Consolidations – Subsequent to the Date of Acquisition

File: Chapter 03 – Consolidations – Subsequent to the Date of Acquisition

 

Multiple Choice:

 

[QUESTION]

1. Which one of the following accounts would not appear in the consolidated financial statements at the end of the first fiscal period of the combination?
2. A) Goodwill.
3. B) Equipment.
4. C) Investment in Subsidiary.
5. D) Common Stock.
6. E) Additional Paid-In Capital.

Answer: C

Learning Objective: 03-01

Topic: Consolidation―Overall effects

Difficulty: 2 Medium

Blooms: Understand

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

2. Which of the following internal record-keeping methods can a parent choose to account for a subsidiary acquired in a businesscombination?
3. A) Initial value or book value.
4. B) Initial value, lower-of-cost-or-market-value, or equity.
5. C) Initial value, equity, or partial equity.
6. D) Initial value, equity, or book value.
7. E) Initial value, lower-of-cost-or-market-value, or partial equity.

Answer: C

Learning Objective: 03-02

Topic: Investment methods―Identify and differentiate

Difficulty: 1 Easy

Blooms: Remember

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

3. Which one of the following varies between the equity, initial value, and partial equity methods of accounting for an investment?
4. A) The amount of consolidated net income.
5. B) Total assets on the consolidated balance sheet.
6. C) Total liabilities on the consolidated balance sheet.
7. D) The balance in the investment account on the parent’s books.
8. E) The amount of consolidated cost of goods sold.

Answer: D

Learning Objective: 03-02

Topic: Investment methods―Identify and differentiate

Difficulty: 2 Medium

Blooms: Understand

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

4. Under the partial equity method, the parent recognizes income when
5. A) Dividends are received from the investee.
6. B) Dividends are declared by the investee.
7. C) The related expense has been incurred.
8. D) The related contract is signed by the subsidiary.
9. E) It is earned by the subsidiary.

Answer: E

Learning Objective: 03-02

Learning Objective: 03-03c

Topic:  Investment methods―Identify and differentiate

Topic: Investment and income―Partial equity method

Difficulty: 1 Easy

Blooms: Remember

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

5. An impairment model is used
6. A) To assess whether asset write-downs are appropriate for indefinite-lived assets.
7. B) To calculate the fair value of intangible assets.
8. C) To calculate the amortization of indefinite-lived assets over their useful lives.
9. D) To determine whether the fair value of assets should be recognized.
10. E) To determine the likelihood that the fair value of an assumed liability will increase.

Answer: A

Learning Objective: 03-05

Learning Objective: 03-07

Topic: Impairment―Goodwill―Rationale

Topic: Impairment―Intangibles other than goodwill

Difficulty: 2 Medium

Blooms: Remember

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

6. Racer Corp. acquired all of the common stock of Tangiers Co. in 2016. Tangiers maintained its incorporation.  Which of Racer’s account balances would vary between the equity method and the initial value method?
7. A) Goodwill, Investment in Tangiers , and Retained Earnings.
8. B) Expenses, Investment in Tangiers , and Equity in Subsidiary Earnings.
9. C) Investment in Tangiers Co., Equity in Subsidiary Earnings, and Retained Earnings.
10. D) Common Stock, Goodwill, and Investment in Tangiers Co.
11. E) Expenses, Goodwill, and Investment in Tangiers Co.

Answer: C

Learning Objective: 03-02

Learning Objective: 03-03a

Learning Objective: 03-03b

Topic: Investment methods―Identify and differentiate

Difficulty: 3 Hard

Blooms: Understand

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

7. How does the partial equity method differ from the equity method?
8. A) In the total assets reported on the consolidated balance sheet.
9. B) In the treatment of dividends.
10. C) In the total liabilities reported on the consolidated balance sheet.
11. D) Under the partial equity method, subsidiary income does not increase the balance in the parent’s investment account.
12. E) Under the partial equity method, the balance in the investment account is not decreased by amortization on allocations made in the acquisition of the subsidiary.

Answer: E

Learning Objective: 03-02

Learning Objective: 03-03a

Learning Objective: 03-03c

Topic: Investment methods―Identify and differentiate

Difficulty: 2 Medium

Blooms: Remember

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

8. Jansen Inc. acquired all of the outstanding common stock of Merriam Co. on January 1, 2017, for $257,000. Annual amortization of $19,000 resulted from this acquisition.  Jansen reported net income of $70,000 in 2017 and $50,000 in  2018 and paid $22,000 in dividends each year.  Merriam reported net income of $40,000 in 2017 and $47,000 in  2018 and paid $10,000 in dividends each year.  What is the Investment in Merriam Co. balance on Jansen’s books as of December 31,  2018, if the equity method has been applied?
9. A) $286,000.
10. B) $295,000.
11. C) $276,000.
12. D) $344,000.
13. E) $324,000.

Answer: A

Learning Objective: 03-03a

Topic: Investment and income―Equity method

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: $257,000 + $40,000 + $47,000 – $10,000 – $19,000 – $10,000 – $19,000 = $286,000

 

[QUESTION]

9. Which of the following is not an example of an intangible asset?
10. A) Customer list
11. B) Database
12. C) Lease agreement
13. D) Broken equipment
14. E) Trademark

Answer: D

Learning Objective: 03-07

Topic:Impairment―Intangibles other than goodwill

Difficulty: 1 Easy

Blooms: Understand

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

10. Parrett Corp. acquired one hundred percent of Jones Inc. on January 1, 2016, at a price in excess of the subsidiary’s fair value. On that date, Parrett’s equipment (ten-year life) had a book value of $360,000 but a fair value of $480,000.  Jones had equipment (ten-year life) with a book value of $240,000 and a fair value of $350,000.  Parrett used the partial equity method to record its investment in Jones.  On December 31, 2018, Parrett had equipment with a book value of $250,000 and a fair value of $400,000. Jones had equipment with a book value of $170,000 and a fair value of $320,000. What is the consolidated balance for the Equipment account as of December 31, 2018?
11. A) $387,000.
12. B) $497,000.
13. C) $508.000.
14. D) $537,000.
15. E) $570,000.

Answer: B

Learning Objective: 03-03

Learning Objective: 03-03c

Topic: Amortization calculations

Topic: Investment and income―Partial equity method

Topic: Consolidation balances―Calculate

Difficulty: 3 Hard

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Excess of Sub’s FV = $110,000 + Parent’s BV $250,000 + Sub’s BV $170,000 – Excess Amortization ($11,000 × 3yrs) = $497,000

 

REFERENCE: 03-01

On January 1, 2017, Cale Corp. paid $1,020,000 to acquire Kaltop Co.  Kaltop maintained separate incorporation.  Cale used the equity method to account for the investment.  The following information is available for Kaltop’s assets, liabilities, and stockholders’ equity accounts on January 1, 2017:

Kaltop earned net income for 2017 of $126,000 and paid dividends of $48,000 during the year.

 

[QUESTION]

REFER TO: 03-01

11. The 2017 total excess amortization of fair-value allocations is calculated to be
12. A) $4,000.
13. B) $6,400.
14. C) ($2,400).
15. D) ($1,000).
16. E) $3,800.

Answer: D

Learning Objective: 03-03

Learning Objective: 03-03a

Topic: Amortization calculations

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Building = FV $268,000 – BV $240,000 = $28,000 / 20 yrs = $1,400 Equipment = FV $516,000 – BV $540,000 = ($24,000) / 10 yrs = ($2,400)

($2,400) + $1,400 = ($1,000)

 

[QUESTION]

REFER TO: 03-01

12. In Cale’s accounting records, what amount would appear on December 31, 2017 for equity in subsidiary earnings?
13. A) $77,000.
14. B) $79,000.
15. C) $125,000.
16. D) $127,000.
17. E) $81,800.

Answer: D

Learning Objective: 03-03a

Topic: Investment and income―Equity method

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: $126,000 + $1,000 = $127,000

 

[QUESTION]

REFER TO: 03-01

13. What is the balance in Cale’s investment in subsidiary account at the end of 2017?
14. A) $1,099,000.
15. B) $1,020,000.
16. C) $1,096,200.
17. D) $1,098,000.
18. E) $1,144,400.

Answer: A

Learning Objective: 03-03a

Topic: Investment and income―Equity method

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: $1,020,000 + ($126,000 + $1,000) – $48,000 = $1,099,000

 

[QUESTION]

REFER TO: 03-01

14. At the end of 2017, the consolidation entry to eliminate Cale’s accrual of Kaltop’s earnings would include a credit to Investment in Kaltop Co. for
15. A) $124,400.
16. B) $126,000.
17. C) $127,000.
18. D) $ 76,400.
19. E) $

Answer: C

Learning Objective: 03-03a

Topic: Consolidation entries―Equity

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: $126,000 + $1,000 = $127,000

 

[QUESTION]

REFER TO: 03-01

15. If Cale Corp. had net income of $444,000 in 2017, exclusive of the investment, what is the amount of consolidated net income?
16. A) $569,000.
17. B) $570,000.
18. C) $571,000.
19. D) $566,400.
20. E) $444,000.

Answer: C

Learning Objective: 03-03

Learning Objective: 03-03a

Learning Objective: 03-04

Topic:Consolidation entries―Equity

Topic: Consolidation balances―Calculate

Topic: Consolidation balances―Understand by any method

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: $444,000 + ($126,000 + $1,000) = $571,000

 

REFERENCE: 03-02

On January 1, 2017, Franel Co. acquired all of the common stock of Hurlem Corp.  For 2017, Hurlem earned net income of $360,000 and paid dividends of $190,000.  Amortization of the patent allocation that was included in the acquisition was $6,000.

 

[QUESTION]

REFER TO: 03-02

16. How much difference would there have been in Franel’s income with regard to the effect of the investment, between using the equity method or using the initial value method of internal recordkeeping?
17. A) $190,000.
18. B) $360,000.
19. C) $164,000.
20. D) $354,000.
21. E) $150,000.

Answer: C

Learning Objective: 03-02

Learning Objective: 03-03a

Learning Objective: 03-03b

Topic: Investment methods―Identify and differentiate

Topic: Investment and income―Equity method

Topic: Investment and income―Initial value method

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Initial Value Method = $190,000 Recognized from Sub Income (only dividend income)Equity Method = $360,000 – $6,000=$354,000 (Sub income less amortizations). $354,000 – $190,000 = $164,000 difference in  equity method and initial value

[QUESTION]

REFER TO: 03-02

17. How much difference would there have been in Franel’s income with regard to the effect of the investment, between using the equity method or using the partial equity method of internal recordkeeping?
18. A) $170,000.
19. B) $354,000.
20. C) $164,000.
21. D) $ 6,000.
22. E) $174,000.

Answer: D

Learning Objective: 03-02

Learning Objective: 03-03a

Learning Objective: 03-03c

Topic: Investment methods―Identify and differentiate

Topic: Investment and income―Equity method

Topic: Investment and income―Partial equity method

Difficulty: 1 Easy

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Equity Method = $360,000 – $6,000  = $354,000 Equity income

Partial Equity Method = $360,000 – $0 (amortizations not recorded under partial equity method); $354,000 – $360,000 = $6,000 difference

 

REFERENCE: 03-03

Cashen Co. paid $2,400,000 to acquire all of the common stock of Janex Corp. on January 1, 2017.  Janex’s reported earnings for 2017 totaled $432,000, and it paid $120,000 in dividends during the year.  The amortization of allocations related to the investment was $24,000.  Cashen’s net income, not including the investment, was $3,180,000, and it paid dividends of $900,000.

 

[QUESTION]

REFER TO: 03-03

18. On the consolidated financial statements for 2017, what amount should have been shown for Equity in Subsidiary Earnings?
19. A) $432,000.
20. B) $ -0-
21. C) $408,000.
22. D) $120,000.
23. E) $288,000.

Answer: B

Learning Objective: 03-03

Learning Objective: 03-04

Topic: Consolidation balances―Calculate

Topic: Consolidation balances―Understand by any method

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: $0; (Income is eliminated from the investment account)

 

[QUESTION]

REFER TO: 03-03

19. On the consolidated financial statements for 2017, what amount should have been shown for consolidated dividends?
20. A) $ 900,000.
21. B) $1,020,000.
22. C) $ 876,000.
23. D) $ 996,000.
24. E) $ 948,000.

Answer: A

Learning Objective: 03-03

Learning Objective: 03-04

Topic: Consolidation balances―Calculate

Topic: Consolidation balances―Understand by any method

Difficulty: 1 Easy

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: $900,000 Parent’s Dividends Only

 

QUESTION]

REFER TO: 03-03

20. What is the amount of consolidated net income for the year 2017?
21. A) $3,180,000.
22. B) $3,612,000.
23. C) $3,300,000.
24. D) $3,588,000.
25. E) $3,420,000.

Answer: D

Learning Objective: 03-03

Learning Objective: 03-04

Topic: Consolidation balances―Calculate

Topic: Consolidation balances―Understand by any method

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Parent Income $3,180,000 + Sub Income $432,000 – Amortization Allocations $24,000 = Consolidated Net Income $3,588,000

 

REFERENCE: 03-04

Jans Inc. acquired all of the outstanding common stock of Tysk Corp. on January 1, 2016, for $372,000.  Equipment with a ten-year life was undervalued on Tysk’s financial records by $46,000.  Tysk also owned an unrecorded customer list with an assessed fair value of $67,000 and an estimated remaining life of five years.

 

Tysk earned reported net income of $180,000 in 2016 and $216,000 in 2017.  Dividends of $70,000 were paid in each of these two years.  Selected account balances as of December 31, 2018, for the two companies follow.

	Jans	Tysk
Revenues	$1,080,000	$840,000
Expenses	480,000	600,000
Investment income	Not given	0
Retained earnings, 1/1/18	840,000	600,000
Dividends paid	132,000	70,000

 

[QUESTION]

REFER TO: 03-04

21. If the partial equity method had been applied, what was 2018 consolidated net income?
22. A) $840,000.
23. B) $768,400.
24. C) $822,000.
25. D) $240,000.
26. E) $600,000.

Answer: C

Learning Objective: 03-03

Learning Objective: 03-03c

Learning Objective: 03-04

Topic:Amortization calculations

Topic:  Consolidation entries―Partial equity

Topic: Consolidation balances―Calculate

Topic:Consolidation balances―Understand by any method

Difficulty: 3 Hard

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Excess amortizations: Equipment ($46,000/10) = $4,600

Customer list ($67,000/5) = $13,400

Total: $4,600 + $13,400 = $18,000

Parent $1,080,000 – $480,000 = $600,000; Sub $840,000 – $600,000 = $240,000; $600,000 + $240,000 = $840,000 – $18,000 = $822,000

[QUESTION]

REFER TO: 03-04

22. If the equity method had been applied, what would be the Investment in Tysk Corp. account balance within the records of Jans at the end of 2018?
23. A) $612,100.
24. B) $744,000.
25. C) $774,150.
26. D) $372,000.
27. E) $844,150.

Answer: B

Learning Objective: 03-03a

Topic: Investment and income―Equity method

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Initial Investment $372,000

2016 Entries: $180,000 – $70,000 – $18,000 = $92,000

2017 Entries: $216,000 – $70,000 – $18,000 = $128,000

2018 Entries: $240,000 – $70,000 – $18,000 = $152,000

$372,000 + $92,000 + $128,000 + $152,000 = $744,000

 

[QUESTION]

23. Red Co. acquired 100% of Green, Inc. on January 1, 2017. On that date, Green had land with a book value of $42,000 and a fair value of $52,000.  Also, on the date of acquisition, Green had a building with a book value of $200,000 and a fair value of $390,000.  Green had equipment with a book value of $350,000 and a fair value of $280,000.  The building had a 10-year remaining useful life and the equipment had a 5-year remaining useful life. How much total expense will be in the consolidated financial statements for the year ended December 31, 2017 related to the acquisition allocations of Green?
24. A) $43,000.
25. B) $33,000.
26. C) $ 5,000.
27. D) $15,000.
28. E) $0.

Answer: C

Learning Objective: 03-03

Learning Objective: 03-04

Topic: Amortization calculations

Topic: Consolidation balances―Understand by any method

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Land ($0 excess amortization) + Building ($190,000/10 = $19,000 excess amortization) + Equipment ($70,000/5 = $14,000 reduction of amortization expense) = ($19,000 – $14,000) = $5,000 excess amortization

 

[QUESTION]

24. All of the following are acceptable methods to account for a majority-owned investment in subsidiary except
25. A) The equity method.
26. B) The initial value method.
27. C) The partial equity method.
28. D) The fair-value method.
29. E) Book value method.

Answer: D

Learning Objective: 03-02

Topic: Investment methods―Identify and differentiate

Difficulty: 1 Easy

Blooms: Remember

AACSB: Reflective thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

25. Under the equity method of accounting for an investment:
26. A) The investment account remains at initial value.
27. B) Dividends received are recorded as revenue.
28. C) Goodwill is amortized over 20 years.
29. D) Income reported by the subsidiary increases the investment account.
30. E) Dividends received increase the investment account.

Answer: D

Learning Objective: 03-02

Topic: Investment methods―Identify and differentiate

Topic:Investment and income―Equity method

Difficulty: 1 Easy

Blooms: Remember

AACSB: Reflective thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

26. Under the partial equity method of accounting for an investment,
27. A) The investment account remains at initial value.
28. B) Dividends received are recorded as revenue.
29. C) The allocations for excess fair value allocations over book value of net assets at date of acquisition are applied over their useful lives to reduce the investment account.
30. D) Amortization of the excess of fair value allocations over book value is ignored in regard to the investment account.
31. E) Dividends received increase the investment account.

Answer: D

Learning Objective: 03-02

Topic:Investment and income―Partial equity method

Difficulty: 2 Medium

Blooms: Understand

AACSB: Reflective thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

27. Under the initial value method, when accounting for an investment in a subsidiary,
28. A) Dividends received by the subsidiary decrease the investment account.
29. B) The investment account is adjusted to fair value at year-end.
30. C) Income reported by the subsidiary increases the investment account.
31. D) The investment account does not change from year to year.
32. E) Dividends received are ignored.

Answer: D

Learning Objective: 03-02

Topic:Investment and income―Initial value method

Difficulty: 2 Medium

Blooms: Understand

AACSB: Reflective thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

28. According to GAAP regarding amortization of goodwill, which of the following statements is true?
29. A) Goodwill recognized in consolidation must be amortized over 20 years.
30. B) Goodwill recognized in consolidation must be expensed in the period of acquisition.
31. C) Goodwill recognized in consolidation will not be amortized but subject to an annual test for impairment.
32. D) Goodwill recognized in consolidation can never be written off.
33. E) Goodwill recognized in consolidation must be amortized over 40 years.

Answer: C

Learning Objective: 03-05

Topic: Impairment―Goodwill―Rationale

Difficulty: 1 Easy

Blooms: Remember

AACSB: Reflective thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

29. When a company applies the initial value method in accounting for its investment in a subsidiary, and the subsidiary reports income in excess of dividends paid, what entry would be made for a consolidation worksheet for the second year?

 

A)	Retained earnings
	Investment in subsidiary
B)	Investment in subsidiary
	Retained earnings
C)	Investment in subsidiary
	Equity in subsidiary’s income
D)	Equity in subsidiary’s income
	Investment in subsidiary
E)	Additional paid-in capital Retained earnings

Answer: B

Learning Objective: 03-03b

Topic: Consolidation entries―Initial value

Difficulty: 2 Medium

Blooms: Analyze

AACSB: Analytical Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

30. When a company applies the initial value method in accounting for its investment in a subsidiary and the subsidiary reports income less than dividends paid, what entry would be made for a consolidation worksheet in the second year?

 

A)	Retained earnings
	Investment in subsidiary
B)	Investment in subsidiary
	Retained earnings
C)	Investment in subsidiary
	Equity in subsidiary’s income
D)	Investment in subsidiary
	Additional paid-in capital
E)	Retained earnings Additional paid-in capital

Answer: A

Learning Objective: 03-03b

Topic: Consolidation entries―Initial value

Difficulty: 2 Medium

Blooms: Analyze

AACSB: Analytical Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

31. When a company applies the partial equity method in accounting for its investment in a subsidiary and the subsidiary’s equipment has a fair value greater than its book value, what consolidation worksheet entry is made in a year subsequent to the initial acquisition of the subsidiary?

 

A)	Retained earnings
	Investment in subsidiary
B)	Investment in subsidiary
	Retained earnings
C)	Investment in subsidiary
	Equity in subsidiary’s income
D)	Investment in subsidiary
	Additional paid-in capital
E)	Retained earnings Additional paid-in capital

 

Answer: A

Learning Objective: 03-03c

Topic: Consolidation entries―Partial equity

Difficulty: 2 Medium

Blooms: Analyze

AACSB: Analytical Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

 

[QUESTION]

32. When consolidating parent and subsidiary financial statements, which of the following statements is true?
33. A) Goodwill is never recognized.
34. B) Goodwill required is amortized over 20 years.
35. C) Goodwill may be recorded on the parent company’s books.
36. D) The value of any goodwill should be tested annually for impairment in value.
37. E) Goodwill should be expensed in the year of acquisition.

Answer: D

Learning Objective: 03-05

Topic: Impairment―Goodwill―Rationale

Difficulty: 1 Easy

Blooms: Remember

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

33. When consolidating a subsidiary under the equity method, which of the following statements is true with regard to the subsidiary subsequent to the year of acquisition?
34. A) All net assets are revalued to fair value and must be amortized over their useful lives.
35. B) Only net assets that had excess fair value over book value when acquired by the parent must be amortized over their useful lives.
36. C) All depreciable net assets are revalued to fair value at date of acquisition and must be amortized over their useful lives.
37. D) Only depreciable net assets that have excess fair value over book value must be amortized over their useful lives.
38. E) Only assets that have excess fair value over book value must be amortized over their useful lives.

Answer: B

Learning Objective: 03-03a

Topic: Consolidation entries―Equity

Topic:

Difficulty: 2 Medium

Blooms: Understand

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

34. Which of the following is not a factor to be considered when determining the useful life of an intangible asset?
35. A) Legal, regulatory or contractual provisions.
36. B) The effects of obsolescence.
37. C) The expected use of the asset by the organization.
38. D) The fair value of the asset.
39. E) The level of maintenance expenditures that will be required to obtain expected future benefits.

Answer: D

Learning Objective: 03-07

Topic: Impairment―Intangibles other than goodwill

Difficulty: 1 Easy

Blooms: Remember

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

35. Which of the following is false regarding contingent consideration in business combinations?
36. A) Contingent consideration payable in cash is reported under liabilities.
37. B) Contingent consideration payable in stock shares is reported under stockholders’ equity.
38. C) Contingent consideration is recorded because of its substantial probability of eventual payment.
39. D) The contingent consideration fair value is recognized as part of the acquisition regardless of whether eventual payment is based on future performance of the target firm or future stock price of the acquirer.
40. E) Contingent consideration is reflected in the acquirer’s balance sheet at the present value of the potential expected future payment.

Answer: C

Learning Objective: 03-08

Topic: Contingent consideration

Difficulty: 2 Medium

Blooms: Remember

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

36. With respect to identifiable intangible assets other than goodwill, which of the following is true?
37. A) If the value of the identified asset meets a de minimis exception, the entity may elect to treat it as goodwill.
38. B) An identifiable intangible asset with an indefinite useful life must be assessed for impairment once every three years.
39. C) If the average fair value of the asset is less than the average carrying amount of the asset with respect to, and determined for, the preceding three-year period, the asset is considered impaired and the entity may recognize a loss.
40. D) A quantitative evaluation of value is required each year regardless of circumstances.
41. E) If a qualitative assessment of the asset performed by an entity indicates impairment is likely, a quantitative assessment must be performed to determine whether there has been a loss in fair value.

Answer: E

Learning Objective: 03-07

Topic: Impairment―Intangibles other than goodwill

Difficulty: 2 Medium

Blooms: Remember

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

37. Consolidated net income using the equity method for an acquisition combination is computed as follows:
38. A) Parent company’s revenues from its own operations plus subsidiary retained earnings.
39. B) Parent’s reported net income plus subsidiary dividends.
40. C) Combined revenues less combined expenses less equity in subsidiary’s earnings less amortization of fair-value allocations in excess of book value.
41. D) Parent’s revenues less expenses for its own operations plus the equity from subsidiary’s earnings less subsidiary dividends.
42. E) None of these answer choices are correct.

Answer: C

Learning Objective: 03-03a

Topic: Consolidation entries―Equity

Topic:Consolidation balances―Calculate

Difficulty: 2 Medium

Blooms: Remember

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

REFERENCE: 03-05

Perry Company acquires 100% of the stock of Hurley Corporation on January 1, 2017, for $3,800 cash.  As of that date Hurley has the following trial balance;

Any excess of consideration transferred over fair value of net assets acquired is considered goodwill with an indefinite life.

 

[QUESTION]

REFER TO: 03-05

38. Compute the consideration transferred in excess of book value acquired at January 1, 2017.
39. A) $
40. B) $
41. C) $2,200.
42. D) $
43. E) $2,900.

Answer: B

Learning Objective: 03-04

Topic: Consolidation balances―Understand by any method

Difficulty: 1 Easy

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Acquisition Price $3,800 – Total Equity at Acquisition $3,100 = $700

 

[QUESTION]

REFER TO: 03-05

39. Compute goodwill, if any, at January 1, 2017.
40. A) $
41. B) $
42. C) $
43. D) $1,200.
44. E) $

Answer: B

Learning Objective: 03-04

Topic: Consolidation balances―Understand by any method

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Excess (from above) $700 + $300 buildings – $250 equipment – $400 Land –$100 liabilities = $250 Excess Unidentified (Goodwill)

 

[QUESTION]

REFER TO: 03-05

40. Compute the amount of Hurley’s inventory that would be reported in a January 1, 2017, consolidated balance sheet.
41. A) $800.
42. B) $100.
43. C) $900.
44. D) $150.
45. E) $

Answer: A

Learning Objective: 03-03

Topic:Consolidation balances―Calculate

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Fair Value at Acquisition = $800

 

 

[QUESTION]

REFER TO: 03-05

41. Compute the amount of Hurley’s buildings that would be reported in a December 31, 2017, consolidated balance sheet.
42. A) $1,560.
43. B) $1,260.
44. C) $1,440.
45. D) $1,160.
46. E) $1,140.

Answer: B

Learning Objective: 03-03

Topic:Amortization calculations

Topic: Consolidation balances―Calculate

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: FV $1,200 + Excess Amortization ($300 / 5) $60 = $1,260

 

[QUESTION]

REFER TO: 03-05

42. Compute the amount of Hurley’s equipment that would be reported in a December 31, 2017, consolidated balance sheet.
43. A) $1,000.
44. B) $1,250.
45. C) $
46. D) $1,125.
47. E) $

Answer: D

Learning Objective: 03-03

Topic:Amortization calculations

Topic: Consolidation balances―Calculate

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: FV $1,250 – Excess Amortization ($250 / 2) $125 = $1,125

 

[QUESTION]

REFER TO: 03-05

43. Compute the amount of Hurley’s long-term liabilities that would be reported in a December 31, 2017, consolidated balance sheet.
44. A) $1,800.
45. B) $1,700.
46. C) $1,725.
47. D) $1,675.
48. E) $3,500.

Answer: C

Learning Objective: 03-03

Topic:Amortization calculations

Topic: Consolidation balances―Calculate

Difficulty: 3 Hard

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: FV $1,700 + Excess Amortization ($100 / 4) $25 = $1,725

 

[QUESTION]

REFER TO: 03-05

44. Compute the amount of Hurley’s buildings that would be reported in a December 31, 2018, consolidated balance sheet.
45. A) $1,620.
46. B) $1,380.
47. C) $1,320.
48. D) $1,080.
49. E) $1,500.

Answer: C

Learning Objective: 03-03

Topic: Amortization calculations

Topic: Consolidation balances―Calculate

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: FV $1,200 + Excess Amortization ($300 / 5) $60 × 2 = $1,320

 

[QUESTION]

REFER TO: 03-05

45. Compute the amount of Hurley’s equipment that would be reported in a December 31, 2018, consolidated balance sheet.
46. A) $
47. B) $1,000.
48. C) $1,250.
49. D) $1,125.
50. E) $1,200.

Answer: B

Learning Objective: 03-03

Topic: Amortization calculations

Topic:Consolidation balances―Calculate

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: FV $1,250 – Excess Amortization ($250 / 2) $125 × 2 = $1,000

 

[QUESTION]

REFER TO: 03-05

46. Compute the amount of Hurley’s land that would be reported in a December 31, 2018, consolidated balance sheet.
47. A) $
48. B) $1,300.
49. C) $
50. D) $1,450.
51. E) $2,200.

Answer: B

Learning Objective: 03-03

Topic: Consolidation balances―Calculate

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: FV $1,300

 

[QUESTION]

REFER TO: 03-05

47. Compute the amount of Hurley’s long-term liabilities that would be reported in a December 31, 2018, consolidated balance sheet.
48. A) $1,700.
49. B) $1,800.
50. C) $1,650.
51. D) $1,750.
52. E) $3,500.

Answer: D

Learning Objective: 03-03

Topic: Amortization calculations

Topic: Consolidation balances―Calculate

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: FV $1,700 + Excess Amortization ($100 / 4) $25 × 2 = $1,750

 

REFERENCE: 03-06

Kaye Company acquired 100% of Fiore Company on January 1, 2018.  Kaye paid $1,000 excess consideration over book value, which is being amortized at $20 per year.  There was no goodwill in the combination. Fiore reported net income of $400 in 2018 and paid dividends of $100.

 

[QUESTION]

REFER TO: 03-06

48. Assume the equity method is applied. How much equity income will Kaye report on its internal accounting records as a result of Fiore’s operations?
49. A) $400
50. B) $300
51. C) $380
52. D) $280
53. E) $480

Answer: C

Learning Objective: 03-02

Learning Objective: 03-03a

Topic: Investment and income―Equity method

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback:  2018 Income $400 – Amortization $20 = $380

 

[QUESTION]

REFER TO: 03-06

49. Assume the partial equity method is applied. How much equity income will Kaye report on its internal accounting records as a result of Fiore’s operations?
50. A) $400
51. B) $300
52. C) $380
53. D) $280
54. E) $480

Answer: A

Learning Objective: 03-02

Topic: Investment and income―Partial equity method

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback:  2018 Income = $400

 

[QUESTION]

REFER TO: 03-06

50. Assume the initial value method is applied. How much equity income will Kaye report on its internal accounting records as a result of Fiore’s operations?
51. A) $400
52. B) $300
53. C) $380
54. D) $100
55. E) $210

Answer: D

Learning Objective: 03-02

Topic: Investment and income―Initial value method

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback:  2018 Dividends = $100

 

[QUESTION]

REFER TO: 03-06

51. Assume the partial equity method is used. In the years following acquisition, what additional worksheet entry must be made for consolidation purposes, but is not required for the equity method?

A)	Retained earnings	20
	Investment in Fiore		20
B)	Investment in Fiore	20
	Retained earnings		20
C)	Expenses	20
	Investment in Fiore		20
D)	Expenses	20
	Retained earnings		20
E)	Retained earnings	20
	Additional paid-in capital		20

 

1. A) Entry A.
2. B) Entry B.
3. C) Entry C.
4. D) Entry D.
5. E) Entry E.

Answer: A

Learning Objective: 03-03c

Topic: Consolidation entries―Partial equity

Difficulty: 2 Medium

Blooms: Analyze

AACSB: Analytical Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

REFER TO: 03-06

52. Assume the initial value method is used. In the year subsequent to acquisition, what additional worksheet entry must be made for consolidation purposes that is not required for the equity method?

 

A)	Investment in Fiore	380
	Retained earnings		380
B)	Retained earnings	380
	Investment in Fiore		380
C)	Investment in Fiore	280
	Retained earnings		280
D)	Retained earnings	280
	Investment in Fiore		280
E)	Additional paid-in capital	280
	Retained earnings		280

 

1. A) Entry A.
2. B) Entry B.
3. C) Entry C.
4. D) Entry D.
5. E) Entry E.

Answer: C

Learning Objective: 03-03b

Topic: Consolidation entries―Initial value

Difficulty: 3 Hard

Blooms: Analyze

AACSB: Analytical Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

53. Hoyt Corporation agreed to the following terms in order to acquire the net assets of Brown Company on January 1, 2018:

(1.) To issue 400 shares of common stock ($10 par) with a fair value of $45 per share.

(2.) To assume Brown’s liabilities which have a book value of $1,600 and a fair value of $1,500.

On the date of acquisition, the consideration transferred for Hoyt’s acquisition of Brown would be

1. A) $18,000.
2. B) $16,500.
3. C) $20,000.
4. D) $18,500.
5. E) $19,500.

Answer: E

Learning Objective: 03-04

Topic:Consolidation balances―Understand by any method

Difficulty: 1 Easy

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Common Stock (400 shares × $45) $18,000 + Liabilities Assumed $1,500 = $19,500

 

REFERENCE: 03-07

Following are selected accounts for Green Corporation and Vega Company as of December 31, 2020.  Several of Green’s accounts have been omitted.

 

	Green	Vega
Revenues	$900,000	$500,000
Cost of goods sold	360,000	200,000
Depreciation expense	140,000	40,000
Other expenses	100,000	60,000
Equity in Vega’s income	?
Retained earnings, 1/1/2020	1,350,000	1,200,000
Dividends	195,000	80,000
Current assets	300,000	1,380,000
Land	450,000	180,000
Building (net)	750,000	280,000
Equipment (net)	300,000	500,000
Liabilities	600,000	620,000
Common stock	450,000	80,000
Additional paid-in capital	75,000	320,000

Green acquired 100% of Vega on January 1,2016, by issuing 10,500 shares of its $10 par value common stock with a fair value of $95 per share.  On January 1, 2016, 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.

 

[QUESTION]

REFER TO: 03-07

54. Compute the book value of Vega at January 1, 2016.
55. A) $ 997,500.
56. B) $ 857,500.
57. C) $1,200,000.
58. D) $1,600,000.
59. E) $ 827,500.

Answer: B

Learning Objective: 03-04

Topic: Consolidation balances―Understand by any method

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Common Stock Fair Value $997,500 – Fair Value Asset Adjustment (Land $40,000 – Building $30,000 + Equipment $80,000 + Unrecorded Trademark $50,000) $140,000 = $857,500

 

[QUESTION]

REFER TO: 03-07

55. Compute the December 31, 2020, consolidated revenues.
56. A) $1,400,000.
57. B) $ 800,000.
58. C) $ 500,000.
59. D) $1,590,375.
60. E) $1,390,375.

Answer: A

Learning Objective: 03-03

Topic: Consolidation balances―Calculate

Difficulty: 1 Easy

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: $900,000 + $500,000 = $1,400,000

 

[QUESTION]

REFER TO: 03-07

56. Compute the December 31, 2020, consolidated total expenses.
57. A) $620,000.
58. B) $280,000.
59. C) $900,000.
60. D) $909,625.
61. E) $299,625.

Answer: D

Learning Objective: 03-03

Topic:Amortization calculations

Topic: Consolidation balances―Calculate

Difficulty: 3 Hard

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: COGS ($360,000 + $200,000) + Depreciation ($140,000 + $40,000) + Other Exp ($100,000 + $60,000) + Excess FV Amortization (Blg [$1,500] + Equip $8,000 + Trademark $3,125) = $909,625

 

[QUESTION]

REFER TO: 03-07

57. Compute the December 31, 2020, consolidated buildings.
58. A) $1,037,500.
59. B) $1,007,500.
60. C) $1,000,000.
61. D) $1,022,500.
62. E) $1,012,500.

Answer: B

Learning Objective: 03-03

Topic:Amortization calculations

Topic: Consolidation balances―Calculate

Difficulty: 3 Hard

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: $750,000 + $280,000 – $30,000 = $1,000,000 + Amortization ($1,500 × 5) = $1,007,500

 

[QUESTION]

REFER TO: 03-07

58. Compute the December 31, 2020, consolidated equipment.
59. A) $800,000.
60. B) $808,000.
61. C) $840,000.
62. D) $760,000.
63. E) $848,000.

Answer: C

Learning Objective: 03-03

Topic: Amortization calculations

Topic:Consolidation balances―Calculate

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: $300,000 + $580,000 = $880,000 – Amortization ($8,000 × 5) = $840,000

 

[QUESTION]

REFER TO: 03-07

59. Compute the December 31, 2020, consolidated land.
60. A) $220,000.
61. B) $180,000.
62. C) $670,000.
63. D) $630,000.
64. E) $450,000.

Answer: C

Learning Objective: 03-03

Topic: Consolidation balances―Calculate

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: $450,000 + $180,000 +$40,000= $670,000

 

[QUESTION]

REFER TO: 03-07

60. Compute the December 31, 2020, consolidated trademark.
61. A) $50,000.
62. B) $46,875.
63. C) $
64. D) $34,375.
65. E) $37,500.

Answer: D

Learning Objective: 03-03

Topic:Amortization calculations

Topic: Consolidation balances―Calculate

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: $50,000 – Amortization ($3,125 × 5) = $34,375

 

[QUESTION]

REFER TO: 03-07

61. Compute the December 31, 2020, consolidated common stock.
62. A) $450,000.
63. B) $530,000.
64. C) $555,000.
65. D) $635,000.
66. E) $525,000.

Answer: A

Learning Objective: 03-03

Topic: Consolidation balances―Calculate

Difficulty: 1 Easy

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: $450,000 (Parent Only)

 

[QUESTION]

REFER TO: 03-07

62. Compute the December 31, 2020, consolidated additional paid-in capital.
63. A) $210,000.
64. B) $75,000.
65. C) $1,102,500.
66. D) $942,500.
67. E) $525,000.

Answer: B

Learning Objective: 03-03

Topic: Consolidation balances―Calculate

Difficulty: 1 Easy

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: $75,000 (Parent Only)

 

[QUESTION]

REFER TO: 03-07

63. Compute the December 31, 2020 consolidated retained earnings.
64. A) $1,645,375.
65. B) $1,350,000.
66. C) $1,565,375.
67. D) $1,840,375.
68. E) $1,265,375.

Answer: A

Learning Objective: 03-03

Topic: Consolidation balances―Calculate

Difficulty: 3 Hard

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Parent Beg RE: $1,350,000 + Consolidated Net Income $490,375 – Consolidated Dividends $195,000 = Consolidated RE $1,645,375

 

[QUESTION]

64. One company acquires another company in a combination accounted for under the acquisition method. 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?
65. A) It is the only method allowed by the SEC.
66. B) It is relatively easy to apply.
67. C) It is the only internal reporting method allowed by generally accepted accounting principles.
68. D) Operating results on the parent’s financial records reflect consolidated totals.
69. E) When the initial method is used, no worksheet entries are required in the consolidation process.

Answer: B

Learning Objective: 03-02

Topic: Investment methods―Identify and differentiate

Difficulty: 1 Easy

Blooms: Understand

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

65. One company acquires another company in a combination accounted for under the acquisition method. 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?
66. A) It is the only method allowed by the SEC.
67. B) It is relatively easy to apply.
68. C) It is the only internal reporting method allowed by generally accepted accounting principles.
69. D) Operating results on the parent’s financial records reflect consolidated totals.
70. E) When the equity method is used, no worksheet entries are required in the consolidation process.

Answer: D

Learning Objective: 03-02

Topic: Investment methods―Identify and differentiate

Difficulty: 1 Easy

Blooms: Understand

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

66. When is a goodwill impairment loss recognized?
67. A) Annually on a systematic and rational basis.
68. B) Never.
69. C) When both the fair value of a reporting unit and its associated implied goodwill fall below their respective carrying values.
70. D) If the fair value of a reporting unit falls below its original acquisition price.
71. E) Whenever the fair value of the entity declines significantly.

Answer: C

Learning Objective: 03-05

Topic: Impairment―Goodwill―Rationale

Difficulty: 2 Medium

Blooms: Remember

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

67. Which of the following will result in the recognition of an impairment loss on goodwill?
68. A) Goodwill amortization is to be recognized annually on a systematic and rational basis.
69. B) Both the fair value of a reporting unit and its associated implied goodwill fall below their respective carrying values.
70. C) The fair value of the entity declines significantly.
71. D) The fair value of a reporting unit falls below the original consideration transferred for the acquisition.
72. E) The entity is investigated by the SEC and its reputation has been severely damaged.

Answer: B

Learning Objective: 03-05

Topic: Impairment―Goodwill―Rationale

Difficulty: 2 Medium

Blooms: Remember

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

REFERENCE: 03-08

Goehler, Inc. acquires all of the voting stock of Kenneth, Inc. on January 4, 2017, 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, 2018, 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.

 

[QUESTION]

REFER TO: 03-08

68. If Goehler applies the equity methodin accounting for Kenneth, what is the consolidated balance for the Equipment account as of December 31, 2018?
69. A) $1,080,000.
70. B) $1,104,000.
71. C) $1,100,000.
72. D) $1,468,000.
73. E) $1,475,000.

Answer: B

Learning Objective: 03-03

Learning Objective: 03-03a

Topic: Amortization calculations

Topic: Consolidation balances―Calculate

Topic:Consolidation entries―Equity

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Excess amortizations: (120,000-90,000=30,000/10 = 3,000 per year).

2018 Balance Goehler Bv 975,000+ Kenneth BV 105,000 + Fair value adjustment 30,000 – amortization for 2017 and 2018 (3,000 × 2) = 1,104,000

 

[QUESTION]

REFER TO: 03-08

69. If Goehler applies the partial equity method in accounting for Kenneth, what is the consolidated balance for the Equipment account as of December 31, 2018?
70. A) $1,080,000.
71. B) $1,104,000.
72. C) $1,100,000.
73. D) $1,468,000.
74. E) $1,475,000.

Answer: B

Learning Objective: 03-03

Learning Objective: 03-04

Learning Objective: 03-03c

Topic: Amortization calculations

Topic: Consolidation balances―Calculate

Topic:Consolidation entries―Partial equity

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Same as above

 

[QUESTION]

REFER TO: 03-08

70. If Goehler applies the initial value method in accounting for Kenneth, what is the consolidated balance for the Equipment account as of December 31, 2018?
71. A) $1,080,000.
72. B) $1,104,000.
73. C) $1,100,000.
74. D) $1,468,000.
75. E) $1,475,000.

Answer: B

Learning Objective: 03-03

Learning Objective: 03-04

Learning Objective: 03-03b

Topic: Amortization calculations

Topic: Consolidation balances―Calculate

Topic:Consolidation entries―Initial value

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Same as above,

 

[QUESTION]

71. 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?
72. A) Equally over 20 years.
73. B) Equally over 40 years.
74. C) Equally over 20 years with an annual impairment review.
75. D) No amortization, but annually reviewed for impairment and adjusted accordingly.
76. E) No amortization over an indefinite period time.

Answer: D

Learning Objective: 03-07

Topic:Impairment―Intangibles other than goodwill

Difficulty: 1 Easy

Blooms: Remember

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

REFERENCE: 03-09

Harrison, Inc. acquires 100% of the voting stock of Rhine Company on January 1, 2017 for $400,000 cash.  A contingent payment of $16,500 will be paid on April 15, 2018 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.

 

[QUESTION]

REFER TO: 03-09

72. What will Harrison record as its Investment in Rhine on January 1, 2017?
73. A) $400,000.
74. B) $403,142.
75. C) $406,000.
76. D) $409,142.
77. E) $416,500.

Answer: B

Learning Objective: 03-08

Difficulty: 2 Medium

Topic: Contingent consideration

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Cash Payment $400,000 + Weighted Fair Value of Contingency $3,142 = $403,142

 

[QUESTION]

REFER TO: 03-09

73. Assuming Rhine generates cash flow from operations of $27,200 in 2017, how will Harrison record the $16,500 payment of cash on April 15, 2018 in satisfaction of its contingent obligation?
74. A) Debit Contingent performance obligation $16,500, and Credit Cash $16,500.
75. B) Debit Contingent performance obligation $3,142, debit Loss from revaluation of contingent performance obligation $13,358, and Credit Cash $16,500.
76. C) Debit Investment in Subsidiary and Credit Cash, $16,500.
77. D) Debit Goodwill and Credit Cash, $16,500.
78. E) No entry.

Answer: B

Learning Objective: 03-08

Topic: Contingent consideration

Difficulty: 3 Hard

Blooms: Analyze

AACSB: Analytical Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

REFER TO:  Ref. 03-09

74. When recording consideration transferred for the acquisition of Rhine on January 1, 2017, Harrison will record a contingent performance obligation in the amount of:
75. A) $ 40
76. B) $ 2,671.60
77. C) $ 3,142.00
78. D) $13,358.00
79. E) $16,500.00

Answer: C

Learning Objective: 03-08

Topic:Contingent consideration

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Weighted Fair Value of Contingency = $3,142

 

REFERENCE: 03-10

Beatty, Inc. acquires 100% of the voting stock of Gataux Company on January 1, 2017 for $80,000, consisting of $20,000 in cash and 6,000 shares of stock. A contingent payment of $12,000 in cash will be paid on April 1, 2018 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. A contingent payment of $20,000, payable in stock, will be paid to the former owners of Gateaux on April 1, 2018 if the market value of Beatty stock drops below $10 per share. Beatty estimates there is a 15% probability that its share price will not exceed that threshold. Using the same interest rate and probability-weighted approach, Beatty calculates the market value of the stock contingency to be $2,884.

 

[QUESTION]

REFER TO: 03-10

75. What will Beatty record as its Investment in Gataux on January 1, 2017?
76. A) $500,000.
77. B) $503,461.
78. C) $506,345.
79. D) $532,000.
80. E) $546,500.

Answer: C

Learning Objective: 03-08

Topic: Contingent consideration

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Cash Payment $500,000 + Weighted Fair Value of Contingency ($3,461 cash + $2,884 stock) = $506,345.

 

[QUESTION]

REFER TO: 03-10

76. Using the acquisition method, how will Beatty record the stock contingency?
77. A) Credit Contingent Performance Obligation, $20,000.
78. B) Debit Additional Paid-In Capital, $20,000.
79. C) Credit Additional Paid-In Capital, $2,884.
80. D) Debit Contingent Performance Obligation, $2,884.
81. E) No entry.

Answer: B

Learning Objective: 03-08

Topic:Contingent consideration

Difficulty: 2 Medium

Blooms: Analyze

AACSB: Analytical Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

REFER TO: 03-10

77. On April 1, 2018, Beatty stock closes with a market value of $8.98 per share. How many shares of stock, rounded to the next whole number, must it issue to the former owners of Gateax?
78. A) 682
79. B) 2,000
80. C) 2,228
81. D) 2,884
82. E) 6,000

Answer: C

Learning Objective: 03-08

Topic: Contingent consideration

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: $20,000/8.98 per share = 2,228 shares

 

[QUESTION]

78. Prince Company acquires Duchess, Inc. on January 1, 2016. At the date of acquisition, Duchess has long-term debt with a fair value of $1,500,000 and a carrying amount of $1,200,000.

 

With respect to long-term debt consolidation worksheet adjustments in periods following the acquisition, which of the following is correct:

 

1. A) Debit Interest Expense and Credit Long-Term Debt Expense.
2. B) Prince must recognize an increase in interest expense if the amount is material.
3. C) Do not adjust the value of the debt because Prince is not obligated to repay the debt.
4. D) Credit Long-Term Debt and Debit Interest Expense on the balance sheet of Duchess
5. E) Debit Long-Term Debt and Credit Interest Expense

 

Answer: E

Learning Objective: 03-03

Topic: Amortization calculations

Difficulty: 2 Medium

Blooms: Analyze

AACSB: Analytical Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

79. With respect to the recognition of goodwill in a business combination, which of the following statements is true?
80. A) Only US GAAP requires recognition of goodwill when the fair value of the consideration transferred exceeds the net fair value of assets and liabilities.
81. B) US GAAP standards require goodwill to be allocated to reporting units expected to benefit from the goodwill.
82. C) Only IFRS standards require annual assessments for goodwill impairment.
83. D) IFRS requires a reporting unit’s implied fair value for goodwill to be calculated as the excess of such unit’s fair value over the fair value of its identifiable net assets.
84. E) Neither US GAAP, nor IFRS, provide that goodwill impairments will not be recoverable once recognized.

Answer: B

Learning Objective: 03-05

Topic: Impairment―Goodwill―Rationale

Difficulty: 1 Easy

Blooms: Understand

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

REFERENCE: 03-12

Watkins, Inc. acquires all of the outstanding stock of Glen Corporation on January 1, 2017.  At that date, Glen owns only three assets and has no liabilities:

 

	Book	Fair
	Value	Value
Land	$   40,000	$   50,000
Equipment (10-year life)	80,000	75,000
Building (20-year life)	200,000	300,000

 

[QUESTION]

REFER TO: 03-12

80. If Watkins pays $450,000 in cash for Glen, what amount would be represented as the subsidiary’s Building in a consolidation at December 31, 2019, assuming the book value of the building at that date is still $200,000?
81. A) $200,000.
82. B) $285,000.
83. C) $290,000.
84. D) $295,000.
85. E) $300,000.

Answer: B

Learning Objective: 03-03

Topic: Amortization calculations

Topic: Consolidation balances―Calculate

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Fair Value at Acquisition ($300,000) – Amortization [($100,000 / 20) × 3] = $285,000

 

[QUESTION]

REFER TO: 03-12

81. If Watkins pays $400,000 in cash for Glen, what amount would be represented as the subsidiary’s Building in a consolidation at December 31, 2019, assuming the book value of the building at that date is still $200,000?
82. A) $200,000.
83. B) $285,000.
84. C) $260,000.
85. D) $268,000.
86. E) $300,000.

Answer: B

Learning Objective: 03-03

Topic: Amortization calculations

Topic: Consolidation balances―Calculate

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Fair Value at Acquisition ($300,000) – Amortization [($100,000 / 20) × 3] = $285,000

 

[QUESTION]

REFER TO: 03-12

82. If Watkins pays $450,000 in cash for Glen, what amount would be represented as the subsidiary’s Equipment in a consolidation at December 31, 2019, assuming the book value of the equipment at that date is still $80,000?
83. A) $70,000.
84. B) $73,500.
85. C) $75,000.
86. D) $76,500.
87. E) $80,000.

Answer: D

Learning Objective: 03-03

Topic: Amortization calculations

Topic:Consolidation balances―Calculate

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Fair Value at Acquisition ($75,000) + Amortization [($5,000 / 10) × 3] = $76,500

 

[QUESTION]

REFER TO: 03-12

83. If Watkins pays $450,000 in cash for Glen, what acquisition-date fair value allocation, net of amortization, should be attributed to the subsidiary’s Equipment in consolidation at December 31, 2019?
84. A) ($5,000).
85. B) $80,000.
86. C) $75,000.
87. D) $73,500.
88. E) ($3,500).

Answer: E

Learning Objective: 03-03

Topic: Amortization calculations

Topic: Consolidation balances―Calculate

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Fair Value Differential at Acquisition [$5,000] + Amortization ([($5000 / 10) × 3] = [$3,500]

 

[QUESTION]

REFER TO: 03-12

84. If Watkins pays $300,000 in cash for Glen, at what amount would the subsidiary’s Building be represented in a January 2, 2017 consolidation?
85. A) $200,000.
86. B) $225,000.
87. C) $273,000.
88. D) $279,000.
89. E) $300,000.

Answer: E

Learning Objective: 03-03

Topic: Consolidation balances―Calculate

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Fair Value at Acquisition = $300,000

 

[QUESTION]

REFER TO: 03-12

85. If Watkins pays $450,000 in cash for Glen, and Glen earns $50,000 in net income and pays $20,000 in dividends during 2017, what amount representing Glen would be reflected in consolidated net income for the year ended December 31, 2017?
86. A) $20,000 under the initial value method.
87. B) $30,000 under the partial equity method.
88. C) $50,000 under the partial equity method.
89. D) $44,500 under the equity method.
90. E) $45,500 regardless of the internal accounting method used.

Answer: E

Learning Objective: 03-03

Learning Objective: 03-04

Topic: Amortization calculations

Topic:Consolidation balances―Calculate

Topic: Consolidation balances―Understand by any method

Difficulty: 3 Hard

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Sub Income $50,000 – Amortizations ([$5,000] / 10) – ($100,000 / 20) = $45,500

 

[QUESTION]

86. According to the FASB ASC regarding the testing procedures for Goodwill Impairment, the proper procedure for conducting impairment testing is:
87. A) Goodwill recognized in consolidation may be amortized uniformly and only tested if the amortization method originally chosen is changed.
88. B) Goodwill recognized in consolidation must only be impairment tested prior to disposal of the consolidated unit to eliminate the impairment of goodwill from the gain or loss on the sale of that specific entity.
89. C) Goodwill recognized in consolidation may be impairment tested in a two-step approach, first by quantitative assessment of the possible impairment of the fair value of the unit relative to the book value, and then a qualitative assessment as to why the impairment, if any, occurred for disclosure.
90. D) Goodwill recognized in consolidation may be impairment tested in a two-step approach, first by qualitative assessment of the possibility of impairment of the unit fair value relative to the book value, and then quantitative assessments as to how much impairment, if any, occurred for disclosure.
91. E) Goodwill recognized in consolidation may be impairment tested in a two-step approach, first by qualitative assessment of the possibility of impairment of the unit fair value relative to the book value, and then quantitative assessments as to how much impairment, if any, occurred for asset write-down.

Answer: E

Learning Objective: 03-06

Topic: Impairment―Goodwill―Procedures

Difficulty: 2 Medium

Blooms: Remember

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

87. When is a goodwill impairment loss recognized?
88. A) Only after both a quantitative and qualitative assessment of the fair value of goodwill of a reporting unit.
89. B) After only definitive quantitative assessments of the fair value of goodwill is completed.
90. C) After only definitive qualitative assessments of the fair value of goodwill is completed.
91. D) If the fair value of a reporting unit falls to zero or below its original acquisition price.
92. E) Never.

Answer: B

Learning Objective: 03-06

Topic: Impairment―Goodwill―Procedures

Difficulty: 2 Medium

Blooms: Remember

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

 

Essay:

 

[QUESTION]

88. For an acquisition when the subsidiary retains its incorporation, which method of internal recordkeeping is the easiest for the parent to use?

 

Answer: The initial value method is the easiest to use.

Learning Objective: 03-02

Topic: Investment methods―Identify and differentiate

Difficulty: 1 Easy

Blooms: Understand

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

89. For an acquisition when the subsidiary retains its incorporation, which method of internal recordkeeping gives the most accurate portrayal of the accounting results for the entire business combination?

 

Answer: The equity method gives the most accurate portrayal of the results for the combined entity.

Learning Objective: 03-02

Topic: Investment methods―Identify and differentiate

Difficulty: 2 Medium

Blooms: Remember

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

90. For an acquisition when the subsidiary maintains its incorporation, under the partial equity method, what adjustments are made to the balance of the investmentaccount?

 

Answer: The balance of the investment account is increased for the subsidiary’s net income.  It is decreased for subsidiary dividends and losses.  The amortization of excess fair value allocations does not affect the account balance.

Learning Objective: 03-02

Topic: Investment and income―Partial equity method

Difficulty: 2 Medium

Blooms: Remember

AACSB: Reflective Thinking

AACSB: Communication

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

91. From which methods can a parent choose for its internal recordkeeping related to the operations of a subsidiary?

 

Answer: The parent can choose from among the initial value method, equity method, and partial equity method.

Learning Objective: 03-02

Topic: Investment methods―Identify and differentiate

Difficulty: 1 Easy

Blooms: Remember

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

92. For recognized intangible assets that are considered to possess indefinite lives, what is the accounting treatment for purposes of income recognition?

 

Answer: Assets that are recognized as intangible assets and that are considered to have indefinite lives are assessed for impairment on an annual basis, as opposed to being amortized over their useful lives.

Learning Objective: 03-07

Topic: Impairment―Intangibles other than goodwill

Difficulty: 1 Easy

Blooms: Remember

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

93. What is the partial equity method? How does it differ from the equity method?  What are its advantages and disadvantages compared to the equity method?

 

Answer: The partial equity method is a compromise between the initial value method and the equity method.  It provides some of the advantages of the equity method but is easier to use.  Under the partial equity method, the balance in the investment account is increased by the accrual of the subsidiary’s income and decreased when the subsidiary pays dividends.  The advantage is that the partial equity method is simpler than the equity method because amortization of excess fair value allocations is not recorded in the parent’s internal records.  The disadvantage is that the the full accrual of the subsidiary’s operating results are not reflected in the internal records of the parent and amortizations would then need to be reflected in the consolidation process. Not having the adjustment in the internal records prior to consolidation requires allocating the excess portion of the acquisition-date fair values and calculating amortizations on these allocations at the time of consolidation. In years subsequent to the first year after the date of acquisition, establishment of an appropriate beginning retained earnings figure becomes a significant goal of the consolidation. To convert the parent’s beginning of the year retained earnings balance to a full-accrual basis, the prior years’ amortizations are entered on the consolidation worksheet, so that all of the subsidiary’s operational results for the prior periods are included in the consolidation.

Learning Objective: 03-02

Learning Objective: 03-03c

Topic: Investment methods―Identify and differentiate

Topic:Investment and income―Partial equity method

Topic: Consolidation entries―Partial equity

Difficulty: 2 Medium

Blooms: Analyze

AACSB: Analytical Thinking

AACSB: Communication

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

94. What should an entity evaluate when making an initial impairment assessment of an intangible asset (other than goodwill)?

 

Answer: An entity may perform qualitative assessments for its indefinite-lived intangible assets. If an entity elects to perform a qualitative assessment, it must examine relevant events and circumstances to determine whether it is more likely than not that the asset is impaired. Factors to consider include costs of using the intangible asset, legal and regulatory factors, as well as industry and market considerations.  If the assessment indicates impairment is not likely, no further tests are required.

Learning Objective: 03-07

Topic:Impairment―Intangibles other than goodwill

Difficulty: 2 Medium

Blooms: Understand

AACSB: Reflective Thinking

AACSB: Communication

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

95. What is the basic objective of all consolidations?

 

Answer: The basic objective of all consolidations is to combine asset, liability, revenue, expense, and stockholders’ equity accounts in a manner consistent with the concepts of the acquisition method to reflect substance over form in financial reporting for consolidations.  When a parent has control (substance) over a subsidiary and separate incorporation is maintained (form), the consolidated financial statements will reflect results as if the multiple entities were one entity.

Learning Objective: 03-01

Difficulty: 2 Medium

Topic:Consolidation―Overall effects

Blooms: Understand

AACSB: Reflective Thinking

AACSB: Communication

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

96. Yules Co. acquired Noel Co. and applied the acquisitionmethod. Yules decided to use the partial equity method to account for the investment.  The current balance in the investment account is $416,000.  Describe in words how this balance was derived.

 

Answer: The initial balance in the investment account would be the acquisition value implied by the fair value of consideration transferred.  This would not include consideration paid for costs to effect the combination.  After the acquisition, the balance in the account is increased by the parent’s accrual of the subsidiary’s income and decreased by the dividends paid by the subsidiary.

Learning Objective: 03-02

Topic: Investment and income―Partial equity method

Difficulty: 2 Medium

Blooms: Understand

AACSB: Reflective Thinking

AACSB: Communication

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

97. Paperless Co. acquired Sheetless Co. and in effecting this business combination, there was a cash-flow performance contingency to be paid in cash, and a market-price performance contingency to be paid in additional shares of stock. In what accounts and in what section(s) of a consolidated balance sheet are these contingent consideration items shown?

 

Answer: A cash-flow performance contingency is shown as a contingent performance obligation, which is in the liability section of the consolidated balance sheet.  A market-price performance contingency to be paid in stock is shown as additional paid-in capital – contingent equity outstanding, which is in the stockholders’ equity section of the consolidated balance sheet.

Learning Objective: 03-08

Topic:Contingent consideration

Difficulty: 2 Medium

Blooms: Understand

AACSB: Reflective Thinking

AACSB: Communication

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

98. Avery Company acquires Billings Company in a combination accounted for as an acquisition and adopts the equity method to account for Investment in Billings. At the end of four years, the Investment in Billings account on Avery’s books is $198,984. What items constitute this balance?

 

Answer: Since the equity method has been applied by Avery, the $198,984 is composed of four items:

(a.) The acquisition value of consideration transferred by the parent;

(b.) The annual accruals made by Avery to recognize income as it is earned by the subsidiary;

(c.) The reductions that are created by the subsidiary’s payment of dividends;

(d.) The periodic amortization recognized by Avery in connection with the excess fair value allocations identified with its acquisition.

Learning Objective: 03-02

Topic: Investment and income―Equity method

Difficulty: 2 Medium

Blooms: Understand

AACSB: Reflective Thinking

AACSB: Communication

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

99. Dutch Co. has loaned $90,000 to its subsidiary, Hans Corp., which retains separate incorporation. How would this loan be treated on a consolidated balance sheet?

 

Answer: The loan represents an intra-entity payable for Hans, and a receivable for Dutch. Each receivable and payable would be eliminated in preparing a consolidated balance sheet.

Learning Objective: 03-06

Topic: Consolidation balances―Calculate

Difficulty: 2 Medium

Blooms: Remember

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

100. A business combination results in $90,000 of goodwill. Several years later a worksheet is being produced to consolidate the two companies. Describe in words at what amount goodwill will be reported at this date.

 

Answer: The $90,000 attributed to goodwill is reported at its original amount unless a portion of goodwill is impaired or a unit of the business where goodwill resides is sold.

Learning Objective: 03-05

Topic: Impairment―Goodwill―Rationale

Difficulty: 1 Easy

Blooms: Remember

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

101. Compare the differences in accounting treatment for goodwill between U.S. GAAP and IFRS.

 

Answer: Both U.S. GAAP and IFRS require goodwill recognition in business combinations in which the fair value of the consideration paid is more than the net fair value of the assets and liabilities assumed. Following acquisition, an assessment for goodwill impairment is required at least annually under both sets of standards. If there are indicators that reflect a possible impairment, the assessment is required to be performed more often. Both standards provide that once goodwill impairments are recognized, they will no longer be recoverable. There are differences, however, with respect to the way goodwill impairment is tested for and recognized. Specifically, goodwill allocation, impairment testing, and the determination of impairment loss are different under U.S. GAAP and IFRS.

Learning Objective: 03-05

Topic: Impairment―Goodwill―Rationale

Difficulty: 2 Medium

Blooms: Understand

AACSB: Reflective Thinking

AACSB: Communication

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

 

Problems:

 

[QUESTION]

102. On January 1, 2017, Jumper Co. acquired all of the common stock of Cable Corp. for $540,000. Annual amortization associated with the acquisition amounted to $1,800.  During 2017, Cable recognized net income of $54,000 and paid dividends of $24,000. Cable’s net income and dividends for 2018 were $86,000 and $24,000, respectively.

Required:

Assuming that Jumper decided to use the partial equity method, prepare a schedule to show the balance in the investment account at the end of 2018.

 

Answer:

Investment in Cable Corp. – initial cost	$540,000
Income accrual – 2017	54,000
Dividends collected – 2017	(24,000)
Income accrual–  2018	86,000
Dividends collected –  2018	(24,000)
Investment in Cable Corp., December 31,  2018	$632,000

 

Learning Objective: 03-02

Learning Objective: 03-03c

Topic: Investment and income―Partial equity method

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

103. Hanson Co. acquired all of the common stock of Roberts Inc. on January 1, 2017, transferring consideration in an amount slightly more than the fair value of Roberts’ net assets. At that time, Roberts had buildings with a twenty-year useful life, a book value of $600,000, and a fair value of $696,000.  On December 31, 2018, Roberts had buildings with a book value of $570,000 and a fair value of $648,000.  On that date, Hanson had buildings with a book value of $1,878,000 and a fair value of $2,160,000.

Required:

What amount should be shown for buildings on the consolidated balance sheet dated December 31, 2018?

 

Answer:

Building balance – Hanson Co.	$1,878,000
Building balance – Roberts Co.	570,000
Original fair value allocation to Roberts’ buildings ($696,000 – 600,000)	96,000
Amortization of allocation [($96,000/20 years) × 2 years]	(9,600)
Buildings, consolidated balance	$2,534,400

Learning Objective: 03-03

Learning Objective: 03-04

Topic: Amortization calculations

Topic: Consolidation balances―Calculate

Difficulty: 3 Hard

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

104. Carnes Co. decided to use the partial equity method to account for its investment in Domino Corp. An unamortized trademark associated with the acquisition was $30,000, and Carnes decided to amortize the trademark over ten years.  For 2018, Carnes’ Equity in Subsidiary Earnings was $78,000.

Required:

What balance would have been in the Equity in Subsidiary Earnings account if Carnes had used the equity method?

 

Answer:

Learning Objective: 03-02

Learning Objective: 03-03a

Topic: Investment methods―Identify and differentiate

Topic: Amortization calculations

Topic: Investment and income―Equity method

Difficulty: 1 Easy

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

REFERENCE: 03-13

Fesler Inc. acquired all of the outstanding common stock of Pickett Company on January 1, 2017.  Annual amortization of $22,000 resulted from this transaction.  On the date of the acquisition, Fesler reported retained earnings of $520,000 while Pickett reported a $240,000 balance for retained earnings. Fesler reported net income of $100,000 in 2017 and $68,000 in 2018, and paid dividends of $25,000 in dividends each year. Pickett reported net income of $24,000 in 2017 and $36,000 in 2018, and paid dividends of $10,000 in dividends each year.

 

[QUESTION]

REFER TO: 03-13

105. If the parent’s net income reflected use of the equity method, what were the consolidated retained earnings on December 31, 2018?

Answer:

Learning Objective: 03-03a

Topic: Consolidation balances―Calculate

Topic: Consolidation entries―Equity

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

REFER TO: 03-13

106. If the parent’s net income reflected use of the partial equity method, what were the consolidated retained earnings on December 31, 2018?

Answer:

Learning Objective: 03-03c

Topic: Consolidation balances―Calculate

Topic: Consolidation entries―Partial equity

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

REFER TO: 03-13

107. If the parent’s net income reflected use of the initial value method, what were the consolidated retained earnings on December 31, 2018?

Answer:

Learning Objective: 03-03b

Topic: Consolidation balances―Calculate

Topic: Consolidation entries―Initial value

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

REFERENCE: 03-14

Jaynes Inc. acquired all of Aaron Co.’s common stock on January 1, 2017, by issuing 11,000 shares of $1 par value common stock.  Jaynes’ shares had a $17 per share fair value.  On that date, Aaron reported a net book value of $120,000.  However, its equipment (with a five-year remaining life) was undervalued by $6,000 in the company’s accounting records.  Any excess of consideration transferred over fair value of assets and liabilities acquired is assigned to an unrecorded patent to be amortized over ten years.

 

[QUESTION]

REFER TO: 03-14

108. What balance would Jaynes’ Investment in Aaron Co. account have shown on December 31, 2018, when the equity method was applied for this acquisition?

 

Answer:

An allocation of the acquisition value (based on the fair value of the shares issued) must first be made.

 

			Annual
		Life	Amortization
Acquisition value (11,000 shares × 17)	$187,000
Book value equivalency	(120,000)
Excess of fair value over book value	$ 67,000
Excess of fair value assigned to specific
accounts based on fair value
Equipment	6,000	5 years	$  1,200
Patent	$ 61,000	10 years	6,100
Total			$   7,300
Original acquisition value			$187,000
2017 income accrual ($276,000 – $144,000)			132,000
2017 dividends paid by Aaron			(60,000)
2017 amortization (from above)			(7,300)
2018 income accrual ($336,000 – $180,000)			156,000
2018 dividends paid by Aaron			(50,000)
2018 amortization			(7,300)
Investment in Aaron Co. – December 31, 2018			$350,400

Learning Objective: 03-03

Learning Objective: 03-03a

Topic:Amortization calculations

Topic: Investment and income―Equity method

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

REFER TO: 03-14

109. What was consolidated net income for the year ended December 31, 2018?

 

Answer:

Net income of Jaynes Inc. ($840,000 – $552,000)		$288,000
Net income of Aaron Co. ($336,000 – $180,000)		156,000
Amortization expense (from schedule below)		(7,300)
Consolidated net income – 2018		$436,700
Excess of fair value assigned to specific
accounts based on fair value
Equipment	6,000		5 years		$  1,200
Patent	$ 61,000		10 years		6,100
Total					$   7,300

 

Learning Objective: 03-03

Topic: Amortization calculations

Topic: Consolidation balances―Calculate

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

REFER TO: 03-14

110. What was consolidated equipment as of December 31, 2018?

Answer:

Equipment balance – Jaynes Inc.	$600,000
Equipment balance – Aaron Co.	360,000
Allocation based on fair value (from above)	6,000
Amortization for 2017- 2018 ($1,200 × 2)	(2,400)
Consolidated equipment – December 31, 2018	$963,600

 

Learning Objective: 03-03

Topic: Amortization calculations

Topic: Consolidation balances―Calculate

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

REFER TO: 03-14

111. What was the total for consolidated patents as of December 31, 2018?

Answer:

Allocation to patent based on acquisition price (from above)	$61,000
Amortization for 2017- 2018 ($6,100 × 2)	(12,200)
Consolidated patent – December 31, 2018	$48,800

 

Learning Objective: 03-03

Topic: Amortization calculations

Topic: Consolidation balances―Calculate

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

REFERENCE: 03-15

Utah Inc. acquired all of the outstanding common stock of Trimmer Corp. on January 1, 2016.  At that date, Trimmer owned only three assets and had no liabilities:

 

[QUESTION]

REFER TO: 03-15

112. If Utah paid $300,000 in cash for Trimmer, what allocation and amortization should have been assigned to the subsidiary’s Building account and its Equipment account in a December 31, 2018 consolidation?

 

Answer:

Since Utah paid more than the $288,000 fair value of Trimmer’s net assets, all allocations are based on fair value with the excess $12,000 assigned to goodwill.

 

Accounts	Fair Value Allocation	Life	Annual Amortization
Building	$60,000	10 years	$6,000
Equipment	(24,000)	5 years	(4,800)

 

Building:
Allocation – January 1, 2016	$60,000
Amortization during past years ($6,000 × 2 years)	(12,000)
Amortization for current year	(6,000)
Allocation – December 31, 2018	$42,000

 

Equipment:
Allocation – January 1, 2016 (valuation reduction)	$(24,000)
Amortization during past years ($4,800 × 2 years)	9,600
Amortization for current year	4,800
Allocation – December 31, 2018	$(9,600)

 

Learning Objective: 03-03

Topic: Amortization calculations

Topic: Consolidation balances―Calculate

Difficulty: 3 Hard

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

 

[QUESTION]

113. Matthews Co. acquired all of the common stock of Jackson Co. on January 1, 2017. As of that date, Jackson had the following trial balance:

 

During 2017, Jackson reported net income of $96,000 while paying dividends of $12,000.  During 2018, Jackson reported net income of $132,000 while paying dividends of $36,000.

Assume that Matthews Co. acquired the common stock of Jackson Co. for $588,000 in cash.  As of January 1, 2017, Jackson’s land had a fair value of $102,000, its buildings were valued at $188,000, and its equipment was appraised at $216,000.  Any excess of consideration transferred over fair value of assets and liabilities acquired is due to an unamortized patent to be amortized over 10 years.

Matthews decided to use the equity method for this investment.

Required:

(A.) Prepare consolidation worksheet entries for December 31, 2017.

(B.) Prepare consolidation worksheet entries for December 31, 2018.

