Question 1

Estimating the value of goodwill to be included in an offering price can be done under several alternative methods. The excess earnings approach is frequently used. Identify the steps used in this approach to estimate goodwill.

Accepted Answer

The answer of Estimating the value of goodwill to be...

Question 2

Hopkins Company is considering the acquisition of Richfield, Inc. To assess the amount it might be willing to pay, Hopkins makes the following computations and assumptions.
A. Richfield, Inc. has identifiable assets with a total fair value of $6,000,000 and liabilities of $3,700,000. The assets include office equipment with a fair value approximating book value, buildings with a fair value 25% higher than book value, and land with a fair value 50% higher than book value. The remaining lives of the assets are deemed to be approximately equal to those used by Richfield, Inc.
B. Richfield, Inc.'s pretax incomes for the years 2014 through 2016 were $470,000, $570,000, and $370,000, respectively. Hopkins believes that an average of these earnings represents a fair estimate of annual earnings for the indefinite future. However, it may need to consider adjustments for the following items included in pretax earnings:  C. The normal rate of return on net assets for the industry is 15%.
Required:
A. Assume that Hopkins feels that it must earn a 20% return on its investment, and that goodwill is determined by capitalizing excess earnings. Based on these assumptions, calculate a reasonable offering price for Richfield, Inc. Indicate how much of the price consists of goodwill.
B. Assume that Hopkins feels that it must earn a 15% return on its investment, but that average excess earnings are to be capitalized for five years only. Based on these assumptions, calculate a reasonable offering price for Richfield, Inc. Indicate how much of the price consists of goodwill.

Accepted Answer

The answer of Hopkins Company is considering the acquisition of...

Question 3

Eden Company is trying to decide whether to acquire Bloomington Inc. The following balance sheet for Bloomington Inc. provides information about book values. Estimated market values are also listed, based upon Eden Company's appraisals.  Eden Company expects that Bloomington will earn approximately $290,000 per year in net income over the next five years. This income is higher than the 14% annual return on tangible assets considered to be the industry "norm."
Required:
A. Compute an estimation of goodwill based on the information above that Eden might be willing to pay (include in its purchase price), under each of the following additional assumptions:
(1) Eden is willing to pay for excess earnings for an expected life of 4 years (undiscounted).
(2) Eden is willing to pay for excess earnings for an expected life of 4 years, which should be
capitalized at the industry normal rate of return.
(3) Excess earnings are expected to last indefinitely, but Eden demands a higher rate of return of
20% because of the risk involved.
B. Determine the amount of goodwill to be recorded on the books if Eden pays $1,300,000 cash and assumes Bloomington's liabilities.

Accepted Answer

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Question 4

The following balances were taken from the records of S Company:  P Company purchased 75% of S Company's common stock on January 1, 2014 for $900,000. The difference between implied value and book value is attributable to assets with a remaining useful life on January 1, 2016 of ten years.
Required:
A. Compute the difference between cost/(implied) and book value applying:
1. Parent company theory.
2. Economic unit theory.
B. Assuming the economic unit theory:
1. Compute noncontrolling interest in consolidated income for 2016.
2. Compute noncontrolling interest in net assets on December 31, 2016.

Accepted Answer

The answer of The following balances were taken from the...

Question 5

According to the economic unit concept, the primary purpose of consolidated financial statements is to provide information that is relevant to:
A) majority stockholders.
B) minority stockholders.
C) creditors.
D) both majority and minority stockholders.

Accepted Answer

The economic unit concept treats the group of parent and subsidiary companies as a single economic entity, thus the primary purpose of consolidated financial statements under this concept is to provide information that is relevant to both majority and minority stockholders, as it reflects the financial position and results of operations of the group as a whole.

Question 6

Which of the following statements is correct?
A) The economic unit concept suggests partial elimination of unrealized intercompany profits.
B) The parent company concept suggests partial elimination of unrealized intercompany profits.
C) The economic unit concept suggests no elimination of unrealized intercompany profits.
D) The parent company concept suggests total elimination of unrealized intercompany profits.

Accepted Answer

The parent company concept suggests partial elimination of unrealized intercompany profits, reflecting the perspective that transactions between the parent and subsidiaries are partially external. This contrasts with the economic unit concept, which views the group as a single entity, leading to total elimination of unrealized profits in consolidation.

Question 7

The view that consolidated financial statements represent those of a single economic entity with several classes of stockholder interest is consistent with the:
A) parent company concept.
B) current practice concept.
C) historical cost company concept.
D) economic unit concept.

Accepted Answer

The economic unit concept views a group of companies consolidated for financial reporting purposes as a single economic entity, despite having multiple classes of stockholder interest. This contrasts with the parent company concept, which focuses on the perspective of the parent company's shareholders.

