Question

On August 1, Year 1, A Co. acquired 70 percent of the common shares of B...

On August 1, Year 1, A Co. acquired 70 percent of the common shares of B co. for $700,000 in cash. On that date, the fair value of A’s identifiable net assets was $ 2,000,000 and the book value of its shareholders’ equity was 8,000,000. On that date, the fair value of B’s identifiable net assets was $ 6,000,000 and the book value of its shareholders’ equity was 500,000. For both companies, the fair value of all liabilities is equal to the book value.

  1. What is the impact of the above noted transaction on the debt-to-equity ratio on A’s separate –entity financial statements at the date of acquisition?
  1. It would increase.
  2. It would decrease.
  3. It would not change.
  4. The impact cannot be determined based on the information provided.
  1. Which of the following consolidation methods for valuation of subsidiary would show the lowest debt-to-equity ratio on A’s consolidated financial statements at the date of acquisition?
  1. Proportionate consolidation method.
  2. Parent company method
  3. Identifiable net assets method.
  4. Fair value enterprise method.

  1. Which of the following best describes accounting for intangible assets (other than goodwill) that have an indefinite useful life?
  1. They should be amortized in a systematic and rational manner.
  2. They should be tested annually for impairment, with any impairment amortized to expense in a systematic and rational manner.
  3. They should be carried at fair value on the balance sheet.
  4. They should be tested annually for impairment, with any impairment recorded as a loss.

Homework Answers

Answer #1

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Answer-1

C) it would not chagne

company has acquried the shares of b but it has not issued any fresh issue of shares here the compnay a would shown acuisiiton of shares as investment and not equity shares

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Answer-2

c) Identifiable net assets method. Net identifiable assets represent the subsidiary's total assets minus its total liabilities. The assets and liabilities must be adjusted for the fair value.

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