Question 1

One company acquires another company in a combination accounted for as an acquisition. The acquiring company decides to apply the equity method in accounting for the combination. What is one reason the acquiring company might have made this decision?

Accepted Answer

When the equity method is used, the operating results of the subsidiary are reflected in the parent company's financial records as consolidated totals. This allows for a more complete understanding of the overall financial performance of the combined company.

Question 2

Goehler, Inc. acquires all of the voting stock of Kenneth, Inc. on January 4, 2010, at an amount in excess of Kenneth's fair value. On that date, Kenneth has equipment with a book value of $90,000 and a fair value of $120,000 (10-year remaining life). Goehler has equipment with a book value of $800,000 and a fair value of $1,200,000 (10-year remaining life). On December 31, 2011, Goehler has equipment with a book value of $975,000 but a fair value of $1,350,000 and Kenneth has equipment with a book value of $105,000 but a fair value of $125,000.
If Goehler applies the equity method in accounting for Kenneth, what is the consolidated balance for the Equipment account as of December 31, 2011?

Accepted Answer

The answer of Goehler, Inc. acquires all of the voting...

Question 3

How is the fair value allocation of an intangible asset allocated to expense when the asset has no legal, regulatory, contractual, competitive, economic, or other factors that limit its life?

Accepted Answer

The answer of How is the fair value allocation of...

Question 4

When is a goodwill impairment loss recognized?

Accepted Answer

A goodwill impairment loss is recognized only if the fair value of a reporting unit and its associated implied goodwill fall below their respective carrying values. This is generally tested annually or more frequently if events or changes in circumstances indicate that it is more likely than not that a goodwill impairment exists.

Question 5

Following are selected accounts for Green Corporation and Vega Company as of December 31, 2013. Several of Green's accounts have been omitted.

Green acquired 100% of Vega on January 1, 2009, by issuing 10,500 shares of its $10 par value common stock with a fair value of $95 per share. On January 1, 2009, Vega's land was undervalued by $40,000, its buildings were overvalued by $30,000, and equipment was undervalued by $80,000. The buildings have a 20-year life and the equipment has a 10-year life. $50,000 was attributed to an unrecorded trademark with a 16-year remaining life. There was no goodwill associated with this investment.
Compute the December 31, 2013, consolidated common stock.

Accepted Answer

The answer of Following are selected accounts for Green Corporation...

Question 6

Goehler, Inc. acquires all of the voting stock of Kenneth, Inc. on January 4, 2010, at an amount in excess of Kenneth's fair value. On that date, Kenneth has equipment with a book value of $90,000 and a fair value of $120,000 (10-year remaining life). Goehler has equipment with a book value of $800,000 and a fair value of $1,200,000 (10-year remaining life). On December 31, 2011, Goehler has equipment with a book value of $975,000 but a fair value of $1,350,000 and Kenneth has equipment with a book value of $105,000 but a fair value of $125,000.
If Goehler applies the initial value method in accounting for Kenneth, what is the consolidated balance for the Equipment account as of December 31, 2011?

Accepted Answer

The answer of Goehler, Inc. acquires all of the voting...

Question 7

One company acquires another company in a combination accounted for as an acquisition. The acquiring company decides to apply the initial value method in accounting for the combination. What is one reason the acquiring company might have made this decision?

Accepted Answer

The initial value method is relatively easy to apply, which could be a reason why the acquiring company chose to use it. Other reasons for choosing this method could include the desire for more detailed information on the acquired company's assets and liabilities or the belief that it will result in a more accurate reflection of the combination's financial effects. However, it is important to note that the initial value method is not the only method allowed by the SEC or generally accepted accounting principles, and it may involve worksheet entries in the consolidation process.

Question 8

Following are selected accounts for Green Corporation and Vega Company as of December 31, 2013. Several of Green's accounts have been omitted.

Green acquired 100% of Vega on January 1, 2009, by issuing 10,500 shares of its $10 par value common stock with a fair value of $95 per share. On January 1, 2009, Vega's land was undervalued by $40,000, its buildings were overvalued by $30,000, and equipment was undervalued by $80,000. The buildings have a 20-year life and the equipment has a 10-year life. $50,000 was attributed to an unrecorded trademark with a 16-year remaining life. There was no goodwill associated with this investment.
Compute the December 31, 2013 consolidated retained earnings.

Accepted Answer

The answer of Following are selected accounts for Green Corporation...

Question 9

Prince Company acquires Duchess, Inc. on January 1, 2009. The consideration transferred exceeds the fair value of Duchess' net assets. On that date, Prince has a building with a book value of $1,200,000 and a fair value of $1,500,000. Duchess has a building with a book value of $400,000 and fair value of $500,000.
If push-down accounting is used, what amounts in the Building account appear in Duchess' separate balance sheet and in the consolidated balance sheet immediately after acquisition?

