Partnerships & Business Combinations

Question 1

Under the bonus method:

Answer 1

NO goodwill or any other unidentifiable asset is recorded

Question 2

HOW would you calculate your Weighted Average Capital Balance for interest?

Answer 2

By taking the amount of capital gained throughout the year and multiplying it by the amount of time past during the year then multiplying that by the interest percentage

E.g. Balance, January 1 $140,000 Additional investment, July 1 $40,000

Calculated as: $140,000 x 6/12 and
$40,000 x 1/12 (i.e. 7/1 to 7/31)

Question 3

True or False.

Drawings are not considered in the allocation of partnership income.

Answer 3

TRUE.

Drawings are not considered in the allocation of partnership income.

Therefore, the Allocation Income will be based on the Partnership net income Percentage

Question 4

WHEN a bonus is allocated from the new partner to the existing partners

Answer 4

THEIR old profit and loss ratio must be used

Question 5

WHEN the “bonus method” is used

Answer 5

BONUSES are used to adjust the old and new partners’ capital accounts

THEY do NOT affect the carrying value of partnership assets.

Question 6

WHAT amount should the noncash property be credited to the contributing partner’s capital account for, WHEN property other than cash is invested in a partnership?

Answer 6

THE Fair value at the date of contribution

i.e. THE noncash property should be credited to the contributing partner’s capital account at the “Fair Value” amount at the date of contribution

Question 7

True or False.

Under the acquisition method, the cost of an acquiree consists of the fair value of the consideration given.

Answer 7

TRUE.

Under the acquisition method, the cost of an acquiree consists of the fair value of the consideration given.

E.g. Parent company issues outstanding shares of its common stock for the net assets of a Subsidiary with par value and market value; The Parent company would capitalize the cost at par and market value

Question 8

True or False.

Assets acquired in a business combination are recognized at their fair values. And Total noncurrent assets will equal the parent’s amount plus the subsidiary’s amount plus goodwill.

Answer 8

TRUE.

Assets acquired in a business combination are recognized at their fair values. And Total noncurrent assets will equal the parent’s amount plus the subsidiary’s amount plus goodwill.

Major Key: Look for question to provide Total Assets of the Subsidiary. You will have to take out the Liabilities to get your Net Assets. Then identify if their is any Noncontrolling interest which you will also have to take out.

Question 9

True or False.

A Parent Company’s consolidated financial statements will include the liabilities of those investees in which the Parent has a controlling financial interest.

Answer 9

TRUE.

THE Parent Company’s consolidated financial statements will include the liabilities of those investees in which the Parent has a controlling financial interest.

E.g. If the question states that the Parent Owns more than 50% of the investee’s/ subsidiary’s stock, then you would include that subsidiary’s total liability amount in the parent’s consolidated balance sheet

Question 10

WHAT are some key factors to watch for if the question ask you about retained earnings to report on the Parent company’s year end consolidated balance sheet?

Answer 10

(1) The Parent Company’s Retained Earnings
(2) The Parent’s reported Net Income
(3) The Subsidiary’s Net Income

**NOTE: Watch out to see whether they mention any depreciation for the subsidiary that you will have to subtract from the subsidiary’s Net Income amount

Question 11

For purposes of consolidating financial interests, a majority voting interest is:

Answer 11

GREATER than 50% of the directly or indirectly owned outstanding voting shares of another entity.

NOTE: This does NOT include the “Non-voting Shares”

Question 12

WHAT is a key factor to remember for a question involving the acquisition method, and specifically for Additional Paid-In Capital?

Answer 12

Costs of issuing and registering securities exchanged in the acquisition reduce additional paid-in capital (APIC) NOT as an “Expense”

i.e. Under the acquisition method, the acquirer’s investment in the acquiree is equal to the fair value of the consideration given unless the fair value of acquiree’s identifiable net assets was greater than that amount.

NOTE: Costs of issuing debt securities and registering them are recognized as debt issue costs and are amortized over the term of the debt

Question 13

True or False.

The Parent Company’s relocation cost may be partially or fully capitalized when incurred AND would be included as part of the acquisition cost.

Answer 13

FALSE.

The Parent Company’s relocation cost may be partially or fully capitalized when incurred BUT would not be included as part of the acquisition cost.

Question 14

WHAT key elements do you need to identify if the question asks what the “minority interest” of the subsidiary is?

Answer 14

(1) The Subsidiary’s total Stockholders’ Equity

(2) The amount of “Minority Interest” provided on the Consolidated Financial Statements if there is any

Question 15

WHEN the question asks for intercompany sales:

Answer 15

YOU have to pay attention to the amount of “Revenue” for the Parent and the Owned-Subsidiary.

WHY? - Because chances are that your “intercompany sales” amount will be the difference of what each reported individually and the “Consolidated” amount.

LOOK AT THE “Consolidated” amount.

Question 16

WHAT are the general guidelines for assigning amounts to the inventories acquired under the acquisition method?

Answer 16

(1) Finished goods are to be valued at “estimated” selling prices, less
- both costs of disposal and a reasonable profit allowance
(2) Raw materials are to be valued at “replacement” cost and
(3) Work in process is to be valued at selling price of the finished goods LESS costs to complete, cost of disposal, and a reasonable profit.

Question 17

If the fair value of identifiable net assets exceeds total consideration:

Answer 17

THE excess is recognized as a gain on bargain purchase in the period of the acquisition.

i.e. The “consideration” is the amount of cash or equity paid in by the Parent

Question 18

HOW would the “acquirer” (i.e. The Parent) recognize a bargain purchase in a business acquisition?

Answer 18

As a gain in earnings at the (acquisition date)

The Journal Entries will be:
(Debit) to “Investment” (at net fair value)
(Credit) to Cash
(Credit) to Gain on bargain purchase

Question 19

Under IFRS, an impairment loss must be recognized when:

Answer 19

THE recoverable amount of a cash generating unit (CGU) is less than the carrying amount of the CGU.

i.e. recoverable amount < carrying amount of CGU

NOTE: Any such loss is first allocated to the carrying amount of the CGU’s Goodwill (i.e. Decreasing Goodwill by the Impaired amount)

Question 20

True or False.

On a consolidated balance sheet, total assets will include the assets of the parent, excluding any investment in the subsidiary.

Answer 20

TRUE.

On a consolidated balance sheet, total assets will include the assets of the parent, excluding any investment in the subsidiary.

You would take the Parents Total assets and subtract “Investment in Subsidiary (equity method)”

NOTE: YOU would also add goodwill, if any, net of amortization (meaning subtract out whatever amortization would be based on the timeline provided to amortize the goodwill)