Question

On January 1, 2019, X Inc. purchased 25% of the voting shares of Y Inc. for $100,000. The investment is reported using the equity method, as X has significant influence over Y. Y's net income and declared dividends for the following three years are as follows:

	Net Income	Dividends
2019	$50,000	$20,000
2020	$70,000	$80,000
2021	$30,000	$60,000

What would be the carrying value of X's Investment in Y at the end of 2021?

Multiple Choice

• $100,000

• $91,200

• $97,500

• $98,800

The IASB standard (IFRS 3 Business Combinations) issued with respect to the treatment of negative goodwill requires that:

Multiple Choice

• it must be recognized in income immediately as an extraordinary item.

• it must be recognized in income immediately.

• it must be reflected as an increase in Liabilities and a Reduction in Capital for the Parent Company.

• it can be deferred and amortized over a maximum of 40 years.

IOU Inc. purchased all of the outstanding common shares of UNI Inc. for cash of $800,000. On the date of acquisition, UNI's assets included $2,000,000 of Inventory, and Land with a Book value of $120,000. UNI also had $1,400,000 in Liabilities on that date. UNI's book values were equal to their fair market values, with the exception of the company's Land, which was estimated to have a fair market value which was $50,000 higher than its book value. UNI also had patent rights with a fair market value on acquisition date of $20,000 that were not shown on its balance sheet because the rights had been developed internally.

How much goodwill would be created by IOU's acquisition of UNI?

Multiple Choice

• $30,000

• $10,000

• $70,000

• $80,000

Answer 1

1.)		Amount $
	Cost of Investment	100,000
	Add: 2019 Share of Net Income	12,500
	Less: 2019 Share of Dividend	5,000
	Add: 2020 Share of Net Income	17,500
	Less: 2020 Share of Dividend	20,000
	Add: 2021 Share of Net Income	7,500
	Less: 2021 Share of Dividend	15,000
	Carrying value of X's Investment in Y at the end of 2021	97,500
	Correct answer is option 3 .

2.)	The IASB standard (IFRS 3 Business Combinations) issued with respect to the treatment of negative goodwill requires that it must be recognized in income immediately as an extraordinary item.
	Correct answer is option 1.

3.)			Amount $
	Purchase Consideration		800,000
	Less: Net Assets acquired
	Book value ( 2,000,000 + 120,000 - 1,400,000 )	720,000
	Fair value in excess of book value
	Land	50,000
	Patent rights	20,000	790,000
	Goodwill		10,000
	Correct answer is option 2.