Question 8

The view that only the parent company's share of the unrealized intercompany profit recognized by the selling affiliate that remains in assets should be eliminated in the preparation of consolidated financial statements is consistent with the:
A) economic unit concept.
B) current practice concept.
C) parent company concept.
D) historical cost company concept.

Accepted Answer

The parent company concept focuses on the interests of the parent company's shareholders. According to this concept, in consolidated financial statements, only the parent company's share of unrealized intercompany profits (those profits that result from transactions within the group but have not yet been realized outside the group) that remain in assets should be eliminated. This is because the concept emphasizes the financial results and position from the perspective of the parent company's shareholders, rather than presenting a view of the group as a single economic entity.

Question 9

Park Company acquired an 80% interest in the common stock of Southdale Company for $1,540,000 on July 1, 2016. Southdale Company's stockholders' equity on that date consisted of:  Required:
Compute the total noncontrolling interest to be reported in the consolidated balance sheet assuming the:
(1) parent company concept.
(2) economic unit concept.

Accepted Answer

The answer of Park Company acquired an 80% interest in...

Question 10

The view that the noncontrolling interest in income reflects the noncontrolling stockholders' allocated share of consolidated income is consistent with the:
A) economic unit concept.
B) parent company concept.
C) current practice concept.
D) historical cost company concept.

Accepted Answer

The economic unit concept views the consolidated entity as a single economic entity, regardless of the legal boundaries of individual companies. Therefore, it considers the noncontrolling interest in income as the noncontrolling stockholders' allocated share of the consolidated income, reflecting their economic interest in the consolidated entity.

Question 11

When following the parent company concept in the preparation of consolidated financial statements, noncontrolling interest in combined income is considered a(n):
A) prorated share of the combined income.
B) addition to combined income to arrive at consolidated net income.
C) expense deducted from combined income to arrive at consolidated net income.
D) deduction from current assets in the balance sheet.

Accepted Answer

Noncontrolling interest in combined income is considered an expense deducted from combined income to arrive at consolidated net income under the parent company concept.

Question 12

When following the economic unit concept in the preparation of consolidated financial statements, the basis for valuing the noncontrolling interest in net assets is the:
A) book values of subsidiary assets and liabilities.
B) fair values of subsidiary assets and liabilities.
C) general price level adjusted values of subsidiary assets and liabilities.
D) fair values of parent company assets and liabilities.

Accepted Answer

The economic unit concept in the preparation of consolidated financial statements values the noncontrolling interest in net assets based on the fair values of subsidiary assets and liabilities. This approach reflects the true economic value of the subsidiary's assets and liabilities at the time of acquisition.

Question 13

The two alternative views of consolidated financial statements are the parent company concept and the economic entity concept. Briefly explain the differences between the concepts.

Accepted Answer

The answer of The two alternative views of consolidated financial...

Question 14

Under the economic unit concept, noncontrolling interest in net assets is treated as:
A) a liability.
B) an asset.
C) stockholders' equity.
D) an expense.

Accepted Answer

Under the economic unit concept, noncontrolling interest in net assets is treated as part of stockholders' equity. This reflects the ownership interest of minority shareholders in the consolidated entity.

Question 15

The parent company concept adjusts subsidiary net asset values for the:
A) differences between cost and fair value.
B) differences between cost and book value.
C) total fair value implied by the price paid by the parent.
D) total cost implied by the price paid by the parent.

Accepted Answer

The parent company concept adjusts subsidiary net asset values for the differences between cost and book value, reflecting the parent's perspective in the consolidation process.

Quiz 1: Introduction to Business Combinations and the Conceptual Framework

Estimating the value of goodwill to be included in an offering price can be done under several alternative methods. The excess earnings approach is frequently used. Identify the steps used in this approach to estimate goodwill.

According to the economic unit concept, the primary purpose of consolidated financial statements is to provide information that is relevant to:

Which of the following statements is correct?

The view that consolidated financial statements represent those of a single economic entity with several classes of stockholder interest is consistent with the:

The view that only the parent company's share of the unrealized intercompany profit recognized by the selling affiliate that remains in assets should be eliminated in the preparation of consolidated financial statements is consistent with the:

The view that the noncontrolling interest in income reflects the noncontrolling stockholders' allocated share of consolidated income is consistent with the:

When following the parent company concept in the preparation of consolidated financial statements, noncontrolling interest in combined income is considered a(n) :

When following the economic unit concept in the preparation of consolidated financial statements, the basis for valuing the noncontrolling interest in net assets is the:

The two alternative views of consolidated financial statements are the parent company concept and the economic entity concept. Briefly explain the differences between the concepts.

Under the economic unit concept, noncontrolling interest in net assets is treated as:

The parent company concept adjusts subsidiary net asset values for the: