ACCT 510-Practice Exam CH.1-3

Equity in net income is affected by all but which one of these items related to the investee?

Topic: Equity method investmentsLO: 2 The correct answer is: Investee goodwill impairment

Which unrealized gain affects a company's earnings per share, if the investor does not elect the fair value option?

Topic: Accounting for debt investmentsLO: 1 The correct answer is: Unrealized gain on trading debt securities

Yale Company acquires all of Zip Company's assets and liabilities for $20 million in cash. Zip's reported net assets total $4 million, it has previously unreported identifiable intangible assets of $1 million, and its plant and equipment is overvalued by $6.5 million.How much goodwill is recognized for this acquisition?

$20 - ($4 + $1 - $6.5) = $21.5 millionTopic: Goodwill calculation, negative fair value of identifiable net assetsLO: 1 The correct answer is: $21.5 million

Ajax Beverages holds 40% of the stock of Bubbly Bottler, acquired at a cost equal to 40% of Bubbly's book value at the time of purchase, and reports the investment using the equity method. At the start of the current year, Ajax reports the investment at a balance of $1,000,000. Bubbly reports net income of $200,000 and $10,000 in other comprehensive losses for the current year. Bubbly also declares $50,000 in dividends. The market value of Ajax's investment in Bubbly stock increases by $20,000 during the year.At what amount does Ajax report the investment at the end of the year?

$1,000,000 + 40% x ($200,000 - $10,000 - $50,000) = $1,056,000Topic: Equity method investmentsLO: 2 The correct answer is: $1,056,000

A company buys corporate bonds for $100 in 2023. At the end of 2023, the company still holds the investment and it has a market value of $115. In 2024, the company sells the investment for $108.How is this information reported in the company's 2023 and 2024 income statements if the investment is classified as an AFS investment?

$108 - $100 = $8 gainTopic: Accounting for debt investments classified as AFSLO: 1 The correct answer is: Does not appear on the 2023 income statement; $8 gain on the 2024 income statement

Kaylo Corporation acquires Lotty Inc., paying the following: $25 million in cash, new stock with a fair value of $70 million and par value of $1 million, stock registration fees of $2 million, and acquisition-related advisory and legal fees of $8 million.The total acquisition cost is

$25 + $70 = $95 millionTopic: Acquisition costLO: 2 The correct answer is: $95 million

A company has investments in debt securities, acquired at a cost of $300,000, and classified as trading investments. At the beginning of the year, the investments are reported at $340,000. During the year the company sells the investments for $335,000.What amount is reported in income for the year?

$335,000 - $340,000 = $5,000 lossTopic: Accounting for debt investments classified as tradingLO: 1 The correct answer is: $ 5,000 loss

On January 1 of the current year, Ola Company paid $405,000 for a $400,000 face value 3% corporate bond yielding 2.8%, interest paid annually on December 31, and classified it as held-to-maturity. No impairment losses are reported. Ola's reporting year ends December 31.On its balance sheet as of the end of the following year, Ola reports the investment at:

$404,340 + [($404,340 x 2.8%) - (3% x $400,000)] = $403,662Topic: Accounting for HTM securitiesLO: 1 The correct answer is: $403,662

On January 1 of the current year, Ola Company paid $405,000 for a $400,000 face value 3% corporate bond yielding 2.8%, interest paid annually on December 31, and classified it as held-to-maturity. No impairment losses are reported. Ola's reporting year ends December 31.On its balance sheet as of the end of the current year, Ola reports the investment at:

$405,000 + [$11,340 - (3% x $400,000)] = $404,340Topic: Accounting for HTM securitiesLO: 1 The correct answer is: $404,340

Fizzy Inc. acquired 25% of the stock of Bubbly Inc. at the beginning of 2022 for $5,000,000, and reports the investment using the equity method. There is no basis difference, and no intercompany transactions. Bubbly's retained earnings increased by $800,000 in the two years since acquisition, and its AOCI increased by $20,000. Bubbly declared and paid dividends of $300,000 during this time.What amount does Fizzy report for its investment in Bubbly at the end of 2023?

$5,000,000 + 25% x ($800,000 + $20,000) = $5,205,000Topic: Equity method investmentsLO: 2 The correct answer is: $5,205,000

Menlo Corporation acquires Newton Inc., paying the following: new stock with a fair value of $50 million, stock registration fees of $3 million, an earnings contingency with a present value of $1 million, and converted stock options to Newton's employees that had vested and were related to services performed prior to the acquisition, valued at $5 million.The total acquisition cost is

$50 + $1 + $5 = $56 millionTopic: Acquisition costLO: 2 The correct answer is: $56 million

Mark Company acquires Nap Industries for total consideration of $50 million, recorded as a business combination. Nap's reported net assets have a fair value of $10 million, including reported goodwill of $3 million. Mark identifies the following previously unreported intangible assets attributable to Nap:Customer lists, fair value $2 millionDeveloped technology, fair value $3.5 millionSkilled workforce, fair value $4 millionThe goodwill arising from this business combination is

$50 - ($10 - $3 + $2 + $3.5) = $37.5 millionTopic: Goodwill calculation, previous goodwillLO: 1 The correct answer is: $37.5 million

Kelly Corporation acquires the assets and liabilities of Lawson Company. Below is the balance sheet of Lawson, along with fair values of its assets and liabilities, at the date of acquisition. Book valueDr (Cr)Fair valueDr (Cr)Current assets$ 1,000,000$ 500,000Plant & equipment60,000,00030,000,000Identifiable intangibles10,000,00035,000,000Goodwill4,000,00010,000,000Current liabilities(2,000,000)(2,000,000)Long-term liabilities(52,000,000)(52,000,000)Capital stock(3,000,000)Retained earnings(18,000,000) Kelly pays $50,000,000 in cash for the assets and liabilities of Lawson. How much goodwill does Kelly record for this acquisition?

