Deck 15: Step Purchases

Question 1

When an inter-corporate investment is acquired in stages,when does the equity method first becomes appropriate?

A)The initial investment is made
B)The intent to control is determined
C)Significant influence is first achieved
D)When control is attained

Answer 1

C

Question 2

On January 1,20X7,Water Limited purchased 700,000 shares of Bottle Inc.for $2.8 million.On January 1,20X9,Water purchased another 200,000 shares of Bottle for $950,000.During the entire period Bottle had 1,000,000 shares outstanding.Water accounts for its investment in Bottle under the equity method.The following information was extracted from the financial records of Bottle:

All net identifiable assets had a fair value equal to their carrying value on the date of acquisition except the buildings.There is no goodwill reported on the separate entity financial statements of Water or Bottle.There have been no intercompany transactions between Water and Bottle.
Required:
Calculate the balances of following accounts on the consolidated statement of financial position at December 31,20X10,under the entity method:
a.Goodwill
b.NCI
Determine the adjustment to equity required for the second acquisition.

Answer 2

Measure: Determine goodwill
Building Fair value increment Amortization per year:
Fair value increment = $1,200,000/ 30 = $40,000 annually.
a.
Note- this balance will not change as percentage ownership is added as long as control is maintained.
b.
Adjustment to equity:

Question 3

Frey Ltd.acquired 70% of Sabo Ltd.in 20X4.On January 1,20X8,Frey acquired another 10% of Sabo's common shares for $250,000.Under the parent-company extension method,the balance of the non-controlling interest at December 31,20X7 was $600,000.What adjustment should be made to consolidated shareholders' equity to reflect Frey's additional purchase of shares?

A)$50,000
B)$66,667
C)$200,000
D)$250,000

Answer 3

A

Question 4

Frey Ltd.acquired 70% of Sabo Ltd.on January 1,20X4.On January 1,20X8,Frey acquired another 10% of Sabo's common shares for $250,000.
With respect to this addition purchase,which of the following is true?

A)On the consolidated statement of financial position,the goodwill balance will increase.
B)On the consolidated statement of financial position,the common shares balance will increase.
C)Frey must use the equity method to report the additional investment.
D)Frey should ignore any changes in the fair values of Sabo's net assets between January 1,20X4 and January 1,20X8.

Question 5

Frey Ltd.acquired 70% of Sabo Ltd.in 20X4.On January 1,20X8,Frey acquired another 10% of Sabo's common shares for $250,000.Under the entity method,the balance of the non-controlling interest at December 31,20X7 was $660,000.What adjustment should be made to consolidated shareholders' equity to reflect Frey's additional purchase of shares?

A)$30,000
B)$136,667
C)$220,000
D)$250,000

Question 6

Husch Ltd.acquired 35% of the common shares of Megia Ltd.on June 30,20X1.Husch uses the equity method to record its investment.On June 30,20X8,Husch acquired another 40% of Megia's common shares.At June 30,20X8,how should the original 35% ownership be treated?

A)The original valuation of the 35% is added to the valuation of the 40%.
B)The original 35% investment is deemed to have been disposed of and reacquired at the fair value at June 30,20X8 and added to the new acquisition.
C)The carrying value of the original 35% at June 30,20X8 is added to the new acquisition.
D)The original 35% is irrelevant to the new acquisition and should be ignored.