Advanced Accounting, 5th Edition by Susan S. Hamlen Test Bank

TEST BANK CHAPTER 1 Intercorporate Investments: An Overview MULTIPLE CHOICE 1.

Topic: Accounting for equity securities with no significant influence LO 1 A company invests $350,000 in equity securities on November 30, 2023, and classifies them as investments with no significant influence. At December 31, 2023, the company’s year-end, the securities have a fair value of $345,000. On February 1, 2024, the company sells the securities for $360,000. Which statement is true regarding how this information is reported in the company’s financial statements? a. b. c. d. ANS:

2.

The company’s December 31, 2023 balance sheet reports the securities at $350,000, and a loss of $5,000 is reported on the 2023 income statement. The company’s December 31, 2023 balance sheet reports the securities at $345,000, and a gain of $10,000 is reported on the 2024 income statement. The company’s December 31, 2023 balance sheet reports the securities at $345,000, and a gain of $15,000 is reported on the 2024 income statement. The company’s December 31, 2023 balance sheet reports the securities at $350,000, and no gain or loss appears on the 2023 income statement. c

Topic: Accounting for equity securities with no significant influence LO 1 Which statement is true concerning the reporting for equity investments with no significant influence? a. b. c. d.

They are reported at fair value, with any changes in value reported in income. They are categorized as either trading or available-for-sale, with unrealized changes in the value of trading securities reported in income, and unrealized changes in the value of AFS securities reported in OCI. They are reported at cost, with unrealized changes in value reported in OCI. They are reported at fair value, with unrealized changes in value reported in OCI.

ANS:

a

Test Bank, Chapter 1

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Use the following information on a company’s investments in equity securities with no significant influence to answer Questions 3 and 4. The company’s accounting year ends December 31. Investment Colt Company stock Dana Company stock 3.

4.

5.

Date of Acquisition 9/20/23 10/2/23

Cost $38,000 14,000

Fair Value 12/31/23 $37,000 14,200

Date Sold 2/10/24 1/17/24

Selling Price $42,000 13,000

Topic: Accounting for equity investments with no significant influence LO 1 What amount is reported for gain or loss on these securities in 2023 income? a. b. c. d.

No gain or loss $800 loss $3,000 gain $1,000 loss

ANS:

b ($37,000 – $38,000) + ($14,200 – $14,000) = $800 loss

Topic: Accounting for equity investments with no significant influence LO 1 What amount is reported for gain or loss on these securities in 2024 income? a. b. c. d.

No gain or loss $3,000 gain $3,800 gain $4,000 gain

ANS:

c ($42,000 – $37,000) + ($13,000 – $14,200) = $3,800 gain

Topic: Accounting for equity investments with no significant influence LO 1 A company buys an equity investment for $100 in 2024. The investment has no significant influence. At the end of 2024, the company still holds the investment and it has a market value of $105. In 2025, the company sells the investment for $115. How is this information reported in the company’s 2024 and 2025 income statements? a. b. c. d.

$5 gain on the 2024 income statement; $10 gain on the 2025 income statement. Does not appear on the 2024 income statement; $15 gain on the 2025 income statement. Does not appear on the 2024 income statement; $10 gain on the 2025 income statement. $15 gain on the 2024 income statement; does not appear on the 2025 income statement.

ANS:

a $105 - $100 = $5 gain in 2024; $115 - $105 = $10 gain in 2025.

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Advanced Accounting, 5th Edition

6.

Topic: Accounting for equity investments with no significant influence LO 1 On December 20, 2024, a company pays $40,000 for an investment in equity securities with no significant influence. On December 31, 2024, the company’s year-end, the stock has a market value of $37,000. The company sells the stock in 2025 for $44,000. On its income statement, the company reports:

7.

8.

a. b. c. d.

A loss of $3,000 in 2024, and a gain of $7,000 in 2025 No gain or loss in 2024, and a gain of $4,000 in 2025 A gain of $4,000 in 2024, and no gain or loss in 2025 No gain or loss in 2024, and a gain of $7,000 in 2025

ANS:

a ($37,000 - $40,000) = $3,000 loss in 2024; ($44,000 - $37,000) = $7,000 gain in 2025.

Topic: Accounting for equity investments with no significant influence LO 1 On October 25, 2024, a company pays $35,000 for an investment in equity securities, with no significant influence. On December 31, 2024, the company’s year-end, the stock has a market value of $36,000. The company sells the stock in 2025 for $32,000. How is the company’s 2024 other comprehensive income affected by the above transactions in each year? a. b. c. d.

Decrease of $2,000 in 2024, increase of $2,000 in 2025 Decrease of $2,000 in 2024, increase of $4,000 in 2025 No effect in 2024, increase of $2,000 in 2025 No effect on OCI in either year.

ANS:

d

Topic: Accounting for equity investments with no significant influence LO 1 A company has equity investments with no significant influence, purchased for $550,000 and carried at $520,000 at the beginning of 2024. At the end of 2024, the investments have a fair value of $560,000 and are still held by the company. What amount is reported in income and in other comprehensive income for 2024? a. b. c. d. ANS:

Income $0 $40,000 gain $10,000 gain $0

OCI $40,000 gain $0 $0 $10,000 gain

b $560,000 - $520,000 = $40,000 gain for 2024, reported in income.

Test Bank, Chapter 1

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Use the following information on a company’s investments in debt securities to answer Questions 9 - 13. The company’s accounting year ends December 31. Investment Colt Company bonds Dana Company bonds 9.

10.

11.

Date of Acquisition 9/20/23 10/2/23

Cost $38,000 14,000

Fair Value 12/31/23 $37,000 14,200

Date Sold 2/10/24 1/17/24

Selling Price $42,000 13,000

Topic: Accounting for debt investments classified as trading LO 1 If the above debt investments are categorized as trading securities, what amount is reported for gain or loss on securities in 2023 income? a. b. c. d.

No gain or loss $800 loss $3,000 gain $200 gain

ANS:

b ($37,000 - $38,000) + ($14,200 - $14,000) = $(800) loss

Topic: Accounting for debt investments classified as trading LO 1 If the above debt investments are categorized as trading securities, what amount is reported for gain or loss on securities in 2024 income? a. b. c. d.

No gain or loss $3,000 gain $3,800 gain $5,000 gain

ANS:

c ($42,000 - $37,000) + ($13,000 - $14,200) = $3,800 gain

Topic: Accounting for debt investments classified as AFS LO 1 If the above investments are categorized as available-for-sale securities, what amount is reported for gain or loss on securities in 2023 income? a. b. c. d.

No gain or loss $800 loss $3,000 gain $200 gain

ANS:

a

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Advanced Accounting, 5th Edition

12.

13.

14.

Topic: Accounting for debt investments classified as AFS LO 1 If the above investments are categorized as available-for-sale securities, what amount is reported as gain or loss on securities in 2024 income? a. b. c. d.

$3,000 gain $3,800 gain $2,100 gain $3,100 gain

ANS:

a ($42,000 – $38,000) + ($13,000 – $14,000) = $3,000 gain

Topic: Accounting for debt investments classified as AFS LO 1 If the above investments are categorized as available-for-sale securities, what is the net effect on 2024 other comprehensive income? a. b. c. d.

$0 $3,800 increase $ 800 decrease $ 800 increase

ANS:

d Reclassification of 2023 unrealized loss.

Topic: Accounting for debt investments classified as trading LO 1 A company has investments in debt securities, acquired at a cost of $300,000, and classified as trading investments. At the beginning of the year, the investments are reported at $340,000. During the year the company sells the investments for $335,000. What amount is reported in income for the year? a. b. c. d.

$35,000 gain $ 5,000 gain $ 5,000 loss $40,000 gain

ANS:

c $335,000 - $340,000 = $5,000 loss

Test Bank, Chapter 1

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15.

Topic: Accounting for debt investments classified as AFS LO 1 A company has investments in debt securities, classified as available-for-sale. At the beginning of the year, the investments are reported at $500,000, and unrealized gains of $30,000 are reported in accumulated other comprehensive income. During the year, the company sells the securities for $490,000. What amounts are reported in income and in other comprehensive income for the year? a. b. c. d. ANS:

Income $20,000 gain $10,000 loss $30,000 gain $30,000 gain

OCI $30,000 loss $0 $30,000 loss $0

a The entry to record the sale is: Cash Reclassification of gain (OCI)

490,000 30,000 Investment in AFS securities Gain (income)

16.

500,000 20,000

Topic: Accounting for debt investments classified as AFS LO 1 A company buys corporate bonds for $100 in 2023. At the end of 2023, the company still holds the investment and it has a market value of $115. In 2024, the company sells the investment for $108. How is this information reported in the company’s 2023 and 2024 income statements if the investment is classified as an AFS investment? a. b. c. d. ANS:

$15 gain on the 2023 income statement; $7 loss on the 2024 income statement Does not appear on the 2023 income statement; $8 gain on the 2024 income statement Does not appear on the 2023 income statement; $7 loss on the 2024 income statement $8 gain on the 2023 income statement; does not appear on the 2024 income statement b $108 - $100 = $8 gain

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Advanced Accounting, 5th Edition

17.

Topic: Accounting for debt investments classified as AFS LO 1 A company invests $500,000 in corporate bonds on April 30, 2024 and classifies them as availablefor-sale securities. At December 31, 2024, the company’s year-end, the securities have a fair value of $515,000. On February 1, 2025, the company sells the securities for $510,000. Which statement is true regarding how is this information reported in the company’s financial statements? a. b. c. d. ANS:

18.

The company’s 2024 balance sheet reports the securities at $515,000 and a gain of $15,000 is reported in 2024 other comprehensive income. The company’s 2024 balance sheet reports the securities at $500,000 and a gain of $10,000 is reported on the 2025 income statement. The company’s 2024 balance sheet reports the securities at $515,000 and a gain of $10,000 is reported in 2025 other comprehensive income. The company’s 2024 balance sheet reports the securities at $500,000 and no gain or loss appears in the 2024 financial statements. a

Topic: Accounting for debt investments classified as AFS LO 1 A company invests $700,000 in corporate bonds in 2023 and classifies them as available-for-sale. At the end of 2023, the fair value of the securities is $650,000. In 2024, the company sells the bonds for $706,000. Which statement is true concerning the entry made to record the sale of the bonds in 2024? a. b. c. d.

Other comprehensive income increases by $50,000 and income increases by $6,000. There is no effect on other comprehensive income, and income increases by $6,000. Other comprehensive income declines by $50,000, and income increases by $6,000. Other comprehensive income increases by $6,000, and there is no effect on income.

ANS:

a The 2024 entry to record the sale is as follows: Cash

706,000 Reclassification of loss (OCI) Investment in AFS securities Gain (income)

Test Bank, Chapter 1

50,000 650,000 6,000

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19.

Topic: Impairment of debt investments classified as AFS LO 1 A company paid $100,000 for corporate bonds and classified them as AFS. By year-end, the bonds declined in value to $80,000 due to credit losses. Which statement is true concerning the end-ofyear adjustment for this investment? a. b.

No adjustment is required. The investment account is directly reduced by $20,000 and a $20,000 loss is reported in OCI. The investment account is directly reduced by $20,000 and a $20,000 loss is reported in income. An allowance account is created to reduce the investment by $20,000, and a $20,000 loss is reported in income.

c. d. ANS: 20.

d

Topic: Impairment of debt investments classified as AFS LO 1 Last year, a company paid $80,000 for corporate bonds and classified them as AFS. At the beginning of the current year, these bonds are carried at $85,000. At year-end, their market value is $60,000, due to credit losses. Which statement is true concerning the end-of-year adjustment for this investment? a. b. c. d.

No adjustment is required. OCI is reduced by $5,000. An impairment loss of $25,000 is reported in income. The investment account is reduced by $20,000.

ANS:

b

The adjusting entry is as follows: Reclassification of gain on AFS securities (OCI) Impairment loss on AFS securities (income) Investment in AFS securities Allowance for credit losses

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5,000 20,000 5,000 20,000

Advanced Accounting, 5th Edition

21.

Topic: Impairment of debt investments classified as AFS LO 1 A U.S. company holds available-for-sale debt securities, purchased for $1,000,000 and carried at $1,500,000. At the end of the current year, the company determines that the fair value of these securities is $1,300,000, and the decline in value is due to an increase in the market rate of interest. How will the adjusting entry to record the decline in value affect income and other comprehensive income? a. b. c. d. ANS:

Income $300,000 loss $200,000 loss No effect No effect

OCI No effect No effect $200,000 loss $300,000 loss

c There is no impairment loss since market value is greater than cost. The entry to record the decline in value is: OCI

200,000 Investment in AFS securities

22.

200,000

Topic: Impairment of debt investments classified as AFS LO 1 A U.S. company holds an investment in debt securities, classified as available-for-sale. Unrealized investment gains have been reported in previous years. During the current year, the market value of the investment declines below cost, due to a rise in market interest rates. Which statement below is true concerning this investment? a. b. c. d.

The difference between cost and market value is reported in income as a loss. The difference between cost and market value is reported in OCI as a loss. The difference between carrying value and market value is reported in income as a loss. The difference between carrying value and market value is reported in OCI as a loss. ANS:

Test Bank, Chapter 1

d

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23.

Topic: Impairment of debt investments classified as AFS LO 1 A company purchases corporate bonds for $1,000,000 and categorizes them as AFS. At yearend, their market value is $750,000. $100,000 of the decline in value is attributed to a rise in market interest rates, and $150,000 of the decline is attributed to credit losses. Which statement below is true concerning the entry to record the decline in value? a. b. c. d.

The investment account, net of its allowance for losses, declines by $100,000. An impairment loss of $150,000 is reported in income. The investment account is directly reduced by $150,000. An impairment loss of $100,000 is reported in income.

ANS:

b The entry to record the impairment loss is: Impairment loss (income) Impairment loss (OCI)

150,000 100,000 Allowance for credit losses Investment in bonds

24.

150,000 100,000

Topic: Impairment of debt investments classified as AFS LO 1 A company holds available-for-sale corporate bonds purchased for $100,000. Current value of these securities is $92,000 and the decline in value was recorded as a debit to OCI and a credit to the investment account when the decline occurred. The company determines that the decline in value is due to credit losses. Which statement is true concerning the adjusting entry needed to record this information? a. b. c. d.

Debit loss on securities (income) and credit OCI for $8,000. Debit OCI and credit investments for $8,000. Debit OCI and credit allowance for credit losses for $8,000. No entry is made since the securities are already reported at $92,000.

ANS:

a The adjusting entry is: Impairment loss (income) Investment in AFS securities

8,000 8,000 Reclassification of loss (OCI) Allowance for credit losses

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8,000 8,000

Advanced Accounting, 5th Edition

25.

Topic: Impairment of debt securities classified as AFS LO 1 A company holds an investment in corporate bonds classified as available-for-sale. At the beginning of the year, this investment is reported at a value of $4,000,000. Gains of $500,000 have been previously reported, and no impairment losses have been reported. At the end of the year, the market value of the investment is $2,000,000, and it is determined that the decline in value is due to credit losses. How is this information reported in the company’s financial statements for the year? a. b. c. d.

$500,000 other comprehensive loss; $1,500,000 loss in income $2,000,000 loss in income; no change in other comprehensive income $2,000,000 other comprehensive loss; not reported in income $1,500,000 other comprehensive loss; not reported in income

ANS:

a The entry to record the impairment loss is: Reclassification of gain on AFS securities (OCI) Impairment loss (income) Investment in AFS securities Allowance for credit losses

26.

500,000 1,500,000

Topic: Impairment testing of debt securities classified as AFS LO 1 An AFS debt security’s market value is less than its original cost. The loss is reported in income when: a. b.

d.

Current market value is at least 50% below cost. Current market value is below cost, and it is more likely than not that the investor will sell it before the loss is recovered. Current market value is below carrying value and the decline is due to increases in market interest rates. Current market value is below carrying value.

ANS:

b

c.

27.

500,000 1,500,000

Topic: Impairment of debt securities classified as AFS LO 1 A company has previously recorded in income an impairment loss on debt securities classified as AFS. What can we conclude from this information? a. b. c. d.

The loss is attributed to an increase in market rates of interest. The loss is attributed to a decline in the ability of the investee to meet required principal and interest payments. The amount of the impairment loss directly reduced the investment account. The loss was originally recorded in OCI.

ANS:

b

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Use the following information to answer Questions 28-30: A company holds a $100,000 face value corporate bond, bought January 1, 2023, paying 3% annually on December 31, and maturing December 31, 2025. The company paid $102,884 for the bond, to yield 2%. The company categorizes the bond as a held-to-maturity investment, and its accounting year ends December 31. Round answers to the nearest dollar. 28.

29.

Topic: Accounting for HTM securities LO 1 What amount will the company report as interest revenue on the bond for 2024? a. b. c. d.

$3,000 $2,058 $2,039 $2,000

ANS:

c 2023 investment amortization = (3% x $100,000) – (2% x $102,884) = $942 2024 interest revenue = ($102,884 – $942) x 2% = $2,039

Topic: Accounting for HTM securities LO 1 What is the approximate net entry to record receipt of interest and principal on December 31, 2025, assuming no impairment on the bond throughout its life? a.

Cash

b.

Cash

c.

Cash

d.

Cash

ANS:

a 2023 investment amortization = (3% x $100,000) – (2% x $102,884) = $942; new investment balance = $102,884 – $942 = $101,942 2024 investment amortization = (3% x $100,000) – (2% x $101,942) = $962; new investment balance = $101,942 – $962 = $100,980 2025 interest revenue = 2% x $100,980 = $2,020 Small discrepancy due to rounding to nearest dollar.

Interest revenue Investment in bond Interest revenue Investment in bond Interest revenue Investment in bond Interest revenue Investment in bond

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103,000

103,000

102,000

103,000

2,020 100,980 3,000 100,000 2,000 100,000 116 102,884

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30.

Topic: Impairment of HTM securities LO 1 Assume the market value of the bond on December 31, 2023 is $70,000, and no previous impairment has been reported. The decline in value is due to credit losses. What impairment loss is reported on the company’s 2023 income statement? a. b. c. d.

$30,000 $32,884 $31,942 $27,000

ANS:

c Amortized cost (book value) at the end of 2023, after interest revenue is recorded, is $101,942. Therefore, the impairment loss is $70,000 – $101,942 = $31,942, reported in income.

Use the following information to answer Questions 31 – 33: On January 1 of the current year, Ola Company paid $405,000 for a $400,000 face value 3% corporate bond yielding 2.8%, interest paid annually on December 31, and classified it as held-to-maturity. No impairment losses are reported. Ola’s reporting year ends December 31. 31.

32.

Topic: Accounting for HTM securities LO 1 On its income statement for the current year, Ola reports interest revenue on the corporate bond of: a. b. c. d.

$12,000 $11,200 $12,340 $11,340

ANS:

d 2.8% x $405,000 = $11,340

Topic: Accounting for HTM securities LO 1 On its balance sheet as of the end of the current year, Ola reports the investment at: a. b. c. d.

$400,000 $405,000 $404,340 $405,660

ANS:

c $405,000 + [$11,340 – (3% x $400,000)] = $404,340

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33.

34.

35.

Topic: Accounting for HTM securities LO 1 On its balance sheet as of the end of the following year, Ola reports the investment at: a. b. c. d.

$406,338 $403,662 $403,680 $400,000

ANS:

b $404,340 + [($404,340 x 2.8%) – (3% x $400,000)] = $403,662

Topic: Accounting for HTM securities LO 1 A company invests in a 5-year debt security at a discount. The security is classified as HTM. Using the effective interest method, the company will report interest revenue on this security that is: a. b. c. d.

Increasing over the years Decreasing over the years Equal each year Decreasing in the first and second year and increasing in the remaining years

ANS:

a

Topic: Accounting for HTM securities LO 1 A company invests in a 5-year debt security and classifies it as HTM. Market rates of interest for this type of investment decline while the company holds the security. Which statement is true? a. b.

d.

The company reports an unrealized loss on its income statement. The investment balance reported on the balance sheet is higher than the investment’s market value. The investment balance reported on the balance sheet is lower than the investment’s market value. The company reports an unrealized gain in OCI.

ANS:

c

c.

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Advanced Accounting, 5th Edition

36.

37.

38.

Topic: Impairment of HTM investments LO 1 A held-to-maturity debt investment with a carrying value of $5,000,000 is determined to be impaired due to concerns about the investee’s ability to pay principal and interest. The investment’s current market value is $4,000,000. The bonds were originally sold at par. Which statement is true? a. b. c. d.

A $1,000,000 loss is reported in OCI. A $1,000,000 loss is reported in income. No loss is reported. The investment account is directly reduced by $1,000,000.

ANS:

b

Topic: Impairment testing of investments LO 1 Which investments in debt securities and equity securities with no significant influence must be tested for impairment, if the investor does not elect the fair value option? a. b. c. d.

All Trading and AFS debt securities and HTM securities AFS and HTM debt securities Equity securities

ANS:

c

Topic: Accounting for debt investments LO 1 Which unrealized gain affects a company’s earnings per share, if the investor does not elect the fair value option? a. b. c. d.

Unrealized gain on HTM securities Unrealized gain on trading debt securities Unrealized gain on AFS debt securities Unrealized gain on trading and AFS debt securities

ANS:

b

Use the following information to answer questions 39-42: Exeter Company acquires 35% of the voting stock of Fenton Corporation for $7,000,000 at the beginning of the current year. At the time, the book value of Fenton was $20,000,000. During the year, Fenton reported net income of $2,400,000 and other comprehensive income of $100,000. Fenton did not declare any dividends. Both companies have December 31 year-ends, and the fair value of the investment at yearend was $9,000,000. Exeter uses the equity method to report its investment in Fenton stock.

Test Bank, Chapter 1

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39.

40.

41.

Topic: Equity method investments LO 2 What is the investment balance on Exeter’s balance sheet at the end of the year? a. b. c. d.

$7,000,000 $7,875,000 $9,000,000 $8,050,000

ANS:

b $7,000,000 + [35% x ($2,400,000 + $100,000)] = $7,875,000

Topic: Equity method investments LO 2 Now assume Fenton’s book value at the date of acquisition was $16,000,000, and the excess paid over book value is attributed to previously unrecorded intangibles with an estimated remaining life of five years. Straight-line amortization is appropriate. What amount does Exeter report on its income statement as equity in net income of Fenton for the year? a. b. c. d.

$ 560,000 $2,400,000 $ 525,000 $ 840,000

ANS:

a Intangibles = $7,000,000 – (35% x $16,000,000) = $1,400,000 Amortization = $1,400,000/5 = $280,000 ($2,400,000 x 35%) – $280,000 = $560,000

Topic: Equity method investments LO 2 Assume the same information as in question 40. What is the investment balance at the end of the year, reported on Exeter’s balance sheet? a. b. c. d.

$7,560,000 $7,595,000 $7,875,000 $7,000,000

ANS:

b $7,000,000 + $560,000 + (35% x $100,000) = $7,595,000

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Advanced Accounting, 5th Edition

42.

43.

44.

Topic: Equity method investments LO 2 Now assume Exeter’s ending inventory for the year contains $150,000 in merchandise purchased from Fenton, at a markup of 25% on cost. What is the impact on Exeter’s reported equity in net income for the year? a. b. c. d.

$10,500 lower $37,500 lower $52,500 lower None

ANS:

a [$150,000 – ($150,000/1.25)] x 35% = $10,500

Topic: Equity method investments LO 2 Monroe Company owns 40% of the voting stock of Nartal Industries, acquired at book value. Nartal reports income of $600,000 for the current year. Nartal regularly sells merchandise to Monroe at a markup of 30% on cost. Monroe’s beginning inventory includes $156,000 purchased from Nartal. Its ending inventory includes $260,000 purchased from Nartal. Monroe uses the equity method to report its investment in Nartal. Equity in net income of Nartal for the year is: a. b. c. d.

$249,600 $230,400 $216,000 $264,000

ANS:

b 40% x [$600,000 + ($156,000 – ($156,000/1.3)) – ($260,000 – ($260,000/1.3))] = $230,400

Topic: Equity method investments LO 2 Acton Company uses the equity method to report its investment in 35% of the stock of Bates Company. Its original investment cost exceeded 35% of the book value of Bates by a large amount. Acton is computing equity in net income of Bates for the current year, which is five years after the acquisition. Which situation below is most likely to require Acton to adjust the equity in net income number for the current year, for write-offs of basis differences? Attribute the difference to: a. b. c. d.

Goodwill Inventory reported using FIFO Databases with a 3-year life Plant assets with a 20-year life

ANS:

d

Test Bank, Chapter 1

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45.

46.

47.

48.

Topic: Equity investments LO 2 A company has a 25% interest in X Company stock and a 15% interest in Y Company stock. The company is able to exercise significant influence over Y Company’s decisions but not over X Company’s decisions. Which of the two investments should be reported using the equity method? a. b. c. d.

Both X and Y X only Y only Neither X or Y

ANS:

c

Topic: Impairment of equity method investments LO 2 Impairment losses on equity method investments are: a. b. c. d.

Not reported Reported in other comprehensive income Reported as a direct adjustment to beginning retained earnings Reported in income

ANS:

d

Topic: Impairment of equity method investments LO 2 Impairment losses on equity method investments are: a. b. c. d.

Reported in income if considered other than temporary Reversed as gains if the investment’s market value rises Reclassified from OCI to income if the investment’s value rises Not reported.

ANS:

a

Topic: Impairment of equity method investments LO 2 The U.S. GAAP impairment test for equity method investments requires recognition of impairment losses when: a. b. c. d.

Fair value is less than cost and the decline is other than temporary. A significant loss event occurs. Fair value is less than carrying value and the decline in value is other than temporary. Expected credit losses are significant.

ANS:

c

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Advanced Accounting, 5th Edition

49.

50.

51.

Topic: Equity method investments LO 2 Equity in net income is affected by all but which one of these items related to the investee? a. b. c. d.

Investee goodwill impairment Markup on inventory sold by the investee to the investor Markup on inventory sold by the investor to the investee Amortization of previously unreported limited life intangibles of the investee

ANS:

a

Topic: U.S. GAAP for equity method investments LO 2 Following U.S. GAAP, when should a company use the equity method to report an intercorporate investment? a. b. c. d.

The company significantly influences the decisions of the investee. The investee is the company’s major supplier. The company owns 20 – 50% of the investee’s voting stock. The company is holding the investment in its long-term portfolio.

ANS:

a

Topic: Equity method investments LO 2 Fizzy Corporation uses the equity method to account for its 25% investment in Organic Juices Company, for which it paid $10 million in excess of its share of Organic Juices’ book value three years ago. In the current year, Organic Juices reports net income of $3 million, and Fizzy reports equity in net income from Organic Juices on its income statement in the amount of $750,000. We can determine from this information that Fizzy most likely attributed the $10 million extra it paid for Organic Juices to: a. b. c. d.

Favorable leaseholds with a 10-year life Technology rights with a 4-year life Bottler franchise rights with indefinite life Goodwill

ANS:

d

Test Bank, Chapter 1

©Cambridge Business Publishers, 2023 1-19

52.

Topic: Equity method investments LO 2 Ajax Beverages holds 40% of the stock of Bubbly Bottler, acquired at a cost equal to 40% of Bubbly’s book value at the time of purchase, and reports the investment using the equity method. At the start of the current year, Ajax reports the investment at a balance of $1,000,000. Bubbly reports net income of $200,000 and $10,000 in other comprehensive losses for the current year. Bubbly also declares $50,000 in dividends. The market value of Ajax’s investment in Bubbly stock increases by $20,000 during the year. At what amount does Ajax report the investment at the end of the year?

53.

a. b. c. d.

$1,076,000 $1,056,000 $1,084,000 $1,020,000

ANS:

b $1,000,000 + 40% x ($200,000 - $10,000 - $50,000) = $1,056,000

Topic: Equity method investments LO 2 Company C has a significant influence investment in Company D, and appropriately reports its share of Company D’s reported income as equity in net income. Under what circumstances will Company C be most likely to adjust Company D’s reported income to determine its share of that income, in the first year the investment is held? a. b. c. d. ANS:

Company D declared and paid dividends in excess of its reported net income in the first year. Company C’s acquisition cost was more than its share of Company D’s book value, and the difference is attributable to indefinite life intangibles that are not impaired. Company D reported a loss in the first year, but its performance is expected to improve. Company C’s acquisition cost was more than its share of Company D’s book value, and the difference is attributable to previously unreported customer lists with a 3-year life. d

©Cambridge Business Publishers, 2023 1-20

Advanced Accounting, 5th Edition

54.

55.

Topic: Equity method investments LO 2 Fizzy Inc. acquired 25% of the stock of Bubbly Inc. several years ago, and reports the investment using the equity method. The basis difference was attributed to goodwill. In the current year, Bubbly reported income of $250,000, other comprehensive losses of $5,000, and declared and paid $100,000 in dividends. Fizzy’s net entry to record this information includes a. b. c. d.

a credit of $61,250 to equity in net income. a credit to cash of $25,000. a credit of $1,250 to equity in OCI. a debit of $36,250 to Investment in Bubbly.

ANS:

d The entry is: Cash Equity in OCL of Bubbly (OCI) Investment in Bubbly Equity in net income of Bubbly (income)

25,000 1,250 36,250 62,500

Topic: Equity method investments LO 2 Fizzy Inc. acquired 25% of the stock of Bubbly Inc. at the beginning of 2022 for $5,000,000, and reports the investment using the equity method. There is no basis difference, and no intercompany transactions. Bubbly’s retained earnings increased by $800,000 in the two years since acquisition, and its AOCI increased by $20,000. Bubbly declared and paid dividends of $300,000 during this time. What amount does Fizzy report for its investment in Bubbly at the end of 2023? a. b. c. d.

$5,130,000 $5,200,000 $5,205,000 $5,125,000

ANS:

c $5,000,000 + 25% x ($800,000 + $20,000) = $5,205,000

Test Bank, Chapter 1

©Cambridge Business Publishers, 2023 1-21

56.

57.

58.

Topic: Equity method investments and investee losses LO 2 Grant Corporation has owned 40% of the voting stock of Halliday Company for many years, originally purchased at book value and reported using the equity method. At the beginning of the current year, the carrying value of the investment is $3,000,000. Halliday reports a loss of $8,000,000 for the year, and the loss is considered other than temporary. What amount should Grant report as equity in the net loss of Halliday for the current year? a. b. c. d.

none $3,000,000 $3,200,000 $8,000,000

ANS:

b 40% x $8,000,000 = $3,200,000, but losses that result in a negative balance for the investment are not reported if they are considered other than temporary.

Topic: Equity method investments and investee losses LO 2 Refer to the information from Question 56. Now assume the following year Halliday unexpectedly reports net income of $1,500,000. What amount should Grant report as equity in the net income of Halliday for the current year? a. b. c. d.

$ 400,000 $ 0 $ 600,000 $1,500,000

ANS:

a Grant’s share of Halliday’s net income is $600,000 (= $1,500,000 x 40%). However, it did not report $200,000 of its share of Halliday’s loss last year. $600,000 - $200,000 = $400,000.

Topic: Change to equity method LO 2 Jackson Corporation owns 10% of the voting stock of Kettering Company and has been reporting it as an equity investment with no significant influence. At the beginning of the current year, the investment has a fair value of $40,000,000. Jackson originally purchased its 10% interest for $30,000,000. Jackson purchases an additional 25% interest in Kettering’s voting stock for $120,000,000, and determines that the equity method is now appropriate. Any basis difference is attributed to goodwill. Kettering reports net income of $800,000 for the current year, and declares and pays $100,000 in dividends. The year-end fair value of Jackson’s 35% interest is $170,000,000. At what amount does Jackson report the investment on its balance sheet? a. b. c. d.

$170,000,000 $150,245,000 $160,280,000 $160,245,000

ANS:

d $40,000,000 + $120,000,000 + [($800,000 - $100,000) x 35%] = $160,245,000

©Cambridge Business Publishers, 2023 1-22

Advanced Accounting, 5th Edition

59.

Topic: Change from equity method LO 2 Teton Corporation has a 25% interest in Glacier Inc. and reports the investment using the equity method. At the beginning of the year, the investment balance is $16,000,000. Teton determines that it has lost its significant influence over Glacier due to changes in its representation on Glacier’s board of directors, and recategorizes the investment as having no significant interest, as of the beginning of the year. Glacier reports income of $1,000,000 for the year, declares no dividends, and has no OCI or AOCI. The fair value of the investment at the beginning of the year is $18,000,000, and fair value at the end of the year is $18,200,000. How is Teton’s income for the current year affected by this investment? a. b. c. d.

$200,000 increase $2,000,000 increase $2,200,000 increase $250,000 increase

ANS: 60.

c $18,200,000 - $16,000,000 = $2,200,000

Topic: Joint ventures LO 2 At the beginning of the year, Fizzy Corporation and Healthy Beverages Company each invest $50,000,000 in a project to market ready-to-drink juices in Europe. Each has a 50% interest in this joint venture. During the year, the joint venture reports income of $1,000,000 and pays dividends of $300,000 in cash. The joint venture’s balance sheet at the end of the year looks like this: Current assets Property and equipment Total

$

500,000 170,200,000 $170,700,000

Liabilities Equity Total

$ 70,000,000 100,700,000 $170,700,000

At what amount will Fizzy report its investment in the joint venture on its balance sheet at the end of the year? a. b. c. d.

$50,500,000 $50,000,000 $50,350,000 $50,700,000

ANS:

c $50,000,000 + [($1,000,000 – $300,000) x 50%] = $50,350,000

Test Bank, Chapter 1

©Cambridge Business Publishers, 2023 1-23

61.

62.

Topic: Joint ventures LO 2 If a U.S. company invests in a joint venture, it reports the investment as: a. b. c. d.

An AFS investment A held-to-maturity investment An equity method investment A merger

ANS:

c

Topic: Impairment testing of investments LO 1, 2 Which statement is true concerning impairment testing of investments in debt and equity securities? a. b. c. d. ANS:

63.

64.

Impairment losses are reported in income for credit losses related to investments in debt and equity securities. Impairment losses are reported in income for other than temporary declines in the value of equity securities with no significant influence and those with significant influence. Impairment testing is required for investments in equity securities with no significant influence and those with significant influence. Impairment testing is required for debt securities classified as AFS or HTM, but not for debt securities classified as trading. d

Topic: Impairment testing of investments LO 1, 2 Fizzy Beverages invests in the debt and equity securities of other companies, and does not elect the fair value option for these investments. Which statement is false concerning impairment testing of these investments? a. b. c. d.

Impairment testing is required for equity investments with no significant influence. Credit losses for AFS debt investments are reported in income. Impairment testing is required for equity method investments. Impairment testing is required for debt investments classified as AFS and HTM.

ANS:

a

Topic: Investments in debt and equity securities LO 1, 2 Fizzy Beverages invests in the debt securities of other companies. Which statement is false concerning reporting standards for these investments? a. b. c. d.

Fizzy can elect to report all of these investments at FV-NI. Interest earned on trading and AFS debt investments reduces the investment balance. AFS debt securities are reported on the balance sheet at fair value. Fizzy reports market-related losses related to AFS investments in OCI.

©Cambridge Business Publishers, 2023 1-24

Advanced Accounting, 5th Edition

ANS: 65.

66.

67.

b

Topic: Investment valuation LO 1, 2, 3 If a company elects the fair value option under ASC Topic 825 for all eligible investments, which of its investments are not reported at fair value, with unrealized gains and losses on the investments reported in income? a. b. c. d.

Significant influence investments Equity investments with no significant influence Held-to-maturity debt investments Controlling investments

ANS:

d

Topic: Stock acquisition LO 3 A company acquires all of the voting stock of Previn Company, and records the transaction by debiting “Investment in Previn Company.” The company is accounting for its investment as a: a. b. c. d.

Consolidation Variable interest entity Joint venture Stock acquisition

ANS:

d

Topic: Consolidation LO 3 Which investment(s) require consolidation of the investee’s assets and liabilities on the investor’s balance sheet? a. b. c. d.

All equity investments Investments where the investor has control over the investee’s operations Investments where the investor lends significant amounts to the investee Investments where the fair value of the investee’s net assets is significant

ANS:

b

Test Bank, Chapter 1

©Cambridge Business Publishers, 2023 1-25

68.

Topic: Controlling investment LO 3 A company acquires all of the assets and liabilities of another company, and reports the acquisition as a merger. Which statement is true? a. b. c. d. ANS:

69.

70.

The acquiring company revalues its own assets and liabilities to fair value at the date of acquisition. The acquiring company does not report acquired intangible assets unless they are already reported on the acquired company’s books. The acquiring company reports the acquired company’s assets and liabilities at fair value at the date of acquisition. The acquired company retains its own books, while the acquiring company reports the acquisition as an investment. c

Topic: Controlling investment LO 3 A company acquires all of the assets and liabilities of another company, and reports the acquisition as a merger. Which one of the following increases the amount of goodwill the acquiring company reports? a. b. c. d.

The acquired company’s equipment is undervalued. Acquisition cost is lower. The acquired company’s debt is undervalued. The acquired company has previously unreported intangible assets other than goodwill.

ANS:

c

Topic: Change to controlling interest LO 3 Porter Corporation holds a 35% interest in the voting stock of Quinn Company, and reports its investment using the equity method. Porter then acquires the remainder of Quinn’s voting stock for cash. Which statement is true concerning Porter’s reporting for the acquisition of the remainder of Quinn’s stock? a. b. c. d. ANS:

Quinn’s assets and liabilities are not revalued to fair value in this transaction. The difference between the fair value and book value of the equity method investment is reported in income. No goodwill is reported in this tranasaction. The cost of the additional 65% of Quinn’s stock is reported as the book value of the equity method investment plus cash paid by Porter. b

©Cambridge Business Publishers, 2023 1-26

Advanced Accounting, 5th Edition

71.

Topic: Change from controlling interest LO 3 Radler Corporation holds all of the voting stock of Spald Company. The carrying value of Spald’s net assets is $20 million. Radler sells 75% of the stock for $18 million. Its remaining investment has a fair value of $5,500,000, and is reported using the equity method. The entry to record the deconsolidation includes a a. b. c. d.

gain of $3.5 million, reported in income. gain of $3.5 million, reported in OCI. loss of $3 million, reported in income. loss of $3 million, reported in OCI.

ANS: a The entry to record the deconsolidation is: Cash Investment in Spald Net assets of Spald Gain on deconsolidation (income)

18,000,000 5,500,000 20,000,000 3,500,000

Use the following information to answer Questions 72 - 74: Peregrine Company merged with Falcon Corporation, paying $50,000,000 for its net assets. Falcon’s balance sheet reports the following asset and liability balances. Treat each question independently. Current assets Plant & equipment Current liabilities Long-term debt 72.

$10,000,000 70,000,000 5,000,000 40,000,000

Topic: Controlling investment LO 3 Assume the book values of Falcon’s assets and liabilities equal their fair values. How much goodwill does Peregrine report at the date of acquisition? a. b. c. d.

$30,000,000 $0 $10,000,000 $15,000,000

ANS:

d $50,000,000 – ($10,000,000 + $70,000,000 – $5,000,000 – $40,000,000) = $15,000,000

Test Bank, Chapter 1

©Cambridge Business Publishers, 2023 1-27

73.

74.

75.

Topic: Controlling investment LO 3 Now assume Falcon’s plant and equipment has a fair value of $60,000,000, but the fair values of its other assets and liabilities equal book value. How much goodwill does Peregrine report at the date of acquisition? a. b. c. d.

$15,000,000 $30,000,000 $25,000,000 None

ANS:

c $50,000,000 – ($10,000,000 + $60,000,000 – $5,000,000 – $40,000,000) = $25,000,000

Topic: Controlling investment LO 3 Now assume the book values of Falcon’s assets and liabilities equal their fair values, but Falcon has unreported technology valued at $8,000,000. How much goodwill does Peregrine report at the date of acquisition? a. b. c. d.

$25,000,000 $ 7,000,000 $17,000,000 None

ANS:

b $50,000,000 – ($10,000,000 + $70,000,000 + $8,000,000 – $5,000,000 – $40,000,000) = $7,000,000

Topic: Controlling investment LO 3 Radcliff Corporation acquires Soulon Company’s assets and liabilities for $20,000,000 in cash. At the date of acquisition, Soulon’s reported assets have a fair value of $50,000,000 and its reported liabilities have a fair value of $47,000,000. Investigation reveals that Soulon has unreported technology with a fair value of $5,000,000. How much goodwill does Porter report on this acquisition? a. b. c. d.

$20,000,000 $17,000,000 $12,000,000 $0

ANS:

c $20,000,000 – ($50,000,000 + $5,000,000 – $47,000,000) = $12,000,000

©Cambridge Business Publishers, 2023 1-28

Advanced Accounting, 5th Edition

76.

77.

78.

Topic: Controlling investment LO 3 Rand Corporation acquires Southern Company’s assets and liabilities for $15,000,000 in cash. At the date of acquisition, Southern’s balance sheet reported net assets of $10,000,000. Investigation reveals that Southern’s reported plant assets are overvalued by $1,400,000. Rand reports how much goodwill on this acquisition? a. b. c. d.

$5,000,000 $2,400,000 $1,600,000 $6,400,000

ANS:

d $15,000,000 – ($10,000,000 – $1,400,000) = $6,400,000

Topic: Controlling investment LO 3 Trident Corporation acquires Uvell Company’s assets and liabilities for $40,000,000 in cash. At the date of acquisition, Uvell’s balance sheet reported assets of $90,000,000 and liabilities of $82,000,000. Investigation reveals that Uvell has unreported liabilities valued at $5,000,000. Trident reports how much goodwill on this acquisition? a. b. c. d.

