Advanced Fin Accounting Exam 1

A necessary condition to use the equity method of reporting for an equity investment is that the investor company must

have the ability to exercise significant influence over the operating and financial policies of the investee.

On January 1, 2019, Dermot Company purchased 15% of the voting common stock of Horne Corp. On January 1, 2021, Dermot purchased 28% of Horne's voting common stock. If Dermot achieves significant influence with this new investment, how must Dermot account for the change to the equity method?

It must use the equity method for 2021 but should make no changes in its financial statements for 2020 and 2019.

Which statement is true concerning unrecognized profits in intra-entity inventory sales when an investor uses the equity method?

The same adjustments are made for upstream and downstream sales.

All of the following would require use of the equity method for investments except:

Valuation at fair value.

Which of the following results in an increase in the Equity in Investee Income account when applying the equity method?

Investor's share of gross profit from intra-entity inventory sales for the prior year.

Which of the following results in an increase in the investment account when applying the equity method?

Investor's share of gross profit from intra-entity inventory sales for the prior year.

Luffman Inc. owns 30% of Bruce Inc. and appropriately applies the equity method. During the current year, Bruce bought inventory costing $52,000 and then sold it to Luffman for $80,000. At year-end, all of the merchandise had been sold by Luffman to other customers. What amount of gross profit on intra-entity sales must be deferred by Luffman?

$0. $80,000 − $52,000 = $28,000 Income Recognized; None Deferred

On January 2, 2021, Barley Corp. purchased 40% of the voting common stock of Wheat Co., paying $3,000,000. Barley properly accounts for this investment using the equity method. At the time of the investment, Wheat's total stockholders' equity was $5,000,000. Barley gathered the following information about Wheat's assets and liabilities whose book values and fair values differed: Book Value Fair Value Buildings (20-year life)$1,000,000 $1,800,000 Equipment (5-year life) 1,500,000 2,000,000 Franchises (10-year life) 0 700,000 Any excess of cost over fair value was attributed to goodwill, which has not been impaired. Wheat Co. reported net income of $400,000 for 2021, and paid dividends of $200,000 during that year. What is the amount of the excess of purchase price over book value?

$1,000,000. $5,000,000 × 40% = $2,000,000 BV for 40% of the Shares $3,000,000 Price Paid − $2,000,000 BV = $1,000,000 Excess

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 NewtonRevenues$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. What total amount of additional paid-in capital will Campbell recognize from this acquisition?

$1,020. With respect to stock issued, APIC is adjusted by the amount fair value exceeds par value and stock issuance costs. APIC: Excess Value of Stock Over Par = ($40 − $10) × 35 shares = $1,050 APIC: Stock Issuance Costs = $30 Total APIC resulting from acquisition = $1,050 − $30 = $1,020

On January 1, 2021, the Moody Company entered into a transaction for 100% of the outstanding common stock of Osorio Company. To acquire these shares, Moody issued $400 in long-term liabilities and also issued 40 shares of common stock having a par value of $1 per share but a fair value of $10 per share. Moody paid $20 to lawyers, accountants, and brokers for assistance in bringing about this acquisition. Another $15 was paid in connection with stock issuance costs. Prior to these transactions, the balance sheets for the two companies were as follows: Moody OsorioCash$180 $40 Receivables 810 180 Inventories 1,080 280 Land 600 360 Buildings (net) 1,260 440 Equipment (net) 480 100 Accounts payable (450) (80)Long-term liabilities (1,290) (400)Common stock ($1 par) (330) Common stock ($20 par) (240)Additional paid-in capital (1,080) (340)Retained earnings (1,260) (340) Note: Parentheses indicate a credit balance. In Moody's appraisal of Osorio, three assets were deemed to be undervalued on the subsidiary's books: Inventory by $10, Land by $40, and Buildings by $60. If Osorio retains a separate corporate existence, what amount was recorded as the investment in Osorio?

$1,030. Because the fair value of Osorio's net assets acquired exceeds the consideration paid by Moody, a bargain purchase gain has occurred as follows: Fair value of Osorio's net assets acquired ($1,510 assets - $480 liabiities)$1,030 Consideration transferred for 100% of Osorio ($400 liabilities + $400 common stock) 800 Bargain purchase gain$230 When the fair value of net assets acquired exceeds the consideration transferred, the investment account is recorded at the fair value of the net assets acquired and not the consideration transferred. Therefore, Moody records the Osorio acquisition on its books as follows: Investment in Osorio$1,030 Long-term liabilities 400Common stock ($1 par) 40Additional paid-in capital 360Gain on bargain purchase 230

The financial statement amounts for the Atwood Company and the Franz Company as of December 31, 2021, are presented below. Also included are the fair values for Franz Company's net assets (all numbers are in thousands). AtwoodFranz Co.Franz Co.Book ValueBook ValueFair Value 12/31/202112/31/202112/31/2021Cash$870 $240 $240 Receivables 660 600 600 Inventory 1,230 420 580 Land 1,800 260 250 Buildings (net) 1,800 540 650 Equipment (net) 660 380 400 Accounts payable (570) (240) (240)Accrued expenses (270) (60) (60)Long-term liabilities (2,700) (1,020) (1,120)Common stock ($20 par) (1,980) Common stock ($5 par) (420) Additional paid-in capital (210) (180) Retained earnings 1/1/18 (1,170) (480) Revenues (2,880) (660) Expenses 2,760 620 Note: Parenthesis indicate a credit balance Assume an acquisition business combination took place at December 31, 2021. Atwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Franz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid. Compute consolidated equipment (net) at the date of the acquisition.

$1,060.

On January 1, 2021, Jackie Corp. purchased 30% of the voting common stock of Rob Co., paying $2,000,000. Jackie properly accounts for this investment using the equity method. At the time of the investment, Rob's total stockholders' equity was $3,000,000. Jackie gathered the following information about Rob's assets and liabilities whose book values and fair values differed: Book ValueFair ValueBuildings (15-year life)$1,000,000$1,500,000Equipment (5-year life) 2,500,000 3,000,000Franchises (10-year life)$0$500,000 Any excess of cost over fair value was attributed to goodwill, which has not been impaired. Rob Co. reported net income of $300,000 for 2021, and paid dividends of $100,000 during that year. What is the amount of the excess of purchase price over book value?

$1,100,000.

Presented below are the financial balances for the Boxwood Company and the Tranz Company as of December 31, 2020, immediately before Boxwood acquired Tranz. Also included are the fair values for Tranz Company's net assets at that date (all amounts in thousands). BoxwoodTranz Co.Tranz Co.Book ValueBook ValueFair Value 12/31/2012/31/2012/31/20Cash$870 $240 $240 Receivables 660 600 600 Inventory 1,230 420 580 Land 1,800 260 250 Buildings (net) 1,800 540 650 Equipment (net) 660 380 400 Accounts payable (570) (240) (240)Accrued expenses (270) (60) (60)Long-term liabilities (2,700) (1,020) (1,120)Common stock ($20 par) (1,980) Common stock ($5 par) (420) Additional paid-in capital (210) (180) Retained earnings (1,170) (480) Revenues (2,880) (660) Expenses 2,760 620 Note: Parenthesis indicate a credit balance Assume a business combination took place at December 31, 2020. Boxwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Tranz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid to effect this acquisition transaction. To settle a difference of opinion regarding Tranz's fair value, Boxwood promises to pay an additional $5.2 (in thousands) to the former owners if Tranz's earnings exceed a certain sum during the next year. Given the probability of the required contingency payment and utilizing a 4% discount rate, the expected present value of the contingency is $5 (in thousands). Compute consolidated equipment immediately following the acquisition.

$1,060. $660 book value of Boxwood + $400 fair value of Tranz = $1,060

Flynn acquires 100 percent of the outstanding voting shares of Macek Company on January 1, 2021. To obtain these shares, Flynn pays $400 cash (in thousands) and issues 10,000 shares of $20 par value common stock on this date. Flynn's stock had a fair value of $36 per share on that date. Flynn also pays $15 (in thousands) to a local investment firm for arranging the acquisition. An additional $10 (in thousands) was paid by Flynn in stock issuance costs. The book values for both Flynn and Macek immediately preceding the acquisition follow. The fair value of each of Flynn and Macek accounts is also included. In addition, Macek holds a fully amortized trademark that still retains a $40 (in thousands) value. The figures below are in thousands. Any related question also is in thousands. Flynn, Inc Macek Company Book Value Fair ValueCash$900 $80 $80 Receivables 480 180 160 Inventory 660 260 300 Land 300 120 130 Buildings (net) 1,200 220 280 Equipment 360 100 75 Accounts payable 480 60 60 Long-term liabilities 1,140 340 300 Common stock 1,000 80 Additional paid-in capital 200 0 Retained earnings 1,080 480 Under the acquisition method, what amount will be reported for consolidated retained earnings?

$1,065,000. $1,080,000 (book value of Flynn) − $15,000 (direct costs) = $1,065,000

The financial statement amounts for the Atwood Company and the Franz Company as of December 31, 2021, are presented below. Also included are the fair values for Franz Company's net assets (all numbers are in thousands). AtwoodFranz Co.Franz Co.Book ValueBook ValueFair Value 12/31/202112/31/202112/31/2021Cash$870 $240 $240 Receivables 660 600 600 Inventory 1,230 420 580 Land 1,800 260 250 Buildings (net) 1,800 540 650 Equipment (net) 660 380 400 Accounts payable (570) (240) (240)Accrued expenses (270) (60) (60)Long-term liabilities (2,700) (1,020) (1,120)Common stock ($20 par) (1,980) Common stock ($5 par) (420) Additional paid-in capital (210) (180) Retained earnings 1/1/18 (1,170) (480) Revenues (2,880) (660) Expenses 2,760 620 Note: Parenthesis indicate a credit balance Assume an acquisition business combination took place at December 31, 2021. Atwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Franz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid. Compute consolidated cash at the completion of the acquisition.

$1,085.

Presented below are the financial balances for the Boxwood Company and the Tranz Company as of December 31, 2020, immediately before Boxwood acquired Tranz. Also included are the fair values for Tranz Company's net assets at that date (all amounts in thousands). BoxwoodTranz Co.Tranz Co.Book ValueBook ValueFair Value 12/31/2012/31/2012/31/20Cash$870 $240 $240 Receivables 660 600 600 Inventory 1,230 420 580 Land 1,800 260 250 Buildings (net) 1,800 540 650 Equipment (net) 660 380 400 Accounts payable (570) (240) (240)Accrued expenses (270) (60) (60)Long-term liabilities (2,700) (1,020) (1,120)Common stock ($20 par) (1,980) Common stock ($5 par) (420) Additional paid-in capital (210) (180) Retained earnings (1,170) (480) Revenues (2,880) (660) Expenses 2,760 620 Note: Parenthesis indicate a credit balance Assume a business combination took place at December 31, 2020. Boxwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Tranz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid to effect this acquisition transaction. To settle a difference of opinion regarding Tranz's fair value, Boxwood promises to pay an additional $5.2 (in thousands) to the former owners if Tranz's earnings exceed a certain sum during the next year. Given the probability of the required contingency payment and utilizing a 4% discount rate, the expected present value of the contingency is $5 (in thousands). Compute the consolidated cash upon completion of the acquisition.

$1,085. Cash of Parent + Cash of Subsidiary - Post-Transaction Costs = $870 + $240 - ($15 + $10) = $870 + $240 − $25 = $1,085

McCoy has the following account balances as of December 31, 2020 before an acquisition transaction takes place. Inventory$125,000Land450,000Buildings (net)575,000Common stock ($10 par)600,000Additional paid-in capital300,000Retained earnings250,000 The fair value of McCoy's Land and Buildings are $650,000 and $600,000, respectively. On December 31, 2020, Ferguson Company issues 30,000 shares of its $10 par value ($30 fair value) common stock in exchange for all of the shares of McCoy's common stock. Ferguson paid $12,000 for costs to issue the new shares of stock. Before the acquisition, Ferguson has $800,000 in its common stock account and $350,000 in its additional paid-in capital account. What will the consolidated common stock account be as a result of this acquisition?

$1,100,000.

Flynn acquires 100 percent of the outstanding voting shares of Macek Company on January 1, 2021. To obtain these shares, Flynn pays $400 cash (in thousands) and issues 10,000 shares of $20 par value common stock on this date. Flynn's stock had a fair value of $36 per share on that date. Flynn also pays $15 (in thousands) to a local investment firm for arranging the acquisition. An additional $10 (in thousands) was paid by Flynn in stock issuance costs. The book values for both Flynn and Macek immediately preceding the acquisition follow. The fair value of each of Flynn and Macek accounts is also included. In addition, Macek holds a fully amortized trademark that still retains a $40 (in thousands) value. The figures below are in thousands. Any related question also is in thousands. Flynn, Inc Macek Company Book Value Fair ValueCash$900 $80 $80 Receivables 480 180 160 Inventory 660 260 300 Land 300 120 130 Buildings (net) 1,200 220 280 Equipment 360 100 75 Accounts payable 480 60 60 Long-term liabilities 1,140 340 300 Common stock 1,000 80 Additional paid-in capital 200 0 Retained earnings 1,080 480 What amount will be reported for consolidated common stock?

$1,200,000.

Presented below are the financial balances for the Boxwood Company and the Tranz Company as of December 31, 2020, immediately before Boxwood acquired Tranz. Also included are the fair values for Tranz Company's net assets at that date (all amounts in thousands). BoxwoodTranz Co.Tranz Co.Book ValueBook ValueFair Value 12/31/2012/31/2012/31/20Cash$870 $240 $240 Receivables 660 600 600 Inventory 1,230 420 580 Land 1,800 260 250 Buildings (net) 1,800 540 650 Equipment (net) 660 380 400 Accounts payable (570) (240) (240)Accrued expenses (270) (60) (60)Long-term liabilities (2,700) (1,020) (1,120)Common stock ($20 par) (1,980) Common stock ($5 par) (420) Additional paid-in capital (210) (180) Retained earnings (1,170) (480) Revenues (2,880) (660) Expenses 2,760 620 Note: Parenthesis indicate a credit balance Assume a business combination took place at December 31, 2020. Boxwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Tranz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid to effect this acquisition transaction. To settle a difference of opinion regarding Tranz's fair value, Boxwood promises to pay an additional $5.2 (in thousands) to the former owners if Tranz's earnings exceed a certain sum during the next year. Given the probability of the required contingency payment and utilizing a 4% discount rate, the expected present value of the contingency is $5 (in thousands). Compute consolidated retained earnings as a result of this acquisition.

$1,280.

The financial statement amounts for the Atwood Company and the Franz Company as of December 31, 2021, are presented below. Also included are the fair values for Franz Company's net assets (all numbers are in thousands). AtwoodFranz Co.Franz Co.Book ValueBook ValueFair Value 12/31/202112/31/202112/31/2021Cash$870 $240 $240 Receivables 660 600 600 Inventory 1,230 420 580 Land 1,800 260 250 Buildings (net) 1,800 540 650 Equipment (net) 660 380 400 Accounts payable (570) (240) (240)Accrued expenses (270) (60) (60)Long-term liabilities (2,700) (1,020) (1,120)Common stock ($20 par) (1,980) Common stock ($5 par) (420) Additional paid-in capital (210) (180) Retained earnings 1/1/21 (1,170) (480) Revenues (2,880) (660) Expenses 2,760 620 Note: Parenthesis indicate a credit balance Assume an acquisition business combination took place at December 31, 2021. Atwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Franz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid. Compute consolidated retained earnings at the date of the acquisition.

$1,280. $1,170 (Atwood reported R/E) + $2,880 (Atwood Revenues to be closed to R/E) − $2760 (Atwood Expenses to be closed to R/E) − $10 (direct costs) = $1,280

The financial statement amounts for the Atwood Company and the Franz Company as of December 31, 2021, are presented below. Also included are the fair values for Franz Company's net assets (all numbers are in thousands). AtwoodFranz Co.Franz Co.Book ValueBook ValueFair Value 12/31/202112/31/202112/31/2021Cash$870 $240 $240 Receivables 660 600 600 Inventory 1,230 420 580 Land 1,800 260 250 Buildings (net) 1,800 540 650 Equipment (net) 660 380 400 Accounts payable (570) (240) (240)Accrued expenses (270) (60) (60)Long-term liabilities (2,700) (1,020) (1,120)Common stock ($20 par) (1,980) Common stock ($5 par) (420) Additional paid-in capital (210) (180) Retained earnings 1/1/18 (1,170) (480) Revenues (2,880) (660) Expenses 2,760 620 Note: Parenthesis indicate a credit balance Assume an acquisition business combination took place at December 31, 2021. Atwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Franz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid. Compute fair value of the net assets acquired at the date of the acquisition.

$1,300.

On January 1, 2021, the Moody Company entered into a transaction for 100% of the outstanding common stock of Osorio Company. To acquire these shares, Moody issued $400 in long-term liabilities and also issued 40 shares of common stock having a par value of $1 per share but a fair value of $10 per share. Moody paid $20 to lawyers, accountants, and brokers for assistance in bringing about this acquisition. Another $15 was paid in connection with stock issuance costs. Prior to these transactions, the balance sheets for the two companies were as follows: Moody OsorioCash$180 $40 Receivables 810 180 Inventories 1,080 280 Land 600 360 Buildings (net) 1,260 440 Equipment (net) 480 100 Accounts payable (450) (80)Long-term liabilities (1,290) (400)Common stock ($1 par) (330) Common stock ($20 par) (240)Additional paid-in capital (1,080) (340)Retained earnings (1,260) (340) Note: Parentheses indicate a credit balance. In Moody's appraisal of Osorio, three assets were deemed to be undervalued on the subsidiary's books: Inventory by $10, Land by $40, and Buildings by $60. Compute the amount of consolidated inventories at date of acquisition.

$1,370.

On January 1, 2021, the Moody Company entered into a transaction for 100% of the outstanding common stock of Osorio Company. To acquire these shares, Moody issued $400 in long-term liabilities and also issued 40 shares of common stock having a par value of $1 per share but a fair value of $10 per share. Moody paid $20 to lawyers, accountants, and brokers for assistance in bringing about this acquisition. Another $15 was paid in connection with stock issuance costs. Prior to these transactions, the balance sheets for the two companies were as follows: Moody OsorioCash$180 $40 Receivables 810 180 Inventories 1,080 280 Land 600 360 Buildings (net) 1,260 440 Equipment (net) 480 100 Accounts payable (450) (80)Long-term liabilities (1,290) (400)Common stock ($1 par) (330) Common stock ($20 par) (240)Additional paid-in capital (1,080) (340)Retained earnings (1,260) (340) Note: Parentheses indicate a credit balance. In Moody's appraisal of Osorio, three assets were deemed to be undervalued on the subsidiary's books: Inventory by $10, Land by $40, and Buildings by $60. Compute the amount of consolidated additional paid-in capital at date of acquisition.

$1,425.

Flynn acquires 100 percent of the outstanding voting shares of Macek Company on January 1, 2021. To obtain these shares, Flynn pays $400 cash (in thousands) and issues 10,000 shares of $20 par value common stock on this date. Flynn's stock had a fair value of $36 per share on that date. Flynn also pays $15 (in thousands) to a local investment firm for arranging the acquisition. An additional $10 (in thousands) was paid by Flynn in stock issuance costs. The book values for both Flynn and Macek immediately preceding the acquisition follow. The fair value of each of Flynn and Macek accounts is also included. In addition, Macek holds a fully amortized trademark that still retains a $40 (in thousands) value. The figures below are in thousands. Any related question also is in thousands. Flynn, Inc Macek Company Book Value Fair ValueCash$900 $80 $80 Receivables 480 180 160 Inventory 660 260 300 Land 300 120 130 Buildings (net) 1,200 220 280 Equipment 360 100 75 Accounts payable 480 60 60 Long-term liabilities 1,140 340 300 Common stock 1,000 80 Additional paid-in capital 200 0 Retained earnings 1,080 480 What amount will be reported for consolidated long-term liabilities?

$1,440,000.

Flynn acquires 100 percent of the outstanding voting shares of Macek Company on January 1, 2021. To obtain these shares, Flynn pays $400 cash (in thousands) and issues 10,000 shares of $20 par value common stock on this date. Flynn's stock had a fair value of $36 per share on that date. Flynn also pays $15 (in thousands) to a local investment firm for arranging the acquisition. An additional $10 (in thousands) was paid by Flynn in stock issuance costs. The book values for both Flynn and Macek immediately preceding the acquisition follow. The fair value of each of Flynn and Macek accounts is also included. In addition, Macek holds a fully amortized trademark that still retains a $40 (in thousands) value. The figures below are in thousands. Any related question also is in thousands. Flynn, Inc Macek Company Book Value Fair ValueCash$900 $80 $80 Receivables 480 180 160 Inventory 660 260 300 Land 300 120 130 Buildings (net) 1,200 220 280 Equipment 360 100 75 Accounts payable 480 60 60 Long-term liabilities 1,140 340 300 Common stock 1,000 80 Additional paid-in capital 200 0 Retained earnings 1,080 480 What amount will be reported for consolidated buildings (net)?

$1,480,000. Flynn Buildings ($1,200,000) + Fair Value of Macek Buildings ($280,000) = $1,480,000

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 NewtonRevenues$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 receivables and inventory for 2021.

$1,560. $1,200 + $360 = $1,560

Acker Inc. bought 40% of Howell Co. on January 1, 2020 for $576,000. The equity method of accounting was used. The book value and fair value of the net assets of Howell on that date were $1,440,000. Acker began supplying inventory to Howell as follows: YearCost to AckerTransfer PriceAmount Held by Howell at Year-End2020$55,000$75,000$15,0002021$70,000$110,000$55,000 Howell reported net income of $100,000 in 2020 and $120,000 in 2021 while paying $40,000 in dividends each year. What is Acker's share of the intra-entity inventory gross profit that should be deferred on December 31, 2020?

