Advanced Accounting

What is goodwill associated with an equity method investment?

The excess of the cost of the investment that cannot be attributed to a specific investee asset or liability.

Zell Company sells inventory at a $10,000 gross profit to its equity method investee, Aaron Company. Before the end of the year, Aaron resells all of this inventory to an outside, unrelated entity. As a result of these activities, Zell Company should

recognize the entire $10,000 gross profit on its income statement. Reason: Only the intra-entity gross profits on good remaining in Aaron's ending inventory are deferred.

Which of the following are criteria that are essential to recognizing an intangible asset acquired in a business combination?

-The intangible asset is capable of being sold or otherwise separated from the acquired enterprise. -The intangible asset arises from a contractual or other legal right.

Which of the following represent reasons that Salesforce.com acquired MuleSoft?

-MuleSoft had capabilities to help clients incorporate legacy information technology with Salesforce. -MuleSoft's cloud platform will help to integrate and connect clients applications, data, and devices.

Which of the following is a characteristic of the accounting procedure for a statutory merger or a statutory consolidation?

-Once the dissolved companies' account balances are transferred to the surviving company's records, the records of the dissolved companies are closed. -On the combination date, the surviving company records on its books the assets and liabilities from each of the dissolving companies. -Because the acquired firm's accounts are combined on the surviving company's records, no further consolidation procedures are needed.

Which of the following best describes the accounting procedure for a statutory merger or statutory consolidation?

The surviving company records the assets acquired and liabilities assumed in the merger on its financial records.

Why are consolidated financial statements prepared when a business combination of two or more companies creates a single economic entity?

There is a presumption that consolidated financial statements are more meaningful than separate financial statements.

True or false: Majority stock ownership does not always indicates an exclusive ability for one entity to exercise control over another.

True

True or false: Equity method accounting requires that the investor recognize its share of investee other comprehensive income and accumulated other comprehensive income.

True Reason: Both OCI and AOCI of an investee must be recognized by the investor.

The term used to describe inventory sales between an investor company and its equity-method investee is _____________-______________ inventory sales.

intra entity

Under the equity method, the amount of gross profit deferred from an intra-entity sale is limited to the investor's __________ share of the investee.

percentage, proportional, ownership, or proportionate

For a 100% business acquisition where dissolution of the acquired firm does not occur, the parent company records on its books

the fair value of the aincquired firm in an investment account.

The goal of the FASB/IASB joint project on accounting for business combinations was to

to develop a standard that includes a common set of principles to produce decision-useful information and minimizing exceptions to those principles.

True or false: In a business combination, the acquiring firm increases its retained earning for the amount of the acquisition-date subsidiary retained earnings.

False *None of the acquiree's stockholders' equity accounts are recorded by the acquiring firm in a business combination.

True or false: When an acquired firm is legally dissolved upon acquisition, the acquirer will record on its books all of the former firm's assets and liabilities at their former book values.

False Acquisition-date fair values are used to record acquired assets and liabilities assumed in a business combination.

How can a company actively manage reported amounts by keeping voting share ownership of another firm below 50%?

In applying the equity method, the liabilities of the investee company are not combined with those on the investor's balance sheet.

Which of the following are included in the first two columns of the consolidated worksheet as of the acquisition date?

-Any contingent performance liability that may have accompanied the combination. -An investment account in the parent's financial statement column.

The FASB and IASB both have published standards of accounting for business combinations. Which of the following describes the relation between the two sets of business combination accounting standards?

-The convergence of the two standards was designed to enhance cross-border comparability of consolidated financial statements. -Differences exist across the two standards in accounting for a noncontrolling interest. -The two sets of standard are identical in most respects.

An intra-entity inventory sale occurs between an investor and its equity-method investee. What factors determine the amount of gross profit from the sale to be deferred as of the end of the year?

-The investor's proportionate ownership of the investee. -The seller's gross profit percentage. -The amount of the intra-entity sale remaining in ending inventory.

When an investor sells inventory to its equity-method investee, how is the reported sales balance on the investor's income statement affected?

