FAR 9 Flashcards
On July 1, Dill, Inc. exchanged 10,000 shares of its common stock for all 20,000 shares of Ledo, Inc.’s outstanding common stock. Dill’s stock is closely held and seldom traded; it has a par value of $10 per share and a book value of $12 per share. Ledo’s stock is traded in an active market and has a par value of $5 per share, a book value of $8 per share, and a market price of $11 per share. Which one of the following amounts is most likely the appropriate value of Dill’s investment in Ledo?
Stock issued in a business combination should be measured at fair value. In some cases in which equities are exchanged, the fair value of the acquiree’s stock may be a more reliable measure of the value of the transaction than can be determined for the acquirer’s stock. In this question, that is the case. Since Dill’s stock is closely held and seldom traded, it is less likely to be the basis for determining fair value than is Ledo’s stock, which is traded in an active market. Therefore, the most likely value for the transaction would be the 20,000 shares of Ledo’s stock that were obtained multiplied by the $11 market price of those shares, or 20,000 shares x $11 = $220,000.
Which one of the following assets recognized in a business combination will require that the amount recognized be amortized over future periods?
A reacquired right is a right granted by an acquirer to the acquiree prior to a business combination that is reacquired when the acquirer gains control of the acquiree or the asset in a business combination. For example, the acquiree may have acquired the right to use the acquirer’s trade name as part of a franchise agreement. A reacquired right is an intangible asset that is amortized by the acquirer over the remaining contractual period of the contract that grants the right.
Key Corp. issued 1,000 shares of its nonvoting preferred stock for all of Lev Corp.’s outstanding common stock. On the date of the transaction, Key’s nonvoting preferred stock had a market value of $100 per share, and Lev’s tangible net assets had a book value of $60,000. In addition, Key issued 100 shares of its nonvoting preferred stock to an individual as a finder’s fee for arranging the transaction. As a result of this business combination capital transaction, Key’s total net assets would increase by:
Net assets would increase by $100,000 as a result of Key issuing 1,000 shares of preferred stock with a market value of $100 per share (1,000 shares x $100 = $100,000). The $10,000 finder’s fee (100 shares x $100 per share = $10,000) would be expensed in the period incurred, not capitalized as part of the cost of the combination. Thus, net assets would increase by $100,000.
Plant Company acquired controlling interest in Seed Company in a legal acquisition. Which one of the following could not be part of the entry to record the acquisition?
The entry that Plant will make to record its legal acquisition of Seed cannot include a debit to Goodwill. The entry Plant makes will debit (only) the Investment account and credit whatever form(s) of consideration is given (e.g., Cash, Bonds Payable, Common Stock, etc.). Goodwill cannot be debited at the time of the acquisition, though it may be recognized at the time of consolidation.
In which one of the following cases is the subsidiary most likely to be reported as an unconsolidated subsidiary?
When a subsidiary is in bankruptcy, it is under the control of the bankruptcy court and, therefore, not under the control of the parent. When a parent cannot exercise financial and/or operating control of a subsidiary, the subsidiary would not be consolidated, but would be reported as an unconsolidated subsidiary by the parent.
Under IFRS which of the following would not be recognized as part of a business combination.
Under IFRS, contingent assets are not recognized. Under U.S. GAAP, contingent assets are recognized if the item meets the criteria of the definition of an asset.
Which one of the following kinds of eliminations, if any, will be required in every consolidating process?
An intercompany investment elimination will be required in every consolidating process (to eliminate the parent’s investment against the subsidiary’s shareholders’ equity). Intercompany receivables/payables and intercompany revenues/expenses eliminations will not be required in every consolidating process. Those kinds of eliminations will be required only if the affiliated companies have engaged in intercompany transactions that resulted in such balances.
Under which of the following methods of carrying a subsidiary on its books, if any, will the carrying value of the investment normally change following a combination?
If the parent uses the equity method to carry on its books the investment in a subsidiary, the carrying value of the investment will change as the equity of the subsidiary changes. However, if the parent uses the cost method, the carrying value on its books normally will not change.
On October 1, 2008, Potato Company acquired 100% of the voting stock of Spud Company in a legal acquisition. Potato chose to account for its investment in Spud on its books using the cost method. Spud had the following incomes and dividends for the periods shown:
10/1 - 12/31/08 1/1 - 12/31/09
Net Income $3,000 $15,000
Dividends Declared/Paid 1,000 3,000
In its December 31, 2009, consolidating process, which one of the following is the amount of the reciprocity entry Potato will make on the consolidating worksheet?
The purpose of the reciprocity is to bring the investment account (on the worksheet) in balance with the subsidiary’s retained earnings as of the beginning of the period being consolidated. Therefore, only the undistributed income of the subsidiary since the business combination up to the beginning of the period being consolidated (January 1, 2009) will be the reciprocity entry at the end of 2009. The undistributed income from October 1 to December 31, 2008 (the beginning of 2009) is net income (+$3,000) less dividends declared and paid (-$1,000), or $2,000.
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?
This is the amount ($15,000) that Peace will report as dividends in its consolidated statement of retained earnings. Only Peace’s (the parent’s) dividends paid of $15,000 are shown on the Peace/Surge consolidated statement of retained earnings. The dividend paid by Surge to Peace ($8,000 x .75 = $6,000) will not show on the consolidated statement of retained earnings, because it will be eliminated as intercompany dividend (you can’t pay a dividend to yourself!). The balance of Surge’s dividend ($8,000 x .25 = $2,000) goes to the 25% minority shareholders in Surge and reduces their claim to Surge’s retained earnings, not Peace’s consolidated retained earnings.
