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Advanced Accounting in Canada, 1Ce (Johnstone) Chapter 2 Accounting for Non-Controlled Investments
from TEST BANK for Advanced Financial Accounting in Canada. 1st Edition by Johnstone, Dewald & Wilson
by ACADEMIAMILL
2.1 Account for passive (non-strategic) investments in equity, including journal entries.
1) Non-strategic investments may be classified as a fair value through other comprehensive income (FVOCI), fair value through profit or loss (FVTPL), or as a cost investment. Which of the following statements is true?
A) Dividend revenue is reported in the income section of the statement of income for each of the three classifications.
B) For a non-strategic investment classified as a FVOCI, dividend revenue is reported in the other comprehensive income section of the statement of income.
C) Dividend revenue is only reported as income when the investment is classified as a cost investment.
D) Dividend revenue is only reported in the income section the statement of income when the investment is classified as FVTPL or FVOCI.
Answer: A
Diff: 1 Type: MC
Taxonomy Category: Understanding
Learning Outcome: 2.1 Account for passive (non-strategic) investments in equity, including journal entries.
2) Ecole Inc., a private company reporting under ASPE, owns 9% of the voting common shares of Plato Corp. Ecole Inc. has classified its investment as a passive investment. On November 15, 2022, Plato Corp. declared a dividend $100,000. The dividend will be paid on January 15, 2023. What journal entry or entries should Ecole Inc. make related to the dividends declared by Plato Corp.?
Answer: A
Diff: 2 Type: MC
Taxonomy Category: Analyzing
Learning Outcome: 2.1 Account for passive (non-strategic) investments in equity, including journal entries.
3) Mido Corporation acquired 10% of the 200,000 outstanding voting shares of Josip Ltd. on January 1, 2022 for $150,000. On September 20, 2022, Josip declared and paid a dividend of $100,000 to its shareholders. On December 31, 2022, Josip's shares were trading at $9.25. The investment in Josip was classified as a FVOCI investment. What amount of income would be included in the profit and loss portion of the statement of income?
A) $35,000
B) $10,000
C) $45,000
D) $0
Answer: B
Diff: 2 Type: MC
Taxonomy Category: Applying
Learning Outcome: 2.1 Account for passive (non-strategic) investments in equity, including journal entries.
4) Taki Corporation, a private company reporting under ASPE, acquired 12% of the 175,000 outstanding voting shares of Hoka Ltd., a publicly traded company, on January 1, 2023 for $150,000. On August 15, 2024, Hoka declared a dividend of $120,000 to its shareholders. On December 31, 2023 and 2024, Hoka's shares were trading at $9.25 and $8.75, respectively. What is the total amount of income that would be included in profit and loss for the year ending December 31, 2024?
A) $3,900
B) $33,750
C) $14,400
D) $48,150
Answer: A
Diff: 3 Type: MC
Taxonomy Category: Applying
Learning Outcome: 2.1 Account for passive (non-strategic) investments in equity, including journal entries.
5) Champei Corporation, a public company, acquired 7% of the 200,000 outstanding voting shares of Okello Ltd. on January 2, 2023, for $75,000 which includes brokerage fees of $1,000. Champei's management does not plan to hold the shares for a long period and therefore has classified Okello as a FVTPL investment. On November 15, 2023 and 2024, Okello declared and paid a dividend of $150,000 and $120,000, respectively, to its shareholders. Okello's shares were trading at $4.75 on December 31, 2023. On December 10, 2024, Champei sold its investment in Okello for $87,500 ($88,500 less $1,000 in brokerage fees). What is the total amount of income that would be included in Champei's statement of income for the year ending December 31, 2024?
A) $20,900
B) $31,500
C) $29,400
D) $21,900
Answer: C
Diff: 2 Type: MC
Taxonomy Category: Applying
Learning Outcome: 2.1 Account for passive (non-strategic) investments in equity, including journal entries.
6) On January 15, 2023, Brayan Inc. purchased 10,500 of the 140,000 voting shares of Alina Inc. for $178,500. Brayan classified its investment as a FVTPL investment. The following is information related to Alina for the years ending 2023 to 2025.
On December 31, 2025, Brayan sold its investment in Alina for $246,750 and paid a brokerage fee of $2,500. Determine the amount to be included in net income before OCI related to Brayan's investment in Alina for the year ending December 31, 2025.
A) $7,125
B) $20,375
C) $72,875
D) $22,875
Answer: B
Diff: 3 Type: MC
Taxonomy Category: Analyzing
Learning Outcome: 2.1 Account for passive (non-strategic) investments in equity, including journal entries.
7) On January 15, 2023, Brayan Inc. purchased 10,500 of the 140,000 voting shares of Alina Inc. for $178,500, and paid a brokerage fee of $1,500. Brayan classified its investment as FVOCI. The following is information related to Alina for the years ending 2023 to 2025.
On December 31, 2025, Brayan sold its investment in Alina for $246,750 cash and paid a brokerage fee of $2,500.
Which set of journal entries to record the sale of the investment is correct?
Diff: 3 Type: MC Taxonomy Category: Analyzing
2.1 Account for passive (non-strategic) investments in equity, including journal entries.
8) At the beginning of this year, Bionda Inc purchased 15% of the voting shares of Zoila Ltd. for $195,000. Both companies are private and follow ASPE. It was determined that Bionda does not have significant influence and therefore reports its investment in Zoila using the cost method. Zoila earned net income of $75,000 this year and paid dividends of $50,000. What journal entry should Bionda make to record its share of Ziola's net income? A)
C) No entry is required D)
9) At the beginning of this year, Bionda Inc purchased 15% of the voting shares of Zoila Ltd. for $195,000. Both companies are private and follow ASPE. It was determined that Bionda does not have significant influence and therefore reports its investment in Zoila using the cost method. Zoila earned net income of $75,000 this year and paid dividends of $50,000. What journal entry should Bionda make to record its share of the dividends paid by Zoila?
C) No entry is required D)
Answer: D
Diff: 1 Type: MC
Taxonomy Category: Applying Learning Outcome: 2.1 Account for passive (non-strategic) investments in equity, including journal entries.
10) Abilo Inc. is a public company with a December 31 year end. On March 15, 2022, Abilo acquired 4,500 shares of Eunji Ltd. at a cost of $35 a share. The company incurred $2,500 in brokerage fees as a result of the share purchase. The following is information related to Eunji:
On February 15, 2024, Abilo sold all of its shares in Eunji for $37.50 a share, incurring brokerage fees of $2,000 on the disposal.
Required: Assuming Abilo has classified its investment as a FVTPL, provide the journal entries to account for Abilo's investments in Eunji.
Copyright © 2023 Pearson Canada Inc.
Diff: 2 Type: ES
Taxonomy Category: Applying
Learning Outcome: 2.1 Account for passive (non-strategic) investments in equity, including journal entries.
2.2 Compare and discuss the differences in accounting for passive (non-strategic) investments between International Financial Reporting Standards (IFRS) and Accounting Standards for Private Enterprises (ASPE).
1) Abilo Inc. is a public company with a December 31 year end. On March 15, 2022, Abilo acquired 4,500 shares of Eunji Ltd. at a cost of $35 a share. The company incurred $2,500 in brokerage fees as a result of the share purchase. The following is information related to Eunji:
Dividend declared and paid on November 15
On February 15, 2024, Abilo sold all of its shares in Eunji for $37.50 a share, incurring brokerage fees of $2,000 on the disposal.
Required: a) Assuming Abilo has classified its investment as a FVOCI, provide the journal entries to account for Abilo's investments in Eunji. b) Assume Abilo is a private company and correctly uses the cost method to account for its investment in Eunji, prepare the journal entries to account for its investment in Eunji. the related brokerage
Copyright © 2023 Pearson Canada Inc.