$50,000,000 - ($500,000 + $30,000,000 + $35,000,000 - $2,000,000 - $52,000,000) = $38,500,000Topic: Net asset valuation, prior goodwillLO: 1 The correct answer is: $38,500,000

A company has equity investments with no significant influence, purchased for $550,000 and carried at $520,000 at the beginning of 2024. At the end of 2024, the investments have a fair value of $560,000 and are still held by the company.What amount is reported in income and in other comprehensive income for 2024?

$560,000 - $520,000 = $40,000 gain for 2024, reported in income.Topic: Accounting for equity investments with no significant influenceLO: 1 The correct answer is: Income: $40,000 gain; OCI: $0

Exeter Company acquires 35% of the voting stock of Fenton Corporation for $7,000,000 at the beginning of the current year. At the time, the book value of Fenton was $20,000,000. During the year, Fenton reported net income of $2,400,000 and other comprehensive income of $100,000. Fenton did not declare any dividends. Both companies have December 31 year-ends, and the fair value of the investment at year-end was $9,000,000. Exeter uses the equity method to report its investment in Fenton stock.Assume the same information as in question 40. What is the investment balance at the end of the year, reported on Exeter's balance sheet?

$7,000,000 + $560,000 + (35% x $100,000) = $7,595,000Topic: Equity method investmentsLO: 2 The correct answer is: $7,595,000

Exeter Company acquires 35% of the voting stock of Fenton Corporation for $7,000,000 at the beginning of the current year. At the time, the book value of Fenton was $20,000,000. During the year, Fenton reported net income of $2,400,000 and other comprehensive income of $100,000. Fenton did not declare any dividends. Both companies have December 31 year-ends, and the fair value of the investment at year-end was $9,000,000. Exeter uses the equity method to report its investment in Fenton stock.What is the investment balance on Exeter's balance sheet at the end of the year?

$7,000,000 + [35% x ($2,400,000 + $100,000)] = $7,875,000Topic: Equity method investmentsLO: 2 The correct answer is: $7,875,000

Use the following information on a company's investments in debt securities to answer the following question. The company's accounting year ends December 31.InvestmentDate of AcquisitionCostFair Value12/31/23Date SoldSelling PriceColt Company bonds9/20/23$38,000$37,0002/10/24$42,000Dana Company bonds10/2/2314,00014,2001/17/2413,000If the above debt investments are categorized as trading securities, what amount is reported for gain or loss on securities in 2023 income?

($37,000 - $38,000) + ($14,200 - $14,000) = $(800) lossTopic: Accounting for debt investments classified as tradingLO: 1 The correct answer is: $800 loss

On December 20, 2024, a company pays $40,000 for an investment in equity securities with no significant influence. On December 31, 2024, the company's year-end, the stock has a market value of $37,000. The company sells the stock in 2025 for $44,000.On its income statement, the company reports:

($37,000 - $40,000) = $3,000 loss in 2024; ($44,000 - $37,000) = $7,000 gain in 2025.Topic: Accounting for equity investments with no significant influenceLO: 1 The correct answer is: A loss of $3,000 in 2024, and a gain of $7,000 in 2025

Use the following information on a company's investments in debt securities to answer the following question. The company's accounting year ends December 31.InvestmentDate of AcquisitionCostFair Value12/31/23Date SoldSelling PriceColt Company bonds9/20/23$38,000$37,0002/10/24$42,000Dana Company bonds10/2/2314,00014,2001/17/2413,000If the above debt investments are categorized as trading securities, what amount is reported for gain or loss on securities in 2024 income?

($42,000 - $37,000) + ($13,000 - $14,200) = $3,800 gainTopic: Accounting for debt investments classified as tradingLO: 1 The correct answer is: $3,800 gain

Use the following information on a company's investments in equity securities with no significant influence to answer the following question. The company's accounting year ends December 31.InvestmentDate of AcquisitionCostFair Value12/31/23Date SoldSelling PriceColt Company stock9/20/23$38,000$37,0002/10/24$42,000Dana Company stock10/2/2314,00014,2001/17/2413,000What amount is reported for gain or loss on these securities in 2024 income?