Accepted Answer

Since the consideration transferred exceeds the fair value of Duchess' net assets, there is goodwill that needs to be recognized. Under push-down accounting, the fair value of the buildings are recorded in the separate financial statements of both companies. Therefore, in Duchess' separate balance sheet, the building account will show $500,000 (fair value) and in the consolidated balance sheet, the building account will show $1,700,000 ($1,200,000 book value of Prince's building plus $500,000 fair value of Duchess' building).

Question 10

Following are selected accounts for Green Corporation and Vega Company as of December 31, 2013. Several of Green's accounts have been omitted.

Green acquired 100% of Vega on January 1, 2009, by issuing 10,500 shares of its $10 par value common stock with a fair value of $95 per share. On January 1, 2009, Vega's land was undervalued by $40,000, its buildings were overvalued by $30,000, and equipment was undervalued by $80,000. The buildings have a 20-year life and the equipment has a 10-year life. $50,000 was attributed to an unrecorded trademark with a 16-year remaining life. There was no goodwill associated with this investment.
Compute the December 31, 2013, consolidated additional paid-in capital.

Accepted Answer

The answer of Following are selected accounts for Green Corporation...

Question 11

Beatty, Inc. acquires 100% of the voting stock of Gataux Company on January 1, 2010 for $500,000 cash. A contingent payment of $12,000 will be paid on April 1, 2011 if Gataux generates cash flows from operations of $26,500 or more in the next year. Beatty estimates that there is a 30% probability that Gataux will generate at least $26,500 next year, and uses an interest rate of 4% to incorporate the time value of money. The fair value of $12,000 at 4%, using a probability weighted approach, is $3,461.
What will Beatty record as its Investment in Gataux on January 1, 2010?

Accepted Answer

The initial investment in Gataux is $500,000. However, since there is a contingent payment of $12,000, the total cost of the investment would be $512,000 if the contingency is met. Using a probability weighted approach and an interest rate of 4%, the fair value of the contingent payment is $3,461. Therefore, the investment in Gataux on January 1, 2010 will be recorded as $503,461 ($500,000 + $3,461).

Question 12

Prince Company acquires Duchess, Inc. on January 1, 2009. The consideration transferred exceeds the fair value of Duchess' net assets. On that date, Prince has a building with a book value of $1,200,000 and a fair value of $1,500,000. Duchess has a building with a book value of $400,000 and fair value of $500,000.
If push-down accounting is not used, what amounts in the Building account appear on Duchess' separate balance sheet and on the consolidated balance sheet immediately after acquisition?

Accepted Answer

Without push-down accounting, the carrying amounts of the assets of Duchess, Inc. do not change as a result of the acquisition by Prince Company. Therefore, the building on Duchess' separate balance sheet remains at its $400,000 book value, and the building on the consolidated balance sheet remains at its $1,700,000 fair value ($1,200,000 + $500,000). Thus, the correct answer is (C).

Question 13

Beatty, Inc. acquires 100% of the voting stock of Gataux Company on January 1, 2010 for $500,000 cash. A contingent payment of $12,000 will be paid on April 1, 2011 if Gataux generates cash flows from operations of $26,500 or more in the next year. Beatty estimates that there is a 30% probability that Gataux will generate at least $26,500 next year, and uses an interest rate of 4% to incorporate the time value of money. The fair value of $12,000 at 4%, using a probability weighted approach, is $3,461.
Beatty, Inc. acquires 100% of the voting stock of Gataux Company on January 1, 2010 for $500,000 cash. A contingent payment of $12,000 will be paid on April 1, 2011 if Gataux generates cash flows from operations of $26,500 or more in the next year. Beatty estimates that there is a 30% probability that Gataux will generate at least $26,500 next year, and uses an interest rate of 4% to incorporate the time value of money. The fair value of $12,000 at 4%, using a probability weighted approach, is $3,461.
When recording consideration transferred for the acquisition of Gataux on January 1, 2010, Beatty will record a contingent performance obligation in the amount of:

Accepted Answer

Beatty will record the initial consideration transferred of $500,000 as the cost of the acquisition, and will record a contingent liability for the probability-weighted fair value of the additional $12,000 payment, which is $3,461. Therefore, the contingent performance obligation recorded will be $3,461.

Question 14

Harrison, Inc. acquires 100% of the voting stock of Rhine Company on January 1, 2010 for $400,000 cash. A contingent payment of $16,500 will be paid on April 15, 2011 if Rhine generates cash flows from operations of $27,000 or more in the next year. Harrison estimates that there is a 20% probability that Rhine will generate at least $27,000 next year, and uses an interest rate of 5% to incorporate the time value of money. The fair value of $16,500 at 5%, using a probability weighted approach, is $3,142.
When recording consideration transferred for the acquisition of Rhine on January 1, 2010, Harrison will record a contingent performance obligation in the amount of:

Accepted Answer

Harrison will record the full amount of consideration transferred for the acquisition of Rhine, which is $400,000. However, they will also record a contingent liability for the potential payment of $16,500. Using a probability-weighted approach and discounting the payment to its present value at 5% interest, the fair value of the contingent liability is $3,142. Therefore, the total consideration recorded would be $400,000 + $3,142 = $403,142.

