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Recognizing goodwill in an acquisition

Problems 14 through 17 are based on the following information: Allen, Inc., obtains control over Tucker, Inc., on July 1, 2004. The book value and fair market value of Tucker's accounts on that date (prior to creating the combination) follow, along with the book value of Allen's accounts:

Allen Tucker Tucker
Book Value Book Value Market Value
Revenues . . . . . . . . . . . . . . . . . . . . . . . . $250,000 $130,000
Expenses . . . . . . . . . . . . . . . . . . . . . . . . 170,000 80,000
Retained earnings, 1/1/04 . . . . . . . . . . . 130,000 150,000
Cash and receivables . . . . . . . . . . . . . . . 140,000 60,000 $ 60,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . 190,000 145,000 175,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . 230,000 180,000 200,000
Buildings (net) . . . . . . . . . . . . . . . . . . . . 400,000 200,000 225,000
Equipment (net) . . . . . . . . . . . . . . . . . . . 100,000 75,000 75,000
Liabilities . . . . . . . . . . . . . . . . . . . . . . . . 540,000 360,000 350,000
Common stock . . . . . . . . . . . . . . . . . . . 300,000 70,000
Additional paid-in capital . . . . . . . . . . . . 10,000 30,000

14. Assume that Allen issues 10,000 shares of common stock with a $5 par value and a $40 fair market value to obtain all of Tucker's outstanding stock. How much goodwill should be recognized?
a. -0-
b. $15,000
c. $35,000
d. $100,000

15. For the fiscal year ending December 31, 2004, how will consolidated net income of this business combination be determined if Allen acquires all of Tucker's stock in a purchase?
a. Allen's income for the past year plus Tucker's income for the past six months.
b. Allen's income for the past year plus Tucker's income for the past year.
c. Allen's income for the past six months plus Tucker's income for the past six months.
d. Allen's income for the past six months plus Tucker's income for the past year.

16. Assume that Allen issues preferred stock with a par value of $200,000 and a fair market value of $335,000 for all shares of Tucker. What will be the balance in the consolidated Inventory, Land, and beginning Retained Earnings accounts?
a. $365,000, $410,000, and $130,000.
b. $365,000, $430,000, and $130,000.
c. $352,500, $417,500, and $280,000.
d. $335,000, $430,000, and $280,000.

17. Assume that Allen pays a total of $370,000 in cash for all of the shares of Tucker. In addition, Allen pays $30,000 to a group of attorneys for their work in arranging the acquisition. What will be the balance in consolidated goodwill and retained earnings?
a. 0 and $90,000.
b. 0 and $280,000.
c. $15,000 and $280,000.
d. $15,000 and $130,000.

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See the attached file for complete solution. The text here may not be copied exactly as some of the symbols / tables may not print. Thanks

Problems 14 through 17 are based on the following information: Allen, Inc., obtains control over Tucker, Inc., on July 1, 2004. The book value and fair market value of Tucker's accounts on that date (prior to creating the combination) follow, along with the book value of Allen's accounts:

Allen Tucker Tucker
Book Value Book Value Market Value
Revenues . . . . . . . . . . . . . . . . . . . . . . . . $250,000 $130,000
Expenses . . . . . . . . . . . . . . . . . . . . . . . . 170,000 80,000
Retained earnings, 1/1/04 . . . . . . . . . . . 130,000 150,000
Cash and receivables . . . . . . . . . . . . . . . 140,000 60,000 $ 60,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . 190,000 145,000 175,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . 230,000 180,000 200,000
Buildings (net) . . . . . . . . . . . . . . . . . . . . 400,000 200,000 ...

Solution Summary

This problem explains recognition of goodwill in an acquisition where one company takes control over another company. It also explains when one can consolidate the income and how to calculate the balance in the consolidated Inventory, Land, and beginning Retained Earnings accounts. Although the problems are in multiple choice format, complete solution for the problems is provided with calculations.

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