($42,000 - $37,000) + ($13,000 - $14,200) = $3,800 gainTopic: Accounting for equity investments with no significant influenceLO: 1 The correct answer is: $3,800 gain

Use the following information on a company's investments in debt securities to answer the following question. The company's accounting year ends December 31. InvestmentDate of AcquisitionCostFair Value12/31/23Date SoldSelling PriceColt Company bonds9/20/23$38,000$37,0002/10/24$42,000Dana Company bonds10/2/2314,00014,2001/17/2413,000 If the above investments are categorized as available-for-sale securities, what amount is reported as gain or loss on securities in 2024 income?

($42,000 - $38,000) + ($13,000 - $14,000) = $3,000 gainTopic: Accounting for debt investments classified as AFSLO: 1 The correct answer is: $3,000 gain

On January 1 of the current year, Ola Company paid $405,000 for a $400,000 face value 3% corporate bond yielding 2.8%, interest paid annually on December 31, and classified it as held-to-maturity. No impairment losses are reported. Ola's reporting year ends December 31.On its income statement for the current year, Ola reports interest revenue on the corporate bond of:

2.8% x $405,000 = $11,340Topic: Accounting for HTM securitiesLO: 1 The correct answer is: $11,340

A company holds a $100,000 face value corporate bond, bought January 1, 2023, paying 3% annually on December 31, and maturing December 31, 2025. The company paid $102,884 for the bond, to yield 2%. The company categorizes the bond as a held-to-maturity investment, and its accounting year ends December 31. Round answers to the nearest dollar.What is the approximate net entry to record receipt of interest and principal on December 31, 2025, assuming no impairment on the bond throughout its life?

2023 investment amortization = (3% x $100,000) - (2% x $102,884) = $942; new investment balance = $102,884 - $942 = $101,942 2024 investment amortization = (3% x $100,000) - (2% x $101,942) = $962; new investment balance = $101,942 - $962 = $100,9802025 interest revenue = 2% x $100,980 = $2,020Small discrepancy due to rounding to nearest dollar.Topic: Accounting for HTM securitiesLO: 1 The correct answer is: Cash103,000Interest revenue2,020Investment in bond100,980

Grant Corporation has owned 40% of the voting stock of Halliday Company for many years, originally purchased at book value and reported using the equity method. At the beginning of the current year, the carrying value of the investment is $3,000,000. Halliday reports a loss of $8,000,000 for the year, and the loss is considered other than temporary.What amount should Grant report as equity in the net loss of Halliday for the current year?

40% x $8,000,000 = $3,200,000, but losses that result in a negative balance for the investment are not reported if they are considered other than temporary.Topic: Equity method investments and investee lossesLO: 2 The correct answer is: $3,000,000

A company acquires the assets and liabilities of another company. The fair value of the acquired company's identifiable net assets is $5,000,000. The acquisition transaction includes the following:$5,000,000 in cash paid to the former owners of the acquired company150,000 new shares of stock with a market value $45/share. Registration fees, paid in cash, were $1,000,000.$4,000,000 in cash paid to the underwriter for consulting servicesEarnings contingency with an expected present value of $3,000,000 at the date of acquisition Goodwill for this acquisition is:

Acquisition cost = $5,000,000 + (150,000 x $45) + $3,000,000 = $14,750,000Goodwill = $14,750,000 - $5,000,000 = $9,750,000Topic: Acquisition cost and goodwillLO: 1, 2 The correct answer is: $ 9,750,000

A company holds a $100,000 face value corporate bond, bought January 1, 2023, paying 3% annually on December 31, and maturing December 31, 2025. The company paid $102,884 for the bond, to yield 2%. The company categorizes the bond as a held-to-maturity investment, and its accounting year ends December 31.Assume the market value of the bond on December 31, 2023 is $70,000, and no previous impairment has been reported. The decline in value is due to credit losses. What impairment loss is reported on the company's 2023 income statement? Round answers to the nearest dollar.

Amortized cost (book value) at the end of 2023, after interest revenue is recorded, is $101,942. Therefore, the impairment loss is $70,000 - $101,942 = $31,942, reported in income.Topic: Impairment of HTM securitiesLO: 1 The correct answer is: $31,942

Prescott acquires all of the stock of Sanders by issuing new stock to the previous shareholders of Sanders. Prescott paid consulting, accounting, and legal fees, and registration fees for the new stock issued by Sanders.What effect will these two items have on acquisition cost?

Consulting, accounting, and legal fees are expensed as incurred, and registration fees reduce APIC. Neither adds to acquisition cost.Topic: Acquisition-related costsLO: 2 The correct answer is: Consulting Fees: No effect; Registration Fees: No effect

X Company acquires all of Y Company's assets and liabilities for $15,000,000 in cash. The fair values of Y's assets and liabilities approximate their book values, except Y has developed technology valued at $5,000,000 that is not reported on its balance sheet, and its buildings are overvalued by $7,000,000. Here is Y's balance sheet just prior to the acquisition: Y CompanyCurrent assets$ 500,000Land, buildings, and equipment9,500,000Total assets$10,000,000 Liabilities$ 6,000,000Common stock, $1 par100,000Additional paid-in capital2,915,000Retained earnings1,000,000Treasury stock(20,000)Accumulated other comprehensive income5,000Total liabilities and equity$10,000,000 How much goodwill is recognized for this acquisition?

