AIT707 Assignment _1 Marking Key

AIT707 Assignment _1 Marking Key - AIT707 Advanced...

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AIT707 – Advanced Accounting Assignment #1 – Marking Key Name: ________________________________________ Mark: _____________________ Question #1 – Chapter 4 Discussion Question Maximum 10 marks (1,1,1) (a) VALUE OF GOODWILL - Under all theories of consolidation except for the entity theory, only the portion of Leafs’ goodwill purchased by Maple is reported on the consolidated balance sheet. Given a purchase price of $600,000, Maple paid $324,000 for its share of Leafs’ goodwill as shown in the first column of Exhibit I. Putting a value on 100% of Leafs’ goodwill is not an easy matter as there are different ways of determining this value. (1,1) OPTION 1 (WITH DISCUSSION) - First, one could assume a linear relationship between the amount paid for 60% and the value of 100% of the subsidiary. In this case, if 60% of the shares were worth $600,000, then 100% of the shares should have been worth $1,000,000. In turn, 100% of goodwill would be valued at $540,000 as indicated in the second column of Exhibit I. (1,1) OPTION 2 (WITH DISCUSSION) - Secondly, one could listen to the argument made by the management of Maple and assume that there was not a linear relationship between the amount paid for 60% and the value of 100% of the subsidiary. Management stated that it was willing to pay a premium of $120,000 over and above the market price of the shares in order to gain control over Maple and the premium would be $120,000 regardless of the percentage of shares acquired. If this were the case, the total value of Leafs would be $920,000 of which $460,000 would be allocated to goodwill as indicated in the third column of Exhibit I. Other options ______________________________________________________ (1,1) (b) VALUATION OF NONCONTROLLING INTEREST - The value assigned to goodwill will affect the value reported for noncontrolling interest under the entity theory . When goodwill is valued at $540,000 , noncontrolling interest is reported at $400,000 as indicated in the fourth column in Exhibit II. When goodwill is valued at $460,000 , noncontrolling interest is reported at $320,000 as indicated in the fifth column in Exhibit II. Other results based on above other options_________________________________ (1,1,1) c) REVALUATION OF NET ASSETS - The subsidiary’s assets and liabilities are brought on to the consolidated balance sheet at fair values only at the date of acquisition . These fair values become the historical values for reporting purposes subsequent to the date of acquisition. That is, the subsidiary’s assets and liabilities are not revalued to fair value on each reporting date subsequent to the date of acquisition. (1) d) THEORY - The entity theory presents the fair value of the net assets of the subsidiary including goodwill at the date of acquisition. (1,1) PROS -
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AIT707 Assignment _1 Marking Key - AIT707 Advanced...

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