F4 - Investments, Business Combinations, Goodwill Flashcards
A company issues $1,500,000 of par bonds at 98 on January 1, Year 1, with a maturity date of December 31, Year 30. Bond issue costs are $90,000, and the stated interest rate of the bonds is 6%. Interest is paid semiannually on January 1 and July 1. Ten years after the issue date, the entire issue was called at 102 and canceled. The company uses the straight-line method of amortization for bond discounts and issue costs, and the result of this method is not materially different from the effective interest method. The company should classify what amount as the loss on extinguishment of debt at the time the bonds are called?
A gain or loss on extinguishment of debt is the difference between the reacquisition price and the carrying amount of the debt (including any unamortized discount premium or debt issue costs). The bonds were issued for $1,470,000 ($1,500,000 × 98%), and a discount of $30,000 ($1,500,000 face amount - $1,470,000 proceeds) was recognized. Moreover, $90,000 of debt issue costs was incurred. Given straight-line amortization that is not materially different from the effective interest method, after 10 years, the balance of the discount is $20,000 [($30,000 ÷ 30) × 20]. The balance of debt issue costs is $60,000 [($90,000 ÷ 30) × 20]. Thus, on the extinguishment date, the total carrying amount of the bonds is $1,420,000 ($1,500,000 - $20,000 unamortized discount - $60,000 unamortized issue costs). The reacquisition price is $1,530,000 ($1,500,000 × 102%), so the loss on extinguishment of debt is $110,000 ($1,530,000 reacquisition price - $1,420,000 carrying amount of the bonds).
On January 2 of the current year, Peace Co. paid $310,000 to purchase 75% of the voting shares of Surge Co. Peace reported retained earnings of $80,000, and Surge reported contributed capital of $300,000 and retained earnings of $100,000. The purchase differential was attributed to depreciable assets with a remaining useful life of 10 years. Peace used the equity method in accounting for its investment in Surge. Surge reported net income of $20,000 and paid dividends of $8,000 during the current year. Peace reported income, exclusive of its income from Surge, of $30,000 and paid dividends of $15,000 during the current year. What amount will Peace report as dividends declared and paid in its current year’s consolidated statement of retained earnings?
When the financial statements of Peace and Surge are consolidated, the equity of Surge, including Surge’s retained earnings, will be eliminated.
The consolidated statement of retained earnings will include only the $15,000 dividend paid by Peace in the current year.
On 12/31/Year 1, Passey Co. acquired a 100% interest in Solomon Co. by exchanging 10,000 shares of its common stock for 100,000 shares of Solomon’s common stock. The fair market value of Passey’s common stock on December 31, Year 1, was $9 per share, and the fair value of Solomon’s was $3.50 per share.
Additional information as of December 31, Year 1, is as follows:
Solomon Co.
Book Values: Current Assets = 115,000; Plant Assets = 200,000; Liabilities = 10,000
Fair Values: Current Assets = 115,000; Plant Assets = 255,000; Liabilities = 10,000
Passey Co.
Book Value: Plant assets: 1,700,000
Fair Value: Plant assets: 1,800,000
Passey Co.’s consolidated financial statements as of December 31, Year 1, would report:
a. Gain of $270,000.
b. A deferred credit (negative goodwill) of $235,000.
c. A deferred credit (negative goodwill) of $270,000.
d. Gain of $235,000.
Net assets value of Solomon Co.= FV of total assets – Liab.
= 115000+255000-10000 = 360000
Passey Co. paid = 10000*9= 90000
The got a net value of 360000 and their cost is only 90000 that means they have a gain of 270000
During year 3, Gilman Co. purchased 5,000 shares of the 500,000 outstanding shares of Meteor Corp.’s common stock for $35,000. During year 3, Gilman received $1,800 of dividends from its investment in Meteor’s stock. The fair value of Gilman’s investment on December 31, year 3, is $32,000. Gilman has elected the fair value option for this investment. What amount of income or loss that is attributable to the Meteor stock investment should be reflected in Gilman’s earnings for year 3?
paid 35,000
FV at YE 32,000
MTM w/ a loss of (3000)
dividends of 1,800 (full amount to NI since ownership is 1%)
(3000) + 1800 income = (1200) net loss on IS
On July 1, Year 1, York Co. purchased as a held-to-maturity investment $1,000,000 of Park, Inc.’s 8% bonds for $946,000, including accrued interest of $40,000. The bonds were purchased to yield 10% interest. The bonds mature on January 1, Year 8, and pay interest annually on January 1. York uses the effective interest method of amortization. In its December 31, Year 1, balance sheet, what amount should York report as investment in bonds?
