Advanced Accounting - Unit 1
On January 3, 2021, Matteson Corporation acquired 40 percent of the outstanding common stock of O'Toole Company for $1,160,000. This acquisition gave Matteson the ability to exercise significant influence over the investee. The book value of the acquired shares was $820,000. Any excess cost over the underlying book value was assigned to a copyright that was undervalued on its balance sheet. This copyright has a remaining useful life of 10 years. For the year ended December 31, 2021, O'Toole reported net income of $260,000 and declared cash dividends of $50,000. On December 31, 2021, what should Matteson report as its investment in O'Toole under the equity method?
$1,210,000 Purchase price $ 1,160,000 Basic 2021 equity accrual ($260,000 × 40%) 104,000 Amortization of copyright: Excess payment ($1,160,000 − $820,000 = $340,000) to copyright allocated over 10 year remaining life (34,000 ) Dividends ($50,000 × 40%) (20,000 ) Investment account balance at year end $ 1,210,000
On January 1, Belleville Company paid $1,710,000 to acquire 57,000 shares of O'Fallon's voting common stock, which represents a 40 percent investment. No allocations to goodwill or other specific accounts were made. Significant influence over O'Fallon is achieved by this acquisition, and so Belleville applies the equity method. O'Fallon declared a $3 per share dividend during the year and reported net income of $590,000. What is the balance in the Investment in O'Fallon account found in Belleville's financial records as of December 31?
$1,775,000. Acquisition price $ 1,710,000 Equity income ($590,000 × 40%) 236,000 Dividends (57,000 shares × $3) (171,000 ) Investment in O'Fallon as of December 31 $ 1,775,000
Jubilee, Inc., owns 25 percent of JPW Company and applies the equity method. During the current year, Jubilee buys inventory costing $110,250 and then sells it to JPW for $147,000. At the end of the year, JPW still holds only $24,800 of merchandise. What amount of gross profit must Jubilee defer in reporting this investment using the equity method?
$1,550. Gross profit rate (GPR): $36,750 ÷ $147,000 = 25%
Baker Company owns 15% of the common stock of Charlie Corporation and used the fair-value method to account for this investment. Charlie reported net income of $120,000 for 2021 and paid dividends of $70,000 on October 1, 2021. How much income should Baker recognize on this investment in 2021?
$10,500. $70,000 × 0.15 = $10,500
Wilkins Inc. acquired 100% of the voting common stock of Granger Inc. on January 1, 2021. The book value and fair value of Granger's accounts on that date (prior to creating the combination) are as follows, along with the book value of Wilkins's accounts: WilkinsBook Value GrangerBook Value GrangerFair Value Retained earnings, 1/1/21 $ 250,000 $ 240,000 Cash and receivables 170,000 70,000 $ 70,000 Inventory 230,000 180,000 210,000 Land 320,000 220,000 240,000 Buildings (net) 480,000 240,000 280,000 Equipment (net) 120,000 90,000 90,000 Liabilities 650,000 440,000 430,000 Common stock 360,000 80,000 Additional paid-in capital 60,000 40,000 Assume that Wilkins issued 13,000 shares of common stock, with a $5 par value and a $46 fair value, to obtain all of Granger's outstanding stock. In this acquisition transaction, how much goodwill should be recognized?
$138,000. Goodwill = Consideration Transferred less Acquisition Date Fair Value of Net Assets Acquired and Liabilities Assumed Consideration Transferred: $46 × 13,000 = $598,000 Fair Value of Assets Acquired: $70,000 (cash and receivables) + $210,000 (inventory) + $240,000 (land) + $280,000 (buildings) + $90,000 (equipment) = $890,000 Fair Value of Liabilities Assumed: $430,000 Net Assets = $890,000 − $430,000 = $460,000 Goodwill: $598,000 − $460,000 = $138,000
On June 1, Cline Co. paid $1,049,000 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 $ 246,000 Accounts receivable 259,000 Capitalized software costs 323,000 Goodwill 158,000 Liabilities (145,000 ) Net assets $ 841,000 On June 1, Renn's accounts receivable had a fair value of $193,000. Additionally, Renn's in-process research and development was estimated to have a fair value of $242,000. All other items were stated at their fair values. On Cline's June 1 consolidated balance sheet, how much is reported for goodwill?
$190,000. Consideration transferred (fair value) $ 1,049,000 Cash $ 246,000 Accounts receivable 193,000 Capitalized software costs 323,000 Research and development asset 242,000 Liabilities (145,000 ) Fair value of net identifiable assets acquired 859,000 Goodwill $ 190,000
On January 1, Belleville Company paid $1,970,000 to acquire 98,500 shares of O'Fallon's voting common stock, which represents a 40 percent investment. No allocations to goodwill or other specific accounts were made. Significant influence over O'Fallon is achieved by this acquisition, and so Belleville applies the equity method. O'Fallon declared a $2 per share dividend during the year and reported net income of $598,000. What is the balance in the Investment in O'Fallon account found in Belleville's financial records as of December 31?
$2,012,200. Acquisition price $ 1,970,000 Equity income ($598,000 × 40%) 239,200 Dividends (98,500 shares × $2) (197,000 ) Investment in O'Fallon as of December 31 $ 2,012,200
Jubilee, Inc., owns 35 percent of JPW Company and applies the equity method. During the current year, Jubilee buys inventory costing $60,000 and then sells it to JPW for $75,000. At the end of the year, JPW still holds only $30,000 of merchandise. What amount of gross profit must Jubilee defer in reporting this investment using the equity method?