$37,000,000 $43,000,000 $39,000,000 $49,000,000

ANS:

a $40,000,000 – ($90,000,000 - $82,000,000 - $5,000,000) = $37,000,000

Topic: Change to controlling interest LO 3 Viceroy Company owns 40% of the voting stock of Wagner Enterprises, and reports the investment using the equity method. The investment balance is currently $6,000,000, but its fair value is $9,000,000. Viceroy pays $18,000,000 in cash to acquire the remainder of Wagner’s stock. Wagner’s reported net assets have a book value of $7,000,000 and a fair value of $5,000,000, and it has unreported technology valued at $1,000,000. What is the effect of this transaction on Viceroy’s net income? a. b. c. d.

$ 2,000,000 gain $ 3,000,000 gain $17,000,000 loss No effect on income

ANS:

b $9,000,000 - $6,000,000 = $3,000,000 gain on equity method investment.

Test Bank, Chapter 1

©Cambridge Business Publishers, 2023 1-29

79.

80.

Topic: Change from controlling interest LO 3 Primer Enterprises owns all of the stock of Specialty Beverages, and includes Specialty’s assets and liabilities on its balance sheet. Primer sells 65% of Specialty stock to outside investors for $8,000,000, and retains 35% of the stock, currently valued at $4,200,000. Specialty’s net assets are currently carried on Primer’s balance sheet at $10,000,000. How is Primer’s income affected by this transaction? a. b. c. d.

$2,200,000 gain $1,200,000 gain $8,400,000 loss No effect on income

ANS:

a $8,000,000 + $4,200,000 - $10,000,000 = $2,200,000.

Topic: Variable interest entities LO 3 Lavalle Corporation creates a separate legal entity that acquires equipment and leases it to Lavalle. Lavalle does not own any of the entity’s stock. Which statement is false? a.

d.

Lavalle does not consolidate the entity because it doesn’t have any ownership interests in it. The entity is a variable interest entity if it cannot obtain financing on its own. Lavalle consolidates the entity if the entity is a variable interest entity and Lavalle absorbs the entity’s risks and rewards. Lavalle will not consolidate the entity if it is not a variable interest entity.

ANS:

a

b. c.

81.

Topic: Equity method investments, IFRS LO 4 Sanofi reports using IFRS and invests in some of the voting shares of Pasteur. What is the deciding factor on whether it uses the equity method for this investment, or treats it as an AFS security? a. b. c. d.

Does Sanofi intend to hold Pasteur’s stock for a term longer than one year? Does Sanofi own at least 20% of Pasteur’s stock? Does Sanofi significantly influence Pasteur’s decisions? Is Pasteur a U.S. company?

ANS:

c

©Cambridge Business Publishers, 2023 1-30

Advanced Accounting, 5th Edition

82.

Topic: Joint ventures, IFRS LO 4 At the beginning of the current year, Jalu S.A. enters a joint venture with another company to develop new technology. Each company invests €1,000,000 for a 50% interest in the joint venture. During the year, the joint venture reports income of €200,000 and pays dividends of €60,000. At the end of the year, the joint venture’s balance sheet reports €5,000,000 in assets and €2,600,000 in liabilities. Jalu reports €22,000,000 in assets and €8,000,000 in liabilities from its own operations. At what amount are Jalu’s total liabilities reported at the end of the year?

83.

84.

a. b. c. d.

€ 8,000,000 €10,600,000 € 9,300,000 € 2,600,000

ANS:

a Using the equity method, only Jalu’s liabilities are reported.

Topic: IFRS for joint ventures LO 4 IFRS requires joint ventures to be reported as: a. b. c. d.

Equity method investments Trading securities Variable interest entities Available-for-sale securities

ANS:

a

Topic: IFRS for intercorporate debt investments LO 4 Unless there is a “significant deterioration” in credit quality, an IFRS company measures credit losses on AFS and HTM investments as: a.

85.

b. c. d.

The difference between book value and the present value of the future expected cash flows. Credit losses expected over the next 12 months. The difference between market value and book value. The decline in value due to a specific loss event.

ANS:

b

Topic: IFRS for intercorporate investments LO 4 What is “value-in-use,” as used in reporting intercorporate investments, per IFRS? a. b. c. d.

Present value of the investment’s future expected cash flows Market value of the investment in an active market Present value of the investment’s future dividend payments Market value of the investment when acquired

Test Bank, Chapter 1

©Cambridge Business Publishers, 2023 1-31

ANS: 86.

a

Topic: U.S. GAAP and IFRS for significant influence investments LO 2, 4 Under current standards, when is an impairment loss reported on a significant influence investment in the stock of another company, following U.S. GAAP and IFRS? U.S. GAAP Carrying value exceeds fair value, and the decline is other than temporary.

IFRS Carrying value is greater than the higher of market value or value-in-use, and a loss event has occurred.

b. Book value is greater than the higher of market value or value-in-use, and the decline is other than temporary.

Carrying value exceeds fair value, and the decline is other than temporary.

c.

Carrying value is greater than the higher of market value or value-in-use, and a loss event has occurred.

a.

Not reported

d. Carrying value is greater than the higher of market value or value-in-use, and a loss event has occurred. ANS: 87.

88.

Not reported

a

Topic: IFRS for intercorporate equity investments with no significant influence LO 4 IFRS companies can choose from which of the following options for reporting their investments in equity securities with no significant influence, depending on investment objectives? a. b. c. d.

Equity method only FV-NI only FV-NI or FV-OCI FV-NI or equity method

ANS:

c

Topic: IFRS for intercorporate debt investments LO 4 IFRS companies can choose from which of the following options for reporting their investments in debt securities, depending on investment objectives? a. b. c. d.

FV-NI or FV-OCI Amortized cost only Amortized cost or FV-OCI FV-NI, FV-OCI, or amortized cost

ANS:

d

©Cambridge Business Publishers, 2023 1-32

Advanced Accounting, 5th Edition

89.

90.

91.

92.

Topic: IFRS for intercorporate investments with no significant influence LO 4 Realized gains and losses on which of the following investments never appear on the income statement of IFRS companies? a. b. c. d.

FV-NI securities and FV-OCI equity securities FV-NI securities Amortized cost debt securities FV-OCI equity securities

ANS:

d

Topic: IFRS for intercorporate investments with no significant influence LO 4 When an IFRS company sells an equity investment categorized as not held for trading, gains and losses can be a. b. c. d.

reclassified from AOCI to income. reported in income. reclassified from AOCI to retained earnings. not reported.

ANS:

c

Topic: IFRS for intercorporate investments LO 4 Following IFRS, significant influence investments are usually called: a. b. c. d.

Long-term equity method investments Investments in associates Noncurrent stock investments Investments in financial instruments

ANS:

b

Topic: IFRS for joint ventures LO 4 Which statement is true regarding U.S. GAAP and IFRS for joint ventures? a. b. c. d.

U.S. GAAP reports joint ventures using the equity method, and IFRS requires consolidation of joint ventures. Both U.S. GAAP and IFRS require the equity method for joint ventures. U.S. GAAP requires consolidation of joint ventures while IFRS requires the equity method. Both U.S. GAAP and IFRS require consolidation of joint ventures.

ANS:

b

Test Bank, Chapter 1

©Cambridge Business Publishers, 2023 1-33

93.

Topic: IFRS vs U.S. GAAP for investments in equity securities with no significant influence LO 1, 4 How do IFRS and U.S. GAAP differ concerning the reporting of equity investments with no significant influence? a. b. c. d. ANS:

There is no difference; both standards require the investments to be reported at FV-NI. IFRS requires equity investments to be reported using the equity method, while U.S. GAAP requires FV-OCI. IFRS allows investments to be reported at FV-NI or FV-OCI, while U.S. GAAP requires FVNI for all equity investments with no significant influence. U.S. GAAP allows investments to be reported at FV-NI or FV-OCI, while IFRS requires FVNI for all equity investments with no significant influence. c

©Cambridge Business Publishers, 2023 1-34

Advanced Accounting, 5th Edition

PROBLEMS 1.

Topic: Investment in equity securities with no significant influence LO 1 A company invests in stock of other companies. None of the company’s holdings are considered a significant interest. Its accounting year ends December 31. Its investment activity during 2023 and 2024 is as follows: • •

Purchased stock of Acme Company in 2023 for $200,000. Sold the investment later in 2023 for $215,000. Purchased stock of Beeber Company in 2023 for $300,000. The investment had a fair value of $280,000 at the end of 2023. It was sold for $285,000 in 2024.

Required Prepare the journal entries necessary to report the above events. For recorded gains and losses, indicate whether they are reported in OCI or in income. ANS: 2023 Investment in Acme

200,000 Cash

Cash

200,000 215,000

Investment in Acme Gain (income) Investment in Beeber

200,000 15,000 300,000

Cash Loss (income)

300,000 20,000

Investment in Beeber 2024 Cash

285,000 Investment in Beeber Gain (income)

Test Bank, Chapter 1

20,000

280,000 5,000

©Cambridge Business Publishers, 2023 1-35

2.

Topic: Investment in equity securities with no significant influence LO 1 A company invests in stock of other companies. None of the company’s holdings are considered a significant interest. Its accounting year ends December 31. Its investment activity during 2023, 2024 and 2025 is as follows: • • •

Purchased stock of Fizzy Corporation in 2023 for $100,000. The market value of the stock at the end of the year was $115,000. Sold the investment in 2024 for $116,000. Purchased stock of Bubbly Bottlers in 2023 for $100,000. The market value of the stock at the end of the year was $90,000. It was sold for $85,000 in 2024. Purchased stock of Java Juices Company in 2024 for $100,000. The market value of the stock at the end of the year was $102,000. It was sold for $99,000 in 2025.

Required a. At what total amount is the company’s investment in equity securities reported on its December 31, 2023 and 2024 balance sheets? b. What net gains and losses on equity investments are reported on the company’s income statements for 2023, 2024, and 2025? ANS: a. b.

3.

2023 balance sheet: $115,000 + $90,000 = $205,000 2024 balance sheet: $102,000 2023 income statement: $15,000 gain - $10,000 loss = $5,000 net gain 2024 income statement: $1,000 gain - $5,000 loss + $2,000 gain = $2,000 net loss 2025 income statement: $3,000 net loss

Topic: Investment in debt securities classified as AFS LO 1 In 2023 a company purchases debt securities for $100,000 and classifies them as available-forsale. At the end of the year their market value is $105,000. In 2024 the company sells the securities for $98,000. Required Prepare the journal entries to report the above information in 2023 and 2024. For recorded gains and losses, indicate whether they are reported in OCI or in income. ANS: 2023 Investment in AFS securities

100,000 Cash

Investment in AFS securities

5,000 Gain (OCI)

©Cambridge Business Publishers, 2023 1-36

100,000

5,000

Advanced Accounting, 5th Edition

2024 Cash Reclassification of gain (OCI) Loss (income)

98,000 5,000 2,000 Investment in AFS securities

4.

105,000

Topic: Investment in debt securities classified as AFS, impairment LO 1 In 2023 a company purchases debt securities for $100,000 and classifies them as available-forsale. At the end of the year their market value is $90,000, the decline in value is attributed to market-related factors, and the securities are not expected to be sold before the loss is recovered. In 2024 the company sells the securities for $104,000. Required Prepare the journal entries to report the above information in 2023 and 2024. For recorded gains and losses, indicate whether they are reported in OCI or in income. ANS: 2023 Investment in AFS securities

100,000 Cash

100,000

Loss (OCI)

10,000 Investment in AFS securities

10,000

2024 Cash

104,000 Gain (income) Reclassification of loss (OCI) Investment in AFS securities

5.

4,000 10,000 90,000

Topic: Impairment of AFS debt securities LO 1 An AFS debt security was purchased for $100,000 in a prior year. At the beginning of the current year, it has a fair value of $125,000. At the end of the current year, its fair value is $70,000. The decline in value is attributed to a decline in the credit rating of the investee, and is expected to be recovered before the security is sold. Required Prepare the journal entry to report the impairment loss for the current year. ANS: Loss (income) Reclassification of gain (OCI)

30,000 25,000 Investment in AFS securities Allowance for credit losses

Test Bank, Chapter 1

25,000 30,000

©Cambridge Business Publishers, 2023 1-37

6.

Topic: Impairment of AFS debt securities LO 1 An AFS debt security was purchased at par value, $100,000. At the end of the year, its fair value is $80,000. $6,000 of the decline in value is attributed to market conditions, and the remainder is attributed to a decline in the credit rating of the investee. Losses are expected to be recovered before the security is sold. Required Prepare the journal entry to report the impairment loss for the current year. For reported gains and losses, indicate whether they are reported in income or OCI. ANS: Loss (income) Loss (OCI)

14,000 6,000 Investment in AFS securities Allowance for credit losses

7.

6,000 14,000

Topic: Impairment reporting for AFS debt securities LO 1 A company buys debt securities at a par value of $300,000, and designates them as AFS securities. At the end of the year, the company still holds the securities but their fair value has declined to $250,000. Required For each circumstance below, indicated where the loss, if any, is reported, and how the investment is reported on the company’s year-end balance sheet. a. The company intends to sell the securities before the loss in value is recovered. b. The company does not intend to sell the securities before the loss in value is recovered, and (1) The loss is determined to be a credit loss. (2) The loss is attributed as follows: $10,000 to changes in market conditions, and $40,000 to credit loss. ANS: a. The $50,000 loss is a direct reduction in the investment balance, and is reported in income. The investment is reported at $250,000. b. (1) The $50,000 loss is reported in income, and in an allowance account, contra to the investment account. Investment…………………………………………….. $300,000 Allowance for credit losses……………………. (50,000) Investment, net…………………………………….. $250,000 (2) The credit-related loss of $40,000 is reported in income, and in an allowance account, contra to the investment account. The market-related loss of $10,000 is reported in OCI, as a direct reduction in the investment account. Investment…………………………………………….. $290,000 Allowance for credit losses……………………. (40,000) Investment, net…………………………………….. $250,000

©Cambridge Business Publishers, 2023 1-38

Advanced Accounting, 5th Edition

8.

Topic: Impairment reporting for AFS debt securities LO 1 A company holds an investment in debt securities, categorized as available-for-sale, and originally purchased for $360,000. At the beginning of the year, the investment has a carrying value of $350,000, with the decline in value appropriately reported in AOCI. At the end of the year, the company still holds the securities, but their fair value has declined to $300,000. Of the total impairment loss, $45,000 is attributed to a credit loss. Required a. Prepare the journal entry to record the impairment. For recorded gains and losses, indicate whether they are reported in income or in OCI. b. Show how the investment is reported on the company’s balance sheet at the end of the year. ANS: a. The total impairment loss is $360,000 - $300,000 = $60,000, of which $45,000 is creditrelated. Loss (income) Loss (OCI)

45,000 5,000 Investment in AFS securities Allowance for credit losses

b.

9.

Investment…………………………………………….. Allowance for credit losses……………………. Investment, net……………………………………..

5,000 45,000 $345,000 (45,000) $300,000

Topic: Trading and AFS debt investments; impairment LO 1 On November 1, 2024, a U.S. company invests in debt securities at a cost of $2,000,000. On December 31, 2024, the securities have a market value of $1,890,000. The securities are sold on February 1, 2025, for $2,005,000. Required a. Assume the company classifies the securities as trading securities. Prepare the journal entries on December 31, 2024 and February 1, 2025 to record the above information. b. Repeat Part a., but this time assume the securities are classified as available-for-sale, and the 2024 decline in value is due to changes in market interest rates. The loss is expected to be recovered before the securities are sold. ANS: a.

December 31, 2024 Loss (income)

110,000 Investment in trading securities

February 1, 2025 Cash

2,005,000 Investment in trading securities Gain (income)

Test Bank, Chapter 1

110,000

1,890,000 115,000

©Cambridge Business Publishers, 2023 1-39

b.

December 31, 2024 Loss (OCI)

110,000 Investment in AFS securities

110,000

February 1, 2025 Cash

2,005,000 Investment in AFS securities Reclassification of loss (OCI) Gain (income)

1,890,000 110,000 5,000

Use the following information to complete problems 10 and 11: Guavalite Corporation purchased the following bonds at par: Investment Donar Company bonds Etlak Corporation bonds Fren Company bonds

Date of Acquisition 4/20/23 8/1/23 9/2/23

Cost $45,000 25,000 20,000

Fair Value 12/31/23 $40,000 N/A 21,000

Date Sold 2/10/24 9/15/23 1/14/24

Selling Price $42,000 23,000 22,500

Ignore the reporting for interest payments. Guavalite’s accounting year ends December 31. 10.

Topic: Debt investments classified as trading investments LO 1 Guavalite classifies the securities as trading investments. Required Prepare the journal entries to record the events related to these intercorporate investments. For reported gains and losses, indicate whether they are reported on the income statement or in OCI. ANS: 4/20/23 Investment in trading securities

45,000 Cash

45,000

8/1/23 Investment in trading securities

25,000 Cash

25,000

9/2/23 Investment in trading securities

20,000 Cash

20,000

9/15/23 Cash Loss on securities (income)

23,000 2,000 Investment in trading securities

©Cambridge Business Publishers, 2023 1-40

25,000

Advanced Accounting, 5th Edition

12/31/23 Loss on securities (income)

4,000

Investment in trading securities $(4,000) = ($40,000 – $45,000) + ($21,000 – $20,000) 1/14/24 Cash

4,000

22,500 Investment in trading securities Gain on securities (income)

2/10/24 Cash

21,000 1,500

42,000 Investment in trading securities Gain on securities (income)

11.

40,000 2,000

Topic: Debt investments classified as AFS investments LO 1 Guavalite Corporation classifies the debt investments as available-for-sale securities. Declines in value are due to changes in market interest rates, and are expected to be recovered. Required Prepare the journal entries to record the events related to these intercorporate investments. ANS: 4/20/23 Investment in AFS securities

45,000 Cash

45,000

8/1/23 Investment in AFS securities

25,000 Cash

25,000

9/2/23 Investment in AFS securities

20,000 Cash

20,000

9/15/23 Cash Loss on securities (income)

23,000 2,000 Investment in AFS securities

12/31/23 Loss on securities (OCI)

4,000

Investment in AFS securities $(4,000) = ($40,000 – $45,000) + ($21,000 – $20,000)

Test Bank, Chapter 1

25,000

4,000

©Cambridge Business Publishers, 2023 1-41

1/14/24 Cash Reclassification of gain (OCI)

22,500 1,000 Investment in AFS securities Gain on securities (income)

2/10/24 Cash Loss on securities (income)

21,000 2,500

42,000 3,000 Investment in AFS securities Reclassification of loss (OCI)

12.

40,000 5,000

Topic: Trading and AFS investments; impairment LO 1 On January 1, 2024, a company holds an investment in corporate bonds, reported on its balance sheet at $850,000. The company originally purchased the investment at a par value of $835,000. In answering the questions below, for any reported gains and losses, indicate whether they are reported in income or in OCI. Required a. Assume the company classifies the securities as trading securities. In 2024, it sells the securities for $855,000. Prepare the journal entry to record the sale, assuming no entries have been made previously in 2024. b. Repeat Part a., but this time assume the securities are classified as available-for-sale. c. Assume the securities are classified as available-for-sale, and they were not sold in 2024. Their value at December 31, 2024 is $800,000, attributed to the investee’s decline in credit rating. The loss is expected to be recovered. Prepare the journal entry to record the impairment loss, assuming no other entries have been made previously in 2024. ANS: a. Cash

855,000 Investment in trading securities Gain on sale (income)

850,000 5,000

b. Cash Reclassification of gain (OCI)

855,000 15,000 Investment in AFS securities Gain on sale (income)

850,000 20,000

c. Impairment loss (income) Reclassification of gain (OCI)

35,000 15,000 Investment in AFS securities Allowance for credit losses

©Cambridge Business Publishers, 2023 1-42

Advanced Accounting, 5th Edition

15,000 35,000

13.

Topic: AFS debt investment impairment LO 1 On January 1, 2024, a company invests $175,000 par value in debt securities, and designates them as available-for-sale. Following is valuation information for these securities for December 31, 2024 and 2025. The company does not expect to sell the securities before recovery of losses at the end of either year.

Fair value Present value of future cash flows

December 31, 2024 $128,000 130,000

December 31, 2025 $131,000 134,000

Required Prepare the journal entry or entries necessary to report the change in fair value of the debt securities as of December 31, 2024 and December 31, 2025. Indicate whether reported gains or losses appear in income or OCI. ANS: December 31, 2024 Impairment loss (income) Loss on AFS securities (OCI)

45,000 2,000 Allowance for credit losses Investment in AFS securities

December 31, 2025 Allowance for credit losses Loss on AFS securities (OCI)

45,000 2,000

4,000 1,000 Credit losses on AFS securities (income) Investment in AFS securities

14.

Topic: HTM investment LO 1 Nature Pure Corporation purchased a 2-year bond at the beginning of 2024, at a price to yield 3%, classified as HTM. The bond has a face value of $1,000,000, coupon rate 4%, interest paid at the end of each year. The bond is not impaired at the end of 2024. Required At what value is the bond reported on Nature Pure’s balance sheet at the end of 2024? Round to the nearest dollar. ANS: Original cost: $40,000/(1.03) + $1,040,000/(1.03)2 = $1,019,135 2024 interest revenue = 3% x $1,019,135 = 2024 interest received = 4% x 1,000,000 = Reduction in investment

$30,574 40,000 $ 9,426

Investment balance, end of 2024: $1,019,135 – $9,426 = $1,009,709

Test Bank, Chapter 1

©Cambridge Business Publishers, 2023 1-43

4,000 1,000

15.

Topic: HTM investment LO 1 A company acquired a 4-year $1,000,000 face value corporate bond on January 1, 2023. The bond pays 3% annually on December 31, and matures December 31, 2026. Round all answers to the nearest dollar. Required a. Assume the investment yields 4%. How much did the company pay for the bond? b. Assume the company categorizes the bond as a held-to-maturity investment. Calculate interest revenue for 2025 (the third year). ANS: a. b.

16.

$30,000/1.04 + $30,000/(1.04)2 + $30,000/(1.04)3 + $1,030,000/(1.04)4 = $963,701 2023 interest revenue = 4% x $963,701 = $38,548; cash received = $30,000, so the investment increases by ($38,548 - $30,000) = $8,548. 2024 interest revenue = 4% x ($963,701 + $8,548) = $38,890; cash received = $30,000, so the investment increases by ($38,890 - $30,000) = $8,890. 2025 interest revenue = 4% x (963,701 + $8,548 + $8,890) = $39,246

Topic: Investments in AFS and HTM securities; impairment LO 1 A company has investments in corporate bonds, classified as AFS and HTM. Information on these investments for the current year is as follows: •

•

An AFS security with a coupon rate of 3% was purchased at a par value of $100,000 in a previous year. Interest is paid at the end of the year. The security has a $104,000 fair value at the beginning of the current year. At the end of the year its fair value is $75,000, and it is determined that the decline in value is due to expected credit losses, which are recoverable. A 2-year bond is purchased at the beginning of the current year, at a price to yield 3.5%, classified as HTM. The bond has a face value of $1,000,000, coupon rate 4%, interest paid at the end of each year. At the end of the year, the bond has a fair value of $500,000, and it is determined that the decline in value is a credit loss.

Required Prepare the journal entries to record the events of the current year. Indicate whether gains or losses are reported in income or OCI. Round to the nearest dollar if necessary. ANS: AFS security: Cash

3,000 Interest revenue

3,000

Loss on securities (income) Reclassification of gain (OCI)

25,000 4,000 Investment in AFS securities Allowance for credit losses

©Cambridge Business Publishers, 2023 1-44

Advanced Accounting, 5th Edition

4,000 25,000

HTM security: Investment in HTM securities

1,009,498

Cash $40,000/(1.035) + $1,040,000/(1.035)2 = $1,009,498

1,009,498

Cash

40,000 Interest revenue (income) Investment in HTM securities

Ending investment balance = $1,009,498 – $4,668 = Fair value Impairment loss

35,332 4,668

$1,004,830 (500,000) $ 504,830

Impairment loss (income)

504,830 Allowance for credit losses

17.

504,830

Topic: Equity method investments LO 2 At the beginning of the year, Cornwall Corporation acquired 40% of the voting stock of Kingston Company for $4,000,000 in cash, when Kingston’s total book value was $20,000,000. The basis difference was attributed to goodwill. During the year, Kingston reported net income of $700,000 and declared and paid cash dividends of $100,000. Kingston also reported an other comprehensive loss of $5,000. Kingston sells merchandise to Cornwall at a markup of 20% on cost; $360,000 remains in Cornwall’s ending inventory. Cornwall uses the equity method to report its investment in Kingston. Required a. Compute Cornwall’s equity in net income and equity in other comprehensive income of Kingston for the year, reported on Cornwall’s statement of comprehensive income. b. Make the journal entry or entries necessary to report the investment in Kingston on Cornwall’s books for the year. ANS: a.

Share of reported income Less unconfirmed profit in ending inventory Equity in net income

40% x $700,000 [$360,000–($360,000/1.2)] x 40%

$ 280,000 (24,000) $ 256,000

Equity in other comprehensive loss: $5,000 OCL x 40% = $2,000

Test Bank, Chapter 1

©Cambridge Business Publishers, 2023 1-45

b. Investment in Kingston

4,000,000 Cash

4,000,000

Investment in Kingston

256,000 Equity in NI of Kingston (income)

Equity in OCL of Kingston (OCI)

256,000

2,000 Investment in Kingston

2,000

Cash

40,000 Investment in Kingston

18.

40,000

Topic: Equity method investments LO 2 Larkland Company acquired 30% of the voting stock of Martin Corporation at the beginning of the year for $50 million, when Martin’s total book value was $140 million. The basis difference was attributed to goodwill. During the year, Martin Corporation reported net income of $6,000,000, other comprehensive income of $200,000, and declared and paid cash dividends of $2,500,000. Larkland uses the equity method to report its investment in Martin. Required a. What is the basis difference at the date of acquisition? b. Prepare Larkland’s journal entries for the year, related to its investment in Martin. c. Calculate the balance in Investment in Martin, appearing on Larkland’s ending balance sheet for the year. ANS: a. b.

$50 million – (30% x $140 million) = $8 million Investment in Martin

50,000,000 Cash

Investment in Martin Cash

1,110,000 750,000 Equity in NI of Martin (income) Equity in OCI of Martin (OCI)

c.

50,000,000

1,800,000 60,000

$50,000,000 + $1,110,000 = $51,110,000

©Cambridge Business Publishers, 2023 1-46

Advanced Accounting, 5th Edition

19.

Topic: Equity method investments LO 2 Delta Corporation acquired 25% of the voting stock of Davidson Company in 2023. There was no basis difference. It is now 2024. Davidson reported 2024 net income of $5,000,000, other comprehensive income of $100,000, and declared and paid cash dividends of $1,500,000. Delta’s ending inventory contains $1,020,000 purchased from Davidson, and its beginning inventory contains $750,000 purchased from Davidson. Davidson sells inventory to Delta at a markup of 20% on cost. Delta uses the equity method to account for its investment in Davidson. Required a. Calculate equity in net income of Davidson, reported on Delta’s 2024 income statement. b. Prepare Delta’s 2024 journal entry or entries related to its investment in Davidson. c. What is the net effect of the investment in Davidson on Delta’s 2024 net income and on Delta’s 2024 comprehensive income? ANS: a.

25% of net income Unconfirmed profit on upstream ending inventory Confirmed profit on upstream beginning inventory Equity in net income

25% x $5,000,000

$1,250,000

25% x [$1,020,000 – ($1,020,000/1.2)] 25% x [$750,000 – ($750,000/1.2)]

(42,500) 31,250 $1,238,750

b. Investment in Davidson Cash

888,750 375,000 Equity in OCI of Davidson OCI) Equity in NI of Davidson (income)

c. 20.

25,000 1,238,750

Effect on net income: +$1,238,750 Effect on comprehensive income: $1,238,750 + $25,000 = +$1,263,750

Topic: Equity method investments LO 2 Grant Company acquired 40% of the voting stock of Jake Corporation on January 1, 2020, for $50,000,000. The basis difference was attributed entirely to goodwill. During the 5-year period from January 1, 2020 through December 31, 2024, Jake reported total net income of $25,000,000 and declared and paid $10,000,000 in dividends. During 2025, Jake reported net income of $4,000,000 and declared and paid $1,000,000 in dividends. Required a. Calculate the balance in Investment in Jake, reported on Grant’s December 31, 2024 balance sheet. b. Calculate the balance in Investment in Jake, reported on Grant’s December 31, 2025 balance sheet.

Test Bank, Chapter 1

©Cambridge Business Publishers, 2023 1-47

ANS: a.

b.

21.

Investment, 1/1/20 Equity in net income, 2020-2024 Share of dividends, 2020-2024 Investment, 12/31/24

40% x $25,000,000 40% x $10,000,000

$50,000,000 10,000,000 (4,000,000) $56,000,000

Investment, 12/31/2024 Equity in net income, 2025 Share of dividends, 2025 Investment, 12/31/25

40% x $4,000,000 40% x $1,000,000

$56,000,000 1,600,000 (400,000) $57,200,000

Topic: Equity method investments LO 2 Solac Company acquires 30% of the voting stock of Talgo Corporation on January 1, 2022, for $15,000,000, which was 30% of Talgo’s book value. It is now December 31, 2024. Solac sells merchandise to Talgo at a markup of 25% on cost. Talgo sells merchandise to Solac at a markup of 20% on cost. Below are the inventory balances held by Solac, purchased from Talgo, and held by Talgo, purchased from Solac, at various dates.

December 31, 2022 December 31, 2023 December 31, 2024

Inventory Held by Solac, Purchased from Talgo $1,920,000 3,000,000 3,120,000

Inventory Held by Talgo, Purchased From Solac $ 750,000 1,000,000 1,025,000

Talgo reports total net income of $2,800,000 for 2022 through 2023, and $1,600,000 for 2024. Talgo declares and pays no dividends during this period. Required a. Calculate equity in net income of Talgo, reported on Solac’s 2024 income statement. b. Calculate the Investment in Talgo balance, reported on Solac’s December 31, 2024 balance sheet. ANS: a.

30% net income Unconfirmed profit on upstream ending inventory Unconfirmed profit on downstream ending inventory Confirmed profit on upstream beginning inventory Confirmed profit on downstream beginning inventory Equity in net income, 2024

©Cambridge Business Publishers, 2023 1-48

30% x $1,600,000

$480,000

30% x [$3,120,000 – ($3,120,000/1.2)]

(156,000)

30% x [$1,025,000 – ($1,025,000/1.25)]

(61,500)

30% x [$3,000,000 – ($3,000,000/1.2)]

150,000

30% x [$1,000,000 – ($1,000,000/1.25)]

60,000 $472,500

Advanced Accounting, 5th Edition

b.

Investment, 1/1/22 Share of net income, 2022 through 2023 Unconfirmed profit on upstream ending inventory, 12/31/23 Unconfirmed profit on downstream ending inventory, 12/31/23 Investment, 12/31/23 Equity in net income, 2024 Investment, 12/31/24

$15,000,000 840,000

30% x $2,800,000 30% x [$3,000,000 – ($3,000,000/1.2)]

(150,000)

30% x [$1,000,000 – ($1,000,000/1.25)]

(60,000) 15,630,000 472,500 $16,102,500

Note: Confirmed and unconfirmed profits on 2022 inventories cancel out over time and do not affect the 12/31/23 investment balance. 22.

Topic: Equity method investments LO 2 Konica Company acquires 40% of the voting stock of Lexmark Corporation on January 1, 2020, for $50,000,000, and reports it using the equity method. There was no basis difference. Lexmark reports total net income of $15,000,000 for the period 2020 - 2023, and $2,000,000 for 2024. Lexmark declared and paid no dividends during the period 2020 – 2024. Lexmark sells merchandise to Konica at a markup of 25% on cost. The inventory balances held by Konica, purchased from Lexmark, are as follows. Inventory Held by Konica; Purchased from Lexmark December 31, 2023 $1,250,000 December 31, 2024 1,500,000 Required a. Calculate equity in net income of Lexmark, reported on Konica’s 2024 income statement. b. Calculate investment in Lexmark, reported on Konica’s December 31, 2024 balance sheet. ANS: a.

b.

40% 2024 net income Unconfirmed profit on upstream ending inventory Confirmed profit on upstream beginning inventory Equity in net income, 2021 Investment, 1/1/20 Share of net income, 2020-2023 Unconfirmed profit on upstream ending inventory, 12/31/23 Investment, 12/31/23 Equity in net income, 2024 Investment, 12/31/24

Test Bank, Chapter 1

40% x $2,000,000

$ 800,000

40% x [$1,500,000 – ($1,500,000/1.25)]

(300,000)

40% x [$1,250,000 – ($1,250,000/1.25)]

250,000 $ 750,000

40% x $15,000,000 40% x ($1,250,000 - $1,250,000/1.25)

$50,000,000 6,000,000 (250,000) 55,750,000 750,000 $56,500,000

©Cambridge Business Publishers, 2023 1-49

23.

Topic: Equity method investments LO 2 On January 1, 2022, Acme Beverages purchases 40% of the stock of Health Juices for $1,500,000, when the total book value of Health Juices was $3,000,000. Acme reports its investment using the equity method. The basis difference is attributed to goodwill, and there are no intercompany transactions. Health Juices reports the following income and dividends for 2022 through 2024. Health Juices does not report OCI.

2022 2023 2024

Income (loss) $120,000 (20,000) 60,000

Dividends $10,000 -6,000

Required a. Calculate the basis difference that is attributed to goodwill. b. Calculate the investment balance, reported on Acme’s December 31, 2024 balance sheet. ANS: a. b.

$1,500,000 – (40% x $3,000,000) = $300,000 Investment cost + 40% reported income 2022-2024 - 40% dividends 2022-2024 Investment balance, 12/31/24

24.

40% x $160,000 40% x $16,000

$1,500,000 64,000 (6,400) $1,557,600

Topic: Equity method investments and investee losses LO 2 Delta Corporation has owned 45% of the voting stock of Egret Company for many years, originally purchased at book value and reported using the equity method. Egret has reported significant net losses in recent years, and at the beginning of 2023, the carrying value of the investment is $1,000,000. Egret reports a loss of $3,000,000 for 2023, and the loss is considered other than temporary. In 2024 Egret unexpectedly reports net income of $900,000. Required a. What amount should Delta report on its 2023 income statement as equity in net loss of Egret? b. What amount should Delta report on its 2024 income statement as equity in net income of Egret? ANS: a. b.

45% x $3,000,000 = $1,350,000, but because the loss is considered other than temporary, Delta reports a 2023 equity in net loss of $1,000,000, which brings the investment balance to zero. 45% x $900,000 = $405,000. However, Delta has to make up for the $350,000 loss it didn’t recognize last year. Therefore, equity in net income for 2024 is ($405,000 - $350,000) = $55,000.

©Cambridge Business Publishers, 2023 1-50

Advanced Accounting, 5th Edition

25.

Topic: Change to significant influence investment LO 2 Franklin Corporation owns 15% of the voting stock of Grantham Company and has been reporting it as an equity investment with no significant influence. At the beginning of the current year, the investment has a fair value of $50,000,000. Franklin originally purchased its 15% interest for $35,000,000. Franklin purchases an additional 10% interest in Grantham’s voting stock for $40,000,000 and determines that the equity method is now appropriate. Any basis difference is attributed to goodwill. Grantham reports net income of $3,000,000 for the current year, and declares and pays $500,000 in dividends. The year-end fair value of Franklin’s 25% interest is $100,000,000. Required At what amount does Franklin report the investment on its year-end balance sheet? ANS:

26.

$50,000,000 + $40,000,000 + [($3,000,000 - $500,000) x 25%] = $90,625,000

Topic: Change from significant influence investment LO 2 Natural Beverages invests in 20% of the stock of Nature Bottlers for $20 million in cash on January 1, 2021, and reports the investment using the equity method. On January 1, 2023, Natural Beverages determines that it no longer has a significant influence on Nature Bottlers’ decisions, and changes its reporting accordingly. The fair value of the investment at December 31, 2021, 2022, and 2023 is $21 million, $21.5 million, and $23 million, respectively. Nature Bottlers reports the following for 2021-2023:

Net income OCI (L)

2021 $1,000,000 40,000

2022 $1,200,000 (10,000)

2023 $1,300,000 35,000

Any basis difference is attributed to goodwill and there are no intercompany transactions. Nature Bottlers declares no dividends during 2021-2023. Required Prepare the journal entries Natural Beverages makes for this investment during 2021-2023. What is the investment balance at December 31, 2023? ANS:

January 1, 2021 Investment in Nature Bottlers

20,000,000 Cash

20,000,000

December 31, 2021 Investment in Nature Bottlers

208,000 Equity in NI (income) Equity in OCI (OCI)

December 31, 2022 Investment in Nature Bottlers Equity in OCL (OCI)

238,000 2,000 Equity in NI (income)

Test Bank, Chapter 1

200,000 8,000

240,000

©Cambridge Business Publishers, 2023 1-51

January 1, 2023 Reclassification of OCI (OCI)

6,000 Investment in Nature Bottlers

Investment in Nature Bottlers

6,000 1,060,000

Unrealized gain (income) $1,060,000 = $21,500,000 - $20,440,000. December 31, 2023 Investment in Nature Bottlers

1,060,000

1,500,000

Unrealized gain (income) $1,500,000 = $23,000,000 - $21,500,000.

1,500,000

The investment balance at December 31, 2023 is its fair value, $23 million. 27.

Topic: Joint ventures LO 2 On January 1, 2019, Coca-Cola and another company jointly acquired Argo Natural Juices. Each acquiring company paid $10 million to acquire 50% of Argo. At the date of acquisition, Argo’s book value was $6 million, consisting of $2 million in capital stock, $3.7 million in retained earnings, and 0.3 million in accumulated other comprehensive income. The basis difference was attributed entirely to goodwill. It is now December 31, 2024. Argo reported net income of $240,000, other comprehensive income of $10,000, and declared and paid cash dividends of $40,000 in 2024. Coca-Cola treats Argo as an equity method investment. Argo’s balance sheet at December 31, 2024, is as follows: Argo 500,000 30,500,000 $ 31,000,000

Current assets Plant & equipment, net Total assets

$

Liabilities Capital stock Retained earnings Accumulated other comprehensive loss Total liabilities & equity

$ 23,000,000 2,000,000 6,100,000 (100,000) $ 31,000,000

Required a. Prepare Coca-Cola’s 2024 entries related to its investment in Argo. b. Calculate the ending balance in Investment in Argo, appearing on Coca-Cola’s December 31, 2024 balance sheet. ANS: a. Cash Investment in Argo

20,000 105,000 Equity in NI of Argo (income) Equity in OCI of Argo (OCI)

©Cambridge Business Publishers, 2023 1-52

120,000 5,000

Advanced Accounting, 5th Edition

b.

28.

Investment cost Change in retained earnings ($6,100,000 – $3,700,000) x 50% Change in AOCI/L ($300,000 + $100,000) x 50% Investment balance, December 31, 2024

$10,000,000 1,200,000 (200,000) $11,000,000

Topic: Joint ventures LO 2 At the beginning of the current year, Edgecor Corporation and another company created a joint venture. Each company contributed $10 million and has a 50% interest in the joint venture. At the end of the year, the joint venture reports the following balance sheet: Current assets Land, buildings, and equipment, net Investments in securities Total assets

Joint Venture $ 18,000,000 200,000,000 2,000,000 $220,000,000

Liabilities Capital stock Retained earnings Accumulated other comprehensive income Total liabilities & equity

$197,400,000 20,000,000 2,500,000 100,000 $220,000,000

The joint venture declared and paid a total of $500,000 in dividends during the year. The estimated market value of a 50% ownership of the joint venture is $14,000,000 at the end of the year. Edgecor uses the equity method to account for its joint venture. Required a. What was the joint venture’s reported net income for the year? b. Prepare a schedule calculating Edgecor’s ending investment balance. c. Edgecor’s beginning and ending credit balances for accumulated other comprehensive income were $160,000 and $170,000, respectively. What was Edgecor’s other comprehensive income or loss from its own operations for the year? ANS: a. b.

c.

The joint venture’s ending retained earnings is $2,500,000 and it declared and paid dividends of $500,000. Therefore its net income was $3,000,000. Beginning investment balance Equity in NI (50% x $3,000,000) Equity in OCI (50% x $100,000) Share of dividends (50% x $500,000) Ending investment balance

$10,000,000 1,500,000 50,000 (250,000) $11,300,000

The change in Edgcor’s AOCI is a positive $10,000. Since equity in the OCI of the joint venture is $50,000, the other comprehensive loss from Edgecor’s operations is $40,000.

Test Bank, Chapter 1

©Cambridge Business Publishers, 2023 1-53

29.

Topic: Equity investments: no influence versus significant influence LO 1, 2 Spritz Company owns 15% of the stock of Turner Corporation. The investment was purchased for $200,000. At the beginning of the current year, the investment had a fair value of $230,000. At the end of the year, its fair value is $250,000. Turner reported net income of $100,000 for the year, and declared and paid cash dividends of $60,000. Spritz sells products to Turner at a markup of 20% on cost. Turner’s ending inventory for the year included a balance of $10,800 for products purchased from Spritz. Turner’s beginning inventory included no products purchased from Spritz. Required Prepare the journal entries Spritz makes during the year to record the above facts, assuming: a. b.

Spritz treats its investment as an equity investment with no significant influence. Spritz treats its investment as having significant influence and uses the equity method.

ANS: a. Investment in equity securities

20,000 Unrealized gain (income)

Cash

20,000 9,000

Dividend income (income) b.

