Need help with these questions and sources 1 How is the cost

Need help with these questions and sources.

1. How is the cost of a lump-sum purchase allocated to the individual assets acquired? Why?

2. Does the balance in the Accumulated Depreciation – Machinery account represent funds to replace the machinery when it wears out? If not, what does it represent?

3. When do we know that a company has goodwill? When can goodwill appear in a company’s balance sheet?

4.  Companies sometimes purchase a stock ownership or equity interest in other companies. When a company invests in equity securities, why does it matter HOW MUCH of an ownership interest is purchased? Be sure to describe the specific % levels of ownership and the method of accounting that is required by that level of ownership interest.

5. What are Debt Securities, and what is unique about this type of investment compared to Equity Securities?

Solution

1. Cost of Lump-sum purchase allocated to the individual assets on the basis of relative fair value percentage. Suppose the company purchased a unit for lump sum payment for $ 140 which includes Land, Building & machinery market value for $70, $50 & $30 respectively, in this case puchase cost for individual assets is as follows:-

Cost of Land :- 140*70/150= $65.33

Cost of Building:- 140*50/150=$ 46.67

Cost of Machinery:- 140*30/150= $28.00

The cost needed to calculate for individual assets because of recognition in books of accounts and to know respective share to earn profit.

2. No. Balance in the Accumulated Depreciation – Machinery account does not represent funds to replace the machinery when it wears out . Accumulated Depreciation reports the amount of depreciation that has been taken from the time an asset was acquired until the date of the balance sheet. The cost of an asset minus its accumulated depreciation is the asset\'s carry value or book value.

The accumulated depereciation merely reports the total cost of Machinery send to Profit & Loss Statement as wear & tear expenses since Machinery acquired.

3. When a acquirer wants to pay more than the Net Worth of any company it means there is Goodwill for that company. The excess payment over Net worth of company is called Goodwill.

In the books of Acquirer company, Goodwill appears in Assets side of Balance Sheet , when does the Acquirer company purchesed a segment or unit for more than its Net worth.

4. The company invested in Equity or ownership of an Entity to get control over that entity. When a company doing well or need to recover company from its bad financial situation, a strong company take control over that company by investing in equity of that company for specific percentage. HOW MUCH is matters because only after purching a specific percentage , a company can take any decision in another mcompany and can run company as its own.

For taking ownership of the company a acquirer company needs to purchase more than 50% of the Equity of another company.

5. Debt Securities are the burden to the company because its carry mandatory payment of interest with a specific percetage over the time until it can be fully repaid to investor. Its unique compare to Equity Securities because Equity never carry mandatory peodic payment to holder. The dividend is only paid to equity holder if there is profit to company but other hand for Debts Securities paymnet of Interest is compulsory. Secondly, The Eqity Holder have voting rights on any deciding matter but Debts Secuirties holder have no right to vote. The Debts Securities is repayable after a specific period of time but Equity Securities can hold by company till life of the company.