 

Answer:

Consideration transferred for Jackson Co.				$588,000
Book value				(480,000)
Excess of consideration transferred over book value				$108,000
Excess consideration transferred, assigned to specific accounts based on fair values	Life	Annual Amortization	Allocation
Land	–	–	12,000
Buildings	20 years	$  2,400	48,000
Equipment	8 years	(3,000)	(24,000)	36,000
Patent (remaining excess)	10 years	7,200		72,000
Total		6,600

 

 

A.
Consolidated Worksheet Entries-2017:
Entry S
Common Stock-Jackson Co.		300,000
Additional Paid-In Capital		60,000
Retained Earnings, 1/1/17		120,000
Investment in Jackson Co.			480,000
Entry A
Land		12,000
Buildings		48,000
Patent		72,000
Equipment			24,000
Investment in Jackson Co.			108,000
Entry I
Investment Income		89,400
Investment in Jackson Co.			89,400
Entry D
Investment in Jackson Co.		12,000
Dividends Paid			12,000
Entry E
Expense		6,600
Equipment		3,000
Buildings			2,400
Patent			7,200

 

1. Consolidated Worksheet Entries – 2018:

 

Entry S
Common Stock-Jackson Co.		300,000
Additional Paid-In Capital		60,000
Retained Earnings, 1/1/18		204,000
Investment in Jackson Co.			564,000
Entry A
Land		12,000
Buildings		45,600
Patent		64,800
Equipment			21,000
Investment in Jackson Co.			101,400
Entry I
Investment Income		125,400
Investment in Jackson Co.			125,400
Entry D
Investment in Jackson Co.		36,000
Dividends Paid			36,000
Entry E
Expense		6,600
Equipment		3,000
Buildings			2,400
Patent			7,200

 

Learning Objective: 03-03a

Topic: Consolidation entries―Equity

Difficulty: 3 Hard

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

114. On January 1, 2016, Rand Corp. issued shares of its common stock to acquire all of the outstanding common stock of Spaulding Inc. Spaulding’s book value was only $140,000 at the time, but Rand issued 12,000 shares having a par value of $1 per share and a fair value of $20 per share. Rand was willing to convey these shares because it felt that buildings (ten-year life) were undervalued on Spaulding’s records by $60,000 while equipment (five-year life) was undervalued by $25,000.  Any consideration transferred over fair value of identified net assets acquired is assigned to goodwill.

Following are the individual financial records for these two companies for the year ended December 31, 2019.

 

	Rand	Spaulding
	Corp.	Inc.
Revenues	$  372,000	$108,000
Expenses	(264,000)	(72,000)
Equity in subsidiary earnings	25,000	0
Net income	$  133,000	$  36,000
Retained earnings, January 1, 2019	$  765,000	$102,000
Net income (above)	133,000	36,000
Dividends paid	(84,000)	(24,000)
Retained earnings, December 31, 2019	$  814,000	$114,000
Current assets	$  150,000	$  22,000
Investment in Spaulding Inc.	242,000	0
Buildings (net)	525,000	85,000
Equipment (net)	389,250	129,000
Total assets	$1,306,250	$236,000
Liabilities	$   82,250	$  50,000
Common stock	360,000	72,000
Additional paid-in capital	50,000	0
Retained earnings, December 31, 2019 (above)	814,000	114,000
Total liabilities and stockholders’ equity	$1,306,250	$236,000

 

Required:

Prepare a consolidation worksheet for this business combination.

 

Answer:

Consolidation Worksheet for Rand and Spaulding:

CONSOLIDATION WORKSHEET-Acquisition

For the Year Ended 12/31/ 2019

 

	Rand	Spaulding	Consolidation Entries		Consolidated
Account	Corp.	Inc.	DR	CR	Balance
Revenues	372,000	108,000			480,000
Expenses	(264,000)	(72,000)	(E)  11,000		(347,000)
Equity in Sub Income	25,000	_____	(I)   25,000		______
Net Income	133,000	36,000			133,000
R/E, 1/1/19	765,000	102,000	(S) 102,000		765,000
Net Income	133,000	36,000			133,000
Dividends	(84,000)	(24,000)		(D) 24,000	(84,000)
R/E, 12/31/19	814,000	114,000			814,000
Current assets	150,000	22,000			172,000
Investment in Spaulding	242,000		(D)  24,000	(S) 174,000
				(A)  67,000
				(I)   25,000
Building (net)	525,000	85,000	(A)  42,000	(E)    6,000	646,000
Equipment (net)	389,250	129,000	(A)  10,000	(E)    5,000	523,250
Goodwill	_______	______	(A)  15,000		15,000
Total Assets	1,306,250	236,000			1,356,250
Liabilities	82,250	50,000			132,250
Common Stock	360,000	72,000	(S)  72,000		360,000
Additional Paid-in Capital	50,000				50,000
R/E, 12/31/19	814,000	114,000			814,000
Total liabilities&	________	_______	_______	_______	________
Stockholders’ Equity	1,306,250	236,000	301,000	301,000	1,356,250

 

Learning Objective: 03-03a

Topic: Consolidation worksheet preparation

Difficulty: 3 Hard

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

REFERENCE: 03-16

Pritchett Company recently acquired three businesses, recognizing goodwill in each acquisition.  Destin has allocated its acquired goodwill to its three reporting units: Apple, Banana, and Carrot.  Pritchett provides the following information in performing the 2018 annual review for impairment:

 

[QUESTION]

REFER TO: 03-16

115. Which of Pritchett’s reporting units require both steps to test for goodwill impairment?

 

Answer:

Goodwill Impairment Test—Step 1

For the first step, the fair value of the reporting unit is compared to its carrying value. If the fair value (including goodwill) exceeds the carrying value, the goodwill of the entity is not considered impaired and Step 2 is not required.

	Total Fair	Carrying	Potential Goodwill
	Value (w/GW)	Value (w/GW)	Impairment?
Apple	$525,000	>      $515,000	No
Banana	450,000	>       433,000	No
Carrot	215,000	<        230,000	Yes

 

Therefore, the Carrot reporting unit requires both steps to test for goodwill impairment.

 

Learning Objective: 03-06

Topic: Impairment―Goodwill―Procedures

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

REFER TO: 03-16

116. How much goodwill impairment should Pritchett report for 2018?

Answer:

Goodwill Impairment Test—Step 2 (Carrot only)

 

Carrot—total fair value		$215,000
Fair values of identifiable net assets
Tangible assets	$120,000
Unpatented technology	50,000
Customer list	45,000	215,000
Implied value of goodwill		0
Carrying value of goodwill		75,000
Total Impairment loss			$75,000

 

Learning Objective: 03-06

Topic: Impairment―Goodwill―Procedures

Difficulty: 3 Hard

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

REFERENCE: 03-17

On 1/1/16, Sey Mold Corporation acquired 100% of DotDot.Com for $2,000,000 cash.  On the date of acquisition, DotDot’s net book value was $900,000.  DotDot’s assets included land that was undervalued by $300,000, a building that was undervalued by $400,000, and equipment that was overvalued by $50,000.  The building had a remaining useful life of 8 years and the equipment had a remaining useful life of 4 years.  Any excess fair value over consideration transferred is allocated to an undervalued patent and is amortized over 5 years.

 

[QUESTION]

REFER TO: 03-17

117. Determine the amortization expense related to the combination at the year-end date of 12/31/16.

Answer:

		Amount	Life	Amortization
Fair value consideration transferred  in Sey Mold’s acquisition		$2,000,000
BV of DotDot.com at 1/1/16		(900,000)
Fair value in excess of BV, to be allocated:		$1,100,000
Land		(300,000)
Building		(400,000)	8	$50,000
Equipment		50,000	4	(12,500)
Patent		$   450,000	5	90,000
Total Amortization				$127,500

 

Learning Objective: 03-03

Topic: Amortization calculations

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

 

[QUESTION]

REFER TO: 03-17

118. Determine the amortization expense related to the consolidation at the year-end date of 12/31/24.

 

Answer:

By 2024, all of the fair value adjustments and the patent will have been fully amortized.  The amortization expense for 2024 related to the combination will be $0.

Learning Objective: 03-03

Topic: Amortization calculations

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

119. For each of the following situations, select the best answer that applies to consolidating financial information subsequent to the acquisition date:

(A) Initial value method.

(B) Partial equity method.

(C) Equity method.

(D) Initial value method and partial equity method but not equity method.

(E) Partial equity method and equity method but not initial value method.

(F) Initial value method, partial equity method, and equity method.

 

_____1. Method(s) available to the parent for internal record-keeping.

_____2. Easiest internal record-keeping method to apply.

_____3. Income of the subsidiary is recorded by the parent when earned.

_____4. Designed to create a parallel between the parent’s investment accounts and changes in

the underlying equity of the acquired company.

_____5. For years subsequent to acquisition, requires the *C entry.

_____6. Uses the cash basis for income recognition.

_____7. Investment account remains at initially recorded amount.

_____8. Dividends received by the parent from the subsidiary reduce the parent’s investment

account.

_____9. Often referred to in accounting as a single-line consolidation.

_____10. Increases the investment account for subsidiary earnings, but does not decrease the

subsidiary account for equity adjustments such as amortizations.

 

Answer: (1) F; (2) A; (3) E; (4) C; (5) D; (6) A; (7) A; (8) E; (9) C; (10) B

Learning Objective: 03-02

Topic: Investment methods―Identify and differentiate

Difficulty: 3 Hard

Blooms: Understand

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

ADDITIONAL QUESTIONS COVERING APPENDIX MATERIAL AND NEW LO: 03-09

 

[QUESTION]

120. Private companies, with respect to goodwill:
121. A) May elect to amortize it over a period of 15 years.
122. B) Must treat it as an intangible asset with an indefinite life.
123. C) Must amortize it over a 12-year period.
124. D) May amortize goodwill if the value of the company does not exceed $10 million.
125. E) May treat goodwill as a definite lived intangible asset with a 10-year useful life.

Answer: E

Learning Objective: 03-09

Topic: Private company accounting

Difficulty: 1 Easy

Blooms: Remember

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

121. How is the goodwill impairment process simplified for private companies?

 

ANSWER: The goodwill impairment process is simplified in two ways for private companies. First, if there is a triggering event, the unamortized balance of goodwill is required to be assessed for impairment. A triggering event is defined as any event or change in circumstances that may cause the fair value of the acquired entity, or reporting unit, to decline to an amount less than its carrying amount. However, there are no requirements to re-measure each of the entity’s (or reporting unit’s) separate assets and liabilities at current fair values in order to calculate a residual implied value for goodwill. This rule was adopted in order to save costs and streamline the process. Goodwill impairment loss is calculated as the amount of the excess (if any) of the fair value of the acquired entity over its total carrying amount. Impairment loss is limited to the remaining unamortized balance in the goodwill account.

 

Second, private companies may choose to designate and test goodwill for impairment at either the entity level, or the reporting unit level. This election must be made at the time the alternative goodwill method is adopted by the entity.

 

Learning Objective: 03-09

Topic: Private company accounting

Difficulty: 2 Medium

Blooms: Understand

AACSB: Reflective Thinking

AACSB: Communication

AICPA BB: Critical Thinking

AICPA FN: Measurement