Test 1- Advanced 1-3
What is a statutory merger? A takeover completed within one year of the initial tender offer. A business combination in which only one company continues to exist as a legal entity. A merger approved by the Securities and Exchange Commission. An acquisition involving the purchase of both stock and assets.
A business combination in which only one company continues to exist as a legal entity.
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 Equally over 20 years. No amortization over an indefinite period time. No amortization, but annually reviewed for impairment and adjusted accordingly. Equally over 20 years with an annual impairment review. Equally over 40 years.
no amortization, but annually reviewed for impairment and adjusted accordingly
Which one of the following varies between the equity, initial value, and partial equity methods of accounting for an investment Total assets on the consolidated balance sheet. The amount of consolidated cost of goods sold. Total liabilities on the consolidated balance sheet. The amount of consolidated net income. The balance in the investment account on the parent's books.
the balance in the investment account on the parent's books
All of the following are acceptable methods to account for a majority-owned investment in subsidiary except The equity method. The partial equity method. The fair-value method. Book value method. The initial value method.
the fair value method
Under the initial value method, when accounting for an investment in a subsidiary, The investment account is adjusted to fair value at year-end. Dividends received are ignored. Income reported by the subsidiary increases the investment account. The investment account does not change from year to year. Dividends received by the subsidiary decrease the investment account.
the investment account does not change from year to year
an impairment model is used To calculate the fair value of intangible assets. To assess whether asset write-downs are appropriate for indefinite-lived assets. To determine the likelihood that the fair value of an assumed liability will increase. To calculate the amortization of indefinite-lived assets over their useful lives. To determine whether the fair value of assets should be recognized.
to assess whether asset write-downs are appropriate for indefinite-lived assets
On January 1, Puckett Company paid $1.25 million for 62,500 shares of Harrison's voting common stock, which represents a 40 percent investment. No allocation to goodwill or other specific account was made. Significant influence over Harrison is achieved by this acquisition and so Puckett applies the equity method. Harrison distributed a dividend of $2 per share during the year and reported net income of $610,000. What is the balance in the Investment in Harrison account found in Puckett's financial records as of December 31?
$1,369,000
Evan Company reports net income of $212,000 each year and declares an annual cash dividend of $100,000. The company holds net assets of $1,760,000 on January 1, 2017. On that date, Shalina purchases 40 percent of Evan's outstanding common stock for $919,000, which gives it the ability to significantly influence Evan. At the purchase date, the excess of Shalina's cost over its proportionate share of Evan's book value was assigned to goodwill. On December 31, 2019, what is the Investment in Evan Company balance (equity method) in Shalina's financial records?
1,053,400
The separate condensed balance sheets of Patrick Corporation and its wholly owned subsidiary, Sean Corporation, are as follows: BALANCE SHEETS December 31, 2017 Patrick Sean Cash $ 78,000 $ 74,000 Accounts receivable (net) 144,000 40,000 Inventories 82,000 58,000 Plant and equipment (net) 640,000 260,000 Investment in Sean 440,000 - Total assets $ 1,384,000 $ 432,000 Accounts payable 166,000 88,000 Long-term debt 100,000 28,000 Common stock ($10 par) 336,000 56,000 Additional paid-in capital 10,000 Retained earnings 782,000 250,000 Total liabilities and shareholders' equity $ 1,384,000 $ 432,000 Additional Information: On December 31, 2017, Patrick acquired 100 percent of Sean's voting stock in exchange for $440,000. At the acquisition date, the fair values of Sean's assets and liabilities equaled their carrying amounts, respectively, except that the fair value of certain items in Sean's inventory were $22,000 more than their carrying amounts. In the December 31, 2017, consolidated balance sheet of Patrick and its subsidiary, what amount of total stockholders' equity should be reported?
