MIDTERM for ac 507
Watkins, Inc. acquires all of the outstanding stock of Glen Corporation on January 1, 2020. At that date, Glen owns only three assets and has no liabilities: BookValueFairValueLand$40,000 $50,000 Equipment (10-year life) 80,000 75,000 Building (20-year life) 200,000 300,000 If Watkins pays $450,000 in cash for Glen, what acquisition-date fair value allocation, net of amortization, should be attributed to the subsidiary's Equipment in consolidation at December 31, 2022?
$(3,500). Fair Value Differential at Acquisition [$5,000] + Amortization [($5000 ÷ 10) × 3] = [$3,500]
Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2019. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows: 2019 2020 2021Net income$100,000 $120,000 $130,000 Dividends 40,000 50,000 60,000 Assume the equity method is applied. What is the consolidated balance of the Investment in Demers account at December 31, 2021.
$0. The balance reported by the parent is eliminated through the consolidation process.
Anderson, Inc. acquires all of the voting stock of Kenneth, Inc. on January 4, 2020, at an amount in excess of Kenneth's fair value. On that date, Kenneth has equipment with a book value of $90,000 and a fair value of $120,000 (10-year remaining life). Anderson has equipment with a book value of $800,000 and a fair value of $1,200,000 (10-year remaining life). On December 31, 2021, Anderson has equipment with a book value of $975,000 but a fair value of $1,350,000 and Kenneth has equipment with a book value of $105,000 but a fair value of $125,000. If Anderson applies the partial equity method in accounting for Kenneth, what is the consolidated balance for the Equipment account as of December 31, 2021?
$1,104,000. Excess amortization: ($120,000 − $90,000 = $30,000 ÷ 10 = $3,000 per year). 2021 Balance: Anderson BV $975,000 + Kenneth BV $105,000 + Fair value adjustment $30,000 − Amortization for 2020 and 2021 ($3,000 × 2 years) = $1,104,000
Green acquired 100% of Vega on January 1, 2019, by issuing 10,500 shares of its $10 par value common stock with a fair value of $95 per share. On January 1, 2019, Vega's land was undervalued by $40,000, its buildings were overvalued by $30,000, and equipment was undervalued by $80,000. The buildings have a 20-year life and the equipment has a 10-year life. $50,000 was attributed to an unrecorded trademark with a 16-year remaining life. There was no goodwill associated with this investment. Compute the December 31, 2023 consolidated retained earnings.
$1,645,375. Parent Beg RE: $1,350,000 + Consolidated Net Income $490,375 − Consolidated Dividends $195,000 = Consolidated RE $1,645,375 Consolidated Net Income = Consolidated Revenues − Consolidated Expenses = $1,400,000 − $909,625 = $490,375 Consolidated Revenues = $900,000 + $500,000 = $1,400,000 Consolidated Expenses = COGS ($360,000 + $200,000) + Depreciation ($140,000 + $40,000) + Other Exp ($100,000 + $60,000) − Excess FV Amortization (Bldg [$1,500] + Equip $8,000 + Trademark $3,125) = $909,625
Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2019. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired.Demers earns income and pays dividends as follows:201920202021Net income$100,000$120,000$130,000Dividends40,00050,00060,000Assume the equity method is applied.Compute the noncontrolling interest in Demers at December 31, 2020.
$148,200 December 2019 Noncontrolling Interest Balance $135,600 + Noncontrolling Interest Share of (Net Income for 2020 ($120,000 × .20) - Dividends for 2020 ($50,000 × .20) - Excess FV Annual Amortization ($7,000 × .20)) = $148,200
Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2019. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows: 2019 2020 2021Net income$100,000 $120,000 $130,000 Dividends 40,000 50,000 60,000 Assume the partial equity method is applied. Compute the noncontrolling interest in Demers at December 31, 2020.
$148,200. Noncontrolling Interest at Acquisition$ 125,000 Demers 2019 Net Income ($100,000 × 20%)20,000 Demers 2019 Dividends ($40,000 × 20%)(8,000) 2019 Amortization* ($7,000 × 20%)(1,400) Demers 2020 Net Income ($120,000 × 20%)24,000 Demers 2020 Dividends ($50,000 × 20%)(10,000) 2020 Amortization* ($7,000 × 20%)(1,400) Noncontrolling interest at December 31, 2020$ 148,200
Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2019. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows: 2019 2020 2021Net income$100,000 $120,000 $130,000 Dividends 40,000 50,000 60,000 Assume the equity method is applied. Compute the noncontrolling interest in Demers at December 31, 2021.
