Exam 1 Flashcards
as companies grow in size and respond to their unique business environment, they often develop complex organizational and ownership structures
1
2
a transfer of product to a subsidiary does not constitute a sale for income purposes and as such would not increase profit for the parent
3
when a merger occurs, all the assets and liabilities are transferred to the purchasing company and any excess of the purchase price over the fair value of the net assets its recorded as goodwill on the purchaser’s books
4
in an internal expansion, in which the existing company creates a new subsidiary, the assets and liabilities are recorded at the carrying values of the original company
5
this is the proper impairment test required under US GAAP according to FASB 142/ASC 350
2-1
goodwill = the excess sum of the consideration given over the sum of the fair value of identifiable assets less liabilities
2-2
Costs of issuing equity securities used to acquire the acquire are treated in the same manner as stock
issue costs are normally treated, as a reduction in the paid-in capital associated with the securities” A
reduction to the paid-in capital account results in a reduction in the fair value of the securities issued.
2-3
When a new company is acquired, the assets and liabilities are recorded at fair value
2-4
this combination would result in a bargain purchase
2-5
$875,000 – $800,000 = $75,000. Total consideration given – FV of net assets = Goodwill
2/1 1
Cash dividends received will never cause an increase in the investment account under either method.
2/1 2
Because the ownership in Amal Corporation is less than 20%, the investment should be carried at fair
value. Accordingly, the $1,500 dividend received from Amal is recorded as dividend revenue.
2/1 3
Under the equity method, net income increases the investment account while dividends decrease it.
Because net income was greater than the dividends declared, this results in a net increase in the
investment account. The problem information indicated that fair value of the stock was unchanged during
the year. Thus in this problem, the balance at year-end would be lower if the investment was carried at
fair value than it would be under the equity method.
2/1 4
Under the equity method the company records a share of the affiliate net income as income for the
company. This increases the net income of the company which increases earnings per share.
2/2 1
Equity method reporting is used when an investor gains significant influence over the operating and
financing decisions of the investee. Typically, this is satisfied by maintaining 20% or more of the voting
stock, but can also be obtained by other contractual obligations or circumstances.
2/2 2
Under the equity method, net income from the investee causes an increase to the investment, while
dividends declared by the investee causes a reduction.
2/3 1
$250,000 + ($100,000 x 0.30) – ($10,000 x 0.30) = $277,000