1,118,000
The separate condensed balance sheets of Patrick Corporation and its wholly owned subsidiary, Sean Corporation, are as follows: BALANCE SHEETS December 31, 2017 Patrick Sean Cash $ 78,000 $ 74,000 Accounts receivable (net) 144,000 40,000 Inventories 82,000 58,000 Plant and equipment (net) 640,000 260,000 Investment in Sean 440,000 - Total assets $ 1,384,000 $ 432,000 Accounts payable 166,000 88,000 Long-term debt 100,000 28,000 Common stock ($10 par) 336,000 56,000 Additional paid-in capital 10,000 Retained earnings 782,000 250,000 Total liabilities and shareholders' equity $ 1,384,000 $ 432,000 Additional Information: On December 31, 2017, Patrick acquired 100 percent of Sean's voting stock in exchange for $440,000. At the acquisition date, the fair values of Sean's assets and liabilities equaled their carrying amounts, respectively, except that the fair value of certain items in Sean's inventory were $22,000 more than their carrying amounts. In the December 31, 2017, consolidated balance sheet of Patrick and its subsidiary, what amount of total assets should be reported?
1,500,000
On May 1, Donovan Company reported the following account balances: Current assets $ 116,000 Buildings & equipment (net) 220,500 Total assets $ 336,500 Liabilities $ 62,500 Common stock 150,000 Retained earnings 124,000 Total liabilities and equities $ 336,500 On May 1, Beasley paid $441,400 in stock (fair value) for all of the assets and liabilities of Donovan, which will cease to exist as a separate entity. In connection with the merger, Beasley incurred $22,200 in accounts payable for legal and accounting fees. Beasley also agreed to pay $82,700 to the former owners of Donovan contingent on meeting certain revenue goals during the following year. Beasley estimated the present value of its probability adjusted expected payment for the contingency at $24,200. In determining its offer, Beasley noted the following: Donovan holds a building with a fair value $36,000 more than its book value. Donovan has developed unpatented technology appraised at $29,800, although is it not recorded in its financial records. Donovan has a research and development activity in process with an appraised fair value of $50,600. The project has not yet reached technological feasibility. Book values for Donovan's current assets and liabilities approximate fair values. 12. What should Beasley record as total liabilities incurred or assumed in connection with the Donovan merger?
108,900
On June 1, Cline Co. paid $892,000 cash for all of the issued and outstanding common stock of Renn Corp. The carrying amounts for Renn's assets and liabilities on June 1 follow: Cash $ 178,000 Accounts receivable 237,000 Capitalized software costs 374,000 Goodwill 110,000 Liabilities (201,000 ) Net assets $ 698,000 On June 1, Renn's accounts receivable had a fair value of $155,000. Additionally, Renn's in-process research and development was estimated to have a fair value of $235,000. All other items were stated at their fair values. On Cline's June 1 consolidated balance sheet, how much is reported for goodwill?
151,000
Hoyt Corporation agreed to the following terms in order to acquire the net assets of Brown Company on January 1, 2018: To issue 400 shares of common stock ($10 par) with a fair value of $45 per share. To assume Brown's liabilities which have a book value of $1,600 and a fair value of $1,500. On the date of acquisition, the consideration transferred for Hoyt's acquisition of Brown would be:
19,500
On July 1, TruData Company issues 10,000 shares of its common stock with a $5 par value and a $50 fair value in exchange for all of Webstat Company's outstanding voting shares. Webstat's precombination book and fair values are shown below along with book values for TruData's accounts. TruData Webstat Webstat Book Values Book Values Fair Values Revenues (1/1 to 7/1) $ (263,000) $ (138,000) Expenses (1/1 to 7/1) 144,000 94,000 Retained earnings, 1/1 (124,000) (158,000) Cash and receivables 176,000 64,000 $64,000 Inventory 164,000 144,000 180,000 Patented technology (net) 228,000 182,000 206,000 Land 416,000 206,000 256,000 Buildings and equipment (net) 114,000 74,000 74,000 Liabilities (528,000) (376,000) (342,000) Common stock (316,000) (60,000) Additional paid-in capital (11,000) (32,000) On its acquisition-date consolidated balance sheet, what amount should TruData report as retained earnings as of July 1?
