Question

13. Topic: Change to the Equity Method On January 1, Mauer purchased 15% of Thome's common stock. On August 1, it purchased another 30% of Thome's common stock. During October, Thome declared and paid a cash dividend on its common stock. How much income from Thome should Mauer report on its income statement?

a. 15% of Thome's income for January 1 to July 31, plus 45% of Thome's income for the remainder of the year
b. 45% of Thome's income from August 1 to December 31 only
c. 40% of Thome's income
d. The amount of dividends received from Thome

14. Topic: Preacquisition Contingencies Accounting standards require that a portion of the cost of an acquired company be allocated to investee liabilities. However, often in the case of pre-existing contingent liabilities, the amounts may be unknown at the acquisition date. What are the general financial reporting requirements for the consolidated statements at date of acquisition?

a. If the fair value of a pre-existing contingent liability is unknown, the liability should not be recognized.
b. A contingent liability would not be recognized unless the loss was "probable."
c. Contingencies meeting the "possible" threshold would be disclosed, not accrued.
d. All of the above statements are true.

**Please provide computations and explanation!!

Answer 1

Answer to Question number 13: Recognitio of Dividend Income Declared.

Here the answer to the question is option "d" :- The amount of dividend received from Thome. As per revenue recognition accounting stardards , the revenue from dividend should be recognised as and when the declaring company dcalres dividend. Dividend is declared and calculated on the basis of holding the equity on the date of declaring dividend and irrespective of its actual holding period. Here the company is declaring dividend during october, and at the time of declaring Mauer holds 45% of common stock of Thome. Hence Mauer gets dividend for 45% stake all the dividend received should report on his income statement.

Answer to Question number 14: on the topic disclosure of preaqusition contingencies accounting standards.

Here the correct answer to the given question is option "d" :- All the above statements are true.

As per the accounting stardards regarding the contingent liability, An enterprise should not recognise the contingent liability but it should be disclosed in financial statement.