1. Distinguish among the following concepts:
a) Difference between cost and book value.
b) Excess of cost over fair value.
c) Excess of fair value over cost.
d) Deferred excess of fair value over cost.
2. In what account is “the difference between cost and book value” recorded on the books of the investor? In what account is the “excess of cost over fair value” recorded?
3. How do you determine the amount of “the difference between cost and book value” to be allocated to a specific asset of a less than wholly owned subsidiary?
4. The parent company’s share of the fair value of the net assets of a subsidiary may exceed acquisition cost. How must this excess be treated in the preparation of consolidated financial statements?
5. Why are marketable securities excluded from the noncurrent assets to which any excess of fair value over cost is to be allocated?
6. P Company acquired a 100% interest in S Company. On the date of acquisition the fair value of the assets and liabilities of S Company was equal to their book value except for land that had a fair value of $1,500,000 and a book value of $300,000. At what amount should the land of S Company be included in the consolidated balance sheet? At what amount should the land of S Company be included in the consolidated balance sheet if P Company acquired an 80% interest in S Company rather than a 100% interest?
7. Corporation A purchased the net assets of Corporation B for $80,000. On the date of A’s purchase, Corporation B had no long-term investments in marketable securities and $10,000 (book and fair value) of liabilities. The fair values of Corporation B’s assets, when acquired, were
How should the $10,000 difference between the fair value of the net assets acquired ($90,000) and the cost ($80,000) be accounted for by Corporation A? a) The $10,000 difference should be credited to retained earnings. b) The noncurrent assets should be recorded at $50,000.
c) The current assets should be recorded at $36,000, and the noncurrent assets should be recorded at $54,000. d) A current gain of $10,000 should be recognized.
8. Meredith Company and Kyle Company were combined in a purchase transaction. Meredith was able to acquire Kyle at a bargain price. The sum of the market or appraised values of identifiable assets acquired less the fair value of liabilities assumed exceeded the cost to Meredith. After reducing noncurrent assets to zero, there was still some “negative goodwill.” Proper accounting treatment by Meredith is to report the amount as a) An extraordinary item.
b) Part of current income in the year of combination.
c) A deferred credit.
d) Paid in capital.
9. How does the recording in the consolidated statements workpaper of the increase in depreciation that results from the allocation of a portion of the difference between cost and book value to depreciable property affect the calculation of noncontrolling interest in combined income?
Exercise 5-1 Allocation of Cost
On January 1, 2003, Pam Company purchased an 85% interest in Shaw Company for $540,000. On this date, Shaw Company had common stock of $400,000 and retained earnings of $140,000. An examination of Shaw Company's assets and liabilities revealed that their book value was equal to their fair value except for marketable securities and equipment:
| |Book Value |Fair Value | |Marketable securities | $ 20,000 | $ 45,000 | |Equipment (net) | 120,000 | 140,000...
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