243,000
On January 1, 2016, Phoenix Co. acquired 100 percent of the outstanding voting shares of Sedona Inc. for $752,000 cash. At January 1, 2016, Sedona's net assets had a total carrying amount of $526,400. Equipment (eight-year remaining life) was undervalued on Sedona's financial records by $104,000. Any remaining excess fair over book value was attributed to a customer list developed by Sedona (four-year remaining life), but not recorded on its books. Phoenix applies the equity method to account for its investment in Sedona. Each year since the acquisition, Sedona has declared a $16,000 dividend. Sedona recorded net income of $106,000 in 2016 and $118,700 in 2017. Selected account balances from the two companies' individual records were as follows: Phoenix Sedona 2018 Revenues $ 605,000 $ 375,200 2018 Expenses 417,000 268,000 2018 Income from Sedona 78,600 Retained earnings 12/31/18 321,600 236,900 What is consolidated net income for Phoenix and Sedona for 2018?
266,600
Jansen Inc. acquired all of the outstanding common stock of Merriam Co. on January 1, 2017, for $257,000. Annual amortization of $19,000 resulted from this acquisition. Jansen reported net income of $70,000 in 2017 and $50,000 in 2018 and paid $22,000 in dividends each year. Merriam reported net income of $40,000 in 2017 and $47,000 in 2018 and paid $10,000 in dividends each year. What is the Investment in Merriam Co. balance on Jansen's books as of December 31, 2018, if the equity method has been applied?
286,000
Panner, Inc., owns 35 percent of Watkins and applies the equity method. During the current year, Panner buys inventory costing $73,800 and then sells it to Watkins for $123,000. At the end of the year, Watkins still holds only $24,100 of merchandise. What amount of gross profit must Panner defer in reporting this investment using the equity method?
3,374
On January 1, 2016, Phoenix Co. acquired 100 percent of the outstanding voting shares of Sedona Inc. for $752,000 cash. At January 1, 2016, Sedona's net assets had a total carrying amount of $526,400. Equipment (eight-year remaining life) was undervalued on Sedona's financial records by $104,000. Any remaining excess fair over book value was attributed to a customer list developed by Sedona (four-year remaining life), but not recorded on its books. Phoenix applies the equity method to account for its investment in Sedona. Each year since the acquisition, Sedona has declared a $16,000 dividend. Sedona recorded net income of $106,000 in 2016 and $118,700 in 2017. Selected account balances from the two companies' individual records were as follows: Phoenix Sedona 2018 Revenues $ 605,000 $ 375,200 2018 Expenses 417,000 268,000 2018 Income from Sedona 78,600 Retained earnings 12/31/18 321,600 236,900 On its Dec 31, 2018, consolidated balance sheet, what amount should Phoenix report for Sedona's customer list?
30,400
Alex, Inc., buys 30 percent of Steinbart Company on January 1, 2017, for $690,000. The equity method of accounting is to be used. Steinbart's net assets on that date were $2.00 million. Any excess of cost over book value is attributable to a trade name with a 20-year remaining life. Steinbart immediately begins supplying inventory to Alex as follows: Year Cost to Steinbart Transfer Price Amount Held by Alex at Year-End (at Transfer Price) 2017 $166,920 $214,000 $53,500 2018 168,360 244,000 78,000 Inventory held at the end of one year by Alex is sold at the beginning of the next. Steinbart reports net income of $93,250 in 2017 and $131,950 in 2018 and declares $30,000 in dividends each year. What is the equity income in Steinbart to be reported by Alex in 2018?
