#11

Question 1

Equity method or cost method for preferred stock dividends?

Answer 1

Cost method. Preferred stock has no voting rights, so accumulation of it will never get significant influence. Therefore, cost method.

Question 2

A owns more than 50% of B, and B owns more than 50% of C. Does A need to use consolidation or equity method for C?

Answer 2

Consolidation, because C is consolidated into B and B is consolidated into A.

Question 3

For business combination accounted for as an acquisition, is registration fee for equity securities insured included in the determination of net income of the combined corporation?

Answer 3

No. Registration fee for equity securities is in additional paid-in capital (stockholders’ equity)

Question 4

In business combination accounted for as an acquisition, direct cost of combination, other than registration and issuance cost, should be:

Answer 4

deducted in determining the net income of the combined corporation for the period in which the costs were incurred. Because, as you know, direct costs are expensed in the period incurred.

Question 5

Fair value of inventories is:

Answer 5

estimated selling price minus both cost of disposal and a reasonable profit allowance

Question 6

For inventories what is the difference between fair value for raw materials and fair value for finished goods

Answer 6

FV of raw materials = replacement cost

FV of finished goods = selling price - cost of disposal - reasonable profit allwance

Question 7

Goodwill

Answer 7

Excess of the purchase price over the FMV of the net assets acquired

Question 8

Consolidated stockholder’s equity is

Answer 8

stockholder’s equity + noncontrolling interest (NCI)

Question 9

Stockholder’s equity

Answer 9

Common stock + APIC + RE

Question 10

How to calculate noncontrolling interest?

Answer 10

NCI at beginning + NCI share of net income - NCI share of dividend = NCI at year end

Question 11

How to calculate retained earning?

Answer 11

RE at beginning + net income - dividend = RE at year end

Question 12

Consolidated equity consists of

Answer 12

the parent company’s stockholders’ equity + FV of NCI(if any)

Question 13

When acquisition price exceeds the fair value of the net asset, how should assets and liabilities be reported?

Answer 13

At fair value

Question 14

In consolidation, what should the parent company report for shareholder’s equity?

Answer 14

100% of a purchased subsidiary’s shareholders’ equity is eliminated. Doesn’t matter if the parent did not purchase 100% of the subsidiary. The parent company equity account becomes the consolidated equity account when the acquisition method is used. That goes for net income, RE, common stock, etc…

Question 15

When company A has a controlling interest in company B, does a dividend paid by company B affect company A’s retained earnings and NCI?

Answer 15

Does not affect retained earning of company a, because dividend paid is just moved from one company to another, so it would be eliminated in consolidation.
NCI would decrease, because NCI is calculated under the equity method, which decrease NCI, as the amount of dividend is transferred from it to the noncontrolling shareholders.

Question 16

If purchase price - FV of company is negative, what is it recorded as?

Answer 16

A gain for the company, because you paid less than what the company is worth for it.

Question 17

In the acquisition method, how would plant assets of the parents parent subsidiary be recognized?

Answer 17

Plants are recorded using historical price(book value). However, the subsidiary’s plants and equipments are valued using fair value, and 100% of the subsidiary’s fair value must be recognized.
Therefore, plant assets of the parent will be book value, while that of the subsidiaries will be fair value.

Question 18

Difference between GAAP and IFRS for goodwill acquired under acquisition method

Answer 18

GAAP recognize the whole goodwill, which is the FV of the whole subsidiary minus the whole subsidiary net asset at FV, even if the parent did not buy all the stocks.
IFRS recognize the amount of goodwill that you bought based on the percentage of stock you bought.

Question 19

What happens when investor goes from non-control to control of a subsidiary?

Answer 19

previously held equity must be adjusted to fair value. The fair value adjustment is recognized as a gain or loss by the investor in the period when he gets control of the subsidiary.

Question 20

When an investor sells shares and go from control to non-control, what happens?

Answer 20

The investor recognize the gain or loss from the sale of the stock and then remeasure the remaining NCI to fair value. Basically, stock measured at fair-value, even portions not sold.