Adv. Acct. Test 1 Study
When an investor uses the equity method to account for investments in common stock, the investor's share of cash dividends from the investee should be recorded as Multiple Choice A deduction from the stockholders' equity account, Dividends to Stockholders. A deduction from the investor's share of the investee's profits. A deduction from the investment account. Dividend income.
A deduction from the investment account.
What is goodwill?
An intangible asset representing the excess of consideration transferred over the collective fair values of the net identifiable assets acquired in a business combination
Under fair-value accounting for an equity investment, which of the following affects the income the investor recognizes from its ownership of the investee? Other comprehensive income reported by the investee. Intra-entity profits from upstream sales. Changes in the fair value of the investor's ownership shares of the investee. The investee's reported income adjusted for excess cost over book value amortizations.
Changes in the fair value of the investor's ownership shares of the investee
On June 1, Cline Co. paid $800,000 cash for all of the issued and outstanding common stock of Renn Corp. The carrying amounts for Renn's assets and liabilities on June 1 follow: Cash$150,000 Accounts receivable 180,000 Capitalized software costs 320,000 Goodwill 100,000 Liabilities (130,000)Net assets$620,000 On June 1, Renn's accounts receivable had a fair value of $140,000. Additionally, Renn's in-process research and development was estimated to have a fair value of $200,000. All other items were stated at their fair values. On Cline's June 1 consolidated balance sheet, how much is reported for goodwill? mc $320,000. $80,000. $120,000. $20,000.
120,000 Explanation Consideration transferred (fair value) $800,000 Cash$150,000 Accounts receivable 140,000 Capitalized software costs 320,000 Research and development asset 200,000 Liabilities (130,000) Fair value of net identifiable assets acquired 680,000 Goodwill $120,000
Jordan, Inc., holds 75 percent of the outstanding stock of Paxson Corporation. Paxson currently owes Jordan $400,000 for inventory acquired over the past few months. In preparing consolidated financial statements, what amount of this debt should be eliminated? Multiple Choice $0 $300,000. $100,000. $400,000.
400,000
On May 1, Donovan Company reported the following account balances: Current assets$90,000 Buildings & equipment (net) 220,000 Total assets$310,000 Liabilities$60,000 Common stock 150,000 Retained earnings 100,000 Total liabilities and equities$310,000 On May 1, Beasley paid $400,000 in stock (fair value) for all of the assets and liabilities of Donovan, which will cease to exist as a separate entity. In connection with the merger, Beasley incurred $15,000 in accounts payable for legal and accounting fees. Beasley also agreed to pay $75,000 to the former owners of Donovan contingent on meeting certain revenue goals during the following year. Beasley estimated the present value of its probability adjusted expected payment for the contingency at $20,000. In determining its offer, Beasley noted the following: Donovan holds a building with a fair value $30,000 more than its book value. Donovan has developed unpatented technology appraised at $25,000, although is it not recorded in its financial records. Donovan has a research and development activity in process with an appraised fair value of $45,000. The project has not yet reached technological feasibility. Book values for Donovan's current assets and liabilities approximate fair values. How much should Beasley record as total assets acquired in the Donovan merger? Multiple Choice $480,000. $410,000. $420,000. $400,000.
480,000 Required information Consideration transferred (fair value) $420,000 {Current assets $90,000 and equipment 250,000 Unpatented technology 25,000 Research and development asset 45,000 Liabilities (60,000) =} Fair value of net identifiable assets acquired 350,000 Goodwill $70,000 Current assets $90,000 Building and equipment 250,000 Unpatented technology 25,000 Research and development asset 45,000 Goodwill 70,000 Total assets $480,000
Mittelstaedt, Inc., buys 60 percent of the outstanding stock of Sherry, Inc. Sherry owns a piece of land that cost $212,000 but had a fair value of $549,000 at the acquisition date. What value should be attributed to this land in a consolidated balance sheet at the date of takeover? Multiple Choice $127,200. $549,000. $421,800. $337,000.
549000 At the date control is obtained, the parent consolidates subsidiary assets at fair value ($549,000 in this case) regardless of the parent's percentage ownership.