9,000

Equity in net income calculation: 15% x {$100,000 – [($10,800 – ($10,800/1.2)]} = $14,730 Cash Investment in Turner

9,000 5,730 Equity in NI of Turner (income)

©Cambridge Business Publishers, 2023 1-54

14,730

Advanced Accounting, 5th Edition

30.

Topic: Merger LO 3 Delicious Delicacies acquires the assets and liabilities of Elegant Eateries for $10,000,000 cash. At that date, Elegant Eateries’ balance sheet is as follows: Assets Current assets Plant & equipment, net Total

$ 1,000,000 10,000,000 _ _______ $11,000,000

Liabilities and Equity Current liabilities Long-term debt Capital stock Total

$

900,000 8,000,000 2,100,000 $11,000,000

Elegant’s current assets are overvalued by $600,000, and its plant and equipment is overvalued by $6,000,000. Elegant has previously unreported brand names of $5,000,000. Required Prepare the journal entry made by Delicious Delicacies to record its acquisition of Elegant Eateries. ANS: Current assets Plant & equipment Brand names Goodwill

400,000 4,000,000 5,000,000 9,500,000 Current liabilities Long-term debt Cash

Test Bank, Chapter 1

900,000 8,000,000 10,000,000

©Cambridge Business Publishers, 2023 1-55

31.

Topic: Merger LO 3 Kent Industries acquires the assets and liabilities of Stow Inc. for $100,000,000 cash. Stow Inc. has the following assets and liabilities, at fair value: Cash Receivables Inventories Plant assets Notes payable

$

300,000 1,400,000 9,000,000 28,000,000 25,000,000

Required a. Calculate the goodwill Kent records for this acquisition. b. If Stow’s notes payable had a market value of $23,000,000, how is goodwill affected? Calculate the amount and direction of change. ANS: a.

b.

Price paid Fair value of identifiable net assets acquired: Cash Receivables Inventories Plant assets Notes payable Goodwill

$100,000,000 $

300,000 1,400,000 9,000,000 28,000,000 (25,000,000)

13,700,000 $86,300,000

If notes payable have a market value of $23,000,000, a decrease of $2,000,000, the fair value of identifiable net assets acquired increases to $15,700,000 (= $13,700,000 + $2,000,000) and goodwill declines to $84,300,000 (= $86,300,000 - $2,000,000).

©Cambridge Business Publishers, 2023 1-56

Advanced Accounting, 5th Edition

32.

Topic: Merger, stock acquisition LO 3 International Beverages acquires Ecoplastics Recycling Company for $100,000,000 in cash. Ecoplastics’ balance sheet reports the following assets and liabilities, at fair value: Cash & receivables Inventories Buildings & equipment Patents & trademarks Current liabilities Long-term debt

$

500,000 1,100,000 35,000,000 10,000,000 7,000,000 40,000,000

Ecoplastics also has developed technology, valued at $15,000,000, which does not appear on its balance sheet but is appropriately reported by International Beverages on acquisition. Required a. Prepare the journal entry International Beverages makes to record the acquisition of Ecoplastics, assuming this is a merger. b. Repeat Part a, assuming this is a stock acquisition. ANS: a. Cash & receivables Inventories Buildings & equipment Patents & trademarks Developed technology Goodwill

500,000 1,100,000 35,000,000 10,000,000 15,000,000 85,400,000 Current liabilities Long-term debt Cash

7,000,000 40,000,000 100,000,000

b. Investment in Ecoplastics

100,000,000 Cash

Test Bank, Chapter 1

100,000,000

©Cambridge Business Publishers, 2023 1-57

33.

Topic: Merger LO 3 Ferodo Industries acquires the assets and liabilities of Grundig Inc. for $85,000,000 cash. At that date, Grundig’s balance sheet is as follows: Assets Cash, receivables Merchandise inventory Land, buildings, and equipment, net

$

600,000 3,000,000

300,000,000

_________ $303,600,000

Total

Liabilities and equity Current liabilities Long-term bonds payable Common stock Additional paid-in capital Retained loss Accumulated other comprehensive loss

$ 6,000,000 300,000,000 300,000 60,000,000 (53,200,000) (9,500,000) $303,600,000

At the acquisition date, Grundig’s assets and liabilities have the following fair values: Fair value $ 600,000 2,500,000 100,000,000 6,000,000 300,000,000

Cash, receivables Merchandise inventory Land, buildings, and equipment Current liabilities Long-term bonds payable Grundig has $5,000,000 in unreported technology.

Required a. Prepare the journal entry made by Ferodo to record its acquisition of Grundig. b. Grundig’s book value is -$2,400,000. Explain why Ferodo paid $85,000,000, or $87,400,000 more than book value for Grundig. ANS: a. Cash, receivables Merchandise inventory Land, buildings, and equipment Technology Goodwill

600,000 2,500,000 100,000,000 5,000,000 282,900,000 Current liabilities Long-term bonds payable Cash

©Cambridge Business Publishers, 2023 1-58

6,000,000 300,000,000 85,000,000

Advanced Accounting, 5th Edition

b.

Grundig’s identifiable book values differ from fair value as follows: Merchandise inventory Land, buildings, and equipment Technology Total

Fair value – Book value $ (500,000) (200,000,000) 5,000,000 $(195,500,000)

This analysis indicates that Ferodo should pay $195,500,000 less than book value for Grundig, or -$197,900,000 (= -$2,400,000 - $195,500,000), based on Grundig’s identifiable net asset value. Ferodo was willing to pay $85,000,000 more than book value, indicating that Grundig has unidentifiable intangible assets, valued at $282,900,000 (= $85,000,000 + $195,500,000 + $2,400,000), which it records as goodwill. These assets could include reputation, work force, and other intangibles expected to create future revenues. On the other hand, Ferodo could have paid too much for Grundig, perhaps due to pressure from competing potential buyers or from Grundig’s existing shareholders.

Test Bank, Chapter 1

©Cambridge Business Publishers, 2023 1-59

34.

Topic: Merger LO 3 Parrott Corporation acquires all of the assets and liabilities of Swann Company. The fair values of Swann’s reported assets and liabilities are estimated to be as follows at the date of acquisition: Fair Value Dr (Cr) $ 400 1,500 (1,600)

Current assets Plant & equipment Liabilities

Parrott determines that Swann has not recorded the following intangible assets on its books. These intangible assets are appropriately reported by Parrott on acquisition. Fair Value $ 500 200

Completed technology Favorable leases

Required a. Assume Parrott pays $1,000 in cash to acquire all of Swann’s assets and liabilities. Prepare the journal entry Parrott makes to record the acquisition. b. Now assume Parrott pays $5,000 in cash to acquire all of Swann’s assets and liabilities. Prepare the journal entry Parrott makes to record the acquisition. ANS: a. Current assets Plant & equipment Completed technology Favorable leases

400 1,500 500 200 Liabilities Cash

1,600 1,000

b. Current assets Plant & equipment Completed technology Favorable leases Goodwill

400 1,500 500 200 4,000 Liabilities Cash

©Cambridge Business Publishers, 2023 1-60

1,600 5,000

Advanced Accounting, 5th Edition

35.

Topic: Merger LO 3 Tasty Drinks Company merges with Unkle Company, paying $2,000,000 for Unkle’s net assets. Unkle’s reported net assets total $2,100,000, but the fair value of Unkle’s noncurrent assets is $2,500,000 below book value, and it has unreported brand names valued at $100,000. Required How much goodwill does Tasty Drinks report? ANS: $2,000,000 – ($2,100,000 - $2,500,000 + $100,000) = $2,300,000.

36.

Topic: Change from significant influence to control LO 3 Xavier Company owns 45% of the voting stock of Yellig Corporation, and reports the investment using the equity method. The investment balance is currently $50,000,000, but its fair value is $80,000,000. Xavier pays $100,000,000 in cash to acquire the remainder of Yellig’s stock, and reports the transaction as a merger. The fair value of Yellig’s identifiable net assets is $160,000,000. Required Prepare the journal entries to record acquisition of the remaining 55% interest. ANS: Investment in Yellig

30,000,000 Gain (income)

30,000,000

Identifiable net assets Goodwill

160,000,000 20,000,000 Cash Investment in Yellig

37.

100,000,000 80,000,000

Topic: Change from control to significant influence LO 3 Bubbly Beverages owns all of the stock of Organic Muffins Inc. and includes Organic’s net assets on its reported balance sheet. Bubbly sells 70% of its investment in Organic to outside investors for $32,000,000 and changes its reported for the remaining investment to the equity method. The carrying value of Organic’s net assets is $40,000,000, and the fair value of the remaining investment is $9,500,000. Required Prepare the journal entry to record the deconsolidation on Bubbly’s books. ANS: Investment in Organic Cash

9,500,000 32,000,000 Net assets Gain (income)

Test Bank, Chapter 1

40,000,000 1,500,000 ©Cambridge Business Publishers, 2023 1-61

TEST BANK CHAPTER 2 Mergers and Acquisitions MULTIPLE CHOICE 1.

2.

Topic: Acquisition accounting LO 1 ASC Topic 805 provides standards for reporting business combinations. Which one of the following is most likely to be considered a business combination? a. b. c. d.

Formation of a joint venture by two or more existing companies. Formation of a new subsidiary. Purchase of a controlling interest in an international company. Merger of an existing subsidiary with a parent.

ANS:

c

Topic: Acquisition accounting LO 1 The requirements of ASC Topic 805 do not apply to: a. b. c.

3.

4.

d.

Acquisitions where control is obtained over one or more businesses Combinations of two or more companies already under common control Acquisitions where control is obtained by acquiring the voting stock of the acquired company Acquisitions of product lines and divisions

ANS:

b

Topic: Acquisition accounting LO 1 ASC Topic 805 only applies to an acquisition if: a. b. c. d.

You are buying all the assets and liabilities of another company. You are buying a business and obtaining control of that business. You are a public company buying the assets and liabilities of another public company. You are buying over 50% of the voting stock of another company.

ANS:

b

Topic: Acquisition accounting LO 1 Acquisition accounting only applies to the acquisition of a business. What are the three elements of a business, per ASC Topic 805? a. b. c. d.

assets, liabilities, and equity facilities, workforce, and contracts input, process, and output products, services, and workforce

Test Bank, Chapter 2

© Cambridge Business Publishers, 2023 2-1

ANS: 5.

6.

7.

8.

c

Topic: Acquisition accounting LO 1 Acquisition accounting only applies to the acquisition of a business. ASC Topic 805 identifies an initial condition that immediately determines that the transaction is not an acquisition of a business, without further analysis. What is this condition? a. b. c. d.

Acquisition of a division within another company. Acquisition of a single identifiable asset. Acquisition of only intangible assets. Acquisition of a single product line.

ANS:

b

Topic: Acquisition date LO 1 A company acquires another company by issuing its stock to the acquired company’s shareholders. The issued stock is valued at its fair value a. b. c. d.

On the date the merger agreement is signed. On the date the acquiring company gains control. On the date the stock is issued. At the beginning of the acquiring company’s next financial reporting period.

ANS:

b

Topic: Acquisition date LO 1 A company acquires the assets and liabilities of another company. The acquired company’s assets and liabilities are reported on the acquiring company’s books at fair value as of what date? a. b. c. d.

The day the acquiring company takes control of the acquired company The day the acquisition is announced to the public The day the acquiring company obtains the financing necessary for the acquisition The day the acquiring company completes its research concerning the value of the acquired assets and liabilities

ANS:

a

Topic: Identification of acquiring company LO 1 In acquisition accounting, one company is identified as the acquiring company. Which statement below is most likely to be true concerning the acquiring company. a. b. c. d.

It pays cash for the acquisition rather than issuing stock. Its shareholders sell their stock before the acquisition takes place. It is largest, in terms of assets, revenue, or profits. Its shareholders receive a premium over market value in the exchange of shares.

© Cambridge Business Publishers, 2023 2-2

Advanced Accounting, 5th Edition

ANS: 9.

Topic: Valuation of acquired assets and liabilities LO 1 Proctor Company acquires the assets and liabilities of Singer Corporation, in a transaction reported as a merger. How are the assets and liabilities of Proctor and Singer reported? a. b. c. d. ANS:

10.

Proctor’s assets and liabilities remain at book value, and Singer’s assets and liabilities are reported at fair value at the date of acquisition. Singer’s assets and liabilities remain at book value, and Proctor’s assets and liabilities are reported at fair value at the date of acquisition. The assets and liabilities of both Proctor and Singer are reported at fair value at the date of acquisition. Proctor’s assets and liabilities remain at book value, and Singer’s assets and liabilities are reported at fair value at the balance sheet date, each time a balance sheet is prepared. a

Topic: Valuation of acquired assets and liabilities LO 1 Proctor Company and Singer Corporation are acquired by a new legal entity, which absorbs the assets and liabilities of both companies. Singer is designated as the acquiring company. How are the assets and liabilities of Proctor and Singer reported? a. b. c. d. ANS:

11.

c

Proctor’s assets and liabilities remain at book value, and Singer’s assets and liabilities are reported at fair value at the date of acquisition. Singer’s assets and liabilities remain at book value, and Proctor’s assets and liabilities are reported at fair value at the date of acquisition. The assets and liabilities of both Proctor and Singer are reported at fair value at the date of acquisition. Singer’s assets and liabilities remain at book value, and Proctor’s assets and liabilities are reported at fair value at the balance sheet date, each time a balance sheet is prepared. b

Topic: Recognition of acquired assets LO 1 The following intangibles have been identified for an acquired company. Which one(s) are most likely to be separately capitalized by the acquiring company, per ASC Topic 805? • •

Franchise agreements Non-competition agreements

• •

Customer lists Potential contracts

a. b. c. d.

All four intangibles Franchise agreements, customer lists, and potential contracts Franchise agreements and potential contracts Franchise agreements, customer lists, and non-competition agreements

ANS:

d

Test Bank, Chapter 2

© Cambridge Business Publishers, 2023 2-3

12.

13.

14.

15.

Topic: Recognition of acquired assets, private companies LO 1 When a private company acquires another company, GAAP for private companies allows which identifiable intangible assets to be combined with goodwill and not separately capitalized? a. b. c. d.

Franchise agreements Order backlogs Databases Broadcast rights

ANS:

b

Topic: Valuation of acquired assets LO 1 Company A has unreported identifiable intangible assets that are very valuable, and would like investors to know about them. Which one of the following actions will allow these intangible assets to be reported? a. b. c. d.

Get a third-party appraisal of the intangible assets. Reclassify Company A’s reported plant and equipment as intangible assets. Find a company to combine with, and designate Company A as the acquirer. Find a company to combine with, and designate Company A as the company being acquired.

ANS:

d

Topic: Intangible assets acquired LO 1 Which of the following is least likely to be reported as an acquired identifiable intangible asset? a. b. c. d.

In-process research and development Synergies in developing future products Production processes Broadcast rights

ANS:

b

Topic: Valuation of intangible assets acquired LO 1 What is the most common way to value acquired intangible assets? a. b. c. d.

Income method Market approach Cost approach Opportunity cost approach

ANS:

a

© Cambridge Business Publishers, 2023 2-2

Advanced Accounting, 5th Edition

16.

Topic: Valuation of intangible assets acquired LO 1 Acquired developed technology is expected to generate after-tax operating income of $60,000 in the first year and grow at a rate of 8% over the next two years. Depreciation expense included in operating expenses is expected to be $6,000 in each of the next three years. The value of acquired developed technology is estimated as the present value of operating cash flow over the first three years. The appropriate discount rate is 20%, and cash flows are assumed to occur at year-end for purposes of valuing acquired developed technology. Which value is closest to the amount at which the acquired developed technology should be reported on the acquiring company’s balance sheet? a. b. c. d.

$155,000 $148,000 $141,000 $159,000

ANS:

b Operating profit Depreciation expense Operating cash flow

Year 1 $60,000 6,000 $66,000

Year 2 $64,800 6,000 $70,800

Year 3 $69,984 6,000 $75,984

$66,000/1.2 + $70,800/(1.2)2 + $75,984/(1.2)3 = $148,139 17.

Topic: Valuation of intangible assets acquired LO 1 An acquired company has previously unreported technology that meets the criteria for recognition as an identifiable intangible asset. Forecasted net cash inflow for the first year is $500,000, and it is expected to grow at a rate of 4% for the next two years. The appropriate discount rate is 10%. What amount is closest to the correct value for the intangible asset, recorded at the date of acquisition? Assume all cash flows occur at the end of the year. a. b. c. d.

$1,090,000 $1,202,000 $1,291,000 $1,305,000

ANS:

c $500,000/1.1 + $520,000/(1.1)2 + $540,800/(1.1)3 = $1,290,608

Test Bank, Chapter 2

© Cambridge Business Publishers, 2023 2-3

18.

Topic: Goodwill LO 1 Pringle Corporation acquires Snax Company at an acquisition cost of $45,000,000. Identifiable assets and liabilities of Snax are as follows: Book Value Fair Value Current assets $ 1,500,000 $ 800,000 Land, buildings, and equipment (net) 16,000,000 7,000,000 Brand names -08,000,000 Liabilities 12,000,000 11,500,000 Goodwill arising from this acquisition is:

19.

a. b. c. d.

$17,700,000 $39,500,000 $15,500,000 $40,700,000

ANS:

d $45,000,000 – ($800,000 + $7,000,000 + $8,000,000 – $11,500,000) = $40,700,000

Topic: Goodwill calculation LO 1 Prolean Corporation acquired Setlan Company for $10,000,000 in cash, paid to Setlan’s former owners. The carrying value of Setlan’s reported net assets totaled $2,000,000 at the date of acquisition. Setlan's reported asset and liability values equaled their fair values, except for the following:

Inventory Land Identifiable intangible assets

Fair Value $ 15,000 80,000 400,000

Book Value $40,000 20,000 0

The identifiable intangible assets meet ASC Topic 805 requirements for separate capitalization. Goodwill reported for this acquisition is: a. b. c. d.

$7,965,000 $7,515,000 $7,565,000 $9,505,000

ANS:

c Cost Fair value of IDNA: Book value Inventory revaluation Land revaluation Recognition of ID intangibles Goodwill

© Cambridge Business Publishers, 2023 2-4

$10,000,000 $2,000,000 (25,000) 60,000 400,000

2,435,000 $7,565,000

Advanced Accounting, 5th Edition

20.

Topic: Goodwill calculation, previous goodwill LO 1 Mark Company acquires Nap Industries for total consideration of $50 million, recorded as a business combination. Nap’s reported net assets have a fair value of $10 million, including reported goodwill of $3 million. Mark identifies the following previously unreported intangible assets attributable to Nap: • • •

Customer lists, fair value $2 million Developed technology, fair value $3.5 million Skilled workforce, fair value $4 million

The goodwill arising from this business combination is

21.

a. b. c. d.

$33.5 million $34.5 million $37.5 million $40 million

ANS:

c $50 – ($10 - $3 + $2 + $3.5) = $37.5 million

Topic: Valuation of assets acquired LO 1 Pyn Corporation acquires all of Sys Company at an acquisition cost of $100,000,000 in cash. Fair values of Sys’ assets and liabilities are as follows: Current assets Land, buildings & equipment Brand names Customer lists Skilled workforce Potentially profitable future projects Liabilities

Fair Value $ 1,000,000 8,000,000 3,000,000 4,000,000 15,000,000 10,000,000 8,000,000

Pyn records goodwill of: a. b. c. d.

$67,000,000 $77,000,000 $82,000,000 $92,000,000

ANS:

d The entry to record the combination is: Current assets Land, buildings & equipment Brand names Customer lists Goodwill Liabilities Cash

Test Bank, Chapter 2

1,000,000 8,000,000 3,000,000 4,000,000 92,000,000 8,000,000 100,000,000 © Cambridge Business Publishers, 2023 2-5

22.

Topic: Goodwill calculation LO 1 X Company acquires all of Y Company’s assets and liabilities for $15,000,000 in cash. The fair values of Y’s assets and liabilities approximate their book values, except Y has developed technology valued at $5,000,000 that is not reported on its balance sheet, and its buildings are overvalued by $7,000,000. Here is Y’s balance sheet just prior to the acquisition: Current assets Land, buildings, and equipment Total assets

Y Company $ 500,000 9,500,000 $10,000,000

Liabilities Common stock, $1 par Additional paid-in capital Retained earnings Treasury stock Accumulated other comprehensive income Total liabilities and equity

$ 6,000,000 100,000 2,915,000 1,000,000 (20,000) 5,000 $10,000,000

How much goodwill is recognized for this acquisition? a. b. c. d.

$15,000,000 $ 7,000,000 $13,000,000 $19,000,000

ANS: c Cost Fair value of IDNA acquired: Reported net assets ($10,000,000 - $6,000,000 – $7,000,000) Developed technology Goodwill 23.

$15,000,000 $(3,000,000) 5,000,000

2,000,000 $13,000,000

Topic: Goodwill calculation, negative fair value of identifiable net assets LO 1 Yale Company acquires all of Zip Company’s assets and liabilities for $20 million in cash. Zip’s reported net assets total $4 million, it has previously unreported identifiable intangible assets of $1 million, and its plant and equipment is overvalued by $6.5 million. How much goodwill is recognized for this acquisition? a. b. c. d.

$16 million $21.5 million $15 million $9.5 million

ANS:

b $20 – ($4 + $1 - $6.5) = $21.5 million

© Cambridge Business Publishers, 2023 2-6

Advanced Accounting, 5th Edition

24.

Topic: Net asset valuation, prior goodwill LO 1 Kelly Corporation acquires the assets and liabilities of Lawson Company. Below is the balance sheet of Lawson, along with fair values of its assets and liabilities, at the date of acquisition.

Current assets Plant & equipment Identifiable intangibles Goodwill Current liabilities Long-term liabilities Capital stock Retained earnings

Book value Dr (Cr) $ 1,000,000 60,000,000 10,000,000 4,000,000 (2,000,000) (52,000,000) (3,000,000) (18,000,000)

Fair value Dr (Cr) $ 500,000 30,000,000 35,000,000 10,000,000 (2,000,000) (52,000,000)

Kelly pays $50,000,000 in cash for the assets and liabilities of Lawson. How much goodwill does Kelly record for this acquisition?

25.

a. b. c. d.

$28,500,000 $34,500,000 $38,500,000 $0

ANS:

c $50,000,000 – ($500,000 + $30,000,000 + $35,000,000 – $2,000,000 – $52,000,000) = $38,500,000

Topic: Contingent Consideration LO 2 Peters Corporation acquires all of the voting shares of Stefan Company by issuing 500,000 shares of $1 par common stock valued at $10,000,000. Included in the agreement is a contingency guaranteeing the former shareholders of Stefan that Peters’ shares will be worth at least $18 per share after one year. If the shares are worth less, Peters will pay the former shareholders of Stefan enough cash to reimburse them for the decline in value below $18 per share. Peters estimates that there is a 5% chance that the stock value will be $16 at the end of one year, and a 95% chance that the stock value will be $18 per share or higher. A discount rate of 10% is appropriate. Which amount below is closest to the value of the contingent consideration at the date of acquisition? a. b. c. d.

$1,000,000 $ 45,000 $ 50,000 $ 865,000

ANS:

b [($18 – $16) x 500,000] x 0.05 = $50,000/1.10 = $45,455

Test Bank, Chapter 2

© Cambridge Business Publishers, 2023 2-7

26.

27.

Topic: Acquisition cost LO 2 Poppy Corporation acquires Stevens Company, paying the owners of Stevens 1,000,000 new shares with a par value of $0.50 per share and a fair value of $60 per share at the date of acquisition. Poppy also incurs cash registration fees of $50,000 and consulting fees of $500,000. Several of Stevens’ former owners will stay on as employees, and Poppy agrees to pay them an additional amount if they remain with the company. The present value of this agreement at the date of acquisition is $300,000. What is Poppy’s reported acquisition cost? a. b. c. d.

$60,000,000 $60,500,000 $60,300,000 $60,800,000

ANS:

a $60 x 1,000,000 = $60,000,000. Registration fees reduce APIC, consulting fees are expensed, and the contingent payment to employees is compensation for future services.

Topic: Acquisition cost and goodwill LO 1, 2 A company acquires the assets and liabilities of another company. The fair value of the acquired company’s identifiable net assets is $5,000,000. The acquisition transaction includes the following: • • • •

$5,000,000 in cash paid to the former owners of the acquired company 150,000 new shares of stock with a market value $45/share. Registration fees, paid in cash, were $1,000,000. $4,000,000 in cash paid to the underwriter for consulting services Earnings contingency with an expected present value of $3,000,000 at the date of acquisition

Goodwill for this acquisition is: a. b. c. d.

$11,750,000 $14,750,000 $10,750,000 $ 9,750,000

ANS:

d Acquisition cost = $5,000,000 + (150,000 x $45) + $3,000,000 = $14,750,000 Goodwill = $14,750,000 – $5,000,000 = $9,750,000

© Cambridge Business Publishers, 2023 2-8

Advanced Accounting, 5th Edition

28.

Topic: Acquisition-related costs LO 2 Prescott acquires all of the stock of Sanders by issuing new stock to the previous shareholders of Sanders. Prescott paid consulting, accounting, and legal fees, and registration fees for the new stock issued by Sanders. What effect will these two items have on acquisition cost? a. b. c. d. ANS:

29.

30.

Consulting Fees No effect Increase No effect Increase

Registration Fees Increase Increase No effect No effect

c Consulting, accounting, and legal fees are expensed as incurred, and registration fees reduce APIC. Neither adds to acquisition cost.

Topic: Acquisition cost, contingent payments LO 2 The expected present value of contingent payments made by an acquiring company to the former owners of the acquired company are part of the acquisition cost a. b. c. d.

At all times. When they are compensation for future employee services. When they are tied to a future company performance goal. Never.

ANS:

c

Topic: Acquisition cost, earnings contingency LO 2 An acquirer includes an earnings contingency in the acquisition agreement. Additional cash will be paid to the former owners of the acquired company if the acquired company’s performance exceeds certain thresholds within the next three years. The payoff, if any, would occur three years after the acquisition. Which of the following statements is false? a.

c. d.

The earnings contingency is not reported at the date of acquisition but is reported as an adjustment to the acquisition price if and when paid. The earnings contingency is reported as a liability on the acquiring company’s books at the date of acquisition. If the discount rate decreases, the earnout value increases. The earnings contingency usually increases reported goodwill at the date of acquisition.

ANS:

a

b.

Test Bank, Chapter 2

© Cambridge Business Publishers, 2023 2-9

31.

32.

33.

Topic: Acquisition cost, earnings contingency LO 2 ABC Corporation acquires the assets and liabilities of XYZ Company in a merger. If ABC offers the former shareholders of XYZ an earnings contingency, what is the likely result of having this contingency, on ABC’s balance sheet at the date of acquisition? a. b. c. d.

ABC will report less goodwill. ABC will revalue XYZ’s previously reported assets at higher amounts. ABC will revalue XYZ’s previously reported liabilities at higher amounts. ABC will report a liability for the earnings contingency.

ANS:

d

Topic: Acquisition cost, registration fees LO 2 Parish Corporation issues new stock with $1/share par value to the former shareholders of Sanford Company, in a merger. The registration fees Parish pays to issue the new stock will a. b. c. d.

Increase goodwill. Reduce Parish’s income. Increase previously unreported identifiable intangible assets acquired. Reduce Parish’s additional paid-in capital.

ANS:

d

Topic: Acquisition costs and goodwill LO 1, 2 Which one of the following items increases the amount of goodwill recognized in an acquisition? a. b.

d.

Consulting fees paid to Goldman Sachs Payments offered to employees of the acquired company that are based on their future performance An earnout added to an acquisition agreement to motivate the acquired company’s shareholders to sell Registration fees the acquiring company pays to issue new stock in an acquisition

ANS:

c

c.

34.

Topic: Acquisition costs LO 2 All of the following increase the acquisition cost of the acquired company except: a. b. c. d.

Fair market value of stock issued by the acquiring company to the former shareholders of the acquired company Fair market value of debt issued by the acquiring company to acquire the voting stock of the acquired company Payments to the former owners of the acquired company that are contingent on continued employment in the firm Earnings contingency that is dependent on the future performance of the acquired company

© Cambridge Business Publishers, 2023 2-10

Advanced Accounting, 5th Edition

ANS: 35.

36.

Topic: Valuation of acquired net assets, acquisition costs LO 1, 2 ABC Corporation acquires the assets and liabilities of XYZ Company. Holding everything else constant, which situation will result in ABC reporting more goodwill on this acquisition? a. b. c. d.

XYZ has previously unreported identifiable intangible assets. The market rate of interest on XYZ’s liabilities has declined. The fair value of XYZ’s buildings and equipment is higher than its book value. ABC pays fees to outside consultants in connection with this acquisition.

ANS:

b

Topic: Acquired net assets, acquisition costs LO 1, 2 Which item affects the reported net income of an acquiring company at the date of acquisition? a.

d.

An earnout agreement promising future payments to the former owners of the acquired company, dependent on the acquired company’s future performance Fees paid to outside accountants and lawyers Identifiable intangible assets acquired, that were not previously reported by the acquired company Goodwill recognized as a result of the acquisition

ANS:

b

b. c.

37.

c

Topic: Acquisition cost, contingent consideration LO 2 An acquired company’s former owners become employees of the acquiring company. At the date of acquisition, an acquiring company promises to make future payments to these former owners, which are terminated when the former owners are no longer employed. At the date of acquisition, the acquiring company: a. b. c. d.

Does not report these contingent payments Reports the contingent payments as a liability, at expected present value Reports the contingent payments as a liability, by summing up the expected future payments Reports the contingent payments as a credit to equity

ANS:

a

Test Bank, Chapter 2

© Cambridge Business Publishers, 2023 2-11

38.

Topic: Acquisition costs, goodwill LO 1, 2 An acquiring company pays $50 million in cash, and issues new no-par stock with a fair value of $90 million, to the acquired company’s former owners, for the assets and liabilities of the acquired company. Registration fees associated with the new stock issuance are $500,000, paid in cash. Consulting fees for the acquisition are $700,000, paid in cash. The fair value of the acquired company’s identifiable net assets is $80 million. The entry or entries the acquiring company makes to record the acquisition have what net effect on its account balances? a. b. c. d.

Capital stock increases by $90 million. Expenses increase by 1.2 million. Cash decreases by $51 million. Goodwill increases by $60 million.

ANS:

d The acquisition entry is: Identifiable net assets Goodwill Merger expenses

80,000,000 60,000,000 700,000 Cash Capital stock

51,200,000 89,500,000

Use this information to answer questions 39 and 40. Pyn Corporation acquires all of Sys Company’s assets and liabilities, reported as a merger. Acquisition-related items are as follows: • • • • •

$60 million in cash paid to Sys’ former shareholders $25 million fair value of stock issued $1 million consulting fees, paid in cash $4 million in new stock registration fees, paid in cash Earnout with an expected present value of $3 million

Fair values of Sys’ assets and liabilities are as follows: Current assets Land, buildings, and equipment Brand names Customer lists Skilled workforce Potentially profitable future projects Liabilities

© Cambridge Business Publishers, 2023 2-12

Fair Value $ 1,000,000 5,000,000 2,000,000 4,000,000 15,000,000 10,000,000 6,000,000

Advanced Accounting, 5th Edition

39.

Topic: Valuation of assets and liabilities acquired, acquisition costs LO 1, 2 Pyn records goodwill of: a. b. c. d.

$83,000,000 $87,000,000 $82,000,000 $85,000,000

ANS:

c The entry made to record the acquisition is: Current assets Land, buildings, and equipment Brand names Customer lists Goodwill Merger expenses

1,000,000 5,000,000 2,000,000 4,000,000 82,000,000 1,000,000 Liabilities Cash Capital stock

40.

41.

9,000,000 65,000,000 21,000,000

Topic: Valuation of assets and liabilities acquired, acquisition costs LO 1, 2 What is the effect of Pyn’s acquisition entry on Pyn’s income? a. b. c. d.

No effect $1,000,000 reduction $4,000,000 reduction $3,000,000 reduction

ANS:

b Only consulting fees are expensed.

Topic: Acquisition cost LO 2 Kaylo Corporation acquires Lotty Inc., paying the following: $25 million in cash, new stock with a fair value of $70 million and par value of $1 million, stock registration fees of $2 million, and acquisition-related advisory and legal fees of $8 million. The total acquisition cost is a. b. c. d.

$95 million $94 million $97 million $105 million

ANS:

a $25 + $70 = $95 million

Test Bank, Chapter 2

© Cambridge Business Publishers, 2023 2-13

42.

43.

Topic: Acquisition cost LO 2 Menlo Corporation acquires Newton Inc., paying the following: new stock with a fair value of $50 million, stock registration fees of $3 million, an earnings contingency with a present value of $1 million, and converted stock options to Newton’s employees that had vested and were related to services performed prior to the acquisition, valued at $5 million. The total acquisition cost is a. b. c. d.

$50 million $55 million $56 million $59 million

ANS:

c $50 + $1 + $5 = $56 million

Topic: Changes in asset values subsequent to acquisition LO 3 Sheetz Company is purchased by Pulsar Corporation at the beginning of its accounting year, at an acquisition cost that is $25,000,000 greater than the fair value of identifiable net assets acquired. One of the assets acquired is a building, originally valued at $15,000,000 at the date of the purchase. Six months after the acquisition, it is discovered that the building was actually worth $7,000,000 at the date of acquisition. What entry is made to reflect this new information?

44.

a. b. c. d.

Dr. goodwill; Cr. building for $8,000,000 Dr. loss on building; Cr. building for $8,000,000 Dr. retained earnings; Cr. building for $8,000,000 no entry is made

ANS:

a

Topic: Changes in asset values subsequent to acquisition LO 3 Pearson Company acquired Sunview Company at an acquisition cost that was $20 million greater than the fair value of identifiable net assets acquired. Pearson assigned a fair value of $1,000,000 to Sunview’s land. Ten months later, Pearson obtained information that the land was worth $4,000,000 at the date of acquisition. How does Pearson account for this value change? a. b. c. d.

Gain of $3,000,000, reported in income Increase goodwill by $3,000,000 Loss of $3,000,000, reported in other comprehensive income Reduce goodwill by $3,000,000

ANS:

d

© Cambridge Business Publishers, 2023 2-14

Advanced Accounting, 5th Edition

45.

Topic: Changes in asset values subsequent to acquisition LO 3 An acquirer made the following entry to report an acquisition, occurring at the beginning of its accounting year: Tangible assets Intangible asset: technology Goodwill

50,000 6,000 9,000 Liabilities Cash

40,000 25,000

Six months after the acquisition, the technology is determined to be worthless. How is this information reported if (1) the new information relates to the value of the technology as of the date of acquisition, and (2) the new information relates to changes in its value since acquisition?

46.

a. b. c. d.

(1) $6,000 gain on acquisition in income (1) $6,000 loss in income (1) $6,000 increase in goodwill (1) $6,000 decrease in cash

ANS:

c

(2) $6,000 decrease in goodwill (2) $6,000 increase in goodwill (2) $6,000 loss in income (2) $6,000 loss in income

Topic: Subsequent changes in acquired asset values LO 3 Kelly Corporation acquires all of the assets and liabilities of Lawson Co. at the beginning of its accounting year, at an acquisition cost that is $50 million above the fair value of identifiable net assets acquired. Three months after the acquisition, land belonging to Lawson at the date of acquisition is discovered. The land has a fair value of $5,000,000. The entry to reflect this new information includes: a. b. c. d.

A credit to goodwill of $5,000,000 A credit to land of $5,000,000 A gain of $5,000,000, reported in income A loss of $5,000,000, reported in income

ANS:

a The correcting entry is: Land

5,000,000 Goodwill

Test Bank, Chapter 2

5,000,000

© Cambridge Business Publishers, 2023 2-15

47.

Topic: Subsequent changes in acquired asset values LO 3 Kelly Corporation acquires all of the assets and liabilities of Lawson Co. at the beginning of its accounting year, at an acquisition cost that is $50 million above the fair value of identifiable net assets acquired. Three months after the acquisition, it is determined that because of a downturn in the economy after the acquisition, acquired brand names with indefinite lives are worth $5,000,000 less than originally estimated. The entry to reflect this new information includes: a. b. c. d.

A credit to goodwill of $5,000,000 A debit to identifiable intangibles of $5,000,000 A gain of $5,000,000, reported in income A loss of $5,000,000, reported in income

ANS:

d The correcting entry is: Impairment loss (income)

5,000,000 Identifiable intangibles

48.

5,000,000

Topic: Subsequent changes in acquired asset values LO 3 Quality Inc. acquires Rekless Company for $100 million in cash at the beginning of its accounting year, and records the acquisition as a merger. At the date of acquisition, Rekless’ reported net assets have a fair value of $15 million and previously unreported intangible assets, appropriately recognized per ASC 805, have a fair value of $10 million for technology, and $10 million for favorable leases. Six months after the acquisition, it is determined that the technology has a value of $50 million, but the favorable leases are worthless. How are these value changes reported, if both represent a better estimate of the value of these intangibles at the date of acquisition? a.

d.

Identifiable intangibles increase $30 million and a gain of $30 million is reported in income. Identifiable intangibles increase, and goodwill decreases by $30 million. A loss of $10 million is reported in income and identifiable intangibles decrease by $10 million. Goodwill increases by $10 million and identifiable intangibles decrease by $10 million.

ANS:

b

b. c.

© Cambridge Business Publishers, 2023 2-16

Advanced Accounting, 5th Edition

49.

Topic: Subsequent changes in acquired asset values LO 3 Quality Inc. acquires Rekless Company for $100 million in cash at the beginning of its accounting year, and records the acquisition as a merger. At the date of acquisition, Rekless’ reported net assets have a fair value of $15 million and previously unreported intangible assets, appropriately recognized per ASC 805, have a fair value of $10 million for technology, and $10 million for favorable leases. Six months after the acquisition, it is determined that the technology has a value of $50 million, but the favorable leases are worthless. How are these value changes reported, if both represent changes in conditions occurring subsequent to the acquisition? a.

d.

Identifiable intangibles increase $30 million and a gain of $30 million is reported in income. Identifiable intangibles increase, and goodwill decreases by $30 million. A loss of $10 million is reported in income and identifiable intangibles decrease by $10 million. Goodwill increases by $10 million and identifiable intangibles decrease by $10 million.

ANS:

c

b. c.

50.

51.

Topic: Subsequent changes in acquisition valuations LO 3 The estimated value of assets acquired and liabilities assumed change subsequent to the acquisition. When should a company record the change as a correction of the initial acquisition entry? a. b. c. d.

The change takes place within one year of the acquisition. The change is normally reported in income. The change is normally reported as an adjustment to other comprehensive income. The change reflects value as of the date of acquisition, and occurs within one year.

ANS:

d

Topic: Subsequent value changes, bargain purchase LO 3, 4 Portland Company paid $21 million in cash for Seattle Company’s assets and liabilities on January 1, and reported the acquisition as a merger. The fair value of net assets acquired was $22 million, including previously unreported intangibles of $4 million. Three months later, the previously unreported intangibles are determined to have been worthless as of the date of acquisition. Portland’s accounting year ends December 31. What is the effect of this new information on Portland’s income for the year? a. b. c. d.

$1 million decrease $4 million decrease $1 million increase No effect

Test Bank, Chapter 2

© Cambridge Business Publishers, 2023 2-17

ANS:

a The correcting entry, within the measurement period, is: Bargain gain (income) Goodwill

1,000,000 3,000,000 Intangibles

52.

4,000,000

Topic: Subsequent value changes, bargain purchase LO 3, 4, 5 Portland Company paid $21 million in cash for Seattle Company’s assets and liabilities on January 1, and reported the acquisition as a merger. The fair value of net assets acquired was $22 million. Three months later, it is determined that Seattle’s acquisition-date liabilities failed to include a pending lawsuit, valued at $1 million, which should have been recorded per GAAP. Portland’s accounting year ends December 31. What is the effect of this new information on Portland’s income for the year? a. b. c. d.

$1 million decrease $2 million decrease $1 million increase No effect

ANS:

a The correcting entry, within the measurement period, is: Bargain gain (income)

1,000,000 Liabilities

53.

1,000,000

Topic: Subsequent value changes, bargain purchase LO 3, 4 Portland Company paid $21 million in cash for Seattle Company’s assets and liabilities on January 1, and reported the acquisition as a merger. The fair value of net assets acquired was $22 million, including previously unreported intangibles of $4 million. Three months later, the previously unreported intangibles are determined to be worthless because of changes in economic conditions subsequent to the acquisition. Portland’s accounting year ends December 31. What is the effect of this new information on Portland’s income? a. b. c. d.

$1 million decrease $4 million decrease $1 million increase No effect

ANS:

b The entry to record the write-down is: Loss (income)

4,000,000 Intangibles

© Cambridge Business Publishers, 2023 2-18

4,000,000

Advanced Accounting, 5th Edition

54.

Topic: Subsequent value changes, earnings contingency LO 2, 3 Pecan acquires Southern in an acquisition reported as a merger. The acquisition results in $50 million in goodwill. The acquisition cost includes an earnings contingency, valued at $1 million at the date of acquisition. Within the measurement period, additional information on Southern’s expected future performance at the date of acquisition reveals that the earnout actually had a fair value of $200,000 at the date of acquisition. The entry to record the new information includes a credit of $800,000 to: a. b. c. d.

Intangible assets Goodwill Gain on acquisition Earnings contingency liability

ANS:

b The entry to correct the date of acquisition value of the earnout is: Earnings contingency liability

800,000 Goodwill

55.