To record the sale of the investment in Eunji and reclassify the balance in AOCI to retained earnings.
To record the dividends declared and paid by Eunji.
Diff: 3 Type: ES
Taxonomy Category: Analyzing
Learning Outcome: 2.2 Compare and discuss the differences in accounting for passive (non-strategic) investments between International Financial Reporting Standards (IFRS) and Accounting Standards for Private Enterprises (ASPE).
2.3 Calculate goodwill for significant influence (associates) investments using two methods.
1) At the beginning of 2023, Eminence Retailer Inc. (ERI) acquired 26% of the voting common shares of Marcel Cosmetic Ltd. (MCL) for $375,000. It was determined that ERI had significant influence over MCL as a result ERI accounts for its investment using the equity method of accounting. On the acquisition date, MCL's shareholders' equity section consisted of $75,000 in common shares and $255,000 in retained earnings. At acquisition, it was determined that the fair values of all the assets were equal to their carrying value with the exception of the following:
What amount of goodwill resulted from this investment?
A) $5,000
B) $278,800
C) $299,600
D) $276,200
Answer: B
Diff: 2 Type: MC
Taxonomy Category: Applying
Learning Outcome: 2.3 Calculate goodwill for significant influence (associates) investments using two methods.
2) On January 1, 2023, Prince Leather Inc. purchased 27% of the outstanding voting shares of Soul Shoes Ltd. (SSL) for $800,000. Below is the statement of financial position for SSL, along with the fair values of the net assets on January 1, 2023:
Required: Determine the amount of goodwill resulting from this investment using both the fair value method and carrying value method.
Answer:
Goodwill using the fair value method:
Less
Goodwill using the carrying value method:
Diff: 2 Type: ES
Taxonomy Category: Applying
Learning Outcome: 2.3 Calculate goodwill for significant influence (associates) investments using two methods.
2.4 Account for significant influence (associates) investments, including journal entries and equity income calculation.
1) On January 1, 2022, KCG Inc. paid $145,000 to purchase 20% of the 100,000 outstanding voting common shares of EMG Ltd. The remaining shares are owned equally by three unrelated entities. KCG Inc. uses the equity method to account for its investment. The following is information related to EMG Ltd for the years ending December 31:
At what value should KCG Ltd. report its investment in EMG Ltd. on its December 31, 2023 statement of financial position?
A) $166,000
B) $160,000
C) $145,000
D) $178,000
Answer: A
Diff: 1 Type: MC
Taxonomy Category: Applying Learning Outcome: 2.4 Account for significant influence (associates) investments, including journal entries and equity income calculation.
2) Dahlia Ltd. has classified its investment in Rose Inc. as an associate and accounts for it using the equity method. Dahlia received $25,000 in dividends from Rose in the current year. How should Dahlia report these dividends?
A) The $25,000 in dividends should be reported as dividend revenue in the profit and loss portion of the statement of income.
B) The $25,000 in dividends should be recorded as a decrease to the investment in Rose Inc. in the statement of financial position.
C) The $25,000 in dividends should be reported as dividend revenue in other comprehensive income.
D) The $25,000 in dividend should be recorded as an increase to the investment in Rose Inc. in the statement of financial position.
Answer: B
Diff: 1 Type: MC
Taxonomy Category: Applying Learning Outcome: 2.4 Account for significant influence (associates) investments, including journal entries and equity income calculation.
3) On July 1, 2021, Javelin Corp. acquired 22% of the outstanding common shares of Baton Inc. for $210,000 cash. There was no acquisition differential or goodwill. Baton was classified as an associate, and the equity method of accounting was used to account for the investment in Baton. The following information relates to Baton:
Dividends declared and paid on September 15 of each year: 2021 $ 55,000
Which of the following amounts would represent Javelin's investment in Baton account on the statement of financial position (SFP) as at December 31, 2023?
A) $266,210
B) $248,610
C) $38,610
D) $249,160
Answer: B
Diff: 3 Type: MC
Taxonomy Category: Analyzing
Learning Outcome: 2.4 Account for significant influence (associates) investments, including journal entries and equity income calculation.
4) Clifford Inc. owns 25% (25,000 shares of the 100,000 shares) of the voting common shares of RedDog Inc. Clifford has been using the equity method of accounting to report its investment in RedDog Inc. At December 31, 2022, the investment in RedDog account had a balance of $357,000. On January 1, 2023, it was determined that Clifford no longer has significant influence over RedDog. As a result, Clifford reclassified the investment as FVTPL. On that date, RedDog's shares were trading at $15.25 per share. How should Clifford account for this change in classification?
A) Clifford should revalue its investment to fair value, with any gain or loss being reported in profit and loss.
B) Clifford should disclose the change in the classification with no change to the investment account balance.
C) Clifford should revalue its investment at the fair value, with the gain or loss being reported in other comprehensive income.
D) Clifford should revalue the investment at the fair value, with the gain or loss being reported in a separate shareholder equity account.
Answer: A
Diff: 2 Type: MC
Taxonomy Category: Understanding
Learning Outcome: 2.4 Account for significant influence (associates) investments, including journal entries and equity income calculation.
5) On January 1, 2022, I-Core Inc. purchased 45,000 of the 150,000 voting shares of Core Electronics Ltd. (CEL) for $325,000. On that date, CEL's shareholders' equity consisted of common shares of $125,000 and retained earnings of $85,000. At acquisition, all the fair values were equal to the carrying value of the assets with the exception of inventory and land. The inventory was undervalued by $50,000, while the land was overvalued by $20,000. What amount of goodwill would be recorded as a result of this investment?
A) $271,000
B) $241,000
C) $253,000
D) $85,000
Answer: C
Diff: 2 Type: MC
Taxonomy Category: Analyzing
Learning Outcome: 2.4 Account for significant influence (associates) investments, including journal entries and equity income calculation.
6) On January 1, 2022, HCI Inc. purchased 40,000 of the 160,000 voting shares of SBI Ltd. for $325,000. At acquisition, all the fair values were equal to the carrying value of the assets with the exception of inventory and building. The inventory was undervalued by $40,000, while the land was overvalued by $30,000. The building had a remaining useful like of 10 years. For the year ending December 31, 2022, HCI had net income of $115,000. What amount of equity income would HCI record for the year ending December 31, 2022?
A) $19,500
B) $38,000
C) $41,750
D) $28,750
Answer: A
Diff: 2 Type: MC
Taxonomy Category: Analyzing
Learning Outcome: 2.4 Account for significant influence (associates) investments, including journal entries and equity income calculation.
7) At the beginning of 2024, Eminence Retailer Inc. (ERI) acquired 26% of the voting common shares of Marcel Cosmetic Ltd. (MCL) for $375,000. It was determined that ERI had significant influence over MCL as a result, ERI accounts for its investment using the equity method of accounting. At acquisition, it was determined that the fair values of all the MCL assets were equal to their carrying value with the exception of the following:
Carrying
For the year ending December 31, 2024, MCL earned net income of $240,000 and paid a dividend or $100,000. Accounts receivables turn over every 45 days and inventory turns over every 90 days. MCL did not sell any land during 2024. What amount of equity income would ERI report for the year ending 2024?
A) $52,000
B) $62,400
C) $240,000
D) $58,500
Answer: B
Diff: 2 Type: MC
Taxonomy Category: Applying
Learning Outcome: 2.4 Account for significant influence (associates) investments, including journal entries and equity income calculation.
