Question

Zooco, Inc. acquired 40% of the voting stock of Stubco, Inc. on September 1, 2008, and accounted for the investment using the equity method of accounting. On May 1, 2009, Zooco acquired an additional 20% of Stubco's voting stock to achieve a business combination. Which one of the following is the value Zooco should use to measure its original 40% investment in Stubco when recording the combination?A. Original cost, September 1, 2008.B. Carrying value, May 1, 2009.C. Fair value, May 1, 2009.D. 40% of Stubco's book value, May 1, 2009.

Answer 1

C) Fair value, May 1, 2009.

Step-by-step explanation:

When a company acquires another company in stages (2, 3, 4 o even more), and the parent company is finally able to purchase more than 50% of the stocks, enough to carry out the business combination, it must adjust its carrying values.

Once the 50% threshold is passed, the parent company must adjust its previous investments to the fair value of the acquired company, just like any other acquisition.

Since Zooco reached 60% in May 1, 2009, then that is the date for the adjustment of the investment account. Similarly to any other acquisition, the difference between previous carrying value and fair market value results in a gain or loss.

Answer 2

Answer: The answer is C Fair value May 1, 2009

Step-by-step explanation:

When a business is acquired first by 40% of the voting stock, and then again by 20% of the voting stock. In the measurement of the original investment the fair value of the acquisition date is used to measure the original investment when recording the combination. At the date of acquisition of the business, all assets and liabilities and any non controlling interest in the acquiree should be measured at fair value at that date. The difference therefore between the carrying value and the fair value on the date of the acquisition will then be recognized as a gain or loss for the period under review.