Cpa Module 5.3

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Lesson 1 Quiz

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LESSON 1 — QUIZ

1. On January 1, 20X5, Gate Corp. purchased 30% of the outstanding ordinary shares of Zenith Inc. for $1,200,000 cash. Gate paid an additional $30,000 to various parties in directly attributable transaction costs. At the purchase date, the book value of Zenith’s equity (ordinary shares and retained earnings) was $3,000,000. The fair value of Zenith’s identifiable net assets equalled its carrying values, with the following exceptions:

• The estimated fair value of Zenith’s equipment was $380,000; the net book value was

$400,000.

• The estimated fair value of Zenith’s inventory was $550,000; the net book value was

$470,000.

What is the amount of goodwill to be recognized on acquisition?

Solution:

Option b) is correct.

Purchase price        $1,200,000

Directly attributable transaction costs                        30,000 Total consideration paid                1,230,000

Less:

Zenith’s equity        $3,000,000

Percentage acquired                30%                900,000

Acquisition differential        330,000

Allocated to:

Fair value decrement equipment                (20,000) Fair value increment inventory                80,000

60,000

Percentage acquired                30%                        18,000 Goodwill on acquisition                                $312,000[pic 4]

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Module 5.3 — Advanced Financial Reporting        Lesson 1 — Quiz[pic 5]

Option a) is incorrect. You neglected to include the $30,000 directly attributable transaction costs in the total consideration paid.

Option c) is incorrect. You neglected to include the $30,000 directly attributable transaction costs in the total consideration paid, and you reversed the signage on the fair value decrement on the equipment (–$20,000) and the fair value increment (+$80,000) on the inventory.

Option d) is incorrect. You reversed the signage on the fair value decrement on the equipment (–$20,000) and the fair value increment (+$80,000) on the inventory.

Source: Topic 1.4-1

1. On July 1, 20X6, Scarlet Corp. paid $800,000 cash to acquire 35% of Rain Inc.’s ordinary shares. The book value and fair value of Rain’s identifiable net assets at time of acquisition was $2,400,000. Rain’s after-tax net income for its year ended June 30, 20X7 was

$200,000. On April 30, 20X7, Rain declared and paid a total of $80,000 dividends to its ordinary shareholders.

What is the balance in Scarlet’s investment account on June 30, 20X7 pertaining to its investment in Rain?

Solution: