The Statements of Financial Position for Company P and Company

question 21

Multiple Choice

The Statements of Financial Position for company P and company S are shown below:

At the time of the acquisition,the net asset value of S was £50,000.This was £40,000 share capital plus £10,000 retained earnings.If company P owns 75% of Company S,then the consolidated Statement of Financial Position will include,as well as 100% of the assets and liabilities of both companies:

• A) £50,000 which represents 100% of the goodwill on the purchase of S
• B) £37,500 which represents 75% of the goodwill on the purchase of S
• C) £25,000 which represents 50% of the goodwill on the purchase of S
• D) Nothing

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Definitions:

Financial Leverage

The use of borrowed funds with a fixed cost to enhance the potential return on investment.

Bankruptcy Risk

The risk that a company will be unable to meet its financial obligations and thus may have to declare bankruptcy.

Operating Leverage

A measure of how sensitive a company's operating income is to a change in revenue, indicating the level of fixed versus variable costs.

Financial Leverage

The use of borrowed money to increase the potential return of an investment, which also increases the risk of loss.