Advanced Accounting
14th Edition
ISBN: 9781260247824
Author: Joe Ben Hoyle, Thomas F. Schaefer, Timothy S. Doupnik
Publisher: RENT MCG
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Chapter 2, Problem 10Q
To determine
Explain the manner in which the reduction in price accounted for within the consolidation process.
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Two large, publicly owned firms are contemplating a merger. No operating synergy isexpected. However, because returns on the two firms are not perfectly positively correlated,the standard deviation of earnings would be reduced for the combined corporation. Onegroup of consultants argues that this risk reduction is sufficient grounds for the merger.Another group thinks that this type of risk reduction is irrelevant because stockholders canhold the stock of both companies and thus gain the risk-reduction benefits without all thehassles and expenses of the merger. Whose position is correct? Explain.
If the market value of a firm becomes less than its book value, it becomes an attractive takeover target.the firm will be delisted by the stock exchange.the Securities and Exchange Commission will not allow it to declare dividends until the market value once again exceeds the book value.the firm will be unable to service its debt.
A bargain purchase arises when the price paid to acquire a controlling interest in another company is less than the acquirer’s share of the fair value of net assets of the company being acquired. At the end of your preliminary analysis, you believe that a business combination results in a bargain purchase. What is your next step?
A. Recognize an immediate gain in the consolidated statement of profit and loss without further analysis.
B. Recognize a liability in the consolidated balance sheet.
C. Contact the acquiree to confirm its intention.
D. Reassess each step of your analysis to confirm your preliminary findings.
Chapter 2 Solutions
Advanced Accounting
Ch. 2 - Prob. 1QCh. 2 - Describe the concept of a synergy. What are some...Ch. 2 - Prob. 3QCh. 2 - What does the term consolidated financial...Ch. 2 - Within the consolidation process, what is the...Ch. 2 - Prob. 6QCh. 2 - Prob. 7QCh. 2 - Prob. 8QCh. 2 - Prob. 9QCh. 2 - Prob. 10Q
Ch. 2 - Prob. 11QCh. 2 - Prob. 12QCh. 2 - Which of the following does not represent a...Ch. 2 - Prob. 2PCh. 2 - Prob. 3PCh. 2 - Prob. 4PCh. 2 - Prob. 5PCh. 2 - Prob. 6PCh. 2 - Prob. 7PCh. 2 - When does gain recognition accompany a business...Ch. 2 - Prob. 9PCh. 2 - Prob. 10PCh. 2 - Prob. 11PCh. 2 - On June 1, Cline Co. paid 800,000 cash for all of...Ch. 2 - On May 1, Donovan Company reported the following...Ch. 2 - Prob. 14PCh. 2 - Prob. 15PCh. 2 - Prob. 16PCh. 2 - Prob. 17PCh. 2 - On its acquisition-date consolidated balance...Ch. 2 - On its acquisition-date consolidated balance...Ch. 2 - Prob. 20PCh. 2 - Prob. 21PCh. 2 - Prob. 22PCh. 2 - The following book and fair values were available...Ch. 2 - Prob. 24PCh. 2 - Prob. 25PCh. 2 - Prob. 26PCh. 2 - Prob. 27PCh. 2 - Prob. 28PCh. 2 - SafeData Corporation has the following account...Ch. 2 - Prob. 34PCh. 2 - Prob. 35PCh. 2 - Prob. 39APBCh. 2 - Prob. 40APB
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- Coffee Partners decides to close due to the increased competition from the national chains. If after liquidating the noncash assets there is not enough cash to cover accounts payable, what happens?arrow_forwardIn the process of determining fair value, the exit price refers to: Multiple Choice the amount the firm would receive if it sold a given asset. the amount the firm would pay if it bought an asset of the same type and condition as the one being valued. the sum of the future cash flows expected to be generated by continuing to use the asset. the expected sale price of the stock in a corporate buy-out.arrow_forwardBMW Motors Corp. wants to acquire all the assets of MWB Corp. BMW plans to pay for the assets by issuing its own corporate stock. BMW’s board of directors has already approved the merger. In what circumstances would the approval of BMX’s shareholders be required for this merger?Is the approval of MWB’s shareholders necessary? Explain.arrow_forward
- A company has an agreement with a bondholder that prevents it from selling several of its coal-fired power plants. However, recent regulatory changes have made these plants less profitable and the value of the firm is falling. Which of the following is this agreement called? Collateral trust Lien Indenture Debenturearrow_forward3. Merger valuation and discounted cash flows When a merger takes place between two companies to form a single firm, the target company does not continue identity. Consider the following scenario: continues does not continue to operate as a separate Newtown Propane Inc. is considering an acquisition of Pirtucon Co., and estimates that acquiring Pirtucon will result in incremental after- tax net cash flows in years 1-3 of $5 million, $7.5 million, and $9 million, respectively. After the first three years, the incremental cash flows contributed by the Pirtucon acquisition are expected to grow at a constant rate of 5% per year. Newtown's current beta is 0.80, but its post-merger beta is expected to be 1.04. The risk-free rate is 4.5%, and the market risk premium is 6.60%. Based on this information, complete the following table by selecting the appropriate values. (Note: Round your intermediate calculations to two decimal places.) Post-merger cost of equity Projected value of the cash…arrow_forwardWhy might one company have to complete more due diligence than another in a merger? A. None of these answers B. It is important for a company to know what it is buying C. Acquisitions can be risky D. If there is a large size discrepancy the merger seems more like an aquisarrow_forward
- Explainarrow_forwardWhich of the following liquidating dividend is not legal? a. Liquidating dividend of a continuing merchandising corporation b. Liquidating dividend of a mining corporation c. Liquidating dividend of a wasting asset corporation d. Liquidating dividend of a corporation at the state of bankruptcyarrow_forwardIn the business combination of Polka and Spot Select one: a. all of the costs except those of registering and issuing the securities are included in the purchase price of Spot. b. the salaries of Polka's employees assigned to the merger are treated as expenses. c. only the accounting and legal fees are included in the purchase price of Spot d. the costs of registering and issuing the securities are included as part of the purchase price for Spot.arrow_forward
- Parts e and f are wrong! below is the reason why these parts were wrong: "I would like you to write out the ED entry so you can see that it decreases depreciation expense. It has a credit to an expense account, which decreases the expense account balance. Therefore, it would not reduce consolidated income, it would increase it. The subsidiary's reported income is separately affected by the ED entry before taking the noncontrolling interest share." Plz, help me!arrow_forwardWhat is a good response to? The unrealized intercompany profits can assuredly have an impact on the consolidated financial statements, as true profits and losses will not be recognized until inventory is sold to an unrelated entity. Prior to this third-party sale the intercompany profit or loss in unrealized and must be removed from the reports consolidation to avoid overstating the consolidated net income (Hoyle, Schaefer, & Doupnik, 2024). It is also important to determine if the inventory sale was upstream or downstream, as the considerations will vary based on the sale in relation to the parent company. For an upstream sale (subsidiary to parent company) any unrealized profit or loss can be partially allocated to non-controlling interests assuming such entities exist, and once the inventory has been resold the recognized revenue is subsequently split accordingly. During a downstream sale (parent to subsidiary company) the unrealized revenue is allocated to the parent company,…arrow_forwardhi, i need a quick answer. thanksarrow_forward
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