31,362
On January 1, 2016, Phoenix Co. acquired 100 percent of the outstanding voting shares of Sedona Inc. for $752,000 cash. At January 1, 2016, Sedona's net assets had a total carrying amount of $526,400. Equipment (eight-year remaining life) was undervalued on Sedona's financial records by $104,000. Any remaining excess fair over book value was attributed to a customer list developed by Sedona (four-year remaining life), but not recorded on its books. Phoenix applies the equity method to account for its investment in Sedona. Each year since the acquisition, Sedona has declared a $16,000 dividend. Sedona recorded net income of $106,000 in 2016 and $118,700 in 2017. Selected account balances from the two companies' individual records were as follows: Phoenix Sedona 2018 Revenues $ 605,000 $ 375,200 2018 Expenses 417,000 268,000 2018 Income from Sedona 78,600 Retained earnings 12/31/18 321,600 236,900 What is Phoenix's consolidated retained earnings balance at Dec. 31, 2018
321,600
Prior to being united in a business combination, Atkins, Inc., and Waterson Corporation had the following stockholders' equity figures: Atkins Waterson Common stock ($1 par value) $ 240,000 $ 110,000 Additional paid-in capital 120,000 52,500 Retained earnings 355,000 123,750 Atkins issues 55,500 new shares of its common stock valued at $5 per share for all of the outstanding stock of Waterson. Immediately afterward, what are consolidated Additional Paid-In Capital and Retained Earnings, respectively?
342,000 and 355,000
On July 1, TruData Company issues 10,000 shares of its common stock with a $5 par value and a $50 fair value in exchange for all of Webstat Company's outstanding voting shares. Webstat's precombination book and fair values are shown below along with book values for TruData's accounts. TruData Webstat Webstat Book Values Book Values Fair Values Revenues (1/1 to 7/1) $ (263,000) $ (138,000) Expenses (1/1 to 7/1) 144,000 94,000 Retained earnings, 1/1 (124,000) (158,000) Cash and receivables 176,000 64,000 $64,000 Inventory 164,000 144,000 180,000 Patented technology (net) 228,000 182,000 206,000 Land 416,000 206,000 256,000 Buildings and equipment (net) 114,000 74,000 74,000 Liabilities (528,000) (376,000) (342,000) Common stock (316,000) (60,000) Additional paid-in capital (11,000) (32,000) On its acquisition-date consolidated balance sheet, what amount should TruData report as common stock?
366,000
On July 1, TruData Company issues 10,000 shares of its common stock with a $5 par value and a $50 fair value in exchange for all of Webstat Company's outstanding voting shares. Webstat's precombination book and fair values are shown below along with book values for TruData's accounts. TruData Webstat Webstat Book Values Book Values Fair Values Revenues (1/1 to 7/1) $ (263,000) $ (138,000) Expenses (1/1 to 7/1) 144,000 94,000 Retained earnings, 1/1 (124,000) (158,000) Cash and receivables 176,000 64,000 $64,000 Inventory 164,000 144,000 180,000 Patented technology (net) 228,000 182,000 206,000 Land 416,000 206,000 256,000 Buildings and equipment (net) 114,000 74,000 74,000 Liabilities (528,000) (376,000) (342,000) Common stock (316,000) (60,000) Additional paid-in capital (11,000) (32,000) On its acquisition-date consolidated balance sheet, what amount should TruData report as patented technology (net)?
434,000
Parrett Corp. acquired one hundred percent of Jones Inc. on January 1, 2016, at a price in excess of the subsidiary's fair value. On that date, Parrett's equipment (ten-year life) had a book value of $360,000 but a fair value of $480,000. Jones had equipment (ten-year life) with a book value of $240,000 and a fair value of $350,000. Parrett used the partial equity method to record its investment in Jones. On December 31, 2018, Parrett had equipment with a book value of $250,000 and a fair value of $400,000. Jones had equipment with a book value of $170,000 and a fair value of $320,000. What is the consolidated balance for the Equipment account as of December 31, 2018?
