:

A. Compute the difference between cost/(implied) and book value applying:

1. Parent company theory.

Prepare the journal entries on the books of Phillips to record the acquisition of Solina Company's net assets.

Answer

Current Assets 85, Plant and Equipment 150, Goodwill* 100, Liabilities 35, Common Stock [(20,000 shares @ $10/share)] 200, Other Contributed Capital [(20,000 ฀฀($15 – $10))] 100,

Acquisition Costs Expense 20, Cash 20,

Other Contributed Capital 6, Cash 6, To record the direct acquisition costs and stock issue costs

• Goodwill = Excess of Consideration of $335,000 (stock valued at $300,000 plus debt assumed of $35,000) over Fair Value of Identifiable Assets of $235,000 (total assets of $225,000 plus PPE fair value adjustment of $10,000)

Problem 8. Stockholders of Acme Company, Baltic Company, and Colt Company are considering alternative arrangements for a business combination. Balance sheets and the fair values of each company's assets on October 1, 2019, were as follows:

Acme Baltic Colt Assets $3,900,000 $7,500,000 $ 950, Liabilities $2,030,000 $2,200,000 $ 260, Common stock, $20 par value 2,000,000 1,800,000 540, Other contributed capital — 0 — 600,000 190, Retained earnings (deficit) (130,000) 2,900,000 (40,000) Total equities $3,900,000 $7,500,000 $ 950, Fair values of assets $4,200,000 $9,000,000 $1,300,

Acme Company shares have a fair value of $50. A fair (market) price is not available for shares of the other companies because they are closely held. Fair values of liabilities equal book values.

Required: Prepare a balance sheet for the business combination. Assume the following: Acme Company acquires all the assets and assumes all the liabilities of Baltic and Colt Companies by issuing in exchange 140, shares of its common stock to Baltic Company and 40,000 shares of its common stock to Colt Company. Assume, further, that the acquisition was consummated on October 1, 2019, as described above. However, by the end of 2020, Acme was concerned that the fair values of one or both of the acquired units had deteriorated. To test for impairment, Acme decided to measure goodwill impairment using the

present value of future cash flows to estimate the fair value of the reporting units (Baltic and Colt). Acme accumulated the following data:

Year 2015

Present Value of Future Cash Flows

Carrying Value of Identifiable Net Assets*

Fair Value Identifiable Net Assets

Baltic $6,500, 0

Colt

*Identifiable Net Assets do not include goodwill.

Prepare the journal entry, if needed, to record goodwill impairment at December 31, 2020. Use FASB's simplified approach to test for goodwill impairment (assume that the qualitative test is satisfied or bypassed).

Answer

Part A.

Acme Company

Balance Sheet

October 1, 2024

Assets (except goodwill) ($3,900 + $9,000 + $1,300) $14, Goodwill (1) 1, Total Assets $15,

Liabilities ($2,030 + $2,200 + $260) $4, Common Stock (180 ฀฀$20) + $2,000 5, Other Contributed Capital (180 ฀฀($50 – $20)) 5, Retained Earnings (130) Total Liabilities and Equity $15,

(1) Cost (180 ฀฀$50) $9, Fair value of net assets acquired:

Fair value of assets of Baltic and Colt $10,

Less liabilities assumed 2,460 7, Goodwill $1,

Part B. (using the new simplified goodwill impairment rules)

Baltic

Cash $ 250,000 $114,000 $114, Receivables 352,700 150,000 135, Inventories 848,300 232,000 310, Land 700,000 100,000 315, Buildings 950,000 410,000 54, Accumulated depreciation (325, —buildings 00) $ (170,500) Equipment 262,750 136,450 39, Accumulated depreciation —equipment (70,050) (90,450) Total assets $2,968,700 $881,500 $968,

Current liabilities Bonds payable, 8% due

1/1/2024, Interest payable 6/30 and 12/31 (^) 300,000 260, Common stock, $15 par value 1,200, Common stock, $5 par value 236, Other contributed capital 950,000 170, Retained earnings 526,000 79, Total equities $2,968,700 $881,

Required: Prepare the journal entry on the books of Perez Company to record the acquisition of Stalton Company's assets and liabilities in exchange for the bonds.

Answer: Present value of maturity value, 20 periods @ 6%: 0.3118 (^) ฀฀$600,000 = $187, Present value of interest annuity, 20 periods @ 6%: 11.46992 ฀^ $30,000 = 344, Total Present value 531, Par value 600, Discount on bonds payable $68,

Cash 114, Accounts Receivable 135, Inventory 310, Land 315, Buildings 54, Equipment 39, Bond Discount ($40,000 + $68,822) 108, Current Liabilities 95, Bonds Payable ($300,000 + $600,000) 900, Gain on Purchase of Business 81,

Computation of Excess of Net Assets Received Over Cost

Cost (Purchase Price) ($531,178 plus liabilities assumed of $95,300 and $260,000) $886,

Less: Total fair value of assets received $968, Excess of fair value of net assets over cost $ 81,872)

Problem 10. Pham Company acquired the assets (except for cash) and assumed the liabilities of Senn Company on January 1, 2019, paying $720,000 cash. Senn Company's December 31, 2018, balance sheet, reflecting both book values and fair values, showed:

Accounts receivable

Book Value Fair Value

(net) $ 72,000 $ 65, Inventory 86,000 99, Land 110,000 162, Buildings (net) 369,000 450,

Equipment (net) 237,000 288, Total $874,000 $1,064,

Accounts payable $ 83,000 $ 83, Note payable 180,000 180, Common stock, $2 par value 153, Other contributed capital 229,

Retained earnings 229, Total $874,

As part of the negotiations, Pham Company agreed to pay the former stockholders of Senn Company $200,000 cash if the postcombination earnings of the combined company (Pham) reached certain levels during 2019 and 2020. The fair value of contingent consideration was estimated to be $100,000 on the date of acquisition.

Required: Record the journal entry on the books of Pham Company to record the acquisition on January 1, 2019. During 2019, the likelihood of meeting the post combination earnings goal increased. As a result, at the end of 2019, the estimated fair value of the contingent consideration increased to $120,000. Prepare any journal entry needed to account for the change in the fair value of contingent consideration. During 2020, the likelihood of meeting the post combination earnings goal significantly decreased and the contingent consideration target was not met. Prepare any journal entry needed to account for the change in the fair value of contingent consideration.

Answer Part A January 1, 2024

A. Prepare Maplewood’s general journal entry for the cash purchase of West’s net assets.

rather than $560,000, prepare the general journal entry.

• B. Assume Maplewood Corporation purchased the net assets of West Corporation for $500,
  • Accounts Receivable 180, Answer:
  • Inventory 400,
  • Land 50,
  • Building 60,
  • Equipment 70,
  • Patent 20,
  • Goodwill 10,
  • Acquisition Expense 20,
    • Current Liabilities 70,
    • Long-term Debt 160,
    • Cash 580,
  • Acquisition Expense 20, B.
  • Accounts Receivable 180,
  • Inventory 400,
  • Land 50,
  • Building 60,
  • Equipment 70,
  • Patent 20,
    • Current Liabilities 70,
    • Long-term Debt 160,
    • Cash 520,
    • Gain on Acquisition 50,