Business Combinations - CPA Financial Accounting and Reporting (FAR)
Card 1 of 96
On January 1, Year 1, Parent Company buys 15% of Son Company for $300,000. Parent has the ability to assert significant influence over Son and does not elect the fair value method. During Year 1, Son reported net income of $160,000 and paid cash dividends of $25,000. What is the book value of Parent's investment in Son at the end of Year 1?
On January 1, Year 1, Parent Company buys 15% of Son Company for $300,000. Parent has the ability to assert significant influence over Son and does not elect the fair value method. During Year 1, Son reported net income of $160,000 and paid cash dividends of $25,000. What is the book value of Parent's investment in Son at the end of Year 1?
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Parent must use the equity method to account for its investment in Son because it has the ability to exert significant influence over Son. Under the equity method, the balance in the investment account at the end of the year will be the beginning balance of $300K (equal to cost) + Parent's portion of Son's net income equal to $24K ($160K x 15% ownership) - Parent's portion of dividends paid of $3,750 ($25K x 15% ownership).
Parent must use the equity method to account for its investment in Son because it has the ability to exert significant influence over Son. Under the equity method, the balance in the investment account at the end of the year will be the beginning balance of $300K (equal to cost) + Parent's portion of Son's net income equal to $24K ($160K x 15% ownership) - Parent's portion of dividends paid of $3,750 ($25K x 15% ownership).
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Greg Company owns 75% of George Company's common stock. During the 3rd quarter of the current year, George sold inventory to Greg for $100,000. At the end of the current year, half of this purchase remains in Greg's inventory. For the current year, Greg's gross profit margin was 25% and George's gross profit margin was 40%. How much unrealized profit should be eliminated from ending inventory at year-end?
Greg Company owns 75% of George Company's common stock. During the 3rd quarter of the current year, George sold inventory to Greg for $100,000. At the end of the current year, half of this purchase remains in Greg's inventory. For the current year, Greg's gross profit margin was 25% and George's gross profit margin was 40%. How much unrealized profit should be eliminated from ending inventory at year-end?
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George must eliminate any gross profit recognized on sold inventory that still remains in Greg's possession. Thus the elimination would be calculated as $100K x 50% remaining in inventory x 40% GP margin.
George must eliminate any gross profit recognized on sold inventory that still remains in Greg's possession. Thus the elimination would be calculated as $100K x 50% remaining in inventory x 40% GP margin.
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Which of the following, if received from an investee, will effect income reported by an investor using the equity method?
Which of the following, if received from an investee, will effect income reported by an investor using the equity method?
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Under the equity method, dividends are not reported as income. Even a cash dividend would reduce the investment account rather than increasing income.
Under the equity method, dividends are not reported as income. Even a cash dividend would reduce the investment account rather than increasing income.
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ABC Company uses the equity method to account for its investment in DEF Co common stock. How should ABC record a 3% stock dividend received from DEF?
ABC Company uses the equity method to account for its investment in DEF Co common stock. How should ABC record a 3% stock dividend received from DEF?
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ABC should record the stock dividend received from DEF with a memorandum entry that reduces the unit cost of all DEF stock owned.
ABC should record the stock dividend received from DEF with a memorandum entry that reduces the unit cost of all DEF stock owned.
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ABC Inc is currently using the equity method to account for its 25% investment in DEF Inc. In the acquisition last year of DEF stock, ABC calculated $750,000 of goodwill. The correct accounting for this goodwill during the current year is:
ABC Inc is currently using the equity method to account for its 25% investment in DEF Inc. In the acquisition last year of DEF stock, ABC calculated $750,000 of goodwill. The correct accounting for this goodwill during the current year is:
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Any goodwill created in an investment accounted for under the equity method is ignored. It is neither amortized nor tested for impairment. The entire investment is subject to the impairment test.
Any goodwill created in an investment accounted for under the equity method is ignored. It is neither amortized nor tested for impairment. The entire investment is subject to the impairment test.
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Gerald Company purchased 30% of Randy Company's outstanding nonvoting preferred stock. How should this investment be recorded?
Gerald Company purchased 30% of Randy Company's outstanding nonvoting preferred stock. How should this investment be recorded?
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There is not significant influence in this situation so the fair value method is utilized. If there was more than 50% ownership, consolidation would be used and the equity method would only be used if there is significant influence.
There is not significant influence in this situation so the fair value method is utilized. If there was more than 50% ownership, consolidation would be used and the equity method would only be used if there is significant influence.
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Carmen, Inc purchased 15% of Loman's 60,000 outstanding shares of common stock on January 1, Year 2, for $80,000. On December 31, Year 2, Carmen purchased an additional 12,000 shares of common stock for $150,000. Loman reported $75,000 in earnings for Year 2. There was no goodwill as a result of either transaction, and Loman didn't issue any additional shares of stock in Year 2. There was no unrealized holding gain or loss reported in other comprehensive income for this investment. What amount should Carmen report in its investment account at the end of Year 2?