$1,600. $75,000 − $55,000 = $20,000 × ($15,000 ÷ $75,000) = $4,000 × 40% = $1,600 Deferred intra-entity gross profit

The financial statement amounts for the Atwood Company and the Franz Company as of December 31, 2021, are presented below. Also included are the fair values for Franz Company's net assets (all numbers are in thousands). AtwoodFranz Co.Franz Co.Book ValueBook ValueFair Value 12/31/202112/31/202112/31/2021Cash$870 $240 $240 Receivables 660 600 600 Inventory 1,230 420 580 Land 1,800 260 250 Buildings (net) 1,800 540 650 Equipment (net) 660 380 400 Accounts payable (570) (240) (240)Accrued expenses (270) (60) (60)Long-term liabilities (2,700) (1,020) (1,120)Common stock ($20 par) (1,980) Common stock ($5 par) (420) Additional paid-in capital (210) (180) Retained earnings 1/1/18 (1,170) (480) Revenues (2,880) (660) Expenses 2,760 620 Note: Parenthesis indicate a credit balance Assume an acquisition business combination took place at December 31, 2021. Atwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Franz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid. Compute the amount of the consideration transferred by Atwood to acquire Franz.

$1,750.

Presented below are the financial balances for the Boxwood Company and the Tranz Company as of December 31, 2020, immediately before Boxwood acquired Tranz. Also included are the fair values for Tranz Company's net assets at that date (all amounts in thousands). BoxwoodTranz Co.Tranz Co.Book ValueBook ValueFair Value 12/31/2012/31/2012/31/20Cash$870 $240 $240 Receivables 660 600 600 Inventory 1,230 420 580 Land 1,800 260 250 Buildings (net) 1,800 540 650 Equipment (net) 660 380 400 Accounts payable (570) (240) (240)Accrued expenses (270) (60) (60)Long-term liabilities (2,700) (1,020) (1,120)Common stock ($20 par) (1,980) Common stock ($5 par) (420) Additional paid-in capital (210) (180) Retained earnings (1,170) (480) Revenues (2,880) (660) Expenses 2,760 620 Note: Parenthesis indicate a credit balance Assume a business combination took place at December 31, 2020. Boxwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Tranz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid to effect this acquisition transaction. To settle a difference of opinion regarding Tranz's fair value, Boxwood promises to pay an additional $5.2 (in thousands) to the former owners if Tranz's earnings exceed a certain sum during the next year. Given the probability of the required contingency payment and utilizing a 4% discount rate, the expected present value of the contingency is $5 (in thousands). Compute the investment to be recorded at the date of acquisition.

$1,755. $35 fair value per share × 50 shares = $1,750 (stock issued) + $5 (contingency) = $1,755

On January 1, 2021, the Moody Company entered into a transaction for 100% of the outstanding common stock of Osorio Company. To acquire these shares, Moody issued $400 in long-term liabilities and also issued 40 shares of common stock having a par value of $1 per share but a fair value of $10 per share. Moody paid $20 to lawyers, accountants, and brokers for assistance in bringing about this acquisition. Another $15 was paid in connection with stock issuance costs. Prior to these transactions, the balance sheets for the two companies were as follows: Moody OsorioCash$180 $40 Receivables 810 180 Inventories 1,080 280 Land 600 360 Buildings (net) 1,260 440 Equipment (net) 480 100 Accounts payable (450) (80)Long-term liabilities (1,290) (400)Common stock ($1 par) (330) Common stock ($20 par) (240)Additional paid-in capital (1,080) (340)Retained earnings (1,260) (340) Note: Parentheses indicate a credit balance. In Moody's appraisal of Osorio, three assets were deemed to be undervalued on the subsidiary's books: Inventory by $10, Land by $40, and Buildings by $60. Compute the amount of consolidated buildings (net) at date of acquisition.

$1,760. Moody Buildings on Acquisition Date (Book Value of $1,260) + Osorio Buildings on Acquisition Date ($500 Fair Value) = $1,760

The financial statement amounts for the Atwood Company and the Franz Company as of December 31, 2021, are presented below. Also included are the fair values for Franz Company's net assets (all numbers are in thousands). AtwoodFranz Co.Franz Co.Book ValueBook ValueFair Value 12/31/202112/31/202112/31/2021Cash$870 $240 $240 Receivables 660 600 600 Inventory 1,230 420 580 Land 1,800 260 250 Buildings (net) 1,800 540 650 Equipment (net) 660 380 400 Accounts payable (570) (240) (240)Accrued expenses (270) (60) (60)Long-term liabilities (2,700) (1,020) (1,120)Common stock ($20 par) (1,980) Common stock ($5 par) (420) Additional paid-in capital (210) (180) Retained earnings 1/1/18 (1,170) (480) Revenues (2,880) (660) Expenses 2,760 620 Note: Parenthesis indicate a credit balance Assume an acquisition business combination took place at December 31, 2021. Atwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Franz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid. Compute consolidated inventory at the date of the acquisition.

$1,810.

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 NewtonRevenues$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 additional paid-in capital at December 31, 2021

$1,830. Campbell's reported APIC ($810) plus the excess of FV of shares issued to acquire Newton [($40 − $10) × 35 shares = $1,050] less stock issuance costs ($30) = $810 + $1,050 − $30 = $1,830

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 NewtonRevenues$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 expenses for 2021.

$1,905. Consolidated Expenses = Campbell's Expenses only immediately following the transaction Campbell's Expenses = $1,880 (2021 Expenses Reported on Financial Statements) + $25 (Fees Expensed as Incurred) = $1,905

On January 1, 2021, Anderson Company purchased 40% of the voting common stock of Barney Company for $2,000,000, which approximated book value. During 2021, Barney paid dividends of $30,000 and reported a net loss of $70,000. What is the balance in the investment account on December 31, 2021?

$1,960,000. $2,000,000 − ($70,000 × 40%) − ($30,000 × 40%) = $1,960,000

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.

On January 1, 2020, Archer, Incorporated, paid $100,000 for a 30% interest in Harley Corporation. This investee had assets with a book value of $550,000 and liabilities of $300,000. A patent held by Harley having a book value of $10,000 was actually worth $40,000 with a six-year remaining life. Any goodwill associated with this acquisition is considered to have an indefinite life. During 2020, Harley reported net income of $50,000 and paid dividends of $20,000 while in 2021 it reported net income of $75,000 and dividends of $30,000. Assume Archer has the ability to significantly influence the operations of Harley. The balance in the Investment in Harley account at December 31, 2020, is

$107,500. $100,000 + $13,500 − ($20,000 × 30%) = $107,500

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 ValueGrangerBook ValueGrangerFair ValueRetained earnings, 1/1/21$250,000$240,000 Cash and receivables 170,000 70,000$70,000Inventory 230,000 180,000 210,000Land 320,000 220,000 240,000Buildings (net) 480,000 240,000 280,000Equipment (net) 120,000 90,000 90,000Liabilities 650,000 440,000 430,000Common 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

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 NewtonRevenues$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 goodwill arising from this acquisition at December 31, 2021.

$140. Goodwill equals excess of: (i) fair value of assets received and liabilities assumed; less (ii) consideration paid. Fair value of assets received: $230 cash + $360 receivables and inventory + $590 fair value of buildings (net) + $1,450 fair value of equipment (net) = $2,630 Fair value of liabilities assumed: $720 Consideration paid: $650 cash + FV of common stock ($40 × 35 = $1,400) = $2,050 Goodwill = Consideration Paid ($2,050) less Fair Value of assets received and liabilities assumed ($2,630 assets received − $720 liabilities assumed = $1,910) = $2,050 − $1,910 = $140

On January 1, 2020, Mehan, Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan a 15% ownership of Cook. The fair value of the 15% investment was the same as the carrying value of the investment when, on January 1, 2021, Mehan purchased an additional 25,000 shares (25%) of Cook for $300,000. This last purchase gave Mehan the ability to apply significant influence over Cook. The book value of Cook on January 1, 2020 was $1,000,000. The book value of Cook on January 1, 2021, was $1,100,000. Any excess of cost over book value for this second transaction is assigned to a database and amortized over four years. Cook reports net income and dividends as follows. These amounts are assumed to have occurred evenly throughout the years: Net Income Dividends2020$200,000 $50,000 2021 225,000 50,000 2022 250,000 60,000 On April 1, 2022, just after its first dividend receipt, Mehan sells 10,000 shares of its investment. What is the balance in the investment account for the 15% ownership interest, at January 1, 2021?

$150,000.

On January 1, 2021, Corzine Inc. acquired 15% of Hammon Co.'s outstanding common stock for $62,400 and did not exercise significant influence. Hammon earned net income of $96,000 in 2021 and paid dividends of $36,000. The fair value of Corzine's investment was $80,000 at December 31, 2021. On January 3, 2022, Corzine bought an additional 10% of Hammon for $54,000. This second purchase gave Corzine the ability to significantly influence the decision making of Hammon. During 2022, Hammon earned $120,000 and paid $48,000 in dividends. As of December 31, 2022, Hammon reported a net book value of $468,000. At the date of the second purchase, Corzine concluded that Hammon Co.'s book values approximated fair values and attributed any excess cost to goodwill. On Corzine's December 31, 2022 balance sheet, what balance was reported for the Investment in Hammon Co. account?

$152,000.

On January 1, 2020, Archer, Incorporated, paid $100,000 for a 30% interest in Harley Corporation. This investee had assets with a book value of $550,000 and liabilities of $300,000. A patent held by Harley having a book value of $10,000 was actually worth $40,000 with a six-year remaining life. Any goodwill associated with this acquisition is considered to have an indefinite life. During 2020, Harley reported net income of $50,000 and paid dividends of $20,000 while in 2021 it reported net income of $75,000 and dividends of $30,000. Assume Archer has the ability to significantly influence the operations of Harley. The amount allocated to goodwill at January 1, 2020, is

$16,000. Book value purchased = ($550,000 − $300,000) = $250,000 × 30% = $75,000 Excess: $100,000 − $75,000 = $25,000 Allocated to patent: $30,000 × 30% = $9,000 Remainder to goodwill: $25,000 − $9,000 = $16,000.

Prior to being united in a business combination, Taunton Inc. and Eubanks Corp. had the following stockholders' equity figures: TauntonEubanksCommon stock ($1 par value)$240,000$64,000Additional paid-in capital 120,000 30,000Retained earnings 370,000 14,000 Taunton issued 62,000 new shares of its common stock valued at $2.75 per share for all of the outstanding stock of Eubanks. Assume that Taunton acquired Eubanks on January 1, 2020 and that Eubanks maintains a separate corporate existence. At what amount did Taunton record the investment in Eubanks?

$170,500. $2.75 × 62,000 = $170,500

On January 1, 2021, the Moody Company entered into a transaction for 100% of the outstanding common stock of Osorio Company. To acquire these shares, Moody issued $400 in long-term liabilities and also issued 40 shares of common stock having a par value of $1 per share but a fair value of $10 per share. Moody paid $20 to lawyers, accountants, and brokers for assistance in bringing about this acquisition. Another $15 was paid in connection with stock issuance costs. Prior to these transactions, the balance sheets for the two companies were as follows: Moody OsorioCash$180 $40 Receivables 810 180 Inventories 1,080 280 Land 600 360 Buildings (net) 1,260 440 Equipment (net) 480 100 Accounts payable (450) (80)Long-term liabilities (1,290) (400)Common stock ($1 par) (330) Common stock ($20 par) (240)Additional paid-in capital (1,080) (340)Retained earnings (1,260) (340) Note: Parentheses indicate a credit balance. In Moody's appraisal of Osorio, three assets were deemed to be undervalued on the subsidiary's books: Inventory by $10, Land by $40, and Buildings by $60. Compute the amount of consolidated cash after recording the acquisition transaction.