800,000

Topic: Earnings contingency, subsequent value changes LO 2, 3 Pecan acquires Southern in an acquisition reported as a merger. The acquisition results in $50 million in goodwill. The acquisition cost includes an earnings contingency, valued at $1 million at the date of acquisition. Within the next year, increases in the demand for Southern’s products subsequent to acquisition require that the earnout be revalued to $1,800,000. The entry to record the new information includes a debit of $800,000 to: a. b. c. d.

Intangible assets Goodwill Loss on contingency Earnings contingency liability

ANS:

c The change in earnout value is due to subsequent events and is therefore not a correction of the initial acquisition entry. The entry to record the revaluation is: Loss on contingency (income)

800,000 Earnings contingency liability

Test Bank, Chapter 2

800,000

© Cambridge Business Publishers, 2023 2-19

56.

57.

Topic: Subsequent value changes LO 3 ABC Corporation acquires all of the assets and liabilities of XYZ Company, at a price that is significantly higher than the fair value of the identifiable net assets acquired. Four months after the acquisition, a fire destroys some of XYZ’s property. How does ABC report this? a. b. c. d.

ABC will report less goodwill from the acquisition. ABC will report more goodwill from the acquisition. ABC will not report this event. ABC will report a loss on property in income.

ANS:

d The value change is due to subsequent events, so the decline in property value is an impairment loss.

Topic: Subsequent value changes LO 3 Pacific Company acquired Starz Company for $100 million and recognized $70 million in goodwill. Within a year after the acquisition, due to improvement in the economy, Starz’ land is worth $15 million more than the amount estimated at the date of acquisition. How is this information reported?

58.

a. b. c. d.

Gain on acquisition of $15 million Gain on land of $15 million Reduction in goodwill of $15 million Not reported

ANS:

d The value change is due to subsequent events and is therefore reported using normal accounting. Increases in the value of land are not reported.

Topic: Subsequent value changes LO 3, 5 Pacific Company acquired Starz Company for $100 million and recognized $70 million in goodwill. When it recorded the acquisition, Pacific recognized an additional liability not already reported on Starz’ balance sheet, for a pending lawsuit against Starz, and estimated its value at $12 million. Three months after the date of acquisition, Pacific determined that the present value of the lawsuit liability was really $2 million, because of events occurring subsequent to the date of acquisition. How is this information reported? a. b. c. d.

Loss on acquisition of $10 million Gain on lawsuit of $10 million Reduction in goodwill of $10 million Not reported

ANS:

b This is a subsequent event so normal accounting applies. Changes in the value of contingent liabilities affect income.

© Cambridge Business Publishers, 2023 2-20

Advanced Accounting, 5th Edition

59.

60.

Topic: Subsequent value changes LO 3 Atold Corporation reports goodwill of $40 million on acquisition of Benholm Company. Subsequently, Atold learns that one of Benholm’s buildings has increased in value by $4 million. How is this reported, if the information is discovered (1) within the measurement period, and (2) after the measurement period is over? a. b. c. d.

(1) Within the measurement period Decrease in goodwill Increase in goodwill Decrease in goodwill Increase in goodwill

ANS:

c

Topic: Subsequent value changes LO 3 Atold Corporation reports goodwill of $40 million on acquisition of Benholm Company. One month later, Atold learns that Benholm’s portfolio of AFS debt investments is worth $3 million more than estimated at the date of acquisition. How is this reported, if the information is (1) a better estimate of the portfolio’s value at the date of acquisition (within the measurement period), or (2) is due to events occurring subsequent to the acquisition (after the measurement period). a. b. c. d. ANS:

61.

(2) After the measurement period Gain on income statement Not reported Not reported Gain on income statement

(1) Within the measurement period Decrease in goodwill Decrease in goodwill Gain in OCI Not reported

(2) After the measurement period Gain in OCI Not reported Not reported Gain in OCI

a Within the measurement period, the correction of the original acquisition entry increases investments and reduces goodwill. After the measurement period, changes in the value of AFS debt investments are reported normally, in OCI.

Topic: Bargain purchase LO 4 Igloo Inc. acquires Jagged Enterprises for $15 million in an acquisition reported as a merger. Jagged’s recorded identifiable assets have a book value of $10 million and a fair value of $2 million. Jagged’s liabilities have a book and fair value of $5 million. Jagged has previously unrecorded identifiable assets of $20 million. The entry to record this acquisition incudes a bargain gain of a. b. c. d.

$ 5 million $ 2 million $18 million $0

ANS:

b $2 - $5 + $20 - $15 = $2 million

Test Bank, Chapter 2

© Cambridge Business Publishers, 2023 2-21

62.

Topic: Bargain purchase LO 4 Pluto Corporation purchased Saturn Corporation’s assets and liabilities for $4,500,000 in cash. Saturn's reported assets and liabilities have the following fair values at the date of acquisition:

Cash, receivables Inventory Land and buildings Liabilities

Fair Value Dr (Cr) $ 2,000,000 8,000,000 36,500,000 (40,000,000)

The gain on acquisition is: a. b. c. d.

$3,000,000 $2,500,000 $2,000,000 $0

ANS:

c Cost Fair value of identifiable net assets: Cash, receivables Inventory Land and buildings Liabilities Gain

63.

$4,500,000 $ 2,000,000 8,000,000 36,500,000 (40,000,000)

6,500,000 $ (2,000,000)

Topic: Bargain purchase LO 4 Titan Company pays $3,000,000 in cash to acquire Victory Company’s assets and liabilities. Book and fair values of Victory’s assets and liabilities appear below.

Current assets HTM debt investments Buildings, net Equipment, net Identifiable intangible assets Liabilities

Book Value $ 300,000 100,000 1,200,000 2,000,000 0 120,000

Fair Value $ 100,000 140,000 1,260,000 800,000 1,000,000 100,000

What is the gain on acquisition? a. b. c. d.

$1,200,000 $ 100,000 $ 200,000 $0

© Cambridge Business Publishers, 2023 2-22

Advanced Accounting, 5th Edition

ANS:

c Cost Fair value of net assets acquired: Current assets HTM debt investments Buildings Equipment Identifiable intangible assets Liabilities Gain on acquisition

64.

65.

$ 100,000 140,000 1,260,000 800,000 1,000,000 (100,000)

3,200,000 $ (200,000)

Topic: Bargain purchase LO 4 Packard Company acquires the assets and liabilities of Sutton Company, with an acquisition cost that is less than the fair value of its identifiable net assets. The difference between acquisition cost and the fair value of identifiable net assets acquired a. b. c. d.

Increases net income on the income statement Increases other comprehensive income on the statement of comprehensive income Reduces noncurrent assets acquired Reduces goodwill

ANS:

a

Topic: Bargain purchase, contingent consideration LO 2, 4 A company acquires the assets and liabilities of another company, paying the former owners cash plus an earnings contingency. A gain on acquisition is reported in income if: a. b.

d.

The cash paid is less than the book value of the net assets acquired. The cash paid plus the present value of the earnings contingency is less than the fair value of the identifiable net assets acquired. The cash paid plus the present value of the earnings contingency is less than the fair value of the tangible net assets acquired. The cash paid is less than the fair value of identifiable net assets acquired.

ANS:

b

c.

66.

$3,000,000

Topic: Bargain purchase LO 4 An acquiring company may be motivated to report a larger bargain gain to improve its bottom line. Which manipulation could be used to overstate the gain? a. b. c. d.

Overstate the present value of an earnings contingency. Overstate the fair value of acquired liabilities. Overstate the value of previously unreported intangible assets acquired. Overstate the value of acquired contingent liabilities such as pending lawsuits.

ANS:

c

Test Bank, Chapter 2

© Cambridge Business Publishers, 2023 2-23

67.

Topic: Bargain purchase LO 2, 4 Which of the following actions reduces the likelihood of reporting a bargain gain on an acquisition? a. b. c. d. ANS:

68.

b Only actions that increase total acquisition cost reduce bargain gains.

Topic: Bargain purchase LO 1, 3, 4, 5 Which of the following actions increases the likelihood of reporting a bargain gain on an acquisition? a. b. c. d. ANS:

69.

Pick a higher discount rate to value the earnings contingency. If stock is issued, pick an acquisition date when the market value of the stock is higher. Make cash payments to former owners conditional on continued employment in the company. If stock is issued, classify fewer cash outlays as registration fees.

Identify additional previously unreported acquired identifiable intangible assets. Use a higher discount rate to measure the present value of expected cash flows from previously unreported acquired favorable leases. Identify additional previously unreported acquired contingent liabilities. Identify increases in acquired plant asset value as outside the measurement period. a Only actions that increase the fair value of acquired identifiable net assets increase bargain gains.

Topic: Acquired in-process research and development LO 5 Average Company acquired all of the assets and liabilities of Best Company. Best Company has research and development projects in process, which have not yet been completed. How does Average Company report Best’s in-process research and development? a. b. c. d.

As a limited life intangible asset, at fair value As an indefinite life intangible asset, at fair value As part of goodwill It is not reported

ANS:

b

© Cambridge Business Publishers, 2023 2-24

Advanced Accounting, 5th Edition

70.

71.

72.

Topic: Acquired in-process research and development LO 5 Plaza Corporation acquires all of the assets and liabilities of Spiceland Company. How are Spiceland’s research and development costs of ongoing projects reported on Plaza’s books at the date of acquisition? a. b. c. d.

Included as part of goodwill Identifiable asset, at fair value Operating expense, at fair value Loss on acquisition, at Spiceland’s cost

ANS:

b

Topic: Acquired in-process research and development LO 5 If an acquired company has in-process R&D projects, the value of the R&D is reported as an acquired intangible asset: a. b. c. d.

Only if it already appears on the acquired company’s balance sheet Only if it has an alternative future use If the probability of success is greater than 50% At fair value

ANS:

d

Topic: Acquired in-process research and development LO 5 Tangle Corporation acquires all of the net assets of Unger Company, in an acquisition reported as a merger. The acquisition cost is $100 million, and Unger’s reported net assets have a book value of $35 million and a fair value of $30 million. Unger has previously unreported in-process research and development projects, which do not have an alternative use, valued at $10 million. It is uncertain whether these projects will result in future positive cash flow for the company. Goodwill reported on this acquisition is a. b. c. d.

$60 million $70 million $55 million $40 million

ANS:

a $100 - $30 - $10 = $60 million

Test Bank, Chapter 2

© Cambridge Business Publishers, 2023 2-25

73.

74.

75.

Preacquisition contingency LO 5 An acquirer discovers that a competitor has filed a patent infringement lawsuit against the company it is acquiring. This lawsuit is not currently recognized on the acquiree’s books. How should the acquirer report the lawsuit at the date it makes the acquisition? a. b. c. d.

Don’t report it until it is settled. Report it as a liability if it is a probable liability and its value can be reasonably estimated. Report it as a liability if it is a contractual or separable obligation. Report it as a liability if it is more likely than not that they will lose the lawsuit.

ANS:

b

Preacquisition contingency LO 5 An acquirer pays cash for the assets and liabilities of another company. Which of the following is most likely to be reported by the acquirer as one of the liabilities acquired from the other company? a. b. c. d.

Contingent consideration (earnout) included as part of the acquisition Warranty liability not previously reported by the acquiree Unreported unsettled lawsuit against the acquiree Promised payments to former owners of the acquiree, not related to future employment

ANS:

b

Topic: Preacquisition contingency LO 5 Brucker Company has warranty liabilities related to the products it has sold in the past, but does not report them on its books. Acme Corporation acquires all of Brucker’s net assets, and records the acquisition as a merger. In the journal entry to record the acquisition, Brucker’s warranty liabilities typically a. b. c. d.

decrease the amount of goodwill reported for the acquisition. increase the amount of goodwill reported for the acquisition. are reported at book value. are not reported.

ANS:

b

© Cambridge Business Publishers, 2023 2-26

Advanced Accounting, 5th Edition

76.

Topic: Acquired deferred taxes LO 5 In a nontaxable acquisition, assets acquired were reported on the acquired company’s books at $1,000, but they are reported on the acquiring company’s books at a fair value of $6,000. The acquiring company’s tax rate is 25% and the assets have a 5-year life. At the date of acquisition, the acquiring company reports an acquired deferred tax liability of:

77.

78.

a. b. c. d.

$6,000 $ 250 $1,250 $1,500

ANS:

c ($6,000 – $1,000) x 25% = $1,250

Topic: Acquired deferred taxes LO 5 An acquirer reports a deferred tax asset as one of the assets acquired in a business combination when: a. b. c. d.

The acquisition is taxable. The book value of acquired assets is greater than fair value. The book value of acquired assets is less than fair value. The acquiree’s tax rate is lower than the acquirer’s tax rate.

ANS:

b

Topic: Acquired deferred taxes LO 5 Potash Company acquires Spokane Corporation’s assets and liabilities, in a nontaxable acquisition. The tax basis of Spokane’s buildings is $50 million, with an average remaining life of 20 years, straight-line. The fair value of the buildings at the date of acquisition is $40 million. Assume the tax rate is 20%. Based on this information, because of the difference between reporting Spokane’s buildings on the books versus tax return, each year for the next 25 years Potash will: a. b. c. d.

Credit deferred tax asset $2,000,000 Credit deferred tax asset $100,000 Debit deferred tax liability $2,000,000 Debit deferred tax liability $100,000

ANS:

b The total deferred tax asset acquired = ($50 million – $40 million) x 20% = $2 million. Each year the deferred tax asset declines by $2 million/20 = $100,000.

Test Bank, Chapter 2

© Cambridge Business Publishers, 2023 2-27

79.

Topic: Acquired deferred taxes LO 5 Peer Company acquires Spear Corporation’s assets and liabilities, in a nontaxable acquisition. The tax basis of Spear’s identifiable intangible assets is $1 million, with an average remaining life of 5 years, straight-line. The fair value of the identifiable intangible assets at the date of acquisition is $26 million. Assume the tax rate is 25%. Based on this information, because of the difference between reporting Spear’s plant assets on the books versus tax return, each year for the next 5 years Peer will:

80.

a. b. c. d.

Credit deferred tax liabilities $6.25 million Debit deferred tax liabilities $1.25 million Debit deferred tax assets $1.25 million Credit deferred tax assets $6.25 million

ANS:

b The total deferred tax liability acquired = ($26 million – $1 million) x 25% = $6.25 million. Each year the deferred tax liability declines by $6.25 million/5 = $1.25 million.

Topic: Acquired deferred taxes LO 5 An acquired company’s tax basis of identifiable net assets acquired is lower than the fair value of identifiable net assets acquired. The acquisition is nontaxable. Which statement below is true? a. b. c. d. ANS:

81.

The acquiring company reports an acquired deferred tax asset. In future years, because of the difference in tax basis and fair value of acquired identifiable net assets, reported tax expense will be less than taxes paid. No deferred tax assets or liabilities are acquired. In future years, taxable income will be lower than earnings before tax reported on the books. b

Topic: Acquired deferred taxes LO 5 Cognitive Company acquires the assets and liabilities of Tableau in a nontaxable acquisition. The carrying value of Tableau’s equipment is greater than its fair value. This tax situation will have what effect on Cognitive’s acquisition entry? a. b. c. d.

Goodwill is lower. Goodwill is higher. Acquired equipment is recorded at a lower amount. There is no effect on the acquisition entry.

ANS:

a A deferred tax asset is recorded so the fair value of identifiable net assets acquired is higher and goodwill is lower.

© Cambridge Business Publishers, 2023 2-28

Advanced Accounting, 5th Edition

82.

83.

84.

Topic: Acquired deferred taxes LO 5 Century Company acquires the assets and liabilities of Horizon Company in a nontaxable acquisition. The acquisition results in recognition of a deferred tax liability. Which of the following is a possible explanation for this deferred tax liability? a. b. c. d.

The acquisition was a bargain purchase. Horizon had previously unreported liabilities. The book value of Horizon’s buildings was less than their market value. The acquisition’s cost equaled Horizon’s book value.

ANS:

c

Topic: Acquired deferred taxes LO 5 ABC Company acquires DEF Inc. in a nontaxable business combination. DEF’s identifiable intangible assets have a fair value of $6,000,000 but are currently not reported on DEF’s books. The intangibles have a 4-year life, straight-line. The appropriate tax rate is 25%. The acquisition entry includes a. b. c. d.

a debit to deferred tax asset of $1,500,000. a credit to deferred tax liability of $1,500,000. a debit to deferred tax asset of $375,000. a credit to deferred tax liability of $375,000.

ANS:

b This is a deferred tax liability since the future amortization deducted for tax purposes is less than the expense reported in the financial statements. ($6,000,000 - $0) x 25% = $1,500,000.

Topic: Valuation of assets acquired and liabilities assumed, IPR&D, preacquisition contingencies LO 1, 5 Pawan Corporation acquires all of Sesa Company at an acquisition cost of $75,000,000 in cash. Sesa’s reported assets and liabilities have fair values as follows:

Current assets Land, buildings, and equipment (net) Liabilities

Fair Value $ 7,000,000 40,000,000 35,000,000

Pawan determines that Sesa has the following identifiable intangible assets, not reported on its balance sheet:

Developed technology In-process research & development Trade name

Fair Value $ 5,000,000 2,000,000 6,000,000

Pawan also discovers that Sesa has not properly recorded the expected liability from a settled lawsuit, currently estimated at $4,000,000. Test Bank, Chapter 2

© Cambridge Business Publishers, 2023 2-29

Pawan records goodwill of:

85.

86.

a. b. c. d.

$58,000,000 $67,000,000 $56,000,000 $54,000,000

ANS:

d $75 – ($7 + $40 - $35 + $13 - $4) = $54 million

Topic: Preacquisition contingency, change in estimate LO 3, 5 Relic Corporation acquires the assets and liabilities of Vware Company and reports goodwill of $40 million. At the time of the acquisition, Vware was a defendant in a customer’s lawsuit, but it was expected that Vware would win, so the lawsuit was not recorded. Within a year of the acquisition, the lawyers persuade both parties to settle out of court for $8,000,000. How is this payment most likely to be reported? Credit cash, and debit: a. b. c. d.

Retained earnings (balance sheet) Other comprehensive income (statement of comprehensive income) Loss (income statement) Lawsuit liability (balance sheet)

ANS:

c

Topic: Step acquisition LO 5 Pivot Corporation owns 80% of the voting stock of Speegee Company. It then acquires the remaining 20% of Speegee’s voting stock. Which statement is true concerning reporting for the acquisition of the remaining 20%? a. The assets and liabilities of Speegee are revalued to fair value. b. If the acquisition cost is greater than the fair value of identifiable assets acquired, goodwill is recognized. c. If the carrying value of the purchased noncontrolling interest is greater than its acquisition cost, shareholders’ equity increases. d. If the carrying value of the purchased noncontrolling interest is greater than its acquisition cost, equity declines. ANS:

c

© Cambridge Business Publishers, 2023 2-30

Advanced Accounting, 5th Edition

87.

Topic: Step acquisition LO 5 Asena Corporation owns 30% of the voting stock of Tapestry Company, and reports it as an equity method investment. It then pays cash to acquire the remaining 70% of Tapestry’s voting stock. Which statement is false concerning reporting for the acquisition of the remaining 70%, if the acquisition is reported as a merger? a.

88.

b. c. d.

If the total acquisition cost is greater than the fair value of identifiable assets acquired, goodwill is recognized. The equity method investment is written off as a reduction in additional paid-in capital. The assets and liabilities of Tapestry are revalued to fair value. The assets and liabilities of Tapestry will now appear on Asena’s books.

ANS:

b

Topic: Step acquisition LO 5 Nebulus Corporation owns 80% of the voting stock of Suite Company. It reports the 20% interest in the equity section of its balance sheet at $25 million, and all of Suite’s assets and liabilities are reported on Nebulus’ balance sheet. Nebulus acquires the remaining 20% interest for $20 million in cash. At that time, the fair value of Suite’s identifiable net assets was $80 million. As part of the acquisition entry, Nebulus records a. b. c. d.

A loss of $5 million, in income. A $5 million net increase in shareholders’ equity. $5 million in goodwill. A $20 million net reduction in shareholders’ equity.

ANS:

d The acquisition entry is: Noncontrolling interest (equity)

25,000,000 Cash APIC (equity)

89.

20,000,000 5,000,000

Topic: Step acquisition LO 5 Nebulus Corporation owns 30% of the voting stock of Suite Company. It reports the 30% interest as an equity method investment, with a current carrying value of $32 million and a market value of $45 million. Nebulus acquires the remaining 70% interest for $120 million in cash. At that time, the fair value of Suite’s identifiable net assets was $125 million, and Suite’s book value was $45 million. As part of the acquisition entry, Nebulus records a. b. c. d.

A gain of $13 million, in income. Goodwill of $27 million. Goodwill of $107 million. A gain of $5 million, in income.

Test Bank, Chapter 2

© Cambridge Business Publishers, 2023 2-31

ANS:

a

The combined acquisition entry is: Identifiable net assets Goodwill

125,000,000 40,000,000 Cash Investment in Suite Gain (income)

90.

91.

92.

120,000,000 32,000,000 13,000,000

Topic: Step acquisition LO 5 Olya Company has a 45% interest in Protech Company, reported using the equity method, carried at $30 million and with an estimated fair value of $50 million. Olya acquires the remaining stock of Protech for $70 million in cash. The fair value of Protech’s identifiable net assets is $95 million. What amount of goodwill is recognized when the remaining stock is acquired? a. b. c. d.

$0 $5 million $20 million $25 million

ANS:

d $70 + $50 - $95 = $25 million

Topic: Step acquisition LO 5 Olya Company has a 70% interest in Protech Company, originally acquired at a cost of $84 million, and reported as a business combination. Olya acquires the remaining 30% of the stock of Protech for $42 million. The fair value of Protech’s identifiable net assets is currently $70 million. What amount of goodwill is recognized when the remaining stock is purchased? a. b. c. d.

$0 $56 million $14 million $90 million

ANS:

a There is no change in control, so Protech’s net assets are not revalued.

Topic: Asset acquisition LO 6 Which statement is true regarding reporting for the acquisition of a group of assets, reported as an asset acquisition? a. b. c. d.

Goodwill is not recognized, even if cost exceeds the fair value of net assets acquired. Contingent consideration is included in the initial measurement of total cost. Consulting fees paid to complete the transaction are expensed. Changes in value estimates are reported retroactively within the measurement period.

ANS:

a

© Cambridge Business Publishers, 2023 2-32

Advanced Accounting, 5th Edition

93.

94.

95.

Topic: Asset acquisition LO 6 Hule Inc. acquires equipment and land from another company for $49 million, and records the transaction as an asset acquisition. The equipment has a fair value of $20 million, and the land has a fair value of $30 million. Neither asset is nonqualifying. At what value does Hule record the equipment? a. b. c. d.

$20 million $19.6 million $19.2 million $24.5 million

ANS:

b ($20/($20 + $30)) x $49 = $19.6 million

Topic: Asset acquisition LO 6 In an asset acquisition, nonqualifying assets include all of the following except a. b. c. d.

Cash HTM debt investments Equity investments with no significant influence Trading debt investments

ANS:

b

Topic: Asset acquisition LO 6 A company acquires cash and equipment of another company for $98 million, and records the transaction as an asset acquisition. Total cash acquired is $20 million, and the equipment has a fair value of $80 million. The company records the equipment at a. b. c. d.

$80 million $78.4 million $78 million $81.6 million

ANS:

c $98 - $20 = $78 million

Test Bank, Chapter 2

© Cambridge Business Publishers, 2023 2-33

PROBLEMS 1.

Topic: Valuation of assets acquired and liabilities assumed LO 1 Cally Company owns current assets with a market value of $4,000,000 and plant and equipment with a market value of $50,000,000. It has liabilities valued at $40,000,000. It also has unreported brand names valued at $5,000,000. Breaker Corporation buys Cally’s assets and liabilities for $75,000,000 in cash. Required Prepare the journal entry Breaker makes to record the acquisition. ANS: Current assets Plant and equipment Brand names Goodwill

4,000,000 50,000,000 5,000,000 56,000,000 Liabilities Cash

2.

40,000,000 75,000,000

Topic: Valuation of assets acquired and liabilities assumed LO 1 Bestvalue Airlines’ balance sheet is as follows (in thousands): Assets Cash Receivables Investments Maintenance supplies Flight equipment (net of $2,000 accumulated depreciation) International routes Total assets

$ 1,400 650 1,000 150 8,500 700 ______ $12,400

Liabilities & Equity Current liabilities Long-term debt Common stock, $0.01 par Additional paid-in capital Retained earnings (deficit) Accumulated other comprehensive income Treasury stock Total liabilities & equity

$ 3,200 5,000 1 5,500 (2,300) 1,999 (1,000) $12,400

Safebuy Airlines acquired Bestvalue in an acquisition reported as a merger. Bestvalue’s cash, receivables, investments, and current liabilities were reported at fair value. Its maintenance supplies had a fair value of $200,000, flight equipment had a fair value of $10 million, and international routes were worth $400,000. Long-term debt had a fair value of $5.1 million. Bestvalue also had an unrecorded intangible, representing leases with favorable terms, worth $600,000, which meets ASC 805 criteria for separate capitalization. Safebuy paid $12 million in cash for Bestvalue. Required Present Safebuy’s journal entry to record the acquisition. Express all dollar amounts in thousands.

© Cambridge Business Publishers, 2023 2-34

Advanced Accounting, 5th Edition

ANS: (in thousands) Cash Receivables Investments Maintenance supplies Flight equipment International routes Leases Goodwill

1,400 650 1,000 200 10,000 400 600 6,050 Current liabilities Long-term debt Cash

3.

3,200 5,100 12,000

Topic: Valuation of assets acquired and liabilities assumed LO 1 Sully Company’s balance sheet is as follows: Assets Cash, receivables Inventories Equity method investments Land, buildings & equipment

Total assets

$ 3,000,000 4,000,000 1,000,000 5,500,000

_________ $13,500,000

Liabilities & Equity Current liabilities Long-term liabilities Capital stock Retained earnings Accumulated other comprehensive loss Treasury stock Total liabilities & equity

$ 2,000,000 6,500,000 2,000,000 3,500,000 (400,000) (100,000) $13,500,000

Pronto Corporation acquires Sully’s assets and liabilities for $50 million in cash. Sully’s cash and receivables, and liabilities are reported at values approximating fair value. However, its inventories are overvalued by $3,000,000, and its equity method investments are undervalued by $2,000,000. Its land, buildings & equipment are overvalued by $2,500,000. The accountants identify the following possible intangible assets attributed to Sully but not currently recorded on its balance sheet:

Skilled workforce Favorable leases Developed technology Prospective customer contracts Synergies on future projects

Fair Value $8,000,000 6,000,000 3,000,000 2,000,000 4,000,000

Required Prepare Pronto’s journal entry to record the acquisition.

Test Bank, Chapter 2

© Cambridge Business Publishers, 2023 2-35

ANS: Cash, receivables Inventories Equity method investments Land, buildings & equipment Favorable leases Developed technology Goodwill

3,000,000 1,000,000 3,000,000 3,000,000 6,000,000 3,000,000 39,500,000 Current liabilities Long-term liabilities Cash

4.

2,000,000 6,500,000 50,000,000

Topic: Valuation of identifiable intangible assets LO 1 Parsons Corporation acquires all of the assets and liabilities of Sonata Company at the beginning of 2023, in an acquisition reported as a merger. Developed technology, not reported on Sonata’s balance sheet, is appropriately reported as an acquired identifiable intangible asset. Parsons uses the income approach to value this intangible asset, at the present value of forecasted operating cash flow, net of taxes, capital charges and additional capital expenditures, for the next four years. The following information is collected as part of the valuation process: •

Projected 2023 operating income derived from the developed technology is $4 million before tax. This amount is expected to grow at a rate of 6% yearly.

•

Depreciation and amortization expense included in operating income is $1 million. This amount is expected to be constant during 2023-2026.

•

The tax rate for 2023-2026 is 25%.

•

Additional capital expenditures related to the developed technology are forecasted to be $500,000 in 2023, growing at a rate of 2% yearly.

•

The capital charge on contributory assets is estimated at $200,000. This amount is expected to be constant during 2023-2026.

•

The appropriate risk-adjusted discount rate is 20%.

Required Calculate the value of the developed technology, reported by Parsons as an acquired identifiable intangible asset. Round answers to the nearest dollar and assume cash flows occur at year-end. ANS: Operating income Less income tax expense After-tax operating income Plus depreciation expense Less capital expenditures Less contributory assets capital charge Net cash flow

2023 $4,000,000 (1,000,000) 3,000,000 1,000,000 (500,000)

2024 $4,240,000 (1,060,000) 3,180,000 1,000,000 (510,000)

2025 $4,494,400 (1,123,600) 3,370,800 1,000,000 (520,200)

2026 $4,764,064 (1,191,016) 3,573,048 1,000,000 (530,604)

(200,000) $3,300,000

(200,000) $3,470,000

(200,000) $3,650,600

(200,000) $3,842,444

$3,300,000/1.2 + $3,470,000/(1.2)2 + $3,650,600/(1.2)3 + $3,842,444/(1.2)4 = $9,125,368 © Cambridge Business Publishers, 2023 2-36

Advanced Accounting, 5th Edition

5.

Topic: Recognition of acquired intangibles, goodwill LO 1 ABC Services provides web services to professional service organizations. ABC acquires XYZ Consulting to broaden its service offerings, at a cost of $50,000,000. The book value of XYZ's recorded net assets (all tangibles) is $300,000, and their fair value is $3,000,000. XYZ also possesses the following unreported intangibles, with fair values as listed: Fair Value Customer contracts 4,000,000 Long-time customer relationships 8,000,000 Favorable lease contracts 3,500,000 Patent rights 10,000,000 Required Prepare a schedule to calculate the goodwill recognized for this acquisition. ANS: Identifiable intangibles arising from contractual or other legal rights, or separable intangibles, are capitalized by the acquirer. The customer contracts, favorable lease contracts, and patent rights meet these requirements. Acquisition cost $50,000,000 Fair value of identifiable net assets acquired: Tangible net assets $ 3,000,000 Customer contracts 4,000,000 Favorable lease contracts 3,500,000 Patent rights 10,000,000 20,500,000 Goodwill $29,500,000

Use the following information to answer Questions 6 and 7. Parrott Corporation acquires the assets and liabilities of Swann Company. The fair values of Swann’s reported assets and liabilities are estimated to be as follows at the date of acquisition. Fair Value Dr (Cr) Current assets $ 400 Plant & equipment, net 1,500 Liabilities (1,200) Parrott determines that Swann has not recorded the following intangible assets on its books: Fair Value Completed technology $ 600 Favorable leases 100 Synergies on future projects 250 Assembled workforce 800 These intangibles may or may not all meet the standards for capitalization as identifiable intangible assets. Each of the following questions is independent. Test Bank, Chapter 2

© Cambridge Business Publishers, 2023 2-37

6.

Topic: Valuation of assets acquired and liabilities assumed LO 1 Parrott pays $8,000 in cash to buy all of Swann’s assets and liabilities. Required a. How much in acquired previously unreported identifiable intangibles will Parrott report? b. What is the fair value of identifiable net assets acquired? c. How much goodwill does Parrott report? ANS: a. b. c.

7.

$600 + $100 = $700 $400 + $1,500 + $700 – $1,200 = $1,400 $8,000 – $1,400 = $6,600

Topic: Measurement of acquisition cost LO 2 Parrott issues 1,000 shares of $0.10 par stock to buy Swann’s assets and liabilities. Parrott’s stock has a market value of $8.50/share. Parrott pays $500 in registration fees to issue the stock, and the fees are paid in cash. Required a. What is Parrott’s credit to common stock (par)? b. What is Parrott’s credit to APIC? c. What is acquisition cost? d. How much goodwill does Parrott report? ANS: a. b. c. d.

8.

1,000 x $0.10 = $100 (1,000 x $8.50) – $100 – $500 = $7,900 (1,000 x $8.50) = $8,500, or $100 + $7,900 + $500 = $8,500 $8,500 – $1,400 = $7,100

Topic: Valuation of assets acquired and liabilities assumed, measurement of acquisition cost LO 1, 2 Vim Company acquired Worth Enterprises for $300 million in cash. This price reflected goodwill of $200 million and identifiable intangible assets of $85 million. Vim also incurred $8 million in acquisition-related legal and advisory services, paid in cash. Required a. In addition to goodwill and identifiable intangible assets, did Vim recognize any acquired tangible net assets, such as inventories, plant and equipment, and liabilities? If so, what was the fair value of tangible net assets at the date of acquisition? b. Prepare the journal entry to record this business combination.

© Cambridge Business Publishers, 2023 2-38

Advanced Accounting, 5th Edition

ANS: a. $300 - $200 - $85 = $15 million b. (in millions) Identifiable intangible assets Goodwill Tangible net assets Merger expenses Cash 9.

85 200 15 8 308

Topic: Assets acquired and liabilities assumed, measurement of acquisition cost LO 1,2 Powell Corporation paid $15 million in cash to acquire the assets and liabilities of Sloan Company. Powell also agreed to make an additional cash payment in the future, with an expected present value of $600,000, if certain performance targets are met. Powell paid legal and consulting fees of $300,000 in cash in connection with the merger. A comparison of book and fair values of Sloan’s reported assets and liabilities follows: (in thousands) Current assets………………………………………………………………….. Property and equipment, net…………………………………………… Patents and trademarks…………………………………………………… Current liabilities…………………………………………………………….. Long-term debt……………………………………………………………….. Net assets…………………………………………………………………………

Book Value $ 600 5,000 200 (400) (3,000) $2,400

Fair Value $ 450 2,000 1,800 (400) (3,200) $ 650

Sloan also has previously unreported developed technology, valued at $1.2 million, meeting ASC Topic 805 criteria for capitalization. Required a. What is the acquisition cost for this transaction? b. Prepare the journal entry or entries made by Powell to record the business combination as a merger. ANS: a. b.

$15,000,000 + $600,000 = $15,600,000 Current assets Property and equipment Patents and trademarks Identifiable intangible: developed technology Goodwill Merger expenses (income) Current liabilities Long-term debt Cash Earnout liability

Test Bank, Chapter 2

450,000 2,000,000 1,800,000 1,200,000 13,750,000 300,000 400,000 3,200,000 15,300,000 600,000

© Cambridge Business Publishers, 2023 2-39

10.

Topic: Assets acquired and liabilities assumed, measurement of acquisition cost, stock options LO 1,2 Adams Industries acquired Baker Supplies in a transaction reported as a merger. Adams paid Baker’s shareholders $100 million in cash and new stock with a fair value of $50 million and par value of $1 million. Adams converted Baker employees’ stock options, valued at $5 million, to Adams stock. $2 million of these options are vested and compensate for services performed prior to the acquisition date. Out-of-pocket acquisition costs were $4 million, paid in cash. The fair values of Baker’s identifiable net assets at the date of acquisition are as follows (in millions): Current assets Plant and equipment Identifiable intangibles Liabilities Fair value of identifiable net assets

$ 5 25 45 (20) $ 55

Required a. What is the total acquisition cost, and the amount of goodwill to be recognized? b. Prepare the journal entry to record this transaction. ANS: (in millions) a. $100 + $50 + $2 = $152 acquisition cost $152 - $55 = $97 goodwill b. Current assets Plant and equipment Identifiable intangibles Goodwill Merger expenses (income) Prepaid compensation expense Liabilities Cash Common stock (par) Additional paid-in capital

5 25 45 97 4 3 20 104 1 54

Use the following information to answer Questions 11, 12 and 13. Each question is independent. Arnprior Corporation acquires all of the assets and liabilities of Bracebridge Company at the beginning of the accounting year. The fair values of Bracebridge’s reported assets and liabilities are estimated to be as follows at the date of acquisition: Tangible assets Liabilities

Fair Value $ 2,000 (1,500)

Arnprior determines that Bracebridge has not recorded the following intangible assets on its books: Customer lists Brand names © Cambridge Business Publishers, 2023 2-40

Fair Value $200 600 Advanced Accounting, 5th Edition

Note: The above intangibles may or may not all meet the standards for capitalization as identifiable intangible assets. 11.

Topic: Valuation of assets acquired and liabilities assumed LO 1 Arnprior pays $6,000 in cash to buy Bracebridge. Required a. What is the fair value of identifiable net assets acquired? b. How much goodwill does Arnprior report? ANS: a. b.

12.

$2,000 + $200 + $600 – $1,500 = $1,300 $6,000 – $1,300 = $4,700

Topic: Measurement of acquisition cost LO 2 Arnprior pays $1,000 in cash and 1,000 shares of $0.50 par stock to buy Bracebridge’s outstanding stock. Arnprior’s stock has a market value of $8/share. Arnprior pays $100 in registration fees to issue the stock, and $150 in consulting fees. All fees are paid in cash. Required Prepare the journal entry to record the acquisition on Arnprior’s books. Arnprior treats the acquisition as a stock acquisition. ANS: Investment in Bracebridge Merger expenses

9,000 150 Cash Common stock (par) Additional paid-in capital

13.

1,250 500 7,400

Topic: Assets acquired and liabilities assumed, measurement of acquisition cost, subsequent changes in estimates LO 1, 2, 3 Arnprior pays $8,000 in cash to buy Bracebridge. Arnprior also agrees to pay Bracebridge’s former owners an additional amount if Bracebridge’s EBITDA exceeds a certain target amount over the next three years. Arnprior values this promise at a present value of $200. Arnprior pays consulting fees of $150 in cash in connection with this acquisition. Required a. Prepare the journal entry or entries Arnprior makes to record the acquisition as a merger. b. Three months after the acquisition, Arnprior determines that the date-of-acquisition fair value of Bracebridge’s tangible assets was really $1,100. Prepare the journal entry Arnprior makes to record this information.

Test Bank, Chapter 2

© Cambridge Business Publishers, 2023 2-41

ANS: a. Tangible assets Identifiable intangible assets Goodwill Merger expenses

2,000 800 6,900 150 Liabilities Cash Earnout liability

1,500 8,150 200

b. Goodwill

900 Tangible assets

14.

900

Topic: Earnings contingency LO 2 At the beginning of 2023, Pentron Corporation is in negotiations to acquire all of the stock of Santel Company. Pentron agrees to pay the former shareholders of Santel an additional cash amount at the end of 2025 (three years after the acquisition) that depends on the total reported earnings before interest, taxes, depreciation and amortization (EBITDA) for Santel during 20232025. Pentron will pay $2 for each dollar of total EBITDA above $10,000,000 that Santel reports. Here are Pentron’s expectations for Santel’s total reported EBITDA for 2023-2025. Total EBITDA $ 4,000,000 $ 8,000,000 $ 12,000,000 $ 16,000,000

Probability 0.40 0.10 0.20 0.30

The appropriate discount rate for this earnout is 15%. Required Calculate the amount of the earnout that Pentron should report as part of its cost of acquiring Santel. Round your answer to the nearest thousand dollars. ANS: ($12,000,000 – $10,000,000) x 0.20 x $2 ($16,000,000 – $10,000,000) x 0.30 x $2 $4,400,000/(1.15)3

© Cambridge Business Publishers, 2023 2-42

$ 800,000 3,600,000 $ 4,400,000 $ 2,893,000

Advanced Accounting, 5th Edition

15.

Topic: Earnings Contingency LO 2 To induce the owners of Splunk Company to sell to Patterson Corporation, an earnings contingency was included in the acquisition agreement. Patterson agrees to pay the former owners of Splunk $5 for every dollar of total EBITDA earned over $20 million in the next four years. The payment would be made at the end of four years. Expected total EBITDA in the next four years is as follows: Total EBITDA earned Less than $20 million $20 million 25 million 40 million

Probability 0.60 0.20 0.15 0.05

Required What is the expected present value of the earnout at the date of acquisition, assuming a discount rate of 25%? Round your answer to the nearest thousand dollars. ANS: ($25,000,000 - $20,000,000) x $5 x 0.15 ($40,000,000 - $20,000,000) x $5 x 0.05 $8,750,000/(1.25)4 16.

$3,750,000 5,000,000 $8,750,000 $3,584,000

Topic: Valuation of assets acquired and liabilities assumed, acquisition cost LO 1, 2 Dr. Pepper Snapple Group (DPSG) acquired the assets and liabilities of Turquoise Water Inc., in a merger. The acquisition involves the following payments: Cash paid to Turquoise Water shareholders Cash paid to Morgan Stanley for consulting services New stock issued, 100,000 shares, $0.50 par, fair value at acquisition Stock registration fees, paid in cash Earnings contingency, to be paid in three years, present value

$85,000,000 12,000,000 5,000,000 600,000 2,000,000

Turquoise Water’s balance sheet just prior to the acquisition appears below. information on Turquoise Water’s assets and liabilities is also provided.

Test Bank, Chapter 2

Fair value

© Cambridge Business Publishers, 2023 2-43

Turquoise Water, Inc. Book Value Assets Current assets Plant and equipment, net Patents and trademarks Total assets Liabilities & Equity Current liabilities Long-term liabilities Common stock, par value Additional paid-in capital Retained earnings Accumulated OCI Treasury stock Total liabilities & equity

Fair Value

$ 1,000,000 41,000,000 3,400,000 $ 45,400,000

$

$

400,000 40,000,000 500,000 8,500,000 (2,000,000) (1,400,000) (600,000) $ 45,400,000

800,000 10,000,000 20,000,000

400,000 41,000,000

In addition to the assets reported on Turquoise Water’s balance sheet, the following previously unreported intangible assets are identified: Fair Value Bottlers’ franchise rights $ 10,400,000 Skilled workforce 15,000,000 Non-competition agreements 4,000,000 Expected expansion into new product lines 5,000,000 Order backlogs 2,000,000 Required a. Prepare the journal entry DPSG makes to record this acquisition as a merger. b. Now assume DPSG acquires all of the stock of Turquoise Water. Prepare the journal entry DPSG makes to record this acquisition as a stock acquisition. ANS: a. Current assets Plant and equipment Patents and trademarks Bottlers’ franchise rights Non-competition agreements Order backlogs Merger expenses Goodwill

800,000 10,000,000 20,000,000 10,400,000 4,000,000 2,000,000 12,000,000 86,200,000 Current liabilities Long-term liabilities Cash Common stock, par Additional paid-in capital Earnout liability

© Cambridge Business Publishers, 2023 2-44

400,000 41,000,000 97,600,000 50,000 4,350,000 2,000,000

Advanced Accounting, 5th Edition

b. Investment in Turquoise Water Merger expenses

92,000,000 12,000,000 Cash Common stock, par Additional paid-in capital Earnout liability

17.

97,600,000 50,000 4,350,000 2,000,000

Topic: Valuation of assets acquired and liabilities assumed, acquisition cost LO 1, 2 IBM acquired all of DemandTec’s assets and liabilities. DemandTec’s assets and liabilities at the date of acquisition are as follows:

Cash & receivables Inventories Plant & equipment, net Loans payable

Book Value Dr (Cr) $ 2,000,000 10,000,000 30,000,000 (35,000,000)

Fair Value Dr (Cr) $ 1,000,000 5,000,000 11,000,000 (36,000,000)

IBM identifies the following intangibles that exist at the acquisition date but are not currently reported on DemandTec’s books. Not all of these may qualify as separately reported identifiable intangible assets, per ASC Topic 805. Fair Value $ 10,000,000 3,000,000 6,000,000 30,000,000

Brand name Potential contracts with prospective customers Order backlogs Technically skilled workforce

The acquisition terms are as follows: • $5,000,000 in cash paid to the former owners of DemandTec. •

200,000 new shares of IBM common stock, par value $0.10 and market value $150/share. Registration fees, paid in cash, were $500,000.

•

$2,000,000 in cash paid to Credit Suisse for consulting services.

•

Earnings contingency with an expected present value of $4,000,000 at the date of acquisition.

Required Prepare the journal entry to record this acquisition on IBM’s books.

Test Bank, Chapter 2

© Cambridge Business Publishers, 2023 2-45

ANS: Cash & receivables Inventories Plant & equipment Brand name Order backlogs Goodwill Merger expenses

1,000,000 5,000,000 11,000,000 10,000,000 6,000,000 42,000,000 2,000,000 Loans payable Earnings contingency liability Cash Common stock APIC

18.

36,000,000 4,000,000 7,500,000 20,000 29,480,000

Acquisition with stock options LO 1, 2 Fir Corporation acquired the net assets of Pine Inc. by issuing one million shares of $.01 par value stock with a total fair value of $35 million. In addition, Fir converted Pine’s unvested employee stock options to Fir stock. The stock options are valued at $3 million, of which $2 million is considered compensation for work performed prior to the acquisition. Registration fees for the stock issued were $400,000, and consulting fees were $600,000, all paid in cash. Pine’s reported assets had a fair value of $25 million, consisting of $5 million in current assets and $20 million in plant and equipment. The fair value of Pine’s liabilities was $30 million. Previously unreported technology owned by Pine, and capitalizable per ASC 805, was valued at $2.5 million. Required Prepare the journal entry made by Fir Corporation to record the acquisition as a merger. ANS: Current assets Plant & equipment Technology Merger expenses Prepaid compensation expense Goodwill

5,000,000 20,000,000 2,500,000 600,000 1,000,000 39,500,000 Liabilities Cash Common stock APIC

© Cambridge Business Publishers, 2023 2-46

30,000,000 1,000,000 10,000 37,590,000

Advanced Accounting, 5th Edition

19.

Valuation of goodwill and consideration paid LO 1, 2 Hally Corporation acquired the net assets of Izzy Inc. by paying Izzy’s shareholders $65 million in cash, and reported the transaction as a merger. In addition, stock-based compensation awards attributable to pre-combination services had a fair value of $4.5 million, and stock issued to holders of vested performance share units were valued at $2.5 million. Acquisition-related legal and advisory fees paid to outside consultants, in cash, totaled $1.25 million. Compensation related to employee retention plans for the period following acquisition, paid in cash at the date of acquisition, totaled $0.75 million. An estimated $1 million associated with these retention plans remains to be paid in future years. The fair values of Izzy’s reported current assets and noncurrent assets at the date of acquisition were $2 million and $40 million, respectively, and the fair value of its reported liabilities was $36 million. Izzy also had unreported identifiable intangible assets valued at $3 million and unreported liabilities of $5 million. Required a. Compute the total acquisition cost for this business combination. If any payments are excluded from your calculation, explain why they are excluded and specify the appropriate accounting for these payments. b. Compute the goodwill recognized for this business combination. c. Prepare the journal entry to record the business combination. ANS: a. Cash paid to Izzy’s shareholders Stock-based compensation for pre-combination services Vested performance shares Acquisition cost

$65,000,000 4,500,000 2,500,000 $72,000,000

Consulting fees are expensed as incurred. Compensation for future services is expensed over the related service period. b. Acquisition cost Fair value of identifiable net assets: Current assets Noncurrent assets Intangibles Liabilities Goodwill

$72,000,000 $2,000,000 40,000,000 3,000,000 (41,000,000)

4,000,000 $68,000,000

c. Current assets Noncurrent assets Intangibles Merger expenses Goodwill

2,000,000 40,000,000 3,000,000 1,250,000 68,000,000 Liabilities Cash APIC

Test Bank, Chapter 2

41,000,000 66,250,000 7,000,000 © Cambridge Business Publishers, 2023 2-47

Use the following information to answer questions 20 – 22 below. Drover Corporation acquired all of Exeter Company’s assets and liabilities in an all-cash acquisition. Drover recorded the transaction as follows: Current assets Plant assets Identifiable intangibles Goodwill

500,000 20,000,000 4,500,000 15,000,000 Liabilities Cash

20.

17,000,000 23,000,000

Topic: Changes in estimated valuations LO 3 Subsequent to the acquisition, Drover obtains information that Exeter’s plant assets have a fair value of $15 million. Required Prepare the journal entry needed to record this information, if the change in value occurs: a. During the measurement period. b. Outside of the measurement period. ANS: a. Goodwill

5,000,000 Plant assets

5,000,000

b. Loss (income)

5,000,000 Plant assets

21.

5,000,000

Topic: Changes in estimated valuations LO 3 Subsequent to the acquisition, Drover obtains information that Exeter’s plant assets have a fair value of $25 million. Required Prepare the journal entry needed to record this information, if the change in value occurs: a. During the measurement period. b. Outside of the measurement period. ANS: a. Plant assets

5,000,000 Goodwill

b.

5,000,000

No entry; writeups of plant assets are not recorded using normal accounting

© Cambridge Business Publishers, 2023 2-48

Advanced Accounting, 5th Edition

22.

Topic: Changes in estimated valuations, bargain purchase LO 3, 4 Subsequent to the acquisition, Drover obtains information that Exeter has additional identifiable intangibles with a fair value of $18 million. Required Prepare the journal entry needed to record this information, if the change in value occurs: a. During the measurement period. b. Outside of the measurement period. ANS: a. Identifiable intangibles

18,000,000 Goodwill Bargain gain (income)

b. 23.

15,000,000 3,000,000

No entry; identifiable intangibles are not recorded using normal accounting.

Topic: Subsequent value changes LO 3, 5 Plattsburgh Company acquired all of Sedona Corporation’s assets and liabilities for $40 million in cash. At the date of acquisition, Sedona’s identifiable net assets had a fair value of $10 million. Required For each of the following value changes occurring six months subsequent to the acquisition, prepare the journal entry, if any, to record the revaluation. Treat each change independently. a.

b.

c. d.

e.

f. g.

It was determined that brand names valued at $1 million at the date of acquisition, and capitalized per ASC Topic 805 requirements, actually had a value of $5 million at the date of acquisition. A downturn in the economy subsequent to the acquisition resulted in a $2 million decline in the value of acquired developed technology, capitalized at the date of acquisition per ASC Topic 805 requirements. Land valued at $6 million at the date of acquisition increased in value to $8 million due to an increased demand for real estate in the last six months. The acquisition included an earnout provision, valued at $3 million at the date of acquisition. Due to an upturn in demand for Sedona’s products in the last six months, the expected present value of the earnout is now $5 million. The acquisition included an earnout provision, valued at $3 million at the date of acquisition. New information is obtained about Sedona’s expected future performance as of the date of acquisition, increasing its expected present value to $4 million at the date of acquisition. It is determined that Sedona’s acquisition-date liabilities omitted a pending lawsuit valued at $1.5 million. Sedona’s acquired liabilities, reported by Plattsburgh, include a pending lawsuit with a date-of-acquisition estimated value of $10 million. Because of events occurring subsequent to the acquisition, it is determined that the lawsuit’s value has declined to $2 million.

Test Bank, Chapter 2

© Cambridge Business Publishers, 2023 2-49

h.

i.

Sedona’s acquired assets include AFS debt investments with a date-of-acquisition value of $2 million. These investments increase in value to $2.5 million due to a decline in market interest rates subsequent to acquisition. Sedona’s acquired assets include AFS debt investments with a date-of-acquisition value of $2 million. It is determined that some AFS debt investments were omitted from the inventory of acquired investments. The value of these omitted investments was $1.5 million.

ANS: a. Brand names (intangible asset)

4,000,000 Goodwill

4,000,000

b. Impairment loss (income)

2,000,000 Developed technology (intangible asset)

c.

2,000,000

Not reported

d. Loss on earnout (income)

2,000,000 Earnings contingency liability

2,000,000

e. Goodwill

1,000,000 Earnings contingency liability

1,000,000

f. Goodwill

1,500,000 Lawsuit liability

1,500,000

g. Lawsuit liability

8,000,000 Gain on lawsuit (income)

8,000,000

h. AFS investments

500,000 Gain on AFS investments (OCI)

500,000

i. AFS investments

1,500,000 Goodwill

© Cambridge Business Publishers, 2023 2-50

1,500,000

Advanced Accounting, 5th Edition

24.

Topic: Earnings contingency and subsequent revaluation LO 2, 3 Patterson Corporation acquired Slees Company, with the entire consideration in the form of an earnout. Patterson Corporation agreed to pay the former owners of Slees Company three times total operating income earned over the next three years. The payment, if any, would be made at the end of three years. Patterson originally reported the earnout at $350 million. Required a. Assume Patterson used a discount rate of 20% to record the earnout at the date of acquisition. What did Patterson expect total operating income over the next three years to be? Round your answer to the nearest million. b. What factors determined the discount rate used in Part a.? c. Patterson estimated the fair value of Slees’ identifiable net assets to be $150 million at the date of acquisition. How did the existence of the earnout affect the entry Patterson made to record the acquisition? d. During the first year, the value of the earnout increased to $375 million due to the passage of time. How did Patterson record this increase in value? ANS: a.

Let E = Expected operating income $350 = 3E/(1.2)3 E = $201.6 million

b.

The discount rate should be the risk-free rate adjusted for the uncertainty connected with the payout. Factors include the current prime rate and variability in expected future performance, which is a function of the predicted risk associated with economic variables impacting the company’s ability to perform.

c.

Without the earnout, no consideration was paid and Patterson would have reported a bargain gain of $150 million. Since the earnout was valued at $350 million, Patterson reported goodwill of $200 million (= $350 – $150 million).

d.

The passage of time is a subsequent event. The entry is as follows (in millions): Loss (income)

25 Earnout liability

25.

25

Topic: Income effects of measurement period adjustments LO 3 On December 1, 2023, Pronto Corporation acquired all of the assets and liabilities of Slipup Company. The acquisition generated goodwill of $50,000,000. At the date of acquisition, Slipup’s identifiable intangibles had an estimated fair value of $2,400,000, and a 2-year life, straight-line. On June 30, 2024, new information reveals that the fair value of the intangibles was $3,600,000 at the date of acquisition. Pronto’s accounting year ends on December 31. Required Prepare the journal entry or entries to record the change in valuation of Slipup’s intangibles on June 30, 2024, assuming the valuation change is within the measurement period, and depreciation has already been recorded through June 30, 2024.

Test Bank, Chapter 2

© Cambridge Business Publishers, 2023 2-51

ANS: Identifiable intangibles Amortization expense

850,000 350,000

Goodwill To correct the valuation of acquired equipment and related depreciation.

1,200,000

The uncorrected balance in the intangibles account at June 30, 2024 is $2,400,000 x 17/24 = $1,700,000. The corrected balance is $3,600,000 x 17/24 = $2,550,000. The correction to the intangibles account is $850,000 = $2,550,000 - $1,700,000. The total amortization expense correction over the 7 prior months = ($3,600,000 - $2,400,000) x 7/24 = $350,000. Although one month of the correction belongs in 2023, it is recognized in 2024. 26.

Topic: Income effects of measurement period adjustments LO 3 On November 1, 2023, Pronto Corporation acquired all of the assets and liabilities of Slipup Company. The acquisition generated goodwill of $30,000,000. At the date of acquisition, Slipup’s equipment had an estimated fair value of $15,000,000, and a 4-year life, straight-line. On April 30, 2024, new information reveals that the equipment’s fair value was $25,000,000 at the date of acquisition. Pronto’s accounting year ends on December 31. Required Prepare the journal entry or entries to record the change in valuation of Slipup’s equipment on April 30, 2024, assuming the valuation change is within the measurement period, and depreciation has already been recorded through April 30. ANS: Equipment, net Depreciation expense

8,750,000 1,250,000

Goodwill To correct the valuation of acquired equipment and related depreciation.

10,000,000

The adjustment, net of depreciation, to the equipment account = ($25,000,000 - $15,000,000) x (42/48) = $8,750,000. Alternatively, the correction to depreciation expense = [($25,000,000 $15,000,000)/4] x (6/12) = $1,250,000. Although two months of the depreciation expense adjustment is related to 2023, it is recognized as part of 2024 depreciation.

© Cambridge Business Publishers, 2023 2-52

Advanced Accounting, 5th Edition

27.

Topic: Income effects of measurement period adjustments LO 3 On September 30, 2023, Pepper Corporation acquired all of the assets and liabilities of Salt Company. The acquisition generated goodwill of $50,000,000. At the date of acquisition, identifiable intangibles related to developed technology were reported at a value of $13,800,000, and subsequently amortized using an estimated life of 3 years, straight-line. On March 31, 2024, new information reveals that the technology’s fair value was $3,000,000 at the date of acquisition. Pepper’s accounting year ends on December 31. Round answers to the nearest dollar if necessary. Required Prepare the journal entry or entries to record the change in valuation of the developed technology on March 31, 2024, assuming the valuation change is within the measurement period, and a. b.

Amortization on the identifiable intangible has already been recorded through March 31, 2024. Amortization on the identifiable intangible has not yet been recorded for the first quarter of 2024.

ANS: a. Goodwill

10,800,000 Identifiable intangibles Amortization expense To correct the valuation of acquired technology and related amortization.

9,000,000 1,800,000

The adjustment, net of amortization, to the intangibles account = ($3,000,000 - $13,800,000) x (30/36) = $9,000,000. Alternatively, the correction to amortization expense = [($3,000,000 $13,800,000)/3] x (6/12) = $1,800,000. Although three months of the amortization expense adjustment is related to 2023, it is recognized as an adjustment to 2024 amortization. b.

The solution below splits the entries into two parts to clarify the reasoning. Goodwill

10,800,000 Identifiable intangibles 9,900,000 Amortization expense 900,000 To correct the valuation of acquired technology and related amortization as of the end of 2023. Now the identifiable intangibles balance is corrected as of the start of 2024, and the first quarter’s amortization expense is recorded normally: Amortization expense 250,000 Identifiable intangibles 250,000 To record amortization expense for the first quarter of 2024. $250,000= ($3,000,000/3) x 3/12. The entries may be handled in different ways. However, in both a. and b., the total amortization expense recorded in 2024 must be $(650,000), and the intangibles balance at March 31, 2024 is $2,500,000 (= $3,000,000 – ($3,000,000/3 x ½). The amounts already recorded differ between scenarios a. and b. and therefore the corrections are different.

Test Bank, Chapter 2

© Cambridge Business Publishers, 2023 2-53

28.

Topic: Intangibles valuation and measurement changes LO 1, 3 Fox Company acquires Gerbil Inc. for $15 million in cash, and reports it as a merger. The fair value of Gerbil’s tangible net assets is $1 million. Gerbil also has previously unreported developed technology, reportable following ASC 805 requirements. Fox uses the income approach to value the technology, using a 10% discount rate. At the date of acquisition, cash flows are estimated to be $2 million each year for the next three years. Required a. Estimate the value of the developed technology at the date of acquisition. Assume the yearly cash flows take place at the end of each year, and round your answer to the nearest thousand. b. Prepare the entry to record the merger. c. Two months after the merger, new information becomes available changing the expected cash flows from the developed technology to $2.5 million per year. Prepare the entry, if any, to record the new information when (1) the new estimate clarifies the value of the developed technology at the date of acquisition, or (2) the new estimate is the result of events occurring subsequent to the acquisition. Ignore amortization. ANS: (amounts are in thousands) a. Present value of $2 million per year for 3 years at 10% = $4,974 b. Tangible net assets Developed technology Goodwill Cash c.

(1)

15,000

Present value of $2.5 million per year for 3 years at 10% = $6,217 Correction = $6,217 - $4,974 = $1,243

Developed technology

1,243 Goodwill

(2)

1,000 4,974 9,026

1,243

No entry, because increases in the value of reported intangible assets are not reported using normal GAAP.

© Cambridge Business Publishers, 2023 2-54

Advanced Accounting, 5th Edition

29.

Topic: Bargain purchase LO 4 Plains Company pays $2,500,000 in cash to acquire the assets and liabilities of Southwest Corporation. Southwest’s balance sheet at the date of acquisition, including fair values of reported assets and liabilities, appears below. In addition, Southwest has previously unreported technology valued at $5,000,000. Southwest Corporation Book Value

Fair Value

Assets Current assets Plant & equipment, net Total assets

$ 5,000,000 20,000,000 $ 25,000,000

$ 2,000,000 18,000,000

Liabilities & Equity Liabilities Capital stock Retained earnings AOCI Total liabilities & equity

$ 22,000,000 4,000,000 (950,000) (50,000) $ 25,000,000

22,000,000

Required Prepare Plains’ journal entry to record its acquisition of Southwest. ANS: Current assets Plant & equipment Identifiable intangibles

2,000,000 18,000,000 5,000,000 Liabilities Cash Gain on purchase (income)

Test Bank, Chapter 2

22,000,000 2,500,000 500,000

© Cambridge Business Publishers, 2023 2-55

30.

Topic: Valuation of assets acquired and liabilities assumed, acquisition cost, bargain purchase LO 1, 2, 4 Delight Candy acquires all of the assets and liabilities of Orbit Brands. Delight incurs the following costs for the acquisition: • • • •

5,000,000 shares of new Delight common stock, par value $0.10/share, market value $6/share, issued to the former shareholders of Orbit Registration fees connected with issuing the new shares, $200,000, paid in cash $1,000,000 in cash paid to retire the outstanding Orbit stock Consulting fees paid to Goldman Sachs, in cash: $1,100,000

The balance sheet of Orbit immediately prior to the acquisition is as follows: Orbit Brands Assets Current assets Plant & equipment, net Trademarks Total assets Liabilities & Equity Current liabilities Long-term liabilities Capital stock Retained earnings Accumulated other comprehensive income Treasury stock Total liabilities & equity

Book Value

Fair Value

$ 8,400,000 40,000,000 1,000,000 $ 49,400,000

$ 6,000,000 30,000,000 5,000,000

$

400,000 44,000,000

400,000 45,000,000 4,000,000 2,000,000 1,000,000 (3,000,000) $ 49,400,000

In addition to the assets and liabilities already reported, Orbit has the following previously unrecorded intangible assets that meet the requirements for capitalization: Intangible Asset Brand names Secret formulas

Fair Value $ 8,000,000 20,000,000

Required a. Prepare the journal entry or entries to record the acquisition on Delight’s books. b. Assume the same information as above, but Orbit has an additional previously unreported intangible that meets the requirements for capitalization: a noncompetition agreement with a fair value of $10,000,000. All fair value calculations have been double checked for accuracy and found to be correct. Make the journal entry or entries to record the acquisition on Delight’s books.

© Cambridge Business Publishers, 2023 2-56

Advanced Accounting, 5th Edition

ANS:

a. Current assets Plant & equipment Trademarks Brand names Secret formulas Goodwill Merger expenses

6,000,000 30,000,000 5,000,000 8,000,000 20,000,000 6,400,000 1,100,000 Current liabilities Long-term liabilities Cash Common stock APIC

400,000 44,000,000 2,300,000 500,000 29,300,000

b. Current assets Plant & equipment Trademarks Brand names Secret formulas Noncompetition agreement Merger expenses

6,000,000 30,000,000 5,000,000 8,000,000 20,000,000 10,000,000 1,100,000 Current liabilities Long-term liabilities Cash Common stock APIC Gain on acquisition (income)

Test Bank, Chapter 2

400,000 44,000,000 2,300,000 500,000 29,300,000 3,600,000

© Cambridge Business Publishers, 2023 2-57

31.

Topic: Valuation of assets and liabilities, acquisition cost, bargain purchase LO 1, 2, 4 Schenk Corporation’s balance sheet immediately prior to its acquisition by Piaget Company is as follows: Schenk Corporation Book Value Fair Value Assets Current assets $ 3,000,000 $ 2,000,000 Plant & equipment, net 24,000,000 18,000,000 Total assets $ 27,000,000 Liabilities & Equity Liabilities Common stock Additional paid-in capital Retained earnings AOCI Total liabilities & equity

$ 23,220,000 60,000 3,400,000 400,000 (80,000) $ 27,000,000

23,000,000

In addition to the assets already reported by Schenk, previously unreported identifiable intangible assets valued at $10,000,000 are identified as owned by Schenk Corporation. These assets are appropriately recorded by Piaget as assets. Piaget Company issues 200,000 shares of new $0.10 par common stock with a market value of $75/share to acquire Schenk’s assets and liabilities. Stock registration fees are $300,000 and costs for the services of outside accountants and lawyers are $500,000, both paid in cash. Required a. Prepare Piaget’s entry to record the acquisition. b. Now assume Piaget Company issues 50,000 shares of $0.10 par common stock with a market value of $75/share to acquire Schenk’s assets and liabilities. Registration fees for the stock issue are $100,000 and out of pocket costs for the services of outside accountants and lawyers are $125,000, both paid in cash. The terms of the merger include an earnings contingency. Piaget Company estimates the expected present value of the payout on the earnings contingency to be $200,000. Prepare Piaget’s entry to record the acquisition.

© Cambridge Business Publishers, 2023 2-58

Advanced Accounting, 5th Edition

ANS: a. Current assets Plant & equipment Identifiable intangibles Goodwill Merger expenses

2,000,000 18,000,000 10,000,000 8,000,000 500,000 Liabilities Common stock APIC Cash

23,000,000 20,000 14,680,000 800,000

b. Current assets Plant & equipment Identifiable intangibles Merger expenses

2,000,000 18,000,000 10,000,000 125,000 Liabilities Earnings contingency liability Common stock APIC Cash Gain on purchase (income)

32.

23,000,000 200,000 5,000 3,645,000 225,000 3,050,000

Topic: Bargain purchase LO 2, 4 Frank Inc. acquired Gorman Company and reported the acquisition as a merger. Consideration paid consisted of $30 million in cash and 700,000 shares of $0.01 par common stock with a fair value of $45 per share. The estimated fair value of Gorman’s tangible assets was $455 million, and its liabilities had a fair value of $400 million. Gorman also has intangible assets valued at $10 million, which are appropriately capitalized per ASC 805. Required Prepare the entry to record the merger. ANS: Tangible assets Intangible assets

455,000,000 10,000,000 Liabilities Cash Common stock APIC Gain on purchase (income)

Test Bank, Chapter 2

400,000,000 30,000,000 7,000 31,493,000 3,500,000

© Cambridge Business Publishers, 2023 2-59

33.

Topic: Assets acquired and liabilities assumed, measurement of acquisition cost, in-process R&D LO 1, 2, 5 Date-of-acquisition information on an acquired company’s reported assets and liabilities appears below:

Current assets Property, plant, and equipment, net Total assets Liabilities Capital stock Retained earnings Total liabilities and equity

Book Value $ 3,000 10,000 $ 13,000

Fair Value $ 1,500 5,000

$ 8,000 1,000 4,000 $ 13,000

7,600

The following amounts were paid by the acquiring company: Cash consideration to the former owners Fair value of 1,000,000 shares of new no-par common stock issued Registration fees on new stock issued, paid in cash Accounting, consulting, and attorney services, paid in cash Fair value of earnings contingency

$35,000 70,000 2,000 5,000 500

The acquired company has the following previously unreported intangible assets. Not all of them meet the criteria for separate recognition as assets. Favorable lease agreements Developed technology Future product improvements Optimization of product and service delivery In-process research and development projects

$ 3,000 18,000 4,000 15,000 22,000

Required The acquiring company records the assets and liabilities of the acquired company directly on its books. Prepare the journal entry the acquiring company made to record the acquisition. ANS: Current assets Property, plant and equipment Favorable lease agreements Developed technology In-process R&D Goodwill Merger expenses

1,500 5,000 3,000 18,000 22,000 63,600 5,000 Liabilities Cash Capital stock Earnout liability

© Cambridge Business Publishers, 2023 2-60

7,600 42,000 68,000 500

Advanced Accounting, 5th Edition

34.

Topic: Valuation of assets acquired and liabilities assumed, acquisition cost, subsequent value changes, preacquisition contingency, in-process R&D LO 1, 2, 3, 5 Serano Corporation’s trial balance is as follows:

Cash and receivables Inventories Property, plant, and equipment, net Liabilities Capital stock Retained earnings

Serano Dr (Cr) $ 200 600 7,500 (7,600) (720) 20

An analysis of Serano’s assets and liabilities reveals that its inventories are overvalued by $250 and its property, plant and equipment is overvalued by $2,000. In addition, the following items are not currently reported on Serano’s balance sheet:

• • •

Customer contracts, valued at $25 In-process research and development, valued at $100 Expected future warranty liabilities with a present value of $20

Pago issues new stock with a market value of $700 to acquire the assets and liabilities of Serano. Stock registration fees are $40, paid in cash. Consulting, accounting, and legal fees connected with the merger are $80, paid in cash. In addition, Pago enters into an earnings contingency agreement, whereby Pago will pay the former shareholders of Serano an additional amount if Serano’s performance meets certain minimum levels. The present value of the contingency is estimated at $30. Required a. Prepare the journal entry Pago makes to record the acquisition. b. Now assume that during the measurement period, new information comes in regarding the value of Serano’s property, plant and equipment at the date of acquisition. It is determined that the property was actually worth $400 less than previously estimated. Make the entry to record this new information.

Test Bank, Chapter 2

© Cambridge Business Publishers, 2023 2-61

ANS: a. Cash and receivables Inventories Property, plant & equipment Identifiable intangibles Goodwill Merger expenses

200 350 5,500 125 2,175 80 Liabilities Cash Earnings contingency liability Capital stock

7,620 120 30 660

b. Goodwill

400 Property, plant & equipment

35.

400

Topic: Valuation of assets acquired and liabilities assumed, acquisition cost, in-process R&D, deferred taxes LO 1, 2, 5 International Auto (IA) acquires Genuine Parts, Inc. (GP). The acquisition involves the following payments: Cash paid to GP Cash paid to consultants and lawyers New stock issued, 1,000 shares, $2 par Stock registration fees, paid in cash

$ 5,000 1,200 36,000 900

Here is GP’s balance sheet at the date of acquisition. Fair value information on GP’s assets and liabilities is also provided. Genuine Parts, Inc. Book value

Fair value

Assets Current assets Plant assets, net Trademarks Total assets

$ 1,000 27,000 3,400 $31,400

$ 1,200 20,000 6,000

Liabilities & Equity Current liabilities Long-term liabilities Common stock, par value Additional paid-in capital Retained earnings Treasury stock Total liabilities & equity

$ 400 26,000 500 8,500 (3,400) (600) $31,400

400 25,000

© Cambridge Business Publishers, 2023 2-62

Advanced Accounting, 5th Edition

In addition to the assets reported on GP’s balance sheet, the following previously unreported intangible assets are identified. Fair Value $ 900 4,000 1,500

Licensing agreements Order backlogs In-process R&D The acquisition also results in a deferred tax asset valued at $1,000.

Required IA acquires all of the assets and liabilities of GP. Prepare the journal entry IA makes to record this acquisition. ANS: Current assets Plant assets Identifiable intangibles Deferred tax assets Goodwill Merger expenses

1,200 20,000 12,400 1,000 31,800 1,200 Current liabilities Long-term liabilities Cash Common stock APIC

36.

400 25,000 7,100 2,000 33,100

Topic: Valuation of assets acquired and liabilities assumed, acquisition cost, in-process R&D, preacquisition contingency, deferred taxes LO 1, 2, 5 Bed & Bath buys all of Costless Company’s assets and liabilities in a nontaxable acquisition. Costless’ balance sheet at the date of acquisition, including fair value information on its reported assets and liabilities, is as follows: Book Value Dr (Cr)

Fair Value Dr (Cr)

Assets Cash, receivables Inventories Property and equipment Total assets

$ 1,000,000 5,000,000 60,000,000 $ 66,000,000

$

Liabilities & Equity Accounts and notes payable Common stock Additional paid-in capital Retained earnings Total liabilities and equity

$ 30,000,000 500,000 15,000,000 20,500,000 $ 66,000,000

30,500,000

Test Bank, Chapter 2

800,000 3,000,000 35,000,000

© Cambridge Business Publishers, 2023 2-63

Assets and liabilities attributed to Costless, not currently reported on its books are: Fair value $1,800,000 1,500,000

In-process R&D Warranty liabilities

In addition, a deferred tax asset of $2,500,000 is recognized as part of the acquisition. The acquisition terms are as follows: • Bed & Bath paid Costless’ shareholders a total of $20,000,000 in cash. • Bed & Bath issued a total of 2,000,000 new shares of its common stock to Costless’ shareholders. Bed & Bath’s shares have a par value of $0.01/share and a total fair value of $50,000,000. Bed & Bath paid $500,000 in cash for registration fees to issue the shares. • Bed & Bath paid $750,000 to Goldman Sachs for merger advisement, all paid in cash. Required a. Explain why a deferred tax asset might be recorded for this acquisition. b. Prepare the journal entry to record this acquisition on Bed & Bath’s books. ANS: a.

The fair values of Costless’ identifiable assets are mostly less than book value. Because the acquisition is nontaxable, write-offs of these assets will appear on Bed & Bath’s books at amounts that are lower than allowed tax deductions. Therefore, tax expense will be higher than taxes owed in future years, creating an asset that will decline over time.

b. Cash, receivables Inventories Property and equipment Identifiable intangibles Deferred tax asset Merger expenses Goodwill

800,000 3,000,000 35,000,000 1,800,000 2,500,000 750,000 58,900,000 Accounts and notes payable Warranty liabilities Cash Common stock APIC

© Cambridge Business Publishers, 2023 2-64

30,500,000 1,500,000 21,250,000 20,000 49,480,000

Advanced Accounting, 5th Edition

37.

Topic: Acquired deferred taxes LO 5 Peabody Company acquires all of the assets and liabilities of Shea Company in a nontaxable acquisition at the beginning of the year, reporting the acquisition as a merger. The tax basis of Shea’s plant assets was $8 million. Their date-of-acquisition fair values totaled $10 million. The plant assets have an average remaining life, as of the date of acquisition, of 20 years. During the year, Peabody reports income before depreciation on Shea’s plant assets of $3.5 million. Assume a tax rate of 25%. Required a. At what value does Peabody report acquired deferred taxes at the date of acquisition? Is this an asset or liability? Explain. b. Prepare Peabody’s journal entry to record income taxes for the year. Report taxes owed as taxes payable. ANS: a.

b.

($10,000,000 – $8,000,000) x 25% = $500,000 This amount is reported as an acquired deferred tax liability. Peabody will only be able to deduct depreciation based on the lower $8 million value, but it will report depreciation expense based on the higher $10 million value. Therefore, in future years, it will pay more taxes than it reports as tax expense, due to the lower deductible depreciation, and the difference is a liability at the date of acquisition. Tax expense = [$3,500,000 – ($10,000,000/20)] x 25% = $750,000 Taxes payable = [$3,500,000 – ($8,000,000/20)] x 25% = $775,000 2021 entry: Tax expense Deferred tax liability

750,000 25,000 Taxes payable

38.

775,000

Topic: Acquired deferred taxes LO 5 PNC Corporation acquires all of the assets and liabilities of SPN Company in a nontaxable acquisition at the beginning of the year, reporting the acquisition as a merger. The tax basis of SPN’s buildings and equipment was $35 million. Their date-of-acquisition fair values totaled $15 million. The buildings and equipment have an average remaining life, as of the date of acquisition, of 20 years. During the year, PNC reports income before depreciation on SPN’s buildings and equipment of $4 million. Assume a tax rate of 25%. Required a. At what value does PNC report acquired deferred taxes at the date of acquisition? Is this an asset or liability? Explain. b. Prepare PNC’s journal entry to record income taxes for the year. Report taxes owed as taxes payable.

Test Bank, Chapter 2

© Cambridge Business Publishers, 2023 2-65

ANS: a.

b.

($35,000,000 – $15,000,000) x 25% = $5,000,000. This amount is reported as an acquired deferred tax asset. PNC will be able to deduct depreciation based on the higher $35 million value, but it will report depreciation expense based on the lower $15 million value. Therefore, it can look forward to paying less in taxes than it reports as tax expense, due to the higher deductible depreciation, and the difference is an asset at the date of acquisition. Tax expense = [$4,000,000 – ($15,000,000/20)] x 25% = $812,500 Taxes payable = [$4,000,000 – ($35,000,000/20)] x 25% = $562,500 Tax expense

812,500 Taxes payable Deferred tax asset

39.

562,500 250,000

Topic: Assets acquired and liabilities assumed, measurement of acquisition cost, preacquisition contingencies, deferred taxes LO 1, 2, 5 Date-of-acquisition information on Fizzy Beverage’s assets and liabilities appears below: Current assets Property, plant, and equipment, net Total assets

Book Value $ 2,000 14,000 $ 16,000

Fair Value $ 1,500 5,000

Liabilities Capital stock Retained earnings Accumulated other comprehensive loss Treasury stock Total liabilities and equity

$ 9,000 1,500 6,800 (500) (800) $ 16,000

9,500

Cola King Company acquires the assets and liabilities of Fizzy Beverage, paying the following amounts: Cash consideration to the former owners $50,000 Fair value of new no-par common stock issued 60,000 Registration fees on new stock issued, paid in cash 1,000 Accounting, consulting, and attorney services, paid in cash 4,000 Fizzy has the following previously unreported intangible assets meeting the criteria for separate recognition as identifiable intangible assets. Favorable lease agreements Developed technology

$ 5,000 40,000

The following liabilities previously unreported by Fizzy meet the criteria for separate recognition as acquired liabilities. Deferred tax liabilities Warranty liabilities © Cambridge Business Publishers, 2023 2-66

$ 4,000 8,000

Advanced Accounting, 5th Edition

Required Cola King records the assets and liabilities of Fizzy directly on its books. Prepare the journal entry Cola King made to record the acquisition. ANS: Current assets Property, plant, and equipment Identifiable intangible assets Goodwill Merger expenses

1,500 5,000 45,000 80,000 4,000 Liabilities Cash Capital stock

40.

21,500 55,000 59,000

Topic: Step acquisition LO 5 Plunk Corporation currently holds an 80% interest in Spelt Industries and reports the noncontrolling interest in Spelt at $4,000,000 in the equity section of its balance sheet. Plunk pays $5,000,000 in cash to acquire the remaining 20% interest in Spelt. Required Prepare Plunk’s journal entry to record acquisition of the noncontrolling interest in Spelt. ANS: Noncontrolling interest (equity) Shareholders’ equity (APIC)

4,000,000 1,000,000 Cash

41.

5,000,000

Topic: Step acquisition LO 5 Paxata Corporation holds a 35% interest in SCP Company’s stock, reported at $8,000,000 using the equity method. The fair value of the investment is $12,000,000. It acquires the remaining 65% of SCP’s stock for $25,000,000 in cash. At that date, STP’s tangible assets have a fair value of $5,000,000, its identifiable intangible assets have a fair value of $16,000,000, and its liabilities have a fair value of $12,000,000. The acquisition is accounted for as a merger. Required Prepare Paxata’s journal entry or entries to record acquisition of the remaining interest in SCP. ANS: Tangible assets Identifiable intangible assets Goodwill

5,000,000 16,000,000 28,000,000 Liabilities Cash Investment in SCP Gain on investment (income)

Test Bank, Chapter 2

12,000,000 25,000,000 8,000,000 4,000,000

© Cambridge Business Publishers, 2023 2-67

42.

Topic: Step acquisition LO 5 Adele Inc. has a significant interest equity investment in Algo Company, reported using the equity method. Adele acquires the remaining stock of Algo and records the transaction as a merger. Information on this transaction is as follows (in millions): Cash consideration paid Fair value of equity method investment Gain on revaluation of equity method investment Fair value of identifiable intangible assets acquired Goodwill recognized

$100 55 30 40 120

Required: a. What was the book value of Adele’s investment in Algo, immediately prior to its revaluation for the acquisition? b. What was the fair value of tangible net assets (liabilities) acquired? c. Prepare the journal entry or entries Adele makes to record the transaction. ANS (in millions): a. $55 - $30 = $25 b. $100 + $55 - $40 - $120 = $(5) c. Identifiable intangible assets Goodwill

40 120 Tangible net assets Cash Investment in Algo Gain on investment (income)

43.

5 100 25 30

Topic: Step acquisition with earnout, changes in estimated valuations LO 2, 3, 5 Cougar Company holds a 40% interest in Puma Company, reported using the equity method and currently carried at $150 million on Cougar’s books. Cougar acquires the remaining 60% of Puma for $900 million in cash. In addition, Cougar will pay the former owners of Puma additional cash in the future if certain financial milestones are reached. The earnout has a current value of $200 million. Puma has $250 million in previously unreported trademarks. Cougar reports a $800 million gain on its investment in Puma, and goodwill of $600 million. Required a. Assume that acquisition cost attributed to net assets other than trademarks and goodwill is allocated to tangible net assets. Prepare the journal entry Cougar makes to record the business combination. b. By the end of the year, the earnout increases in value by $25 million due to postcombination events. Prepare the journal entry to record this information. c. Assume that in the following year, Cougar settles the earnout by paying $175 million to Puma’s former owners. Prepare the journal entry to record this transaction.

© Cambridge Business Publishers, 2023 2-68

Advanced Accounting, 5th Edition

ANS (in millions): a. Trademarks Goodwill Tangible net assets

250 600 1,200 Investment in Puma Gain on investment (income) Cash Earnout liability

150 800 900 200

b. Loss on earnout (income)

25 Earnout liability

25

c. Earnout liability

225 Cash Gain on earnout (income)

44.

175 50

Topic: Business combination versus asset acquisition LO 6 Hampton Corporation pays $4,000 in cash to acquire the following group of assets from Johnson Company:

Equipment Developed technology Favorable leases

Fair value $ 700 1,400 1,400

None of the acquired assets is nonqualifying. Required a. Prepare the journal entry Hampton makes to record the transaction as acquisition of a business. b. Prepare the journal entry Hampton makes to record the transaction as an asset acquisition. ANS: a. Equipment Developed technology Favorable leases Goodwill

700 1,400 1,400 500 Cash

4,000

b. Equipment Developed technology Favorable leases

800 1,600 1,600 Cash

Test Bank, Chapter 2

4,000 © Cambridge Business Publishers, 2023 2-69

45.

Topic: Asset acquisition LO 6 Iona Company purchases equipment with a fair value of $40 million and technology with a fair value of $10 million from Jackson Company, at a total cost of $54 million in cash. Iona also agrees to pay Jackson future additional consideration with a current value of $2 million, if certain financial performance conditions are met. Legal fees for the transaction are $1 million, paid in cash. Required Prepare Iona’s journal entry to record this transaction, assuming it does not qualify as an acquisition of a business. ANS (in millions): Equipment Technology

44 11 Cash

© Cambridge Business Publishers, 2023 2-70

55

Advanced Accounting, 5th Edition

TEST BANK CHAPTER 3 Consolidated Financial Statements: Date of Acquisition MULTIPLE CHOICE 1.

2.

3.

4.

Topic: Motivations behind consolidation LO 1 What is the most likely reason why a company may take steps to avoid consolidating another company? a. b. c. d.

Consolidation reduces total assets. Consolidation increases leverage. Consolidation is confusing, since the other company’s account balances are hard to find. Consolidation requires the parent company to maintain the subsidiary’s books.

ANS:

b

Topic: Motivations behind consolidation LO 1 What is the purpose of consolidated financial statements, per the FASB Codification? a. b. c. d.

Present financial statements that put the parent company in the best light. Highlight the separate performance of the subsidiary. Represent the results of activities under the control of the parent. Represent the results of activities under the control of the subsidiary.

ANS:

c

Topic: Consolidation principles LO 1 A key concept in determining whether to consolidate an investee is: a. b. c. d.

The percentage ownership of the investee’s voting stock Whether or not the investee carries a significant amount of debt owed to the investor Whether or not the assets and liabilities of the investee are reported at fair value Whether the investor has the power to direct the activities of the investee

ANS:

d

Topic: Consolidation principles LO 1 U.S. GAAP criteria for consolidation are found in: a. b. c. d.