Assume that in acquiring a subsidiary, the parent determined that several depreciable assets had a fair value greater than book value. If the parent accounts for its investment in the subsidiary using the equity method, what effect will the amortization of the excess fair value over the book value of the subsidiary’s assets have on the following parent’s accounts?
When the fair value of a subsidiary’s assets is greater than book value, it is as though the parent paid more for the assets than the subsidiary paid for those assets. Using the equity method of accounting for the investment, the parent must depreciate the excess of fair value over book value. That equity entry would be: DR: Equity Revenue - to reduce it by the amount of depreciation on the excess of fair value over book value, and CR: Investment in Subsidiary - to offset a portion of the net income (or increase the amount of net loss) recognized from the subsidiary. Thus, both accounts would be decreased.
On January 1, 20x6, Ritt Corp. purchased 80% of Shaw Corp.’s $10 par common stock for $975,000, which included a control premium. On this date, the fair value of the noncontrolling interest was $200,000, giving Shaw a full fair value of $1,175,000. On the acquisition date the carrying amount of Shaw’s net assets was $1,000,000. The fair values of Shaw’s identifiable assets and liabilities were the same as their carrying amounts except for plant assets (net), which were $100,000 in excess of the carrying amount. Those plant assets had a 10-year remaining life, depreciated on a straight-line basis. Shaw had a net income of $190,000 and paid cash dividends totaling $125,000. Which one of the following is the amount of noncontrolling interest that should be reported in a consolidated balance sheet prepared December 31, 20x6?
On January 1, 20x6, Ritt Corp. purchased 80% of Shaw Corp.’s $10 par common stock for $975,000, which included a control premium. On this date, the fair value of the noncontrolling interest was $200,000, giving Shaw a full fair value of $1,175,000. On the acquisition date the carrying amount of Shaw’s net assets was $1,000,000. The fair values of Shaw’s identifiable assets and liabilities were the same as their carrying amounts except for plant assets (net), which were $100,000 in excess of the carrying amount. Those plant assets had a 10-year remaining life, depreciated on a straight-line basis. Shaw had a net income of $190,000 and paid cash dividends totaling $125,000. Which one of the following is the amount of noncontrolling interest that should be reported in a consolidated balance sheet prepared December 31, 20x6?
Zest Co. owns 100% of Cinn, Inc. On January 2, 1999, Zest sold equipment with an original cost of $80,000 and a carrying amount of $48,000 to Cinn for $72,000. Zest had been depreciating the equipment over a five-year period using straight-line depreciation with no residual value. Cinn is using straight-line depreciation over three years with no residual value. In Zest’s December 31, 1999, consolidating worksheet, by what amount should depreciation expense be decreased?
There are two ways to approach this solution. First, take the difference in carrying values 72,000-48,000 = 24,000. The 24,000 is the incremental amount Cinn carries the equipment over the carrying amount of Zest. The 24,000/3 = 8,000
OR, compute the depreciation for each company:
Cinn is 72,000/3 = 24,000
Zest is 80,000/5 = 16,000
Since Cinn is 100% owned by Zest, the equipment cannot be depreciated by a greater amount through an intracompany sale. The difference is 24,000 - 16,000 = 8,000.
On December 31, 2008, Pico acquired $250,000 par value of the outstanding $1,000,000 bonds of its subsidiary, Sico, in the market for $200,000. At that date, Sico had a $100,000 premium on its total bond liability.
Assume each company maintains its premium or discount in a separate account. Which one of the following will be the intercompany bond elimination entry made on the December 31, 2008 consolidating worksheet?
The Investment in Bonds (a debit balance, so it will be credited) and the Bonds Payable (a credit balance, so it will be debited) will be eliminated against each other at par value ($250,000). The Discount on Bond Investment $50,000 (a credit balance, so it will be debited) and the Premium on Bonds Payable $25,000 (a credit balance, so it will be debited) will be eliminated resulting in a Gain on Constructive Retirement of $75,000, a credit balance. Therefore, the correct entry would be:
DR: Bonds Payable
Premium on Bonds Payable
Discount on Bond Investment
CR: Investment in Bonds
Gain on Constructive RetirementOn December 31, 2008, Pico acquired $250,000 par value of the outstanding $1,000,000 bonds of its subsidiary, Sico, in the market for $200,000. On that date, Sico had a $100,000 premium on its total bond liability.
Which one of the following is the net amount of gain or loss that will be recognized by Pico in its December 31, 2008, consolidated financial statements as a result of its intercompany bonds?
In the elimination of intercompany bonds, the intercompany bond liability at par will be eliminated against the intercompany bond investment at par. Therefore, the gain or loss recognized as a result of constructive retirement of intercompany bonds is the net of the premium or discount on the bond liability and the premium or discount on the bond investment. In this case, there is a total $100,000 premium on the bond liability, but because only one-fourth ($250,000/$1,000,000 = 1/4) of the bonds are intercompany, only one fourth of the premium is eliminated. Thus, $25,000 of premium on the bond liability (a credit) will be eliminated against the $50,000 discount on the bond investment (also a credit). As a result of eliminating the two credits ($25,000 + $50,000 = $75,000), a $75,000 gain on constructive retirement will be recognized.
