F5 M2 - Equity Method

Question 1

Answer 1

Question 2

Birk Co. purchased 30 percent of Sled Co.’s outstanding common stock on December 31 for $200,000. On that date, Sled’s stockholders’ equity was $500,000, and the fair value of its identifiable net assets was $600,000. On December 31, what amount of goodwill should Birk attribute to this acquisition?

A.	$0

B.	$20,000

C.	$30,000

D.	$50,000

Answer 2

Question 3

Puff Co. acquired 40 percent of Straw Inc.’s voting common stock on January 2, Year 1 for $400,000. The carrying amount of Straw’s net assets at the purchase date totaled $900,000. Fair values equaled carrying amounts for all items except equipment, for which fair values exceeded carrying amounts by $100,000. The equipment has a five-year life. During Year 1, Straw reported net income of $150,000. What amount of income from this investment should Puff report in its Year 1 income statement?

A.	$40,000

B.	$52,000

C.	$56,000

D.	$60,000

Answer 3

Question 4

Band Co. uses the equity method to account for its investment in Guard, Inc. common stock. How should Band record a 2% stock dividend received from Guard?

A.	As dividend revenue at Guard's carrying value of the stock.

B.	As dividend revenue at the market value of the stock.

C.	As a reduction in the total cost of Guard stock owned.

D.	As a memorandum entry reducing the unit cost of all Guard stock owned.

Answer 4

Choice “D” is correct. Bank should record the 2% stock dividend received from Guard with a memorandum entry that reduces the unit cost of all Guard stock owned. The total investment in Guard, Inc. will simply be spread over a larger amount of shares, thereby reducing the unit cost of all Guard stock owned.

Choices “A” and “B” are incorrect as dividend revenue is not recorded when a stock dividend of the same shares in the same company are received.

Choice “C” is incorrect. Band Co. uses the equity method to account for its investment in Guard, Inc. The initial investment (or cost) of the total Guard stock owned should not be changed simply because additional shares of stock are obtained. The total investment in Guard, Inc. will now be spread over a larger amount of shares.

Question 5

Answer 5

Question 6

Palmetto Inc. is currently using the equity method to account for its 30% investment in Royal Company. In the acquisition last year of Royal Co. common stock, Palmetto calculated $1,000,000 of goodwill. The correct accounting for this goodwill on a quarterly basis during the current year is:

A.	Amortization over 40 years.

B.	Amortization over the anticipated holding period of the Royal Company stock.

C.	Test for impairment at year-end.

D.	No accounting necessary.

Answer 6

Choice “D” is correct. Any goodwill created in an investment accounted for under the equity method is ignored. It is neither amortized nor tested for impairment on a quarterly basis. The entire investment (using the equity method) is subject to the impairment test. The treatment for goodwill resulting from an equity method investment differs significantly on a quarterly basis from the treatment at year-end, when the entire investment should be evaluated both quantitatively and qualitatively for potential impairment.

Choices “A” and “B” are incorrect. Goodwill is no longer amortized in any situation under GAAP.

Choice “C” is incorrect. Purchased goodwill is only tested for impairment in an acquisition of a controlling interest in another company. As Palmetto acquired only 30% of Royal, no consolidation will occur; the investment will be correctly accounted for under the equity method if Palmetto has significance influence over Royal.

Question 8

Answer 8