On May 1, Donovan Company reported the following account balances: Current assets$90,000 Buildings & equipment (net) 220,000 Total assets$310,000 Liabilities$60,000 Common stock 150,000 Retained earnings 100,000 Total liabilities and equities$310,000 On May 1, Beasley paid $400,000 in stock (fair value) for all of the assets and liabilities of Donovan, which will cease to exist as a separate entity. In connection with the merger, Beasley incurred $15,000 in accounts payable for legal and accounting fees. Beasley also agreed to pay $75,000 to the former owners of Donovan contingent on meeting certain revenue goals during the following year. Beasley estimated the present value of its probability adjusted expected payment for the contingency at $20,000. In determining its offer, Beasley noted the following: Donovan holds a building with a fair value $30,000 more than its book value. Donovan has developed unpatented technology appraised at $25,000, although is it not recorded in its financial records. Donovan has a research and development activity in process with an appraised fair value of $45,000. The project has not yet reached technological feasibility. Book values for Donovan's current assets and liabilities approximate fair values. What should Beasley record as total liabilities incurred or assumed in connection with the Donovan merger? Multiple Choice $75,000. $95,000. $150,000. $15,000.
95,000 Legal and acc fees accounts payable $15,000 Contingent liability 20,000 Donovan's liabilities assumed 60,000 Liabilities assumed or incurred $95,000
What is a statutory merger?
A business combination in which only one company continues to exist as a legal entity.
What is a basic premise of the acquisition method regarding accounting for a noncontrolling interest? Multiple Choice Consolidated financial statements should not report a noncontrolling interest balance because these outside owners do not hold stock in the parent company. Consolidated financial statements should be primarily for the benefit of the parent company's stockholders. A subsidiary is an indivisible part of a business combination and should be included in its entirety regardless of the degree of ownership. Consolidated financial statements should be produced only if both the parent and the subsidiary are in the same basic industry.
A subsidiary is an indivisible part of a business combination and should be included in its entirety regardless of the degree of ownership.
What is pushdown accounting? Multiple Choice Inventory transfers made from a parent company to a subsidiary. A requirement that a subsidiary must use the same accounting principles as a parent company. A subsidiary's recording of the fair-value allocations as well as subsequent amortization. The adjustments required for consolidation when a parent has applied the equity method of accounting for internal reporting purposes.
A subsidiary's recording of the fair-value allocations as well as subsequent amortization.
The equity method tends to be most appropriate if Multiple Choice The investor is unable to obtain representation on the investee's board of directors. An investment enables the investor to influence the operating and financial decisions of the investee. Majority ownership of the investee is concentrated among a small group of shareholders who operate the investee without regard to the views of the investor. An investment represents 50 percent or more of the voting stock of an investee.
An investment enables the investor to influence the operating and financial decisions of the investee.
Consolidated financial statements are typically prepared when one company has Multiple Choice Accounted for its investment in another company by the equity method. Dividend income from another company. Significant influence over the operating and financial policies of another company. Control over another company.
Control over another company.
Which of the following is the best theoretical justification for consolidated financial statements?
In form, the companies are separate; in substance, they are one entity.
If no legal, regulatory, contractual, competitive, economic, or other factors limit the life of an intangible asset, the asset's assigned value is allocated to expense over which of the following? Multiple Choice Indefinitely (no amortization) with an annual impairment review until its life becomes finite Infinitely 20 years 20 years with an annual impairment review
Indefinitely (no amortization) with an annual impairment review until its life becomes finite
A company acquires a subsidiary and will prepare consolidated financial statements for external reporting purposes. For internal reporting purposes, the company has decided to apply the initial value method. Why might the company have made this decision? Multiple Choice Consolidation is not required when the parent uses the initial value method. GAAP now requires the use of this particular method for internal reporting purposes. Operating results appearing on the parent's financial records reflect consolidated totals. It is a relatively easy method to apply.
It is a relatively easy method to apply.
Which of the following does not represent a primary motivation for business combinations? Synergies may be available through quick entry for new and existing products into markets. Combinations are often a vehicle to accelerate growth and competitiveness. Cost savings can be achieved through elimination of duplicate facilities and staff. Larger firms are less likely to fail.
Larger firms are less likely to fail.
Hawkins Company has owned 10 percent of Larker, Inc., for the past several years. This ownership did not allow Hawkins to have significant influence over Larker. Recently, Hawkins acquired an additional 30 percent of Larker and now will use the equity method. How will the investor report change? Multiple Choice A cumulative effect of an accounting change is shown in the current income statement. Hawkins will report the change as a component of accumulated other comprehensive income. No change is recorded; the equity method is used from the date of the new acquisition. A retrospective adjustment is made to restate all prior years presented using the equity method.