497,000
On May 1, Donovan Company reported the following account balances: Current assets $ 116,000 Buildings & equipment (net) 220,500 Total assets $ 336,500 Liabilities $ 62,500 Common stock 150,000 Retained earnings 124,000 Total liabilities and equities $ 336,500 On May 1, Beasley paid $441,400 in stock (fair value) for all of the assets and liabilities of Donovan, which will cease to exist as a separate entity. In connection with the merger, Beasley incurred $22,200 in accounts payable for legal and accounting fees. Beasley also agreed to pay $82,700 to the former owners of Donovan contingent on meeting certain revenue goals during the following year. Beasley estimated the present value of its probability adjusted expected payment for the contingency at $24,200. In determining its offer, Beasley noted the following: Donovan holds a building with a fair value $36,000 more than its book value. Donovan has developed unpatented technology appraised at $29,800, although is it not recorded in its financial records. Donovan has a research and development activity in process with an appraised fair value of $50,600. The project has not yet reached technological feasibility. Book values for Donovan's current assets and liabilities approximate fair values 13. How much should Beasley record as total assets acquired in the Donovan merger?
528,100
Franklin purchases 40 percent of Johnson Company on January 1 for $619,800. Although Franklin did not use it, this acquisition gave Franklin the ability to apply significant influence to Johnson's operating and financing policies. Johnson reports assets on that date of $1,491,000 with liabilities of $510,000. One building with a seven-year remaining life life is undervalued on Johnson's books by $196,000. Also, Johnson's book value for its trademark (10-year life) is undervalued by $372,500. During the year, Johnson reports net income of $171,000 while declaring dividends of $110,000. What is the Investment in Johnson Company balance (equity method) in Franklin's financial records as of December 31?
618,100
On July 1, TruData Company issues 10,000 shares of its common stock with a $5 par value and a $50 fair value in exchange for all of Webstat Company's outstanding voting shares. Webstat's precombination book and fair values are shown below along with book values for TruData's accounts. TruData Webstat Webstat Book Values Book Values Fair Values Revenues (1/1 to 7/1) $ (263,000) $ (138,000) Expenses (1/1 to 7/1) 144,000 94,000 Retained earnings, 1/1 (124,000) (158,000) Cash and receivables 176,000 64,000 $64,000 Inventory 164,000 144,000 180,000 Patented technology (net) 228,000 182,000 206,000 Land 416,000 206,000 256,000 Buildings and equipment (net) 114,000 74,000 74,000 Liabilities (528,000) (376,000) (342,000) Common stock (316,000) (60,000) Additional paid-in capital (11,000) (32,000) On its acquisition-date consolidated balance sheet, what amount should TruData report as goodwill?
62,000
Paar Corporation bought 100 percent of Kimmel, Inc., on January 1, 2015. On that date, Paar's equipment (10-year life) has a book value of $472,500 but a fair value of $629,500. Kimmel has equipment (10-year life) with a book value of $283,000 but a fair value of $440,000. Paar uses the equity method to record its investment in Kimmel. On December 31, 2017, Paar has equipment with a book value of $330,750 but a fair value of $530,250. Kimmel has equipment with a book value of $198,100 but a fair value of $409,100. What is the consolidated balance for the Equipment account as of December 31, 2017?
638,750
In January 2017, Domingo, Inc., acquired 20 percent of the outstanding common stock of Martes, Inc., for $823,000. This investment gave Domingo the ability to exercise significant influence over Martes, whose balance sheet on that date showed total assets of $4,467,000 with liabilities of $977,000. Any excess of cost over book value of the investment was attributed to a patent having a remaining useful life of 10 years. In 2017, Martes reported net income of $247,000. In 2018, Martes reported net income of $291,500. Dividends of $91,000 were declared in each of these two years. What is the equity method balance of Domingo's Investment in Martes, Inc., at December 31, 2018?