$185.

On January 1, 2021, Jackie Corp. purchased 30% of the voting common stock of Rob Co., paying $2,000,000. Jackie properly accounts for this investment using the equity method. At the time of the investment, Rob's total stockholders' equity was $3,000,000. Jackie gathered the following information about Rob's assets and liabilities whose book values and fair values differed: Book ValueFair ValueBuildings (15-year life)$1,000,000$1,500,000Equipment (5-year life) 2,500,000 3,000,000Franchises (10-year life)$0$500,000 Any excess of cost over fair value was attributed to goodwill, which has not been impaired. Rob Co. reported net income of $300,000 for 2021, and paid dividends of $100,000 during that year. What is the balance in Jackie Corp's Investment in Rob Co. account at December 31, 2021?

$2,005,000.

On January 1, 2021, Lee Company paid $1,870,000 for 80,000 shares of Thomas Co.'s voting common stock which represents a 45% investment. No allocation to goodwill or other specific account was necessary. Significant influence over Thomas was achieved by this acquisition. Thomas distributed a dividend of $2.00 per share during 2021 and reported net income of $720,000. What was the balance in the Investment in Thomas Co. account found in the financial records of Lee as of December 31, 2021?

$2,034,000.

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 NewtonRevenues$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 consideration transferred for this acquisition at December 31, 2021.

$2,050.

Presented below are the financial balances for the Boxwood Company and the Tranz Company as of December 31, 2020, immediately before Boxwood acquired Tranz. Also included are the fair values for Tranz Company's net assets at that date (all amounts in thousands). BoxwoodTranz Co.Tranz Co.Book ValueBook ValueFair Value 12/31/2012/31/2012/31/20Cash$870 $240 $240 Receivables 660 600 600 Inventory 1,230 420 580 Land 1,800 260 250 Buildings (net) 1,800 540 650 Equipment (net) 660 380 400 Accounts payable (570) (240) (240)Accrued expenses (270) (60) (60)Long-term liabilities (2,700) (1,020) (1,120)Common stock ($20 par) (1,980) Common stock ($5 par) (420) Additional paid-in capital (210) (180) Retained earnings (1,170) (480) Revenues (2,880) (660) Expenses 2,760 620 Note: Parenthesis indicate a credit balance Assume a business combination took place at December 31, 2020. Boxwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Tranz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid to effect this acquisition transaction. To settle a difference of opinion regarding Tranz's fair value, Boxwood promises to pay an additional $5.2 (in thousands) to the former owners if Tranz's earnings exceed a certain sum during the next year. Given the probability of the required contingency payment and utilizing a 4% discount rate, the expected present value of the contingency is $5 (in thousands). Compute consolidated land immediately following the acquisition.

$2,050. $1,800 Book Value of Boxwood + $250 Fair Value of Tranz = $2,050

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 NewtonRevenues$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. Assuming that Newton retains a separate corporate existence after this acquisition, at what amount is the investment recorded on Campbell's books?

$2,050. $650 Cash + ($40 per share × 35 shares) = $2,050 Investment

The financial statement amounts for the Atwood Company and the Franz Company as of December 31, 2021, are presented below. Also included are the fair values for Franz Company's net assets (all numbers are in thousands). AtwoodFranz Co.Franz Co.Book ValueBook ValueFair Value 12/31/202112/31/202112/31/2021Cash$870 $240 $240 Receivables 660 600 600 Inventory 1,230 420 580 Land 1,800 260 250 Buildings (net) 1,800 540 650 Equipment (net) 660 380 400 Accounts payable (570) (240) (240)Accrued expenses (270) (60) (60)Long-term liabilities (2,700) (1,020) (1,120)Common stock ($20 par) (1,980) Common stock ($5 par) (420) Additional paid-in capital (210) (180) Retained earnings 1/1/18 (1,170) (480) Revenues (2,880) (660) Expenses 2,760 620 Note: Parenthesis indicate a credit balance Assume an acquisition business combination took place at December 31, 2021. Atwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Franz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid. Compute consolidated expenses immediately following the acquisition.

$2,770. $2,760 (Atwood reported balance) + $10 (direct costs) = $2,770

Presented below are the financial balances for the Boxwood Company and the Tranz Company as of December 31, 2020, immediately before Boxwood acquired Tranz. Also included are the fair values for Tranz Company's net assets at that date (all amounts in thousands). BoxwoodTranz Co.Tranz Co.Book ValueBook ValueFair Value 12/31/2012/31/2012/31/20Cash$870 $240 $240 Receivables 660 600 600 Inventory 1,230 420 580 Land 1,800 260 250 Buildings (net) 1,800 540 650 Equipment (net) 660 380 400 Accounts payable (570) (240) (240)Accrued expenses (270) (60) (60)Long-term liabilities (2,700) (1,020) (1,120)Common stock ($20 par) (1,980) Common stock ($5 par) (420) Additional paid-in capital (210) (180) Retained earnings (1,170) (480) Revenues (2,880) (660) Expenses 2,760 620 Note: Parenthesis indicate a credit balance Assume a business combination took place at December 31, 2020. Boxwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Tranz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid to effect this acquisition transaction. To settle a difference of opinion regarding Tranz's fair value, Boxwood promises to pay an additional $5.2 (in thousands) to the former owners if Tranz's earnings exceed a certain sum during the next year. Given the probability of the required contingency payment and utilizing a 4% discount rate, the expected present value of the contingency is $5 (in thousands). Compute consolidated expenses immediately following the acquisition.

$2,770. Atwood's Total Expenses = Expenses Before Acquisition + Direct Costs = $2,760 + $10 = $2,770

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 NewtonRevenues$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 retained earnings at December 31, 2021.

$2,825. $2,850 − $25 Broker Expense = $2,825

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 NewtonRevenues$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 liabilities at December 31, 2021.

$2,870. Campbell's liabilities plus Newton's liabilities equal consolidated liabilities Campbell's Liabilities: $1,500 Existing + $650 to fund consideration paid on business consolidation = $2,150 Newton's Liabilities: $720 Consolidated Liabilities = $2,150 (Campbell) + $720 (Newton) = $2,870

Presented below are the financial balances for the Boxwood Company and the Tranz Company as of December 31, 2020, immediately before Boxwood acquired Tranz. Also included are the fair values for Tranz Company's net assets at that date (all amounts in thousands). BoxwoodTranz Co.Tranz Co.Book ValueBook ValueFair Value 12/31/2012/31/2012/31/20Cash$870 $240 $240 Receivables 660 600 600 Inventory 1,230 420 580 Land 1,800 260 250 Buildings (net) 1,800 540 650 Equipment (net) 660 380 400 Accounts payable (570) (240) (240)Accrued expenses (270) (60) (60)Long-term liabilities (2,700) (1,020) (1,120)Common stock ($20 par) (1,980) Common stock ($5 par) (420) Additional paid-in capital (210) (180) Retained earnings (1,170) (480) Revenues (2,880) (660) Expenses 2,760 620 Note: Parenthesis indicate a credit balance Assume a business combination took place at December 31, 2020. Boxwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Tranz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid to effect this acquisition transaction. To settle a difference of opinion regarding Tranz's fair value, Boxwood promises to pay an additional $5.2 (in thousands) to the former owners if Tranz's earnings exceed a certain sum during the next year. Given the probability of the required contingency payment and utilizing a 4% discount rate, the expected present value of the contingency is $5 (in thousands). Compute consolidated revenues immediately following the acquisition. Multiple Choice

$2,880. $2,880 Revenues of the Parent Only

The financial statement amounts for the Atwood Company and the Franz Company as of December 31, 2021, are presented below. Also included are the fair values for Franz Company's net assets (all numbers are in thousands). AtwoodFranz Co.Franz Co.Book ValueBook ValueFair Value 12/31/202112/31/202112/31/2021Cash$870 $240 $240 Receivables 660 600 600 Inventory 1,230 420 580 Land 1,800 260 250 Buildings (net) 1,800 540 650 Equipment (net) 660 380 400 Accounts payable (570) (240) (240)Accrued expenses (270) (60) (60)Long-term liabilities (2,700) (1,020) (1,120)Common stock ($20 par) (1,980) Common stock ($5 par) (420) Additional paid-in capital (210) (180) Retained earnings 1/1/18 (1,170) (480) Revenues (2,880) (660) Expenses 2,760 620 Note: Parenthesis indicate a credit balance Assume an acquisition business combination took place at December 31, 2021. Atwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Franz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid. Compute consolidated revenues immediately following the acquisition.

$2,880. $2,880 Revenues of the Parent Only

On January 3, 2020, Baxter, Inc. acquired 40% of the outstanding common stock of Anchor Co. for $2,800,000. This investment gave Baxter the ability to exercise significant influence over Anchor. Anchor's assets on that date were recorded at $11,700,000 with liabilities of $4,700,000. There were no other differences between book and fair values. During 2020, Anchor reported net income of $600,000. For 2021, Anchor reported net income of $900,000. Dividends of $350,000 were paid in each of these two years. What was the reported balance of Baxter's Investment in Anchor Co. at December 31, 2020?

$2,900,000.

Crown Company had common stock of $360,000 and retained earnings of $510,000. Baker Inc. had common stock of $750,000 and retained earnings of $970,000. On January 1, 2021, Baker issued 32,000 shares of common stock with a $13 par value and a $37 fair value for all of Crown Company's outstanding common stock. This combination was accounted for using the acquisition method. Immediately after the combination, what was the amount of total consolidated net assets?

$2,904,000. Consideration Transferred = Net Fair Value of Assets Acquired and Liabilities Assumed Consideration Transferred: $37 per share × 32,000 shares = $1,184,000 Net Fair Value of Assets/Liabilities: $750,000 + $970,000 = $1,720,000 Total: $1,184,000 + $1,720,000 = $2,904,000

The financial statement amounts for the Atwood Company and the Franz Company as of December 31, 2021, are presented below. Also included are the fair values for Franz Company's net assets (all numbers are in thousands). AtwoodFranz Co.Franz Co.Book ValueBook ValueFair Value 12/31/202112/31/202112/31/2021Cash$870 $240 $240 Receivables 660 600 600 Inventory 1,230 420 580 Land 1,800 260 250 Buildings (net) 1,800 540 650 Equipment (net) 660 380 400 Accounts payable (570) (240) (240)Accrued expenses (270) (60) (60)Long-term liabilities (2,700) (1,020) (1,120)Common stock ($20 par) (1,980) Common stock ($5 par) (420) Additional paid-in capital (210) (180) Retained earnings 1/1/18 (1,170) (480) Revenues (2,880) (660) Expenses 2,760 620 Note: Parenthesis indicate a credit balance Assume an acquisition business combination took place at December 31, 2021. Atwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Franz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid. Compute the consolidated common stock at the date of acquisition.