946,000 less accrued interest 40,000 = 906,000 CV to calc amortized disc from 7/1 -> 12/31 CV X semi int rate 906,000 X (10%/2) 5% =45300 int receivable 1,000,000 X (8%/2) = 40,000
45300 - 40000 = 5300 amortized amount
906000 + 5300 = 911300
PDX Corp. acquired 100% of the outstanding common stock of Sea Corp. in an acquisition transaction. The cost of the acquisition exceeded the fair value of the identifiable assets and assumed liabilities. The general guidelines for assigning amounts to the inventories acquired provide for:
a. Work in process to be valued at the estimated selling prices of finished goods, less both costs to complete and costs of disposal.
b. Raw materials to be valued at original cost.
c. Finished goods to be valued at estimated selling prices, less both costs of disposal and a reasonable profit allowance.
d. Finished goods to be valued at replacement cost.
c. Finished goods to be valued at estimated selling prices, less both costs of disposal and a reasonable profit allowance.
Jent Corp. purchased bonds at a discount of $10,000. Subsequently, Jent sold these bonds at a premium of $14,000.
During the period that Jent held this investment, amortization of the discount amounted to $2,000. What amount should Jent report as gain on the sale of bonds?
100,000 face
if bought at 10,000 discount, recorded at 90,000, then a 2,000 amortization of discount brings carrying value to 92,000
if sold at a premium then they were sold for 114,000 (face 100,000 + 14,000)
114000-92000=22,000 gain
Sayon Co. issues 200,000 shares of $5 par value common stock to acquire Trask Co. in an acquisition-business combination. The market value of Sayon’s common stock is $12. Legal and consulting fees incurred in relationship to the purchase are $110,000. Registration and issuance costs for the common stock are $35,000. What should be recorded in Sayon’s additional paid-in capital account for this business combination?
$1,545,000
$1,400,000
$1,365,000
$1,255,000
C 1365000
Inv. in Trask Co. 2,400,000
Common stock ($5 x 200,000) 1,000,000
Additional paid-in capital ($7 x 200,000) 1,400,000
Legal and consulting costs are a current expense:
Prof service expenses 110,000
Cash 110,000
Registration and issuance costs reduce Additional Paid-in Capital:
APIC 35,000
Cash 35,000
The effect on Additional Paid-in Capital is:
Stock issue $1,400,000
Registration/ issuance costs (35,000)
$1,365,000
Jane Co. owns 90% of the common stock of Dun Corp. and 100% of the common stock of Beech Corp. On December 30, Dun and Beech each declared a cash dividend of $100,000 for the current year. What is the total amount of dividends that should be reported in the December 31 consolidated financial statements of Jane and its subsidiaries, Dun and Beech?
Intercompany dividends are eliminated in consolidation. The only dividends that remain after the eliminating entries are dividends paid to noncontrolling shareholders: 10% of Dun’s dividend of $100,000, or $10,000.
All intercompany liabilities are eliminated in the consolidation process. The amounts are not included as assets or liabilities on the consolidated balance sheet.
On September 29, Year 1, Wall Co. paid $860,000 for all the issued and outstanding common stock of Hart Corp. On that date the carrying amounts of Hart’s recorded assets and liabilities were 800,000 and 180,000 respectively. Hart’s recorded assets and liabilities had fair values of 840,000 and 140,000 respectively. In Wall’s September 30, Year 1 balance sheet, what amount should be reported as goodwill?
BV 800-160 = 620
FV 840-140 = 700
Adjustment to FV to FV +80
Paid 860
860-700 = 160 GW
Penn Corp paid 300,000 for 75% of the oustanding common stock of Star Co. at that time, Star had the following condensed balance sheet: Carrying amounts Current assets 40,000 PPE net 380,000 Liabilities 200,000 Stockholders equity 220,000
The fair value of the plant and equipment was 60,000 more than its recorded carrying amount. The fair value and carrying amounts were equal for all other assets and liabilities. What amount of goodwill related to Star’s acquisition should Penn report on its consolidated balance sheet under US GAAP?
A) 20,000
B) 40,000
C) 90,000
D) 120,000
D
220
+ 60
=280
400-280=120
Computation for Noncontrolling interest (NCI) at acquisition date
Fair value of sub.
*NCI %
=
Non controlling interest
How to compute for NCI AFTER acquisition date (BASE)
Beginning NCI
+NCI share of sub net income
-NCI share of sub dividends
=Ending balance NCI
An AFS security purchased at par for $1,000,000 has current FV of $1,015,000 due to an overall decline in market IRs. Due to CF concerns, investor anticipates reduction in int pmts from issuer. PV of expected CFs is $978,000. Investor will record a:
a. unrealized loss in OCI $15,000
b. credit loss on IS of $22,000
c. credit loss on IS of $0
d. unrealized gain in OCI $15,000
Per CeCL model expected credit loss is diff b/t amortized cost $1,000,000 and PV of expected CFs $978,000.
Loss not booked on IS b/c FV is higher than cost.
FV exceeds amortized by $15,000 which is a gain in OCI
Answer: c. credit loss on IS of $0
