Goodwill
CPA Financial Accounting and Reporting (FAR) · Learn by Concept
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CPA Financial Accounting and Reporting (FAR) › Goodwill
Diego Company buys all outstanding assets and liabilities of Francisco Company on January 1, Year 3, by giving up consideration of \$3.5 million. On that date, Francisco's net assets have a book value of \$3 million and a fair value of \$3.7 million. Which of the following statements is true?
Goodwill of \$500,000 should be recognized and amortized
Goodwill of \$500,000 should be recorded and tested annually for impairment
A bargain purchase of \$200,000 has occurred and will be reported immediately as a gain for consolidation purposes
A bargain purchase of \$200,000 has occurred and will be used to reduce the value of Francisco's long-term assets for consolidation purposes
Explanation
A bargain purchase takes place when the amount of consideration paid in a business acquisition is less than the fair value of all assets received. In this case, the bargain purchase amount is equal to FV of \$3.7M - consideration of \$3.5M. Bargain purchases are reported as gains immediately.
Under IFRS regulations, goodwill should be tested for impairment at ________.
Each cash generating unit
Entire business
Each reporting unit
Each acquisition unit
Explanation
Goodwill impairment is assessed at the cash generating unit level rather than any other level listed here.
Lion Company pays \$10 million for all outstanding shares of Tiger Company. On the date of the purchase, Tiger company has net identifiable assets with a book value of \$8 million and a fair value of \$8.5 million. Which of the following statements is true?
Goodwill of \$1.5 million should be reported for consolidation purposes and amortized over a period of time
Goodwill of \$1.5 million should be reported for consolidation purposes and tested annually for impairment
Goodwill of \$2 million should be reported for consolidation purposes and amortized over a period of time
Goodwill of \$2 million should be reported for consolidation purposes and tested annually for impairment
Explanation
Goodwill will be recorded for the difference between the fair value of assets received in the purchase (\$8.5M) and the fair value of consideration paid ($10M). Under GAAP, goodwill is not amortized but is tested annually for impairment.
ABC Inc owns 55% of the voting stock of DEF Inc. ABC would not produce consolidated financial statements if:
DEF is in legal reorganization or bankruptcy
DEF is a real estate company
DEF owns 40% of ABC
DEF is located and does all of its business in a foreign country
Explanation
The investor company would not produce consolidated financial statements if DEF is in legal reorganization, bankruptcy, or operates under severe foreign restrictions.
Herring Company buys 100% of the outstanding shares of Catfish Company during Year 1. On a consolidated balance sheet produced immediately after the sale, goodwill of \$250,000 is reported. How was this goodwill determined?
It was on the balance sheet of Catfish before the acquisition took place
It is a figure calculated by a reasonable estimate of future cash flows from Catfish
The specific components that determine goodwill are separately identified and calculated
It is the fair value of consideration given up by Herring less the fair value of all identifiable assets and liabilities owned by Catfish
Explanation
Goodwill will be recorded for the difference between the fair value of assets received in the purchase and the fair value of consideration paid in the purchase.
Of the following factors, which would not be an indicator of an investor's ability to exercise significant influence over the operating and financial policies of an investee?
Investor recommendation for the investee to hire a specific executive
Interchange of managerial personnel between investor and investee
Dependence by the investee on the investor's proprietary technology
Investor representation on the investee board of directors
Explanation
Significant influence exists when a company owns between 20 and 50 percent of the voting stock of another company. Only option A falls under significant influence.