Cost$15,000,000Fair value of IDNA acquired:Reported net assets ($10,000,000 - $6,000,000 - $7,000,000)$(3,000,000)Developed technology5,000,0002,000,000Goodwill$13,000,000 Topic: Goodwill calculationLO: 1 The correct answer is: $13,000,000

Refer to the information from Question 56. Now assume the following year Halliday unexpectedly reports net income of $1,500,000. What amount should Grant report as equity in the net income of Halliday for the current year?

Grant's share of Halliday's net income is $600,000 (= $1,500,000 x 40%). However, it did not report $200,000 of its share of Halliday's loss last year. $600,000 - $200,000 = $400,000.Topic: Equity method investments and investee lossesLO: 2 The correct answer is: $400,000

Exeter Company acquires 35% of the voting stock of Fenton Corporation for $7,000,000 at the beginning of the current year. At the time, the book value of Fenton was $20,000,000. During the year, Fenton reported net income of $2,400,000 and other comprehensive income of $100,000. Fenton did not declare any dividends. Both companies have December 31 year-ends, and the fair value of the investment at year-end was $9,000,000. Exeter uses the equity method to report its investment in Fenton stock.Now assume Fenton's book value at the date of acquisition was $16,000,000, and the excess paid over book value is attributed to previously unrecorded intangibles with an estimated remaining life of five years. Straight-line amortization is appropriate. What amount does Exeter report on its income statement as equity in net income of Fenton for the year?

Intangibles = $7,000,000 - (35% x $16,000,000) = $1,400,000Amortization = $1,400,000/5 = $280,000($2,400,000 x 35%) - $280,000 = $560,000Topic: Equity method investmentsLO: 2 The correct answer is: $560,000

Pyn Corporation acquires all of Sys Company's assets and liabilities, reported as a merger. Acquisition-related items are as follows:1. $60 million in cash paid to Sys' former shareholders2. $25 million fair value of stock issued3. $1 million consulting fees, paid in cash4. $4 million in new stock registration fees, paid in cash5. Earnout with an expected present value of $3 millionFair values of Sys' assets and liabilities are as follows:Fair ValueCurrent assets$ 1,000,000Land, buildings, and equipment5,000,000Brand names2,000,000Customer lists4,000,000Skilled workforce15,000,000Potentially profitable future projects10,000,000Liabilities6,000,000What is the effect of Pyn's acquisition entry on Pyn's income?

Only consulting fees are expensed.Topic: Valuation of assets and liabilities acquired, acquisition costsLO: 1, 2 The correct answer is: $1,000,000 reduction

A company invests $700,000 in corporate bonds in 2023 and classifies them as available-for-sale. At the end of 2023, the fair value of the securities is $650,000. In 2024, the company sells the bonds for $706,000.Which statement is true concerning the entry made to record the sale of the bonds in 2024?

The 2024 entry to record the sale is as follows:Cash706,000Reclassification of loss (OCI)50,000Investment in AFS securities 650,000Gain (income)6,000Topic: Accounting for debt investments classified as AFSLO: 1 The correct answer is: Other comprehensive income increases by $50,000 and income increases by $6,000.

An acquiring company pays $50 million in cash, and issues new no-par stock with a fair value of $90 million, to the acquired company's former owners, for the assets and liabilities of the acquired company. Registration fees associated with the new stock issuance are $500,000, paid in cash. Consulting fees for the acquisition are $700,000, paid in cash. The fair value of the acquired company's identifiable net assets is $80 million.The entry or entries the acquiring company makes to record the acquisition have what net effect on its account balances?

The acquisition entry is:Identifiable net assets80,000,000Goodwill60,000,000Merger expenses700,000Cash51,200,000Capital stock89,500,000Topic: Acquisition costs, goodwillLO: 1, 2 The correct answer is: Goodwill increases by $60 million.

Last year, a company paid $80,000 for corporate bonds and classified them as AFS. At the beginning of the current year, these bonds are carried at $85,000. At year-end, their market value is $60,000, due to credit losses.Which statement is true concerning the end-of-year adjustment for this investment?

The adjusting entry is as follows:Reclassification of gain on AFS securities (OCI)5,000Impairment loss on AFS securities (income)20,000Investment in AFS securities 5,000Allowance for credit losses20,000Topic: Impairment of debt investments classified as AFSLO: 1 The correct answer is: OCI is reduced by $5,000.

A company holds available-for-sale corporate bonds purchased for $100,000. Current value of these securities is $92,000 and the decline in value was recorded as a debit to OCI and a credit to the investment account when the decline occurred. The company determines that the decline in value is due to credit losses.Which statement is true concerning the adjusting entry needed to record this information?

The adjusting entry is:Impairment loss (income)8,000Investment in AFS securities8,000Reclassification of loss (OCI)8,000Allowance for credit losses8,000Topic: Impairment of debt investments classified as AFSLO: 1 The correct answer is: Debit loss on securities (income) and credit OCI for $8,000.

Pecan acquires Southern in an acquisition reported as a merger. The acquisition results in $50 million in goodwill. The acquisition cost includes an earnings contingency, valued at $1 million at the date of acquisition. Within the next year, increases in the demand for Southern's products subsequent to acquisition require that the earnout be revalued to $1,800,000.The entry to record the new information includes a debit of $800,000 to:

The change in earnout value is due to subsequent events and is therefore not a correction of the initial acquisition entry. The entry to record the revaluation is:Loss on contingency (income)800,000Earnings contingency liability800,000Topic: Earnings contingency, subsequent value changesLO: 2, 3 The correct answer is: Loss on contingency

Kelly Corporation acquires all of the assets and liabilities of Lawson Co. at the beginning of its accounting year, at an acquisition cost that is $50 million above the fair value of identifiable net assets acquired. Three months after the acquisition, it is determined that because of a downturn in the economy after the acquisition, acquired brand names with indefinite lives are worth $5,000,000 less than originally estimated.The entry to reflect this new information includes:

The correcting entry is:Impairment loss (income)5,000,000Identifiable intangibles5,000,000Topic: Subsequent changes in acquired asset valuesLO: 3 The correct answer is: A loss of $5,000,000, reported in income

Portland Company paid $21 million in cash for Seattle Company's assets and liabilities on January 1, and reported the acquisition as a merger. The fair value of net assets acquired was $22 million, including previously unreported intangibles of $4 million. Three months later, the previously unreported intangibles are determined to have been worthless as of the date of acquisition. Portland's accounting year ends December 31.What is the effect of this new information on Portland's income for the year?

The correcting entry, within the measurement period, is:Bargain gain (income)1,000,000Goodwill3,000,000Intangibles4,000,000Topic: Subsequent value changes, bargain purchaseLO: 3, 4 The correct answer is: $1 million decrease

Portland Company paid $21 million in cash for Seattle Company's assets and liabilities on January 1, and reported the acquisition as a merger. The fair value of net assets acquired was $22 million. Three months later, it is determined that Seattle's acquisition-date liabilities failed to include a pending lawsuit, valued at $1 million, which should have been recorded per GAAP. Portland's accounting year ends December 31.What is the effect of this new information on Portland's income for the year?

The correcting entry, within the measurement period, is:Bargain gain (income)1,000,000Liabilities1,000,000Topic: Subsequent value changes, bargain purchaseLO: 3, 4, 5 The correct answer is: $1 million decrease

Fizzy Inc. acquired 25% of the stock of Bubbly Inc. several years ago, and reports the investment using the equity method. The basis difference was attributed to goodwill. In the current year, Bubbly reported income of $250,000, other comprehensive losses of $5,000, and declared and paid $100,000 in dividends. Fizzy's net entry to record this information includes

The entry is:Cash25,000Equity in OCL of Bubbly (OCI)1,250Investment in Bubbly36,250Equity in net income of Bubbly (income)62,500Topic: Equity method investmentsLO: 2 The correct answer is: a debit of $36,250 to Investment in Bubbly.

Pyn Corporation acquires all of Sys Company's assets and liabilities, reported as a merger. Acquisition-related items are as follows: 1. $60 million in cash paid to Sys' former shareholders2. $25 million fair value of stock issued3. $1 million consulting fees, paid in cash4. $4 million in new stock registration fees, paid in cash5. Earnout with an expected present value of $3 million Fair values of Sys' assets and liabilities are as follows: Fair ValueCurrent assets$ 1,000,000Land, buildings, and equipment5,000,000Brand names2,000,000Customer lists4,000,000Skilled workforce15,000,000Potentially profitable future projects10,000,000Liabilities6,000,000 Pyn records goodwill of:

The entry made to record the acquisition is:Current assets1,000,000Land, buildings, and equipment5,000,000Brand names2,000,000Customer lists4,000,000Goodwill82,000,000Merger expenses1,000,000Liabilities9,000,000Cash65,000,000Capital stock21,000,000Topic: Valuation of assets and liabilities acquired, acquisition costsLO: 1, 2 The correct answer is: $82,000,000

Pecan acquires Southern in an acquisition reported as a merger. The acquisition results in $50 million in goodwill. The acquisition cost includes an earnings contingency, valued at $1 million at the date of acquisition. Within the measurement period, additional information on Southern's expected future performance at the date of acquisition reveals that the earnout actually had a fair value of $200,000 at the date of acquisition.The entry to record the new information includes a credit of $800,000 to:

The entry to correct the date of acquisition value of the earnout is:Earnings contingency liability800,000Goodwill800,000Topic: Subsequent value changes, earnings contingencyLO: 2, 3 The correct answer is: Goodwill

Pyn Corporation acquires all of Sys Company at an acquisition cost of $100,000,000 in cash. Fair values of Sys' assets and liabilities are as follows: Fair ValueCurrent assets$ 1,000,000Land, buildings & equipment8,000,000Brand names3,000,000Customer lists4,000,000Skilled workforce15,000,000Potentially profitable future projects10,000,000Liabilities8,000,000 Pyn records goodwill of:

The entry to record the combination is:Current assets1,000,000Land, buildings & equipment8,000,000Brand names3,000,000Customer lists4,000,000Goodwill92,000,000Liabilities8,000,000Cash100,000,000Topic: Valuation of assets acquiredLO: 1 The correct answer is: $92,000,000

A company purchases corporate bonds for $1,000,000 and categorizes them as AFS. At year-end, their market value is $750,000. $100,000 of the decline in value is attributed to a rise in market interest rates, and $150,000 of the decline is attributed to credit losses.Which statement below is true concerning the entry to record the decline in value?