8) At the beginning of 2023, Eminence Retailer Inc. (ERI) acquired 26% of the voting common shares of Marcel Cosmetic Ltd. (MCL) for $375,000. It was determined that ERI had significant influence over MCL as a result, ERI accounts for its investment using the equity method of accounting. On the acquisition date, MCL's shareholders' equity section consisted of $75,000 in common shares and $255,000 in retained earnings. At acquisition, it was determined that the fair values of all the MCL assets were equal to their carrying value with the exception of the following:
Carrying value
Value
For the year ending December 31, 2023, MCL earned net income of $95,000 and paid a dividend of $50,000. For the year ending December 31, 2024, MCL earned net income of $240,000 and paid a dividend or $100,000. Accounts receivables turn over every 45 days and inventory turns over every 90 days. MCL has not sold any of the land that existed with ERI acquired the shares. What amount would ERI report on the December 31, 2024 statement of financial position for this investment?
A) $466,000
B) $419,200
C) $423,100
D) $458,200
Answer: B
Diff: 2 Type: MC
Taxonomy Category: Applying
Learning Outcome: 2.4 Account for significant influence (associates) investments, including journal entries and equity income calculation.
9) Petar Corporation Ltd. (PCL), a public company reporting under IFRS, acquired a 35% interest in Kailey Design Corporation (KDC) a few years ago. At the time of acquisition, the carrying value of the assets of KDC equaled their book value with the exception of a building, which was undervalued by $75,000. At acquisition, the building had a remaining useful life of 10 years. PCL accounts for its investment using the equity method of accounting. During the year ending December 31, 2025, KDC declared dividends of $125,000 and reported its income for the year as follows:
Assuming PCL has significant influence over KDC, which set of journal entries correctly accounts for the income PCL would report in its December 31, 2025 statement of income?
A
Diff: 2 Type: MC
Taxonomy Category: Applying
Learning Outcome: 2.4 Account for significant influence (associates) investments, including journal entries and equity income calculation.
10) At the beginning of 2023, Luis Grocer Inc. (LGI) acquired 30% of the voting common shares of Garcia Producers Ltd. (GPL) for $295,000. It was determined that LGI had significant influence over GPL. LGI accounts for its investment using the equity method of accounting. At acquisition, it was determined that the fair values of all the assets were equal to their carrying value with the exception of the following:
For the year ending December 31, 2024, GPL earned net income of $265,000 and paid a dividend of $80,000. Inventory turns over every 90 days. What amount of equity income would LGI report for the year ending 2024?
A) $79,500
B) $48,750
C) $76,875
D) $256,250
Answer: C
Diff: 1 Type: MC
Taxonomy Category: Applying
Learning Outcome: 2.4 Account for significant influence (associates) investments, including journal entries and equity income calculation.
11) On January 1, 2023, Milan Wines Inc., a private company reporting under ASPE, acquired 5,000 of the 20,000 outstanding voting common shares of ELB Winery Ltd. for $95,000 cash. At the time of the investment, ELB's common shares were $50,000, and its retained earnings were $225,000 and all of the assets of ELB were equal to their fair value. Both companies have a December 31 year end. The following is information related to ELB:
Required: Provide any journal entries that would be required to account for Milan's investment in ELB for the 2023 and 2024 year ends assuming Milan accounts for its investment using: a) The equity method b) The cost method
Answer:
a) Equity method:
b) Cost method:
Diff: 1 Type: ES
Taxonomy Category: Applying
Learning Outcome: 2.4 Account for significant influence (associates) investments, including journal entries and equity income calculation.
12) On January 1, 2023, Lars Corporation purchased 21% of the outstanding common shares of Takibi Tubes Inc. (TTI) for $325,000. At acquisition, all of the fair values of the net assets were equal to the carrying value with the exception of a building and long-term debt. The building was undervalued by $125,000 and had a remaining useful life of 10 years. The long-term debt was undervalued by $25,000 and will mature in 5 years. TTI's net income for 2023 and 2024 was $200,000 and $175,000, respectively. TTI declared and paid dividends of $120,000 in both years on November 15.
Required: a) Calculate the equity income that Lars would record for the year ending December 31, 2024. b) Determine the investment in TTI account balance that Lars would report on its statement of financial position at December 31, 2024.
Learning Outcome: 2.4 Account for significant influence (associates) investments, including journal entries and equity income calculation.
13) On April 1, 2022, Delightful Donuts Inc. (DDI) purchased 30% of the outstanding voting shares of Neudorf Flours Ltd. (NFL) for $1,350,000 cash. On the acquisition date, NFL's common shares and retained earnings were $1,000,000 and $2,000,000, respectively. The fair value of the net assets was equal to the carrying value with the exception of the following:
Both companies have a December 31 year end and earn net income evenly throughout the year. Inventory turns over every 45 days. During the three years following the acquisition, NFL earned the following net income and paid dividends on October 15 each year:
Required: a) Using the carrying value method, calculate the goodwill related to the acquisition. b) Determine the investment in NFL balance that would be reported on DDI's statement of financial position at December 31, 2024. b) Investment in NFL as of December 31, 2024:
Income is earned evenly throughout the year. The purchase happened on April 1, 2022 therefore DDI should only record 9 months of the adjusted net income for 2022. The exception is the FVD for inventory which should be included 100% for the period as inventory was sold:
Diff: 3 Type: ES
Taxonomy Category: Analyzing
Learning Outcome: 2.4 Account for significant influence (associates) investments, including journal entries and equity income calculation.
14) On January 1, 2023, Chocolate Heaven Ltd. (CHL), a private company, acquired 5,000 shares of Cotton Candy Inc. (CCI) for $115,000 cash. CHL paid professional fees of $3,500 in relation to this investment. Both companies have a December 31 year end. This investment represents 18% of the outstanding voting shares of CCI. There was no goodwill or fair value differences at acquisition. The following information relates to CCI:
* Amounts are not included in the net income before OCI column
It has been determined that CHL has significant influence over CCI and as a result, CHL is accounting for the investment using the equity method. On January 2, 2026, CHL sold its shares in CCI for $150,000.
Required: a) Calculate the investment in CCI account balance at the end of 2025. b) Prepare the journal entry to record the sale of CCI on January 2, 2026.
Answer: b) Prepare the journal entry to record the sale of CCI on January 2, 2026.
Calculate the investment in CCI account balance at the end of 2025.
Diff: 2 Type: ES
Taxonomy Category: Applying
Learning Outcome: 2.4 Account for significant influence (associates) investments, including journal entries and equity income calculation.
Copyright © 2023 Pearson Canada Inc.
15) On January 1, 2023, Chocolate Heaven Ltd.(CHL), a private company, acquired 5,000 shares of Cotton Candy Inc. (CCI) for $115,000 cash. CHL paid professional fees of $3,500 in relation to this investment. Both companies have a December 31 year end. This investment represents 18% of the outstanding voting shares of CCI. There was no goodwill or fair value differences at acquisition. The following information relates to CCI:
* Amounts are not included in the Net income before OCI column
It has been determined that CHL has significant influence over CCI and as a result, CHL is accounting for the investment using the equity method. On January 2, 2026, CHL sold its shares in CCI for $150,000.
Required: a) Prepare the equity method journal entries for the years ending 2023 and 2024. b) Assume CHL has decided to account for its investment using the cost method. Calculate the investment income related to CCI for the years ending 2023 and 2024.
Answer: a) Prepare the equity method journal entries for the years ending 2023 and 2024. b) Cost method income:
Diff: 2 Type: ES
Taxonomy Category: Applying
Learning Outcome: 2.4 Account for significant influence (associates) investments, including journal entries and equity income calculation.
2.5 Account for the deferred tax implications for passive (non-strategic) equity investments, including journal entries.
1) Taki Corporation, a private company reporting under ASPE, acquired 12% of the 175,000 outstanding voting shares of Hoka Ltd., a publicly traded company, on January 1, 2023 for $150,000. On August 15, 2024, Hoka declared a dividend of $120,000 to its shareholders. On December 31, 2023 and 2024, Hoka's shares were trading at $9.25 and $8.75, respectively. Both companies pay tax at a rate of 20%. Taki uses the future income taxes method to account for income taxes. What is the total amount of income would be included in profit and loss for the year ending December 31, 2024?
A) $3,900
B) $6,000
C) $14,400
D) $27,000
Answer: B
Diff: 3 Type: MC
Taxonomy Category: Applying
Learning Outcome: 2.5 Account for the deferred tax implications for passive (non-strategic) equity investments, including journal entries.
2) Champei Corporation, a public company, acquired 7% of the 200,000 outstanding voting shares of Okello Ltd. on January 2, 2023, for $75,000 which includes brokerage fees of $1,000. Champei's management does not plan to hold the shares for a long period and therefore has classified Okello as a FVTPL investment. On November 15, 2023 and 2024, Okello declared and paid a dividend of $150,000 and $120,000, respectively, to its shareholders. Okello's shares were trading at $4.75 on December 31, 2023. On December 10, 2024, Champei sold its investment in Okello for $87,500 ($88,500 less $1,000 in brokerage fees). Both companies pay tax at a rate of 20%. What is the total amount of income would be included in Champei's statement of income for the year ending December 31, 2024?
A) $18,400
B) $27,300
C) $25,200
D) $19,200
Answer: C
Diff: 2 Type: MC
Taxonomy Category: Applying
Learning Outcome: 2.5 Account for the deferred tax implications for passive (non-strategic) equity investments, including journal entries.
3) On January 15, 2023, Brayan Inc. purchased 10,500 of the 140,000 voting shares of Alina Inc. for $178,500. Brayan classified its investment as a FVTPL investment. The following is information related to Alina for the years ending 2023 to 2025.
On December 31, 2025, Brayan sold its investment in Alina for $246,750 and paid a brokerage fee of $2,500. Both companies pay tax at a rate of 20%. Determine the amount to be included in net income before OCI related to Brayan's investment in Alina for the year ending December 31, 2025.
A) $7,125
B) $17,725
C) $59,725
D) $19,725
Answer: B
Diff: 3 Type: MC
Taxonomy Category: Analyzing
Learning Outcome: 2.5 Account for the deferred tax implications for passive (non-strategic) equity investments, including journal entries.
4) On January 15, 2023, Brayan Inc. purchased 10,500 of the 140,000 voting shares of Alina Inc. for $178,500, and paid a brokerage fee of $1,500. Brayan classified its investment as FVOCI. The following is information related to Alina for the years ending 2023 to 2025.
On December 31, 2025, Brayan sold its investment in Alina for $246,750 cash and paid a brokerage fee of $2,500. Both companies pay tax at a rate of 20%.
Which set of journal entries to record the sale of the investment are correct?
Learning Outcome: 2.5 Account for the deferred tax implications for passive (non-strategic) equity investments, including journal entries.
5) Abilo Inc. is a public company with a December 31 year end. On March 15, 2022, Abilo acquired 4,500 shares of Eunji Ltd. at a cost of $35 a share. The company incurred $2,500 in brokerage fees as a result of the share purchase. The following is information related to Eunji:
On February 15, 2024, Abilo sold all of its shares in Eunji for $37.50 a share, incurring brokerage fees of $2,000 on the disposal.
Required: Assuming Abilo has classified its investment as a FVTPL, provide the journal entries to account for Abilo's investments in Eunji.
To record the sale of the investment in Eunji along with the related tax implications.
Diff: 2 Type: ES
Taxonomy Category: Applying
Learning Outcome: 2.5 Account for the deferred tax implications for passive (non-strategic) equity investments, including journal entries.
6) Abilo Inc. is a public company with a December 31 year end. On March 15, 2022, Abilo acquired 4,500 shares of Eunji Ltd. at a cost of $35 a share. The company incurred $2,500 in brokerage fees as a result of the share purchase. The following is information related to Eunji:
On February 15, 2024, Abilo sold all of its shares in Eunji for $37.50 a share, incurring brokerage fees of $2,000 on the disposal.
Required: a) Assuming Abilo has classified its investment as a FVOCI, provide the journal entries to account for Abilo's investments in Eunji. b) Assume Abilo is a private company and correctly uses the cost method to account for its investment in Eunji, prepare the journal entries to account for its investment in Eunji. the related income tax implications related to the sale and reclassify the AOCI balance.
To record the investment in Eunji, the related brokerage fees and the deferred income tax implications
To record the sale of the investment and the related tax implications.
Diff: 3 Type: ES
Taxonomy Category: Analyzing
Learning Outcome: 2.5 Account for the deferred tax implications for passive (non-strategic) equity investments, including journal entries.
2.6 Account for the deferred tax implications for significant influence (associates) investments when calculating equity income.
1) On January 1, 2022, HCI Inc. purchased 40,000 of the 160,000 voting shares of SBI Ltd. for $325,000. At acquisition, all the fair values were equal to the carrying value of the assets with the exception of inventory and building. The inventory was undervalued by $40,000, while the land was overvalued by $30,000. The building had a remaining useful like of 10 years. For the year ending December 31, 2022, HCI had net income of $115,000. Both companies pay tax at a rate of 20%. What amount of equity income (loss) would HCI record for the year ending December 31, 2022?
A) $21,350
B) $36,150
C) $(850)
D) $28,750
Answer: A
Diff: 2 Type: MC
Taxonomy Category: Analyzing
Learning Outcome: 2.6 Account for the deferred tax implications for significant influence (associates) investments when calculating equity income.
2) At the beginning of 2024, Eminence Retailer Inc. (ERI) acquired 26% of the voting common shares of Marcel Cosmetic Ltd. (MCL) for $375,000. It was determined that ERI had significant influence over MCL as a result ERI accounts for its investment using the equity method of accounting. At acquisition, it was determined that the fair values of all the assets were equal to their carrying value with the exception of the following:
For the year ending December 31, 2024, MCL earned net income of $240,000 and paid a dividend or $100,000. Accounts receivables turn over every 45 days and inventory turns over every 90 days. MCL did not sell any land during 2024. Both companies pay tax at a rate of 20%. What amount of equity income would ERI report for the year ending 2024?
A) $65,520
B) $59,280
C) $54,080
D) $228,000
Answer: B
Diff: 2 Type: MC
Taxonomy Category: Applying
Learning Outcome: 2.6 Account for the deferred tax implications for significant influence (associates) investments when calculating equity income.
3) At the beginning of 2023, Eminence Retailer Inc. (ERI) acquired 26% of the voting common shares of Marcel Cosmetic Ltd. (MCL) for $375,000. It was determined that ERI had significant influence over MCL as a result ERI accounts for its investment using the equity method of accounting. On the acquisition date, MCL's shareholders' equity section consisted of $75,000 in common shares and $255,000 in retained earnings. At acquisition, it was determined that the fair values of all the MCL assets were equal to their carrying value with the exception of the following:
Carrying value Fair value
For the year ending December 31, 2023 MCL earned net income of $95,000 and paid a dividend of $50,000. For the year ending December 31, 2024, MCL earned net income of $240,000 and paid a dividend or $100,000. Accounts receivable turns over every 45 days and inventory turns over every 90 days. MCL has not sold any of the land that existed with ERI acquired the shares. Both companies pay tax at a rate of 20%. What amount would ERI report on the December 31, 2024 statement of financial position for this investment?
A) $423,100
B) $419,980
C) $465,220
D) $458,980
Answer: B
Diff: 2 Type: MC
Taxonomy Category: Applying
Learning Outcome: 2.6 Account for the deferred tax implications for significant influence (associates) investments when calculating equity income.
4) Petar Corporation Ltd. (PCL), a public company reporting under IFRS, acquired a 35% interest in Kailey Design Corporation (KDC) a few years ago. At the time of acquisition, the carrying value of the assets of KDC equaled their book value with the exception of a building, which was undervalued by $75,000. At acquisition, the building had a remaining useful life of 10 years. PCL accounts for its investment using the equity method of accounting. Both companies pay tax at a rate of 20%. During the year ending December 31, 2025, KDC declared dividends of $125,000 and reported its income for the year as follows:
Assuming PCL has significant influence over KDC, which set of journal entries correctly accounts for the income PCL would report in its December 31, 2025 statement of income?
Answer: A
Diff: 2 Type: MC
Taxonomy Category: Applying
Learning Outcome: 2.6 Account for the deferred tax implications for significant influence (associates) investments when calculating equity income.
5) At the beginning of 2023, Luis Grocer Inc. (LGI) acquired 30% of the voting common shares of Garcia Producers Ltd. (GPL) for $295,000. It was determined that LGI had significant influence over GPL. LGI accounts for its investment using the equity method of accounting. At acquisition, it was determined that the fair values of all the GPL assets were equal to their carrying value with the exception of the following:
For the year ending December 31, 2024, GPL earned net income of $265,000 and paid a dividend of $80,000. Inventory turns over every 90 days. Both companies pay tax at a rate of 20%. What amount of equity income would LGI report for the year ending 2024?
A) $79,500
B) $54,900
C) $77,400
D) $258,000
Answer: C
Diff: 2 Type: MC
Taxonomy Category: Applying Learning Outcome: 2.6 Account for the deferred tax implications for significant influence (associates) investments when calculating equity income.
6) On January 1, 2023, Lars Corporation purchased 21% of the outstanding common shares of Takibi Tubes Inc. (TTI) for $325,000. At acquisition, all of the fair values of the net assets were equal to the carrying value with the exception of a building and long-term debt. The building was undervalued by $125,000 and had a remaining useful life of 10 years. The long-term debt was undervalued by $25,000 and will mature in 5 years. TTI's net income for 2023 and 2024 was $200,000 and $175,000, respectively. TTI declared and paid dividends of $120,000 in both years on November 15. Both companies pay tax at a rate of 20%.
Required: a) Calculate the equity income that Lars would record for the year ending December 31, 2024. b) Determine the investment in TTI account balance that Lars would report on its statement of financial position at December 31, 2024.
Answer: b)
Diff: 2 Type: ES Taxonomy Category: Analyzing Learning Outcome: 2.6 Account for the deferred tax implications for significant influence (associates) investments when calculating equity income.
7) On April 1, 2022, Delightful Donuts Inc. (DDI) purchased 30% of the outstanding voting shares of Neudorf Flours Ltd. (NFL) for $1,350,000 cash. On the acquisition date, NFL's common shares and retained earnings were $1,000,000 and $2,000,000, respectively. The fair value of the net assets was equal to the carrying value with the exception of the following:
Both companies have a December 31 year end, pay tax at a rate of 20%, and earn net income evenly throughout the year. Inventory turns over every 45 days. During the three years following the acquisition, NFL earned the following net income as well as declared and paid dividends on October 15 each year:
Required: a) Using the carrying value method, calculate the goodwill related to the acquisition. b) Determine the investment in NFL balance that would be reported on DDI's statement of financial position at December 31, 2024.
b)
Investment in NFL as of December 31, 2024:
Income is earned evenly throughout the year. The purchase happened on April 1, 2022 therefore DDI should only record 9 months of the adjusted net income for 2022. The exception is the FVD for inventory which should be included 100% for the period as it was all sold in the period:
Diff: 3 Type: ES
Taxonomy Category: Analyzing
Learning Outcome: 2.6 Account for the deferred tax implications for significant influence (associates) investments when calculating equity income.
2.7 Include the deferred tax implications when calculating goodwill for significant influence (associates) investments using two methods.
1) On January 1, 2022, I-Core Inc. purchased 45,000 of the 150,000 voting shares of Core Electronics Ltd. (CEL) for $325,000. On that date, CEL's shareholders' equity consisted of common shares of $125,000 and retained earnings of $85,000. At acquisition, all the fair values were equal to the carrying value of the assets with the exception of inventory and land. The inventory was undervalued by $50,000, while the land was overvalued by $20,000. Both companies pay tax at a rate of 20%. What amount of goodwill would be recorded as a result of this investment?
A) $245,200
B) $269,200
C) $254,800
D) $91,000
Answer: C
Diff: 2 Type: MC
Taxonomy Category: Analyzing
Learning Outcome: 2.7 Include the deferred tax implications when calculating goodwill for significant influence (associates) investments using two methods.
2) At the beginning of 2023, Eminence Retailer Inc. (ERI) acquired 26% of the voting common shares of Marcel Cosmetic Ltd. (MCL) for $375,000. It was determined that ERI had significant influence over MCL as a result, ERI accounts for its investment using the equity method of accounting. Both companies pay tax at a rate of 20%. On the acquisition date, MCL's shareholders' equity section consisted of $75,000 in common shares and $255,000 in retained earnings. At acquisition, it was determined that the fair values of all the assets were equal to their carrying value with the exception of the following:
What amount of goodwill resulted from this investment?
A) $ 13,000
B) $280,880
C) $297,520
D) $278,800
Answer: B
Diff: 2 Type: MC
Taxonomy Category: Applying
Learning Outcome: 2.7 Include the deferred tax implications when calculating goodwill for significant influence (associates) investments using two methods.
3) On January 1, 2023, Prince Leather Inc. purchased 27% of the outstanding voting shares of Soul Shoes Ltd. (SSL) for $800,000. Below is the statement of financial position for SSL, along with the fair values of the net assets on January 1, 2023:
Required: Assuming the tax rate is 20% for both companies, determine the amount of goodwill resulting from this investment using both the fair value method and carrying value method.
Answer: Goodwill using the fair value method:
*
Diff: 2 Type: ES
Taxonomy Category: Applying
Learning Outcome: 2.7 Include the deferred tax implications when calculating goodwill for significant influence (associates) investments using two methods.
2.8 Prepare the journal entries, including the deferred tax implications, for significant influence (associates) investments.
1) On April 1, 2022, Delightful Donuts Inc. (DDI) purchased 30% of the outstanding voting shares of Neudorf Flours Ltd. (NFL) for $1,350,000 cash. On the acquisition date, NFL's common shares and retained earnings were $1,000,000 and $2,000,000, respectively. The fair value of the net assets was equal to the carrying value with the exception of the following:
Both companies have a December 31 year end, pay tax at a rate of 20%, and earn net income evenly throughout the year. Assume inventory turns over every 45 days. During the three years following the acquisition, NFL earned the following net income as well as declared and paid dividends on October 15 each year:
Required: a) Prepare the equity method journal entries for each year. b) Determine the investment in NFL balance that would be reported on DDI's statement of financial position at December 31, 2024.
Answer: a) Prepare the equity method journal entries for each period. In order to prepare the equity method journal entries, we need to know the equity income for each period. Since the purchase happened on April 1, 2022, all amounts relating to 2022 should only be included for 9 months. The exception is the amortization of the fair value difference for inventory which is included 100% in 2022 as all the inventory would have been sold in the period
Diff: 3 Type: ES
Taxonomy Category: Applying
Learning Outcome: 2.8 Prepare the journal entries, including the deferred tax implications, for significant influence (associates) investments.
