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84. Susqua, Inc. has held-to-maturity debt securities it purchased in 2018. At December 31,
2019, Susqua, Inc. reported a $120,000 impairment loss related to these securities. During 2020,
the debtor was successful in registering a new patent which improved the debtor’s operating
outlook. This change of events resulted in a reversal of $45,000 of the impairment loss. At
December 31, 2020, the fair value of the debt securities had increased by $68,000 over the
impaired value previously recorded. Susqua, Inc. uses IFRS for its external reporting. How
much, if any, of this reversal can Susqua, Inc. report in its income for 2020?
a. $ – 0 –
b. $120,000.
c. $68,000.
d. $45,000.
85. Which of the following is not true regarding consolidations under IFRS?
a. A parent and a subsidiary are permitted to have different accounting policies.
b. While both IFRS and GAAP require a firm to consolidate entities it controls, IFRS defines
control more broadly than does GAAP.
c. The noncontrolling interest is classified on the balance sheet in the stockholders’ equity
section shown separate from the equity of the parent.
d. On the income statement, noncontrolling interest is shown as a deduction from total entity
(parent + 100% subsidiary) consolidated earnings.
86. Under IFRS, SPEs are consolidated when evidence indicates that the reporting company
“controls” the SPE. Control is presumed if which of the following conditions exist?
I. The reporting entity performs activities on behalf of the SPE.
II. The SPE has decision-making powers over the activities of the reporting entity.
III. The reporting company has exposure, or rights, to variable returns from its involvement
with the investee
IV. The reporting company has the ability to use its power over the investee to affect the
amount of the firm’s returns
a. I and II only.
b. I, II, and III only.
c. III and IV only.
d. I, II, III, and IV.
87. If Sun Company acquired Star, Inc. many years ago in a pooling of interests transaction, the
entry would have used which one of the following to account for the pooling?
a. Fair value of Star’s assets
b. Book value of Star’s assets
c. Net present value of Star’s assets
d. Future value of Star’s assets
88. Pooling of interests method for accounting for business combinations was criticized because
it tended to allow recording of acquisitions
a. at artificially high amounts.
b. at artificially low amounts.
c. at exact amounts.
d. at amounts equal to fair value.
89. Financial analysts must be wary of business acquisitions accounted for as pooling of interests
because this method tends to inflate the
a. current ratio.
b. inventory turnover ratio.
c. rate of return ratios.
d. cash flow ratio.
90. For debt securities, if a firm intends to sell the security or it is more likely than not that the
firm will be required to sell the security before recovery of its amortized cost basis less current–
period credit loss, then the amount of impairment
a. is recognized in other comprehensive income equal to the entire difference between the
investment’s amortized cost basis and its fair value at the balance sheet date.
b. is separated into two components: the amount representing the credit loss and the amount
related to all other factors.
c. is separated into two components: the amount recognized in income and the amount
deferred until it is realized.
d. is recognized in earnings equal to the entire difference between the investment’s amortized
cost basis and its fair value at the balance sheet date.
91. The difference between the amortized cost basis of a debt security and the present value of
expected cash flows for that security discounted at the effective interest rate implicit in the debt
instrument when it was originally acquired is called the
a. amount representing the credit loss.
b. amount related to all other factors.
c. other-than-temporary impairment.
d. subsequent recovery in fair value.
92. Other-than-temporary impairments are not an issue for debt investments classified as
a. available-for-sale.
b. held-to-maturity.
c. trading.
d. both trading and held-to-maturity.
93. At December 31, 2017, a company reported the following minority passive equity
investments and related items:
Investments in trading securities (at cost): $500,000
Investments in available-for-sale securities (at cost): $350,000
Accumulated other comprehensive income from investments in AFS securities: Unrealized gain
of $30,000
Fair value adjustment―Trading securities: Unrealized gain $ 25,000
Required:
Prepare the journal entries on 1/1/2018 to transition to the new rules for minority passive equity
investments (ignore income tax).
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94. On April 1, 2018, GMR Company purchased 30% of the outstanding voting stock of the
Victory Corporation for $960,000. Victory’s net assets on April 1, 2018 totaled $2,500,000.
Victory’s equipment was undervalued by $500,000 and its inventory was undervalued by
$200,000 as of the date of purchase. The equipment has a ten-year remaining life as of April 1,
2018; the inventory was sold during 2018. Victory reported $450,000 of net income during 2018
and paid dividends of $75,000. Assume that net income was recognized evenly during 2018 and
dividends were declared and paid evenly during 2018.
Required:
1. Prepare a schedule to determine the amount of investment income to be reported by
GMR during 2018 assuming that the equity method of accounting is applicable.