The entry to record the impairment loss is:Impairment loss (income)150,000Impairment loss (OCI)100,000Allowance for credit losses150,000Investment in bonds100,000Topic: Impairment of debt investments classified as AFSLO: 1 The correct answer is: An impairment loss of $150,000 is reported in income.

A company holds an investment in corporate bonds classified as available-for-sale. At the beginning of the year, this investment is reported at a value of $4,000,000. Gains of $500,000 have been previously reported, and no impairment losses have been reported. At the end of the year, the market value of the investment is $2,000,000, and it is determined that the decline in value is due to credit losses.How is this information reported in the company's financial statements for the year?

The entry to record the impairment loss is:Reclassification of gain on AFS securities (OCI)500,000Impairment loss (income)1,500,000Investment in AFS securities 500,000Allowance for credit losses1,500,000Topic: Impairment of debt securities classified as AFSLO: 1 The correct answer is: $500,000 other comprehensive loss; $1,500,000 loss in income

A company has investments in debt securities, classified as available-for-sale. At the beginning of the year, the investments are reported at $500,000, and unrealized gains of $30,000 are reported in accumulated other comprehensive income. During the year, the company sells the securities for $490,000.What amounts are reported in income and in other comprehensive income for the year?

The entry to record the sale is:Cash490,000Reclassification of gain (OCI)30,000Investment in AFS securities 500,000Gain (income)20,000Topic: Accounting for debt investments classified as AFSLO: 1 The correct answer is: Income: $20,000 gain; OCI: $30,000 loss

Portland Company paid $21 million in cash for Seattle Company's assets and liabilities on January 1, and reported the acquisition as a merger. The fair value of net assets acquired was $22 million, including previously unreported intangibles of $4 million. Three months later, the previously unreported intangibles are determined to be worthless because of changes in economic conditions subsequent to the acquisition. Portland's accounting year ends December 31.What is the effect of this new information on Portland's income?

The entry to record the write-down is:Loss (income)4,000,000Intangibles4,000,000Topic: Subsequent value changes, bargain purchaseLO: 3, 4 The correct answer is: $4 million decrease

A U.S. company holds available-for-sale debt securities, purchased for $1,000,000 and carried at $1,500,000. At the end of the current year, the company determines that the fair value of these securities is $1,300,000, and the decline in value is due to an increase in the market rate of interest.How will the adjusting entry to record the decline in value affect income and other comprehensive income?

There is no impairment loss since market value is greater than cost. The entry to record the decline in value is:OCI200,000Investment in AFS securities 200,000Topic: Impairment of debt investments classified as AFSLO: 1 The correct answer is: Income: No effect; OCI: $200,000 loss

Use the following information on a company's investments in debt securities to answer the following question. The company's accounting year ends December 31.InvestmentDate of AcquisitionCostFair Value12/31/23Date SoldSelling PriceColt Company bonds9/20/23$38,000$37,0002/10/24$42,000Dana Company bonds10/2/2314,00014,2001/17/2413,000If the above investments are categorized as available-for-sale securities, what amount is reported for gain or loss on securities in 2023 income?

Topic: Accounting for debt investments classified as AFSLO: 1 The correct answer is: No gain or loss

On October 25, 2024, a company pays $35,000 for an investment in equity securities, with no significant influence. On December 31, 2024, the company's year-end, the stock has a market value of $36,000. The company sells the stock in 2025 for $32,000.How is the company's 2024 other comprehensive income affected by the above transactions in each year?

Topic: Accounting for equity investments with no significant influenceLO: 1 The correct answer is: No effect on OCI in either year.

The requirements of ASC Topic 805 do not apply to:

Topic: Acquisition accountingLO: 1 The correct answer is: Combinations of two or more companies already under common control

Acquisition accounting only applies to the acquisition of a business. What are the three elements of a business, per ASC Topic 805?

Topic: Acquisition accountingLO: 1 The correct answer is: Input, process, and output

ASC Topic 805 provides standards for reporting business combinations. Which one of the following is most likely to be considered a business combination?

Topic: Acquisition accountingLO: 1 The correct answer is: Purchase of a controlling interest in an international company.

ASC Topic 805 only applies to an acquisition if:

Topic: Acquisition accountingLO: 1 The correct answer is: You are buying a business and obtaining control of that business.

An acquired company's former owners become employees of the acquiring company. At the date of acquisition, an acquiring company promises to make future payments to these former owners, which are terminated when the former owners are no longer employed.At the date of acquisition, the acquiring company:

Topic: Acquisition cost, contingent considerationLO: 2 The correct answer is: Does not report these contingent payments

The expected present value of contingent payments made by an acquiring company to the former owners of the acquired company are part of the acquisition cost

Topic: Acquisition cost, contingent paymentsLO: 2 The correct answer is: When they are tied to a future company performance goal

ABC Corporation acquires the assets and liabilities of XYZ Company in a merger. If ABC offers the former shareholders of XYZ an earnings contingency, what is the likely result of having this contingency, on ABC's balance sheet at the date of acquisition?

