Advanced Accounting 12th Edition Paul M Fischer William J Taylor Rita H Cheng

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Sample Test Chapter_03_Consolidated_Statements_Subsequent_to_Acquisition 1. The method of accounting for subsidiaries that better reflects the investment account on parentonly financial statements is the a.

cost method.

simple equity method.

investment method.

sophisticated equity method.

ANSWER:

RATIONALE:

Under the sophisticated equity method the subsidiary income, and therefore, the investment over book value of the net assets acquired.

DIFFICULTY:

LEARNING OBJECTIVES:

ADAC.FISC.3-1

2. The method of accounting for subsidiaries that is required for influential investments is the a.

cost method.

simple equity method.

investment method.

sophisticated equity method.

ANSWER:

RATIONALE:

The sophisticated equity method is required by GAAP for unconsolidated investments ove

DIFFICULTY:

LEARNING OBJECTIVES:

ADAC.FISC.3-1

3. The method of accounting for subsidiaries where investment income is limited to dividends received is the a.

cost method.

simple equity method.

investment method.

sophisticated equity method.

ANSWER:

RATIONALE:

Under the cost method, dividends received from the subsidiary are recorded

DIFFICULTY:

LEARNING OBJECTIVES:

ADAC.FISC.3-1

4. Which of the following statements applying to the use of the equity method versus the cost method is true? a.

A parent company may incur a delay in closing its books while waiting for a subsidiary that it accounts for using

If no dividends were paid by the subsidiary, the investment account would have the same balance under both m

The method used has no impact on consolidated financial statements.

An advantage of the equity method is that no amortization of excess adjustments needs to be made on the con

ANSWER:

RATIONALE:

Regardless of the method the parent uses to account for the subsidiary, the consolidated

DIFFICULTY:

LEARNING OBJECTIVES:

ADAC.FISC.3-1

5. On January 1, 2016, Rabb Corp. purchased 80% of Sunny Corp.’s $10 par common stock for $975,000. On this date, the carrying amount of Sunny’s net assets was $1,000,000. The fair values of Sunny’s identifiable assets and liabilities were the same as their carrying amounts except for

plant assets (net), which were $100,000 in excess of the carrying amount. In the January 1, 2016, consolidated balance sheet, goodwill should be reported at ____. a.

$75,750

$95,000

$118,750

ANSWER:

d Determination and Distribution of Excess Schedule: Implied Fair

RATIONALE:

Fair value of subsidiary

$1,218,750

Less book value of interest acquired

1,000,000

Excess of book value over fair value

$ 218,750

Adjustment of identifiable accounts

DIFFICULTY:

Plant assets

$100,000

Goodwill

118,750

Total

$218,750

LEARNING OBJECTIVES:

ADAC.FISC.3-1

6. On January 1, 2016, Promo, Inc. purchased 70% of Set Corporation for $469,000. On that date the book value of the net assets of Set totaled $500,000. Based on the appraisal done at the time of the purchase, all assets and liabilities had book values equal to their fair values except as follows:

Inventory Land Equipment (useful life 4 years)

The remaining excess of cost over book value was allocated to a patent with a 10year useful life. During 2016 Promo reported net income of $200,000 and Set had net income of $100,000. What income from subsidiary did Promo include in its net income if Promo uses the simple equity method? a.

$33,000

$42,000

$70,000

$100,000

ANSWER:

RATIONALE:

Promo’s subsidiary income under the simple equity method would be $70,000 (

DIFFICULTY:

LEARNING OBJECTIVES:

ADAC.FISC.3-1

7. Pete purchased 100% of the common stock of the Sanburn Company on January 1, 2016, for $500,000. On that date, the stockholders’ equity of Sanburn Company was $380,000. On the purchase date, inventory of Sanburn Company, which was sold during 2016, was understated by $20,000. Any remaining excess of cost over book value is attributable to patent with a 20year life. The reported income and dividends paid by Sanburn Company were as follows:

Net income Dividends paid

Using the simple equity method, which of the following amounts are correct? Investment Income Investment Account Balance 2016 December 31, 2016 a.

$80,000

$570,000

$70,000

$570,000

$70,000

$550,000

$80,000

$550,000

ANSWER:

a Investment in Sanburn Cash

Investment in Sanburn Subsidiary Income RATIONALE: Cash Investment in Sanburn

Investment Balance, December 31, 2016

DIFFICULTY:

LEARNING OBJECTIVES:

ADAC.FISC.3-1

8. Pete purchased 100% of the common stock of the Sanburn Company on January 1, 2016, for $500,000. On that date, the stockholders’ equity of Sanburn Company was $380,000. On the purchase date, inventory of Sanburn Company, which was sold during 2016, was understated by $20,000. Any remaining excess of cost over book value is attributable to

patent with a 20year life. The reported income and dividends paid by Sanburn Company were as follows:

Net income Dividends paid

Using the sophisticated (full) equity method, which of the following amounts are correct? Investment Income Investment Account Balance 2016 December 31, 2016 a.

$55,000

$555,000

$55,000

$545,000

$75,000

$565,000

$80,000

$570,000

ANSWER:

b Investment in Sanburn Cash

RATIONALE: Investment in Sanburn Subsidiary Income ($80,000 – $25,000**)

Cash Investment in Sanburn

Investment Balance, December 31, 2016

**Determination and Distribution of Excess Schedule: Implied Fair Fair value of subsidiary

$500,000

Less book value of interest acquired

380,000

Excess of book value over fair value

$120,000

Adjustment of identifiable accounts Inventory

$ 20,000

Patent

100,000

Total

$120,000

DIFFICULTY:

LEARNING OBJECTIVES:

ADAC.FISC.3-1

9. Pete purchased 100% of the common stock of the Sanburn Company on January 1, 2016, for $500,000. On that date, the stockholders’ equity of

Sanburn Company was $380,000. On the purchase date, inventory of Sanburn Company, which was sold during 2016, was understated by $20,000. Any remaining excess of cost over book value is attributable to patent with a 20year life. The reported income and dividends paid by Sanburn Company were as follows:

Net income Dividends paid

Using the cost method, which of the following amounts are correct? Investment Income Investment Account Balance 2016 December 31, 2016 a.

$10,000

$500,000

$10,000

$570,000

$80,000

$500,000

ANSWER: RATIONALE:

a Investment in Sanburn Cash

Cash

Subsidiary Income

Investment Balance, December 31, 2016

DIFFICULTY:

LEARNING OBJECTIVES:

ADAC.FISC.3-1

10. What is the effect if an unconsolidated subsidiary is accounted for by the equity method but consolidated statements are being prepared for the parent company and other subsidiaries? a.

All of the unconsolidated subsidiary’s accounts will be included individually in the consolidated statements.

The consolidated retained earnings will not reflect the earnings of the unconsolidated subsidiary.

The consolidated retained earnings will be the same as if the subsidiary had been included in the consolidatio

Dividend revenue from the unconsolidated subsidiary will be reflected in consolidated net income.

ANSWER:

RATIONALE:

When using the equity method, the amount the parent records as its investment income or lo statements, namely, the parent’s ownership interest multiplied by the subsidiary’s reported in

DIFFICULTY:

LEARNING OBJECTIVES:

ADAC.FISC.3-1

11. In consolidated financial statements, it is expected that: a.

Dividends declared equals the sum of the total parent company’s declared dividends and the total subsidiary’s

Retained Earnings equals the sum of the controlling interest’s separate retained earnings and the non-controllin

Common Stock equals the sum of the parent company’s outstanding shares and the subsidiary’s outstanding sh

Consolidated Net Income equals the sum of the income distributed to the controlling interest and the income d

ANSWER:

RATIONALE:

Consolidated net income is distributed to the controlling and non-controlling

DIFFICULTY:

LEARNING OBJECTIVES:

ADAC.FISC.3-2

12. How is the portion of consolidated earnings to be assigned to non controlling interest in consolidated financial statements determined?

a. The net income of the parent is subtracted from the subsidiary’s net income to determine the non-controlling in b. The subsidiary’s net income is extended to the non-controlling interest. c.

The amount of the subsidiary’s earnings is multiplied by the non-controlling’s percentage ownership and is adju

d. The amount of consolidated earnings determined on the consolidated working papers is multiplied by the non-c

ANSWER:

RATIONALE:

All amortizations of excess resulting from the consolidation process are adjusted to the subsid controlling and non-controlling interest based on their respective portion of ownership.

DIFFICULTY:

LEARNING OBJECTIVES:

ADAC.FISC.3-2

13. If in the consolidation process the investment in subsidiary account is increased or decreased by the amount determined by the following calculation: the investment account is being converted from

cost to simple equity.

cost to sophisticated equity.

simple equity to sophisticated equity.

simple equity to cost.

ANSWER:

RATIONALE:

Rather than develop a separate set of procedures for elimination of an investment under the equity balance at the beginning of the period to create date alignment.

DIFFICULTY:

LEARNING OBJECTIVES:

ADAC.FISC.3-3

14. Balance sheet information for Pawn Company and its 90%owned subsidiary, Sox Corporation, at December 31, 2016, is summarized as follows:

Current assets-net

Property, plant, and equipment-net Investment in Sox

Current liabilities Capital stock Retained earnings

Pawn acquired its interest in Sox for cash at book value several years ago when Sox’s assets and liabilities were equal to their fair values. Consolidated total assets of Pawn and Sox, at December 31, 2016, will be ____. a.

$1,785,000

$1,850,000

$2,343,000

$2,408,000

ANSWER: RATIONALE:

b Pawn total assets Sox total assets

Combined total assets Elimination of investment account Consolidated total assets DIFFICULTY:

LEARNING OBJECTIVES:

ADAC.FISC.3-2 ADAC.FISC.3-3 ADAC.FISC.3-4

15. Balance sheet information for Pawn Company and its 90%owned subsidiary, Sox Corporation, at December 31, 2016, is summarized as follows:

Current assets-net Property, plant, and equipment-net Investment in Sox

Current liabilities Capital stock Retained earnings

Pawn acquired its interest in Sox for cash at book value several years ago when Sox’s assets and liabilities were equal to their fair values. The consolidated balance sheet of Pawn and Sox at December 31, 2016 will show a.

Investment in Sioux, $558,000.

Capital stock, $800,000.

Retained earnings, $1,078,000.

Non-controlling interest, $65,000.

ANSWER:

The consolidated balance sheet will show capital stock of $800,000 as the consolidated financ shareholders, which is that of the parent and that attributable to the NCI. The NCI would be 1 RATIONALE:

The Investment in Sox account will be eliminated in consolidation.

DIFFICULTY:

LEARNING OBJECTIVES:

ADAC.FISC.3-2 ADAC.FISC.3-3 ADAC.FISC.3-4

16. On January 1, 2016, Promo, Inc. purchased 70% of Set Corporation for $469,000. On that date the book value of the net assets of Set totaled $500,000. Based on the appraisal done at the time of the purchase, all assets and liabilities had book values equal to their fair values except as follows:

Inventory Land Equipment (useful life 4 years)

The remaining excess of cost over book value was allocated to a patent with a 10year useful life. During 2016 Promo reported net income of $200,000 and Set had net income of $100,000. What is consolidated net income if Promo recognizes income from Set using the sophisticated equity method? a.

$242,000

$249,000

$270,000

$300,000

ANSWER:

a Determination and Distribution of Excess Schedule: Implied Fair

RATIONALE: Fair value of subsidiary

$670,000

Less book value of interest acquired

500,000

Excess of book value over fair value

$170,000

Adjustment of identifiable accounts Inventory ($120,000 – $100,000)

$ 20,000

Land ($85,000 – $75,000)

10,000

Equipment ($165,000 – $125,000)

40,000

Patent

100,000

Total

$170,000

Promo reported net income Set reported net income Less amortizations

Promo’s interest in Set Consolidated net income DIFFICULTY:

LEARNING OBJECTIVES:

ADAC.FISC.3-5

17. On January 1, 2016, Promo, Inc. purchased 70% of Set Corporation for $469,000. On that date the book value of the net assets of Set totaled $500,000. Based on the appraisal done at the time of the purchase, all assets and liabilities had book values equal to their fair values except as

follows:

Inventory Land Equipment (useful life 4 years)

$42,000

$49,000

$70,000

$100,000

ANSWER:

RATIONALE:

Determination and Distribution of Excess Schedule: Implied Fair

Fair value of subsidiary

$670,000

Less book value of interest acquired

500,000

Excess of book value over fair value

$170,000

Adjustment of identifiable accounts Inventory ($120,000 – $100,000)

$ 20,000

Land ($85,000 – $75,000)

10,000

Equipment ($165,000 – $125,000)

40,000

Patent

100,000

Total

$170,000

Set reported net income Less amortizations

Promo’s interest in Set Promo’s investment income

DIFFICULTY:

LEARNING OBJECTIVES:

ADAC.FISC.3-5

18. On January 1, 2016, Payne Corp. purchased 70% of Shayne Corp.’s $10 par common stock for $900,000. On this date, the carrying amount of

Shayne’s net assets was $1,000,000. The fair values of Shayne’s identifiable assets and liabilities were the same as their carrying amounts except for plant assets (net), which were $200,000 in excess of the carrying amount. For the year ended December 31, 2016, Shayne had net income of $150,000 and paid cash dividends totaling $90,000. Excess attributable to plant assets is amortized over 10 years. In the December 31, 2016, consolidated balance sheet, noncontrolling interest should be reported at ____. a.

$282,714

$300,500

$397,714

$345,500

ANSWER:

c Determination and Distribution of Excess Schedule: Implied Fair

RATIONALE:

Fair value of subsidiary

$1,285,714

Less book value of interest acquired

1,000,000

Excess of book value over fair value

$ 285,714

Adjustment of identifiable accounts Plant assets

$200,000

Goodwill

85,714

Total

$285,714

NCI value at acquisition date Shayne net income Amortization

NCI portion NCI portion of dividends ($90,000 x 30%) NCI balance at December 31, 2016 DIFFICULTY:

LEARNING OBJECTIVES:

ADAC.FISC.3-5

19. In a midyear purchase when the subsidiary’s books are not closed until the end of the year, the consolidated net income contains the parent’s share of the a.

subsidiary’s income earned for the entire year.

subsidiary’s income earned from the beginning of the year to the date of acquisition.

subsidiary’s income earned from the date of acquisition to the end of the year.

dividends received from the subsidiary during the period of ownership.

ANSWER:

RATIONALE:

The parent’s share of subsidiary income that was earned prior to the purchase date was earne company. This income is not included in consolidated net income.

DIFFICULTY:

LEARNING OBJECTIVES:

ADAC.FISC.3-6

20. Alpha purchased an 80% interest in Beta on June 30, 2016. Both Alpha’s and Beta’s reporting periods end December 31. Which of the following represents the controlling interest in consolidated net income for 2016? a.

100% of Alpha’s July 1-December 31 income plus 80% of Beta’s July 1-December 31 income

100% of Alpha’s July 1-December 31 income plus 100% of Beta’s July 1-December 31 income

100% of Alpha’s January 1-December 31 income plus 80% of Beta’s July 1-December 31 income

100% of Alpha’s January 1-December 31 income plus 80% of Beta’s January 1-December 31 income

ANSWER:

RATIONALE:

The parent’s share of subsidiary income that was earned prior to the purchase date was earne company. This income is not included in consolidated net income.

DIFFICULTY:

LEARNING OBJECTIVES:

ADAC.FISC.3-6

21. Under IASB for small and medium entities, goodwill: a.

is subject to impairment procedures.

is never adjusted.

is amortized over ten years.

is not recorded in an acquisition.

ANSWER:

RATIONALE:

Under IASB for small and medium entities, goodwill is amortized over ten

DIFFICULTY:

LEARNING OBJECTIVES:

ADAC.FISC.3-6

22. Prossart Company owned 70% of the outstanding stock of Say Company. During the annual goodwill impairment test, the following information pertaining to Say was noted:

Book value of net assets Fair value of Say Company Estimated fair value of net identifiable assets Recorded goodwill

The amount of goodwill impairment loss that would be recorded on Prossart’s books would be:

$200,000

$140,000

$100,000

$70,000

ANSWER:

d Results of impairment test:

The book value of Say’s net assets exceeds the fair value of the company. Calculation of impairment loss: Fair value of Say Company

RATIONALE:

Less fair value of identifiable assets Estimated goodwill Recorded goodwill Goodwill impairment loss

Prossart will record $70,000 ($100,000 x 70%) on its books. The remaining 30% will DIFFICULTY:

LEARNING OBJECTIVES:

ADAC.FISC.3-7

23. On January 1, 2016, Piston, Inc. acquired Spur Corp. While recording the acquisition, Piston established a deferred tax liability. It is most likely that this account was created because

The transaction was a tax-free exchange to Piston.

Piston had not paid all of the income taxes due the government when acquiring Spur.

The transaction was a tax-free exchange to Spur.

Spur had not paid all of the income taxes due the government prior to the acquisition by Piston.

ANSWER:

RATIONALE:

A deferred tax liability results when the fair value of an asset may not be used in future depre exchange to the seller.

DIFFICULTY:

LEARNING OBJECTIVES:

ADAC.FISC.3-9

24. Which of the following is not true regarding a subsidiary’s tax loss carryovers in an acquisition? a.

The resulting deferred tax asset should be considered when determining the amount of goodwill.

The parent will always be able to use a portion of the tax loss carryovers in the current period.

A valuation allowance should be provided if it is probable the benefit will not be used.

The resulting deferred tax asset should be separated into current and noncurrent components.

ANSWER:

RATIONALE:

The parent may not be able to use a portion of the tax loss carryovers in the current period fo circumstances of the acquisition do not meet IRS requirements for the parent to be able to do

DIFFICULTY:

LEARNING OBJECTIVES:

ADAC.FISC.3-9

25. On January 1, 2016, Parent Company purchased 80% of the common stock of Subsidiary Company for $316,000. On this date, Subsidiary had common stock, other paidin capital, and retained earnings of $40,000, $120,000, and $190,000, respectively. Net income and dividends for 2 years for Subsidiary Company were as follows:

Net income Dividends

On January 1, 2016, the only tangible assets of Subsidiary that were undervalued were inventory and building. Inventory, for which FIFO is used, was worth $5,000 more than cost. The inventory was sold in 2016. Building, which was worth $15,000 more than book value, has a remaining life of 8 years, and straightline depreciation is used. Any remaining excess is goodwill. Prepare Parent’s 2016 and 2017 journal entries (after the purchase has been recorded) to record the transactions related to its investment in Subsidiary under the a.

cost method

simple equity method

a. cost method journal entries: 2016 Debit ANSWER:

Cash

8,000 (1)

Dividend Income

(1)

80% of $10,000 dividends

(2)

80% of $20,000 dividends

b. simple equity method: 2016 Debit Investment in Subsidiary

40,000 (1)

Subsidiary Income

Cash

8,000 (3)

Investment in Subsidiary

(1)

80% of $50,000 net income

(2)

80% of $90,000 net income

(3)

80% of $10,000 dividends

(4)

80% of $20,000 dividends

DIFFICULTY:

LEARNING OBJECTIVES:

ADAC.FISC.3-1

26. On January 1, 2016, Parent Company purchased 80% of the common stock of Subsidiary Company for $316,000. On this date, Subsidiary had common stock, other paidin capital, and retained earnings of $40,000, $120,000, and $190,000, respectively. Net income and dividends for 2 years

for Subsidiary Company were as follows:

Net income Dividends

20X1 Debit Investment in Subsidiary

34,500 (1)

Subsidiary Income ANSWER:

Cash Investment in Subsidiary

8,000 (3)

(1)

80% of $50,000 net income less amortization of $5,500

(2)

80% of $90,000 net income less amortization of $1,500

(3)

80% of $10,000 dividends

(4)

80% of $20,000 dividends

Amortization: Inventory: $5,000 ´ 80% Building: $15,000 ´ 80% ÷ 8 years

DIFFICULTY:

LEARNING OBJECTIVES:

ADAC.FISC.3-1

27. On January 1, 2016, Parent Company purchased 80% of the common stock of Subsidiary Company for $316,000. On this date, Subsidiary had common stock, other paidin capital, and retained earnings of $40,000, $120,000, and $190,000, respectively. Net income and dividends for 2 years for Subsidiary Company were as follows:

Net income Dividends

a: Value analysis schedule Company Implied Fair Value Implied entity fair value Fair value of entity net

$395,000 Identifiable assets

Goodwill

370,000 $ 25,000

b. Determination and distribution schedule Company Implied Fair Value

Fair value of subsidiary

$395,000

Less book value:

Common stock

Paid in capital in excess of par

40,000

120,000 Retained earnings

Total equity

190,000

350,000

Interest Acquired

Book value

Excess of fair over book

45,000

Adjust identifiable accounts:

Inventory

Building

Goodwill

Total

DIFFICULTY:

LEARNING OBJECTIVES:

ADAC.FISC.3-1 ADAC.FISC.3-5

5,000

15,000

25,000

$45,000

28. On January 1, 20161, Parent Company purchased 80% of the common stock of Subsidiary Company for $316,000. On this date, Subsidiary had common stock, other paidin capital, and retained earnings of $40,000, $120,000, and $190,000, respectively. Net income and dividends for 2 years for Subsidiary Company were as follows:

Net income Dividends

On January 1, 2016, the only tangible assets of Subsidiary that were undervalued were inventory and building. Inventory, for which FIFO is used, was worth $5,000 more than cost. The inventory was sold in 2017. Building, which was worth $15,000 more than book value, has a remaining life of 8 years, and straightline depreciation is used. Any remaining excess is goodwill. Prepare the necessary date alignment entries for the consolidating worksheet for December 31, 2016 and December 31, 2017 assuming that Parent records its investment in Subsidiary using a. the cost method b. the simple equity method If date alignment entries are not required, give rationale. a. elimination entries for cost method 12/31/16

ANSWER: CV

Investment in Subsidiary

n/a

R/E-Parent

CY2

Dividend Income

(2) 8,000

Dividends Declared-Sub

n/a for first year: date alignment is automatic; the investment in subsidiary and the subsidiary retai (1) (Sub RE 1/1/X2 â&#x20AC;&#x201C; Sub RE 1/1/X1 = $40,000) Â´ 80% (2) 80% of $10,000 dividends (3) 80% of $20,000 dividends b. elimination entries for simple equity method