2. Prepare a schedule to determine the balance in the investment account as of December
31, 2018 assuming that the equity method is applicable.
3. Describe how the financial accounting and reporting would have differed if the equity
method was not applicable.
4. Describe how equity method investments are accounted for if GMR uses the fair value
option of accounting for its investment.
95. On January 2, 2018, the Rambler Company purchased 40% of the outstanding common stock
of the AMC Corporation for $2,000,000. AMC’s net assets had a book value of $3,900,000 as of
January 2, 2018. AMC’s buildings were undervalued by $350,000, their land was overvalued by
$75,000, and their inventory was undervalued by $145,000.
Required:
Determine the amount of goodwill resulting from the purchase of the AMC stock.
96. Sub Company is a 100% owned subsidiary of Parent Corporation. During 2018, Parent sold
inventory costing $500,000 to Sub for $750,000. Sub Company had sold all of these goods to
outsiders as of December 31, 2018. During 2018, Parent Company reported sales of $2,250,000
and cost of goods sold of $1,500,000, while Sub Company reported sales of $1,200,000 and cost
of goods sold of $1,000,000.
Required:
Determine the 2018 consolidated gross profit.
97. Mercedes Company paid $20,000,000 to acquire 100% of the outstanding common stock of
Benz Incorporated on January 1, 2018. The book value of Benz’s net assets on the date of
acquisition was $17,000,000. Benz’s buildings were undervalued by $1,500,000 as of January 1,
2018; the buildings had a ten-year remaining life as of the date of acquisition. There are no other
book-to-fair value differences for the other assets and liabilities of Benz.
Mercedes retained earnings as of January 1, 2018 was $5,750,000, while Benz reported retained
earnings of $3,175,000. Mercedes net income was $1,750,000 during 2018 and was $2,035,000
during 2019; the 2018 and 2019 net income amounts did not include any amounts pertaining to
the Benz investment.
Benz’s retained earnings increased $1,050,000 from January 1, 2018 to December 31, 2019 even
though Benz declared $225,000 of dividends during that two-year period.
Required:
Determine the December 31, 2019 consolidated retained earnings balance.
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98. The Kruk Company regularly sells merchandise to German customers. On December 1,
2018, Kruk sold merchandise to a German customer at a price of three million Euros; the
customer is required to pay for the goods on February 1, 2019. The spot rate was $0.875 per euro
on December 1, 2018, it was $0.8875 per euro on December 31, 2018, and it was $0.865 per euro
on February 1, 2019.
Required:
Prepare the journal entries that might be necessary on December 1, 2018, December 31,
2018, and on February 1, 2019.
99. The Collins Company paid $1,050,000 to acquire 70% of Revsine Company’s outstanding
common stock on July 1, 2018. Revsine’s balance sheet on the acquisition date reported net
assets totaling $1,200,000. Revsine’s land had a fair value which was $175,000 greater than book
value, while the inventory’s fair value exceeded its book value by $67,500. Immediately after the
acquisition of the Revsine stock, Collins reported net assets of $5,785,000.
Required:
1. Determine the consolidated net assets total as of July 1, 2018.
2. Determine the amount of noncontrolling interest to be reported on the July 1, 2018
balance sheet. How is the noncontrolling interest reported within the consolidated balance
sheet? Assume that the acquisition method of accounting is applicable.
Answer:
100. Ford Corporation paid $10,200,000 for a 47% interest in Allen Corporation on January 1,
2018 when Allen had the following identifiable assets and liabilities:
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Book Fair
Value Value
Current assets $ 3,000,000 $ 3,000,000
Fixed assets (net) 4,000,000 6,800,000
$ 7,000,000 $ 9,800,000
Liabilities $ 2,000,000 $ 2,000,000
At the time of Ford’s purchase, the fixed assets had a remaining life of 8 years. For the year
ended December 31, 2018, Allen reported sales of $9 million and expenses of $5 million
and declared and paid dividends of $1 million. At December 31, 2018, Allen reported the
following balance sheet information:
December 31, 2018
Current assets $ 4,000,000
Fixed assets (net) 5,500,000
$ 9,500,000
Liabilities $ 1,500,000
Required:
1. Determine the income statement and balance sheet accounts and amounts as they
would appear on Ford’s financial statements under the equity method for the year
ended December 31, 2018. Be sure to show calculations.
2. Explain how your answer to requirement 1 would change if Ford determined that it
actually controlled Allen and had to consolidate its investment. Determine specific
income statement and balance sheet accounts and amounts where possible. Be sure to
show calculations.
Answer:
1. See following tables.
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