ASC Topic 805 ASC Topic 810 ASC Topic 825 ASC Topic 350

ANS:

b

Test Bank, Chapter 3

© Cambridge Business Publishers, 2023 3-1

5.

6.

7.

Topic: Motivations behind consolidation, consolidation of variable interest entities LO 1 While a company can create a special purpose entity for sound business reasons, it can also make its financial statements look better by creating an entity and then not consolidating the entity, primarily because if they don’t consolidate, a. b. c. d.

Expenses are under-reported Debt is under-reported Debt is over-reported Assets are under-reported

ANS:

b

Topic: Motivations in consolidation LO 1 GM forms a separate legal entity, funded mostly by debt. The entity acquires a building and leases it to GM. If GM does not consolidate the entity, how does this reporting choice affect GM’s financial statements, as compared with consolidating the entity? a. b. c. d.

GM’s operating expenses are overstated. GM’s retained earnings balance is overstated. GM’s capital stock is understated. GM’s assets are understated.

ANS:

d

Topic: Consolidation of equity investments LO 2 General Motors owns 50% of the voting stock of two companies in China. General Motors most likely a. b. c. d. ANS:

Consolidates the entities because General Motors controls their decisions. Reports the investments using the equity method, because General Motors owns between 20% and 50% of the entities’ voting stock. Consolidates the entities because General Motors is their largest customer. Reports the investments as investments without significant influence, because General Motors owns less than a majority of their voting stock. b

© Cambridge Business Publishers, 2023 3-2

Advanced Accounting, 5th Edition

8.

9.

10.

Topic: Consolidation of equity investments LO 2 Prival Company acquires 49.99% of the voting stock of Schaffer Company. From the viewpoint of readers of the financial statements, the most important factor Prival should consider when deciding whether to consolidate Schaffer in its financial statements is: a. b. c. d.

Prival’s percentage ownership of Schaffer’s stock Whether consolidation will make it harder for Prival to borrow money Whether Prival follows IFRS or U.S. GAAP Whether Prival controls the performance of Schaffer

ANS:

d

Topic: Consolidation of equity investments LO 2 Following U.S. GAAP, a company consolidates its majority-owned subsidiary unless: a. b. c. d.

The subsidiary is a financial institution. The minority shareholders have significant veto rights over the majority shareholders. The subsidiary is substantially smaller than its parent company. The subsidiary is highly leveraged.

ANS:

b

Topic: Consolidation of equity investments LO 2 Following U.S. GAAP, if a company owns over 50% of the voting stock of another company: a. b. c.

11.

d.

It is required to consolidate the company. It consolidates the company unless the stock ownership does not result in control. It treats the investment as an equity method investment unless it is a joint venture, which is consolidated. It consolidates the company unless it is a special purpose entity.

ANS:

b

Topic: Consolidation of equity investments LO 2 Petron, a U.S. company, owns the majority of the voting stock of Sego. Petron consolidates Sego unless: a. b. c. d.

Sego is in an underdeveloped country. Sego deals with products or services that are not Petron’s primary focus. Sego is bankrupt. The shares of Sego that are not owned by Petron are owned by one investor.

ANS:

c

Test Bank, Chapter 3

© Cambridge Business Publishers, 2023 3-3

12.

13.

Topic: Consolidation of equity investments LO 2 Preston Company, a U.S. auto part manufacturer, owns the majority of the voting stock of SEO Bearings Company, located in China. Preston uses the equity method to report its investment in SEO Bearings. Which situation justifies this reporting choice? a. b. c. d.

SEO is controlled by the Chinese government. SEO is located in China. SEO’s board of directors includes representation from other entities. SEO’s decisions are the responsibility of SEO’s CEO.

ANS:

a

Topic: Consolidation principles LO 2 When assessing whether you control another entity, it is important to consider “kick-out rights” because although it appears that you control the entity’s decisions, a. b. c.

14.

15.

d.

You may only own rights to voting shares, rather than the shares themselves. You may be acting as an agent for the real decision makers. You may not make the types of decisions that significantly affect the overall entity’s performance. You may own the entity’s convertible instruments, rather than its voting shares.

ANS:

b

Topic: Special purpose entities LO 3 A U.S. financial services company sets up a special purpose entity to buy accounts receivable from its clients. The SPE’s stock is held by outside investors. The financial services company should not consolidate the assets and liabilities of the SPE if: a. b. c. d.

The SPE is not a variable interest entity. Holders of the SPE’s stock are also clients of the financial services company. The SPE’s total equity is more than 50% of the SPE’s total assets. The financial services company guarantees the SPE’s debt.

ANS:

a

Topic: Variable interest entities LO 3 Acme, a U.S. company, has a financial relationship with Zeta, but does not own any of its voting stock. When should Acme consolidate Zeta’s accounts in its annual report, following U.S. GAAP? a. b. c. d.

Never Zeta is a variable interest entity. Zeta is a variable interest entity and Acme is its primary beneficiary. Acme controls Zeta’s operations.

ANS:

c

© Cambridge Business Publishers, 2023 3-4

Advanced Accounting, 5th Edition

16.

Topic: Variable interest entities LO 3 Persuasive qualitative evidence that an entity is not a variable interest entity, per U.S. GAAP, includes which one of the following? a.

d.

The entity is the sole supplier to another entity, and its profit margin is comparable to its competitors. The entity has issued preferred and common stock, and the shareholders are guaranteed a certain return on their investment. The entity’s equity level is greater than that of similar entities that do not require their debt to be guaranteed by another party. The entity has a debt to equity ratio that is higher than that of its competitors.

ANS:

c

b. c.

17.

18.

19.

Topic: Variable interest entities LO 3 Persuasive qualitative evidence that an entity is not a variable interest entity, per U.S. GAAP, includes which one of the following? a. b. c. d.

The entity’s business is not focused on just a few customers. The entity’s shareholders are guaranteed a certain return on their investment. The entity can borrow based on its own creditworthiness. The entity has never issued equity shares with no voting interests.

ANS:

c

Topic: Variable interest entities LO 3 TuffCo has a financial relationship with Umber but does not own any of its stock. If Umber does not qualify as a variable interest entity, TuffCo will likely a. b. c. d.

report its investment in Umber using the equity method. report its investment in Umber at fair value through income. consolidate Umber. not report its investment in Umber.

ANS:

d

Topic: Variable interest entities LO 3 ABC has a financial relationship with XYZ and must include XYZ’s assets and liabilities on its balance sheet. If ABC and XYZ were already under common control at the date ABC identifies XYZ as meeting the requirements for consolidation, XYZ’s consolidated balance sheet reports a noncontrolling interest valued at a. b. c. d.

the VIE’s book value. the VIE’s market value. zero. the fair value of the VIE’s identifiable net assets.

Test Bank, Chapter 3

© Cambridge Business Publishers, 2023 3-5

ANS: 20.

21.

22.

a

Topic: Variable interest entities LO 3 ABC has a financial relationship with XYZ and must include XYZ’s assets and liabilities on its balance sheet. If ABC and XYZ were not previously under common control at the date ABC identifies XYZ as meeting the requirements for consolidation, XYZ’s consolidated balance sheet reports a noncontrolling interest valued at a. b. c. d.

the VIE’s book value. the VIE’s market value. zero. the fair value of the VIE’s identifiable net assets.

ANS:

b

Topic: Variable interest entities LO 3 Peters Inc. consolidates a variable interest entity even though it owns none of the entity’s equity. The difference between the VIE’s assets and liabilities is reported on Peters’ balance sheet: a. b. c. d.

In equity, as “noncontrolling interest” In equity, as an increase in retained earnings As a noncurrent liability As a contra to the investment account reported in Peters’ assets

ANS:

a

Topic: Variable interest entities LO 3 A company decides it is required to consolidate a special interest entity. The assets and liabilities of that entity are consolidated at book value, and not revalued to fair value, when a. b. c. d.

The company owns some of the stock of the entity. The company and the entity are already under common control. The company becomes the primary beneficiary of the entity. The entity is not previously under the control of the company.

ANS:

b

© Cambridge Business Publishers, 2023 3-6

Advanced Accounting, 5th Edition

23.

Topic: Variable interest entities LO 3 Tyvo is a legal entity that securitizes receivables for a variety of financial institutions. It was formed with an investment of $100 million. Qualitative analysis is inconclusive regarding whether Tyvo is a variable interest entity. Quantitative analysis indicates that Tyvo’s expected future cash flows are as follows, in millions (assume all cash flows occur at the end of the first year): Expected Cash Flows Probability $ 84 0.40 144 0.60 A risk-adjusted discount rate of 20% is appropriate. Tyvo is likely to be considered a variable interest entity, per U.S. GAAP, if its equity financing is less than what amount? a. b. c. d.

$100 million $25 million $10 million $12 million

ANS:

d The present value of expected losses is $12 million, as calculated below: (in millions) Cash Present Flows Value $ 84 $ 70 144 120

Test Bank, Chapter 3

Prob 0.40 0.60

E(PV) $ 28 72 $100

Investment $100 100

Resid. Returns $ (30) 20

E(G) $12 $12

E(L) $(12) ___ $(12)

© Cambridge Business Publishers, 2023 3-7

24.

Topic: Variable interest entities LO 3 Ulon is a legal entity that provides leasing services. It was formed with an investment of $75 million, of which $65 million was financed by debt, and the remainder was provided by outside equity interests. Qualitative analysis is inconclusive in determining whether Ulon is a variable interest entity. Quantitative analysis indicates that Ulon’s expected future cash flows are as follows, in millions (assume a one-year time frame, with cash flows occurring at the end of the year): Expected Cash Flows Probability $108 0.50 72 0.50 A risk-adjusted discount rate of 20% is appropriate. Is Ulon likely to be a variable interest entity, per U.S. GAAP? a. b. c. d.

No, because the equity interest is more than 10% of total financing. Yes, because the equity interest is less than expected losses of $15 million. No, because the equity interest is more than expected losses of $7.5 million. Yes, because the equity interest is more than 10% of total assets.

ANS:

c The present value of expected losses is $7.5 million, as calculated below. The equity interest is $75 - $65 = $10 million. (in millions) Cash Present Flows Value $108 $90 72 60

25.

Prob. 0.50 0.50

E(PV) $45 30 $75

Resid. Returns $ 15 (15)

Investment $75 75

E(G) $ 7.50 $ 7.50

E(L) $(7.50) $(7.50)

Topic: Different accounting years LO 4 If a subsidiary has a different accounting year-end than its parent, a. b. c. d.

The subsidiary must change its accounting year to match that of the parent. The parent must change its accounting year to match that of the subsidiary. The subsidiary’s year-end can differ from that of the parent, up to three months. The subsidiary’s year-end can differ from that of the parent, up to six months.

ANS:

c

© Cambridge Business Publishers, 2023 3-8

Advanced Accounting, 5th Edition

26.

27.

Topic: Different accounting principles LO 4 A parent company uses IFRS and has a subsidiary whose books are maintained following U.S. GAAP. The consolidated financial statements of the parent include the subsidiary’s accounts, reported using: a. b. c. d.

IFRS U.S. GAAP Either IFRS or U.S. GAAP, since both are acceptable A combination of IFRS and U.S. GAAP, depending on the account

ANS:

a

Topic: Different currencies LO 4 A U.S. parent consolidates its U.K. subsidiary. The U.K. subsidiary’s accounts are measured in pounds sterling. The subsidiary’s accounts are included in the consolidated financial statements a. b. c. d. ANS:

28.

29.

in U.S. dollars. in pounds. in pounds for monetary assets and liabilities, and in U.S. dollars for nonmonetary assets and liabilities. in pounds for accounts valued at fair value, and in U.S. dollars for accounts valued at cost or amortized cost. a

Topic: Different accounting principles and currencies LO 4 A parent company uses U.S. GAAP and presents its financial statements in U.S. dollars. It has a subsidiary in Singapore whose books are maintained in Singapore dollars, following IFRS. The subsidiary’s accounts are included in the consolidated financial statements of the parent: a. b. c. d.

in Singapore dollars, following IFRS. in Singapore dollars, following U.S. GAAP. in U.S. dollars, following IFRS. in U.S. dollars, following U.S. GAAP.

ANS:

d

Topic: Consolidation objectives LO 4 The consolidated balance sheet of a parent and subsidiary reports account balances as if the parent accounted for its investment in the subsidiary as a: a. b. c. d.

Significant influence investment. Investment with no influence. Merger. Variable interest entity.

ANS:

c

Test Bank, Chapter 3

© Cambridge Business Publishers, 2023 3-9

30.

Topic: Consolidation eliminating entries LO 4 When consolidating the balance sheets of a parent and its subsidiary at the date of acquisition, the overall effect of consolidation eliminating entries is to: a. b. c. d. ANS:

31.

32.

33.

Remove the parent’s investment account and the subsidiary’s equity accounts. Remove the parent’s investment account, the subsidiary’s capital stock accounts, and adjust the subsidiary’s assets and liabilities to fair value at the date of acquisition. Remove the the parent’s investment account and the subsidiary’s equity accounts and adjust the subsidiary’s assets and liabilities to fair value at the date of acquisition. Remove the subsidiary’s equity accounts and adjust the subsidiary’s assets and liabilities to fair value at the date of acquisition. c

Topic: Consolidated balance sheet LO 4 Which account balance is always reported at the same amount on the parent’s balance sheet and on the consolidated balance sheet of the parent and its subsidiary at the date of acquisition? a. b. c. d.

Inventories Goodwill Accumulated other comprehensive income Identifiable intangible assets

ANS:

c

Topic: Consolidated balance sheet LO 4 Which one of the following accounts, appearing on the books of an acquired company, will not appear on a consolidated balance sheet at the date of acquisition? a. b. c. d.

Retained earnings Trademarks Investments in equity securities Investments in HTM debt securities

ANS:

a

Topic: Consolidated balance sheet LO 4 Which one of the following balances appears on a consolidated balance sheet at the date of acquisition? a. b. c. d.

Gain on sale of investments, reported on the subsidiary’s books Dividends, reported on the parent’s books Identifiable intangible assets, reported on the parent’s books Accumulated other comprehensive income, reported on the subsidiary’s books

© Cambridge Business Publishers, 2023 3-10

Advanced Accounting, 5th Edition

ANS: 34.

c

Topic: Consolidated balance sheet, bargain purchase LO 4 A parent acquires all of the stock of a subsidiary for $50 million in cash. The fair value of the subsidiary’s identifiable net assets is $55 million. On its own books, the parent reports a. b. c. d.

a gain of $5 million in income. a gain of $5 million in other comprehensive income. its investment at a balance of $50 million. its investment at a balance of $55 million, with a contra asset allowance of $5 million.

ANS:

a The parent’s entry to record the acquisition on its own books is (in millions): Investment in subsidiary 55 Cash Bargain gain (income)

50 5

Use the following information to answer questions 35 and 36 below. A parent acquires all of the stock of a subsidiary for $40 million in cash. The subsidiary’s books report the following account balances at the date of acquisition (in trial balance format). Date-of-acquisition fair values are also displayed. (in millions) Current assets Noncurrent assets Liabilities Capital stock Retained earnings Accumulated other comprehensive loss Total 35.

Book value Dr (Cr) $ 5 45 (40) (8) (3) 1 $ 0

Fair value Dr (Cr) $ 6 38 (42)

Topic: Consolidation eliminating entries LO 4 On the consolidation working paper, eliminating entry (E) debits a. b. c. d.

accumulated other comprehensive loss by $1 million. retained earnings by $3 million. investment in subsidiary by $10 million. liabilities by $2 million.

ANS:

b (E) Capital stock Retained earnings

8 3 AOCL Investment in subsidiary

Test Bank, Chapter 3

1 10

© Cambridge Business Publishers, 2023 3-11

36.

Topic: Consolidation eliminating entries LO 4 On the consolidation working paper, eliminating entry (R) credits a. b. c. d.

current assets by $1 million. liabilities by $2 million. investment in subsidiary by $10 million. goodwill by $35 million.

ANS:

b (R) Current assets Goodwill

1 38 Noncurrent assets Liabilities Investment in subsidiary

7 2 30

Use the following information to answer questions 37 and 38 below. A parent acquires all of the stock of a subsidiary for $65 million in cash. The subsidiary’s books report the following account balances at the date of acquisition (in trial balance format). Date-of-acquisition fair values are also displayed. (in millions) Current assets Noncurrent assets Liabilities Capital stock Retained deficit Accumulated other comprehensive income Total 37.

Book value Dr (Cr) $ 15 100 (127) (5) 20 (3) $ 0

Fair value Dr (Cr) $ 10 80 (127)

Topic: Consolidation eliminating entries LO 4 On the consolidation working paper, eliminating entry (E) debits a. b. c. d.

current assets by $5 million. retained deficit by $20 million. investment in subsidiary by $12 million. noncurrent assets by $20 million.

ANS:

c (E) Capital stock AOCI Investment in subsidiary

5 3 12 Retained deficit

© Cambridge Business Publishers, 2023 3-12

20

Advanced Accounting, 5th Edition

38.

Topic: Consolidation eliminating entries LO 4 On the consolidation working paper, eliminating entry (R) debits a. b. c. d.

current assets by $5 million. noncurrent assets by $20 million. investment in subsidiary by $10 million. goodwill by $102 million.

ANS:

d (R) Goodwill

102 Current assets Noncurrent assets Investment in subsidiary

39.

Topic: Consolidation eliminating entries LO 4 GMI acquires all of the voting stock of ELI for an acquisition cost that is $4 million above the book value of ELI’s net assets. At the date of acquisition, ELI’s equipment was overvalued by $2 million and its reported intangible assets were undervalued by $6 million. Consolidation eliminating entry R, at the date of acquisition, includes a(n): a. b. c. d.

$2 million debit to equipment $8 million credit to the investment account $4 million debit to goodwill $6 million debit to intangible assets

ANS:

d Eliminating entry (R) is: Identifiable intangibles

6,000,000 Investment in ELI Equipment

40.

5 20 77

4,000,000 2,000,000

Topic: Consolidation eliminating entries LO 4 Palm Corporation acquired all the stock of Sequoia Company, at an acquisition cost that was $6,000,000 in excess of Sequoia’s $2,000,000 book value. All of Sequoia's assets and liabilities are carried at amounts approximating fair value, except that land is overvalued by $500,000. Which of the following is false concerning the consolidation eliminating entries at the date of acquisition? a. b. c. d.

Eliminating entry (E) reduces the investment by $2,000,000. Eliminating entry (R) reduces land by $500,000. Eliminating entry (R) reduces the investment by $4,000,000 Eliminating entry (R) increases goodwill by $6,500,000

Test Bank, Chapter 3

© Cambridge Business Publishers, 2023 3-13

ANS:

c Eliminating entries are: (E) Equity-Sequoia

2,000,000 Investment in Sequoia

(R) Goodwill

2,000,000

6,500,000 Land Investment in Sequoia

41.

500,000 6,000,000

Topic: Consolidation eliminating entries, previously unreported intangible assets LO 4 Pringle Corporation acquired all the stock of Sunny Company, at an acquisition cost of $30 million. Sunny’s book value at the time was $10 million. Sunny’s current assets and all liabilities were carried at amounts approximating fair value. However, its plant assets were overvalued by $6 million. Sunny also has previously unreported developed technology valued at $4 million. Which of the following is false concerning the consolidation eliminating entries at the date of acquisition? a. b. c. d.

Eliminating entry (E) reduces the investment by $10 million. Eliminating entry (R) increases goodwill by $12 million. Eliminating entry (R) increases identifiable intangible assets by $4 million. Eliminating entry (E) reduces Sunny’s shareholders’ equity by $10 million.

ANS:

b Eliminating entries are: (E) Equity-Sunny

10,000,000 Investment in Sunny

(R) Goodwill Identifiable intangible assets

22,000,000 4,000,000 Investment in Sunny Plant assets

© Cambridge Business Publishers, 2023 3-14

10,000,000

20,000,000 6,000,000

Advanced Accounting, 5th Edition

42.

Topic: Acquisition entry, consolidation eliminating entries, bargain purchase LO 4 PMC Corporation acquired all of the stock of SVB Company, at an acquisition cost of $12 million in cash. SVB’s book value at the time was $9 million. SVB’s net assets are reported at amounts approximating market value at the date of acquisition. However, it has previously unreported brand names and favorable lease agreements, valued at a total of $5 million. Which of the following is true concerning consolidation of PMC and SVB at the date of acquisition? a. b. c. d.

Eliminating entry (E) reduces the investment by $12 million. Eliminating entry (E) reduces the subsidiary’s equity by $14 million. Eliminating entry (R) creates a bargain gain of $2 million. Eliminating entry (R) reduces the investment by $5 million.

ANS:

d PMC’s entry to record the acquisition is: Investment in SVB

14,000,000 Cash Gain on acquisition

Eliminating entries are: (E) Equity-SVB

12,000,000 2,000,000

9,000,000 Investment in SVB

(R) Identifiable intangible assets

9,000,000

5,000,000 Investment in SVB

43.

5,000,000

Topic: Consolidation eliminating entries, goodwill previously reported by subsidiary LO 4 Power Inc. acquires all the voting stock of Signal Company for $30,000,000 in cash. At the date of acquisition, Signal’s balance sheet is as follows:

Tangible assets Goodwill Liabilities Equity

Book Value Dr (Cr) $15,000,000 5,000,000 (12,000,000) (8,000,000)

Fair Value Dr (Cr) $14,000,000 7,000,000 (12,000,000)

What amount of consolidated goodwill is recognized for this acquisition in eliminating entry (R) at the date of acquisition? a. b. c. d.

$7,000,000 $12,000,000 $23,000,000 $28,000,000

Test Bank, Chapter 3

© Cambridge Business Publishers, 2023 3-15

ANS:

d Eliminating entries are: (E) Equity – Signal

8,000,000 Investment in Signal

(R) Goodwill (new)

8,000,000

28,000,000 Investment in Signal Tangible assets Goodwill (old)

22,000,000 1,000,000 5,000,000

Use the following information to answer Questions 44 - 48. Precision Company acquires all of Springfield Company’s voting stock for $4,000,000 in cash. Information on Springfield's assets and liabilities at the date of acquisition is as follows:

Current assets Land, buildings and equipment (net) Liabilities Capital stock Retained earnings

Book Value Dr (Cr) $ 500,000 2,000,000 (600,000) (700,000) (1,200,000)

Fair Value Dr (Cr) $ 400,000 1,800,000 (610,000)

In addition, Springfield Company has unrecorded identifiable intangible assets, in the form of brand names and lease agreements, with a total estimated fair value of $500,000. 44.

45.

Topic: Consolidation working paper LO 4 In eliminating entry (R) on the consolidation working paper, the credit to investment is: a. b. c. d.

$1,900,000 $2,100,000 $2,600,000 $4,000,000

ANS:

b

Topic: Consolidation working paper LO 4 In eliminating entry (R) on the consolidation working paper, the debit to goodwill is: a. b. c. d.

$ 670,000 $3,190,000 $1,910,000 $0

ANS:

c

© Cambridge Business Publishers, 2023 3-16

Advanced Accounting, 5th Edition

46.

Topic: Consolidation working paper LO 4 In eliminating entry (R) on the consolidation working paper, the debit to identifiable intangibles is: a. b. c. d.

$0 $200,000 $490,000 $500,000

ANS:

d

Calculations for Questions 44 – 46: Eliminating entries are: (E) Capital stock Retained earnings

700,000 1,200,000 Investment in Springfield

1,900,000

(R) Identifiable intangibles Goodwill

500,000 1,910,000 Investment in Springfield Current assets Land, buildings and equipment Liabilities

47.

48.

2,100,000 100,000 200,000 10,000

Topic: Consolidation working paper, pushdown accounting LO 4 Now assume Springfield uses pushdown accounting at the date of acquisition. What amount does it credit to its Pushdown Capital account on its own books? a. b. c. d.

$3,300,000 $2,100,000 $1,510,000 $0

ANS:

a

Topic: Consolidation working paper, pushdown accounting LO 4 Assuming Springfield uses pushdown accounting at the date of acquisition, eliminating entry (E) includes a a. b. c. d.

Debit to retained earnings of $1,200,000. Debit to pushdown capital of $2,100,000. Credit to investment in Springfield of $4,000,000. Debit to land, buildings and equipment of $200,000.

ANS:

c

Test Bank, Chapter 3

© Cambridge Business Publishers, 2023 3-17

Calculations for Questions 47 and 48: Springfield makes the following entry on its own books: Retained earnings Identifiable intangibles Goodwill

1,200,000 500,000 1,910,000 Current assets Land, buildings and equipment Liabilities Pushdown capital

Eliminating entry (E) is: (E) Capital stock Pushdown capital

100,000 200,000 10,000 3,300,000

700,000 3,300,000 Investment in Springfield

4,000,000

Eliminating entry (R) is not necessary. Use the following information to answer Questions 49 - 52. DataCloud purchased all of the shares of Supercore for $30 million in cash. The balance sheets of DataCloud and Supercore just after the acquisition appear below, along with fair value information for Supercore’s net assets. DataCloud Book Value Current assets Plant assets Identifiable intangible assets Investment in Supercore Liabilities Capital stock Retained earnings Treasury stock Accumulated other comprehensive loss Total 49.

$ 10,000,000 40,000,000 -30,000,000 (35,000,000) (30,000,000) (15,600,000) 100,000 500,000 $ 0

Supercore Book Value Fair Value Dr (Cr) $ 5,000,000 $ 4,000,000 36,000,000 25,000,000 -10,000,000 --(37,800,000) (37,500,000) (5,000,000) 1,500,000 100,000 200,000 $ 0

Topic: Consolidated balance sheet LO 4 On the consolidated balance sheet at the date of acquisition, what is the balance for retained earnings? a. b. c. d.

$14,100,000 $17,100,000 $15,600,000 $0

© Cambridge Business Publishers, 2023 3-18

Advanced Accounting, 5th Edition

ANS: 50.

51.

52.

c

Topic: Consolidated balance sheet LO 4 On the consolidated balance sheet at the date of acquisition, what is the balance for goodwill? a. b. c. d.

$25,100,000 $28,500,000 $29,100,000 $24,900,000

ANS:

b

Topic: Consolidated balance sheet LO 4 On the consolidated balance sheet on the date of acquisition, what is the balance for plant assets? a. b. c. d.

$76,000,000 $87,000,000 $40,000,000 $65,000,000

ANS:

d

Topic: Consolidated balance sheet LO 4 On the consolidated balance sheet on the date of acquisition, what is the balance for accumulated other comprehensive loss? a. b. c. d.

$700,000 debit $300,000 debit $500,000 debit $300,000 credit

ANS:

c

Worksheet for Questions 49 - 52:

Current assets Plant assets Identifiable intangibles Investment in Supercore

DataCloud Dr (Cr) $ 10,000,000 40,000,000 -30,000,000

Supercore Dr (Cr) $ 5,000,000 36,000,000 ---

Goodwill Liabilities Capital stock Retained earnings Treasury stock AOCL Total

-(35,000,000) (30,000,000) (15,600,000) 100,000 500,000 $ 0

-(37,800,000) (5,000,000) 1,500,000 100,000 200,000 $ 0

Test Bank, Chapter 3

Dr

Cr 1,000,000 (R) 11,000,000 (R)

(R) 10,000,000 3,200,000 (E) 26,800,000 (R) (R) 28,500,000 (R) 300,000 (E) 5,000,000

________ $43,800,000

1,500,000 (E) 100,000 (E) 200,000 (E) $43,800,000

Consolidated Dr (Cr) $ 14,000,000 65,000,000 10,000,000 -28,500,000 (72,500,000) (30,000,000) (15,600,000) 100,000 500,000 $ 0

© Cambridge Business Publishers, 2023 3-19

Use the following information to answer Questions 53 - 55: Pilgrim Corporation acquires all of the stock of Sonic Company for $6,000,000 in cash. Sonic's net assets had a book value of $3,000,000 at the date of acquisition. The book values of Sonic's assets and liabilities approximated fair values, except that Sonic reported plant assets at $4,950,000 more than fair value. In addition, Sonic had unrecorded identifiable intangible assets with an estimated fair value of $8,000,000, appropriately capitalized according to GAAP. 53.

54.

55.

Topic: Consolidation working paper, bargain purchase LO 4 When recording its investment in Sonic, Pilgrim reports a gain on acquisition in the amount of: a. b. c. d.

$0 $ 500,000 $ 50,000 $3,000,000

ANS:

c

Topic: Consolidation working paper, bargain purchase LO 4 Consolidation working paper eliminating entry (R) at the date of acquisition includes a credit to Investment in Sonic in the amount of: a. b. c. d.

$3,050,000 $6,050,000 $3,000,000 $3,950,000

ANS:

a

Topic: Consolidation working paper, bargain purchase LO 4 Consolidation working paper eliminating entry (E) at the date of acquisition includes a debit to Sonic’s shareholders’ equity in the amount of: a. b. c. d.

$3,000,000 $0 $4,950,000 $3,050,000

ANS:

a

© Cambridge Business Publishers, 2023 3-20

Advanced Accounting, 5th Edition

Calculations for Questions 53 - 55: The fair value of Sonic’s identifiable net assets = $3,000,000 – $4,950,000 + $8,000,000 = $6,050,000. Pilgrim’s entry to record the acquisition is: Investment in Sonic

6,050,000 Cash Gain on acquisition

6,000,000 50,000

Eliminating entries are: (E) Shareholders’ equity-Sonic

3,000,000 Investment in Sonic

(R) Identifiable intangibles

3,000,000

8,000,000 Investment in Sonic Plant assets

3,050,000 4,950,000

Use the following information to answer Questions 56 – 58. PVN Corporation acquired all of the stock of SFC Corporation by issuing 1,000,000 shares of no-par stock with a market value of $40 per share. Registration fees were $500,000 and legal fees were $300,000, all paid in cash. SFC’s book value at the date of acquisition was $8,000,000. At the date of acquisition, all of SFC’s assets and liabilities were reported at amounts approximating fair value, except that its plant and equipment was overvalued by $10,000,000. SFC also had unreported identifiable intangible assets valued at $15,000,000, and unreported warranty liabilities of $4,000,000. A deferred tax liability valued at $2 million was reported in consolidation at the date of acquisition. 56.

Topic: Consolidation working paper, registration and out-of-pocket costs, preacquisition contingency, deferred taxes LO 4 Eliminating entry (R) reduces Investment in SFC by: a. b. c. d.

$32,800,000 $32,300,000 $32,000,000 $40,000,000

ANS:

c

Test Bank, Chapter 3

© Cambridge Business Publishers, 2023 3-21

57.

58.

Topic: Consolidation working paper, registration and out-of-pocket costs, preacquisition contingency, deferred taxes LO 4 Eliminating entry (R) debits goodwill for: a. b. c. d.

$29,300,000 $41,000,000 $21,000,000 $33,000,000

ANS:

d

Topic: Consolidation working paper, registration and out-of-pocket costs, preacquisition contingency, deferred taxes LO 4 Eliminating entry (E) reduces Investment in SFC by: a. b. c. d.

$8,000,000 $8,300,000 $8,800,000 $40,300,000

ANS:

a

Calculations for Questions 56 – 58: PVN’s acquisition entry is: Investment in SFC Merger expenses

40,000,000 300,000 Capital stock Cash

39,500,000 800,000

Eliminating entries are: (E) Shareholders’ equity-SFC

8,000,000 Investment in SFC

(R) Identifiable intangibles Goodwill

15,000,000 33,000,000 Plant and equipment Warranty liabilities Investment in SFC Deferred tax liability

© Cambridge Business Publishers, 2023 3-22

8,000,000

10,000,000 4,000,000 32,000,000 2,000,000

Advanced Accounting, 5th Edition

Use the following information to answer Questions 59 – 63: Pacific Inc. acquires all of the voting stock of Skye Company for $360 in cash. Skye’s balance sheet at the date of acquisition is as follows:

Assets Current assets Land, buildings & equipment, net

Total assets

Skye Company Liabilities & equity $ 75 Current liabilities 1,580 Long-term liabilities Capital stock Retained earnings Accumulated other comprehensive loss _____ Treasury stock $1,655 Total liabilities & equity

$ 80 1,500 100 5 (10) (20) $1,655

Skye’s land, buildings & equipment have a fair value of $1,000. Skye’s other assets and liabilities are reported at amounts that approximate fair value. Skye has unreported identifiable intangibles with a fair value of $350 that meet the criteria for capitalization. 59.

60.

Topic: Consolidation eliminating entries LO 4 On the date of acquisition consolidation working paper, what is the effect of eliminating entry (E) on Investment in Skye? a. b. c. d.

Credit of $75 Credit of $95 Debit of $30 Credit of $85

ANS:

a

Topic: Consolidation eliminating entries LO 4 On the date of acquisition consolidation working paper, what is the effect of eliminating entry (R) on Investment in Skye? a. b. c. d.

Debit of $135 Credit of $135 Debit of $230 Credit of $285

ANS:

d

Test Bank, Chapter 3

© Cambridge Business Publishers, 2023 3-23

61.

Topic: Consolidation eliminating entries LO 4 On the date of acquisition consolidation working paper, eliminating entry (R) includes a debit to goodwill in the amount of: a. b. c. d.

$495 $515 $505 $285

ANS:

b

Calculations for Questions 59 - 61: Eliminating entries are: (E) Capital stock Retained earnings

100 5 AOCL Treasury stock Investment in Skye

(R) Identifiable intangibles Goodwill

350 515 Land, buildings & equipment Investment in Skye

62.

63.

10 20 75

580 285

Topic: Consolidation eliminating entries, pushdown accounting LO 4 Now assume Skye elects to use pushdown accounting at the date of acquisition. What is its credit to Pushdown Capital, on its own books? a. b. c. d.

$305 $285 $275 $280

ANS:

d

Topic: Consolidation eliminating entries, pushdown accounting LO 4 Assuming Skye uses pushdown accounting at the date of acquisition, which statement is true concerning eliminating entry (R) on the consolidation working paper at the date of acquisition? a. b. c. d.

Retained earnings is debited by $5. Capital stock is debited by $100. Investment in Skye is credited by $285. There is no eliminating entry (R).

ANS:

d

© Cambridge Business Publishers, 2023 3-24

Advanced Accounting, 5th Edition

Calculations for Questions 62 and 63: Skye’s pushdown accounting entry is: Identifiable intangibles Retained earnings Goodwill AOCL Land, buildings & equipment Pushdown capital

350 5 515 10 580 280

The eliminating entry is: (E) Capital stock Pushdown capital

100 280 Investment in Skye Treasury stock

360 20

No entry (R) is necessary. Use the following information to answer Questions 64 - 68. PC Company purchased all of the common stock of Silicon Company by issuing 400,000 shares of its $0.10 par value common stock, with a market value of $15/share. PC Company incurred $125,000 in registration and issuing costs, and $75,000 in consulting and legal fees, paid in cash. The book value of Silicon Company at the date of acquisition was as follows: Capital stock Retained deficit Accumulated other comprehensive income Total book value

$ 2,000,000 (2,500,000) 100,000 $ (400,000)

The carrying values of Silicon’s reported assets and liabilities approximated fair value at the date of acquisition, but it has $5,000,000 in developed technology, not reported on its balance sheet but meeting criteria for capitalization per ASC Topic 805. 64.

Topic: Consolidation working paper, registration and out-of-pocket costs LO 4 PC's journal entry to record this acquisition includes a credit to additional paid-in capital for: a. b. c. d.

$5,760,000 $5,835,000 $6,000,000 $5,960,000

ANS:

b

Test Bank, Chapter 3

© Cambridge Business Publishers, 2023 3-25

65.

66.

67.

68.

Topic: Consolidation working paper, registration and out-of-pocket costs LO 4 PC's journal entry to record this acquisition includes a debit to Investment in Silicon for: a. b. c. d.

$5,760,000 $5,835,000 $6,000,000 $5,960,000

ANS:

c

Topic: Consolidation working paper, registration and out-of-pocket costs LO 4 Eliminating entry (E) includes: a. b. c. d.

A debit to retained deficit for $2,500,000 A debit to developed technology for $5,000,000 A credit to accumulated other comprehensive income for $100,000 A debit to Investment in Silicon for $400,000

ANS:

d

Topic: Consolidation working paper, registration and out-of-pocket costs LO 4 Eliminating entry (R) includes a debit to goodwill for: a. b. c. d.

$1,400,000 $1,000,000 $ 400,000 $0

ANS:

a

Topic: Consolidation working paper, registration and out-of-pocket costs LO 4 Eliminating entry (R) includes a credit to Investment in Silicon for: a. b. c. d.

$5,600,000 $6,000,000 $6,400,000 $6,475,000

ANS:

c

© Cambridge Business Publishers, 2023 3-26

Advanced Accounting, 5th Edition

Calculations for Questions 64 – 68: PC’s acquisition entry is: Investment in Silicon Merger expenses

6,000,000 75,000 Common stock (400,000 x $0.10) Additional paid-in capital [(400,000 x $15) – $40,000 - $125,000] Cash ($125,000 + $75,000)

Eliminating entries are: (E) Capital stock AOCI Investment in Silicon

40,000 5,835,000 200,000

2,000,000 100,000 400,000 Retained deficit

2,500,000

(R) Developed technology Goodwill

5,000,000 1,400,000 Investment in Silicon

69.

6,400,000

Topic: Eliminating entries, bargain purchase LO 4 A parent acquires all of the voting stock of a subsidiary. The acquisition cost of $8 million is $1 million less than the fair value of the subsidiary’s identifiable net assets, and $0.8 million less than the subsidiary’s book value. Which statement below is true concerning the consolidation working paper eliminating entries at the date of acquisition? a. b. c. d.

Eliminating entry (R) credits gain on acquisition for $1 million. Eliminating entry (R) debits identifiable net assets for $200,000. Eliminating entry (E) credits Investment in Subsidiary for $8 million. Eliminating entry (R) credits Investment in Subsidiary for $1 million.

ANS:

b The subsidiary book value is $8.8 million, and the gain on acquisition is $1 million. The investment is valued at $9 million, the fair value of the subsidiary’s identifiable net assets, on the parent’s books. Eliminating entries at the date of acquisition are: (E) Equity – subsidiary

8,800,000 Investment in subsidiary

(R) Identifiable net assets

200,000 Investment in subsidiary

Test Bank, Chapter 3

8,800,000

200,000

© Cambridge Business Publishers, 2023 3-27

70.

Topic: Pushdown accounting LO 4 Which statement is true concerning the use of pushdown accounting by a subsidiary? a. b. c. d. ANS:

71.

72.

73.

An acquired company is required to use pushdown accounting. Using pushdown accounting, a subsidiary recognizes unrealized gains and losses on all its assets and liabilities at each balance sheet date. Using pushdown accounting, a subsidiary resets its accumulated other comprehensive income to zero at the date of acquisition. If the subsidiary uses pushdown accounting, no eliminating entries are necessary to consolidate the parent and subsidiary. c

Topic: Pushdown accounting LO 4 If a subsidiary uses pushdown accounting, what is the effect on consolidation eliminating entries at the date of acquisition? a. b. c. d.

No effect It is not necessary to eliminate the subsidiary’s equity accounts. It is not necessary to revalue the subsidiary’s net assets to fair value. An additional entry is required to reverse the pushdown accounting entry.

ANS:

c

Topic: Pushdown accounting LO 4 A company may use pushdown accounting to revalue its assets and liabilities to fair value when a. b. c. d.

The fair values of its assets are significantly different from book value. It gains control of another company through a business acquisition. Its book value is negative. Another company obtains control over it through a business acquisition.

ANS:

d

Topic: Pushdown accounting LO 4 Pivot pays $20,000,000 for all the voting stock of Sand. Sand’s equity accounts consist of capital stock of $2,000,000, retained deficit of $1,500,000, and accumulated other comprehensive income of $100,000. If Sand uses pushdown accounting, it credits Pushdown Capital in the amount of a. b. c. d.

$17,800,000 $17,900,000 $18,000,000 $21,000,000

© Cambridge Business Publishers, 2023 3-28

Advanced Accounting, 5th Edition

ANS:

c Revaluations = $20,000,000 – ($2,000,000 - $1,500,000 + $100,000) = $19,400,000 Sand’s entry is: Revaluations AOCI

19,400,000 100,000 Retained deficit Pushdown capital

1,500,000 18,000,000

Use the following information to answer Questions 74 and 75 Salsa Company’s equity accounts consist of capital stock of $1,500,000 and retained earnings of $400,000. Prance Company pays $9,000,000 for all the voting stock of Salsa Company. The fair value of Salsa’s identifiable net assets is $4,000,000 higher than book value. 74.

75.

Topic: Pushdown accounting LO 4 If Salsa uses pushdown accounting, Salsa’s entry to record the acquisition includes a. b. c. d.

No changes in its equity accounts. A $3,100,000 debit to goodwill. A $1,500,000 debit to capital stock. A $500,000 credit to retained earnings.

ANS:

b

Topic: Pushdown accounting LO 4 If Salsa uses pushdown accounting, what is Salsa’s credit to Pushdown Capital? a. b. c. d.

$7,100,000 $4,400,000 $8,300,000 $7,500,000

ANS:

d

Calculations for Questions 74 and 75: Goodwill = $9,000,000 – ($1,900,000 + $4,000,000) = $3,100,000 Salsa’s entry is: ID net assets Goodwill Retained earnings

4,000,000 3,100,000 400,000 Pushdown capital

Test Bank, Chapter 3

7,500,000

© Cambridge Business Publishers, 2023 3-29

Use the following information to answer questions 76 and 77: Salsa Company’s equity accounts consist of capital stock of $1,500,000 and retained earnings of $400,000. Prance Company pays $9,100,000 for all the voting stock of Salsa Company. The fair value of Salsa’s identifiable net assets is $7,500,000 greater than book value. Salsa uses pushdown accounting to revalue its net assets at the date of acquisition. 76.