Question 15

Which of the following will result in the recognition of an impairment loss on goodwill?

Accepted Answer

An impairment loss on goodwill is recognized when the fair value of a reporting unit falls below its carrying value, and this results in the implied goodwill of the reporting unit also falling below its carrying value. A is incorrect because goodwill amortization is not used to assess impairment. C is incorrect because a decline in entity's fair value does not necessarily indicate that there is an impairment loss on goodwill. D is partially correct, but the original consideration transferred for the acquisition is not relevant for assessing impairment because it is a historical cost measurement. E is irrelevant to the impairment testing.

Question 16

Goehler, Inc. acquires all of the voting stock of Kenneth, Inc. on January 4, 2010, at an amount in excess of Kenneth's fair value. On that date, Kenneth has equipment with a book value of $90,000 and a fair value of $120,000 (10-year remaining life). Goehler has equipment with a book value of $800,000 and a fair value of $1,200,000 (10-year remaining life). On December 31, 2011, Goehler has equipment with a book value of $975,000 but a fair value of $1,350,000 and Kenneth has equipment with a book value of $105,000 but a fair value of $125,000.
If Goehler applies the partial equity method in accounting for Kenneth, what is the consolidated balance for the Equipment account as of December 31, 2011?

Accepted Answer

Under the partial equity method, consolidated equipment is calculated as the sum of the parent's share and the subsidiary's share of equipment at the beginning of the year, plus any equipment purchased during the year, minus any equipment sold during the year, and adjusted for any difference between book value and fair value at the date of acquisition. 
Consolidated Equipment = Parent's share + Subsidiary's share + Equipment purchased - Equipment sold +/- Difference in fair value at acquisition
The parent's share is based on the parent's percentage of ownership in the subsidiary. Since Goehler acquired all of the voting stock of Kenneth, it has a 100% ownership interest and therefore its share is equal to the entire amount of Kenneth's equipment at the beginning of the year. 
Parent's share of beginning equipment = $120,000 + $125,000 = $245,000
The subsidiary's share is equal to the subsidiary's book value of equipment at the beginning of the year adjusted for any difference between book value and fair value at the date of acquisition. 
Subsidiary's share of beginning equipment = $90,000 + ($120,000 - $90,000) = $120,000
Consolidated Equipment (beginning of year) = $245,000
During the year, there were no equipment transactions for either Goehler or Kenneth, so the beginning balance carries forward. 
Consolidated Equipment (end of year) = $245,000
However, the fair value of both Goehler's and Kenneth's equipment at the end of the year is greater than their respective book values, resulting in a revaluation surplus. 
Revaluation surplus = ($1,350,000 - $975,000) + ($125,000 - $105,000) = $395,000
The revaluation surplus is allocated between Goehler and Kenneth based on their respective percentage ownership interests. 
Goehler's share of revaluation surplus = $395,000 x 100% = $395,000
Total consolidated equipment at the end of the year is therefore: 
Consolidated Equipment (end of year) = $245,000 + $395,000 = $640,000
Adding this to the equipment purchased during the year and subtracting any equipment sold during the year does not impact the result since there were no such transactions. Therefore, the consolidated equipment balance as of December 31, 2011, is $640,000.

Question 17

Harrison, Inc. acquires 100% of the voting stock of Rhine Company on January 1, 2010 for $400,000 cash. A contingent payment of $16,500 will be paid on April 15, 2011 if Rhine generates cash flows from operations of $27,000 or more in the next year. Harrison estimates that there is a 20% probability that Rhine will generate at least $27,000 next year, and uses an interest rate of 5% to incorporate the time value of money. The fair value of $16,500 at 5%, using a probability weighted approach, is $3,142.
What will Harrison record as its Investment in Rhine on January 1, 2010?

Accepted Answer

Harrison, Inc. will record the initial investment at the cost of $400,000. However, they will also recognize a contingent liability for the probability-weighted fair value of the contingent payment, which is $3,142 (20% x $16,500). Therefore, the initial investment will be $403,142.

Question 18

Following are selected accounts for Green Corporation and Vega Company as of December 31, 2013. Several of Green's accounts have been omitted.