$2,980.

On January 2, 2021, Barley Corp. purchased 40% of the voting common stock of Wheat Co., paying $3,000,000. Barley properly accounts for this investment using the equity method. At the time of the investment, Wheat's total stockholders' equity was $5,000,000. Barley gathered the following information about Wheat's assets and liabilities whose book values and fair values differed: Book Value Fair Value Buildings (20-year life)$1,000,000 $1,800,000 Equipment (5-year life) 1,500,000 2,000,000 Franchises (10-year life) 0 700,000 Any excess of cost over fair value was attributed to goodwill, which has not been impaired. Wheat Co. reported net income of $400,000 for 2021, and paid dividends of $200,000 during that year. How much goodwill is associated with this investment?

$200,000.

On January 1, 2020, Archer, Incorporated, paid $100,000 for a 30% interest in Harley Corporation. This investee had assets with a book value of $550,000 and liabilities of $300,000. A patent held by Harley having a book value of $10,000 was actually worth $40,000 with a six-year remaining life. Any goodwill associated with this acquisition is considered to have an indefinite life. During 2020, Harley reported net income of $50,000 and paid dividends of $20,000 while in 2021 it reported net income of $75,000 and dividends of $30,000. Assume Archer has the ability to significantly influence the operations of Harley. The equity in income of Harley for 2021, is

$21,000. 2021 Equity Income = ($75,000 × 30%) = $22,500 2021 Excess Patent Amortization = ($30,000 ÷ 6 = $5,000) × 30%) = $1,500 $22,500 − $1,500 = $21,000

Borgin Inc. owns 30% of the outstanding voting common stock of Burkes Co. and has the ability to significantly influence the investee's operations and decision-making. On January 1, 2021, the balance in the Investment in Burkes Co. account was $402,000. Amortization associated with the purchase of this investment is $8,000 per year. During 2021, Burkes earned income of $108,000 and paid cash dividends of $36,000. Previously in 2020, Burkes had sold inventory costing $28,800 to Borgin for $48,000. All but 25% of this merchandise was consumed by Borgin during 2020. The remainder was used during the first few weeks of 2021. Additional sales were made to Borgin in 2021; inventory costing $33,600 was transferred at a price of $60,000. Of this total, 40% was not consumed until 2022. What amount of equity income would Borgin have recognized in 2021 from its ownership interest in Burkes?

$22,672.

On January 3, 2020, Baxter, Inc. acquired 40% of the outstanding common stock of Anchor Co. for $2,800,000. This investment gave Baxter the ability to exercise significant influence over Anchor. Anchor's assets on that date were recorded at $11,700,000 with liabilities of $4,700,000. There were no other differences between book and fair values. During 2020, Anchor reported net income of $600,000. For 2021, Anchor reported net income of $900,000. Dividends of $350,000 were paid in each of these two years. How much income did Baxter report from Anchor for 2020?

$240,000. $600,000 × 40% = $240,000

Cayman Inc. bought 30% of Maya Company on January 1, 2021 for $450,000. The equity method of accounting was used. The book value and fair value of the net assets of Maya on that date were $1,500,000. Maya began supplying inventory to Cayman as follows: YearCost to MayaTransfer PriceAmount Held by Cayman at Year-End2021$30,000$45,000$9,0002022$48,000$80,000$20,000 Maya reported net income of $100,000 in 2021 and $120,000 in 2022 while paying $40,000 in dividends each year. What is the Equity in Maya Income that should be reported by Cayman in 2021?

$29,100.

On January 3, 2020, Baxter, Inc. acquired 40% of the outstanding common stock of Anchor Co. for $2,800,000. This investment gave Baxter the ability to exercise significant influence over Anchor. Anchor's assets on that date were recorded at $11,700,000 with liabilities of $4,700,000. There were no other differences between book and fair values. During 2020, Anchor reported net income of $600,000. For 2021, Anchor reported net income of $900,000. Dividends of $350,000 were paid in each of these two years. What was the reported balance of Baxter's Investment in Anchor Co. at December 31, 2021?

$3,120,000.

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 NewtonRevenues$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

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 NewtonRevenues$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 equipment (net) account at December 31, 2021.

$3,550.

The financial statement amounts for the Atwood Company and the Franz Company as of December 31, 2021, are presented below. Also included are the fair values for Franz Company's net assets (all numbers are in thousands). AtwoodFranz Co.Franz Co.Book ValueBook ValueFair Value 12/31/202112/31/202112/31/2021Cash$870 $240 $240 Receivables 660 600 600 Inventory 1,230 420 580 Land 1,800 260 250 Buildings (net) 1,800 540 650 Equipment (net) 660 380 400 Accounts payable (570) (240) (240)Accrued expenses (270) (60) (60)Long-term liabilities (2,700) (1,020) (1,120)Common stock ($20 par) (1,980) Common stock ($5 par) (420) Additional paid-in capital (210) (180) Retained earnings 1/1/18 (1,170) (480) Revenues (2,880) (660) Expenses 2,760 620 Note: Parenthesis indicate a credit balance Assume an acquisition business combination took place at December 31, 2021. Atwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Franz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid. Compute consolidated long-term liabilities at the date of the acquisition.

$3,820.

On January 3, 2021, Madison Corp. purchased 30% of the voting common stock of Huntsville Co., paying $3,000,000. Madison decided to use the equity method to account for this investment. At the time of the investment, Huntsville's total stockholders' equity was $8,000,000. Madison gathered the following information about Huntsville's assets and liabilities: Book ValueFair ValueBuildings (10-year life)$400,000 $600,000 Equipment (5-year life) 1,200,000 1,400,000 Franchises (8-year life)$0 $480,000 For all other assets and liabilities, book value and fair value were equal. Any excess of cost over fair value was attributed to goodwill, which has not been impaired. What is the amount of goodwill associated with the investment?

$336,000.

Cayman Inc. bought 30% of Maya Company on January 1, 2021 for $450,000. The equity method of accounting was used. The book value and fair value of the net assets of Maya on that date were $1,500,000. Maya began supplying inventory to Cayman as follows: YearCost to MayaTransfer PriceAmount Held by Cayman at Year-End2021$30,000$45,000$9,0002022$48,000$80,000$20,000 Maya reported net income of $100,000 in 2021 and $120,000 in 2022 while paying $40,000 in dividends each year. What is the Equity in Maya Income that should be reported by Cayman in 2022?

$34,500. $120,000 × 30% = $36,000 + ($900 from 2021) − ($2,400 from 2022 Deferral) = $34,500

Flynn acquires 100 percent of the outstanding voting shares of Macek Company on January 1, 2021. To obtain these shares, Flynn pays $400 cash (in thousands) and issues 10,000 shares of $20 par value common stock on this date. Flynn's stock had a fair value of $36 per share on that date. Flynn also pays $15 (in thousands) to a local investment firm for arranging the acquisition. An additional $10 (in thousands) was paid by Flynn in stock issuance costs. The book values for both Flynn and Macek immediately preceding the acquisition follow. The fair value of each of Flynn and Macek accounts is also included. In addition, Macek holds a fully amortized trademark that still retains a $40 (in thousands) value. The figures below are in thousands. Any related question also is in thousands. Flynn, Inc Macek Company Book Value Fair ValueCash$900 $80 $80 Receivables 480 180 160 Inventory 660 260 300 Land 300 120 130 Buildings (net) 1,200 220 280 Equipment 360 100 75 Accounts payable 480 60 60 Long-term liabilities 1,140 340 300 Common stock 1,000 80 Additional paid-in capital 200 0 Retained earnings 1,080 480 What amount will be reported for consolidated additional paid-in capital?

$350,000.

On January 3, 2021, Madison Corp. purchased 30% of the voting common stock of Huntsville Co., paying $3,000,000. Madison decided to use the equity method to account for this investment. At the time of the investment, Huntsville's total stockholders' equity was $8,000,000. Madison gathered the following information about Huntsville's assets and liabilities: Book ValueFair ValueBuildings (10-year life)$400,000 $600,000 Equipment (5-year life) 1,200,000 1,400,000 Franchises (8-year life)$0 $480,000 For all other assets and liabilities, book value and fair value were equal. Any excess of cost over fair value was attributed to goodwill, which has not been impaired. For 2021, what is the total amount of excess amortization for Madison's 30% investment in Huntsville?

$36,000. $600,000 − $400,000 = $200,000 ÷ 10yrs = $20,000 $1,400,000 − $1,200,000 = $200,000 ÷ 5yrs = $40,000 $480,000 − 0 = $480,000 ÷ 8yrs = $60,000 $20,000 + $40,000 + $60,000 = $120,000 × 30% = $36,000

On January 3, 2020, Baxter, Inc. acquired 40% of the outstanding common stock of Anchor Co. for $2,800,000. This investment gave Baxter the ability to exercise significant influence over Anchor. Anchor's assets on that date were recorded at $11,700,000 with liabilities of $4,700,000. There were no other differences between book and fair values. During 2020, Anchor reported net income of $600,000. For 2021, Anchor reported net income of $900,000. Dividends of $350,000 were paid in each of these two years. How much income did Baxter report from Anchor for 2021?

$360,000.

Kane Inc. owns 30% of Woodhouse Co. and applies the equity method. During the current year, Kane bought inventory costing $71,500 and then sold it to Woodhouse for $130,000. At year-end, only $30,000 of merchandise was still being held by Woodhouse. What amount of intra-entity gross profit must be deferred by Kane?

$4,050.

Acker Inc. bought 40% of Howell Co. on January 1, 2020 for $576,000. The equity method of accounting was used. The book value and fair value of the net assets of Howell on that date were $1,440,000. Acker began supplying inventory to Howell as follows: YearCost to AckerTransfer PriceAmount Held by Howell at Year-End2020$55,000$75,000$15,0002021$70,000$110,000$55,000 Howell reported net income of $100,000 in 2020 and $120,000 in 2021 while paying $40,000 in dividends each year. What is the Equity in Howell Income that should be reported by Acker in 2021?

$41,600.

Flynn acquires 100 percent of the outstanding voting shares of Macek Company on January 1, 2021. To obtain these shares, Flynn pays $400 cash (in thousands) and issues 10,000 shares of $20 par value common stock on this date. Flynn's stock had a fair value of $36 per share on that date. Flynn also pays $15 (in thousands) to a local investment firm for arranging the acquisition. An additional $10 (in thousands) was paid by Flynn in stock issuance costs. The book values for both Flynn and Macek immediately preceding the acquisition follow. The fair value of each of Flynn and Macek accounts is also included. In addition, Macek holds a fully amortized trademark that still retains a $40 (in thousands) value. The figures below are in thousands. Any related question also is in thousands. Flynn, Inc Macek Company Book Value Fair ValueCash$900 $80 $80 Receivables 480 180 160 Inventory 660 260 300 Land 300 120 130 Buildings (net) 1,200 220 280 Equipment 360 100 75 Accounts payable 480 60 60 Long-term liabilities 1,140 340 300 Common stock 1,000 80 Additional paid-in capital 200 0 Retained earnings 1,080 480 What amount will be reported for consolidated equipment (net)?