77.

Topic: Pushdown accounting, bargain purchase LO 4 Salsa’s entry at the date of acquisition includes a. b. c. d.

A $400,000 debit to retained earnings. A $400,000 credit to retained earnings. A $5,600,000 debit to identifiable net assets. A $5,600,000 debit to goodwill.

ANS:

a

Topic: Pushdown accounting, bargain purchase LO 4 Eliminating entry (E) on the consolidation working paper includes a. b. c. d.

A $400,000 debit to retained earnings. A $400,000 credit to retained earnings. A $7,900,000 debit to pushdown capital. A $9,400,000 debit to pushdown capital.

ANS:

c

Calculations for Questions 76 and 77: Salsa’s entry is: Retained earnings Identifiable net asset revaluations

400,000 7,500,000 Pushdown capital

7,900,000

The bargain gain on the acquisition is ($1,900,000+$7,500,000) - $9,100,000 = $300,000 Prance’s entry to record the acquisition on its own books is: Investment in Salsa 9,400,000 Cash Bargain gain Eliminating entry (E) is: Capital stock Pushdown capital

1,500,000 7,900,000 Investment in Salsa

© Cambridge Business Publishers, 2023 3-30

9,100,000 300,000

9,400,000

Advanced Accounting, 5th Edition

78.

Topic: IFRS for consolidation LO 5 IFRS 10, Consolidated Financial Statements a. b. c. d. ANS:

79.

80.

d

Topic: IFRS for equity investments LO 5 Buttenhaus, a German company that reports using IFRS, owns 45% of the voting stock of Zeta. Buttenhaus should consolidate Zeta’s accounts with its own in its annual report, per IFRS 10 a. b. d. c.

Never Buttenhaus has power over Zeta. If Buttenhaus is Zeta’s primary beneficiary. If Buttenhaus significantly influences Zeta’s returns.

ANS:

b

Topic: IFRS for special purpose entities LO 5 Buttenhaus, a German company that reports using IFRS, has a financial relationship with Zeta, but does not own any of its voting stock. When should Buttenhaus consolidate Zeta’s accounts with its own in its annual report? a. b.

d.

Never If Zeta is a variable interest entity and a special purpose entity, Buttenhaus should consolidate it. If Zeta is a variable interest entity and Buttenhaus is its primary beneficiary, Buttenhaus should consolidate it. If Buttenhaus controls Zeta’s operations, Buttenhaus should consolidate it.

ANS:

d

c.

81.

Provides a measurable set of criteria for consolidation, based on the level of equity ownership. Requires joint ventures to be consolidated with the investor’s financial statements. Converges IFRS with U.S. GAAP by requiring the same measure of control now required by U.S. GAAP. Provides a single model for assessing control that is applicable to all investor-investee relationships.

Topic: IFRS for special purpose entities LO 5 Lidi uses IFRS, has a financial relationship with Zeta, but does not own any of its voting stock. When should Lidi consolidate Zeta’s accounts with its own in its annual report? a. b. c. d.

When Lidi controls Zeta When Lidi is Zeta’s primary beneficiary When Zeta is a variable interest entity When Lidi buys Zeta’s stock

Test Bank, Chapter 3

© Cambridge Business Publishers, 2023 3-31

ANS: 82.

83.

Topic: IFRS consolidation policy LO 5 According to IFRS, the financial statements of two legal entities should be presented on a consolidated basis if: a. b. c. d.

One company owns a majority of the voting stock of the other company One company has decision making control over the other company One company is a major supplier of the other company One company is a spinoff of the other company

ANS:

b

Topic: U.S. GAAP and IFRS for consolidation of special purpose entities LO 3, 5 What is the difference between U.S. GAAP and IFRS in consolidation policy for special purpose entities? a. b. c. d. ANS:

84.

a

U.S. GAAP requires identification of an SPE as a variable interest entity, and then requires consolidation by the company that is the primary beneficiary of the VIE. IFRS applies the concept of control to all entities, regardless of whether they are VIEs. IFRS requires identification of an SPE as a variable interest entity, and then requires consolidation by the company that is the primary beneficiary of the VIE. U.S. GAAP applies the concept of control to all entities, regardless of whether they are VIEs. U.S. GAAP requires majority ownership of the stock of the SPE for consolidation, while IFRS applies the concept of control to all entities. IFRS requires majority ownership of the stock of the SPE for consolidation, while U.S. GAAP applies the concept of control to all entities. a

Topic: Consolidation policy under IFRS and U.S. GAAP LO 3, 5 Which statement is true concerning IFRS for consolidations? a. b. c. d. ANS:

U.S. GAAP and IFRS standards for consolidation are the same. U.S. GAAP specifies different consolidation standards for special purpose entities versus equity investments, while IFRS has the same standards for all entities. IFRS specifies different consolidation standards for special purpose entities versus equity investments, while U.S. GAAP has the same standards for all entities. U.S. GAAP always requires consolidation of special purpose entities, while IFRS never requires consolidation of special purpose entities. b

© Cambridge Business Publishers, 2023 3-32

Advanced Accounting, 5th Edition

85.

Topic: IFRS for consolidation LO 5 Which statement is true concerning IFRS for consolidations? a. b. c. d.

ANS:

All majority-owned entities must be consolidated. Pushdown accounting is prohibited. Only entities where the parent owns the stock of the entity may be consolidated. Merger costs for outside consultants adds to acquisition cost. b

Test Bank, Chapter 3

© Cambridge Business Publishers, 2023 3-33

PROBLEMS 1.

Topic: Motivation for off-balance-sheet financing LO 1, 2, 3 Pebble Company pays $120 million in cash to acquire all of the stock of Speck Company. The balance sheets of Pebble and Speck just after the acquisition are as follows: (in millions) Current assets Plant assets, net Investment in Speck

Pebble $ 280 4,000 120 $4,400

Speck $ 80 2,400 -$2,480

Liabilities Capital stock Retained earnings Total

$ 800 3,400 200 $4,400

$2,400 100 (20) $2,480

Speck’s assets and liabilities are reported at amounts that approximate fair value at the date of acquisition, and there are no unreported net assets. Required a. Prepare the consolidated balance sheet for Pebble and Speck at the date of acquisition. b. Now assume Pebble reports its investment in Speck using the equity method. Present Pebble’s balance sheet. c. Assume that instead of acquiring Speck’s stock, Pebble has a financial relationship with Speck. There is no acquisition cost. Present Peck’s balance sheet if: 1) Speck is a variable interest entity and Pebble is its primary beneficiary 2) Speck is a variable interest entity and Pebble is not its primary beneficiary d. Calculate and compare the debt to asset ratio for each alternative above. ANS: a.

b.

Current assets Plant assets, net Investment in Speck Goodwill Total

$ 360 6,400 -40 $6,800

Liabilities Capital stock Retained earnings Outside equity Total

$3,200 3,400 200 -$6,800

Current assets Plant assets, net Investment in Speck Goodwill Total

$ 280 4,000 120 -$4,400

Liabilities Capital stock Retained earnings Outside equity Total

$ 800 3,400 200 -$4,400

© Cambridge Business Publishers, 2023 3-34

Advanced Accounting, 5th Edition

c.1)

c.2)

d.

Current assets Plant assets, net Investment in Speck Goodwill Total

$ 480 6,400 -40 $6,920

Liabilities Capital stock Retained earnings Noncontrolling interest Total

$3,200 3,400 200 120 $6,920

Current assets Plant assets, net Investment in Speck Goodwill Total

$ 400 4,000 --$4,400

Liabilities Capital stock Retained earnings Noncontrolling interest Total

$ 800 3,400 200 -$4,400

Debt to assets: a. $3,200/$6,800 = 47% b. $800/$4,400 = 18% c 1) $3,200/$6,920 = 46% c 2) $800/$4,400 = 18% Speck is significantly more leveraged than Pebble. Pebble avoids reporting higher leverage by not consolidating Speck. Reporting Speck as an equity investment or not being Speck’s primary beneficiary allows Pebble to hide Speck’s debt situation from Pebble’s shareholders.

2.

Topic: Variable interest entities LO 3 A U.S. company does business with a special purpose entity, formed to complete a one-year project. Qualitative factors are inconclusive regarding whether the SPE is a variable interest entity, so the company asks you to do a quantitative analysis. Here is information on expected cash flows for the SPE at the end of one year (all dollar amounts below are in thousands): Expected Cash Flows $3,000 1,200 600

Probability 0.70 0.20 0.10

The SPE was formed with an investment of $2,000, financed with $1,750 in debt and $250 in equity from outside investors. A discount rate of 20% is appropriate. Required a. Is this SPE a variable interest entity, based on your quantitative analysis? Show calculations clearly and explain your answer. b. If the answer to Part a. is “yes,” how should the company decide if it should consolidate the SPE? c. If the answer to Part a. is “no,” how should the company decide if it should consolidate the SPE?

Test Bank, Chapter 3

© Cambridge Business Publishers, 2023 3-35

ANS: (in thousands) a. Cash Present flows Value $3,000 $2,500 1,200 1,000 600 500

Resid. E(PV) Investment Returns E(G) E(L) $1,750 $2,000 $ 500 $350 200 2,000 (1,000) $(200) 50 2,000 (1,500) ____ (150) $2,000 $350 $(350) Equity of $250 is not enough to absorb expected losses, so the SPE is a variable interest entity.

3.

Prob 0.70 0.20 0.10

b.

Consolidate if the company is the VIE’s primary beneficiary (has the power to direct activities that significantly affect the VIE’s performance and absorbs/benefits from the losses/gains significant to the VIE).

c.

Entities that are not SPEs are evaluated based on shares owned, so the VIE will not be consolidated.

Topic: Variable interest entities LO 3 Dendeng Financial Group forms a separate legal entity, TCom, to provide financing services for Dendeng and other companies. The entity is financed by $510 million, of which $440 million is unsubordinated debt financing, and the remainder is equity funding obtained from outside investors. TCom is expected to operate for one year and generate the following cash flows at the end of the year (in millions): Expected Cash Flows $720 600 300

Probability 0.60 0.20 0.20

A risk-adjusted discount rate of 20% is appropriate. Required a. Is TCom a variable interest entity, per U.S. GAAP? Provide both qualitative and quantitative evaluations. b. Based on your conclusion in part a., who should consolidate TCom? Explain how this decision is made.

© Cambridge Business Publishers, 2023 3-36

Advanced Accounting, 5th Edition

ANS: a.

TCom appears to be able to finance its activities without additional subordinated debt. Therefore, qualitative analysis would likely lead to the conclusion that TCom is not a VIE. Quantitative analysis is as follows: (in millions) Cash Present Flows Value $720 $600 600 500 300 250

b. 4.

Prob 0.60 0.20 0.20

E(PV) $360 100 50 $510

Investment $510 510 510

Resid. Returns $ 90 (10) (260)

E(G) $54 ___ $54

E(L) $ (2) (52) $(54)

The equity interest of $510 - $440 = $70 million is sufficient to absorb expected losses of $54 million; therefore, TCom is not a VIE. The entity that controls TCom should consolidate it. If no entity owns a majority of its shares, it is likely that no one will consolidate it.

Topic: Variable interest entities, U.S. GAAP and IFRS LO 3, 5 Xeron Company forms a separate legal entity, Yolar, to develop new product technology. The entity is financed by $260 million, of which $235 million is debt financing, and the remainder is equity funding obtained from outside investors. Xeron guarantees Yolar’s debt, and is heavily involved with Yolar’s business activities. Yolar is expected to operate for one year and generate the following cash flows at the end of the year (in millions): Expected Cash Flows $448 336 224 112

Probability 0.10 0.50 0.30 0.10

A risk-adjusted discount rate of 12% is appropriate. Required a. Assume qualitative analysis is not conclusive regarding whether or not Yolar is a variable interest entity. Based on quantitative analysis, is Yolar a variable interest entity, per U.S. GAAP? Show calculations to justify your answer. b. Who should consolidate Yolar? Explain how this decision is made. c. Now assume Xeron follows IFRS. Should Xeron consolidate Yolar? Justify your answer.

Test Bank, Chapter 3

© Cambridge Business Publishers, 2023 3-37

ANS: a.

b.

c.

5.

(in millions) Cash Present Flows Value $448 $400 336 300 224 200 112 100

Prob 0.10 0.50 0.30 0.10

E(PV) $ 40 150 60 10 $260

Investment $260 260 260 260

Resid. Returns $ 140 40 (60) (160)

E(G) $ 14 20 ____ $ 34

E(L)

$ (18) (16) $(34)

The equity interest of $25 million cannot absorb expected losses of $34 million; therefore, Yolar is a VIE. Because Yolar is a VIE, the primary beneficiary should consolidate it. The PB is the company that has the power to direct the activities of the VIE that most significantly affect its performance, and absorbs the VIE’s expected losses and/or gains that are potentially significant to the VIE. Since Xeron guarantees Yolar’s debt and appears to direct its decisions, it is likely that it is Yolar’s PB and should consolidate it. IFRS has the same criteria for consolidation, whether the investor owns the voting stock of the investee or has a financial relationship with the investee. Xeron should consolidate Yolar if it has power over it, has exposure to its returns, and can use power to influence those returns. Since Xeron is “heavily involved with Yolar’s business activities” and guarantees its debt, it appears likely that the IFRS criteria for consolidation are met.

Topic: Eliminating entries, identifiable intangibles LO 4 Patterson Company acquires all of the stock of Slees Company for $35 million in cash. At the date of acquisition, Slees’ equity accounts consist of capital stock of $3 million, retained earnings of $20 million, and treasury stock of $5 million. Slees’ assets and liabilities are reported on its books at amounts approximating fair value, except that property with a book value of $10 million has a fair value of $12 million, and previously unreported identifiable intangible assets with a fair value of $15 million meet the criteria for capitalization per ASC Topic 805. Required Prepare working paper eliminating entries (E) and (R) to consolidate the balance sheet accounts of Patterson and Slees at the date of acquisition. ANS: (E) Capital stock Retained earnings

3,000,000 20,000,000 Treasury stock Investment in Slees

(R) Property Identifiable intangibles

2,000,000 15,000,000 Investment in Slees

© Cambridge Business Publishers, 2023 3-38

5,000,000 18,000,000

17,000,000

Advanced Accounting, 5th Edition

6.

Topic: Eliminating entries, goodwill LO 4 Patterson Company acquires all of the stock of Slees Company for $12 million in cash. At the date of acquisition, Slees’ equity accounts consist of capital stock of $4 million, retained deficit of $2 million, and accumulated other comprehensive income of $1 million. Slees’ assets and liabilities are reported on its books at amounts approximating fair value, except that property with a book value of $10 million has a fair value of $9 million. Required a. Prepare a schedule calculating the goodwill to be recognized for this acquisition. b. Prepare working paper eliminating entries (E) and (R) to consolidate the balance sheet accounts of Patterson and Slees at the date of acquisition. ANS: a. Acquisition cost Slees book value Excess of acquisition cost over book value Revaluation: property Goodwill

$12,000,000 (3,000,000) 9,000,000 1,000,000 $10,000,000

(E) Capital stock AOCI

4,000,000 1,000,000 Retained deficit Investment in Slees

(R) Goodwill

10,000,000 Property Investment in Slees

7.

2,000,000 3,000,000

1,000,000 9,000,000

Topic: Consolidation eliminating entries, revaluation of reported assets, goodwill LO 4 Pierce Corporation acquires all the voting stock of Stick Company for $100 million in cash. Stick’s equity accounts at the date of acquisition total $20 million, consisting of the following: Capital stock…………………………………………………… $ 5 million Retained earnings………………………………………….. 15 million Stick’s assets and liabilities are reported at amounts approximating fair value, except its plant assets are undervalued by $8 million. It has no unreported identifiable intangible assets. Required Prepare eliminating entries (E) and (R) for the consolidation working paper at the date of acquisition.

Test Bank, Chapter 3

© Cambridge Business Publishers, 2023 3-39

ANS: (E) Capital stock Retained earnings

5,000,000 15,000,000 Investment in Stick

(R) Plant assets Goodwill

20,000,000

8,000,000 72,000,000 Investment in Stick

8.

80,000,000

Topic: Consolidation eliminating entries, revaluation of reported assets LO 4 Gorman Inc. acquires all of the voting stock of Elvan Company for $20 million in cash, an amount that is $15 million above the book value of Elvan’s net assets. At the date of acquisition, Elvan’s plant assets were overvalued by $8 million and its reported intangible assets were undervalued by $23 million. Elvan’s other identifiable assets and liabilities are reported at amounts approximating fair value at the date of acquisition, and it has no previously unreported identifiable intangible assets. Required Prepare consolidation eliminating entries (E) and (R) at the date of acquisition. ANS: (E) Shareholders’ equityElvan

5,000,000 Investment in Elvan

(R) Intangible assets

23,000,000 Investment in Elvan Plant assets

9.

5,000,000

15,000,000 8,000,000

Topic: Consolidation eliminating entries, revaluation of reported assets and liabilities, goodwill LO 4 Plum Corporation acquired all the stock of Sudbury Company, at an acquisition cost of $600 million. Sudbury’s book value at the date of acquisition was $100 million. Sudbury's assets and liabilities are carried at amounts approximating fair value, except its equipment is overvalued by $225 million, its long-term debt is overvalued by $30 million, and its trademarks are undervalued by $80 million. Sudbury has no previously unreported identifiable intangible assets. Required Prepare consolidation eliminating entries (E) and (R) at the date of acquisition.

© Cambridge Business Publishers, 2023 3-40

Advanced Accounting, 5th Edition

ANS: (in millions) (E) Shareholders’ equity-Sudbury

100 Investment in Sudbury

(R) Goodwill Trademarks Long-term debt

100

615 80 30 Investment in Sudbury Equipment

10.

500 225

Topic: Consolidation eliminating entries, revaluation of reported assets, previously unreported intangible assets, goodwill LO 4 Pounce Corporation acquired all of the stock of Stubey Company, at an acquisition cost of $70 million. Stubey’s book value at the time was $45 million. Stubey’s current assets and current liabilities were carried at amounts approximating fair value. However, its plant assets were overvalued by $20 million. Stubey also has previously unreported customer lists valued at $10 million. Required Prepare consolidation eliminating entries (E) and (R) at the date of acquisition. ANS: (in millions) (E) Shareholders’ equity-Stubey

45 Investment in Stubey

(R) Goodwill Identifiable intangible assets

35 10 Investment in Stubey Plant assets

Test Bank, Chapter 3

45

25 20

© Cambridge Business Publishers, 2023 3-41

11.

Topic: Consolidation eliminating entries, revaluation of reported assets and liabilities, goodwill previously reported by subsidiary LO 4 Prop Inc. acquires all the voting stock of Sorter Company for $30 million in cash. At the date of acquisition, Sorter’s balance sheet is as follows (in millions):

Tangible assets Goodwill Liabilities Equity

Book Value Dr (Cr) $20 2 (16) (6)

Fair Value Dr (Cr) $24 6 (15)

Sorter has previously unreported identifiable intangible assets, in the form of brand names and developed technology, valued at $6 million at the date of acquisition. Required Prepare consolidation eliminating entries (E) and (R) at the date of acquisition. ANS:(in millions) (E) Shareholders’ equity – Sorter

6 Investment in Sorter

(R) Goodwill (new) Tangible assets Identifiable intangible assets Liabilities

6

15 4 6 1 Investment in Sorter Goodwill (old)

12.

24 2

Topic: Acquisition entry, consolidation eliminating entries, revaluation of reported assets, goodwill LO 4 Piper Corporation acquired all of the stock of Simon Corporation by issuing 500,000 shares of $0.50 par stock with a market value of $10 per share. Registration fees were $100,000 and legal fees were $200,000, all paid in cash. Simon’s book value at the date of acquisition was consisted of capital stock reported at $150,000, retained earnings of $600,000, and accumulated other comprehensive loss of $15,000. At the date of acquisition, all of Simon’s assets and liabilities were reported at amounts approximating fair value, except that its plant and equipment was overvalued by $200,000. Simon also has previously unreported developed technology with a fair value of $2,500,000, and reportable per ASC Topic 805. Required a. Prepare the entry Piper made to report the acquisition on its own books. b. Prepare consolidation eliminating entries (E) and (R) at the date of acquisition.

© Cambridge Business Publishers, 2023 3-42

Advanced Accounting, 5th Edition

ANS: a. Investment in Simon Merger expenses

5,000,000 200,000 Cash Common stock Additional paid-in capital

b.

(E) Capital stock Retained earnings

300,000 250,000 4,650,000

150,000 600,000 Accumulated other comprehensive loss Investment in Simon

(R) Goodwill Identifiable intangible assets

15,000 735,000

1,965,000 2,500,000 Plant and equipment Investment in Simon

13.

200,000 4,265,000

Topic: Acquisition entry, consolidation eliminating entries, revaluation of reported assets, previously unreported intangibles, preacquisition contingency, deferred taxes LO 4 Photomax Corporation acquired all of the stock of Synapsis Corporation by issuing 1,000,000 shares of $1 par stock with a market value of $40 per share. Registration fees were $300,000 and legal fees were $500,000, all paid in cash. Synapsis’ book value at the date of acquisition was $3,000,000, consisting of capital stock reported at $500,000, retained earnings of $2,600,000, and accumulated other comprehensive loss of $100,000. At the date of acquisition, all of Synapsis’ assets and liabilities were reported at amounts approximating fair value, except that its plant and equipment was overvalued by $8,000,000. Synapsis also had unreported developed technology valued at $12,000,000, and unreported warranty liabilities of $5,000,000. Because this is a nontaxable acquisition, deferred tax assets valued at $1,200,000 were reported in consolidation at the date of acquisition. Required a. Prepare the entry Photomax made to report the acquisition on its own books. b. Prepare consolidation eliminating entries (E) and (R) at the date of acquisition. ANS: a. Investment in Synapsis Merger expenses

40,000,000 500,000 Cash Common stock Additional paid-in capital

Test Bank, Chapter 3

800,000 1,000,000 38,700,000

© Cambridge Business Publishers, 2023 3-43

b.

(E) Capital stock Retained earnings

500,000 2,600,000 Accumulated other comprehensive loss Investment in Synapsis

(R) Goodwill Deferred tax assets Identifiable intangible assets

100,000 3,000,000

36,800,000 1,200,000 12,000,000 Plant and equipment Warranty liabilities Investment in Synapsis

14.

8,000,000 5,000,000 37,000,000

Topic: Consolidation eliminating entries, previously unreported intangible assets, bargain purchase LO 4 Petrie Corporation acquired all the stock of Slab Company, at an acquisition cost of $25 million in cash. Slab’s book value at the time was $18 million. Slab’s net assets are reported at amounts approximating market value at the date of acquisition. However, it has previously unreported identifiable intangible assets, valued at $9 million. Required a. Prepare the entry Petrie makes to record the acquisition. b. Prepare consolidation eliminating entries (E) and (R) at the date of acquisition. ANS: a.

The acquisition cost of $20 million is less than the fair value of identifiable net assets acquired of $22 million (= $15 million + $7 million). Therefore, the investment is recorded at $22 million and a gain on acquisition is reported. (in millions) Investment in Slab

27 Cash Gain on acquisition

b.

(in millions) (E) Shareholders’ equity-Slab

25 2

18 Investment in Slab

(R) Identifiable intangible assets

9 Investment in Slab

© Cambridge Business Publishers, 2023 3-44

18

9

Advanced Accounting, 5th Edition

15.

Topic: Acquisition entry, consolidation eliminating entries, previously unreported intangible assets, bargain purchase LO 4 Prep Corporation acquired all the stock of Silco Company, by issuing one million shares of no-par capital stock with a date-of-acquisition market value of $5/share. Stock registration fees were $100,000, and outside consultants’ fees were $75,000, both paid in cash. In addition, vested stock options, valued at $200,000, were converted to Prep stock, and the acquisition included an earnout valued at $50,000 at the date of acquisition. Silco’s book value at the time was $3.5 million. Silco’s net assets are reported at amounts approximating market value at the date of acquisition. However, it has previously unreported identifiable intangible assets, valued at $1.8 million. Required a. Prepare the entry Prop makes to record the acquisition. b. Prepare consolidation eliminating entries (E) and (R) at the date of acquisition. ANS: a. Investment in Silco Merger expenses

5,300,000 75,000 Cash Capital stock APIC Earnout liability Bargain gain

b.

175,000 4,900,000 200,000 50,000 50,000

(E) Shareholders’ equity-Silco

3,500,000 Investment in Silco

3,500,000

(R) Identifiable intangible assets

1,800,000 Investment in Silco

16.

1,800,000

Topic: Acquisition and eliminating entries, goodwill LO 4 Peter Inc. acquired all of the stock of Sellers Company in an acquisition reported as a stock acquisition. Sellers’ trial balance at the date of acquisition, along with the fair values of its assets and liabilities are:

Tangible assets Intangible assets Liabilities Capital stock Retained earnings Accumulated other comprehensive income Total

Test Bank, Chapter 3

Book Value Dr (Cr) $ 80,000 10,000 (65,000) (15,000) (9,000) (1,000) $ 0

Fair value Dr (Cr) $ 50,000 30,000 (67,000)

© Cambridge Business Publishers, 2023 3-45

Peter pays $45,000 in cash to Sellers’ former shareholders. The acquisition also includes an earnout valued at $2,000, and vested stock options held by Sellers employees, converted to Peter stock, valued at $1,000. Outside consulting fees connected with the acquisition were $500, paid in cash. Required a. Prepare the journal entry Peter made to record the stock acquisition on its own books. b. Prepare working paper eliminating entries (E) and (R) to combine the accounts of Peter and Sellers at the date of acquisition. ANS: a. Investment in Sellers Merger expenses

48,000 500 Cash Earnout liability APIC

b.

(E) Capital stock Retained earnings AOCI

45,500 2,000 1,000

15,000 9,000 1,000 Investment in Sellers

(R) Intangible assets Goodwill

25,000

20,000 35,000 Liabilities Tangible assets Investment in Sellers

17.

2,000 30,000 23,000

Topic: Acquisition entry, consolidation eliminating entries, identifiable intangibles, preacquisition contingency, earnout LO 4 Serano Corporation’s trial balance is as follows:

Cash and receivables Inventories Property, plant, and equipment, net Liabilities Capital stock Retained deficit

© Cambridge Business Publishers, 2023 3-46

Serano Dr (Cr) $ 200 600 7,500 (7,600) (720) 20 $ 0

Advanced Accounting, 5th Edition

An analysis of Serano’s assets and liabilities reveals that its inventories are overvalued by $100 and its property, plant and equipment is overvalued by $3,000. In addition, the following items are not currently reported on Serano’s balance sheet:

• • •

Customer contracts, valued at $30 In-process research and development, valued at $200 Expected future warranty liabilities with a present value of $15

Pago issues new stock with a market value of $700 to acquire the assets and liabilities of Serano. Stock registration fees are $50, paid in cash. Consulting, accounting, and legal fees connected with the merger are $100, paid in cash. In addition, Pago enters into an earnings contingency agreement, whereby Pago will pay the former shareholders of Serano an additional amount if Serano’s performance meets certain minimum levels. The present value of the contingency is estimated at $25. Required a. Prepare the journal entry or entries Pago makes to record the acquisition. b. Prepare consolidation eliminating entries (E) and (R) necessary to consolidate the trial balances of Pago and Serano at the date of acquisition ANS: a. Investment in Serano Merger expenses

725 100 Cash Earnings contingency liability Capital stock

b.

(E) Capital stock

150 25 650

720 Retained deficit Investment in Serano

(R) Identifiable intangibles Goodwill

230 2,910 Inventories Property, plant and equipment Warranty liabilities Investment in Serano

Test Bank, Chapter 3

20 700

100 3,000 15 25

© Cambridge Business Publishers, 2023 3-47

18.

Topic: Eliminating entries, previously unreported intangibles, goodwill LO 4 Pilot Supplies acquires all the voting stock of Stive Automotive for $65,000 in cash. Stive’s trial balance at the date of acquisition is: Dr (Cr) Current assets………………………………………………………. $ 2,000 Property, plant and equipment……………………………. 14,000 Current liabilities…………………………………………………. (3,000) Long-term liabilities…………………………………………….. (15,000) Capital stock………………………………………………………… (2,000) Retained deficit…………………………………………………… 3,500 Accumulated other comprehensive loss……………… 500 Total…………………………………………………………………… $ 0 Date-of-acquisition book values approximate fair value for all reported assets and liabilities. The following previously unreported intangibles are identified as belonging to Stive, along with their estimated fair values at the date of acquisition: Synergies with Pilot technologies …………………………..…………………………. Order backlogs……………………………………………………………………………………. Technical expertise of workforce………………………………………………………… Cost savings on future contracts………………………………………………………… Developed technology………………………………………………………………………..

$ 5,000 2,000 10,000 4,000 15,000

Required a. Prepare a schedule calculating the goodwill to be recognized for this acquisition. b. Prepare the eliminating entries necessary to consolidate the balance sheet accounts of Pilot and Stive at the date of acquisition. ANS: a. Acquisition cost Stive’s book value Excess of acquisition cost over book value Excess of fair value over book value: Order backlogs Developed technology Goodwill b.

$ 65,000 2,000 67,000 $ 2,000 15,000

17,000 $50,000

(E) Capital stock 2,000 Investment in Stive 2,000 Retained deficit 3,500 AOCL 500 To eliminate Stive’s shareholders’ equity accounts and the book value portion of the investment account.

© Cambridge Business Publishers, 2023 3-48

Advanced Accounting, 5th Edition

(R) Order backlogs 2,000 Developed technology 15,000 Goodwill 50,000 Investment in Stive 67,000 To revalue Stive’s assets and liabilities to fair value and eliminate the difference between book value and fair value of Stive’s net assets from the investment account. 19.

Topic: Eliminating entries, previously unreported intangibles, goodwill, pushdown accounting LO 4 Pilot Supplies acquires all the voting stock of Stive Automotive for $65,000 in cash. Stive’s trial balance at the date of acquisition is: Dr (Cr) Current assets………………………………………………………. $ 1,800 Property, plant and equipment……………………………. 14,000 Current liabilities…………………………………………………. (3,000) Long-term liabilities…………………………………………….. (15,000) Capital stock………………………………………………………… (2,000) Retained deficit…………………………………………………… 4,000 Accumulated other comprehensive loss……………… 200 Total…………………………………………………………………… $ 0 Date-of-acquisition book values approximate fair value for all reported assets and liabilities. The following previously unreported intangibles are identified as belonging to Stive, along with their estimated fair values at the date of acquisition: Synergies with Pilot technologies …………………………..…………………………. Order backlogs……………………………………………………………………………………. Technical expertise of workforce………………………………………………………… Cost savings on future contracts………………………………………………………… Developed technology………………………………………………………………………..

$ 5,000 4,000 10,000 6,000 20,000

Stive elects to use pushdown accounting to revalue its assets and liabilities at the date of acquisition. Required a. Prepare a schedule calculating the goodwill for this acquisition. b. Prepare the entry Stive makes to adjust its accounts using pushdown accounting. c. Prepare the eliminating entry or entries necessary to consolidate the balance sheet accounts of Pilot and Stive at the date of acquisition. ANS: a. Acquisition cost Stive’s book value Excess of acquisition cost over book value Excess of fair value over book value: Order backlogs Developed technology Goodwill Test Bank, Chapter 3

$ 65,000 2,200 67,200 $ 4,000 20,000

24,000 $43,200

© Cambridge Business Publishers, 2023 3-49

b. Order backlogs Developed technology Goodwill Retained deficit AOCL Pushdown capital

4,000 20,000 43,200 4,000 200 63,000

c. (E) Capital stock 2,000 Pushdown capital 63,000 Investment in Stive 65,000 To eliminate Stive’s shareholders’ equity accounts against the investment account. 20.

Topic: Acquisition entry, consolidation eliminating entries, registration and out-of-pocket costs, revaluation of reported assets, previously unreported identifiable intangibles LO 4 Pfizer acquires all of Sosa’s 1,400 million shares for $30/share in cash plus 1,400 million shares of Pfizer stock, $0.05/share par value, valued at $15/share. Registration fees for issuing the new Pfizer shares are $200 million, and outside consulting fees are $130 million. Both fees are paid in cash. The book values of Sosa’s assets and liabilities approximate fair value, except for the following: • • •

Plant assets are overvalued by $3,000 million Unreported license agreements are valued at $5,000 million Unreported brand names are valued at $20,000 million

Sosa’s equity is reported as follows at the date of acquisition (in millions): Common stock, par value Additional paid-in capital Retained earnings Accumulated other comprehensive income Treasury stock

Dr (Cr) $ (380) (7,100) (10,500) (230) 10

Required a. Prepare the entry Pfizer makes on its own books to record the acquisition. b. Prepare eliminating entries (E) and (R) to consolidate the balance sheet accounts of Pfizer and Sosa at the date of acquisition.

© Cambridge Business Publishers, 2023 3-50

Advanced Accounting, 5th Edition

ANS: (in millions) a. Investment in Sosa Merger expenses

63,000 130 Cash Common stock APIC

b.

(E) Common stock APIC Retained earnings Accumulated other comprehensive income

42,330 70 20,730 380 7,100 10,500 230

Treasury stock Investment in Sosa (R) Goodwill Identifiable intangible assets

10 18,200 22,800 25,000

Plant assets Investment in Sosa 21.

3,000 44,800

Topic: Consolidation eliminating entries, pushdown accounting LO 4 Pacifica Company acquires all the voting stock of Southern Industries for $85 million in cash, and accounts for the acquisition as a stock acquisition. Balance sheet information at the date of acquisition is as follows (in millions): Pacifica Book Value Dr (Cr) Current assets………………………………… $ 15 Plant and equipment, net………………. 400 Investment in Southern………………… 85 Liabilities……………………………………….. (350) Capital stock………………………………….. (50) Retained earnings………………………….. (100) Total………………………………………………. $ 0

Southern_________ Book Value Fair Value Dr (Cr) Dr (Cr) $ 3 $ 6 160 65 -(155) (153) (3) (5) $ 0

Southern has previously unreported identifiable intangibles with a fair value of $50 million. Southern elects to use pushdown accounting as of the date of acquisition. Required a. Prepare the entry Southern makes on its own books at the date of acquisition, using pushdown accounting. b. Prepare the consolidation eliminating entry or entries necessary to consolidate the balance sheets of Pacifica and Southern at the date of acquisition.

Test Bank, Chapter 3

© Cambridge Business Publishers, 2023 3-51

ANS: (in millions) a. Current assets 3 Liabilities 2 Retained earnings 5 Identifiable intangibles 50 Goodwill 117 Plant and equipment 95 Pushdown capital 82 To revalue Southern’s net assets to fair value and reset retained earnings to zero. b. (E) Capital stock Pushdown capital Investment in Southern 22.

3 82 85

Topic: Acquisition entry, consolidation eliminating entries, identifiable intangibles, preacquisition contingency, employee compensation LO 4 Pinoy Company acquired all the stock of Schell Company by issuing 1,000,000 shares of $0.50 par stock with a market value of $30 per share. Registration fees were $250,000 and legal fees were $150,000, all paid in cash. Pinoy also made cash severance payments of $1,800,000 to Schell’s former employees, and promised payments to former owners of Schell, who are now employees of Pinoy, with an expected present value of $2,000,000. These payments will be terminated if the employee is no longer employed by Pinoy. Schell’s book value at the date of acquisition was $2,000,000, consisting of $600,000 in capital stock and $1,400,000 in retained earnings. All of Schell's assets and liabilities are carried at amounts approximating fair value, except that long-term debt is overvalued by $200,000, and plant assets are overvalued by $5,000,000. Schell also has unreported in-process research & development, capitalizable per GAAP, valued at $20,000,000, and an unreported pending lawsuit, in which it is the defendant, valued at $2,800,000 and reportable per GAAP. Required a. Prepare Pinoy’s entry to record the acquisition of Schell. b. Prepare the necessary consolidation working paper eliminating entries (E) and (R) to consolidate the balance sheets of Pinoy and Schell at the date of acquisition. ANS: a. Investment in Schell Merger expenses

31,800,000 150,000 C/S (1,000,000@$0.50) APIC [(1,000,000@$29.50) – $250,000] Cash ($250,000 + $150,000 + $1,800,000)

500,000 29,250,000 2,200,000

Note: The contingent consideration is compensation for future services and not part of acquisition cost. © Cambridge Business Publishers, 2023 3-52

Advanced Accounting, 5th Edition

b.

(E) Capital stock Retained earnings

600,000 1,400,000 Investment in Schell

2,000,000

(R) Long-term debt In-process R&D Goodwill

200,000 20,000,000 17,400,000 Plant assets Lawsuit liability Investment in Schell

23.

5,000,000 2,800,000 29,800,000

Topic: Derive acquisition information, eliminating entries LO 4 Parkside Company issued stock to acquire all the voting shares of Spark Company. The trial balances of Parkside and Spark immediately prior to acquisition, and the consolidated balance sheet at the date of acquisition, appear below. Parkside (in millions) Current assets Plant & equipment, net Liabilities Capital stock Retained earnings Total

Spark Dr (Cr)

$ 300 1,600 (1,000) (800) (100) $ 0

$ 104 640 (600) (300) 156 $ 0

Parkside Company and Subsidiary Consolidated Balance Sheet Date of Acquisition (in millions) Assets Liabilities & Equity Current assets $ 354 Liabilities $1,600 Plant & equipment, net 1,750 Equity Identifiable intangibles 400 Capital stock 1,260 Goodwill 446 Retained earnings 90 Total assets $2,950 Total liabilities & equity $2,950 The carrying value of Spark’s current assets and all liabilities equaled their fair values at the date of acquisition. Parkside paid stock registration fees and out-of-pocket legal and consulting fees in cash. Required a. Calculate the following amounts: 1) Amount of out-of-pocket merger costs paid in cash 2) Amount of registration fees paid in cash 3) Difference between fair and book value of Spark’s plant & equipment 4) Acquisition cost b. Prepare consolidation eliminating entries (E) and (R) at the date of acquisition. Test Bank, Chapter 3

© Cambridge Business Publishers, 2023 3-53

ANS: (in millions) a.

1) Consolidated retained earnings is $10 less than Parkside’s retained earnings prior to acquisition; therefore merger expenses are $10. 2) Consolidated current assets are $50 less than the combined current assets of Parkside and Spark just prior to acquisition; merger expenses are $10, so registration fees are $40. 3) Consolidated plant & equipment is $490 less than the combined balances for Parkside and Spark. 4) Parkside acquired Spark by issuing stock and paying registration fees and legal and consulting fees. Consolidated capital stock is $460 higher than Parkside’s capital stock immediately prior to the acquisition. From 1) and 2), merger expenses are $10 and registration fees are $40. Therefore, Parkside’s entry to record the acquisition was: Investment in Spark Merger expenses

500 10 Cash Capital stock

50 460

Acquisition cost is $500. b.

(E) Capital stock

300 Retained earnings Investment in Spark

156 144

(R) Identifiable intangibles Goodwill

400 446 Plant and equipment Investment in Spark

© Cambridge Business Publishers, 2023 3-54

490 356

Advanced Accounting, 5th Edition

24.

Topic: Step acquisition and consolidation eliminating entries LO 4 Plato Company owns 25% of the stock of Socrates Corporation, and reports its investment using the equity method. It acquires the remaining 75% of Socrates’ stock by issuing Plato no-par capital stock valued at $80 million to Socrates’ shareholders. Plato records the acquisition as a stock acquisition on its own books. At the date of acquisition, Plato’s 25% investment in Socrates was carried on Plato’s books at $12 million and had a fair value of $25 million. Socrates’ balance sheet at the date of acquisition, and fair value information on its reported assets and liabilities, is as follows: Book Value Dr (Cr) $ 5,000,000 100,000,000 (45,000,000) (10,300,000) (50,000,000) 300,000 $ 0

Current assets Property Liabilities Capital stock Retained earnings Treasury stock Total

Fair Value Dr (Cr) $ 6,500,000 105,000,000 (44,000,000)

Socrates also has previously unreported identifiable intangible assets, valued at $10 million. Required a. Prepare the journal entry or entries Plato made to record the stock acquisition on its own books. b. Prepare working paper eliminating entries (E) and (R) to combine the accounts of Plato and Socrates at the date of acquisition. ANS: a. Investment in Socrates

105,000,000 Investment in Socrates (equity method) Gain on investment (income) Capital stock

b.

12,000,000 13,000,000 80,000,000

(E) Capital stock Retained earnings

10,300,000 50,000,000 Treasury stock Investment in Socrates

300,000 60,000,000

(R) Current assets Property Liabilities Identifiable intangibles Goodwill

1,500,000 5,000,000 1,000,000 10,000,000 27,500,000 Investment in Socrates

Test Bank, Chapter 3

45,000,000 © Cambridge Business Publishers, 2023 3-55

25.