No change is recorded; the equity method is used from the date of the new acquisition.
Paar Corporation bought 100 percent of Kimmel, Inc., on January 1, 2018. On that date, Paar's equipment (10-year remaining life) has a book value of $420,000 but a fair value of $520,000. Kimmel has equipment (10-year remaining life) with a book value of $272,000 but a fair value of $400,000. Paar uses the equity method to record its investment in Kimmel. On December 31, 2020, Paar has equipment with a book value of $294,000 but a fair value of $445,200. Kimmel has equipment with a book value of $190,400 but a fair value of $357,000. What would be the impact on consolidated balance for the Equipment account as of December 31, 2020 if the parent had applied the initial value method rather than the equity method? Multiple Choice The balance in the consolidated Equipment account cannot be determined for the initial value method using the information given. The consolidated Equipment account would have a higher reported balance. No effect: The method the parent uses is for internal reporting purposes only and has no impact on consolidated totals. The consolidated Equipment account would have a lower reported balance.
No effect: The method the parent uses is for internal reporting purposes only and has no impact on consolidated totals.
A company acquires a subsidiary and will prepare consolidated financial statements for external reporting purposes. For internal reporting purposes, the company has decided to apply the equity method. Why might the company have made this decision? Multiple Choice Operating results appearing on the parent's financial records reflect consolidated totals. It is a relatively easy method to apply. Consolidation is not required when the parent uses the equity method. GAAP now requires the use of this particular method for internal reporting purposes.
Operating results appearing on the parent's financial records reflect consolidated totals.
FASB ASC 805, "Business Combinations," provides principles for allocating the fair value of an acquired business. When the collective fair values of the separately identified assets acquired and liabilities assumed exceed the fair value of the consideration transferred, the difference should be Multiple Choice Recognized as an ordinary gain from a bargain purchase. Treated as goodwill and tested for impairment on an annual basis. Treated as negative goodwill to be amortized over the period benefited, not to exceed 40 years. Applied pro rata to reduce, but not below zero, the amounts initially assigned to specific non-current assets of the acquired firm.
Recognized as an ordinary gain from a bargain purchase.
According to the acquisition method of accounting for business combinations, costs paid to attorneys and accountants for services in arranging a merger should be Multiple Choice Written off over a five-year maximum useful life. Included in recognized goodwill. Capitalized as part of the overall fair value acquired in the merger. Recorded as an expense in the period the merger takes place.
Recorded as an expense in the period the merger takes place.
When negotiating a business acquisition, buyers sometimes agree to pay extra amounts to sellers in the future if performance metrics are achieved over specified time horizons. How should buyers account for such contingent consideration in recording an acquisition? Multiple Choice The amount ultimately paid under the contingent consideration agreement is added to goodwill when and if the performance metrics are met. The fair value of the contingent consideration is recorded as a reduction of the otherwise determinable fair value of the acquired firm. The fair value of the contingent consideration is expensed immediately at acquisition date. The fair value of the contingent consideration is included in the overall fair value of the consideration transferred, and a liability or additional owners' equity is recognized.
The fair value of the contingent consideration is included in the overall fair value of the consideration transferred, and a liability or additional owners' equity is recognized.
Camille, Inc., bought all outstanding shares of Jordan Corporation on January 1, 2019, for $700,000 in cash. This portion of the consideration transferred results in a fair-value allocation of $35,000 to equipment and goodwill of $88,000. At the acquisition date, Camille also agrees to pay Jordan's previous owners an additional $110,000 on January 1, 2021, if Jordan earns a 10 percent return on the fair value of its assets in 2019 and 2020. Jordan's profits exceed this threshold in both years. Which of the following is true? Multiple Choice The $110,000 is recorded as a revaluation gain in 2021. The additional $110,000 payment is reported as an adjustment to the beginning balance of consolidated retained earnings. The fair value of the expected contingent payment increases goodwill at the acquisition date. Consolidated goodwill as of January 1, 2021, increases by $110,000.
The fair value of the expected contingent payment increases goodwill at the acquisition date.
When an equity method investment account is reduced to a zero balance The investment retains a zero balance until subsequent investee profits eliminate all unrecognized losses. The investor should discontinue using the equity method until the investee begins paying dividends. The investor should establish a negative investment account balance for any future losses reported by the investee. Future losses are reported as unusual items in the investor's income statement.