The sales account remains unaffected.

True or false: According to the acquisition method, the acquiring firm records all assets acquired and liabilities assumed in a merger transaction at their individual acquisition date fair values.

True Acquisition-date fair value is the valuation basis underlying the acquisition method. The acquisition method is a way of accounting for the purchase of assets. When an organization acquires assets, it must record them as financial statements. This would be at their fair market value. This means that all intangibles and fixed, tangible assets are recorded on the balance sheet.

The acquisition-date fair value allocation schedule helps to prepare the worksheet entries to adjust the subsidiary's assets from book value to ___________ value.

fair

The large amount of __________ recognized in the Salesforce.com acquisition of MuleSoft suggests substantial synergies are expected from the combination.

goodwill

Under the equity method, the amount of gross profit deferred from an intra-entity sale is limited to the investor's _________________ share of the investee.

percentage, proportional, ownership, or proportionate

When an acquired firm's legal status is dissolved in a business combination, the acquiring firm's entry to record the combination includes

-the individual fair values of the assets acquired and liabilities assumed. -the fair value of the consideration transferred. *Goodwill or a bargain purchase gain may be recorded depending on the circumstances.

Consolidation entry S brings subsidiary stockholders' equity account balances to zero because

they represent ownership interests held by the parent and thus are not outstanding equity. *The parent only records an investment account to record the combination and does not combine the stockholders' equity accounts. *A consolidated worksheet is only needed when the subsidiary is a separate legal entity.

When should an investor recognize an impairment loss for its equity method investment?

If evidence exists that the investor will not be able to recover the investment's carrying amount and the decline in value is other than temporary.

When may majority stock ownership fail to provide control over a business entity?

-When the acquiring company has only an indirect ability to determine the direction of management and policies through its majority voting privileges. -When noncontrolling participation rights are powerful enough to prevent the majority owners from exercising control.

Which of the following best describes control through majority voting stock ownership?

By exercising majority voting power, one firm can dictate the operating and financing activities of another firm.

Why is it necessary to identify the sources of the difference between the price paid for an investment and its underlying book value in applying the equity method?

The equity method will likely expense excess costs allocated to different asset categories over different useful lives.

The measurement attribute used by an acquirer to recognize an acquired firm's assets and liabilities is

fair value

When an equity method investment suffers a permanent decline in value, the investor recognizes an impairment loss and writes down the investment account to ____________ value.

fair

Under the equity method, the excess of the investment cost over the proportionately-owned acquisition-date fair value of the investee's net identifiable assets is allocated to the asset _____________

goodwill

When one business entity has a controlling financial interest in another entity, why are consolidated financial statements prepared for external reporting?

It is presumed that consolidated financial statements are necessary for a fair presentation.

Even though measurement of an intangible asset (e.g., unpatented technology or customer relationships) may lack precision, recognition of the identified intangible may result in greater

faithful representation *less goodwill results when more identified intangibles are recognized *if an intangible asset is unrecognized, goodwill increases, thus leaving total assets unchanged.

In its acquisition of Whole Foods Market, Amazon cited "expected improvements in technology performance and functionality" as a source of __________ recognized in the combination.

goodwill or goodwill value

Consolidation entry S is a worksheet entry that:

has no effect on the individual financial records of neither the parent nor the subsidiary.

Which of the following may be included in the calculation of the consideration transferred for a newly acquired firm?

-The liabilities incurred by the acquirer to former owners of the acquiree. -The equity interests issued by the acquirer in the combination. -Sum of the acquisition-date fair values of the assets transferred by the acquirer.

The IASB and FASB standards on equity method accounting are similar in that they both

-rely on the notion of significant influence. -recognize the investor's share of the profit or loss of the investee as a part of the investor's earnings. -treat investee dividend distributions to the investor as a decrease in the carrying amount of the investment.

When an investor sells a portion of an equity-method investment,

-the investor continues to apply the equity method if the investor continues to have the ability to exercise significant influence over the investee. -the investment account should reflect a balance current as of the date of sale. -the investor recognizes a gain or loss on the sale.