$160,800. Noncontrolling Interest at Acquisition$ 125,000 Demers 2019 Net Income ($100,000 × 20%)20,000 Demers 2019 Dividends ($40,000 × 20%)(8,000) 2019 Amortization* ($7,000 × 20%)(1,400) Demers 2020 Net Income ($120,000 × 20%)24,000 Demers 2020 Dividends ($50,000 × 20%)(10,000) 2020 Amortization* ($7,000 × 20%)(1,400) Demers 2021 Net Income ($130,000 × 20%)26,000 Demers 2021 Dividends ($60,000 × 20%)(12,000)2021 Amortization* ($7,000 × 20%)(1,400) Noncontrolling Interest, December 31, 2021$ 160,800 *Amortization = ($30,000 Equipment undervalued + $40,000 Buildings undervalued) ÷ 10 years = $7,000 per year.
Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2019. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows: 2019 2020 2021Net income$100,000 $120,000 $130,000 Dividends 40,000 50,000 60,000 Assume the initial value method is applied. Compute the noncontrolling interest in the net income of Demers at December 31, 2019.
$18,600. Noncontrolling Interest Share of [Net Income for 2019 ($100,000 × 20%) − Excess FV Annual Amortization* ($7,000 × 20%)] = $18,600 *Amortization = ($30,000 Equipment undervalued + $40,000 Buildings undervalued) ÷ 10 years = $7,000 per year.
Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2019. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows:Assume the partial equity method is applied Compute the noncontrolling interest in the net income of Demers at December 31, 2019.
$18,600.Noncontrolling Interest Share of (Net Income for 2019 ($100,000 × .20) - Excess FV Annual Amortization ($7,000 × .20)) = $18,600
McGuire Company acquired 90 percent of Hogan Company on January 1, 2019, for $234,000 cash. This amount is reflective of Hogan's total acquisition-date fair value. Hogan's stockholders' equity consisted of common stock of $160,000 and retained earnings of $80,000. An analysis of Hogan's net assets revealed the following: Book Value Fair ValueBuildings (10-year life)$10,000 $8,000 Equipment (4-year life) 14,000 18,000 Land 5,000 12,000 Any excess consideration transferred over fair value is attributable to an unamortized patent with a useful life of 5 years. In consolidation at January 1, 2019, what adjustment is necessary for Hogan's Buildings account?
$2,000 decrease. Building FV $8,000 − Building BV $10,000 = ($2,000) Differential
Dodd Co. acquired 75% of the common stock of Wallace Corp. for $1,800,000. The fair value of Wallace's net assets was $2,100,000, and the book value was $1,900,000. The noncontrolling interest shares of Wallace Corp. are not actively traded. What is the dollar amount of Wallace Corp.'s net assets that would be represented in a consolidated balance sheet prepared at the date of acquisition?
$2,100,000. FV of Net Assets Acquired = $2,100,000
Beatty, Inc. acquires 100% of the voting stock of Gataux Company on January 1, 2020 for $80,000, consisting of $20,000 in cash and 6,000 shares of stock. A contingent payment of $12,000 in cash will be paid on April 1, 2021 if Gataux generates cash flows from operations of $26,500 or more in the next year. Beatty estimates that there is a 30% probability that Gataux will generate at least $26,500 next year, and uses an interest rate of 4% to incorporate the time value of money. The fair value of $12,000 at 4%, using a probability-weighted approach, is $3,461. A contingent payment of $20,000, payable in stock, will be paid to the former owners of Gataux on April 1, 2021 if the market value of Beatty stock drops below $10 per share. Beatty estimates there is a 15% probability that its share price will not exceed that threshold. Using the same interest rate and probability-weighted approach, Beatty calculates the market value of the stock contingency to be $2,884. On April 1, 2021, Beatty stock closes with a market value of $8.98 per share. How many shares of stock, rounded to the next whole number, must it issue to the former owners of Gataux?
$20,000 / $8.98 per share =2228 shares
Assume the partial equity method is applied.Compute the noncontrolling interest in the net income of Demers at December 31, 2020.
$22,600.Noncontrolling Interest Share of (Net Income for 2020 ($120,000 × .20) - Excess FV Annual Amortization ($7,000 × .20)) = $22,600
LaFevor Co. acquired 70% of the common stock of Dean Corp. on August 1, 2022. For 2022, Dean reported revenues of $960,000 and expenses of $780,000, all reflected evenly throughout the year. The annual amount of amortization related to this acquisition was $21,000. In consolidation, the total amount of expenses related to Dean, and to LaFevor's acquisition of Dean, for 2022 is determined to be
$333,750. Expenses ($780,000 × 5/12 = $325,000 + Amortization ($21,000 × 5/12 = $8,750) = $333,750
Assume the initial value method is applied.How much does Pell record as Income from Demers for the year ended December 31, 2020?
