ACC 703 Lecture Notes - Profit Margin, Financial Statement, Contingent Liability
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Can someone please help me with the following questions so I candouble check my work? No explanation needed just the answer isfine.
8. U.S. GAAP and IFRS require firms to account for minority,active investments, generally those where the investor owns between_____ using the equity method. Under the equity method, theinvestor recognizes as revenue (expense) each period its share ofthe net income (loss) of the investee. The investor recognizesdividends received from the investee as a return (reduction) ofinvestment, not as income.
a. | 10% and 50% |
b. | 20% and 50% |
c. | 30% and 50% |
d. | 40% and 60% |
e. | 50% and 60% |
25. Purchaser Corporation acquires 30%of the outstanding voting common shares of the Investee Corporationfor $600,000. Purchaser Corporation acquires the investment inInvestee Corporation by buying previously issued shares of InvesteeCorporation from other investors. When Purchaser Corporationacquired 30% of Investee Corporation’s common shares for $600,000,Investee Corporation’s total shareholders’ equity was $1.5 million.Purchaser Corporation’s cost exceeds the carrying value of the netassets acquired by $150,000 [ $600,000 - (0.30 x$1,500,000)].
Purchaser Corporation attributes the $150,000 excess purchaseprice as follows: $100,000 to remeasure buildings and equipment tofair value and $50,000 to goodwill. Which of the following is/aretrue?
a. | Purchaser Corporation does not reclassify this excess out of itsInvestment in Stock of Investee Corporation account to Buildingsand Equipment and to Goodwill. |
b. | Purchaser Corporation must amortize (or depreciate) any amountattributed to assets with limited lives. |
c. | Purchaser Corporation must depreciate the $100,000 attributed tobuildings and equipment over their remaining useful lives. |
d. | U.S. GAAP and IFRS do not permit the investor to amortize theexcess purchase price attributed to goodwill and other assets withindefinite lives. Instead, the investor must test the investmentaccount annually for possible impairment. |
e. | all of the above |
32. Pareto Corporation owns 40% ofSpring Corporation. During Year 3, Spring has net income of$60,000. What entry should Pareto record related to its investmentin Spring during Year 3?
a. | Investment in SpringCorp. 24,000 Equity in Earnings ofAffiliate 24,000 |
b. | DividendReceivable 24,000 DividendIncome 24,000 |
c. | InvestmentReceivable 24,000 InvestmentIncome 24,000 |
d. | Investment in SpringCorp. 24,000 InvestmentIncome 24,000 |
e. | Investment in SpringCorp. 24,000 Cash 24,000 |
35. Pense Co. purchased 40% of thestock of Stretch Co. in Year 1 for $100,000. Stretch had net incomein Year 1 of $50,000 and net income in Year 2 of $30,000. Stretchalso paid total dividends of $20,000 in Year 2. On January 1, Year3, Pense Co. sold its investment in Stretch Co. to GE CapitalCorporation (GE) for $130,000. What entry would Pense Co. make torecord the sale of Stretch Co.?
a. | Cash 130,000 Gain onSale 6,000 Investment inStretch 124,000 |
b. | Cash 130,000 Loss onSale 2,000 Investment inStretch 132,000 |
c. | Cash 130,000 Loss onSale 10,000 Investment inStretch 140,000 |
d. | Cash 130,000 Loss onSale 30,000 Investment inStretch 160,000 |
e. | Cash 130,000 Loss onSale 20,000 Investment inStretch 150,000 |
55. Intercompany sales
a. | do not need to be eliminated as long as the sales have beencompleted to an outside party. |
b. | must be eliminated from both the sales and cost of goods soldaccounts. |
c. | do not need to be eliminated if made at arm's length values. |
d. | must be eliminated only if not in the ordinary course of tradeor business. |
e. | do not need to be eliminated. |
54. To avoid double counting P'sinvestment in S, P must eliminate
a. | the investment in S and S's separate company shareholders'equity. |
b. | all debt on S's separate company financial statements. |
c. | any dividends paid against the cash account. |
d. | all intercompany transactions. |
e. | all of the above. |
58. U.S. GAAP view investments of over50 percent of the voting stock of another company (for the purposeof controlling the other company at the broad policy-making leveland at the day-to-day operational level) as
a. | minority, passive investments. |
b. | minority, active investments. |
c. | majority, passive investments. |
d. | majority, active investments. |
e. | marketable securities. |
33. If Wabasso Company pays $55,000 individends to its corporate investor Lament Corporation (Lament owns35% of The Wabasso Company), what entry should Lament Corporationrecord when it receives the dividends?
a. | Cash 55,000 DividendIncome 55,000 |
b. | Cash 55,000 InvestmentIncome 55,000 |
c. | Cash 55,000 Investment in WabassoCompany 55,000 |
d. | Cash 55,000 Additional Paid-inCapital 55,000 |
e. | Cash 55,000 Common Stock- WabassoCompany 55,000 |
25. Purchaser Corporation acquires 30%of the outstanding voting common shares of the Investee Corporationfor $600,000. Purchaser Corporation acquires the investment inInvestee Corporation by buying previously issued shares of InvesteeCorporation from other investors. When Purchaser Corporationacquired 30% of Investee Corporation’s common shares for $600,000,Investee Corporation’s total shareholders’ equity was $1.5 million.Purchaser Corporation’s cost exceeds the carrying value of the netassets acquired by $150,000 [ $600,000 - (0.30 x$1,500,000)].