Carmen, Inc purchased 15% of Loman's 60,000 outstanding shares of common stock on January 1, Year 2, for $80,000. On December 31, Year 2, Carmen purchased an additional 12,000 shares of common stock for $150,000. Loman reported $75,000 in earnings for Year 2. There was no goodwill as a result of either transaction, and Loman didn't issue any additional shares of stock in Year 2. There was no unrealized holding gain or loss reported in other comprehensive income for this investment. What amount should Carmen report in its investment account at the end of Year 2?
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Carmen will use the cost method to account for this investment in Year 1, meaning that the ending balance in the investment account will just be the cost of the stock purchases ($80K + $150K). Because the second purchase brought Carmen's ownership percentage up from 15% to 35%, they will use the equity method beginning in Year 3, but Year 2 will still be accounted for using the cost method.
Carmen will use the cost method to account for this investment in Year 1, meaning that the ending balance in the investment account will just be the cost of the stock purchases ($80K + $150K). Because the second purchase brought Carmen's ownership percentage up from 15% to 35%, they will use the equity method beginning in Year 3, but Year 2 will still be accounted for using the cost method.
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Which of the following is not true regarding the cost method for investments?
Which of the following is not true regarding the cost method for investments?
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If the investor has the ability to exercise significant influence over an investee, it should account for its investment using the equity method, regardless of the percentage of ownership.
If the investor has the ability to exercise significant influence over an investee, it should account for its investment using the equity method, regardless of the percentage of ownership.
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The Bowman Company purchases 10,000 shares of Dalton Company's 300,000 outstanding shares at January 1, Year 2, for $18.34 per share plus a commission of $640. During Year 2, Dalton pays dividends of $2 per share. How much will Bowman report as its investment in Dalton and as dividend income in Year 2?
The Bowman Company purchases 10,000 shares of Dalton Company's 300,000 outstanding shares at January 1, Year 2, for $18.34 per share plus a commission of $640. During Year 2, Dalton pays dividends of $2 per share. How much will Bowman report as its investment in Dalton and as dividend income in Year 2?
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Bowman's investment will be accounted for at cost ($18.34 per share x 10K shares + commission of $640). Under the cost method, they will recognize dividend income of $2 per share x 10K shares.
Bowman's investment will be accounted for at cost ($18.34 per share x 10K shares + commission of $640). Under the cost method, they will recognize dividend income of $2 per share x 10K shares.
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The valuation of goodwill is a calculation in a business calculation:
The valuation of goodwill is a calculation in a business calculation:
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The amount of goodwill recorded on the balance sheet by an acquiring firm for a business combination represents the excess of the price paid over the fair value of the identifiable net assets acquired.
The amount of goodwill recorded on the balance sheet by an acquiring firm for a business combination represents the excess of the price paid over the fair value of the identifiable net assets acquired.
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A company has a 24% investment in another firm that it accounts for using the equity method. Which of the following disclosures should be included in the company's annual financial statements?
A company has a 24% investment in another firm that it accounts for using the equity method. Which of the following disclosures should be included in the company's annual financial statements?
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A company owning between 20-50% in another firm in which the investment is accounted for using the equity method is considered as having significant influence over the company and is required to disclose the company's accounting policy for the investment.
A company owning between 20-50% in another firm in which the investment is accounted for using the equity method is considered as having significant influence over the company and is required to disclose the company's accounting policy for the investment.
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Of the following values, which should be disclosed for the purposes of reporting financial instruments such as debt or equity securities?
Of the following values, which should be disclosed for the purposes of reporting financial instruments such as debt or equity securities?
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Both of these values must be reported for a company that holds financial instruments otherwise users of the statements would not be able to see gain or losses that the company incurs.
Both of these values must be reported for a company that holds financial instruments otherwise users of the statements would not be able to see gain or losses that the company incurs.
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Carmen, Inc purchased 15% of Loman's 60,000 outstanding shares of common stock on January 1, Year 2, for $80,000. On December 31, Year 2, Carmen purchased an additional 12,000 shares of common stock for $150,000. Loman reported $75,000 in earnings for Year 2. There was no goodwill as a result of either transaction, and Loman didn't issue any additional shares of stock in Year 2. There was no unrealized holding gain or loss reported in other comprehensive income for this investment. What amount should Carmen report in its investment account at the end of Year 2?
Carmen, Inc purchased 15% of Loman's 60,000 outstanding shares of common stock on January 1, Year 2, for $80,000. On December 31, Year 2, Carmen purchased an additional 12,000 shares of common stock for $150,000. Loman reported $75,000 in earnings for Year 2. There was no goodwill as a result of either transaction, and Loman didn't issue any additional shares of stock in Year 2. There was no unrealized holding gain or loss reported in other comprehensive income for this investment. What amount should Carmen report in its investment account at the end of Year 2?
