BUS 484 ADVANCED ACCOUNTING QUIZ 1

On December 31, 2020, Lemmon Company issued 20,000 shares of its common stock with a fair value of $50 per share for all of the outstanding common shares of May Company. Stock issuance costs of $4,000 and direct costs of $1,000 were paid. In addition, Lemmon promised to pay an additional $2,200 to the former owners if May's earnings exceeded a certain amount during the next year. The fair value of the potential obligation is estimated at $2,000.Compute the investment to be recorded at date of acquisition.

$1,002,000

The main difference between a "basket purchase" of net assets and an acquisition of net assets that qualifies as a business is that:

In an acquisition of net assets that qualifies as a business, all assets are valued at full fair value regardless of purchase price; while in a "basket purchase" of net assets the purchase price is allocated to the various assets.

When a company holds between 20% and 50% of the outstanding stock of an investee, which of the following statements applies?

The investor should use the equity method to account for its investment unless circumstances indicate that it is unable to exercise "significant influence" over the investee.

In the case of an equity method investment for which there is a change in fair value

no gains are recognized in income until the investment is sold.

After the adoption of FASB ASU 2017-04, if the fair value of a reporting unit with goodwill falls below its book value, which of the following statements is true?

A goodwill impairment loss is recognized for the excess of book value over fair value of the reporting unit.

Huey Company acquires 100% of the stock of Solar Corporation on January 1, 2019, for $2,400,000 cash. As of that date Solar had the following account balances: Book Value Fair value Cash $630,000 $630,000 Accounts receivable 775,000 775,000 Inventory 350,000 400,000 Building-net (10 year life) 1,000,000 900,000 Equipment-net (5 year life) 300,000 400,000 Land 600,000 900,000 Accounts Payable 125,000 125,000 Bonds Payable (Face amount $1,000,000, due 12/31/2023) 2,000,000 2,050,000 Common stock 500,000 Additional paid-in capital 250,000 Retained earnings 780,000 In 2019 and 2020, Solar had net income of $250,000 and $240,000, respectively. In addition, Solar paid dividends of $16,000 in both years. Inventory is assumed to be sold in 2019. Assume straight line amortization/ depreciation for assets and bonds payable.What amount of Solar's equipment would be included on the consolidated balance sheet at December 31, 2020?

$240,000

Lucky's acquires Waterview, Inc., by issuing 40,000 shares of $1 par common stock with a market price of $25 per share on the acquisition date and paying $125,000 cash. The assets and liabilities on Waterview's balance sheet were valued at fair values except equipment that was undervalued by $300,000. There was also an unrecorded patent valued at $40,000, as well as an unrecorded trademark valued at $75,000. In addition, the agreement provided for additional consideration, valued at $60,000, if certain earnings targets were met. The pre-acquisition balance sheets for the two companies at acquisition date are presented below. Lucky's Waterview Cash $ 300,000 $ 260,000 Accounts receivable 250,000 135,000 Inventory 254,000 275,000 Property, plant, and equipment 2,300,000 356,500 $3,104,000. $1,026,500 Accounts payable $ 45,000 $ 37,500 Salaries and taxes payable 450,000 46,000 Notes payable 500,000 450,000 Common stock 250,000 60,000 Additional paid-in capital. 950,000 106,500 Retained earnings 909,000 326,500 $3,104,000 $1,026,500 What amount of goodwill was recorded in the acquisition?

$277,000

On January 1, 2020, Coldspring Corp. paid $770,000 to acquire Whitt Co. Coldspring used the equity method to account for the investment. The following information is available for the assets, liabilities, and stockholders' equity accounts of Whitt: Book Value Fair Value Current assets $95,000 $95,000 Land 95,000 120,000 Building (twenty year life) 255,000 310,000 Equipment (five year life) 185,000 190,000 Current liabilities 40,000 40,000 Long-term liabilities 65,000 65,000 Common stock 140,000 Additional paid-in capital 300,000 Retained earnings 210,000 Whitt earned net income for 2020 of $125,000 and paid dividends of $18,000 during the year. What is the AAP amortization expense for 2020?

$3,750 Debit

On January 2, 2020, Petunia Co. purchased a 20% interest in Sawyer, Inc. for $300,000. Fair values of Sawyer's net assets exceeded book values due to land undervalued by $400,000. In 2020, Sawyer reported net income of $100,000 and paid no dividends.What is the amount of Equity Investment on the December 31, 2020, balance sheet?

$320,000

Pre-consolidation bookkeeping, downstream intercompany sales, profits in ending inventory-Equity method Assume a parent company owns a 100% controlling interest in its long-held subsidiary. The following excerpts are from the parent's and subsidiary's "stand alone" pre-consolidation income statements for the year ending December 31, 2019, prior to any investment bookkeeping or intercompany adjustments: Parent Subsidiary Revenues $4,000,000 $2,500,000 Cost of goods sold (2,800,000) (1,500,000) Gross profit 1,200,000 1,000,000 Selling general & administrative expenses (780,000) (606,000) Net income $420,000 $394,000 On January 1, 2019, neither company held any inventories purchased from the other affiliate. All of the sales made by either company have the same gross margin regardless of whether they are made to affiliates or non-affiliates. The subsidiary declared and paid $200,000 of dividends during 2019. Assume that during the year ended December 31, 2019, the parent sold to the subsidiary $500,000 of merchandise. At December 31, 2019, the subsidiary still held in its inventory 25% of the goods purchased from the parent during 2019. What is the amount of "income from subsidiary" recognized by the parent company if it applies the equity method of pre-consolidation investment bookkeeping?