What are consolidated financial statements?

A single set of combined financial statements for multiple companies tied together through common control.

How does an investor record income from its investment in an equity-method investee?

As a credit to "Equity in Investee Income"

What is the measurement attribute employed in determining the consideration transferred in a business combination?

Fair value

Which of the following is an attribute of a statutory merger?

One company directly acquires another company's assets and assumes its liabilities.

What is the accounting treatment of the acquired subsidiary's equity accounts in a business combination?

Subsidiary equity accounts are excluded from the accounting for the business combination.

In consolidation entry S, the "S" refers to

Subsidiary stockholders' equity

Which of the following is a worksheet effect of consolidation entry S?

Subsidiary stockholders' equity account balances are brought to zero in consolidation.

True or false: Acquisition-date fair values are used to measure assets acquired and liabilities assumed across all business combinations.

True Fair value is the measurement principle applied to assets acquired and liabilities assumed under the acquisition method.

The investor decreases its ____________ account for its share of investee cash dividends.

investment

What are some general criticisms of the equity method for investments in the ownership shares of another firm?

-Significant influence and control may not be properly defined by existing quantitative guidelines. -By not including the investee's assets and liabilities in the investor's financial statement amounts, performance metric may be biased.

The acquisition method requires the recognition and measurement of which of the following?

-The acquiree's identified assets and liabilities assumed by the acquirer. -Any existing noncontrolling interest. -Goodwill or a gain from bargain purchase. *The acquisition method focuses on the assets acquired and liabilities assumed in a business combination and recognizes any noncontrolling interest.

Which of the following describes a fair value exchange price in an orderly transaction between market participants?

-The price that would be received from selling an asset. -The price that would be paid for transferring a liability. *Offering prices may not reflect the ultimate price paid or received for an asset.

Before preparation of a consolidated worksheet, an acquisition-date fair value allocation schedule is typically prepared. What is the purpose of the acquisition-date fair value allocation schedule?

-The schedule allocates the consideration transferred among the individual assets acquired and liabilities assumed in the business combination. -The schedule provides supporting calculations that identify fair value adjustments required in consolidation. -The schedule computes the allocated value assigned to goodwill or a bargain purchase gain. *Fair values are the focus of the schedule as per GAAP.

When a business combination is accompanied by contingent consideration to be paid by the parent upon completion of specified performance metrics, the journal entry to record the combination includes

-a liability for the fair value of the contingent consideration. -the fair value of the contingent consideration in the investment account as part of the overall consideration transferred. *The valuation principle for all elements of a business combination is acquisition-date fair value.

The fair-value option for reporting investments that would otherwise be accounted for under the equity method requires

-an irrevocable election to elect fair value as the measurement attribute for an equity investment -the inclusion in net income of changes in the fair value of an equity investment. -the valuation of the equity method investment at fair value as of the investor's balance sheet date.

In a business combination when each combining firm maintains its separate incorporation

-each company maintains independent record keeping. -consolidation worksheets are employed to generate financial reports for the combined economic entity. -the acquiring firm utilizes an investment account to record the acquisition. *With separate incorporation, an investment account records the combination.

Preexisting goodwill on a newly acquired subsidiary's books is

-essentially ignored in the allocation of the consideration transferred to the subsidiary's assets and liabilities. -not considered an identifiable asset by the parent.

Goodwill recognized in a business combination

-is an asset that represents future economic benefits -may capture value derived from other intangible assets not otherwise eligible for recognition -may embody synergies the acquirer expects to achieve from the combination *results when the consideration transferred exceeds the fair value of the net identifiable assets of the acquired firm in a 100% acquisition.

intangible assets

-lack physical substance. -are required to meet specific criteria to qualify for recognition in a business combination. -are common in business combinations.

In-process research and development acquired in a business combination is

-recognized at its acquisition-date fair value. -recognized as an indefinite life intangible asset. -tested periodically for impairment.

In a business combination when each combining firm remains a legally incorporated separate entity

-the acquiring firm does not physically record the acquired firm's separate assets and liabilities. -the parent company employs consolidated worksheet entries to help prepare a set of consolidated financial statements. *With separate incorporation, an investment account records the combination. *The investment account is typically recorded at the consideration transferred. In a bargain purchase, the investment is recorded at the net fair value of the assets acquired and liabilities assumed.

When the collective fair value of the net identified assets acquired and liabilities assumed exceeds the consideration transferred,

-the fair value of the net identifiable assets becomes the valuation basis for the acquired firm. -the acquirer recognizes a gain on bargain purchase. *No goodwill is recognized in a bargain purchase gain situation.

When an investor sells inventory to its 40%-owned investee (an intra-entity sale), why is 40% of the profit recognition delayed until the inventory is sold to an outside party?

40% of the investor's sale is effectively with itself.

What are the financial reporting requirements when one business organization possesses control over another business organization?

A single set of consolidated financial statements is prepared for the separate business entities tied together through common control.

When an equity method investee declares a dividend, how should the investor company record the event?

As a credit to the Investment account.

How does the acquisition method treat contingent consideration when present in a business combination

As a negotiated component of the fair value of the consideration transferred.

Which of the following qualify as elements of consideration transferred and thus recorded in a business combination?

-Additional paid-in capital related to common stock issued by the acquirer. -Cash paid by the acquirer. -Common stock issued by the acquirer.

Which of the following were cited as motivations for Amazon to acquire Whole Foods Market?

-Amazon gained a competitive edge against other on-line grocery distributors. -Amazon effectively expanded its distribution network to include hundreds of Whole Foods stores.

Which of the following represent reasons why Tesla acquired Grohmann Engineering?

-An expectation that the acquisition will increase the speed and quality of production. -Expected integration of Grohmann's technology into Tesla's automotive business. -Expected reductions in capital expenditures required for vehicle produced. *Grohmann's focus is on batteries and fuel cells, not vehicle manufacturing.

A single entity can become more profitable than the separate parent and subsidiary had been in the past through which of the following?

-Larger firms can become more efficient at delivering goods and services. -Diversification of business risk. -The ability to attract financing at lower interest rates from greater negotiating power.

True or false: Because reported income can affect market perceptions of the underlying value of publicly traded shares, managers will often assess prospective effects of equity method income prior to making an equity-method investment in another firm's shares.

True Reason: Equity-method income directly affects the reported net income of the investor firm.

True or false: If an investor sells sufficient shares to cause it to lose its ability to exercise significant influence over an investee, the equity method would cease to be applicable.

True Reason: The ability to exercise significant ability over an investee is a necessary condition for applying the equity method.

Contingent consideration is

a contractual provision to pay additional amounts to former owners of a business based upon achievements of future performance measures. - Contingent consideration is an obligation of the acquiring entity to transfer additional assets or equity interests to the former owners of an acquiree. The amount of this consideration can be significant, depending on the subsequent performance of the acquiree. IFRS/GAAP - Recognize estimated fair value at acquisition and any other contingent consideration (discount back) - Change in fair vair value of liabilities go to I/S - Change in fair value of equity settled in equity GAAP Only - Changes in fair value of asset to income statement

Attorney fees paid for service provided related to a business combination are accounted for as

a current period expense.

Costs incurred to register and issue securities in connection with a business combination are recorded as

a reduction of additional paid-in capital.

The second column of figures on the consolidated worksheet includes the subsidiary's assets and liabilities at their __________ values.

book or carrying

According to International Accounting Standards, when an investor has significant influence over an investee, the investor must account for its investment using the ______________ method.

equity

Among the items recognized by Tesla from the Grohmann acquisition included __________ assets such as developed technology, software, customer relations, and the Grohmann trade name.

intangible

True or false: Pre-existing goodwill, when present on an acquired firm's separate balance sheet, is considered an identifiable intangible asset

False *Pre-existing goodwill is an unidentifiable asset.

