Deck 7: New Basis of Accounting

Question 1

Push-down accounting is currently required by _________________________.

Answer 1

Staff Accounting Bulletin No. 54 (or the Securities and Exchange Commission)

Question 2

In applying push-down accounting, the upward revaluation of assets to their current values would require a credit entry to _________________________________.

Answer 2

Revaluation capital

Question 3

The alternative to push-down accounting is ___________________________________.

Answer 3

Non-push-down accounting

Question 4

Push-down accounting is currently not required for ______________________ entities.

Question 5

In leveraged buyouts, the critical issue is whether or not there has been a change in __________________________________.

Question 6

In a leveraged buyout transaction, those shareholders whose continuing ownership interest increases are called _________________________________.

Question 7

In a leveraged buyout transaction, those shareholders whose continuing ownership interest decreases are called ________________________________.

Question 8

Concerning push-down accounting, the Securities and Exchange Commission has rules pertaining to publicly owned companies, and the FASB has rules pertaining to privately owned companies.

Question 9

Push-down accounting is an irrelevant issue from a consolidated perspective.

Question 10

Push-down accounting is less logical than non-push-down accounting.

Question 11

The consolidation process is more involved if push-down accounting has been applied by the subsidiary.

Question 12

In applying push-down accounting, the subsidiary's Retained Earnings account is always brought to a zero balance.

Question 13

In applying push-down accounting, the subsidiary's Accumulated Depreciation account is always brought to a zero balance.

Question 14

In applying push-down accounting, the subsidiary's Additional Paid-in Capital account is always brought to a zero balance.

Question 15

In applying push-down accounting, the offsetting entry for adjusting an asset upward to its current value is to the Retained Earnings account.

Question 16

After applying push-down accounting, the parent's conceptual analysis of the Investment account would not show an excess cost element or a goodwill element.

Question 17

Push-down accounting could be applied to a leveraged buyout.

Question 18

Applying push-down accounting does not require any entries on the parent's books.

Question 19

Applying push-down accounting would be abandoning the historical cost basis of accounting.

Question 20

In a leveraged buyout, a new basis of accounting can be used only if a change in control has occurred.

Question 21

In a leveraged buyout, the requirement to create a corporate entity to be used to acquire the common stock of the target company is merely form over substance.

Question 22

Leveraged buyout transactions must be accounted for using entirely the new basis of accounting or entirely the old basis of accounting-never part new basis and part old basis.

Question 23

The first step in analyzing a leveraged buyout transaction is to determine whether a change in control has occurred.

Question 24

In a leveraged buyout transaction, a change in control may not have occurred even though a new group of shareholders owns more than 50% of the common stock.

Question 25

In a leveraged buyout, if management has more than a 20% ownership interest, the new basis of accounting cannot be used.

Question 26

In a leveraged buyout, if an existing shareholder(s) obtains more than a 50% interest, the new basis of accounting cannot be used.

Question 27

In a leveraged buyout in which a change in control has not occurred, cash given to the target company's shareholders that exceeds the book value of the target company's equity results in a charge to equity.

Question 28

In a leveraged buyout, structuring the transaction to achieve the new basis of accounting to the maximum extent possible is usually of major importance.

Question 29

In a leveraged buyout in which no continuing ownership occurs, the new basis of accounting is always used in its entirety.

Question 30

In a leveraged buyout, to the extent that carryover of predecessor basis is required, it is determined using the personal cost basis of the shares owned by these shareholders.

Question 31

In a leveraged buyout, shareholders whose continuing ownership percentage increases are called "bulls."

Question 32

In a leveraged buyout, the carryover of predecessor basis is an issue only for "bears"-not "bulls."

Question 33

In a leveraged buyout, carryover of predecessor basis treatment is not required as long as the continuing ownership percentage does not exceed 20%.

Question 34

In a leveraged buyout, any Retained Earnings balance at the transaction date is not reported in the consolidated balance sheet.

Question 35

_____ Push-down accounting is an issue

A) Only when common stock is acquired.
B) Only when assets are acquired.
C) Whether common stock or assets are acquired.
D) Only if the subsidiary is consolidated.
E) None of the above.

Question 36

_____ In applying push-down accounting in a situation in which the net assets are undervalued, which of the following accounts would not be adjusted or used?

A) Accumulated Depreciation.
B) Retained Earnings.
C) Revaluation Capital.
D) Additional Paid-in Capital.
E) None of the above.

Question 37

_____ In applying push-down accounting in a situation in which the net assets are overvalued, which of the following accounts would not be adjusted or used?

A) Accumulated Depreciation.
B) Additional Paid-in Capital.
C) Revaluation Capital.
D) Retained Earnings.
E) None of the above.

Question 38

_____ The push-down basis of accounting does not make sense if the subsidiary

A) Is 100% owned by the parent.
B) Is not consolidated.
C) Was acquired in a leveraged buyout.
D) Presents its separate financial statements to its lenders.
E) None of the above.

Question 39

_____ Immediately before applying push-down accounting, the subsidiary has the following account balances:
After applying push-down accounting in a situation in which the net assets were neither over- nor undervalued, what would be the proper balance of the Additional Paid-in Capital account?

