Question

BB Co., Inc. issues 1 Million of it $5 par value stock plus $5,000,000 in cash to acquire 100% of the voting common stock in DD Corporation. On the date of acquisition BB stock is trading at $40 per share. BB will account for this business combination as a stock acquisition.

Balance sheet information ($ in thousands) as of the date of acquisition is as follows:

	BB Co., Inc. Book Values Dr (Cr)	DD Corp.
		Book Values Dr (Cr)	Fair Values Dr (Cr)
Cash and AR	20,000	6,000	6,000
Inventories	50,000	10,000	7,000
Property & Equipment, net	350,000	100,000	90,000
Goodwill	20,000	-	-
Current liabilities	(60,000)	(20,000)	(20,000)
Long-term debt	(200,000)	(80,000)	(78,000)
Common stock	(25,000)	(2,000)
Paid-in capital	(75,000)	(8,000)
Retained earnings	(110,000)	(7,000)
AOCI	10,000	(1,000)
Treasury stock	20,000	2,000
Total	-	-

Please Help with the Multiple Choice Questions Pertaining to the Above Information:

Question 1:

Assuming DD uses FIFO costing, the impact on year one of consolidated COGS is:

a. We don’t know without knowing how frequently inventories turn over in a year.

b. No effect.

c. Decrease COGS by $3,000,000.

d. Increase COGS by $3,000,000

Answer 1

The correct answer is "a. We don't know without knowing how frequently inventories turn over in a year".

Supporting explanation:

To know the impact on Cost of Goods Sold, the details regarding the number of units and cost per unit information of Beginning inventory, purchases and sales are required. Then only the impact on COGS under FIFO method can be calculated.

Therefore, the correct option is "We don't know without knowing how frequently inventories turn over in a year".