Advanced Accounting in Canada, 1Ce (Johnstone)
Chapter 3 Introduction to Business Combinations
3.1 Discuss the nature of a business combination and its various forms.
1) Which of the following is least likely to meet the definition of a business combination?
A) ABC Corporation purchased 85% of the voting shares of XYZ Corporation.
B) ABC Corporation purchased 100% of XYZ Corporation's net assets.
C) ABC Corporation purchased 25% of the voting shares of XYZ Corporation. The remaining shares are held by one individual.
D) ABC Corporation purchased 45% of the voting shares of XYZ Corporation. As part of the agreement, ABC Corporation can elect 3 of the 5 board members and can veto any large purchases made by XYZ Corporation.
Answer: C
Diff: 1 Type: MC
Taxonomy Category: Understanding
Learning Outcome: 3.1 Discuss the nature of a business combination and its various forms.
2) Describe what must be established to determine if a business combination has occurred.
Answer: IFRS 3 defines a business combination as a transaction or event in which the acquirer obtains control. Two things must be established to conclude a business combination has happened:
1. That the assets (or net assets) acquired constitutes a business, and
2. Whether control over the business has been acquired.
Diff: 1 Type: ES
Taxonomy Category: Remembering
Learning Outcome: 3.1 Discuss the nature of a business combination and its various forms
3.2 Explain when a business combination occurs and identify the acquirer and the acquisition date.
1) Morgan Inc., Prentis Inc., and Reed Ltd. agree to exchange shares to create a combined entity. After the exchange, each company held the following voting shares of the combined company:
Morgan held 50%, Prentis held 30%, and Reed held 20%.
Which of the following statements is true?
A) The company with the largest percentage of ownership is always the acquirer in situations where no party owns controlling interest.
B) The company with the net assets with the highest value is considered the acquirer in this situation.
C) There is no acquirer in this situation as no one party has control.
D) A number of factors must be considered to determine which company is the acquirer.
Answer: D
Diff: 2 Type: MC
Taxonomy Category: Analyzing
Learning Outcome: 3.2 Explain when a business combination occurs and identify the acquirer and the acquisition date.
2) Stove Inc. acquired the net assets of Magdalena Ltd. by issuing voting common shares to Magdalena Ltd. After the acquisition, Magdalena owned 35% of the outstanding voting shares of Stove. Which of the following statements is true?
A) Stove will be required to prepare consolidated financial statements.
B) Control over the net assets has occurred; Magdalena is now considered a subsidiary of Stove.
C) Stove will record the net assets at their fair value, which may also include goodwill.
D) Control has not occurred; therefore, Stove should report the investment in Magdalena as an equity investment.
Answer: C
Diff: 2 Type: MC
Taxonomy Category: Analyzing
Learning Outcome: 3.2 Explain when a business combination occurs and identify the acquirer and the acquisition date.
3) Outline the factors that should be considered in determining the acquirer in a business combination.
Answer: There are many factors to consider when determining the acquirer in a business combination. They are given below:
The entity that owns more than 50% of the voting shares after the transaction is normally considered the acquirer. In situations that are less straightforward, IFRS 10, Appendix B provides additional factors: a. When the purchase is accomplished through the exchange of cash and other assets, the acquirer is usually the one who gave up the asset. b. Where equity interest is transferred as consideration, the acquirer is usually the one who issues the equity unless it is a reverse takeover. c. The acquirer may be the group with the largest voting interest. d. Which party can elect the majority of the board of directors. e. Largest minority interest may be considered the acquirer. f. Did one party pay a premium of the fair value. g. The largest of the combining entities, which can be measure using assets, revenues, or profits. h. Which entity initiated the transaction.
Diff: 1 Type: ES
Taxonomy Category: Understanding
Learning Outcome: 3.2 Explain when a business combination occurs and identify the acquirer and the acquisition date.
3.3 Recognize and measure the purchase price paid and the assets and liabilities acquired during a business combination.
1) Perex Co. acquired the net assets of KBJ Co by issuing 100,000 common shares to KBJ. At the time of the acquisition, Perex's shares were trading at $3.50. Perex incurred $5,000 in legal fees and $7,500 in share issuance costs as a result of this transaction. What is the purchase price for this transaction?
A) $362,500
B) $350,000
C) $342,500
D) $357,500
Answer: B
Diff: 1 Type: MC
Taxonomy Category: Applying
Learning Outcome: 3.3 Recognize and measure the purchase price paid and the assets and liabilities acquired during a business combination.
2) The purchase price in an acquisition may involve the payment of additional consideration should a specific event occur in the future. Assuming the acquirer issued shares as consideration, describe the accounting for a contingent consideration that requires the acquirer to issue additional shares should the market price of the acquirer's shares drop below a certain value during a specified time frame.
Answer: The issuance of additional shares to the seller would not result in any change in the purchase price. If the acquirer is required to issue additional shares to make up for the decrease in value of the shares originally issued, they would adjust their equity accounts to reflect the increase in the number of shares issues. There would be no adjustment to the acquisition price.
Diff: 2 Type: ES
Taxonomy Category: Understanding
Learning Outcome: 3.3 Recognize and measure the purchase price paid and the assets and liabilities acquired during a business combination.
3) ABC Inc. acquired 100% of the common shares of XYZ Ltd. for $3,000,000. The two parties disagreed on the value of the company but agree that ABC would pay an additional $500,000 if the sales of XYZ Ltd. are greater than $2 million dollars in each of the next two years. Describe how the contingent consideration would be accounted for.
Answer: The payment of additional amounts if a specific event occurs requires professional judgment to determine the accounting implications. To determine the effect on the purchase price, we would need to determine the likelihood of the event occurring within the specified time frame. The likelihood of occurrence would help estimate the additional amount of consideration to be added to the purchase price at acquisition. The estimated consideration would be recorded as a contingent consideration liability.
At each reporting period within the specified time frame, the acquirer would have to revalue the contingent consideration liability based on current information. Any change in value in the contingent consideration liability would be recorded as a gain or loss on purchase, which is included in the acquirer's profit and loss statement. No adjustment would be made to the investment in XYZ account.
If it is later determined that the sales target is not reached, the acquirer would remove the contingent liability and record a gain on purchase.
Diff: 3 Type: ES
Taxonomy Category: Evaluating
Learning Outcome: 3.3 Recognize and measure the purchase price paid and the assets and liabilities acquired during a business combination.
3.4 Recognize and measure the goodwill or bargain purchase resulting from a business combination.
1) Lolapolooza Trinkets Inc. (LTI) purchased 100% of the voting shares of Tiny Toys Ltd. (TTL) for $4,500,000 in cash. The net carrying value of the assets and liabilities equals the fair value, with the exception of long-term debt that was undervalued by $50,000. At acquisition, the shareholders' equity of TTL consisted of $775,000 in common shares and $1,300,000 in retained earnings.
On the date of acquisition, which of the following amounts represents the amount of goodwill that LTI would record on its consolidated statement of financial position?
A) $2,425,000
B) $2,475,000
C) No goodwill would arise from this acquisition
D) $2,375,000
Answer: B
Diff: 3 Type: MC
Taxonomy Category: Analyzing
Learning Outcome: 3.4 Recognize and measure the goodwill or bargain purchase resulting from a business combination.
2) Beauty Inc. paid $1,550,000 for all the net assets of Beast Ltd. At acquisition, the carrying value of the net assets of Beast was $1,300,000. The fair values of all the assets and liabilities were equal to the carrying value with the exception of the following:
On the date of acquisition, which of the following amounts represents the amount of goodwill that Beast would record as a result of this acquisition?
