Big Guy Inc

question 25

Multiple Choice

Big Guy Inc. purchased 80% of the outstanding voting shares of Humble Corp. for $360,000 on July 1, 2011. On that date, Humble Corp. had Common Stock and Retained Earnings worth $180,000 and $90,000, respectively. The Equipment had a remaining useful life of 5 years from the date of acquisition. Humble's Bonds mature on July 1, 2021. Both companies use straight line amortization, and no salvage value is assumed for assets. The trademark is assumed to have an indefinite useful life. Goodwill is tested annually for impairment. The Balance Sheets of Both Companies, as well as Humble's Fair Market Values on the date of acquisition are disclosed below: The following are the Financial Statements for both companies for the fiscal year ended June 30, 2014: An impairment test conducted in September 2012 on Big Guy's goodwill resulted in an impairment loss of $10,000 being recorded. Both companies use a FIFO system, and Humble's entire inventory on the date of acquisition was sold during the following year. During 2014, Humble Inc. borrowed $20,000 in Cash from Big Guy Inc. interest free to finance its operations. Big Guy uses the Equity Method to account for its investment in Humble Corp. Assume that the entity method applies. The amount of Goodwill arising from this business combination is:

• A) Nil.
• B) -$40,000.
• C) $50,000.
• D) $64,000.

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Definitions:

White Pulp

A specialized tissue in the spleen composed mainly of lymphocytes and involved in the immune response.

Capsule

A fibrous, protective covering or layer, frequently surrounding organs or joints.

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A forecasting method that relies on expert opinions, market research, and comparative analysis rather than numerical data.

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