Question 1:
ABC Company has recently undergone a business combination. As part of the transaction, the company acquired a subsidiary by issuing its common shares. The fair value of the subsidiary's net assets was determined to be $10 million, but the purchase consideration was $12 million. How should the excess purchase consideration be accounted for?
Solution 1:
The excess purchase consideration should be allocated to identifiable assets and liabilities of the subsidiary. This allocation is done based on their fair values at the acquisition date. Any remaining excess after the allocation is recorded as goodwill. The journal entries would be as follows:
Debit: Identifiable net assets (based on fair value)
Credit: Subsidiary's common shares (fair value)
Debit: Goodwill (excess purchase consideration)
Credit: Subsidiary's common shares (fair value)
Question 2:
XYZ Corporation operates a defined benefit pension plan. The actuary has provided the following information regarding the plan's funded status: the projected benefit obligation (PBO) is $20 million, the fair value of plan assets is $16 million, and the accumulated benefit obligation (ABO) is $18 million. Calculate the pension liability or asset recognized on the balance sheet.
Solution 2:
The pension liability or asset recognized on the balance sheet is the difference between the PBO and the fair value of plan assets. In this case, the pension liability can be calculated as follows:
Pension liability = PBO - Fair value of plan assets
= $20 million - $16 million
= $4 million
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Question 3:
LMN Corporation leases an asset under a finance lease agreement. The lease term is 5 years, and the implicit interest rate in the lease is 8%. The present value of lease payments is $1.2 million. How should the lease liability be initially recognized?
Solution 3:
The lease liability should be initially recognized at the present value of lease payments. The calculation of the present value can be done using the implicit interest rate and the lease term. In this case, the initial recognition of the lease liability would be:
Lease liability = Present value of lease payments = $1.2 million https://www.accountingassignmenthelp.com/
Question 4: ABC Corporation is evaluating whether to recognize a provision for a contingent liability. The best estimate of the obligation is $5 million, and the probability of the obligation occurring is assessed as 70%. What amount should be recognized as a provision?
Solution 4: A provision should be recognized if it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the obligation can be made. In this case, the provision would be calculated as follows:
Provision = Best estimate of the obligation * Probability of occurrence = $5 million * 70% = $3.5 million
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Question 5:
ABC Company issued $1 million of 5-year bonds with a stated interest rate of 6%. The market interest rate at the issuance date was 7%. How should the bonds be initially recorded on the balance sheet?
Solution 5:
The bonds should be initially recorded at the present value of their future cash flows using the market interest rate. The calculation can be done using the present value formula. In this case, the initial recording of the bonds on the balance sheet would be:
Debit: Cash (present value of future cash flows)
Credit: Bonds payable (face value of the bonds)
Credit: Discount on bonds payable (difference between face value and present value)