869,300
An acquired entity has a long-term operating lease for an office building used for central management. The terms of the lease are very favorable relative to current market rates. However, the lease prohibits subleasing or any other transfer of rights. In its financial statements, the acquiring firm should report the value assigned to the lease contract as An intangible asset under the contractual-legal criterion. An intangible asset under the separability criterion. A part of goodwill. A building.
An intangible asset under the contractual-legal criterion.
What is the appropriate accounting treatment for the value assigned to in-process research and development acquired in a business combination? Expense until future economic benefits become certain and then capitalize as an asset. Expense upon acquisition. Expense if there is no alternative use for the assets used in the research and development and technological feasibility has yet to be reached. Capitalize as an asset.
Capitalize as an asset
According to the FASB ASC regarding the testing procedures for Goodwill Impairment, the proper procedure for conducting impairment testing is: Goodwill recognized in consolidation may be amortized uniformly and only tested if the amortization method originally chosen is changed. Goodwill recognized in consolidation must only be impairment tested prior to disposal of the consolidated unit to eliminate the impairment of goodwill from the gain or loss on the sale of that specific entity. Goodwill recognized in consolidation may be impairment tested in a two-step approach, first by qualitative assessment of the possibility of impairment of the unit fair value relative to the book value, and then quantitative assessments as to how much impairment, if any, occurred for disclosure. Goodwill recognized in consolidation may be impairment tested in a two-step approach, first by qualitative assessment of the possibility of impairment of the unit fair value relative to the book value, and then quantitative assessments as to how much impairment, if any, occurred for asset write-down. Goodwill recognized in consolidation may be impairment tested in a two-step approach, first by quantitative assessment of the possible impairment of the fair value of the unit relative to the book value, and then a qualitative assessment as to why the impairment, if any, occurred for disclosure.
Goodwill recognized in consolidation may be impairment tested in a two-step approach, first by qualitative assessment of the possibility of impairment of the unit fair value relative to the book value, and then quantitative assessments as to how much impairment, if any, occurred for asset write-down.
Which of the following is the best theoretical justification for consolidated financial statements? In form and substance the companies are separate. In form and substance the companies are one entity. In form the companies are one entity; in substance they are separate. In form the companies are separate; in substance they are one entity.
In form the companies are separate; in substance they are one entity
Which of the following internal record-keeping methods can a parent choose to account for a subsidiary acquired in a business combination Initial value or book value. Initial value, equity, or book value. Initial value, lower-of-cost-or-market-value, or partial equity. Initial value, equity, or partial equity. Initial value, lower-of-cost-or-market-value, or equity.
Initial value, equity, or partial equity
Racer Corp. acquired all of the common stock of Tangiers Co. in 2016. Tangiers maintained its incorporation. Which of Racer's account balances would vary between the equity method and the initial value method? Common Stock, Goodwill, and Investment in Tangiers Co. Expenses, Investment in Tangiers Co., and Equity in Subsidiary Earnings. Goodwill, Investment in Tangiers Co., and Retained Earnings. Investment in Tangiers Co., Equity in Subsidiary Earnings, and Retained Earnings. Expenses, Goodwill, and Investment in Tangiers Co.
Investment in Tangiers Co, Equity in Subsidiary Earnings, and Retained Earnings
Which of the following does not represent a primary motivation for business combinations? Cost savings can be achieved through elimination of duplicate facilities and staff. Larger firms are less likely to fail. Synergies may be available through quick entry for new and existing products into markets.
