Cpa Module 5.3

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Module 5.3 — Advanced Financial Reporting Lesson 1 — Quiz[pic 6]

Option a) is incorrect. You valued the original investment at the price paid rather than the interest percentage in the fair value of the net identifiable assets acquired (that is, you did not properly account for the bargain purchase as a gain that increased the investment account).

Option b) is incorrect. You valued the original investment at the price paid rather than the interest percentage in the fair value of the net identifiable assets acquired (that is, you did not properly account for the bargain purchase). You also neglected to deduct the dividends received by Scarlet during the year from its investment account.

Option d) is incorrect. You neglected to deduct the dividends received by Scarlet during the year from its investment account.

Source: Topics 1.4-1 and 1.4-3

- Meeka Corp. owns 40% of Belle Inc. During 20X6, Meeka sold $400,000 of inventory to Belle. The cost of the inventory was $300,000. At the end of 20X6, 25% of the goods remained unsold by Belle to outside parties.

Ignoring income tax considerations, which of the following statements is true with respect to Meeka’s 20X6 adjusting entries relative to the above transaction?

- Meeka will credit its investment in associate account $10,000.

- Meeka will credit its investment in associate account $25,000.

- Meeka will credit its cost of goods sold account $100,000.

- Meeka will debit its sales account $400,000. Solution:

Option a) is correct.

DR Investment income (SCI) 10,000

CR Investment in associate (SFP) 10,000

$400,000 – $300,000 = $100,000 gross profit; $100,000 × 25% × 40% =

required reduction to the investment income and investment in associate accounts.

Option b) is incorrect. $25,000 is the total unrealized gross profit on the transaction. The adjusting journal entry should only correct for the investee’s share of the unrealized profit.

Options c) and d) are incorrect. The sales and cost of goods sold accounts are not adjusted for intercompany sales between the investor and the associate.

Source: Topic 1.4-2

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Module 5.3 — Advanced Financial Reporting Lesson 1 — Quiz[pic 7]

- On April 30, 20X4, Lane Corp. purchased all the net assets of Note Inc. for $2,200,000 cash. Lane also paid its law firm $10,000 for costs directly related to the acquisition. A summarized statement of financial position for Note as at the purchase date follows:

Note Inc.

Statement of financial position

April 30, 20X4 (in ’000s)

Book value Fair value

Tangible assets

$2,050

$2,200

Intangible assets

125

1,100

Current liabilities

540

540

Non-current liabilities

780

780

Equity

855

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Which of the following is true with respect to Lane’s summary journal entry relative to the above purchase?

- Goodwill arising on acquisition is $220,000.

- Goodwill arising on acquisition is $230,000.

- Goodwill arising on acquisition is $1,345,000.

- Note will debit its investment account for $2,200,000.

Solution:

Option a) is correct.

Purchase price

$2,200,000

Less: fair value net identifiable assets* ($2,200 + $1,100 – $540 – $780)

1,980,000

Goodwill on acquisition

$220,000

* Note: The fair value of the identifiable net assets can also be determined by adding the net fair value increment (or subtracting the net fair value decrement) from the book value of the subsidiary’s equity: $1,125 fair value increment + $855 equity = $1,980.

Option b) is incorrect. You included the acquisition costs in the consideration paid. For business acquisitions, acquisition costs are expensed.

Option c) is incorrect. You calculated goodwill based on the book values of Note’s net identifiable assets rather than the fair values.

Option d) is incorrect. The investment account is not debited, given that the acquisition was facilitated by the purchase of Note’s net assets rather than its shares. Instead, the acquired assets and liabilities are recorded at the fair value on the books of the parent.

Source: Topics 1.6-1 and 1.10-4

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Module 5.3 — Advanced Financial Reporting Lesson 1 — Quiz[pic 8]

- Rail Inc. purchased 60% of the outstanding ordinary shares of Power Corp. for $804,000 cash on January 1, 20X8. The respective statements of financial position immediately prior to acquisition are set out below:

Rail Inc. Power Corp.[pic