Advance accounting

Zaid Ltd and Zafar Ltd agreed to merge on January 1, 2019. On the date of the merger agreement, the companies reported the following data:

Balance Sheet

Zaid Ltd

Zafar Ltd

Book Value

Fair Value

Book Value

Fair Value

Cas & Receivables

80,000

80,000

10,000

10,000

Inventory

110,000

160,000

40,000

52,000

Machinery

120,000

150,000

50,000

75,000

Land & Building

480,000

350,000

250,000

200,000

Accumulated Depreciation

(130,000)

(50,000)

Total Assets

660,000

740,000

300,000

337,000

Current Liabilities

100,000

120,000

75,000

75,000

Common Stock

300,000

50,000

Capital in excess of Par Value

40,000

10,000

Retained Earnings

220,000

165,000

Total Liabilities

660,000

300,000

Zaid Ltd has 15,000 shares of its $20 par value shares outstanding on January 1, 20X3, and Zafar Ltd has 10,000 shares of $5 par value stock outstanding. The market values of the shares are $400 and $75, respectively.

Q1. How are direct combination costs, contingent consideration, and a bargain purchase reflected in recording an acquisition transaction?

Q2. Zaid Ltd and Zafar Ltd agreed to merge on January 1, 2019. On the date of the merger agreement, the companies reported the following data:

Balance Sheet Zaid Ltd Zafar Ltd
Book Value Fair Value Book Value Fair Value
Cas & Receivables 80,000 80,000 10,000 10,000
Inventory 110,000 160,000 40,000 52,000
Machinery 120,000 150,000 50,000 75,000
Land & Building 480,000 350,000 250,000 200,000
Accumulated Depreciation (130,000) (50,000)
Total Assets 660,000 740,000 300,000 337,000

Current Liabilities 100,000 120,000 75,000 75,000
Common Stock 300,000 50,000
Capital in excess of Par Value 40,000 10,000
Retained Earnings 220,000 165,000
Total Liabilities 660,000 300,000

Zaid Ltd has 15,000 shares of its $20 par value shares outstanding on January 1, 20X3, and Zafar Ltd has 10,000 shares of $5 par value stock outstanding. The market values of the shares are $400 and $75, respectively.
Required:
Zaid Ltd issues 1,000 shares of stock in exchange for all of Zafar Ltd’s net assets. Prepare a balance sheet for the combined entity immediately following the merger.

Q3. On January 1, 2016, ATM Corporation acquired all of the common stock of ZED Company for $300,000. On that date, ZED’s identifiable net assets had a fair value of $250,000. The assets acquired in the purchase of ZED are considered to be a separate reporting unit of ATM Corporation. The carrying value of ZED’s investment at December 31, 2016, is $310,000. The fair value of the net assets (excluding goodwill) at that date is $220,000 and the fair value of the reporting unit is determined to be 260,000.
Required:
1) Explain how goodwill is tested for impairment for a reporting unit.
2) Determine the amount, if any, of impairment loss to be recognized at December 31, 2016.
Q4. Gant Company purchased 20 percent of the outstanding shares of Temp Company for $70,000 on January 1, 20X6. The following results are reported for Temp Company:

Required
Determine the amounts reported by Gant as income from its investment in Temp for each year and the balance in Gant’s investment in Temp at the end of each year assuming Gant uses the following methods in accounting for its investment in Temp:
a. Cost method.
b. Equity method
c. Fair value method.

Q5. Acquisition at Other than Fair Value of Net Assets
Mason Corporation acquired 100 percent ownership of Best Company on February 12, 20X9. At the date of acquisition, Best Company reported assets and liabilities with book values of $420,000 and $165,000, respectively, common stock outstanding of $80,000, and retained earnings of $175,000. The book values and fair values of Best’s assets and liabilities were identical except for land which had increased in value by $20,000 and inventories which had decreased by $7,000. The estimated fair value of Best as a whole at the date of acquisition was $295,000.
Required:
Give the eliminating entries required to prepare a consolidated balance sheet immediately after the business combination assuming Mason acquired its ownership of Best for $280,000.