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Flashcards: Business Combinations & Investments

Giant Company buys all outstanding shares of Little Company on October 1, Year 1 for $450,000. In Year 1, Little earned revenue of $15,000 per month and incurred expenses of $12,000 per month. On the date of the sale, Little had only one asset, a piece of land, with a book value of $350,000 and a fair value of $400,000. It had no liabilities. By the end of Year 1, the land had appreciated in value and was worth $410,000. Which of the following statements is true regarding the consolidated financial statements at the end of Year 1?

The land owned by Little will be reported in the Year 1 balance sheet at $410,000

Goodwill at the end of Year 1 is reported as $45,000

Consolidated net income will include $9,000 earned by Little

A gain of $160,000 will be reported in Year 1 on the land owned by Little

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Flashcards: Business Combinations & Investments

Your answer:

The land owned by Little will be reported in the Year 1 balance sheet at $410,000

Your answer:

Goodwill at the end of Year 1 is reported as $45,000

Your answer:

A gain of $160,000 will be reported in Year 1 on the land owned by Little

Correct answer:

Consolidated net income will include $9,000 earned by Little

Explanation:

Little had net income of $3K per month ($15K in revenue - $12K in expenses). The consolidated financial statements will only include the net income earned after the purchase of the business, which will include October-December. The net income of Little included in the consolidated statements will be $3K per month x 3 months.

Flashcards: Business Combinations & Investments

During Year 1, the James Company buys all outstanding shares of the Holmes company for $4 million even though Holmes has net assets with a fair value of only $3.5 million. One reason for this excess payment is that Homes owns land worth $1.5 million with a book value of only $800,000. Prior to the purchase of Holmes, James owned its own land with a book value of $400,000 and a fair value of $700,000. Two years later, both companies still own this land and both have acquired additional acreage. James reports land at a book value of $1 million and fair value of $1.1 million; Holmes reports land with a book value of $2 million and a fair value of $2.5 million. At what amount will land be reported at the end of Year 3 in the consolidated balance sheet?

$3 million

$3.5 million

$3.1 million

$3.6 million

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Flashcards: Business Combinations & Investments

Your answer:

$3.5 million

Your answer:

$3.1 million

Your answer:

$3.6 million

Correct answer:

$3 million

Explanation:

The consolidated statements will include the combined book values of the land owned by each company ($1M in land owned by James + $2M in land owned by Holmes).

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All CPA Financial Accounting and Reporting (FAR) Resources

Flashcards: Business Combinations & Investments

Flashcards: Business Combinations & Investments

Flashcards: Business Combinations & Investments

Flashcards: Business Combinations & Investments

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