Purchaser Corporation attributes the $150,000 excess purchaseprice as follows: $100,000 to remeasure buildings and equipment tofair value and $50,000 to goodwill. Which of the following is/aretrue?
a. | Purchaser Corporation does not reclassify this excess out of itsInvestment in Stock of Investee Corporation account to Buildingsand Equipment and to Goodwill. |
b. | Purchaser Corporation must amortize (or depreciate) any amountattributed to assets with limited lives. |
c. | Purchaser Corporation must depreciate the $100,000 attributed tobuildings and equipment over their remaining useful lives. |
d. | U.S. GAAP and IFRS do not permit the investor to amortize theexcess purchase price attributed to goodwill and other assets withindefinite lives. Instead, the investor must test the investmentaccount annually for possible impairment. |
e. | all of the above |
20. Pagoli Corporation acquires 30% ofthe outstanding voting common shares of the Inform Corporation for$600,000. Pagoli Corporation acquires the investment in InformCorporation by buying previously issued shares of InformCorporation from other investors.
Between the time of the acquisition and the end of PagoliCorporation’s next accounting period, Inform Corporation reportsearnings of $80,000; and pays a dividend of $30,000 to holders ofits common stock.
Inform Corporation reports earnings of $100,000 and paysdividends of $40,000 during the subsequent accounting period.
Pagoli Corporation’s Investment in Stock of Inform Corporationaccount now has a balance of:
a. | $609,000 |
b. | $621,000 |
c. | $633,000 |
d. | $642,000 |
e. | $657,000 |
Tax Strategies for Business Planning andInvestment
Tax Planning Case II: Entity Selection
We’ve received an inquiry from a client and we’d like you todraft a memorandum indicating how we should respond to these clientinquiries. The inquiry concerns the formation of a business and ouranalysis of the impact various entity types might have on thebusiness.
Please format your memorandum to Identify significant tax andnontax issues or concerns that may differ across entity types anddiscuss how they are relevant to the choice of entity decision forthe client’s business. Include a brief summary of the inquiry, youranalysis of the inquiry, the issues posed, any relevantcomputations and your recommendations. Please include yourcomputations directly in your memorandum and do not attach them ina separate Excel spreadsheet.
Please format the memorandum as follows:
MEMORANDUM
To: Eugene Kilo, Smith TaxConsultants
From: [Team members, provide your own titles]
Re: Various Tax Matters
Date: [Applicable Date]
Martha Taylor is currently employed by the Maryland Chamber ofCommerce. While she enjoys the relatively short workweeks, sheeventually would like to work for herself rather than for anemployer. In her current position, she deals with a lot ofsuccessful entrepreneurs who have become role models for her.Martha has also developed an extensive list of contacts that shouldserve her well when she starts her own business.
It has taken a while but Martha believes she has finallydeveloped a viable new business idea. Her idea is to design andmanufacture cookware that remains cool to the touch when in use.She has had several friends try out her prototype cookware and theyhave consistently given the cookware rave reviews. With thisencouragement, Martha started giving serious thoughts to making“Cool Touch Cookware” (CTC) a moneymaking enterprise.
Martha had enough business background to realize that she isembarking on a risky path, but one, she hopes, with significantpotential rewards down the road. After creating some initial incomeprojections, Martha realized that it will take a few years for thebusiness to become profitable. After that, she hopes the sky’s thelimit. She would like to grow her business and perhaps at somepoint “go public” or sell the business to a large retailer. Thiscould be her ticket to the rich and famous.
Martha, who is single, decided to quit her job with the stateChamber of Commerce so that she could focus all of her efforts onthe new business. Martha had some savings to support her for awhile but she did not have any other source of income. Martha wasable to recruit Linda and Mike to join her as initial equityinvestors in CTC. Linda has an MBA and a law degree. She wasemployed as a business consultant when she decided to leave thatjob and work with Martha and Mike. Linda’s husband earns around$300,000 a year as an engineer (employee). Mike owns avery profitable used car business. Because buying andselling used cars takes all his time, he is interested in becomingonly a passive investor in CTC. He wanted to get in on the groundfloor because he really likes the product and believes CTC will bewildly successful. While CTC originally has three investors, Marthaand Linda have plans to grow the business and seek more owners andcapital in the future.
The three owners agreed that Martha would contribute land andcash for a 30 percent interest in CTC, Linda would contributeservices (legal and business advisory) for the first two years fora 30 percent interest, and Mike would contribute cash for a 40percent interest. The plan called for Martha and Linda to beactively involved in managing the business while Mike would notbe.
The three equity owners’ contributions are summarized asfollows:
Martha Contributed | FMV | Adjusted Basis | Ownership Interest |
Land (held as investment) | $120,000 | $70,000 | 30% |
Cash | $30,000 | ||
Linda Contributed | |||
Services | $150,000 | 30% | |
Mike Contributed | |||
Cash | $200,000 | 40% |
Working together, Martha and Linda made the following five-yearincome and loss projections for CTC. They anticipate the businesswill be profitable and that it will continue to grow after thefirst five years.
| Cool Touch Cookware 5-Year Income and Loss Projections | ||||||||||||
|
With plans for Martha and Linda to spend a considerable amountof their time working for and managing CTC, the owners would liketo develop a compensation plan that works for all parties. Down theroad, they plan to have two business locations (in differentcities). Martha would take responsibility for the activities of onelocation and Linda would take responsibility for the other.Finally, they would like to arrange for some performance-basedfinancial incentives for each location.
To get the business activities started, Martha and Lindadetermined CTC would need to borrow $800,000 to purchase a buildingto house its manufacturing facilities and its administrativeoffices (at least for now). Also in need of additional cash, Marthaand Linda arranged to have CTC borrow $300,000 from a local bankand to borrow $200,000 cash from Mike. CTC would pay Mike a marketrate of interest on the loan but there was no fixed date forprincipal repayment.