Larger firms are less likely to fail
On January 1, 2018, Jay Company acquired all the outstanding ownership shares of Zee Company. In assessing Zee's acquisition-date fair values, Jay concluded that the carrying value of Zee's long-term debt (8-year remaining life) was less than its fair value by $15,000. At December 31, 2018, Zee Company's accounts show interest expense of $13,800 and long-term debt of $300,000. What amounts of interest expense and long-term debt should appear on the December 31, 2018, consolidated financial statements of Jay and its subsidiary Zee? Interest expense Long-term debt a. $15,675 $315,000 b. $15,675 $313,125 c. $11,925 $315,000 d. $11,925 $313,125
Option D
On January 3, 2018, Matteson Corporation acquired 40 percent of the outstanding common stock of O'Toole Company for $1,379,000. This acquisition gave Matteson the ability to exercise significant influence over the investee. The book value of the acquired shares was $863,000. Any excess cost over the underlying book value was assigned to a copyright that was undervalued on its balance sheet. This copyright has a remaining useful life of 10 years. For the year ended December 31, 2018, O'Toole reported net income of $353,000 and declared cash dividends of $35,000. At December 31, 2018, what should Matteson report as its investment in O'Toole under the equity method?
Purchase price $ 1,379,000 Basic 2018 equity accrual ($353,000 × 40%) 141,200 Amortization of copyright: Excess payment ($1,379,000 − $863,000 = $516,000) to copyright allocated over 10 year remaining life (51,600) Dividends (35,000 × 40%) (14,000) Investment account balance at year end $ 1,454,600
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: Treated as negative goodwill to be amortized over the period benefited, not to exceed 40 years. Treated as goodwill and tested for impairment on an annual basis. Recognized as an ordinary gain from a bargain purchase. Applied pro rata to reduce, but not below zero, the amounts initially assigned to specific non current assets of the acquired firm.
Recognized as an ordinary gain from a bargain purchase
According to the acquisition method of accounting for business combinations, costs paid to attorneys and accountants for services in arranging a merger should be Capitalized as part of the overall fair value acquired in the merger. Written off over a five-year maximum useful life. Included in recognized goodwill. Recorded as an expense in the period the merger takes place.
Recorded as an expense in the period the merger takes place
When negotiating a business acquisition, buyers sometimes agree to pay extra amounts to sellers in the future if performance metrics are achieved over specified time horizons. How should buyers account for such contingent consideration in recording an acquisition? The fair value of the contingent consideration is included in the overall fair value of the consideration transferred, and a liability or additional owners' equity is recognized. The fair value of the contingent consideration is recorded as a reduction of the otherwise determinable fair value of the acquired firm. The amount ultimately paid under the contingent consideration agreement is added to goodwill when and if the performance metrics are met. The fair value of the contingent consideration is expense immediately at acquisition date.
The fair value of the contingent consideration is included in the overall fair value of the consideration transferred, and a liability or additional owners' equity is recognized.
Dosmann, Inc., bought all outstanding shares of Lizzi Corporation on January 1, 2016, for $782,000 in cash. This portion of the consideration transferred results in a fair-value allocation of $37,500 to equipment and goodwill of $116,700. At the acquisition date, Dosmann also agrees to pay Lizzi's previous owners an additional $177,000 on January 1, 2018, if Lizzi earns a 10 percent return on the fair value of its assets in 2016 and 2017. Lizzi's profits exceed this threshold in both years. Which of the following is true?
The fair value of the expected contingent payment increases goodwill at the acquisition date.
An acquired firm's financial records sometimes show goodwill from previous business combinations. How does a parent company account for the preexisting goodwill of its newly acquired subsidiary? The parent includes the preexisting goodwill as an identified intangible asset acquired. The parent tests the preexisting goodwill for impairment before recording the goodwill as part of the acquisition. The parent ignores preexisting subsidiary goodwill and allocates the subsidiary's fair value among the separately identifiable assets acquired and liabilities assumed. Preexisting goodwill is excluded from the identifiable assets acquired unless the subsidiary can demonstrate its continuing value.
The parent ignores preexisting subsidiary goodwill and allocates the subsidiary's fair value among the separately identifiable assets acquired and liabilities assumed.
How does the partial equity method differ from equity method? In the total liabilities reported on the consolidated balance sheet. In the total assets reported on the consolidated balance sheet. Under the partial equity method, the balance in the investment account is not decreased by amortization on allocations made in the acquisition of the subsidiary. Under the partial equity method, subsidiary income does not increase the balance in the parent's investment account. In the treatment of dividends.
