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Becker Professional Education Registered to: www.VividBook"r:rg VividBookNet@Gmail"com
Question CPA-00326
Pare, lnc. purchased 1Aa/o af Tot Co.'s 100,000 outstand:ng shares of common stock on January 2, Year 1, for
$50,000. On December 31 ,
Year 1
,
Pere purchased an additional 20,000 shares of Tot for
$150,000. There
was no goodwill as a result of either acquisiticn, and Tot had not issued any additional siock during Year 'l .
Tot reported earni.ngs of $300,000,for Year 1 . What amount should Pare report in its December 31, Year 1,
balance sheet as investment in Toi?
a $ 1 70,000
b $200,000
c. $230,000
d. $2s0,000
Exp lanat i on
Choice "c" is correct, $230,000 investment in Tot at 12131lYear 1.
Rule: When two or more purchases of stock cause o\rynership in an investee tc go from tess than 20% to
more than 20%, the equity method should be used.
oare i'f;fffiff %
,ffi*ffi
1st step 1l?lYear 1 100,000 x 10%
=
10,000
$ 50,000
Znd step 12l31tYear 1 100,000 x 20o/o
=
20,000 150,000
Total purchase 30% 30,000 200,000 u;-'
Share of earn ings (eq.uj*_method
):
($300,000 earnings x 10%)
=
30,000
lnve$tment account at 1'2l31lYear 1
$?30,q00
Note: Although the equity method is used, ihe actual ownership percentage
{10%)
is used for Year 1 s-lM-^
the additiona! 20%
$1q.npJ
purghased until 12/31/Year 1, ln Year ?, 30o/o of Tot's earnings would be recorded
in the investor's investment account.
201I Fdition
-bistributed
rp. eil rignts reserved
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Becker Professionai Ed{.rcation Registered to: www.VividBook.org VividBoakNt@Gmail.corn
Question CPA-05616
On January 1, Year 1, Parker lnc. acquired 30% of Smith lnc.'s outstanding common stock for $400,000"
During Year 1 , Srnith had net income of $100,000 and paid dividends of S30,000. On January 1,
year
2,
Parker acquired an additional 45% interest on Srniih for $1 ,0'l?,500.
The fair value of Smith cn January 1
,
Year 2 was $2,250,000. What amount of gain from thisiran$action will Parker record in Year,2?
a, $0
b
9?!1 999
c. $275,000
d. $675,000
Expl anat i on
Choice "b" is corect. When an investor goes froffi non-control to control of a subsidiary tlrrough a stgp
acquisition, the previously h*ld equity investment must be adjusted to fair value. The fair vatue adjustment is
recognized as a gain or loss by the investor in the period of the additional acquisition.
FV of 30o/o interest
= $2,250,000 x 30%
+
$675.000
To compute the adjusiment macie on January 1, Year 2, the carrying amount cf Parker's investment in $mith
on thai date must first be calculated. Because Farker previously owned 30% of Smith, the investment would
have been accounled for using the equity method:
lnvestment in $mith, llllYear 1 $400,000
+ 30% share of Srnith's Year 1 earnings 30,000
- 30% share of Smith's Year 1 dividends {9$00}
lnvestment in Ernith, 1?/31lYear I $421,S00
Original Acquired Noncontr*lling Total
/nferesl lnferesl lnleresl Fair
307o 25% Value
Beginning carrying amount $421 ,000 $1,012,500
Adjustment ,t54;000 5q?,500
New carrying amcunt
$qz5,q0q $1,012,500 $5q2,500 $?.250,qqq
The $254,000 adjustment necessary to adjust the original investment to its July 1, Year 2 lair value is
recorded by Farker as a gain in Year 2.
Choice "a" is incorrect. A gain must be recorded to adjust the inve$tment to fair vallre on llllYear 2.
Choice "c" is incorrect. This calculation assumes that the 30% interest is reported at $400,000 an 111/Year 2.
Parker would use the equity rnethod to account for its investment in $mith during Year 1 and the ending vafue
of the investment would be $421,000 on l2l31lYear 1 (see the calculation above).
Choice "d" is incorrect. This is the total fair value of th* original 30% interest cn July 1, Year 2.
2or 1 Edition. Drstnb-
reserved
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