...CHAPTER 3 CONSOLIDATIONS—SUBSEQUENT TO THE DATE OF ACQUISITION Answers to Discussion Questions How Does a Company Really Decide which Investment Method to Apply? Students can come up with literally dozens of factors that should be considered by Pilgrim in making the decision as to the method of accounting for its subsidiary, Crestwood Corporation. The following is simply a partial list of possible points to consider. Use of the information. If Pilgrim does not monitor its own income levels closely, applying the equity method would seem to be a waste of time and energy. A company must plan to use the additional data before the task of accumulation becomes worthwhile. Size of the subsidiary. If the subsidiary is large in comparison to Pilgrim, the effort required of the equity method may be important. Income levels would probably be significant. However, if the subsidiary is actually quite small in relation to the parent, the impact might not be material enough to warrant the extra effort. Size of dividend payments. If Crestwood pays out most of its earnings each period as dividends, that figure will approximate equity income. Little additional information would be accrued by applying the equity method. In contrast, if dividends are small or not paid on a regular basis, a Dividend Income balance might vastly understate the profits to be recognized by the business combination. Amount of excess amortizations. If Pilgrim has paid a significant amount in excess of book value so that...
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...Chapter 1 Introduction to Business Combinations and the Conceptual Framework Multiple Choice 1. Stock given as consideration for a business combination is valued at a. fair market value 2. Which of the following situations best describes a business combination to be accounted for as a statutory merger? b. Only one of the combining companies survives and the other loses its separate identity. 3. A firm can use which method of financing for an acquisition structured as either an asset or stock acquisition? a. Cash b. Issuing Debt c. Issuing Stock d. All of the above 4. The objectives of FASB 141R (Business Combinations) and FASB 160 (NonControlling Interests in Consolidated Financial Statements) are as follows: a. to improve the relevance, comparibility, and transparency of financial information related to business combinations. b. to eliminate the amortization of Goodwill. a and b only 5. A business combination in which the boards of directors of the potential combining companies negotiate mutually agreeable terms is a(n) a. agreeable combination. b. friendly combination. c. hostile combination. d. unfriendly combination. 6. A merger between a supplier and a customer is a(n) a. friendly combination. b. horizontal combination. c. unfriendly combination. d. vertical combination. 7. When a business acquisition is financed using debt, the interest payments are tax deductible and create ...
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...CHAPTER 7 ------------------------------------------------- SUGGESTED ANSWERS Exercise 7-1 1. | | 2006 | 2007 | 2008 | | Contract price | P50,000,000 | P50,000,000 | P50,000,000 | | Cost incurred to date | P 7,500,000 | P34,500,000 | P40,800,000 | | Est. cost to complete | 30,000,000 | 8,625,000 | - | | | | | __________ | | Total estimated cost | 37,500,000 | P43,125,000 | P40,800,000 | | Total estimated gross profit | P12,500,000 | P 6,875,000 | P 9,200,000 | | Percentage of completion | 20% | 80% | 100% | | | | | | | | To Date | Recognized in prior year/s | To be recognized this year | | 2006 - Recognized revenue | P10,000,000 | - | P10,000,000 | | Cost of revenue | 7,500,000 | - | 7,500,000 | | Gross profit | P 2,500,000 | - | P 2,500,000 | | | | | | | 2007 - Recognized revenue | P40,000,000 | P10,000,000 | P30,000,000 | | Cost of revenue | 34,500,000 | 7,500,000 | 27,000,000 | | Gross profit | P 5,500,000 | P 2,500,000 | P 3,000,000 | | | | | | | 2008 - Recognized revenue | P50,000,000 | P40,000,000 | P10,000,000 | | Cost of revenue | 40,800,000 | 34,500,000 | 6,300,000 | | Gross profit | P 9,200,000 | P 5,500,000 | P 3,700,000 | | | | | | 2. | | 2006 | 2007 | 2008 | | a. Construction in progress | 7,500,000 | | 27,000,000 | | 6,300,000 | | | Cash...