Topic: Acquisition cost, earnings contingencyLO: 2 The correct answer is: ABC will report a liability for the earnings contingency.

An acquirer includes an earnings contingency in the acquisition agreement. Additional cash will be paid to the former owners of the acquired company if the acquired company's performance exceeds certain thresholds within the next three years. The payoff, if any, would occur three years after the acquisition.Which of the following statements is false?

Topic: Acquisition cost, earnings contingencyLO: 2 The correct answer is: The earnings contingency is not reported at the date of acquisition but is reported as an adjustment to the acquisition price if and when paid.

Parish Corporation issues new stock with $1/share par value to the former shareholders of Sanford Company, in a merger. The registration fees Parish pays to issue the new stock will

Topic: Acquisition cost, registration feesLO: 2 The correct answer is: Reduce Parish's additional paid-in capital.

Which one of the following items increases the amount of goodwill recognized in an acquisition?

Topic: Acquisition costs and goodwillLO: 1, 2 The correct answer is: An earnout added to an acquisition agreement to motivate the acquired company's shareholders to sell

All of the following increase the acquisition cost of the acquired company except:

Topic: Acquisition costsLO: 2 The correct answer is: Payments to the former owners of the acquired company that are contingent on continued employment in the firm

A company has a 25% interest in X Company stock and a 15% interest in Y Company stock. The company is able to exercise significant influence over Y Company's decisions but not over X Company's decisions. Which of the two investments should be reported using the equity method?

Topic: Equity investmentsLO: 2 The correct answer is: Y only

Company C has a significant influence investment in Company D, and appropriately reports its share of Company D's reported income as equity in net income. Under what circumstances will Company C be most likely to adjust Company D's reported income to determine its share of that income, in the first year the investment is held?

Topic: Equity method investmentsLO: 2 The correct answer is: Company C's acquisition cost was more than its share of Company D's book value, and the difference is attributable to previously unreported customer lists with a 3-year life.

Fizzy Corporation uses the equity method to account for its 25% investment in Organic Juices Company, for which it paid $10 million in excess of its share of Organic Juices' book value three years ago. In the current year, Organic Juices reports net income of $3 million, and Fizzy reports equity in net income from Organic Juices on its income statement in the amount of $750,000.We can determine from this information that Fizzy most likely attributed the $10 million extra it paid for Organic Juices to:

Topic: Equity method investmentsLO: 2 The correct answer is: Goodwill

Acton Company uses the equity method to report its investment in 35% of the stock of Bates Company. Its original investment cost exceeded 35% of the book value of Bates by a large amount. Acton is computing equity in net income of Bates for the current year, which is five years after the acquisition.Which situation below is most likely to require Acton to adjust the equity in net income number for the current year, for write-offs of basis differences? Attribute the difference to:

Topic: Equity method investmentsLO: 2 The correct answer is: Plant assets with a 20-year life

A company paid $100,000 for corporate bonds and classified them as AFS. By year-end, the bonds declined in value to $80,000 due to credit losses. Which statement is true concerning the end-of-year adjustment for this investment?

Topic: Impairment of debt investments classified as AFSLO: 1 The correct answer is: An allowance account is created to reduce the investment by $20,000, and a $20,000 loss is reported in income.

A U.S. company holds an investment in debt securities, classified as available-for-sale. Unrealized investment gains have been reported in previous years. During the current year, the market value of the investment declines below cost, due to a rise in market interest rates.Which statement below is true concerning this investment?

Topic: Impairment of debt investments classified as AFSLO: 1 The correct answer is: The difference between carrying value and market value is reported in OCI as a loss.

The U.S. GAAP impairment test for equity method investments requires recognition of impairment losses when:

Topic: Impairment of equity method investmentsLO: 2 The correct answer is: Fair value is less than carrying value and the decline in value is other than temporary.

Impairment losses on equity method investments are:

Topic: Impairment of equity method investmentsLO: 2 The correct answer is: Reported in income

Impairment losses on equity method investments are:

Topic: Impairment of equity method investmentsLO: 2 The correct answer is: Reported in income if considered other than temporary

Which of the following is least likely to be reported as an acquired identifiable intangible asset?

Topic: Intangible assets acquiredLO: 1 The correct answer is: Synergies in developing future products

When a private company acquires another company, GAAP for private companies allows which identifiable intangible assets to be combined with goodwill and not separately capitalized?

Topic: Recognition of acquired assets, private companiesLO: 1 The correct answer is: Order backlogs

Quality Inc. acquires Rekless Company for $100 million in cash at the beginning of its accounting year, and records the acquisition as a merger. At the date of acquisition, Rekless' reported net assets have a fair value of $15 million and previously unreported intangible assets, appropriately recognized per ASC 805, have a fair value of $10 million for technology, and $10 million for favorable leases. Six months after the acquisition, it is determined that the technology has a value of $50 million, but the favorable leases are worthless.How are these value changes reported, if both represent changes in conditions occurring subsequent to the acquisition?

