WEEK 1 QUIZ 1.

On January 1, 20X5, AKM Corp. paid $450,000 cash to acquire 25% of the common shares of GKM Corp. At the time of acquisition, the carrying value of GKM's common shares was $500,000, and its retained earnings were $1,200,000. The fair values of the identifiable net assets (INA) approximated their carrying values except for a patent whose fair value was $20,000 higher than its carrying value. The patent has a five-year remaining useful life, and straight-line depreciation is used. GKM paid dividends of $40,000 in 20X5 and reported net income of $120,000.

What amount would be reported on AKM's income statement related to its investment in GKM for 20X5?

a) Investment income of $19,000

b) Investment income of $26,000

c) Investment income of $29,000

d) Investment income of $31,000

2. On January 1, 20X5, KMA Corp. paid $400,000 cash to acquire 40% of the common shares of JDL Corp. At the time of acquisition, the carrying value of JDL's common shares was $250,000, and its retained earnings were $400,000. The fair values of the INA approximated their carrying values except for equipment whose fair value was $15,000 higher than its carrying value. The equipment has a six-year remaining useful life, and straight-line depreciation is used. The investment was found to be impaired by the amount of $8,000 by the end of 20X5. JDL paid dividends of $10,000 in 20X5 and reported net income of $120,000.

What amount would be reported in KMA's "investment in JDL" account at December 31, 20X5, assuming the equity method is used?

a) $435,000

b) $436,000

c) $24,786

d) $37,714

Use the following information to answer Questions 4 and 5. Pappy Inc. purchased 80% of the outstanding voting shares of Sappy Corp. for $360,000 cash on July 1, 20X5. Immediately before the acquisition, Pappy and Sappy reported the following: Statements of financial position As at July 1, 20X5 Pappy Sappy Book value Book value Fair value Cash $500,000 $245,000 $245,000 Investments at amortized cost 7,000 24,000 26,000 Accounts receivable 60,000 40,000 40,000 Inventory 120,000 45,000 55,000 Equipment (net) 290,000 80,000 72,000 Patents 10,000 90,000 193,000 Total assets $987.000 $524.000 Current liabilities $ 95,000 $160,000 $160,000 Bonds payable 0 70,000 75,000 Common shares 400,000 180,000 Retained earnings 492.000 114.000 Total liabilities and equity $987.000 $524.000