CPA Financial Accounting and Reporting (FAR) : CPA Financial Accounting and Reporting (FAR)
Study concepts, example questions & explanations for CPA Financial Accounting and Reporting (FAR)
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Example Questions
Example Question #2 : Business Combinations
Herring Company buys 100% of the outstanding shares of Catfish Company during Year 1. On a consolidated balance sheet produced immediately after the sale, goodwill of $250,000 is reported. How was this goodwill determined?
It is the fair value of consideration given up by Herring less the fair value of all identifiable assets and liabilities owned by Catfish
It is a figure calculated by a reasonable estimate of future cash flows from Catfish
It was on the balance sheet of Catfish before the acquisition took place
The specific components that determine goodwill are separately identified and calculated
It is the fair value of consideration given up by Herring less the fair value of all identifiable assets and liabilities owned by Catfish
Goodwill will be recorded for the difference between the fair value of assets received in the purchase and the fair value of consideration paid in the purchase.
Example Question #3 : Business Combinations
Diego Company buys all outstanding assets and liabilities of Francisco Company on January 1, Year 3, by giving up consideration of $3.5 million. On that date, Francisco's net assets have a book value of $3 million and a fair value of $3.7 million. Which of the following statements is true?
Goodwill of $500,000 should be recorded and tested annually for impairment
A bargain purchase of $200,000 has occurred and will be used to reduce the value of Francisco's long-term assets for consolidation purposes
A bargain purchase of $200,000 has occurred and will be reported immediately as a gain for consolidation purposes
Goodwill of $500,000 should be recognized and amortized
A bargain purchase of $200,000 has occurred and will be reported immediately as a gain for consolidation purposes
A bargain purchase takes place when the amount of consideration paid in a business acquisition is less than the fair value of all assets received. In this case, the bargain purchase amount is equal to FV of $3.7M - consideration of $3.5M. Bargain purchases are reported as gains immediately.
Example Question #4 : Business Combinations
Of the following factors, which would not be an indicator of an investor's ability to exercise significant influence over the operating and financial policies of an investee?
Investor recommendation for the investee to hire a specific executive
Dependence by the investee on the investor's proprietary technology
Investor representation on the investee board of directors
Interchange of managerial personnel between investor and investee
Investor recommendation for the investee to hire a specific executive
Significant influence exists when a company owns between 20 and 50 percent of the voting stock of another company. Only option A falls under significant influence.
Example Question #5 : Business Combinations
ABC Inc owns 55% of the voting stock of DEF Inc. ABC would not produce consolidated financial statements if:
DEF owns 40% of ABC
DEF is a real estate company
DEF is in legal reorganization or bankruptcy
DEF is located and does all of its business in a foreign country
DEF is in legal reorganization or bankruptcy
The investor company would not produce consolidated financial statements if DEF is in legal reorganization, bankruptcy, or operates under severe foreign restrictions.
Example Question #6 : Business Combinations
Under IFRS regulations, goodwill should be tested for impairment at ________.
Each cash generating unit
Each reporting unit
Each acquisition unit
Entire business
Each cash generating unit
Goodwill impairment is assessed at the cash generating unit level rather than any other level listed here.
Example Question #1 : Equity Method
On January 1, Year 1, Parent Company buys 15% of Son Company for $300,000. Parent has the ability to assert significant influence over Son and does not elect the fair value method. During Year 1, Son reported net income of $160,000 and paid cash dividends of $25,000. What is the book value of Parent's investment in Son at the end of Year 1?
$327,750
$300,000
$324,000
$320,250
$320,250
Parent must use the equity method to account for its investment in Son because it has the ability to exert significant influence over Son. Under the equity method, the balance in the investment account at the end of the year will be the beginning balance of $300K (equal to cost) + Parent's portion of Son's net income equal to $24K ($160K x 15% ownership) - Parent's portion of dividends paid of $3,750 ($25K x 15% ownership).
Example Question #2 : Equity Method
Greg Company owns 75% of George Company's common stock. During the 3rd quarter of the current year, George sold inventory to Greg for $100,000. At the end of the current year, half of this purchase remains in Greg's inventory. For the current year, Greg's gross profit margin was 25% and George's gross profit margin was 40%. How much unrealized profit should be eliminated from ending inventory at year-end?
$50,000
$12,500
$20,000
$25,000
$20,000
George must eliminate any gross profit recognized on sold inventory that still remains in Greg's possession. Thus the elimination would be calculated as $100K x 50% remaining in inventory x 40% GP margin.
Example Question #1 : Equity Method
Which of the following, if received from an investee, will effect income reported by an investor using the equity method?
Cash dividend
None of the above
Stock dividend
Stock split
None of the above
Under the equity method, dividends are not reported as income. Even a cash dividend would reduce the investment account rather than increasing income.
Example Question #3 : Equity Method
ABC Company uses the equity method to account for its investment in DEF Co common stock. How should ABC record a 3% stock dividend received from DEF?
As a reduction in the total cost of DEF stock owned
As dividend revenue at DEF's carrying value of the stock
As a memorandum entry reducing the unit cost of all DEF stock owned
As dividend revenue at the market value of the stock
As a memorandum entry reducing the unit cost of all DEF stock owned
ABC should record the stock dividend received from DEF with a memorandum entry that reduces the unit cost of all DEF stock owned.
Example Question #2 : Equity Method
ABC Inc is currently using the equity method to account for its 25% investment in DEF Inc. In the acquisition last year of DEF stock, ABC calculated $750,000 of goodwill. The correct accounting for this goodwill during the current year is:
Test for impairment at year end
No accounting necessary
Amortization over the anticipated holding period of the DEF stock
Amortization over 50 years
No accounting necessary
Any goodwill created in an investment accounted for under the equity method is ignored. It is neither amortized nor tested for impairment. The entire investment is subject to the impairment test.
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