Question 1Analysis with Computation
On January 1 2021, Mrs. Potts paid $800,000 and acquired 80% of Chip which had a net book value of
$425,000 on this date.
Mrs. Potts prepares the acquisition fair value allocation and determines the fair value differences for
specifically identified assets and liabilities totals $300,000, which will amortize over 10 years at the rate of
$30,000 per year.
For the year ended December 31, 2021, Mrs. Potts paid dividends of $35,000.
For the year ended December 31, 2021, Chip had net income of $500,000 and paid dividends of $20,000.
Part 1:
What is the implied fair value of Chip at the date of acquisition?
Answer
Computations
1
1
Part 2:
What is the amount recorded by Mrs. Potts in the 2021 equity method entry to record its earnings
in Chip?
Answer
Computations
Part 3:
What is the amount reported in Mrs. Potts 2021 consolidated income statement for net income
attributed to noncontrolling interests?
Answer
Computations
1
2
Part 4:
What is the amount reported in Mrs. Potts 2021 consolidated financial statements for Dividends?
Answer
Computations
Part 5:
What is the amount reported in Mrs. Potts 2021 consolidated financial statements for Goodwill?
Answer
Computations
1
3
Part 6:
What is the amount reported in Mrs. Potts 2021 consolidated financial statements for Investment
in Chip?
Answer
Computations
1
4
Question 2
Analysis
Cardinal is acquiring 100% of Gold.
Part 1
Describe 3 examples in accounting/financial reporting that are different when:
(1) Gold is dissolved immediately after the acquisition and does not continue as a legal entity;
and (2) Gold continues as an independent legal entity.
Answer
Part 2
Describe 2 examples in accounting/financial reporting that are the same when:
(1) Gold is dissolved immediately after the acquisition and does not continue as a legal entity;
and (2) Gold continues as an independent legal entity.
Answer
1
5
Question 3
Analysis
Company A acquires 100% of the net assets of Company B. Company B is dissolved and no longer continues
as a separate legal entity.
Prior to the acquisition, Company B had Goodwill of $25,000 recorded on its general ledger.
Question:
Describe how Company A will account for Company B’s goodwill balance of $25,000.
Answer
1
6
Question 4
Analysis
Describe the structure or terms of an investment in equity securities which would result in the following
accounts being included or reported in the Parent Company general use financial statements:
Part 1:
Investment in Company A [an asset account]
Equity in Earnings of Company A [an income statement account]
Answer
Part 2:
Investment in Company A [an asset account]
Equity in Earnings of Company A [an income statement account]
Answer
1
7
Question 5-8
5.
Company records the following journal entry for its investment in debt securities.
Dr. Investment in Debt Securities
Cr. Unrealized Gain on Investment (Income Statement account)
To record the change in fair value of investment in debt securities
The classification for this investment is:
a.
Available for Sale
b.
Held to Maturity
c.
Trading
d.
All of these could apply based on the structure of the specific transaction
e.
None of these apply.
Answer for Q 5
6.
Company records the following journal entry for its investment in debt securities.
Dr. Cash
Cr. Interest Income
To record interest received from debt securities
The classification for this investment is:
a.
Available for Sale
b.
Held to Maturity
c.
Trading
d.
All of these could apply based on the structure of the specific transaction
e.
None of these apply.
Answer for Q 6
1
8
7.
On January 1, 2021 Tommy Company purchased 35% of the outstanding common stock of Traveler,
Inc. and subsequently used the equity method to account for the investment.
During 2021 Traveler, Inc. reported net income of $1,260,000 and distributed dividends of $540,000.
The ending balance in the Investment in Traveler Inc. account at December 31, 2021 was $960,000
after applying the equity method during 2021.
What was the acquisition cost Tommy Company paid for its investment in Traveler, Inc?
a.
$708,000
b.
$1,590,000
c.
$1,212,000
d.
$330,000
e.
None of these apply.
Answer for Q 7
8.
Oklahoma Inc. acquired all of the outstanding common stock of Enid Co. on January 1, 2019, for
$257,000.
Fair value versus book value differences results in annual amortization of $19,000.
Oklahoma reported net income of $70,000 in 2019 and $50,000 in 2020 (amounts before recording
equity accounting for its investment in Enid) and paid $22,000 in dividends each year.
Enid reported net income of $40,000 in 2019 and $47,000 in 2020 and paid $10,000 in dividends each
year.
What is the Investment in Enid Co. balance on Oklahoma’s general ledger as of December 31, 2020, if
the equity method has been applied?
a.
$276,000
b.
$286,000
c.
$295,000
d.
$344,000
e.
None of these apply.
Answer for Q 8
1
9
1
10
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