A) $415,000
B) $ 95,000
C) $250,000
D) $405,000
Answer: B
Diff: 2 Type: MC
Taxonomy Category: Analyzing
Learning Outcome: 3.4 Recognize and measure the goodwill or bargain purchase resulting from a business combination.
3) How is a bargain purchase recorded in the consolidated financial statements?
A) A bargain purchase is not recorded in the consolidated financial statements.
B) A bargain purchase is recorded as a gain on bargain purchase in other comprehensive income.
C) A bargain purchase is recorded in a separate equity account in the equity section of the consolidated statement of financial position.
D) A bargain purchase is recorded as a gain on bargain purchase in the profit and loss statement.
Answer: D
Diff: 1 Type: MC
Taxonomy Category: Understanding
Learning Outcome: 3.4 Recognize and measure the goodwill or bargain purchase resulting from a business combination.
4) On January 1, 2023, Avion Blue Inc. acquired 100% of the voting common shares of Plane Corporation Inc. by issuing 10,000 common shares. At acquisition, Avion's shares were trading at $70 per share. Avion incurred $5,000 in share issuance costs and $6,000 in legal fees as part of this acquisition. After the transaction, the share ownership consisted of the following:
Group A (original Avion shareholder) 90% Group B (the new shareholder group) 10%
At acquisition, Plane's shareholders' equity consisted of $150,000 in common shares and $275,000 in retained earnings. The following is information related to Plane's assets and liabilities at acquisition:
What amount of goodwill would be recorded in the consolidated statement of financial position as a result of this acquisition?
A) $430,000
B) $280,000
C) $120,000
D) $125,000
Answer: C
Diff: 3 Type: MC
Taxonomy Category: Analyzing
Learning Outcome: 3.4 Recognize and measure the goodwill or bargain purchase resulting from a business combination.
5) On March 1, 2023, Forrest Inc. issued 50,000 voting common shares in return for all the common shares of Mountain Corporation. At that time, Forrest's shares were trading at $19 per share. After the transaction, the original shareholder group of Forrest retained control. Below is information related to Mountain Corporation:
What amount of goodwill would be recorded in the consolidated statement of financial position as a result of this acquisition?
Diff: 2 Type: ES
Taxonomy Category: Analyzing
Learning Outcome: 3.4 Recognize and measure the goodwill or bargain purchase resulting from a business combination.
3.5 Identify a reverse takeover situation and discuss the implications.
1) Explain what a reverse takeover is, and how it is accounted for.
Answer: A reverse takeover is an acquisition where one entity (the legal "parent") issues new shares to the shareholders of another company (the legal "subsidiary") for their shares. After the transaction, the new shareholders group (the shareholders of the legal "subsidiary") control both companies. While the legal "parent" issued the shares to acquire the legal "subsidiary, they do not control the combined entity. For accounting purposes, the legal "subsidiary" is in fact the acquirer.
The accounting for a reverse takeover is more complex, as it requires the determination of the purchase price to be based on the fair value of the legal "subsidiary rather than the price paid by the legal "parent." The consolidated statements would reflect the carrying value of the net assets the legal "subsidiary' and the fair value of the net assets of the legal "parent."
Diff: 2 Type: ES
Taxonomy Category: Understanding
Learning Outcome: 3.5 Identify a reverse takeover situation and discuss the implications.
3.6 Account for the acquisition of the net assets in a business combination in the acquirer's records.
1) Wooden Reed Inc. (WRI) issued 30,000 voting common shares to acquire all of the assets and liabilities of Creative Instrument Ltd. (CIL). On the acquisition date, WRI's shares were trading at $22 per share. After the transaction, CIL owned 20% of WRI's outstanding shares. The following information relates to CIL on the acquisition date:
Based on the information provided, which of the amounts below correctly reflect amounts that would appear on WRI's statement of financial position?
A Diff: 3 Type: MC Taxonomy Category: Analyzing Learning Outcome: 3.6 Account for the acquisition of the net assets in a business combination in the acquirer's records.
2) Wooden Reed Inc. (WRI) issued 30,000 voting common shares to acquire all of the assets and liabilities of Creative Instrument Ltd. (CIL). On the acquisition date, WRI's shares were trading at $22 per share. WRI incurred share issuance costs of $5,000 and legal fees of $8,000 as a result of this acquisition. After the transaction, CIL owned 20% of WRI's outstanding shares. Below are the statements of financial position of both companies immediately before the transaction, along with the fair values of CIL's assets and
If the consolidated statement of financial position was created immediately after the acquisition, the consolidated common share account will be:
A) $773,000
B) $755,000
C) $760,000
D) $100,000
Answer: B
Diff: 2 Type: MC
Taxonomy Category: Analyzing
Learning Outcome: 3.6 Account for the acquisition of the net assets in a business combination in the acquirer's records.
3) ABC Corporation incurred legal fees as part of the acquisition of the net assets of XYZ Inc. How should ABC account for the legal fees associated with the acquisition?
A) The legal fees should be added to the purchase price when determining goodwill.
B) The legal fees should be expensed immediately.
C) The legal fees should be deducted from the purchase price when determining goodwill.
D) The legal fees should be recorded as a direct reduction of retained earnings.
Answer: B
Diff: 1 Type: MC
Taxonomy Category: Understanding
Learning Outcome: 3.6 Account for the acquisition of the net assets in a business combination in the acquirer's records.
4) On April 1, 2023, Jack O'Lantern Inc. (JOI) issued 40,000 voting common shares in return for all the assets and liabilities of Pumpkin Seed Corporation (PSC). At that time, JOI's shares were trading at $25 per share. The original shareholders of JOI continued to control both companies after the transaction. Below is information related to PSC:
Required a) Determine the goodwill for this acquisition b) Prepare the journal entry that JOI would record in their single-entity records to account for this acquisition
Diff: 2 Type: ES
Taxonomy Category: Applying
Learning Outcome: 3.6 Account for the acquisition of the net assets in a business combination in the acquirer's records.
3.7 Account for the acquisition of 100% of the shares in a business combination in the acquirer's records.
1) Marshall Inc. acquired all of the common shares of Runaway Ltd for $950,000 in cash. Marshall incurred legal fees of $8,000 as a result of this acquisition. Below are the statements of financial position of both companies immediately before the transaction, along with the fair values of Runaway's assets and liabilities:
Based on the information provided, which of the following amounts would be correctly included in the consolidated statement of financial position immediately after the acquisition?
A) Inventory: $345,000
B) Retained earnings: $1,507,000
C) Accounts receivable: $249,500
D) Cash: $1,010,000 Answer: C
Diff: 2 Type: MC
Taxonomy Category: Applying
Learning Outcome: 3.7 Account for the acquisition of 100% of the shares in a business combination in the acquirer's records.
2) On July 1, 2023, Sierra Corporation acquired all of the voting common shares of Cole Creations Ltd. (CCL) for $700,000 cash. Sierra paid legal and accounting fees of $15,000 as a result of this acquisition. Below are the statements of financial position of both companies immediately before the transaction, along with the fair values of CCL's assets and liabilities:
Based on the information provided, which of the following amounts would be correctly included in Sierra's consolidated statement of financial position?
A) Cash: $95,000, Inventory: $367,000
B) Cash: $810,000, Accounts receivable: $247,500
C) Cash: $75,000, Accounts receivable: $249,500
D) Cash: $795,000, Common shares: $265,000
Answer: A
Diff: 1 Type: MC
Taxonomy Category: Analyzing
Learning Outcome: 3.7 Account for the acquisition of 100% of the shares in a business combination in the acquirer's records.