The investment retains a zero balance until subsequent investee profits eliminate all unrecognized losses.
An acquired firm's financial records sometimes show goodwill from previous business combinations. How does a parent company account for the preexisting goodwill of its newly acquired subsidiary? Multiple Choice Preexisting goodwill is excluded from the identifiable assets acquired unless the subsidiary can demonstrate its continuing value. The parent tests the preexisting goodwill for impairment before recording the goodwill as part of the acquisition. The parent ignores preexisting subsidiary goodwill and allocates the subsidiary's fair value among the separately identifiable assets acquired and liabilities assumed. The parent includes the preexisting goodwill as an identified intangible asset acquired.
The parent ignores preexisting subsidiary goodwill and allocates the subsidiary's fair value among the separately identifiable assets acquired and liabilities assumed.
SK Corporation acquired Neptune, Inc., on January 1, 2020, by issuing 125,000 shares of common stock with a $5 per share par value and a $30 market value. This transaction resulted in recognizing $95,000 of goodwill. SK also agreed to compensate Neptune's former owners with an additional 20,000 shares of SK's common stock if Neptune's 2020 cash flow from operations exceeds $600,000. On February 1, 2021, SK issues the additional 20,000 shares to Neptune's former owners to honor the contingent consideration agreement. Which of the following is true? Multiple Choice The parent's additional paid-in capital from the contingent equity recorded at the acquisition date is reclassified as a regular common stock issue on February 1, 2021. All of the subsidiary's asset and liability accounts must be revalued for consolidation purposes based on their fair values as of February 1, 2021. The fair value of the number of shares issued for the contingency increases the Goodwill account on February 1, 2021. The additional shares are assumed to have been issued on January 1, 2020, so that a retrospective adjustment is required.
The parent's additional paid-in capital from the contingent equity recorded at the acquisition date is reclassified as a regular common stock issue on February 1, 2021.
Prior to being united in a business combination, Atkins, Inc., and Waterson Corporation had the following stockholders' equity figures: AtkinsWatersonCommon stock ($1 par value)$180,000$45,000Additional paid-in capital 90,000 20,000Retained earnings 300,000 110,000 Atkins issues 51,000 new shares of its common stock valued at $3 per share for all of the outstanding stock of Waterson. Immediately afterward, what are consolidated Additional Paid-In Capital and Retained Earnings, respectively? Multiple Choice $212,000 and $410,000 $110,000 and $410,000 $104,000 and $300,000 $192,000 and $300,000
Value of shares issued (51,000 × $3) $153,000 -Par value of shares issued (51,000 × $1) 51,000 =Additional paid-in capital (new shares)$102,000 +Additional paid-in capital (existing shares) 90,000 =Consolidated additional paid-in capital (fair value)$192,000
When does gain recognition accompany a business combination? Multiple Choice In a combination created in the middle of a fiscal year. In an acquisition when the value of all assets and liabilities cannot be determined. When a bargain purchase occurs. When the amount of a bargain purchase exceeds the value of the applicable noncurrent assets (other than certain exceptions) held by the acquired company.
When a bargain purchase occurs.
Goodwill recognized in a business combination must be allocated across a firm's identified reporting units. For a consolidated entity with multiple reporting units, when is goodwill considered to be impaired? Multiple Choice When the sum of the fair values of all reporting units within a business combination exceeds the sum of their respective carrying amounts When any individual reporting unit's fair value exceeds its carrying amount When the sum of the carrying amounts of all reporting units within a business combination exceeds the sum of their respective fair values When any individual reporting unit's carrying amount exceeds its fair value
When any individual reporting unit's carrying amount exceeds its fair value
When should a consolidated entity recognize a goodwill impairment loss? Multiple Choice When the fair value of a reporting unit with goodwill falls below its carrying amount Annually on a systematic and rational basis Whenever the entity's fair value declines significantly When the fair value of a reporting unit exceeds its respective carrying amount
When the fair value of a reporting unit with goodwill falls below its carrying amount
What is the appropriate accounting treatment for the value assigned to in-process research and development acquired in a business combination? Multiple Choice Capitalize as an asset. Expense if there is no alternative use for the assets used in the research and development and technological feasibility has yet to be reached. Expense upon acquisition. Expense until future economic benefits become certain and then capitalize as an asset.
capitalize as an asset