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Carmen will use the cost method to account for this investment in Year 1, meaning that the ending balance in the investment account will just be the cost of the stock purchases ($80K + $150K). Because the second purchase brought Carmen's ownership percentage up from 15% to 35%, they will use the equity method beginning in Year 3, but Year 2 will still be accounted for using the cost method.
Carmen will use the cost method to account for this investment in Year 1, meaning that the ending balance in the investment account will just be the cost of the stock purchases ($80K + $150K). Because the second purchase brought Carmen's ownership percentage up from 15% to 35%, they will use the equity method beginning in Year 3, but Year 2 will still be accounted for using the cost method.
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Which of the following is not true regarding the cost method for investments?
Which of the following is not true regarding the cost method for investments?
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If the investor has the ability to exercise significant influence over an investee, it should account for its investment using the equity method, regardless of the percentage of ownership.
If the investor has the ability to exercise significant influence over an investee, it should account for its investment using the equity method, regardless of the percentage of ownership.
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The Bowman Company purchases 10,000 shares of Dalton Company's 300,000 outstanding shares at January 1, Year 2, for $18.34 per share plus a commission of $640. During Year 2, Dalton pays dividends of $2 per share. How much will Bowman report as its investment in Dalton and as dividend income in Year 2?
The Bowman Company purchases 10,000 shares of Dalton Company's 300,000 outstanding shares at January 1, Year 2, for $18.34 per share plus a commission of $640. During Year 2, Dalton pays dividends of $2 per share. How much will Bowman report as its investment in Dalton and as dividend income in Year 2?
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Bowman's investment will be accounted for at cost ($18.34 per share x 10K shares + commission of $640). Under the cost method, they will recognize dividend income of $2 per share x 10K shares.
Bowman's investment will be accounted for at cost ($18.34 per share x 10K shares + commission of $640). Under the cost method, they will recognize dividend income of $2 per share x 10K shares.
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The valuation of goodwill is a calculation in a business calculation:
The valuation of goodwill is a calculation in a business calculation:
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The amount of goodwill recorded on the balance sheet by an acquiring firm for a business combination represents the excess of the price paid over the fair value of the identifiable net assets acquired.
The amount of goodwill recorded on the balance sheet by an acquiring firm for a business combination represents the excess of the price paid over the fair value of the identifiable net assets acquired.
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A company has a 24% investment in another firm that it accounts for using the equity method. Which of the following disclosures should be included in the company's annual financial statements?
A company has a 24% investment in another firm that it accounts for using the equity method. Which of the following disclosures should be included in the company's annual financial statements?
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A company owning between 20-50% in another firm in which the investment is accounted for using the equity method is considered as having significant influence over the company and is required to disclose the company's accounting policy for the investment.
A company owning between 20-50% in another firm in which the investment is accounted for using the equity method is considered as having significant influence over the company and is required to disclose the company's accounting policy for the investment.
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Of the following values, which should be disclosed for the purposes of reporting financial instruments such as debt or equity securities?
Of the following values, which should be disclosed for the purposes of reporting financial instruments such as debt or equity securities?
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Both of these values must be reported for a company that holds financial instruments otherwise users of the statements would not be able to see gain or losses that the company incurs.
Both of these values must be reported for a company that holds financial instruments otherwise users of the statements would not be able to see gain or losses that the company incurs.
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Lion Company pays $10 million for all outstanding shares of Tiger Company. On the date of the purchase, Tiger company has net identifiable assets with a book value of $8 million and a fair value of $8.5 million. Which of the following statements is true?
Lion Company pays $10 million for all outstanding shares of Tiger Company. On the date of the purchase, Tiger company has net identifiable assets with a book value of $8 million and a fair value of $8.5 million. Which of the following statements is true?
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Goodwill will be recorded for the difference between the fair value of assets received in the purchase ($8.5M) and the fair value of consideration paid ($10M). Under GAAP, goodwill is not amortized but is tested annually for impairment.
Goodwill will be recorded for the difference between the fair value of assets received in the purchase ($8.5M) and the fair value of consideration paid ($10M). Under GAAP, goodwill is not amortized but is tested annually for impairment.
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Herring Company buys 100% of the outstanding shares of Catfish Company during Year 1. On a consolidated balance sheet produced immediately after the sale, goodwill of $250,000 is reported. How was this goodwill determined?
Herring Company buys 100% of the outstanding shares of Catfish Company during Year 1. On a consolidated balance sheet produced immediately after the sale, goodwill of $250,000 is reported. How was this goodwill determined?
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Goodwill will be recorded for the difference between the fair value of assets received in the purchase and the fair value of consideration paid in the purchase.
Goodwill will be recorded for the difference between the fair value of assets received in the purchase and the fair value of consideration paid in the purchase.
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