Topic: Subsequent changes in acquired asset valuesLO: 3 The correct answer is: A loss of $10 million is reported in income and identifiable intangibles decrease by $10 million.

Quality Inc. acquires Rekless Company for $100 million in cash at the beginning of its accounting year, and records the acquisition as a merger. At the date of acquisition, Rekless' reported net assets have a fair value of $15 million and previously unreported intangible assets, appropriately recognized per ASC 805, have a fair value of $10 million for technology, and $10 million for favorable leases. Six months after the acquisition, it is determined that the technology has a value of $50 million, but the favorable leases are worthless.How are these value changes reported, if both represent a better estimate of the value of these intangibles at the date of acquisition?

Topic: Subsequent changes in acquired asset valuesLO: 3 The correct answer is: Identifiable intangibles increase, and goodwill decreases by $30 million.

The estimated value of assets acquired and liabilities assumed change subsequent to the acquisition. When should a company record the change as a correction of the initial acquisition entry?

Topic: Subsequent changes in acquisition valuationsLO: 3 The correct answer is: The change reflects value as of the date of acquisition, and occurs within one year.

Following U.S. GAAP, when should a company use the equity method to report an intercorporate investment?

Topic: U.S. GAAP for equity method investmentsLO: 2 The correct answer is: The company significantly influences the decisions of the investee.

Proctor Company acquires the assets and liabilities of Singer Corporation, in a transaction reported as a merger. How are the assets and liabilities of Proctor and Singer reported?

Topic: Valuation of acquired assets and liabilitiesLO: 1 The correct answer is: Proctor's assets and liabilities remain at book value, and Singer's assets and liabilities are reported at fair value at the date of acquisition.

Proctor Company and Singer Corporation are acquired by a new legal entity, which absorbs the assets and liabilities of both companies. Singer is designated as the acquiring company. How are the assets and liabilities of Proctor and Singer reported?

Topic: Valuation of acquired assets and liabilitiesLO: 1 The correct answer is: Singer's assets and liabilities remain at book value, and Proctor's assets and liabilities are reported at fair value at the date of acquisition.

Company A has unreported identifiable intangible assets that are very valuable, and would like investors to know about them. Which one of the following actions will allow these intangible assets to be reported?

Topic: Valuation of acquired assetsLO: 1 The correct answer is: Find a company to combine with, and designate Company A as the company being acquired.

ABC Corporation acquires the assets and liabilities of XYZ Company. Holding everything else constant, which situation will result in ABC reporting more goodwill on this acquisition?

Topic: Valuation of acquired net assets, acquisition costsLO: 1, 2 The correct answer is: The market rate of interest on XYZ's liabilities has declined.

What is the most common way to value acquired intangible assets?

Topic: Valuation of intangible assets acquiredLO: 1 The correct answer is: Income method

Acquired developed technology is expected to generate after-tax operating income of $60,000 in the first year and grow at a rate of 8% over the next two years. Depreciation expense included in operating expenses is expected to be $6,000 in each of the next three years. The value of acquired developed technology is estimated as the present value of operating cash flow over the first three years. The appropriate discount rate is 20%, and cash flows are assumed to occur at year-end for purposes of valuing acquired developed technology.Which value is closest to the amount at which the acquired developed technology should be reported on the acquiring company's balance sheet?

Year 1Year 2Year 3Operating profit$60,000$64,800$69,984Depreciation expense6,0006,0006,000Operating cash flow$66,000$70,800$75,984 $66,000/1.2 + $70,800/(1.2)2 + $75,984/(1.2)3 = $148,139Topic: Valuation of intangible assets acquiredLO: 1 The correct answer is: $148,000

Exeter Company acquires 35% of the voting stock of Fenton Corporation for $7,000,000 at the beginning of the current year. At the time, the book value of Fenton was $20,000,000. During the year, Fenton reported net income of $2,400,000 and other comprehensive income of $100,000. Fenton did not declare any dividends. Both companies have December 31 year-ends, and the fair value of the investment at year-end was $9,000,000. Exeter uses the equity method to report its investment in Fenton stock.Now assume Exeter's ending inventory for the year contains $150,000 in merchandise purchased from Fenton, at a markup of 25% on cost. What is the impact on Exeter's reported equity in net income for the year?

[$150,000 - ($150,000/1.25)] x 35% = $10,500Topic: Equity method investmentsLO: 2 The correct answer is: $10,500 lower

Peters Corporation acquires all of the voting shares of Stefan Company by issuing 500,000 shares of $1 par common stock valued at $10,000,000. Included in the agreement is a contingency guaranteeing the former shareholders of Stefan that Peters' shares will be worth at least $18 per share after one year. If the shares are worth less, Peters will pay the former shareholders of Stefan enough cash to reimburse them for the decline in value below $18 per share. Peters estimates that there is a 5% chance that the stock value will be $16 at the end of one year, and a 95% chance that the stock value will be $18 per share or higher. A discount rate of 10% is appropriate.Which amount below is closest to the value of the contingent consideration at the date of acquisition?

[($18 - $16) x 500,000] x 0.05 = $50,000/1.10 = $45,455Topic: Contingent ConsiderationLO: 2 The correct answer is: $45,000