Deck 5: Appendix A: Step Purchases

Question 1

Frey Ltd. acquired 70% of Sabo Ltd. in 20X4. On January 1, 20X8, Frey acquired another 10% of Sabo's common shares for $250,000.

- Under the entity method, the balance of the non-controlling interest at December 31, 20X7, was $660,000. What adjustment should be made to the consolidated shareholders' equity to reflect Frey's additional purchase of shares?

A)$30,000
B)$136,667
C)$220,000
D)$250,000

Answer 1

$30,000

Question 2

Frey Ltd. acquired 70% of Sabo Ltd. in 20X4. On January 1, 20X8, Frey acquired another 10% of Sabo's common shares for $250,000.

- Under the parent-company extension method, the balance of the non-controlling interest at December 31, 20X7, was $600,000. What adjustment should be made to the consolidated shareholders' equity to reflect Frey's additional purchase of shares?

A)$50,000
B)$66,667
C)$200,000
D)$250,000

Answer 2

$50,000

Question 3

Frey Ltd. acquired 70% of Sabo Ltd. in 20X4. On January 1, 20X8, Frey acquired another 10% of Sabo's common shares for $250,000.

- With respect to this addition purchase, which of the following is true?

A)On the consolidated statement of financial position, the goodwill balance will increase.
B)On the consolidated statement of financial position, the common shares balance will increase.
C)Frey must use the equity method to report the additional investment.
D)Frey should ignore any changes in the fair values of Sabo's net assets between January 1, 20X4, and January 1, 20X8.

Answer 3

Frey should ignore any changes in the fair values of Sabo's net assets between January 1, 20X4, and January 1, 20X8.

Question 4

On January 1, 20X7, Water Limited purchased 700,000 shares of Bottle Inc. for $2.8 million. On January 1, 20X9, Water purchased another 200,000 shares of Bottle for $950,000. During the entire period, Bottle had 1,000,000 shares outstanding. Water accounts for its investment in Bottle under the equity method. The following information was extracted from the financial records of Bottle.
$$\begin{array} { | l | r | r | r | } \hline & \begin{array} { c } \text { January 1, } \\20X 7\end{array} & \begin{array} { c } \text { January 1, } \\20X9\end{array} & \begin{array} { c } \text { December 31, } \\20X10\end{array} \\\hline \text { Net carrying value of buildings } & \$ 3,560,000 & 3,320,000 & 3,320,000 \\\hline \text { Fair value of the buildings } & \$ 4,760,000 & 4,804,000 & 4,804,000 \\\hline \begin{array} { l } \text { Remaining useful life of } \\\text { buildings }\end{array} & 30 & 28 & 27 \\\hline \text { Common shares } & \$ 1,000,000 & \$ 1,000,000 & \$ 1,000,000 \\\hline \text { Retained earnings } & \$ 1,500,000 & 1,820,000 & 2,200,000 \\\hline\end{array}$$ All net identifiable assets had a fair value equal to their carrying value on the date of acquisition except the buildings. There is no goodwill reported on the separate entity financial statements of Water or Bottle. There have been no intercompany transactions between Water and Bottle.
Required:
Calculate the balances of the following accounts on the consolidated statement of financial position at December 31, 20X10, under the entity method:
a. Goodwill
b. NCI
Determine the adjustment to equity required for the second acquisition.

Question 5

Husch Ltd. acquired 35% of the common shares of Megia Ltd. on June 30, 20X1. Husch uses the equity method to record its investment. On June 30, 20X8, Husch acquired another 40% of Megia's common shares. At June 30, 20X8, how should the original 35% ownership be treated?

A)The original valuation of the 35% is added to the valuation of the 40%.
B)The original 35% investment is deemed to have been disposed of and reacquired at the fair value at June 30, 20X8, and added to the new acquisition.
C)The carrying value of the original 35% at June 30, 20X8, is added to the new acquisition.
D)The original 35% is irrelevant to the new acquisition and should be ignored.

Question 6

Dinh Co. acquired 60% of Ludo Ltd. five years ago. In the current year, Dinh purchased additional shares from the NCI to bring its holdings to 75%. How should the difference between the purchase consideration paid and the adjustment to the value of the NCI be treated?

A)It should be taken directly to equity, split equally between the shareholders of the parent and the NCI.
B)It should be taken directly to equity, split proportionately between the shareholders of the parent and the NCI.
C)It should be taken directly to equity, all attributed to the shareholders of the parent.
D)It should be taken directly to equity, all attributed to the NCI.