Advanced Accounting
12th Edition
ISBN: 9781305084858
Author: Paul M. Fischer, William J. Tayler, Rita H. Cheng
Publisher: Cengage Learning
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Chapter 1, Problem 1A.1.1AE
a.
To determine
Introduction: Acquisition is a corporate term used to represent purchase of another company and gaining the ownership of the company.
To prepare: Estimating
b.
To determine
Introduction: Acquisition is a corporate term used to represent purchase of another company and gaining the ownership of the company.
To prepare: Estimating goodwill when excess earning continues indefinitely.
c.
To determine
Introduction: Acquisition is a corporate term used to represent purchase of another company and gaining the ownership of the company.
To prepare: Estimating goodwill when excess earning continues indefinitely.
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Crane Company owns a trade name that was purchased in an acquisition of Wildhorse Co.. The trade name has a book value of $2200000, but according to IFRS, it is assessed for impairment on an annual basis. To perform this impairment test, Crane must estimate the fair value of the trade name. It has developed the following cash flow estimates related to the trade name based on internal information. Each cash flow estimate reflects Crane's estimate of annual cash flows over the next 7 years. The trade name is assumed to have no residual value after the 7 years. (Assume the cash flows occur at the end of each year.)
Probability Assessment
Cash Flow Estimate
30%
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50%
360000
20%
450000
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After conducting a thorough review of the company’s fi nancial statements, Martinez concludes the following:Conclusion 1 Although Stellar’s fi nancial statements adhere to generally accepted accounting principles (GAAP), Stellar understates earnings in periods whenthe company is performing well and overstates earnings in periods whenthe company is struggling.Conclusion 2 Stellar most likely understated the value of amortizable intangibles whenrecording the acquisition of Solar, Inc. last year. No goodwill impairmentcharges have been taken since the acquisition.Conclusion 3 Over time, the accruals component of Stellar’s earnings is large relative tothe cash component.Conclusion 4 Stellar reported an unusually sharp decline in accounts receivable in thecurrent year, and an increase in long-term trade receivables.1 . Based on Martinez’s conclusions, Stellar’s fi nancial statements are best categorized as:A . non-GAAP compliant.B . GAAP compliant, but with earnings management.C . GAAP…
After conducting a thorough review of the company’s fi nancial statements, Martinez concludes the following:Conclusion 1 Although Stellar’s fi nancial statements adhere to generally accepted accounting principles (GAAP), Stellar understates earnings in periods whenthe company is performing well and overstates earnings in periods whenthe company is struggling.Conclusion 2 Stellar most likely understated the value of amortizable intangibles whenrecording the acquisition of Solar, Inc. last year. No goodwill impairmentcharges have been taken since the acquisition.Conclusion 3 Over time, the accruals component of Stellar’s earnings is large relative tothe cash component.Conclusion 4 Stellar reported an unusually sharp decline in accounts receivable in thecurrent year, and an increase in long-term trade receivables.2 . Based on Conclusion 2, after the acquisition of Solar, Stellar’s earnings are most likely :A . understated.B . fairly stated.C . overstated
Chapter 1 Solutions
Advanced Accounting
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