Green acquired 100% of Vega on January 1, 2009, by issuing 10,500 shares of its $10 par value common stock with a fair value of $95 per share. On January 1, 2009, Vega's land was undervalued by $40,000, its buildings were overvalued by $30,000, and equipment was undervalued by $80,000. The buildings have a 20-year life and the equipment has a 10-year life. $50,000 was attributed to an unrecorded trademark with a 16-year remaining life. There was no goodwill associated with this investment.
Compute the equity in Vega's income to be included in Green's consolidated income statement for 2013.

Accepted Answer

To compute the equity in Vega's income to be included in Green's consolidated income statement for 2013, we need to first calculate the adjusted basis of Vega's net assets as of January 1, 2009.

Adjusted basis of net assets = (original basis + fair value adjustment) - accumulated depreciation - accumulated amortization

Land: 
Original basis = $200,000 
Fair value adjustment (undervaluation) = $40,000 
Adjusted basis = $240,000

Buildings: 
Original basis = $300,000 
Fair value adjustment (overvaluation) = ($30,000) 
Accumulated depreciation (4 years) = ($60,000) 
Adjusted basis = $210,000

Equipment: 
Original basis = $200,000 
Fair value adjustment (undervaluation) = $80,000 
Accumulated depreciation (4 years) = ($80,000) 
Adjusted basis = $200,000

Trademark: 
Original basis = $50,000
Accumulated amortization (4 years) = ($10,000) 
Adjusted basis = $40,000

Total adjusted basis of net assets = $690,000

Next, we need to compute the noncontrolling interest's share of Vega's income for 2013:

Vega's net income for 2013 = $100,000 
Noncontrolling interest percentage = 10,500/105,000 = 10% 
Noncontrolling interest's share of income = $10,000

Finally, we can compute the equity in Vega's income to be included in Green's consolidated income statement for 2013:

Green's share of Vega's income = Vega's net income - noncontrolling interest's share of income 
Green's share of Vega's income = $100,000 - $10,000 = $90,000

Since the question asks for the equity in Vega's income to be included in Green's consolidated income statement, we can assume that all of Vega's income is being attributed to Vega's equity holders (including Green, as the parent company). Thus, the answer is $90,000, which is the same as Green's share of Vega's net income.

Question 19

Beatty, Inc. acquires 100% of the voting stock of Gataux Company on January 1, 2010 for $500,000 cash. A contingent payment of $12,000 will be paid on April 1, 2011 if Gataux generates cash flows from operations of $26,500 or more in the next year. Beatty estimates that there is a 30% probability that Gataux will generate at least $26,500 next year, and uses an interest rate of 4% to incorporate the time value of money. The fair value of $12,000 at 4%, using a probability weighted approach, is $3,461.
Assuming Gataux generates cash flow from operations of $27,200 in 2010, how will Beatty record the $12,000 payment of cash on April 1, 2011 in satisfaction of its contingent obligation?

Accepted Answer

The answer of Beatty, Inc. acquires 100% of the voting...

Question 20

Harrison, Inc. acquires 100% of the voting stock of Rhine Company on January 1, 2010 for $400,000 cash. A contingent payment of $16,500 will be paid on April 15, 2011 if Rhine generates cash flows from operations of $27,000 or more in the next year. Harrison estimates that there is a 20% probability that Rhine will generate at least $27,000 next year, and uses an interest rate of 5% to incorporate the time value of money. The fair value of $16,500 at 5%, using a probability weighted approach, is $3,142.
Assuming Rhine generates cash flow from operations of $27,200 in 2010, how will Harrison record the $16,500 payment of cash on April 15, 2011 in satisfaction of its contingent obligation?

Accepted Answer

Harrison, Inc. needs to record the contingent payment of $16,500 based on the probability-weighted approach with an interest rate of 5%. Since Rhine Company generated cash flows from operations of $27,200 in 2010, it met the contingency requirement of generating cash flows of $27,000 or more. Therefore, Harrison, Inc. will recognize the contingent payment as an expense in its income statement and as a liability on its balance sheet as of December 31, 2010. The journal entry to record the contingent payment of $16,500 on April 15, 2011, would be to debit the contingent performance obligation for $3,142, and debit the loss from the revaluation of contingent performance obligation for $13,358 (the difference between the original liability and the fair value at the date of payment), and credit cash for $16,500.

Quiz 3: Consolidationssubsequent to the Date of Acquisition

One company acquires another company in a combination accounted for as an acquisition. The acquiring company decides to apply the equity method in accounting for the combination. What is one reason the acquiring company might have made this decision?

How is the fair value allocation of an intangible asset allocated to expense when the asset has no legal, regulatory, contractual, competitive, economic, or other factors that limit its life?

When is a goodwill impairment loss recognized?

One company acquires another company in a combination accounted for as an acquisition. The acquiring company decides to apply the initial value method in accounting for the combination. What is one reason the acquiring company might have made this decision?

Which of the following will result in the recognition of an impairment loss on goodwill?