$40,0002020 Dividends $50,000 × .80 = $40,000
Watkins, Inc. acquires all of the outstanding stock of Glen Corporation on January 1, 2020. At that date, Glen owns only three assets and has no liabilities: BookValueFairValueLand$40,000 $50,000 Equipment (10-year life) 80,000 75,000 Building (20-year life) 200,000 300,000 If Watkins pays $450,000 in cash for Glen, and Glen earns $50,000 in net income and pays $20,000 in dividends during 2020, what amount representing Glen would be reflected in consolidated net income for the year ended December 31, 2020?
$45,500 regardless of the internal accounting method used. Sub Income $50,000 − Amortizations ([−$5,000] ÷ 10) − ($100,000 ÷ 20) = $45,500
Green acquired 100% of Vega on January 1, 2019, by issuing 10,500 shares of its $10 par value common stock with a fair value of $95 per share. On January 1, 2019, Vega's land was undervalued by $40,000, its buildings were overvalued by $30,000, and equipment was undervalued by $80,000. The buildings have a 20-year life and the equipment has a 10-year life. $50,000 was attributed to an unrecorded trademark with a 16-year remaining life. There was no goodwill associated with this investment. Compute the December 31, 2023, consolidated land.
$450,000 + $180,000 + $40,000 = $670,000 Green Land + Vega Land + the undervalue (add) over value substract = ANSWER
Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2019. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows: 2019 2020 2021Net income$100,000 $120,000 $130,000 Dividends 40,000 50,000 60,000 Assume the partial equity method is applied. Compute Pell's Investment in Demers at December 31, 2020.
$604,000. Initial Investment$ 500,000 Demers 2019 Net Income ($100,000 × 80%)80,000 Demers 2019 Dividends ($40,000 × 80%)(32,000) Demers 2020 Net Income ($120,000 × 80%)96,000 Demers 2020 Dividends ($50,000 × 80%)(40,000) Investment in Demers, December 31, 2020$ 604,000
Scott Co. acquired 70% of Gregg Co. for $525,000 on December 31, 2019 when Gregg's book value was $580,000. The Gregg stock was not actively traded. On the date of acquisition, Gregg had equipment (with a ten-year life) that was undervalued in the financial records by $170,000. One year later, the two companies provided the selected amounts shown below. Additionally, no dividends have been paid. Scott Co.Gregg Co. BookValueBookValueFairValueCurrent assets$912,000 $430,000 $458,000 Equipment371,000 290,000 450,000 Buildings584,000 210,000 210,000 Liabilities(564,000)(238,000)(238,000)Revenues(1,320,000)(570,000) Expenses740,000 410,000 Investment incomeNot Given What amount of consolidated net income for 2020 is attributable to Scott's controlling interest?
$680,100. [Parent's Income ($1,320,000 − $740,000 = $580,000)] + [Sub's Income ($570,000 − $410,000) × 70% = $112,000] − [Excess Equipment Amortization for 2020 ($170,000 ÷ 10) × 70% = $11,900] = $680,100
McGuire Company acquired 90 percent of Hogan Company on January 1, 2019, for $234,000 cash. This amount is reflective of Hogan's total acquisition-date fair value. Hogan's stockholders' equity consisted of common stock of $160,000 and retained earnings of $80,000. An analysis of Hogan's net assets revealed the following: Book Value Fair ValueBuildings (10-year life)$10,000 $8,000 Equipment (4-year life) 14,000 18,000 Land 5,000 12,000 Any excess consideration transferred over fair value is attributable to an unamortized patent with a useful life of 5 years. In consolidation at December 31, 2019, what net adjustment is necessary for Hogan's Patent account? Multiple Choice
$8,800. Fair Value Attributed to Patent $11,000 − 2019 Amortization $2,200 = $8,800 Acquisition date FV ($234,000 ÷ 90%)=$ 260,000 Acquisition date BV (C/S $160,000 + RE $80,000)=240,000 Excess$ 20,000 Buildings ($8,000 − $10,000)=(2,000) Equipment ($18,000 − $14,000)=4,000 Land ($12,000 − $5,000)7,000 Remainder attributed to Patent$ 11,000 Life of Patent÷ 5 years Annual Amortization of Patent$ 2,200
Jordan, Inc., holds 75 percent of the outstanding stock of Paxson Corporation. Paxson currently owes Jordan $400,000 for inventory acquired over the past few months. In preparing consolidated financial statements, what amount of this debt should be eliminated?
400000 In consolidating the subsidiary's figures, all intra-entity balances must be eliminated in their entirety for external reporting purposes. Even though the subsidiary is less than fully owned, the parent nonetheless controls it.
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.
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.
Lisa Co. paid cash for all of the voting common stock of Victoria Corp. Victoria will continue to exist as a separate corporation. Entries for the consolidation of Lisa and Victoria would be recorded in
A worksheet.
What is goodwill?
An intangible asset representing the excess of consideration transferred over the collective fair values of the net identifiable assets acquired in a business combination
Which of the following is not an example of an intangible asset?
Broken Equipment
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.
Harrison, Inc. acquires 100% of the voting stock of Rhine Company on January 1, 2020 for $400,000 cash. A contingent payment of $16,500 will be paid on April 15, 2021 if Rhine generates cash flows from operations of $27,000 or more in the next year. Harrison estimates that there is a 20% probability that Rhine will generate at least $27,000 next year, and uses an interest rate of 5% to incorporate the time value of money. The fair value of $16,500 at 5%, using a probability-weighted approach, is $3,142. Assuming Rhine generates cash flow from operations of $27,200 in 2020, how will Harrison record the $16,500 payment of cash on April 15, 2021 in satisfaction of its contingent obligation?
Debit Contingent performance obligation $3,142, debit Loss from revaluation of contingent performance obligation $13,358, and Credit Cash $16,500.
Prince Company acquires Duchess, Inc. on January 1, 2019. At the date of acquisition, Duchess has long-term debt with a fair value of $1,500,000 and a carrying amount of $1,200,000. With respect to long-term debt consolidation worksheet adjustments in periods following the acquisition, which of the following is correct?
Debit Long-Term Debt and Credit Interest Expense.
Jackson Company acquires 100% of the stock of Clark Corporation on January 1, 2020, for $4,100 cash. As of that date Clark has the following trial balance: Any excess of consideration transferred over fair value of net assets acquired is considered goodwill with an indefinite life. Compute the amount of Clark's long-term liabilities that would be reported in a December 31, 2020, consolidated balance sheet.
Fair Value $1,750 + Excess Amortization ($1,900-$1,750) --> $150/3) $50 = $1,800
After allocating cost in excess of book value, which asset or liability would not be amortized over a useful life?
Goodwill.
When a subsidiary is acquired sometime after the first day of the fiscal year, which of the following statements is true?
Income from subsidiary is recognized from date of acquisition to year-end.
Which one of the following accounts would not appear in the consolidated financial statements at the end of the first fiscal period of the combination?
Investment in Subsidiary.
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.
How is the fair value allocation of an intangible asset allocated to expense when the asset has no legal, regulatory, contractual, competitive, economic, or other factors that limit its life? Multiple Choice
No amortization, but annually reviewed for impairment and adjusted accordingly.
When consolidating a subsidiary under the equity method, which of the following statements is true with regard to the subsidiary subsequent to the year of acquisition?
Only net assets that had excess fair value over book value when acquired by the parent must be amortized over their useful lives.
One company acquires another company in a combination accounted for under the acquisition method. The acquiring company decides to apply the equity method in accounting for the combination. What is one reason the acquiring company might have made this decision?
Operating results on the parent's financial records reflect consolidated totals.
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? ParentSubsidiary A)Book ValueBook Value B)Book ValueFair Value C)Fair ValueFair Value D)Fair ValueBook Value E)CostCost
Option B.
FASB ASC 805, "Business Combinations," provides principles for allocating the fair value of an acquired business. When the collective fair values of the separately identified assets acquired and liabilities assumed exceed the fair value of the consideration transferred, the difference should be
Recognized as an ordinary gain from a bargain purchase.
Which of the following results in a decrease in the investment account when applying the equity method?
Share of gross profit on intra-entity inventory sales for the current year.
Which of the following methods is not used to value a noncontrolling interest under circumstances where a control premium is applied to determine the appropriate value for such interest?
The application of a safe harbor discount rate.
Which of the following statements is false regarding multiple acquisitions of a subsidiary's existing common stock?
The book value of the subsidiary will increase.
Jax Company used the acquisition method when it acquired its investment in Saxton Company. Jax now sells some of its shares of Saxton such that neither control nor significant influence exists. Which of the following statements is true?
The difference between selling price and carrying value is recorded as a realized gain or loss.
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.
All of the following are acceptable methods to account for a majority-owned investment in subsidiary except
The fair-value method.
All of the following statements regarding the sale of subsidiary shares are true except which of the following?
The use of specific LIFO assumption is acceptable.
Alfonso Inc. acquired 100 percent of the voting shares of BelAire Company on January 1, 2020. In exchange, Alfonso paid $241,000 in cash and issued 100,000 shares of its own $1 par value common stock. On this date, Alfonso's stock had a fair value of $15 per share. The combination is a statutory merger with BelAire subsequently dissolved as a legal corporation. BelAire's assets and liabilities are assigned to a new reporting unit. The following shows fair values for the BelAire reporting unit for January 1, 2020 along with respective carrying amounts on December 31, 2021.
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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.
Prior to being united in a business combination, Atkins, Inc., and Waterson Corporation had the following stockholders' equity figures: AtkinsWaterson Common stock ($1 par value)$180,000$45,000Additional paid-in capital 90,000 20,000Retained earnings 300,000 110,000
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