Assume Company P acquires Company T for $100 million. The fair market value of Company T’s net tangible assets is $75 million. The only differences in fair market value of the assets and liabilities is in property, plant, and equipment (PP&E), which has a book value of $20 million and a fair market value of $25 million. No other intangible assets are identified. The PP&E has a remaining useful life of ten years. Company P has a company policy of amortizing all intangible assets over 20 years. The acquisition takes place on October 1, 2006, and is accounted for using the purchase method according to U.S. GAAP. Company P has a 31st December fiscal year end. The combined amount of incremental amortization of intangible assets and depreciation of PP&E attributable to the write-up of assets under the purchase method that should be taken by Company P in 2006 is closest to: A) $500,000. B) $125,000. C) $375,000.
Not a CPA or CPK (I wish!) but the only incremental change is $5,000,000 of PP&E. It’s depreciated over 10 years but we are already through 3/4s of the year so 500*1/4 = B.
125 Goodwill = 5 Million (25 - 20) amortized over 10 years = 500 K per year. But the purchase happened on 1 Oct. So only 3 months depreciation = 500/4 = 125 K would be recognized in 2006.
Goodwill is not permitted to be amortized under U.S. GAAP. The company policy is irrelevant here. The fair value increment of PP&E of $5 million should be amortized over its remaining useful life of ten years. This results in annual amortization of $500,000. Pro-rated for three months beginning from October 1st, the amount of amortization in 2004 is $500,000 × 0.25 = $125,000. Duh, I feel stupid now. I guessed $500k but forgot to take into effect the fact this purchase went in place 10/1.
Which of the following statements regarding the statement of cash flow impacts of an acquisition is least accurate? A) When the acquisition is accounted for using the purchase method, the cost of the acquisition is mostly an investing cash outflow offset by a financing inflow. B) When the acquisition is financed with debt, the only impact is a cash flow financing inflow. C) When using the pooling method, no cash flow arises as a result of the transaction
Your answer: B was correct! When the acquisition is financed with debt there is a cash flow financing inflow, but this will be matched with an investing cash outflow.
cpk–are you sure that the 25-20 = 5 difference is called goodwill? if so, doesnt this go aagainst the rules of no amortization of goodwill allowed
its not goodwill, its ppe. 25 is written up from 20, so 5m needs to be depreciated.
fml Which of the following best describes the differences between the non-marketable securities cost method and the equity method for accounting for intercorporate investments? A) Under the cost method, the balance sheet valuation of the investment remains at cost whereas under the equity method, the balance sheet valuation reflects changes in the retained earnings of the affiliate company. B) Under the non-marketable cost method, the balance sheet valuation reflects changes in the market value of the security whereas under the equity method, recognized income only includes dividends received from the affiliate company. C) Under the cost method, the income recognized by the investor is the dividends received from the investee firm whereas under the equity method, the balance sheet valuation reflects changes in the market value of the affiliate’s shares.
Your answer: C was incorrect. The correct answer was A) Under the cost method, the balance sheet valuation of the investment remains at cost whereas under the equity method, the balance sheet valuation reflects changes in the retained earnings of the affiliate company. Under the non-marketable securities cost method, the balance sheet valuation remains at cost unless a permanent impairment of value has been declared – in which case the security’s value is written down. On the income statement, the investor simply includes dividend receipts from the investee as income. Under the equity method, the balance sheet valuation is adjusted each period by the investor’s pro-rata share of the change in retained earnings of the affiliate firm. Income is simply the investor’s pro-rata share of the affiliate’s income.
Wow dude, give people a chance to respond! C is not correct because the equity method reflects the owner’s proportionate share of earnings… value of shares is irrelevant. Think of equity method as just like consolidation (you get your share of the earnings) except that it is only one line on your BS instead of added in line by line. Market values are only used for passive investments.
Is this Correct When Company P acquired T for 100Mn when the fair value is 75Mn, as per purchase method how will that be accounted. 75Mn PPE + 25Mn Goodwill or Something else I understood the depreciation part, but kind of obscure with what amount needs to be identified as Intangible Assets in this transaction QuantJock_MBA Wrote: ------------------------------------------------------- > its not goodwill, its ppe. > > 25 is written up from 20, so 5m needs to be > depreciated.
It will be accounted like this PPE 80 + Goodwill 20 You are allowed to alocated excess purchase price (100>75) to assets which have market values that exceed their book values, as of the acquisition date. Cheers