$435,000. Flynn Equipment ($360,000) + Fair Value of Macek Equipment ($75,000) = $435,000

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 ValueGrangerBook ValueGrangerFair ValueRetained earnings, 1/1/21$250,000$240,000 Cash and receivables 170,000 70,000$70,000Inventory 230,000 180,000 210,000Land 320,000 220,000 240,000Buildings (net) 480,000 240,000 280,000Equipment (net) 120,000 90,000 90,000Liabilities 650,000 440,000 430,000Common stock 360,000 80,000 Additional paid-in capital 60,000 40,000 Assume that Wilkins issued preferred stock with a par value of $260,000 and a fair value of $500,000 for all of the outstanding shares of Granger in an acquisition business combination. What will be the balance in the consolidated Inventory and Land accounts?

$440,000, $560,000.

The financial statement amounts for the Atwood Company and the Franz Company as of December 31, 2021, are presented below. Also included are the fair values for Franz Company's net assets (all numbers are in thousands). AtwoodFranz Co.Franz Co.Book ValueBook ValueFair Value 12/31/202112/31/202112/31/2021Cash$870 $240 $240 Receivables 660 600 600 Inventory 1,230 420 580 Land 1,800 260 250 Buildings (net) 1,800 540 650 Equipment (net) 660 380 400 Accounts payable (570) (240) (240)Accrued expenses (270) (60) (60)Long-term liabilities (2,700) (1,020) (1,120)Common stock ($20 par) (1,980) Common stock ($5 par) (420) Additional paid-in capital (210) (180) Retained earnings 1/1/18 (1,170) (480) Revenues (2,880) (660) Expenses 2,760 620 Note: Parenthesis indicate a credit balance Assume an acquisition business combination took place at December 31, 2021. Atwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Franz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid. Compute consolidated goodwill at the date of the acquisition.

$450.

On January 4, 2021, Mason Co. purchased 40,000 shares (40%) of the common stock of Hefly Corp., paying $560,000. At that time, the book value and fair value of Hefly's net assets was $1,400,000. The investment gave Mason the ability to exercise significant influence over the operations of Hefly. During 2021, Hefly reported income of $150,000 and paid dividends of $40,000. On January 2, 2022, Mason sold 10,000 shares for $150,000. What is the balance in the investment account after the sale of the 10,000 shares?

$453,000. Investment account balance prior to sale: $560,000 + ($150,000 × 40%) − ($40,000 × 40%) = $604,000 $604,000 × (10,000 ÷ 40,000) = $151,000 Cost of Shares Sold $150,000 Sales Price − $151,000 Cost of Shares Sold = $1,000 Loss on Sale of Shares $604,000 − $151,000 = $453,000

Presented below are the financial balances for the Boxwood Company and the Tranz Company as of December 31, 2020, immediately before Boxwood acquired Tranz. Also included are the fair values for Tranz Company's net assets at that date (all amounts in thousands). BoxwoodTranz Co.Tranz Co.Book ValueBook ValueFair Value 12/31/2012/31/2012/31/20Cash$870 $240 $240 Receivables 660 600 600 Inventory 1,230 420 580 Land 1,800 260 250 Buildings (net) 1,800 540 650 Equipment (net) 660 380 400 Accounts payable (570) (240) (240)Accrued expenses (270) (60) (60)Long-term liabilities (2,700) (1,020) (1,120)Common stock ($20 par) (1,980) Common stock ($5 par) (420) Additional paid-in capital (210) (180) Retained earnings (1,170) (480) Revenues (2,880) (660) Expenses 2,760 620 Note: Parenthesis indicate a credit balance Assume a business combination took place at December 31, 2020. Boxwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Tranz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid to effect this acquisition transaction. To settle a difference of opinion regarding Tranz's fair value, Boxwood promises to pay an additional $5.2 (in thousands) to the former owners if Tranz's earnings exceed a certain sum during the next year. Given the probability of the required contingency payment and utilizing a 4% discount rate, the expected present value of the contingency is $5 (in thousands). Compute consolidated goodwill immediately following the acquisition.

$455.

Cayman Inc. bought 30% of Maya Company on January 1, 2021 for $450,000. The equity method of accounting was used. The book value and fair value of the net assets of Maya on that date were $1,500,000. Maya began supplying inventory to Cayman as follows: YearCost to MayaTransfer PriceAmount Held by Cayman at Year-End2021$30,000$45,000$9,0002022$48,000$80,000$20,000 Maya reported net income of $100,000 in 2021 and $120,000 in 2022 while paying $40,000 in dividends each year. What is the balance in Cayman's Investment in Maya account at December 31, 2021?

$467,100.

Cayman Inc. bought 30% of Maya Company on January 1, 2021 for $450,000. The equity method of accounting was used. The book value and fair value of the net assets of Maya on that date were $1,500,000. Maya began supplying inventory to Cayman as follows: YearCost to MayaTransfer PriceAmount Held by Cayman at Year-End2021$30,000$45,000$9,0002022$48,000$80,000$20,000 Maya reported net income of $100,000 in 2021 and $120,000 in 2022 while paying $40,000 in dividends each year. What is the balance in Cayman's Investment in Maya account at December 31, 2022?

$489,600.

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.

On January 1, 2020, Mehan, Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan a 15% ownership of Cook. The fair value of the 15% investment was the same as the carrying value of the investment when, on January 1, 2021, Mehan purchased an additional 25,000 shares (25%) of Cook for $300,000. This last purchase gave Mehan the ability to apply significant influence over Cook. The book value of Cook on January 1, 2020 was $1,000,000. The book value of Cook on January 1, 2021, was $1,100,000. Any excess of cost over book value for this second transaction is assigned to a database and amortized over four years. Cook reports net income and dividends as follows. These amounts are assumed to have occurred evenly throughout the years: Net Income Dividends2020$200,000 $50,000 2021 225,000 50,000 2022 250,000 60,000 On April 1, 2022, just after its first dividend receipt, Mehan sells 10,000 shares of its investment. What was the balance in the investment account at December 31, 2021?

$517,500. $150,000 + $300,000 + ($90,000 − $2,500) − $20,000 = $517,500 Balance 2021 Year End

Renfroe, Inc. acquired 10% of Stanley Corporation on January 4, 2020, for $90,000 when the book value of Stanley was $1,000,000. During 2020, Stanley reported net income of $215,000 and paid dividends of $50,000. The book value of the 10% investment was the same as the fair value of that investment when, on January 1, 2021, Renfroe purchased an additional 30% of Stanley for $325,000. Any excess of cost over book value is attributable to goodwill with an indefinite life. During 2021, Stanley reported net income of $320,000 and paid dividends of $50,000. What is the balance in the Investment in Stanley Corporation on December 31, 2021?

$523,000.

On January 1, 2020, Mehan, Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan a 15% ownership of Cook. The fair value of the 15% investment was the same as the carrying value of the investment when, on January 1, 2021, Mehan purchased an additional 25,000 shares (25%) of Cook for $300,000. This last purchase gave Mehan the ability to apply significant influence over Cook. The book value of Cook on January 1, 2020 was $1,000,000. The book value of Cook on January 1, 2021, was $1,100,000. Any excess of cost over book value for this second transaction is assigned to a database and amortized over four years. Cook reports net income and dividends as follows. These amounts are assumed to have occurred evenly throughout the years: Net Income Dividends2020$200,000 $50,000 2021 225,000 50,000 2022 250,000 60,000 On April 1, 2022, just after its first dividend receipt, Mehan sells 10,000 shares of its investment. What was the balance in the investment account at April 1, 2022 just before the sale of shares?

$535,875.

Flynn acquires 100 percent of the outstanding voting shares of Macek Company on January 1, 2021. To obtain these shares, Flynn pays $400 cash (in thousands) and issues 10,000 shares of $20 par value common stock on this date. Flynn's stock had a fair value of $36 per share on that date. Flynn also pays $15 (in thousands) to a local investment firm for arranging the acquisition. An additional $10 (in thousands) was paid by Flynn in stock issuance costs. The book values for both Flynn and Macek immediately preceding the acquisition follow. The fair value of each of Flynn and Macek accounts is also included. In addition, Macek holds a fully amortized trademark that still retains a $40 (in thousands) value. The figures below are in thousands. Any related question also is in thousands. Flynn, Inc Macek Company Book Value Fair ValueCash$900 $80 $80 Receivables 480 180 160 Inventory 660 260 300 Land 300 120 130 Buildings (net) 1,200 220 280 Equipment 360 100 75 Accounts payable 480 60 60 Long-term liabilities 1,140 340 300 Common stock 1,000 80 Additional paid-in capital 200 0 Retained earnings 1,080 480 What amount will be reported for goodwill as a result of this acquisition?

$55,000.

On January 1, 2021, Jackie Corp. purchased 30% of the voting common stock of Rob Co., paying $2,000,000. Jackie properly accounts for this investment using the equity method. At the time of the investment, Rob's total stockholders' equity was $3,000,000. Jackie gathered the following information about Rob's assets and liabilities whose book values and fair values differed: Book ValueFair ValueBuildings (15-year life)$1,000,000$1,500,000Equipment (5-year life) 2,500,000 3,000,000Franchises (10-year life)$0$500,000 Any excess of cost over fair value was attributed to goodwill, which has not been impaired. Rob Co. reported net income of $300,000 for 2021, and paid dividends of $100,000 during that year. What is the amount of excess amortization expense for Jackie Corp's investment in Rob Co. for year 2021?

$55,000. $500,000 ÷ 15 = $33,333 per year Buildings × 30% = $10,000 $500,000 ÷ 5 = $100,000 per year Equipment × 30% = $30,000 $500,000 ÷ 10 = $50,000 per year Franchises × 30% = $15,000

Flynn acquires 100 percent of the outstanding voting shares of Macek Company on January 1, 2021. To obtain these shares, Flynn pays $400 cash (in thousands) and issues 10,000 shares of $20 par value common stock on this date. Flynn's stock had a fair value of $36 per share on that date. Flynn also pays $15 (in thousands) to a local investment firm for arranging the acquisition. An additional $10 (in thousands) was paid by Flynn in stock issuance costs. The book values for both Flynn and Macek immediately preceding the acquisition follow. The fair value of each of Flynn and Macek accounts is also included. In addition, Macek holds a fully amortized trademark that still retains a $40 (in thousands) value. The figures below are in thousands. Any related question also is in thousands. Flynn, Inc Macek Company Book Value Fair ValueCash$900 $80 $80 Receivables 480 180 160 Inventory 660 260 300 Land 300 120 130 Buildings (net) 1,200 220 280 Equipment 360 100 75 Accounts payable 480 60 60 Long-term liabilities 1,140 340 300 Common stock 1,000 80 Additional paid-in capital 200 0 Retained earnings 1,080 480 What amount will be reported for consolidated cash after the acquisition is completed?

$555,000.

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 ValueGrangerBook ValueGrangerFair ValueRetained earnings, 1/1/21$250,000$240,000 Cash and receivables 170,000 70,000$70,000Inventory 230,000 180,000 210,000Land 320,000 220,000 240,000Buildings (net) 480,000 240,000 280,000Equipment (net) 120,000 90,000 90,000Liabilities 650,000 440,000 430,000Common 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 stock of Granger. What is the consolidated balance for Land as a result of this acquisition transaction?

