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Giant Company buys all outstanding shares of Little Company on October 1, Year 1 for $450,000. In Year 1, Little earned revenue of $15,000 per month and incurred expenses of $12,000 per month. On the date of the sale, Little had only one asset, a piece of land, with a book value of $350,000 and a fair value of $400,000. It had no liabilities. By the end of Year 1, the land had appreciated in value and was worth $410,000. Which of the following statements is true regarding the consolidated financial statements at the end of Year 1?
Little had net income of $3K per month ($15K in revenue - $12K in expenses). The consolidated financial statements will only include the net income earned after the purchase of the business, which will include October-December. The net income of Little included in the consolidated statements will be $3K per month x 3 months.
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During Year 1, the James Company buys all outstanding shares of the Holmes company for $4 million even though Holmes has net assets with a fair value of only $3.5 million. One reason for this excess payment is that Homes owns land worth $1.5 million with a book value of only $800,000. Prior to the purchase of Holmes, James owned its own land with a book value of $400,000 and a fair value of $700,000. Two years later, both companies still own this land and both have acquired additional acreage. James reports land at a book value of $1 million and fair value of $1.1 million; Holmes reports land with a book value of $2 million and a fair value of $2.5 million. At what amount will land be reported at the end of Year 3 in the consolidated balance sheet?
The consolidated statements will include the combined book values of the land owned by each company ($1M in land owned by James + $2M in land owned by Holmes).
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Hope Company owns 100% of the outstanding shares of Howard Company. During the current year, Hope sold inventory costing $80,000 to Howard for $90,000. This inventory has since been sold to a third party and Howard has not paid Hope for the purchase. At the balance sheet date, Hope has total current assets of $850,000 and Howard has total current assets of $550,000. Assume that there were no allocations established at the date of acquisition. What is the total amount of current assets reported in the consolidated balance sheet?
The consolidated statements will include the combined book values of each company's current assets, but outstanding intercompany balances will be removed. Thus the consolidated statements include $850K owned by Hope + $550K owned by Howard - $90K receivable due for the inventory.
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Which of the following financial instruments is not considered a derivative financial instrument?
A bank certificate of deposit is not a derivative financial instrument. The other options are.
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A derivative financial instrument is best described as:
A derivative is an instrument that derives its value from the value of some other instrument.
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Of the following hedge examples, which would likely be a fair value hedge?
A fair value hedge protects the user from decreases in the fair value of an asset such as their inventory. Obsolescence is a common decrease in fair value.
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