At the beginning of the current year, Martin Corporation purchases 20% of the outstanding shares of Foster Company for $200,000 which gave Martin the ability to significantly influence Foster. The price paid reflected Foster's book and fair values of its assets and liabilities. During the current year, Foster reports net income of $25,000 and declares dividends of $15,000. At the end of the current year, what amount should Martin report as investment income from its ownership of Foster's shares?

$5,000 Reason: $25,000 x 20% = $5,000

What is the primary vehicle that business firms employ to exercise control over other business entities?

Control through majority voting stock ownership.

An investor sells inventory to its investee, at a profit. At year end, the investee has not disposed of this inventory. How should the investor account for the gross profit from this intra-entity inventory sale?

Defer the investor's proportionate ownership share of the intra-entity gross profit.

Which of the following are included in net income for an investment in equity shares accounted for under the fair-value method?

Dividends from the investee.

Which of the following best describes a situation where one company acquires the net assets of another firm and the acquired firm then is dissolved as a separate legal entity?

Statutory merger.

Which of the following terms is best described by the integration of successive stages of production and distribution of products?

Vertical integration.

A criticism of the 20%-50% ownership guideline for applying the equity method is that

-a firm may argue that less than 50% ownership indicates a lack of control and thus avoid consolidation of an investee. -contractual agreements may be more indicative of significant influence or control than ownership percentage.

Why is the in-process research and development (IPR&D) of an acquired subsidiary recognized as an asset?

The IPR&D has an acquisition-date fair value. *the IPR&D assets is considered to have an indefinite life and is subject to impairment testing, not amortization.

An investor's excess investment cost over its percentage of investee book value is attributable to a limited-lived tangible asset. How should the investor account for this excess cost in recognizing investment income under the equity method?

The equity in investee income is reduced by the depreciation associated with the excess cost attributable to the limited-lived tangible asset.

Because certain intangible assets are considered to have indefinite lives, they are not subject to _____________

amortization

When an equity-method investee company's activities require recognition of other comprehensive income (OCI), the investor company

records its proportionate share of the investee's OCI as AOCI on its financial records.

In preparing the journal entry to record a merger, the acquiring firm includes

the assets acquired and liabilities assumed at fair value.

What are some common economic consequences of financial reporting on the reporting firm?

-Certain financial statement performance metrics may affect the ability of a firm to raise capital in debt or equity markets. -Failure to maintain certain financial statement ratios may cause a firm to violate debt covenants. -Managerial compensation may depend on reported net income.

Which of the following are considered potential advantages to growth through a business combination?

-Cost savings through elimination of duplicate facilities and staff. -Quick entry for new and existing products into domestic and foreign markets. -Economies of scale allowing greater efficiency and negotiating power.

What accounting procedures are appropriate when an acquired firm is dissolved immediately following a business combination?

The surviving company records the dissolved company's assets and liabilities on its financial records.

An excess price paid by an investor company over the percentage book value of the investee attributable to a depreciable asset will likely affect the equity method _____________ recognized by the investor company over time.

income, earnings, or revenue

When an equity method investee sells inventory to its investor at a gross profit and a portion of the inventory remains unsold to outside parties at year end, the investor's Equity in Investee Income account

is decreased for the investor's ownership percentage of the gross profit on intra-entity inventories that have not been resold to outside entities.

When an investor purchases an investment for an amount in excess of the investee's book value, how is the excess amount allocated?

First to specifically identified assets and liabilities with any remainder allocated to goodwill.

If an increase in an investment now provides an investor with the ability to exercise significant influence over an investee, the change to the equity method of investment accounting is applied on a ___________ basis.

prospective

Which of the following are typical costs that accompany a business combination?

-Costs incurred to register and issue securities. -Secretarial and management time allocated to acquisition activity. -Professional service fees for attorneys and accountants. *Such write downs are not uncommon, but do not involve costs incurred as a result of the business combination.

Which of the following accounting approaches is used when an investment share is increased and the investment now qualifies for the equity method?

Prospective approach