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...ch 1 Student: ___________________________________________________________________________ 1. Gaw Company owns 15% of the common stock of Trace Corporation and used the fair-value method to account for this investment. Trace reported net income of $110,000 for 2011 and paid dividends of $60,000 on October 1, 2011. How much income should Gaw recognize on this investment in 2011? A. $16,500. B. $9,000. C. $25,500. D. $7,500. E. $50,000. Yaro Company owns 30% of the common stock of Dew Co. and uses the equity method to account for the investment. During 2011, Dew reported income of $250,000 and paid dividends of $80,000. There is no amortization associated with the investment. During 2011, how much income should Yaro recognize related to this investment? A. $24,000. B. $75,000. C. $99,000. D. $51,000. E. $80,000. On January 1, 2011, Pacer Company paid $1,920,000 for 60,000 shares of Lennon Co.'s voting common stock which represents a 45% investment. No allocation to goodwill or other specific account was made. Significant influence over Lennon was achieved by this acquisition. Lennon distributed a dividend of $2.50 per share during 2011 and reported net income of $670,000. What was the balance in the Investment in Lennon Co. account found in the financial records of Pacer as of December 31, 2011? A. $2,040,500. B. $2,212,500. C. $2,260,500. D. $2,171,500. E. $2,071,500. A company should always use the equity method to account for an investment if: A. it has the ability to exercise...
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...UTI-1 The intrinsic value of a put option is the happened when strike price bigger than spot price. And the value will be calculate as difference between the price times notional amount. The time value of a put option is using the fair value of option subtract the intrinsic value The intrinsic value of a forward option is difference between the forward rate for farward closing at forward date and farward rate in contract times notional amount. Time value if the total change between the forward rate and the spot rate “ at the forward rate”. UTI-2 The firm commitment is a transaction that has not occurred but for which a contract exists that specifies all significant terms. Because the existing asset or liability value if fixed or the commitment price is set, subsequent changes in prices or rate affect the fair value of the asset, liability or commitment. If a fair value hedge is used, the loss on hedge and the hedge asset, liability or commitment are regocnized as part of net income. If highly effective cannot be justified, the derivative is considered to be held for investment and losses in value changes of asset, liability or monnitment are no longer recognized. UTI-3 A forecasted transaction is one tat is expected to occur in the future at the market price at that date. If 8 criteria are met, gains/losses on the hedge instrument will be reported in other comprehensive income. The change in value of derivative instrument that equals the change in the value of the...
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...Chapter 1 the equity method of accounting for investments Answers to Questions 1. The equity method should be applied if the ability to exercise significant influence over the operating and financial policies of the investee has been achieved by the investor. However, if actual control has been established, consolidating the financial information of the two companies will normally be the appropriate method for reporting the investment. 2. According to Paragraph 17 of APB Opinion 18, "Ability to exercise that influence may be indicated in several ways, such as representation on the board of directors, participation in policy-making processes, material intercompany transactions, interchange of managerial personnel, or technological dependency. Another important consideration is the extent of ownership by an investor in relation to the extent of ownership of other shareholdings." The most objective of the criteria established by the Board is that holding (either directly or indirectly) 20 percent or more of the outstanding voting stock is presumed to constitute the ability to hold significant influence over the decision-making process of the investee. 3. The equity method is appropriate when an investor has the ability to exercise significant influence over the operating and financing decisions of an investee. Because dividends represent financing decisions, the investor may have the ability to influence the timing of the dividend. If dividends were recorded as income...
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...14/05/2014 Mixed Costs Total Mixed Cost VC Per Unit (Slope) Purpose of Mixed Cost Analysis To predict cost at an activity level with no historical record: Total mixed cost line can be expressed as: 2N Y Total Utility Cost Fixed Cost (Intercept) Level of Activity If your fixed monthly utility charge is $40, your variable cost is $0.03 per kilowatt hour, can you predict the utility of next month when you plan to use 2,000 kilowatt hours? Y = a + bX Variable Cost per KW Fixed Monthly Utility Charge Y = $40 + ($0.03 × 2,000) Y = $100 X Activity (Kilowatt Hours) A mixed cost has both fixed and variable components. Total cost CHANGES with activity level but NOT IN PROPORTION The High-Low Method 1. Find the data with highest & lowest activity level 2. Compare high vs low point data to get the slope, b, unit VC 3. Use either high or low point data to get a, total fixed cost Assume the following hours of maintenance work and the total maintenance costs for six months. Y = a + bX • From Algebra, if we know any two points on a line, we can determine its slope. 2. Break-Even Analysis (J. Smith ~ Taxi Driver) Break Even Point is the point at which costs and sales are equal CM = fixed costs. Fixed costs (FC) Insurance Car payment Interest Dispatcher fees Variable costs (VC) Gas Maintenance & repairs neither gain nor loss $ (principal or amortization) Value of Costs or Revenue Step 2, the slope or b is determined by difference...