Under the partial equity method, the balance in the investment account is not decreased by amortization on allocations made in the acquisition of the subsidiary
When does gain recognition accompany a business combination? When the amount of a bargain purchase exceeds the value of the applicable non-current assets (other than certain exceptions) held by the acquired company. In an acquisition when the value of all assets and liabilities cannot be determined. When a bargain purchase occurs. In a combination created in the middle of a fiscal year.
When a bargain purchase occurs
On January 1, 2018, Fisher Corporation paid $2,427,000 for 31 percent of the outstanding voting stock of Steel, Inc., and appropriately applies the equity method for its investment. Any excess of cost over Steel's book value was attributed to goodwill. During 2018, Steel reports $808,000 in net income and a $1,030,000 other comprehensive income loss. Steel also declares and pays $23,000 in dividends. What amount should Fisher report as its Investment in Steel on its December 31, 2018, balance sheet? What amount should Fisher report as Equity in Earnings of Steel on its 2018 income statement?
a. Purchase price $ 2,427,000 Equity income accrual ($808,000 × 31%) 250,480 Other comprehensive loss accrual ($1,030,000 × 31%) (319,300) Dividends (23,000 × 31%) (7,130) Investment in Steel at December 31, 2018 $ 2,351,050 b. Equity income of Steel = $250,480 (does not include OCI share which is reported separately).
Under the partial equity method of accounting for an investment The investment account remains at initial value. Dividends received are recorded as revenue. Amortization of the excess of fair value allocations over book value is ignored in regard to the investment account. The allocations for excess fair value allocations over book value of net assets at date of acquisition are applied over their useful lives to reduce the investment account. Dividends received increase the investment account.
amortization of the excess of fair value allocations over book value is ignored in regards to the investment account
Which of the following will result in the recognition of an impairment loss on goodwill Goodwill amortization is to be recognized annually on a systematic and rational basis. Both the fair value of a reporting unit and its associated implied goodwill fall below their respective carrying values. The entity is investigated by the SEC and its reputation has been severely damaged. The fair value of the entity declines significantly. The fair value of a reporting unit falls below the original consideration transferred for the acquisition.
both the fair value of a reporting unit and its associated implied goodwill fall below their respective carrying values
Which of the following is NOT an example of an intangible asset? Broken equipment. Trademark. Database. Customer list. Lease agreement.
broken equipment
According to GAAP regarding amortization of goodwill, which of the following statements is true Goodwill recognized in consolidation must be amortized over 40 years. Goodwill recognized in consolidation must be expensed in the period of acquisition. Goodwill recognized in consolidation must be amortized over 20 years. Goodwill recognized in consolidation will not be amortized but subject to an annual test for impairment. Goodwill recognized in consolidation can never be written off.
goodwill recognized in consolidation will not be amortized but subject to an annual test for impairment
Under the equity method of accounting for an investment The investment account remains at initial value. Goodwill is amortized over 20 years. Dividends received are recorded as revenue. Income reported by the subsidiary increases the investment account. Dividends received increase the investment account.
income reported by the subsidiary increases the investment account
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. Common Stock. Equipment. Goodwill. Additional Paid-In Capital.
investment in subsidiary
Under the partial equity method, the parent recognizes income when: Dividends are declared by the investee. The related expense has been incurred. Dividends are received from the investee. It is earned by the subsidiary. The related contract is signed by the subsidiary.
it is earned by the subsidiary
Private companies, with respect to goodwill May elect to amortize it over a period of 15 years. May treat goodwill as a definite lived intangible asset with a 10-year useful life. May amortize goodwill if the value of the company does not exceed $10 million. Must amortize it over a 12-year period. Must treat it as an intangible asset with an indefinite life.
may treat goodwill as a definite lived intangible asset with a 10-year useful life