$560,000.

On January 1, 2021, the Moody Company entered into a transaction for 100% of the outstanding common stock of Osorio Company. To acquire these shares, Moody issued $400 in long-term liabilities and also issued 40 shares of common stock having a par value of $1 per share but a fair value of $10 per share. Moody paid $20 to lawyers, accountants, and brokers for assistance in bringing about this acquisition. Another $15 was paid in connection with stock issuance costs. Prior to these transactions, the balance sheets for the two companies were as follows: Moody OsorioCash$180 $40 Receivables 810 180 Inventories 1,080 280 Land 600 360 Buildings (net) 1,260 440 Equipment (net) 480 100 Accounts payable (450) (80)Long-term liabilities (1,290) (400)Common stock ($1 par) (330) Common stock ($20 par) (240)Additional paid-in capital (1,080) (340)Retained earnings (1,260) (340) Note: Parentheses indicate a credit balance. In Moody's appraisal of Osorio, three assets were deemed to be undervalued on the subsidiary's books: Inventory by $10, Land by $40, and Buildings by $60. Compute the amount of consolidated equipment at date of acquisition.

$580. Moody Acquisition Date Equipment (Book Value of $480) + (Osorio's Equipment with Fair Value on Acquisition Date of $100) = $580

McCoy has the following account balances as of December 31, 2020 before an acquisition transaction takes place. Inventory$125,000 Land450,000 Buildings (net)575,000 Common stock ($10 par)600,000 Additional paid-in capital300,000 Retained earnings250,000 The fair value of McCoy's Land and Buildings are $650,000 and $600,000, respectively. On December 31, 2020, Ferguson Company issues 30,000 shares of its $10 par value ($30 fair value) common stock in exchange for all of the shares of McCoy's common stock. Ferguson paid $12,000 for costs to issue the new shares of stock. Before the acquisition, Ferguson has $800,000 in its common stock account and $350,000 in its additional paid-in capital account. At the date of acquisition, by how much does Ferguson's additional paid-in capital increase or decrease?

$588,000 increase.

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 ValueGrangerBook ValueGrangerFair ValueRetained earnings, 1/1/21$250,000$240,000 Cash and receivables 170,000 70,000$70,000Inventory 230,000 180,000 210,000Land 320,000 220,000 240,000Buildings (net) 480,000 240,000 280,000Equipment (net) 120,000 90,000 90,000Liabilities 650,000 440,000 430,000Common 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.

Acker Inc. bought 40% of Howell Co. on January 1, 2020 for $576,000. The equity method of accounting was used. The book value and fair value of the net assets of Howell on that date were $1,440,000. Acker began supplying inventory to Howell as follows: YearCost to AckerTransfer PriceAmount Held by Howell at Year-End2020$55,000$75,000$15,0002021$70,000$110,000$55,000 Howell reported net income of $100,000 in 2020 and $120,000 in 2021 while paying $40,000 in dividends each year. What is the balance in Acker's Investment in Howell account at December 31, 2020?

$598,400.

On January 4, 2021, Mason Co. purchased 40,000 shares (40%) of the common stock of Hefly Corp., paying $560,000. At that time, the book value and fair value of Hefly's net assets was $1,400,000. The investment gave Mason the ability to exercise significant influence over the operations of Hefly. During 2021, Hefly reported income of $150,000 and paid dividends of $40,000. On January 2, 2022, Mason sold 10,000 shares for $150,000. What was the balance in the investment account before the shares were sold?

$604,000.

Acker Inc. bought 40% of Howell Co. on January 1, 2020 for $576,000. The equity method of accounting was used. The book value and fair value of the net assets of Howell on that date were $1,440,000. Acker began supplying inventory to Howell as follows: YearCost to AckerTransfer PriceAmount Held by Howell at Year-End2020$55,000$75,000$15,0002021$70,000$110,000$55,000 Howell reported net income of $100,000 in 2020 and $120,000 in 2021 while paying $40,000 in dividends each year. What is the balance in Acker's Investment in Howell account at December 31, 2021?

$624,000.

On January 1, 2021, Jackie Corp. purchased 30% of the voting common stock of Rob Co., paying $2,000,000. Jackie properly accounts for this investment using the equity method. At the time of the investment, Rob's total stockholders' equity was $3,000,000. Jackie gathered the following information about Rob's assets and liabilities whose book values and fair values differed: Book ValueFair ValueBuildings (15-yearlife)$1,000,000$1,500,000Equipment (5-year life) 2,500,000 3,000,000Franchises (10-year life)$0$500,000 Any excess of cost over fair value was attributed to goodwill, which has not been impaired. Rob Co. reported net income of $300,000 for 2021, and paid dividends of $100,000 during that year. How much goodwill is associated with this investment?

$650,000.

Jones, Incorporated acquires 15% of Anderson Corporation on January 1, 2020, for $105,000 when the book value of Anderson was $600,000. During 2020 Anderson reported net income of $150,000 and paid dividends of $50,000. On January 1, 2021, Jones purchased an additional 25% of Anderson for $200,000. Any excess cost over book value is attributable to goodwill with an indefinite life. The fair-value method was used during 2020 but Jones has deemed it necessary to change to the equity method after the second purchase. During 2021 Anderson reported net income of $200,000, and reported dividends of $75,000. The income reported by Jones for 2020 with regard to the Anderson investment is

$7,500.

On January 1, 2020, Mehan, Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan a 15% ownership of Cook. The fair value of the 15% investment was the same as the carrying value of the investment when, on January 1, 2021, Mehan purchased an additional 25,000 shares (25%) of Cook for $300,000. This last purchase gave Mehan the ability to apply significant influence over Cook. The book value of Cook on January 1, 2020 was $1,000,000. The book value of Cook on January 1, 2021, was $1,100,000. Any excess of cost over book value for this second transaction is assigned to a database and amortized over four years. Cook reports net income and dividends as follows. These amounts are assumed to have occurred evenly throughout the years: Net Income Dividends2020$200,000 $50,000 2021 225,000 50,000 2022 250,000 60,000 On April 1, 2022, just after its first dividend receipt, Mehan sells 10,000 shares of its investment. How much income did Mehan report from Cook during 2020?

$7,500. $7,500 Dividends Received = 15% × (Dividends Declared $50,000)

Acker Inc. bought 40% of Howell Co. on January 1, 2020 for $576,000. The equity method of accounting was used. The book value and fair value of the net assets of Howell on that date were $1,440,000. Acker began supplying inventory to Howell as follows: YearCost to AckerTransfer PriceAmount Held by Howell at Year-End2020$55,000$75,000$15,0002021$70,000$110,000$55,000 Howell reported net income of $100,000 in 2020 and $120,000 in 2021 while paying $40,000 in dividends each year. What is Acker's share of the intra-entity inventory gross profit that should be deferred on December 31, 2021?

$8,000. $110,000 − $70,000 = $40,000 × ($55,000 ÷ $110,000) = $20,000 × 40% = $8,000 Deferred intra-entity gross profit

Jones, Incorporated acquires 15% of Anderson Corporation on January 1, 2020, for $105,000 when the book value of Anderson was $600,000. During 2020 Anderson reported net income of $150,000 and paid dividends of $50,000. On January 1, 2021, Jones purchased an additional 25% of Anderson for $200,000. Any excess cost over book value is attributable to goodwill with an indefinite life. The fair-value method was used during 2020 but Jones has deemed it necessary to change to the equity method after the second purchase. During 2021 Anderson reported net income of $200,000, and reported dividends of $75,000. The income reported by Jones for 2021 with regard to the Anderson investment is

$80,000. $200,000 × 40% = $80,000

On January 1, 2020, Mehan, Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan a 15% ownership of Cook. The fair value of the 15% investment was the same as the carrying value of the investment when, on January 1, 2021, Mehan purchased an additional 25,000 shares (25%) of Cook for $300,000. This last purchase gave Mehan the ability to apply significant influence over Cook. The book value of Cook on January 1, 2020 was $1,000,000. The book value of Cook on January 1, 2021, was $1,100,000. Any excess of cost over book value for this second transaction is assigned to a database and amortized over four years. Cook reports net income and dividends as follows. These amounts are assumed to have occurred evenly throughout the years: Net Income Dividends2020$200,000 $50,000 2021 225,000 50,000 2022 250,000 60,000 On April 1, 2022, just after its first dividend receipt, Mehan sells 10,000 shares of its investment. How much income did Mehan report from Cook during 2021?

$87,500. Share of net income: $225,000 × 40% = $90,000 Fair value of 40% acquired: $150,000 + $300,000 = $450,000. Book value of 40% acquired: $1,100,000 × 40% = $440,000 $450,000 − $440,000 = $10,000 attributable to database $10,000 ÷ 4 = $2,500 $90,000 − $2,500 = $87,500

McCoy has the following account balances as of December 31, 2020 before an acquisition transaction takes place. Inventory$125,000Land450,000Buildings (net)575,000Common stock ($10 par)600,000Additional paid-in capital300,000Retained earnings250,000 The fair value of McCoy's Land and Buildings are $650,000 and $600,000, respectively. On December 31, 2020, Ferguson Company issues 30,000 shares of its $10 par value ($30 fair value) common stock in exchange for all of the shares of McCoy's common stock. Ferguson paid $12,000 for costs to issue the new shares of stock. Before the acquisition, Ferguson has $800,000 in its common stock account and $350,000 in its additional paid-in capital account. On December 31, 2020, assuming that McCoy will retain its separate corporate existence, what value is assigned to Ferguson's investment account?

$900,000.

Cayman Inc. bought 30% of Maya Company on January 1, 2021 for $450,000. The equity method of accounting was used. The book value and fair value of the net assets of Maya on that date were $1,500,000. Maya began supplying inventory to Cayman as follows: YearCost to MayaTransfer PriceAmount Held by Cayman at Year-End2021$30,000$45,000$9,0002022$48,000$80,000$20,000 Maya reported net income of $100,000 in 2021 and $120,000 in 2022 while paying $40,000 in dividends each year. What is the investor's share of gross profit on intra-entity inventory sales that should be deferred on December 31, 2021?

$900.

McCoy has the following account balances as of December 31, 2020 before an acquisition transaction takes place. Inventory$125,000 Land450,000 Buildings (net)575,000 Common stock ($10 par)600,000 Additional paid-in capital300,000 Retained earnings250,000 The fair value of McCoy's Land and Buildings are $650,000 and $600,000, respectively. On December 31, 2020, Ferguson Company issues 30,000 shares of its $10 par value ($30 fair value) common stock in exchange for all of the shares of McCoy's common stock. Ferguson paid $12,000 for costs to issue the new shares of stock. Before the acquisition, Ferguson has $800,000 in its common stock account and $350,000 in its additional paid-in capital account. What will be the consolidated additional paid-in capital as a result of this acquisition?

$938,000. 350,000 (Ferguson APIC Balance on Acquisition Date) + $588,000 Additional Business Combination Related APIC ($30 fair value per share − $10 par value per share = $20 per share × 30,000 shares = $600,000 − $12,000 stock issuance costs = $588,000) = $938,000

On January 1, 2021, Bangle Company purchased 30% of the voting common stock of Sleat Corp. for $1,000,000. Any excess of cost over book value was assigned to goodwill. During 2021, Sleat paid dividends of $24,000 and reported a net loss of $140,000. What is the balance in the investment account on December 31, 2021?