A) $ -0-
B) $500,000
C) $640,000
D) $760,000
E) $900,000

Question 40

_____ Immediately before applying push-down accounting, the subsidiary has the following account balances:
After applying push-down accounting in a situation in which the net assets were neither over- nor undervalued, what would be the proper balance of the Retained Earnings account.

A) $ -0-
B) $140,000
C) $400,000
D) $640,000
E) $900,000

Question 41

_____ Immediately before applying push-down accounting, the subsidiary has the following account balances:
After applying push-down accounting in a situation in which the net assets were undervalued by $310,000, what would be the proper balance of the Additional Paid-in Capital account?

A) $ -0-
B) $400,000
C) $650,000
D) $710,000
E) $960,000

Question 42

_____ Immediately before applying push-down accounting, the subsidiary has the following account balances:
After applying push-down accounting in a situation in which the net assets were undervalued by $310,000, what would be the proper balance of the Retained Earnings account.

A) $ -0-
B) $250,000
C) $560,000
D) $710,000
E) $960,000

Question 43

_____ In a leveraged buyout, which of the following statements is false concerning the carryover of predecessor basis?

A) It has no effect on the amounts reported on a consolidated basis.
B) It is consistent with the historical cost basis of accounting.
C) It facilitates the recording of the transaction.
D) It is the equivalent of using part purchase and part pooling of interests.
E) None of the above.

Question 44

_____ In a leveraged buyout, which of the following accounts would have a zero balance in the consolidated column immediately after recording the transaction?

A) Goodwill.
B) Retained Earnings.
C) Revaluation Capital.
D) Additional Paid-in Capital.
E) None of the above.

Question 45

_____ In a leveraged buyout, a new basis of accounting can be used only if

A) There is no carryover of predecessor basis.
B) The continuing ownership percentage increases.
C) The continuing ownership percentage decreases.
D) There is a change in control.
E) None of the above.

Question 46

_____ In a leveraged buyout, carryover of predecessor basis will not be required if the continuing ownership interest is

A) More than 5%.
B) More than 20%.
C) Not more than 5%.
D) Not more than 20%.
E) None of the above.

Question 47

_____ In a leveraged buyout, carryover of predecessor basis is not required for the bears if the continuing ownership interest is

A) More than 5%.
B) More than 20%.
C) Not more than 5%.
D) Not more than 20%.
E) None of the above.

Question 48

_____ In a leveraged buyout, carryover of predecessor basis is not required for the bulls if the continuing ownership interest is

A) More than 5%.
B) More than 20%.
C) Not more than 5%.
D) Not more than 20%.
E) None of the above.

Question 49

On 6/3/06, Ponex acquired 100% of Sonex's outstanding common stock. At the acquisition date, Sonex had the following account balances:
The only assets or liabilities under- or overvalued at the acquisition date were as follows:
Land-undervalued by $155,000
Patent-overvalued by $40,000
Goodwill paid for in the acquisition was calculated at $75,000.
Required:
Prepare all entries required to achieve the push-down basis of accounting.

Question 50

On 8/5/06 Pellax acquired 100% of Sellax's outstanding common stock. At the acquisition date, Sellax had the following account balances:
The only assets or liabilities under- or overvalued at the acquisition date were as follows:
Building-undervalued by $250,000
Inventory-overvalued by $30,000
Goodwill paid for in the acquisition was calculated at $320,000.
Required:
Prepare all entries required to achieve the push-down basis of accounting.

Question 51

On 5/5/06, a leveraged buyout occurred for Oldco, whereby it became a subsidiary of Newco. Information concerning the leveraged buyout follows:
a. Management, which owned 10% of Oldco before the leveraged buyout (at a collective individual cost of $17,000) exchanged all its shares in exchange for 1,000 shares of Newco common stock (giving management a 50% ownership interest in Newco).
b. An investment firm contributed $100,000 cash in exchange for 1,000 shares of Newco common stock.
c. Newco borrowed $400,000 from a financial institution.
d. Newco paid $500,000 cash to the nonmanagement shareholders of Oldco for the shareholders' entire 90% interest in Oldco.
e. Oldco's fixed assets are undervalued by $300,000.
f. Oldco's stockholders' equity just before the leveraged buyout was $150,000.
Required:
a. Calculate Newco's total cost of its investment in Oldco.
b. Calculate the change in basis for the fixed assets.
c. Calculate the goodwill paid for.

Question 52

On 12/12/06, a leveraged buyout occurred for Oldco, whereby it became a subsidiary of Newco. Information concerning the leveraged buyout follows:
a. Oldco has 10,000 shares of common stock outstanding.
b. Management, which owned 500 shares of Oldco before the leveraged buyout (at a collective individual cost of $14,000) exchanged all its shares in exchange for 1,000 shares of Newco common stock (giving management a 40% ownership interest in Newco).
c. An investment firm contributed $100,000 cash in exchange for 1,000 shares of Newco common stock.
d. Newco borrowed $500,000 from a financial institution.
e. Newco gave $600,000 cash and 500 shares of Newco common stock to the nonmanagement shareholders of Oldco for the shareholders' entire ownership interest in Oldco (9,500 shares).
f. Oldco's fixed assets are undervalued by $400,000.
g. Oldco's stockholders' equity was $100,000 just before the leveraged buyout.
Required:
a. Calculate Newco's total cost of its investment in Oldco.
b. Calculate the change in basis for the fixed assets.
c. Calculate the goodwill paid for.