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...Introduction It is a requirement that, if an entity is defined as a reporting entity, it is required to release financial reports that comply with the Australian Accounting Standards Board (AASB) (Deegan 2008:83). Two companies have been chosen to analyse their reports, in particular the disclosures made in their respective reports. The two companies chosen to analyse are Commonwealth Bank of Australia (CBA) and Macquarie Bank Limited (MBL). CBA The Commonwealth Bank is one of Australia’s leading providers of integrated financial services including retail, business and institutional banking, funds management, superannuation, insurance, investment and broking services. It is one of the largest listed companies on the Australian Stock Exchange (ASX:CBA). MBL On 13 November 2007, Macquarie Bank Limited was restructured to form the newly created Macquarie Group Limited. It businesses comprise a range of investment, commercial and selected retail financial services. It is a global provider of banking, financial, advisory, investment and funds management services. Macquarie Group Limited is listed in Australia (ASX:MQG) Both companies have subsidiaries and associated entities. The three disclosures that will be discussed and compared are 1) Foreign Currency transactions – AASB 121 2) Joint Ventures AASB 131 3) Segment Reporting AASB 114 Foreign Currency transactions AASB 121 governs foreign currency transactions. The disclosure requirements are: 1) Method used...
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...Assignment 2 1. On February 7, 2014, a subsidiary sold land to its parent for $25,000, and showed a loss of $4,000. The parent sold the land to an outside party in 2018 for $30,000. At what amount should the land be shown on the December 31, 2014 consolidated balance sheet? How much gain/loss on the sale of the land should be reported on the 2018 consolidated income statement? Prepare the working paper entry (in journal entry format) for the intercompany sale for the parent and its subsidiary for the years ended December 31, 2014, 2015, and 2018. 2014 Land $4,000 Intercompany loss on sale $4,000 2018 Loss on sale of land $4,000 Retained earnings $4,000 2. Sally Corporation (a 75%-owned subsidiary) owned a truck with an original cost of $12,000. It had been depreciated for $7,500 in the last 5 years on the straight-line method with 8 years of life and no salvage value. On January 1, 2014, Sally sold the truck to its parent, Paulson Company for $5,280. Prepare the working paper entry (in journal entry format) for the intercompany sale for Paulson Company and subsidiary for the years ended December 31, 2014 and 2015. 2014 Intercompany gain on sale of truck $780 Truck $780 Accumulated Depreciation $260 Depreciation expense...
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...Question 1: Case analysis There are many similarities between IFRS and pre-IFRS Canadian GAAP, however there are also significant differences. They are both similar in terms of style and the form of the individual standards because they are based on similar conceptual frameworks. The main objective of both IFRS and pre-IFRS Canadian GAAP is for financial statements to give a fair presentation. When there is a choice of accounting policies, the one that can reflect the most accurate economic portrait should be selected. Since Extract Tar Sands it traded publicly, included in its stakeholders are international investors. It’s compliance with IFRS is necessary to be a global competitor. IFRS will allow easier financial performance benchmarking amongst competing companies. This in turn will provide better access to capital. With the adoption of IFRS it will also eliminate Extract’s need to reconcile information reported under different national standards while providing consistent information for decision making purposes. The two areas with IFRS that represent the greatest change for Extract tar sands are: 1. Impairment: With IFRS impairments are usually triggered more frequently and unlike pre-IFRS Canadian GAAP, impairments under IFRS can be reversed. 2. Revaluations: Some IFRS including Property, Plant and Equipment, Investment Property and Intangibles allow the revaluation of assets under certain circumstances. This is quite a change from pre-IFRS Canadian GAAP which...
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...Advanced Accounting Practice Exam II: (Chapters 11, 15, 16) Multiple Choice (Concepts) 1. Chicago based Corporation X has a number of exporting transactions with companies based in Sweden. Exporting activities result in receivables. If the settlement currency is the Swedish Krona, which of the following will happen by changes in the direct or indirect exchange rates? A. Option A B. Option B C. Option C D. Option D 2. When a partner retires from a partnership and the retiring partner is paid more than the capital balance in her account, which of the following explains the difference? I. The retiring partner is receiving a bonus from the other partners. II. The retiring partner's goodwill is being recognized. A. I only B. II only C. Either I or II D. Neither I nor II 3. In the computation of a partner's Loss Absorption Power (LAP), the individual partner's capital balance and profit-and-loss percentage are used in which of the following ways? A. Option A B. Option B C. Option C D. Option D Multiple Choice (Calculation) . Myway Company sold equipment to a Canadian company for 100,000 Canadian dollars (C$) on January 1, 20X9 with settlement to be in 60 days. On the same date, Alman entered into a 60-day forward contract to sell 100,000 Canadian dollars at a forward rate of 1 C$ = $.94 in order to manage its exposed foreign currency receivable. The forward contract is not designated as a hedge. The spot rates were: 1. Based on the...
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...ADVANCED FINANCIAL ACCOUNTING 260 IMPAIRMENT QUIZ QUESTIONS 1. When should an entity conduct an impairment test? (2 Marks) The following assets require an impairment test every year: • Intangible assets with indefinite useful lives • Intangible assets not yet available for use • Goodwill acquired in a business combination The impairment test is undertaken when there is indication that an asset may be impaired. This means that, at the end of each reporting period, an entity has to test for the probability that an asset has been impaired. An entity, therefore, has to determine after analysing certain sources of information whether there is sufficient evidence to suspect that an asset may be impaired. It is not automatically undertaken at the end of each reporting period or at the end of any set of period of time. 2. How is an impairment test undertaken? (2 Marks) The first step is to determine the fair value, costs of disposal, and value in use. Having determined the fair value less costs of disposal and the value in use, these two amounts are compared and the recoverable amount is the higher of these two amounts. The second step is then to compare the recoverable amount with the carrying amount of the asset as recorded by the entity. The second step is then to compare the recoverable amount with the carrying amount of the asset as recorded by the entity. If the recoverable amount is less than the carrying amount, an...
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...Chapter 15 Partnerships: termination and liquidation Answers to Questions 1. A dissolution refers to the cessation of a partnership. In many cases, this process is simply a preliminary step in the transfer of business property to a newly formed partnership. Therefore, a dissolution does not necessarily affect the operations of the business. In a liquidation, however, actual business activities must cease. Partnership property is sold with the remaining cash distributed to creditors and to any partners with positive capital balances. Dissolution refers to changes in the composition of a partnership whereas liquidation is the selling of a partnership's assets. 2. Many reasons can exist that would lead to the termination and liquidation of a partnership. The business might simply have failed to generate sufficient profits or the partners may elect to enter other lines of work. Liquidation can also be required by the death, retirement, or withdrawal of one of the partners. In such cases, liquidation is often necessary to settle the partner's interest in the business. The bankruptcy of an individual partner can also force the termination of the business as can the bankruptcy of the partnership itself. 3. During the liquidation process, monitoring the balance of the partners' capital accounts becomes of paramount importance. That amount will eventually indicate either the cash to be received by the partners as final distributions or the additional contributions...
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...Chapter 7 Consolidated Financial Statements - Ownership Patterns and Income Taxes Chapter Outline I. Indirect subsidiary control A. Control of subsidiary companies within a business combination is often of an indirect nature; one subsidiary possesses the stock of another rather than the parent having direct ownership. 1. These ownership patterns may be developed specifically to enhance control or for organizational purposes. 2. Such ownership patterns may also result from the parent company's acquisition of a company that already possesses subsidiaries. B. One of the most common corporate structures is the father-son-grandson configuration where each subsidiary in turn owns one or more subsidiaries. C. The consolidation process is altered somewhat when indirect control is present. 1. The worksheet entries are effectively doubled by each corporate ownership layer but the concepts underlying the consolidation process are not changed. 2. Calculation of the accrual-based income of a subsidiary recognizing the consolidated relationships is an important step in an indirect ownership structure. a. The determination of accrual-based income figures is needed for equity income accruals as well as for the computation of noncontrolling interest balances. b. Any company within the business combination that is in both a parent and a subsidiary position must recognize the equity...
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...Batch processing takes similar transactions and groups them to process them all together. The benefit of that is that all of the group files are updated at the same time, but on the other hand, those same files will soon be out of date and remain un-updated until the next group updated, creating a time lag (Chaffey, 2004). The time lag occurs between the time of the actual event and when it is recorded and imputed into the system. For example, batch processing is often used with pay-roll systems because the information only needs to be updated at the set intervals of the pay cycles, and does not need to be opened up other than that time. Real-time systems are a little bit different, because they do not process information together in groups but they process transaction as they occurs, keeping files updated constantly, eliminating the time lag. Real time systems are used when information may need to be accessed and updated at any given time (Chaffey, 2004). For example, a sales order processing system would work better with real-time processing. This would enable information to be accessed at any given time, allowing customer’s questions to be answered immediately, and not have to wait until the next time the information is updated for an accurate answer (Chaffey, 2004). Resource use is one characteristic used to distinguish between batch and real-time systems. Batch processing is usually preferred when looking at it from this aspect because it requires the use of fewer resources...
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