$950,800.

Flynn acquires 100 percent of the outstanding voting shares of Macek Company on January 1, 2021. To obtain these shares, Flynn pays $400 cash (in thousands) and issues 10,000 shares of $20 par value common stock on this date. Flynn's stock had a fair value of $36 per share on that date. Flynn also pays $15 (in thousands) to a local investment firm for arranging the acquisition. An additional $10 (in thousands) was paid by Flynn in stock issuance costs. The book values for both Flynn and Macek immediately preceding the acquisition follow. The fair value of each of Flynn and Macek accounts is also included. In addition, Macek holds a fully amortized trademark that still retains a $40 (in thousands) value. The figures below are in thousands. Any related question also is in thousands. Flynn, Inc Macek Company Book Value Fair ValueCash$900 $80 $80 Receivables 480 180 160 Inventory 660 260 300 Land 300 120 130 Buildings (net) 1,200 220 280 Equipment 360 100 75 Accounts payable 480 60 60 Long-term liabilities 1,140 340 300 Common stock 1,000 80 Additional paid-in capital 200 0 Retained earnings 1,080 480 What amount will be reported for consolidated inventory?

$960,000.

On June 30, 2020, Wisconsin, Inc., issued $158,250 in debt and 19,400 new shares of its $10 par value stock to Badger Company owners in exchange for all of the outstanding shares of that company. Wisconsin shares had a fair value of $40 per share. Prior to the combination, the financial statements for Wisconsin and Badger for the six-month period ending June 30, 2020, were as follows (credit balances in parentheses): Wisconsin Badger Revenues$(1,001,000) $(362,000) Expenses 690,000 247,000 Net income$(311,000) $(115,000) Retained earnings, 1/1$(869,000) $(204,000) Net income (311,000) (115,000) Dividends declared 111,750 0 Retained earnings, 6/30$(1,068,250) $(319,000) Cash$92,250 $114,000 Receivables and inventory 482,000 183,000 Patented technology (net) 935,000 293,000 Equipment (net) 713,000 695,000 Total assets$2,222,250 $1,285,000 Liabilities$(524,000) $(496,000) Common stock (360,000) (200,000) Additional paid-in capital (270,000) (270,000) Retained earnings (1,068,250) (319,000) Total liabilities and equities$(2,222,250) $(1,285,000) Wisconsin also paid $37,000 to a broker for arranging the transaction. In addition, Wisconsin paid $46,600 in stock issuance costs. Badger's equipment was actually worth $811,250, but its patented technology was valued at only $269,600.

.Net income$274,000 .Retained earnings, 1/1/20$869,000s .Patented technology (net)$1,204,600. Goodwill$52,400 .Liabilities$1,178,250 .Common stock$554,000 .Additional paid-in capital$805,400

What is a statutory merger?

A business combination in which only one company continues to exist as a legal entity

How should a permanent loss in value of an investment using the equity method be treated?

A loss is reported in the same manner as a loss in value of other long-term assets.

A company has been using the equity method to account for its investment. The company sells shares and does not continue to have significant influence. Which of the following statements is true?

A prospective change in accounting principle must occur.

A company has been using the fair-value method to account for its investment. The company now has the ability to significantly influence the investee and the equity method has been deemed appropriate. Which of the following statements is true?

A prospective change in accounting principle must occur.

When an investor sells shares of its investee company, which of the following statements is true?

A recognized gain or loss is reported as the difference between selling price and carrying value.

Which of the following examples accurately describes a difference in the types of business combinations?

A statutory merger requires the dissolution of the acquired company while a statutory consolidation requires dissolution of the companies involved in the combination following the transfer of assets or stock to a newly formed entity.

A statutory merger is a(n)

Business combination in which only one of the two companies continues to exist as a legal corporation.

At the date of an acquisition which is not a bargain purchase, the acquisition method

Consolidates all subsidiary assets and liabilities at fair value.

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.

In a business combination where a subsidiary retains its incorporation and which is accounted for under the acquisition method, how should stock issuance costs and direct combination costs be treated?

Direct combination costs are expensed as incurred and stock issuance costs result in a reduction to additional paid-in capital.

All of the following statements regarding the investment account using the equity method are true except:

Dividends received are reported as revenue.

Chase Incorporated sold $260,000 of its inventory to Bartlett Company during 2021 for $400,000. Bartlett sold $300,000 of this merchandise in 2021 with the remainder to be disposed of during 2022. Assume Chase owns 35% of Bartlett and accounts for its investment using the equity method. What journal entry will be recorded at the end of 2021 to defer the recognition of the investor's share of the intra-entity gross profits? A)Equity in income of Bartlett$35,000 Investment in Bartlett 35,000B)Investment in Bartlett$35,000 Equity in income of Bartlett $35,000C)Equity in income of Bartlett$12,250 Investment in Bartlett $12,250D)Investment in Bartlett$12,250 Equity in income of Bartlett $12,250

Entry C.

Chase Incorporated sold $260,000 of its inventory to Bartlett Company during 2021 for $400,000. Bartlett sold $300,000 of this merchandise in 2021 with the remainder to be disposed of during 2022. Assume Chase owns 35% of Bartlett and accounts for its investment using the equity method. What journal entry will be recorded in 2022 to recognize its share of the intra-entity gross profit that was deferred in 2021? A)Equity in income of Bartlett$35,000 Investment in Bartlett $35,000B)Investment in Bartlett$35,000 Equity in income of Bartlett $35,000C)Equity in income of Bartlett$12,250 Investment in Bartlett $12,250D)Investment in Bartlett$12,250 Equity in income of Bartlett $12,250

Entry D.

In a situation where the investor exercises significant influence over the investee, which of the following entries is not actually posted to the books of the investor? (I) Debit to the Investment account, and a Credit to the Equity in Investee Income account. (II) Debit to Cash (for dividends received from the investee), and a Credit to Investment Income account. (III) Debit to Cash (for dividends received from the investee), and a Credit to the Dividend Receivable.

Entry II only.

After allocating cost in excess of book value, which asset or liability would not be amortized over a useful life?

Goodwill.

On January 1, 2021, Halpert Inc. acquired 30% of Schrute Corp. Halpert used the equity method to account for the investment. On January 1, 2022, Halpert sold two-thirds of its investment in Schrute. It no longer had the ability to exercise significant influence over the operations of Schrute. How should Halpert account for this change?

Halpert should use the fair-value method for 2022 and future years, but should not make a retrospective adjustment to the investment account.

What is the primary difference between: (i) accounting for a business combination when the subsidiary is dissolved; and (ii) accounting for a business combination when the subsidiary retains its incorporation?

If the subsidiary retains its incorporation, the consolidation is not formally recorded in the accounting records of the acquiring 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.

Which of the following results in a decrease in the Equity in Investee Income account when applying the equity method?

Investor's share of gross profit from intra-entity inventory sales for the current year.

Jones, Incorporated acquired 15% of Anderson Corporation on January 1, 2020, for $105,000 when the Anderson's book value was $600,000. During 2020 Anderson reported net income of $150,000 and declared dividends of $50,000. By January 1, 2021, the fair value of Jones' 15% investment in Anderson had increased to $120,000. On January 1, 2021, Jones purchased an additional 25% of Anderson for $200,000. Any excess cost over book value was attributable to goodwill with an indefinite life. The fair-value method was used during 2020 but Jones has deemed it necessary to change to the equity method after the second purchase. During 2021 Anderson reported net income of $180,000, and declared dividends of $55,000. How would Jones record its January 1, 2021 investment in Anderson under the equity method?

Jones must debit the Investment in Anderson account for $200,000.

Which of the following statements is true regarding the acquisition method of accounting for a business combination?

Net assets of the acquired company are reported at their fair values.

In a transaction accounted for using the acquisition method where consideration transferred exceeds book value of the acquired company, which statement is true for the acquiring company with regard to its investment?

Net assets of the acquired company are revalued to their fair values and any excess of consideration transferred over fair value of net assets acquired is allocated to goodwill.

On January 1, 2021, the Moody Company entered into a transaction for 100% of the outstanding common stock of Osorio Company. To acquire these shares, Moody issued $400 in long-term liabilities and also issued 40 shares of common stock having a par value of $1 per share but a fair value of $10 per share. Moody paid $20 to lawyers, accountants, and brokers for assistance in bringing about this acquisition. Another $15 was paid in connection with stock issuance costs. Prior to these transactions, the balance sheets for the two companies were as follows: Moody OsorioCash$180 $40 Receivables 810 180 Inventories 1,080 280 Land 600 360 Buildings (net) 1,260 440 Equipment (net) 480 100 Accounts payable (450) (80)Long-term liabilities (1,290) (400)Common stock ($1 par) (330) Common stock ($20 par) (240)Additional paid-in capital (1,080) (340)Retained earnings (1,260) (340) Note: Parentheses indicate a credit balance. In Moody's appraisal of Osorio, three assets were deemed to be undervalued on the subsidiary's books: Inventory by $10, Land by $40, and Buildings by $60. What is the amount of goodwill arising from this acquisition?

None. There is a gain on bargain purchase of $230.

How are direct and indirect costs accounted for when applying the acquisition method for a business combination? Direct CostsIndirect Costs A.ExpensedExpensed B.Increase investment accountDecrease additional paid-in Capital C.ExpensedDecrease additional paid-in capital D.Increase investment accountExpensed E.Increase investment accountIncrease investment account

Option A.

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 ValueBook Value B)Book Value Fair Value C)Fair Value Fair Value D)Fair Value Book Value E)Cost Cost

Option B.

Which of the following statements is true regarding a statutory consolidation?

The original companies dissolve while remaining as separate divisions of a newly created company.

When an investor appropriately applies the equity method, how should it account for any investee Other Comprehensive Income (OCI)?

The OCI would increase the investment.

Which of the following statements is true regarding a statutory merger?

The acquired company dissolves as a separate corporation and becomes a division of the acquiring company.

With respect to recognizing and measuring the fair value of a business combination in accordance with the acquisition method of accounting, which of the following should the acquirer consider when determining fair value?

The consideration transferred by the acquirer and the fair value of assets received less liabilities assumed.

When applying the equity method, how is the excess of cost over book value calculated and accounted for?

The excess is allocated to the difference between fair value and book value multiplied by the percent ownership of net assets.

Renfroe, Inc. acquired 10% of Stanley Corporation on January 4, 2020, for $90,000 when the book value of Stanley was $1,000,000. During 2020, Stanley reported net income of $215,000 and paid dividends of $50,000. The book value of the 10% investment was the same as the fair value of that investment when, on January 1, 2021, Renfroe purchased an additional 30% of Stanley for $325,000. Any excess of cost over book value is attributable to goodwill with an indefinite life. During 2021, Stanley reported net income of $320,000 and paid dividends of $50,000. How much is the adjustment to the Investment in Stanley Corporation for the change from the fair-value method to the equity method on January 1, 2021?

There is no adjustment.