$2,100. Gross profit rate (GPR): $15,000 ÷ $75,000 = 20% Inventory remaining at year-end $ 30,000 GPR × 20 % Gross profit $ 6,000 Ownership × 35 % Intra-entity gross profit—deferred $ 2,100
The financial statements for Campbell, Inc., and Newton Company for the year ended December 31, 2021, prior to the business combination whereby Campbell acquired Newton, are as follows (in thousands): Campbell Newton Revenues $ 2,600 $ 700 Expenses 1,880 400 Net income $ 720 $ 300 Retained earnings, 1/1 $ 2,400 $ 500 Net income 720 300 Dividends (270 ) 0 Retained earning, 12/31 $ 2,850 $ 800 Cash $ 240 $ 230 Receivables and inventory 1,200 360 Buildings (net) 2,700 650 Equipment (net) 2,100 1,300 Total assets $ 6,240 $ 2,540 Liabilities $ 1,500 $ 720 Common stock 1,080 400 Additional paid-in capital 810 620 Retained earnings 2,850 800 Total liabilities & stockholders' equity $ 6,240 $ 2,540 On December 31, 2021, Campbell obtained a loan for $650 and used the proceeds, along with the transfer of 35 shares of its $10 par value common stock, in exchange for all of Newton's common stock. At the time of the transaction, Campbell's common stock had a fair value of $40 per share. In connection with the business combination, Campbell paid $25 to a broker for arranging the transaction and $30 in stock issuance costs. At the time of the transaction, Newton's equipment was actually worth $1,450 but its buildings were only valued at $590. Compute the consolidated buildings (net) account at December 31, 2021.
$3,290. Consolidated Value of Buildings determined by adding the book value of Campbell's buildings ($2,700 BV) to the Fair Value of Newton's buildings ($590 FV) = $3,290
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
A deduction from the investment account.
In a transaction accounted for using the acquisition method where consideration transferred is less than fair value of net assets acquired, which statement is true?
A gain on bargain purchase is recorded.
Wilkins Inc. acquired 100% of the voting common stock of Granger Inc. on January 1, 2021. The book value and fair value of Granger's accounts on that date (prior to creating the combination) are as follows, along with the book value of Wilkins's accounts: WilkinsBook Value GrangerBook Value GrangerFair Value Retained earnings, 1/1/21 $ 250,000 $ 240,000 Cash and receivables 170,000 70,000 $ 70,000 Inventory 230,000 180,000 210,000 Land 320,000 220,000 240,000 Buildings (net) 480,000 240,000 280,000 Equipment (net) 120,000 90,000 90,000 Liabilities 650,000 440,000 430,000 Common stock 360,000 80,000 Additional paid-in capital 60,000 40,000 Assume that Wilkins issued 13,000 shares of common stock with a $5 par value and a $46 fair value for all of the outstanding shares of Granger. What will be the consolidated Additional Paid-In Capital and Retained Earnings (January 1, 2021 balances) as a result of this acquisition transaction?
$593,000 and $250,000. Consolidated Additional Paid-In Capital = Wilkins APIC ($60,000) + APIC related to stock issued in connection with Granger business combination ($41 × 13,000) = $60,000 + $533,000 = $593,000 Wilkins's Retained Earnings: $250,000
What is EDGAR?
A system designed by the SEC to allow electronic filings.
Lisa Co. paid cash for all of the voting common stock of Victoria Corp. Victoria will continue to exist as a separate corporation. Entries for the consolidation of Lisa and Victoria would be recorded in
A worksheet.
What is Form 10-K?
An annual report filed with the SEC.
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
The equity method tends to be most appropriate if
An investment enables the investor to influence the operating and financial decisions of the investee.
A statutory merger is a(n)
Business combination in which only one of the two companies continues to exist as a legal corporation.
The audit committee of an entity subject to SEC regulation will do all of the following except:
Certify the annual financial statements.
Consolidated financial statements are typically prepared when one company has
Control over another company.
Using the acquisition method for a business combination, goodwill is generally calculated as the:
Cost of the investment less the subsidiary's fair value at acquisition date.
All of the following statements regarding the investment account using the equity method are true except:
Dividends received are reported as revenue.
Regulation S-K:
Established requirements for nonfinancial information to be filed with the SEC.
After allocating cost in excess of book value, which asset or liability would not be amortized over a useful life?
Goodwill.
Which of the following is a not a reason for a business combination to take place?
Increase in stock price of the acquired company.
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?
No change is recorded; the equity method is used from the date of the new acquisition.
In an acquisition where 100% control is acquired, how would the land accounts of the parent and the land accounts of the subsidiary be reported on consolidated financial statements? Parent Subsidiary A) Book Value Book Value B) Book Value Fair Value C) Fair Value Fair Value D) Fair Value Book Value E) Cost Cost
Option B.
The SEC's operating costs are supported through:
Registration fees from issuers offering securities to the public.
What is the difference between Regulation S-K and Regulation S-X?
Regulation S-K establishes regulations for nonfinancial information filed with the SEC whereas Regulation S-X prescribes the form and content of financial statements included in SEC filings.
Which one of the following requires the audit committee to be responsible for the appointment and compensation of the external auditor?
The Sarbanes-Oxley Act of 2002.