dirk01

Assume that on the balance sheet date shown below TME Corporation acquires 70% of Abcor, Inc. common stock for $25,000 in cash.

Pre-acquisition Balance Sheets December 31, 2001
	TME Corp.	Abcor, Inc.
Current assets	$80,000	$38,000
Other assets	28,000	15,000
Total assets	$108,000	$53,000
Current liabilities	$60,000	$32,000
Common stock	15,000	14,000
Retained earnings	33,000	7,000
Total liabilities and equity	$108,000	$53,000

What will be the post-acquisition current ratio, using both the acquistion method and the equity method, respectively, for TME?
The choices below represent Acquisition and Equity, respectively.

A) 1.01, 0.92.

B) 1.04, 1.11.

C) 1.21, 1.02.

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With the acquisition method: The current assets are ($80,000 + $38,000 - $25,000) = $93,000. The current liabilities are ($60,000 + $32,000) = $92,000. The current ratio is $93,000/$92,000 = 1.01. With the equity method: The current assets are ($80,000 - $25,000) = $55,000. The current liabilities are $60,000. The current ratio is $55,000/$60,000 = 0.92.

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Using the acquistion method to account for the acquisition, what will be the post-acquisition current assets of TME?

A) $93,000.

B) $105,000.

C) $118,000.

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Using the acquisition basis of accounting, the post-acquisition level of the current assets is the amount of the current assets prior to acquisition minus the amount of cash used for the acquisition. ($80,000 + 38,000 – 25,000) = $93,000.

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Using the acquistion method to account for the acquisition, which of the following is closest to the post-acquisition amount that will be recorded as the minority interest under US GAAP?

A) $10,700.

B) $6,300.

C) $21,000.

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Since only 70% of Abcor was purchased by TME there is a minority interest that must be accounted for, equal to the percentage of Abcor not owned by TME times Abcor’s fair value.
Abcor’s fair value = 25,000/0.7 = 35,714.29
Under US GAAP, only full goodwill.
Minority interest = 35,714.29 (0.3) = 10, 714.29

dirk01

The proportionate consolidation method results in:

A) different net income from the equity method.

B) same equity as the cost method.

C) same net income as the equity method.

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The proportionate consolidation results in the SAME net income and equity as the equity method

dirk01

The proportionate consolidation method will least likely achieve the same results as the acquisition method because:

A) of the use of the equity method on the income statement.

B) there are no minority interests.

C) no joint ventures are included.

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Proportionate consolidations and acquisitions are the same except for the exclusion of minority interests in proportionate consolidations.