3) Assuming a company is reporting under ASPE, which of the following statements is true?
A) Under ASPE, a parent company must prepare consolidated financial statements when it controls the subsidiary.
B) Under ASPE, a parent company has the option to report the subsidiary using either the consolidation process or the equity method.
C) Under ASPE, a parent company must use the equity method to account for its subsidiary.
D) Under ASPE, a parent company has the option to use one of three methods to report for its subsidiary: cost, equity, or consolidation methods.
Answer: D
Diff: 1 Type: MC
Taxonomy Category: Remembering
Learning Outcome: 3.7 Account for the acquisition of 100% of the shares in a business combination in the acquirer's records.
4) The first step in accounting for a business combination is to:
A) determine the acquisition date
B) determine the purchase price
C) identify the acquirer
D) calculate goodwill
Answer: C
Diff: 1 Type: MC
Taxonomy Category: Remembering
Learning Outcome: 3.7 Account for the acquisition of 100% of the shares in a business combination in the acquirer's records.
5) On April 1, 2023, Safe Corporation issued 40,000 voting common shares in return for all the voting common shares of Risky Corporation. At that time, Safe's shares were trading at $30 per share. Safe paid $5,000 in share issuance costs related to this acquisition. The original shareholders of Safe continued to control both companies after the transaction. Below is information related to Risky:
Required: a) Determine the goodwill for this acquisition. b) Prepare the journal entry that Safe would record in its single-entity records. c) Prepare the eliminating entry that would be required to prepare the consolidated statement of financial position.
Answer: a) Determine the goodwill for this acquisition. b) Prepare the journal entry that Safe would record in its single-entity records. c) Prepare the eliminating entry that would be required to prepare the consolidated statement of financial position.
Diff: 2 Type: ES
Taxonomy Category: Analyzing
Learning Outcome: 3.7 Account for the acquisition of 100% of the shares in a business combination in the acquirer's records.
3.8 Explain the impact a business combination has on the deferred income taxes of the consolidated entity.
1) Lolapolooza Trinkets Inc. (LTI) purchased 100% of the voting shares of Tiny Toys Ltd. (TTL) for $4,500,000 in cash. The net carrying value of the assets and liabilities equal the fair value, which the exception of long-term debt which was undervalued by $50,000. At acquisition, the shareholders' equity of TTL consisted of $775,000 in common shares and $1,300,000 in retained earnings. Both companies pay tax at a rate of 20%.
On the date of acquisition, which of the following amounts represents the amount of goodwill that LTI would record on its consolidated statement of financial position?
A) $2,425,000
B) $2,465,000
C) No goodwill would arise from this acquisition
D) $2,385,000
Answer: B
Diff: 3 Type: MC
Taxonomy Category: Analyzing
Learning Outcome: 3.8 Explain the impact a business combination has on the deferred income taxes of the consolidated entity.
2) Boots Inc. paid $1,550,000 for all the shares of Kimos Ltd. At acquisition, the carrying value of the net assets of Kimos was $1,300,000. Both companies pay tax at a rate of 20%. The fair value of all the Kimos assets and liabilities were equal to the carrying value with the exception of the following:
On the date of acquisition, which of the following amounts represents the amount of goodwill that Boots would record as a result of this acquisition?
A) $250,000
B) $158,000
C) $142,000
D) $342,000
Answer: B
Diff: 2 Type: MC
Taxonomy Category: Analyzing
Learning Outcome: 3.8 Explain the impact a business combination has on the deferred income taxes of the consolidated entity.
3) On January 1, 2023, Avion Blue Inc. acquired 100% of the voting common shares of Plane Corporation Inc. by issuing 10,000 common shares. At acquisition, Avion's shares were trading at $70 per share. Avion incurred $5,000 in share issuance costs and $6,000 in legal fees as part of this acquisition. After the transaction, the share ownership consisted of the following:
Group A (Original Avion shareholder) 90% Group B (the new shareholder group) 10%
At acquisition, Plane's shareholders' equity consisted of $150,000 in common shares and $275,000 in retained earnings. Both companies pay tax at a rate of 20%. The following is information related to Plane's assets and liabilities at acquisition:
What amount of goodwill would be recorded in the consolidated statement of financial position as a result of this acquisition?
A) $151,000
B) $ 94,000
C) $280,000
D) $ 89,000
Answer: A
Diff: 3 Type: MC
Taxonomy Category: Analyzing Learning Outcome: 3.8 Explain the impact a business combination has on the deferred income taxes of the consolidated entity.
4) Mirant Corporation acquired 100% of Zion Corporation on January 1, 2023, for $500,000. At acquisition, Zion's common share and retained earnings had balances of $75,000 and $250,000, respectively. All the fair values of Zion's assets and liabilities were equal to their carrying value with the exception of the following:
Both companies pay tax at a rate of 20%. Assuming the consolidated statement of financial position is created immediately after the acquisition, what adjustment to the deferred income tax account on the statement of financial position would be required?
A) A debit to the deferred income tax account for $24,000
B) A credit to the deferred income tax account for $18,000
C) A credit to the deferred income tax account for $20,600
D) A debit to the deferred income tax account for $18,000
Answer: B
Diff: 3 Type: MC
Taxonomy Category: Analyzing
Learning Outcome: 3.8 Explain the impact a business combination has on the deferred income taxes of the consolidated entity.
5) Tara Tiles Inc. (TTI) acquired 100% the common shares of Beaudry Carpets Ltd. (BCL) on January 1, 2023, for $600,000. At acquisition, BCL's common share and retained earnings had balances of $75,000 and $250,000, respectively. All of the fair values of BCL's assets and liabilities were equal to their carrying value with the exception of the following:
Both companies pay tax at a rate of 20%. What is the effect of the deferred income tax in accounting for the acquisition?
A) Increase in deferred income tax liability and goodwill
B) Increase in deferred income tax liability and decrease in goodwill
C) Decrease in deferred income tax liability and goodwill
D) Decrease in deferred income tax liability and increase in goodwill
Answer: A
Diff: 3 Type: MC
Taxonomy Category: Evaluating
Learning Outcome: 3.8 Explain the impact a business combination has on the deferred income taxes of the consolidated entity.
6) On April 1, 2023, Safe Corporation issued 40,000 voting common shares in return for all the voting common shares of Risky Corporation. At that time, Safe's shares were trading at $30 per share. Safe paid $5,000 in share issuance costs related to this acquisition. The original shareholders of Safe continued to control both companies after the transaction. Both companies pay tax at a rate of 20%. Below is information related to Risky:
Required: a) Determine the goodwill for this acquisition. b) Prepare the eliminating entry that would be required to prepare the consolidated statement of financial position.
*Calculation of deferred income tax asset (liability):
Diff: 2 Type: ES
Taxonomy Category: Applying
Learning Outcome: 3.8 Explain the impact a business combination has on the deferred income taxes of the consolidated entity.
7) Brayden Bricks Inc. (BBI) acquired 100% of the common shares of Concrete Plus Ltd. (CPL) on January 1, 2023 for $1,000,000. At acquisition, CPL's common share and retained earnings had balances of $100,000 and $280,000, respectively. All of the fair values of CPL's assets and liabilities were equal to their carrying value with the exception of the following:
Both companies pay tax at a rate of 20%. Prepare the elimination entry that would be required to create the consolidated statement of financial position immediately after acquisition. Answer: Step 1
Diff: 2 Type: ES
Taxonomy Category: Applying
Learning Outcome: 3.8 Explain the impact a business combination has on the deferred income taxes of the consolidated entity.