$356,500

On January 1, 2020, Sylvestor, Inc., paid $400,000 for a 20% interest in Happiness Corporation. This investee had assets with a book value of $1,500,000 and liabilities of $700,000. A patent held by Happiness was undervalued by $150,000. The patent had a ten year remaining life. Any goodwill associated with this acquisition is considered to have an indefinite life. During 2020, Happiness reported income of $200,000 and paid dividends of $80,000 while in 2021 it reported income of $230,000 and dividends of $100,000.What is the balance in Equity Investment at December 31, 2021?

$444,000

Cost method consolidation entries (controlling investment in affiliate, fair value differs from book value) Assume an investee has the following financial statement information for the three years ending December 31, 2019: (At December 31). 2019. 2018. 2017 Current assets. $285,000. $277,500. $207,000 Tangible fixed assets 662,500 575,000 563,000 Intangible assets 40,000. 45,000. 50,000 Total assets. $987,500. $897,500. $820,000 Current liabilities. $120,000. $110,000. $850,000 Noncurrent liabilities 266,250 242,500 220,000 Common stock. 100,000. 100,000. 100,000 Additional paid-in capital 100,000 100,000 100,000 Retained earnings 400,000. 345,000. 300,000 Stockholders' equity 600,000 545,000. 500,000 Total liabilities and equity. $986,250. $897,500. $820,000 Assume on January 1, 2017, an investor company purchased 100% of the outstanding voting common stock of the investee. On the date of the acquisition, the investee's identifiable net assets had fair values that approximated their historical book values, except for tangible fixed assets, which had fair value that was $112,500 higher than the investee's recorded book value. The tangible fixed assets had a remaining useful life of 6 years. In addition, the acquisition resulted in goodwill in the amount of $218,750 recognized in the consolidated financial statements of the investor company. On January 1, 2017, the investee's retained earnings balance was $250,000. Assuming that the investor company uses the cost method to account for its investment in the investee, what is the amount of the [ADJ] entry necessary to prepare the consolidated financial statements for the year ended December 31, 2019?

$57,500

Huey Company acquires 100% of the stock of Solar Corporation on January 1, 2019, for $2,400,000 cash. As of that date Solar had the following account balances: Book Value. Fair value Cash $630,000 $630,000 Accounts receivable 775,000 775,000 Inventory 350,000 400,000 Building-net (10 year life) 1,000,000 900,000 Equipment-net (5 year life) 300,000 400,000 Land 600,000 900,000 Accounts Payable 125,000 125,000 Bonds Payable (Face amount $1,000,000, due 12/31/2023) 2,000,000 2,050,000 Common stock 500,000 Additional paid-in capital 250,000 Retained earnings 780,000 In 2019 and 2020, Solar had net income of $250,000 and $240,000, respectively. In addition, Solar paid dividends of $16,000 in both years. Inventory is assumed to be sold in 2019. Assume straight line amortization/ depreciation for assets and bonds payable.What is the amount of goodwill at date of acquisition?

$570,000

Lucky's acquires Waterview, Inc., by issuing 40,000 shares of $1 par common stock with a market price of $25 per share on the acquisition date and paying $125,000 cash. The assets and liabilities on Waterview's balance sheet were valued at fair values except equipment that was undervalued by $300,000. There was also an unrecorded patent valued at $40,000, as well as an unrecorded trademark valued at $75,000. In addition, the agreement provided for additional consideration, valued at $60,000, if certain earnings targets were met.The pre-acquisition balance sheets for the two companies at acquisition date are presented below. Lucky's Waterview Cash $ 300,000 $ 260,000 Accounts receivable 250,000 135,000 Inventory 254,000 275,000 Property, plant, and equipment 2,300,000 356,500 $3,104,000 $1,026,500 Accounts payable $ 45,000 $ 37,500 Salaries and taxes payable 450,000 46,000 Notes payable 500,000 450,000 Common stock 250,000 60,000 Additional paid-in capital 950,000 106,500 Retained earnings 909,000 326,500 $3,104,000 $1,026,500 What is consolidated retained earnings?

$909,000

In the case of an intercompany sale of land, a consolidation entry is prepared:

In the period of the intercompany sale of the land and in the following periods that the land is held by one of the affiliated companies

Equity method journal entries with intercompany sales of inventoryAssume that an investor owns 30% of an investee, and accounts for its investment using the equity method. At the beginning of the year, the Equity Investment was reported on the investor's balance sheet at $300,000. During the year, the investee reported net income of $105,000 and paid dividends of $20,000 to the investor. In addition, the investor sold inventory to the investee, realizing a gross profit of $42,000 on the sale. At the end of the year, 20% of the inventory remained unsold by the investee. Required a. How much equity income should the investor report for the year? b. What is the balance of the Equity Investment at the end of the year? c. Assume that the remaining inventory is sold in the following year and that the investee reports $150,000 of net income. How much equity income will the investor report for the following year?

a. $29,980 b. $308,980 c. $47,520

Preparing the [I] consolidation entries for sale of land Assume that during 2015 a wholly owned subsidiary sells land that originally cost $720,000 to its parent for a sale price of $800,000. The parent holds the land until it sells the land to an unaffiliated company on December 31, 2019. The parent uses the equity method of pre-consolidation bookkeeping. a. Prepare the required [I] consolidation entry in 2015. b. Prepare the required [I] consolidation entry required at the end of each year 2016 through 2018. c. Assume that the parent re-sells the land outside of the consolidated group for $840,000 on December 31, 2019. Prepare the journal entry made by the parent to record the sale and the required [I] consolidation entry for 2019. d. What will be the amount of gain reported in the consolidated income statement in 2019?

a. Debit Credit Gain on sale $80,000 Land $80,000 b. Equity investment $80,000 Land $80,000 c. Cash $840,000 Gain on Sale $720,000 Land $120,000 [lgain] equity investment $80,000 Gain on Sale $80,000 d. $120,000