Topic: Acquisition entry, goodwill calculation, consolidation eliminating entries, previously unreported identifiable intangibles, employee compensation LO 4 Transco acquires the stock of Quicktruck. The acquisition involves the following payments: Cash paid to Quicktruck’s former shareholders Cash paid to consultants and lawyers Fair value of new stock issued, 2,000 shares, $1 par Stock registration fees, paid in cash Fair value of stock options to Quicktruck employees

$ 3,000 500 35,000 200 1,000

The stock options replace options held by Quicktruck employees, currently denominated in Quicktruck stock. Of the total fair value of options granted, 75% are vested, and the remainder are compensation for services to be provided. Quicktruck’s balance sheet at the date of acquisition appears below. Fair value information on its assets and liabilities is also provided. Quicktruck Book Value

Fair Value

Assets Current assets Fixed assets, net Patents Total assets

$ 1,000 25,000 4,000 $30,000

$ 1,300 22,000 10,000

Liabilities & equity Current liabilities Loans payable Common stock, par value Additional paid-in capital Retained earnings Accumulated OCI Treasury stock Total liabilities & equity

$ 300 21,000 100 7,400 1,000 800 (600) $30,000

300 20,000

In addition to the assets and liabilities reported on Quicktruck’s balance sheet, the following previously unreported assets and liabilities are identified as requiring recognition, per ASC Topic 805: Fair Value Franchise agreements $ 2,000 Deferred tax assets 400 Favorable leases 300 Claims payable 1,500 Required a. Prepare the entry Transco made to record the acquisition on its own books. b. Prepare a schedule calculating the excess paid over book value and its allocation to Quicktruck’s identifiable assets and liabilities and goodwill. c. Prepare eliminating entries (E) and (R) to consolidate the balance sheet accounts of Transco and Quicktruck at the date of acquisition.

© Cambridge Business Publishers, 2023 3-56

Advanced Accounting, 5th Edition

ANS: a. Investment in Quicktruck Merger expenses Prepaid compensation

38,750 500 250 Cash Common stock APIC-stock APIC-stock options

b.

3,700 2,000 32,800 1,000

Acquisition cost Book value Excess paid over book value

$38,750 8,700 30,050

Fair value – book value of Quicktruck’s identifiable net assets: Current assets Fixed assets Patents Franchise agreements Deferred tax assets Favorable leases Claims payable Loans payable Goodwill c.

(E) Common stock APIC Retained earnings Accumulated OCI

$ 300 (3,000) 6,000 2,000 400 300 (1,500) 1,000

100 7,400 1,000 800 Treasury stock Investment in Quicktruck

(R) Current assets Patents Franchise agreements Deferred tax assets Favorable leases Goodwill Loans payable

600 8,700

300 6,000 2,000 400 300 24,550 1,000 Fixed assets Claims payable Investment in Quicktruck

Test Bank, Chapter 3

5,500 $24,550

3,000 1,500 30,050

© Cambridge Business Publishers, 2023 3-57

26.

Topic: Consolidation working paper, revaluation of reported assets, previously unreported intangibles, goodwill LO 4 You are responsible for preparing the consolidated balance sheet of Princecraft and its new subsidiary, Sylvan, at the date of acquisition. The consolidation working paper as of the date of acquisition appears below. Sylvan’s assets and liabilities are reported at fair value, except that its plant and equipment is overvalued by $15,000,000, and it has previously unreported developed technology, which meets the requirements for capitalization per ASC Topic 805, valued at $20,000,000. Required a. Fill in the consolidation working paper. b. Prepare the consolidated balance sheet, in good form.

(in millions) Current assets

Princecraft

Sylvan

Dr (Cr)

Dr (Cr)

Consolidated

$ 100

$ 15

Plant and equipment, net

500

95

Investment in Sylvan

80

Identifiable intangible assets Goodwill Liabilities

(450)

(85)

Capital stock

(120)

(30)

Retained earnings

(90)

4

AOCI

(20)

(1)

Treasury stock

--

2

0

$ 0

Total

$

Dr

Cr

Dr

Cr

Dr (Cr)

ANS: a. (in millions) Current assets

Princecraft

Sylvan

Dr (Cr)

Dr (Cr)

Consolidated

$ 100

$ 15

Plant and equipment, net

500

95

Investment in Sylvan

80

Dr (Cr) $115

15 (R) 25 (E) 55 (R)

580 --

Identifiable intangible assets

(R)

20

20

Goodwill

(R)

50

50

(E)

30

Liabilities

(450)

(85)

Capital stock

(120)

(30)

Retained earnings

(90)

4

AOCI

(20)

(1)

Treasury stock

--

2

_____

0

$ 0

$101

Total

© Cambridge Business Publishers, 2023 3-58

$

(535) (120) 4 (E) (E)

1

(90) (20)

2 (E) $101

-$ 0

Advanced Accounting, 5th Edition

b.

(in millions) Assets Current assets Plant and equipment, net Identifiable intangible assets Goodwill

Total assets 27.

Liabilities $115 580 20 50

____ $765

$535

Equity Capital stock Retained earnings Accumulated other comprehensive income Total equity Total liabilities and equity

$120 90 20 230 $765

Topic: Consolidation working paper, revaluation of reported assets and liabilities, consolidated balance sheet LO 4 Information on balance sheet book values and fair values just after Python Company’s acquisition of Slither Corporation is as follows:

Current assets Plant assets Identifiable intangible assets Investment in Slither Current liabilities Long-term liabilities Common stock Additional paid-in capital Retained earnings/deficit Treasury stock Accumulated other comprehensive loss Total

Python Book Value Dr (Cr) $ 30,000 500,000 40,000 250,000 (100,000) (370,000) (2,000) (260,000) (108,000) 8,000 12,000 $ 0

Slither Book Value Dr (Cr) $ 4,000 50,000 6,000

Slither Fair Value Dr (Cr) $ 3,000 45,000 80,000

(3,000) (50,000) (400) (13,000) 4,000 400 2,000 $ 0

(3,000) (50,000)

Python acquires all of Slither’s common stock for $250,000 in cash.

Test Bank, Chapter 3

© Cambridge Business Publishers, 2023 3-59

Required a. The working paper to consolidate Python and Slither at the date of acquisition appears below. Fill in eliminating entries (E) and (R). Compute the consolidated balances. (in thousands)

Python Dr (Cr)

Slither Dr (Cr)

Current assets

$ 30,000

$ 4,000

Plant assets

500,000

50,000

Investment in Slither

250,000

--

Identifiable intangible assets

40,000

6,000

--

--

Goodwill Current liabilities

(100,000)

(3,000)

Long-term liabilities

(370,000)

(50,000)

(2,000)

(400)

Additional paid-in capital

(260,000)

(13,000)

Retained earnings/deficit

(108,000)

4,000

Treasury stock Accumulated other comprehensive loss

8,000

400

12,000

2,000

Common stock

Total

b.

Dr

$

0

$

Cr

Consolidated Dr (Cr)

0

Present, in good form, the date-of-acquisition consolidated balance sheet.

ANS: a. Python Dr (Cr)

Slither Dr (Cr)

Cr

Consolidated Dr (Cr)

Current assets

$ 30,000

$ 4,000

1,000 (R)

$ 33,000

Plant assets Investment in Slither

500,000 250,000

50,000

5,000 (R) 7,000 (E) 243,000 (R)

545,000 --

Identifiable intangible assets

40,000

6,000

Dr

Goodwill

(R)

74,000

120,000

(R) 175,000

175,000

Current liabilities

(100,000)

(3,000)

(103,000)

Long-term liabilities

(370,000)

(50,000)

(420,000)

(2,000)

(400)

(E)

400

Additional paid-in capital

(260,000)

(13,000)

(E)

13,000

Retained earnings/deficit

(108,000)

4,000

4,000 (E)

(108,000)

Treasury stock Accumulated other comprehensive loss

8,000

400

400 (E)

8,000

12,000

2,000

_______

2,000 (E)

12,000

0

$262,400

Common stock

Total

© Cambridge Business Publishers, 2023 3-60

$

0

$

(2,000) (260,000)

$262,400

$

Advanced Accounting, 5th Edition

0

b.

Assets Current assets Plant assets Identifiable intangible assets Goodwill

Equity Common stock Additional paid-in capital Retained earnings Treasury stock Accumulated other comprehensive loss Total equity Total liabilities and equity

_______ $873,000

Total assets

28.

Liabilities Current liabilities Long-term liabilities Total liabilities

$ 33,000 545,000 120,000 175,000

$103,000 420,000

$523,000

2,000 260,000 108,000 (8,000) (12,000)

350,000 $873,000

Topic: Consolidation working paper, identifiable intangibles, preacquisition contingency LO 4 ADL Corporation issued 1,500,000 shares of common stock with a market value of $30 per share to acquire all of Timeout Co.’s voting stock. Timeout’s book value is $17 million, and its net assets are reported at fair value, except for the following: • • • •

Current assets are undervalued by $1,000,000. Plant & equipment is undervalued by $5,000,000. Previously unrecorded identifiable intangible assets are valued at $8,000,000. There is a preacquisition contingent liability (potential lawsuit) connected with Timeout, valued at $2,500,000, which is not recorded on Timeout’s books.

Required a. Present a schedule calculating the excess of acquisition cost over book value for this acquisition and its allocation to the assets and liabilities of Timeout. b. A consolidation working paper for this acquisition, as of the date of acquisition, appears below. Fill in the worksheet as necessary to consolidate the balance sheet accounts of ADL and Timeout as of the date of acquisition.

c.

ADL Dr (Cr)

Timeout Dr (Cr)

Current assets

$ 5,000,000

$15,000,000

PP&E, net Investment in Timeout

90,000,000 37,500,000

78,000,000

Liabilities

(55,000,000)

(78,000,000)

Capital stock

(67,500,000)

(2,000,000)

Retained earnings

(10,000,000)

(15,000,000)

Total

$

$

0

Dr

Cr

Consolidated Dr (Cr)

0

Present the consolidated balance sheet at the date of acquisition, in good form.

Test Bank, Chapter 3

© Cambridge Business Publishers, 2023 3-61

ANS: a.

Acquisition cost (1,500,000 x $30) Book value Excess of cost over book value Fair value - book value: Current assets Plant and equipment Identifiable intangibles Contingent liability Goodwill

$45,000,000 17,000,000 28,000,000 $ 1,000,000 5,000,000 8,000,000 (2,500,000)

11,500,000 $16,500,000

b. ADL Dr (Cr)

Timeout Dr (Cr)

Dr

Current assets

$ 5,000,000

$15,000,000

(R) 1,000,000

PP&E, net Investment in Timeout

90,000,000 45,000,000

80,000,000

(R) 5,000,000

Consolidated Dr (Cr)

Cr

$ 21,000,000 17,000,000 (E) 28,000,000 (R)

175,000,000 --

Identifiable intangibles

(R) 8,000,000

8,000,000

Goodwill

(R )16,500,000

16,500,000

Liabilities

(55,000,000)

(78,000,000)

Capital stock

(75,000,000)

(2,000,000)

(E) 2,000,000

Retained earnings

(10,000,000)

(15,000,000)

(R) 15,000,000

Total

$

$

0

0

2,500,000 (R)

$47,500,000

(135,500,000) (75,000,000)

__________ $47,500,000

(10,000,000) $

c. ADL and Timeout Consolidated Balance Sheet Date of Acquisition Assets Current assets Plant and equipment, net Identifiable intangibles Goodwill Total assets

© Cambridge Business Publishers, 2023 3-62

$ 21,000,000 175,000,000 8,000,000 16,500,000 $220,500,000

Liabilities & Equity Liabilities Capital stock Retained earnings Total equity Total liabilities & equity

$135,500,000 75,000,000 10,000,000 85,000,000 $220,500,000

Advanced Accounting, 5th Edition

0

29.

Topic: Acquisition entry, goodwill calculation, consolidation working paper, revaluation of reported assets, previously unreported intangibles, preacquisition contingency, deferred taxes LO 4 Here is date-of-acquisition information on Fizzy Beverage’s assets and liabilities: Book Value Fair Value Current assets $ 2,000 $ 1,200 Property, plant and equipment, net 18,000 8,000 Total assets $ 20,000 Liabilities Capital stock Retained earnings Accumulated other comprehensive income Treasury stock Total liabilities and equity

$ 10,000 2,500 7,400

10,000

300 (200) $ 20,000

Cola King Company acquires all of the voting stock of Fizzy Beverage, paying the following amounts: Cash consideration to the former owners Fair value of new no-par common stock issued Registration fees on new stock issued, paid in cash Accounting, consulting, and attorney services, paid in cash

$40,000 50,000 500 2,000

Fizzy has the following previously unreported intangible assets meeting the criteria for separate recognition as identifiable intangible assets. Favorable lease agreements Developed technology

$ 3,000 30,000

Warranty liabilities, previously unreported by Fizzy, are valued at $8,000. In addition, the acquisition creates deferred tax liabilities valued at $4,500. Required a. Prepare the entry Cola King made to record the acquisition on its own books. b. Prepare a schedule calculating the excess paid over book value and its allocation to Fizzy’s identifiable assets and liabilities and goodwill. c. The consolidation working paper immediately following the date of acquisition, in trial balance format, appears below. Fill in the two eliminating entries necessary to consolidate Cola King and Fizzy, in the dr and cr columns. Label the entries as (E) and (R). Compute the consolidated balances and enter them on the working paper. Do not add new account titles to this working paper.

Test Bank, Chapter 3

© Cambridge Business Publishers, 2023 3-63

Current assets Property, plant & equipment, net

Cola King Dr (Cr)

Fizzy Dr (Cr)

$ 30,000

$ 2,000

600,000

18,000

Investment in Fizzy

90,000

Identifiable intangible assets

40,000

Dr

Cr

Consolidated Dr (Cr)

Goodwill Liabilities

(568,000)

(10,000)

Capital stock

(10,000)

(2,500)

Retained earnings Accumulated other comprehensive income

(180,000)

(7,400)

(4,000)

(300)

2,000

200

Treasury stock Total

$

0

$

0

ANS: a. Investment in Fizzy Merger expenses

90,000 2,000 Cash Capital stock

b.

42,500 49,500

Acquisition cost Book value Excess paid over book value Fair value – book value of Fizzy’s identifiable net assets: Current assets Property, plant and equipment, net Identifiable intangibles Liabilities Goodwill

© Cambridge Business Publishers, 2023 3-64

$90,000 10,000 80,000 $ (800) (10,000) 33,000 (12,500)

9,700 $ 70,300

Advanced Accounting, 5th Edition

c. Cola King Dr (Cr)

Fizzy Dr (Cr)

Cr

Consolidated Dr (Cr)

Current assets Property, plant & equipment, net Investment in Fizzy

$ 30,000

$ 2,000

800 (R)

$ 31,200

600,000 90,000

18,000

10,000 (R) 10,000 (E) 80,000 (R)

608,000 --

Identifiable intangible assets

40,000

Dr

Goodwill

33,000

73,000

(R)

70,300

70,300

Liabilities

(568,000)

(10,000)

Capital stock

(10,000)

(2,500)

(E)

2,500

(10,000)

Retained earnings Accumulated other comprehensive income

(180,000)

(7,400)

(E)

7,400

(180,000)

(4,000)

(300)

(E)

300

(4,000)

2,000

200

______

0

$113,500

Treasury stock Total

30.

(R)

$

0

$

12,500 (R)

(590,500)

200 (E) $113,500

2,000 $

Topic: Acquisition entry, goodwill calculation, consolidation working paper, previously unreported identifiable intangibles LO 4 Schenk Corporation’s balance sheet immediately after its acquisition by Piaget Company is as follows: Schenk Corporation Book Value Fair Value Assets Current assets $ 3,000 $ 2,000 Plant & equipment, net 24,000 18,000 Total assets $27,000 Liabilities & Equity Current liabilities Long-term liabilities Common stock Additional paid-in capital Treasury stock Retained earnings Accumulated other comprehensive loss Total liabilities & equity

$ 3,120 20,000 20 3,000 (40) 1,000

3,200 21,000

(100) $27,000

In addition to the assets already reported by Schenk, the following previously unreported identifiable intangible assets are identified. Identifiable Intangible Asset Franchise rights Favorable leaseholds Future cost savings Advertising jingles

Test Bank, Chapter 3

Fair Value $6,000 8,000 5,000 500

© Cambridge Business Publishers, 2023 3-65

0

Piaget acquires all of the voting stock of Schenk for a total acquisition cost of $25,000. Schenk remains as a separate legal entity. You are responsible for preparing the consolidated balance sheet of Piaget and its new subsidiary, Schenk, at the date of acquisition. The working paper to consolidate the balance sheet accounts of Piaget and Schenk follows. Piaget Dr (Cr)

Schenk Dr (Cr)

Current assets

$ 15,000

$ 3,000

Plant and equipment, net

420,000

24,000

Investment in Schenk

25,000

Dr

Cr

Consolidated Dr (Cr)

Identifiable intangibles Goodwill Current liabilities

(12,000)

(3,120)

Long-term liabilities

(353,700)

(20,000)

Common stock, par value

(500)

(20)

Additional paid-in capital

(65,000)

(3,000)

600

40

(24,400)

(1,000)

Treasury stock Retained earnings AOC (income) loss Total

(5,000) $

0

100 $

0

Required Fill in the consolidation working paper as necessary to consolidate Piaget and Schenk’s balance sheet accounts at the date of acquisition. ANS: Piaget Dr (Cr)

Schenk Dr (Cr)

Current assets

$ 15,000

$ 3,000

1,000 (R)

$ 17,000

Plant and equipment, net Investment in Schenk

420,000 25,000

24,000

6,000 (R) 3,880 (E) 21,120 (R)

438,000 --

Dr

Cr

Consolidated Dr (Cr)

Identifiable intangibles

(R)

14,500

14,500

Goodwill

(R)

14,700

14,700

Current liabilities

(12,000)

(3,120)

80 (R)

(15,200)

Long-term liabilities

(353,700)

(20,000)

1,000 (R)

(374,700)

Common stock, par value

(500)

(20)

(E)

20

(500)

Additional paid-in capital

(65,000)

(3,000)

(E)

3,000

(65,000)

600

40

Retained earnings

(24,400)

(1,000)

AOC (income) loss

(5,000)

100

_______

0

$33,220

Treasury stock

Total

© Cambridge Business Publishers, 2023 3-66

$

0

$

40 (E) (E)

600

1,000

(24,400) 100 (E) $33,220

(5,000) $

0

Advanced Accounting, 5th Edition

31.

Topic: Acquisition entry, consolidation working paper, registration and consulting fees, identifiable intangibles LO 4 Mars Inc. acquired all of Wrigley Co.’s voting stock. Mars incurred the following costs for the acquisition: 50,000 shares of new Mars common stock, par value $2/share, market value $80/share, issued to the former shareholders of Wrigley

$ 4,000,000

Cash registration fees for issuing the new shares

500,000

Cash paid to former shareholders of Wrigley: there were 200,000 shares of Wrigley outstanding, and Mars agreed to pay $90 in cash for each share of outstanding Wrigley stock

18,000,000

Consulting fees paid to Goldman Sachs, in cash

1,100,000

The balance sheets of both companies immediately prior to the acquisition are as follows:

Assets Cash Receivables Inventories Plant & equipment, net Trademarks Total assets Liabilities & Equity Current liabilities Long-term liabilities Common stock, par Additional paid-in capital Retained earnings Treasury stock Total liabilities & equity

Mars Inc. Book Value

Wrigley Co. Book Value Fair Value

$ 25,000,000 2,000,000 20,000,000 99,500,000 5,000,000 $151,500,000

$

90,000 200,000 8,110,000 50,000,000 1,000,000 $ 59,400,000

$

$

$

400,000 47,000,000

500,000 70,000,000 2,000,000 55,000,000 25,000,000 (1,000,000) $151,500,000

400,000 45,000,000 1,000,000 10,000,000 6,000,000 (3,000,000) $ 59,400,000

90,000 190,000 7,000,000 40,000,000 4,000,000

In addition to the assets and liabilities already reported, Wrigley has the following previously unrecorded intangible assets that meet ASC Topic 805 requirements for capitalization: Intangible Asset Brand names Secret formulas

Fair Value $ 5,000,000 7,000,000

Required a. Prepare the journal entry Mars made to record the acquisition. b. Prepare a working paper to consolidate the balance sheet accounts of Mars and Wrigley at the date of acquisition.

Test Bank, Chapter 3

© Cambridge Business Publishers, 2023 3-67

ANS: a. Investment in Wrigley Merger expenses

22,000,000 1,100,000 Cash Common stock APIC

19,600,000 100,000 3,400,000

b. (in thousands)

Mars Dr (Cr)

Wrigley Dr (Cr)

Cash

$ 5,400

$ 90

Receivables

2,000

200

Inventories

20,000

8,110

1,110 (R)

27,000

P&E, net Investment in Wrigley

99,500 22,000

50,000

10,000 (R) 14,000 (E) 8,000 (R)

139,500 --

Trademarks

5,000

1,000

Dr

Cr

Consolidated Dr (Cr) $ 5,490

10 (R)

2,190

(R)

3,000

9,000

Brand names

(R)

5,000

5,000

Secret formulas

(R)

7,000

7,000

Goodwill

(R)

6,120

6,120

Current liabilities

(500)

(400)

Long-term liabilities

(70,000)

(45,000)

(900) 2,000 (R)

(117,000)

Common stock, par

(2,100)

(1,000)

(E)

1,000

(2,100)

Additional paid-in capital

(58,400)

(10,000)

(E)

10,000

(58,400)

Retained earnings

(23,900)

(6,000)

(E)

6,000

(23,900)

1,000

3,000

______

0

$38,120

Treasury stock Total

© Cambridge Business Publishers, 2023 3-68

$

0

$

3,000 (E) $38,120

1,000 $

Advanced Accounting, 5th Edition

0

32.

Topic: Acquisition entry, consolidation working paper, registration and out-of-pocket costs, identifiable intangibles LO 4 Player Inc. acquired all the stock of Soccer Company. The acquisition involved the following payments: Cash paid to Soccer shareholders Cash paid to Morgan Stanley for consulting services Stock issued, 100,000 shares, $0.50 par, fair value at acquisition Stock registration fees, paid in cash Earnings contingency, to be paid in three years, present value

$ 85,000,000 12,000,000 5,000,000 600,000 2,000,000

Here are the balance sheets of Player and Soccer just prior to the acquisition. Fair value information on Turquoise Water’s assets and liabilities is also provided. Player Book Value

Soccer Book Value Fair Value

Assets Current assets Plant and equipment, net Patents and trademarks Total assets

$ 120,000,000 720,000,000 15,000,000 $ 855,000,000

$ 1,000,000 41,000,000 3,400,000 $45,400,000

$ 800,000 10,000,000 20,000,000

Liabilities & Equity Current liabilities Long-term liabilities Common stock, par value Additional paid-in capital Retained earnings Accumulated OCL Treasury stock Total liabilities & equity

$ 120,000,000 576,550,000 950,000 120,000,000 52,000,000 (4,500,000) (10,000,000) $ 855,000,000

$ 400,000 40,000,000 500,000 8,500,000 (2,000,000) (1,400,000) (600,000) $45,400,000

400,000 41,000,000

In addition to the assets reported on Soccer’s balance sheet, the following previously unreported intangible assets are identified: Bottlers’ franchise rights Skilled workforce Non-competition agreements Expected expansion into new product lines Order backlogs

Fair Value $10,400,000 15,000,000 4,000,000 5,000,000 2,000,000

Required a. Prepare the journal entry Player made to record the acquisition on its own books. b. Prepare a working paper to consolidate the balance sheet accounts of Player and Soccer at the date of acquisition. c. Present, in good form, Player’s consolidated balance sheet at the date of acquisition.

Test Bank, Chapter 3

© Cambridge Business Publishers, 2023 3-69

ANS: a. Investment in Soccer Merger expenses

92,000,000 12,000,000 Cash Common stock APIC Earnout liability

97,600,000 50,000 4,350,000 2,000,000

b. (in thousands)

Player Dr (Cr)

Soccer Dr (Cr)

Current assets

$ 22,400

$1,000

200 (R)

$ 23,200

Plant and equipment, net

720,000

41,000

31,000 (R)

730,000

Patents and trademarks Investment in Soccer

15,000 92,000

3,400

(R)

Cr

Consolidated Dr (Cr)

16,600

35,000 --

5,000 (E) 87,000 (R)

Bottlers’ franchise rights

(R)

10,400

10,400

Non-competition agreements

(R)

4,000

4,000

Order backlogs

(R)

2,000

2,000

Goodwill

(R)

86,200

86,200

Current liabilities

(120,000)

(400)

Long-term liabilities

(578,550)

(40,000)

Common stock, par value

(1,000)

(500)

(E)

500

Additional paid-in capital

(124,350)

(8,500)

(E)

8,500

Retained earnings

(40,000)

2,000

2,000 (E)

(40,000)

Accumulated OCL

4,500

1,400

1,400 (E)

4,500

Treasury stock

10,000

600

_______

600 (E)

10,000

0

$128,200

Total

c.

Dr

$

0

$

(120,400) 1,000 (R)

(619,550) (1,000) (124,350)

$128,200

$

0

(in thousands) Assets Current assets Plant and equipment, net Identifiable intangible assets Goodwill

Total assets

© Cambridge Business Publishers, 2023 3-70

$ 23,200 730,000 51,400 86,200

Liabilities Current liabilities Long-term liabilities Total liabilities

_______

Equity Common stock Additional paid-in capital Retained earnings Accumulated other comprehensive loss Treasury stock Total equity

$890,800

Total liabilities and equity

$ 120,400 619,550

$739,950

1,000 124,350 40,000 (4,500) (10,000)

150,850 $890,800

Advanced Accounting, 5th Edition

33.

Topic: Acquisition entry, consolidation working paper, bargain purchase, earnings contingency LO 4 Packet Industries purchased all the voting stock of Sameer Manufacturing for $95 million in cash. Accounting and legal costs connected with the acquisition were $2 million, paid in cash. The acquisition also includes an earnout, currently valued at $5 million. At the date of acquisition, the fair value of Sameer’s plant and equipment was $100 million less than carrying value. However, Sameer had $90 million in developed technology, unreported on its balance sheet, but meeting the criteria for capitalization as part of the acquisition. The trial balances of Packet and Sameer just prior to the acquisition appear below. Packet (in millions) Current assets Plant & equipment, net Liabilities Common stock Additional paid-in capital Retained earnings Total

Sameer

Dr (Cr) $ 410 1,500 (600) (10) (1,000) (300) $ 0

$ 60 500 (445) (10) (90) (15) $ 0

Required a. Prepare the journal entry Packet made on its own books to record its acquisition of Sameer. b. Prepare a working paper to consolidate the balance sheet accounts of Packet and Sameer at the date of acquisition. ANS: (all numbers in millions) a. Investment in Sameer Merger expenses

105 2 Cash Earnings contingency liability Gain on acquisition

97 5 5

Fair value of identifiable net assets acquired = $115 book value – $100 revaluation of plant and equipment + $90 previously unreported identifiable intangibles = $105

Test Bank, Chapter 3

© Cambridge Business Publishers, 2023 3-71

b. Packet Dr (Cr)

Dr

Cr

Consolidated Dr (Cr)

Current assets

$ 313

$ 60

Plant and equipment

1,500

500

Identifiable intangibles

--

--

(R)

90

Investment in Sameer

105

--

(R)

10

Liabilities

(605)

(445)

Common stock

(10)

(10)

(E)

10

(10)

(1,000)

(90)

(E)

90

(1,000)

(303)

(15)

(E)

15

____

$215

$215

APIC Retained earnings Total

34.

Sameer Dr (Cr)

$

0

$

$ 373 100 (R)

1,900 90

115 (E)

-(1,050)

0

(303) $

Topic: Acquisition entry, consolidation working paper, identifiable intangibles, subsidiary prior goodwill, bargain purchase LO 4 PLD Company purchased all the shares of SYS Company for $158 million in cash. At the date of acquisition, the fair value of SYS’s plant and equipment was $50 million more than carrying value. SYS also had $20 million in developed technology, unreported on its balance sheet but meeting the criteria for capitalization as part of the acquisition. The balance sheets of PLD and SYS just prior to the date of acquisition appear below. (in millions) Current assets Plant & equipment, net Goodwill Liabilities Capital stock Retained earnings Accumulated other comprehensive (income) loss Total

PLD

SYS

Dr (Cr) $ 450 1,400 -(1,135) (350) (380)

$ 50 125 60 (80) (100) (50)

$

15 0

$

(5) 0

Required a. Prepare the journal entry PLD made to record the acquisition of SYS on its own books. b. Prepare a working paper to consolidate the balance sheet accounts of PLD and SYS at the date of acquisition. ANS: (all numbers in millions) a. Investment in SYS

165 Cash Gain on acquisition

158 7

Fair value of identifiable net assets acquired = $155 book value + $50 revaluation of plant and equipment - $60 write-off of previously reported goodwill + $20 previously unreported customer lists = $165 © Cambridge Business Publishers, 2023 3-72

Advanced Accounting, 5th Edition

0

b. PLD Dr (Cr)

SYS Dr (Cr)

Current assets

$ 292

$ 50

Plant and equipment

1,400

125

(R)

50

1,575

--

--

(R)

20

20

165

--

Goodwill

--

60

Liabilities

(1,135)

(80)

Capital stock

(350)

(100)

(E)

100

(350)

Retained earnings

(387)

(50)

(E)

50

(387)

(5)

(E)

Identifiable intangibles Investment in SYS

Dr

Cr

Consolidated Dr (Cr) $ 342

155 (E)

--

10 (R)

AOC (income) loss Total

35.

15 $

0

$

60 (R)

-(1,215)

0

5

____

$225

$225

15 $

Topic: Consolidation working paper, subsidiary prior goodwill and accumulated depreciation LO 4 Provo Company purchased all the shares of Singleton Company for $250 million in cash. At the date of acquisition, the fair values of Singleton’s reported net assets equal their carrying values, except its plant and equipment (net) has a fair value of $120 million, and previously unreported identifiable intangible assets, meeting ASC Topic 805 criteria for capitalization, total $100 million. The balance sheets of Provo and Singleton just after the acquisition appear below. Provo (in millions) Current assets Plant & equipment Accumulated depreciation Investment in Singleton Goodwill Liabilities Capital stock Retained earnings Total

Singleton Dr (Cr)

$ 15 460 (120) 250 -(300) (150) (155) $ 0

$

6 200 (50)

40 (140) (20) (36) $ 0

Required a. Prepare a schedule calculating the amount of goodwill recognized for this acquisition. b. Prepare a working paper to consolidate Provo and Singleton at the date of acquisition. c. Present the consolidated balance sheet at the date of acquisition, in good form.

Test Bank, Chapter 3

© Cambridge Business Publishers, 2023 3-73

0

ANS: (in millions) a. Acquisition cost Book value Excess Fair value – book value: Plant and equipment Identifiable intangible assets Goodwill Fair value of identifiable net assets Goodwill b.

$250 56 $194 $(30) 100 (40)

30 $164

Consolidation working paper: (in millions)

Provo Dr (Cr)

Singleton Dr (Cr)

Cr

Current assets Plant and equipment

$ 15 460

Accumulated depreciation Investment in S Co.

(120) 250

(50) --

(R)

Identifiable intangible assets

--

--

(R)

100

Goodwill

--

40

(R)

164

Liabilities

(300)

(140)

Capital stock

(150)

(20)

(E)

20

Retained earnings

(155)

(36)

(E)

36

____

$370

$370

Total

$

0

$

Dr

6 200

$

0

Consolidated Dr (Cr) $

50 (R) 30 (R) 50

21 580 (120) --

56 (E) 194 (R)

100 40 (R)

164 (440) (150) (155) $

0

c. Provo Company and Subsidiary Consolidated Balance Sheet Date of Acquisition

(in millions) Assets Current assets Plant & equipment, net of $120 in accumulated depreciation Identifiable intangible assets Goodwill Total assets

© Cambridge Business Publishers, 2023 3-74

$ 21

Liabilities & Equity Liabilities

$ 440

460 100 164 ____ $ 745

Equity: Capital stock Retained earnings Total equity Total liabilities & equity

150 155 305 $ 745

Advanced Accounting, 5th Edition

36.

Topic: Acquisition entry, consolidation working paper, previously unreported identifiable intangibles, preacquisition contingency, earnings contingency LO 4 The balance sheets of Publix Corporation and Stryker Corporation, just prior to Publix’ acquisition of all of Stryker’s voting stock, are as follows: Publix

Stryker Dr (Cr)

Cash and receivables Investment in equity securities Inventories Property, plant and equipment, net Accounts payable Long-term debt Capital stock Treasury stock Retained earnings Accumulated other comprehensive income Total

$ 1,000 200 1,850 9,000 (1,500) (3,000) (5,900) 100 (1,720) (30) $ 0

$ 300 – 600 4,430 (300) (4,000) (1,000) 100 (125) (5) $ 0

An analysis of Stryker’s assets and liabilities reveals that book values of some reported items do not reflect their fair values at the date of acquisition:

• • •

Inventories are overvalued by $350 Property, plant and equipment is overvalued by $2,200 Long-term debt is undervalued by $200

In addition, the following items are not currently reported on Stryker’s balance sheet:

• • • • • •

Favorable lease agreements, valued at $60 Skilled work force, valued at $200 Signed customer contracts for product development, valued at $50 In-process research and development, valued at $175 Favorable press reviews on Stryker’s products, valued at $5 There are lawsuits pending against Stryker, not currently recorded. The best estimate of likely losses on these lawsuits, at present value, is $6

Publix issued no-par capital stock with a market value of $2,400 for all the voting stock of Stryker. Registration fees in connection with issuing the stock are $50, paid in cash. Consulting, accounting, and legal fees connected with the merger are $80, paid in cash. In addition, Publix enters into an earnings contingency agreement, whereby Publix will pay the former shareholders of Stryker an additional amount if Stryker’s performance meets certain minimum levels. The present value of the contingency is estimated at $90.

Test Bank, Chapter 3

© Cambridge Business Publishers, 2023 3-75

Required a. Prepare Publix’s journal entry to record the acquisition of Stryker. b. The consolidation working paper at the date of acquisition appears below. Fill in Publix’s column and the elimination and consolidated balances columns as necessary to consolidate the balance sheet accounts of Publix with Stryker at the date of acquisition. Publix Dr (Cr) Cash & receivables Investment in securities

Stryker Dr (Cr)

Cr

Consolidated Dr (Cr)

$300 --

Inventories

600

PP&E, net

4,430

Accounts payable

(300)

Long-term debt

(4,000)

Capital stock

(1,000)

Treasury stock

100

Retained earnings

(125)

AOCI

Dr

(5)

Total

ANS:

a. Investment in Stryker Merger expenses

2,490 80 Capital stock Earnings contingency liability Cash

© Cambridge Business Publishers, 2023 3-76

2,350 90 130

Advanced Accounting, 5th Edition

b. Publix Dr (Cr) Cash & receivables

Stryker Dr (Cr)

Dr

Consolidated Dr (Cr)

Cr

$ 870

$ 300

$1,170

200

--

200

Inventories

1,850

600

350 (R)

2,100

PP&E, net Investment in Stryker

9,000 2,490

4,430

2,200 (R) 1,030 (E) 1,460 (R)

11,230 --

Investment in securities

Lease agreements

(R)

60

60

Customer contracts

(R)

50

50

IPR&D

(R)

175

175

(R)

3,931

Goodwill Accounts payable

(1,500)

(300)

Long-term debt

(3,000)

(4,000)

Earnings contingency liability

3,931 (1,800) 200 (R)

(90)

(90)

Lawsuit liability

6 (R)

Capital stock

(8,250)

(1,000)

Treasury stock

100

100

(1,640)

(125)

(E)

125

(30)

(5)

(E)

5

______

$5,346

$5,346

Retained earnings AOCI Total

Test Bank, Chapter 3

(7,200)

$

0

$

0

(E)

1,000

(6) (8,250)

100 (E)

100 (1,640) (30) $

© Cambridge Business Publishers, 2023 3-77

0

TEST BANK CHAPTER 4 Consolidated Financial Statements Subsequent to Acquisition MULTIPLE CHOICE 1.

2.

3.

4.

Topic: Overview of consolidation in subsequent years LO 1 On the consolidated financial statements, where does the subsidiary’s retained earnings balance appear? a. b. c. d.

On the consolidated statement of comprehensive income On the consolidated balance sheet, as an equity account On the consolidated balance sheet, as an asset account Doesn’t appear on the consolidated financial statements

ANS:

d

Topic: Overview of consolidation in subsequent years LO 1 On the consolidated financial statements, where does the parent’s dividends balance appear? a. b. c. d.

On the consolidated statement of comprehensive income On the consolidated balance sheet, as an equity account On the consolidated balance sheet, as an asset account Doesn’t appear on the consolidated financial statements

ANS:

d

Topic: Overview of consolidation in subsequent years LO 1 When consolidating the accounts of a parent and subsidiary in subsequent years, eliminating entry (O) recognizes total write-offs of subsidiary revaluations: a. b. c. d.

As of the beginning of the current year. For the current year. As of the end of the current year. As of the date of acquisition.

ANS:

b

Topic: Overview of consolidation in subsequent years LO 1 When consolidating the accounts of a parent and subsidiary in subsequent years, eliminating entry (R) recognizes revaluations of the subsidiary’s assets and liabilities: a. b. c. d.

As of the beginning of the current year. For the current year. As of the end of the current year. As of the date of acquisition.

Test Bank, Chapter 4

© Cambridge Business Publishers, 2023 4-1

ANS: 5.

Topic: Complete equity method LO 1 How does the complete equity method, used to facilitate consolidation in subsequent years, differ from the equity method used for external reporting? a. b. c. d. ANS:

6.

The complete equity method adjusts reported income for impairment losses on previously unreported intangible assets, while the equity method used for external reporting does not. The complete equity method deducts unconfirmed profits on upstream sales to the extent of ownership interests, while the equity method used for external reporting deducts all unconfirmed profits on upstream sales. The complete equity method deducts unconfirmed profits on downstream sales to the extent of ownership interests, while the equity method used for external reporting deducts all unconfirmed profits on downstream sales. The complete equity method adjusts for upstream and downstream unconfirmed profits, while the equity method used for external reporting does not make these adjustments. a

Topic: Complete equity method LO 1 The complete equity method, used to facilitate consolidation in subsequent years, differs from the equity method used for external reporting in all the following ways except: a. b. c. d.

ANS: 7.

a

The complete equity method adjusts reported income for goodwill impairment losses, while the equity method used for external reporting does not. The equity method used for external reporting does not allow the investment balance to become negative due to reported losses, while the complete equity method adjusts the investment balance for all losses. The equity method used for external reporting adjusts reported income for unconfirmed profit on upstream sales, while the complete equity method does not. The complete equity method adjusts for all downstream unconfirmed profits, while the equity method used for external reporting only adjusts for the investor’s share of these profits. c

Topic: Complete equity method LO 1 If the parent company uses the complete equity method when accounting for its wholly-owned subsidiary on its own books, consolidated net income equals a. b. c. d.

The subsidiary’s separately reported income. The parent’s separately reported income. The parent’s separately reported income plus the subsidiary’s ending retained earnings balance. The subsidiary’s separately reported income, adjusted for revaluation write-offs.

© Cambridge Business Publishers, 2023 4-2

Advanced Accounting, 5th Edition

ANS: 8.

9.

10.

b

Topic: Complete equity method LO 1 If the parent company uses the complete equity method when accounting for its wholly-owned subsidiary on its own books: a. b. c. d.

The parent’s net income equals consolidated comprehensive income. The subsidiary’s comprehensive income equals consolidated comprehensive income. The parent’s comprehensive income equals consolidated comprehensive income. The parent’s comprehensive income equals consolidated net income.

ANS:

c

Topic: Complete equity method LO 1 At the date of acquisition, a subsidiary’s inventory (FIFO, sold in the year of acquisition) is overvalued by $500, its plant assets (10-year life, straight-line) are overvalued by $6,000, and it has previously unreported intangibles valued at $2,000 (2-year life, straight-line). Goodwill from the acquisition is not impaired in the year of acquisition. In the year of acquisition, the subsidiary reports net income of $2,500. Using the complete equity method, in the year of acquisition, the parent reports equity in the net income of the subsidiary of: a. b. c. d.

$1,600 $3,100 $2,600 $ 400

ANS:

c $2,500 + $500 + ($6,000/10) – ($2,000/2) = $2,600.

Topic: Complete equity method LO 1 At the date of acquisition, a subsidiary’s inventory (LIFO, still held by the subsidiary) is overvalued by $500, its plant assets (10-year life, straight-line) are overvalued by $6,000, and it has previously unreported intangibles valued at $2,000 (2-year life, straight-line). Goodwill from the acquisition is not impaired in the year of acquisition. In the year of acquisition, the subsidiary reports net income of $2,500. Using the complete equity method, in the year of acquisition, the parent reports equity in the net income of the subsidiary of: a. b. c. d.

$3,500 $2,100 $2,400 $2,900

ANS:

b $2,500 + ($6,000/10) – ($2,000/2) = $2,100.

Test Bank, Chapter 4

© Cambridge Business Publishers, 2023 4-3

11.

12.

13.

14.

Topic: Complete equity method LO 1 At the date of acquisition, a subsidiary’s inventory (FIFO, sold in the year of acquisition) is overvalued by $500, its plant assets (10-year life, straight-line) are overvalued by $6,000, and it has previously unreported intangibles valued at $2,000 (2-year life, straight-line). Goodwill from the acquisition is not impaired. In the third year following acquisition, the subsidiary reports net income of $2,500. Using the complete equity method, in the third year following acquisition, the parent reports equity in the net income of the subsidiary of: a. b. c. d.

$1,900 $3,100 $1,500 $ 400

ANS:

b $2,500 + ($6,000/10) = $3,100.

Topic: Overview of consolidation in subsequent years LO 1 A subsidiary still holds all net assets that were revalued at the date of acquisition. Which working paper eliminating entry below is most likely to be the same whether the consolidation takes place at the date of acquisition or in subsequent years? a. b. c. d.

Write-off eliminating entry (O) adjustment to goodwill Equity eliminating entry (E) adjustment to retained earnings Equity eliminating entry (E) adjustment to capital stock Revaluation eliminating entry (R) adjustment to inventory

ANS:

c

Topic: Overview of consolidation in subsequent years LO 1 On consolidated financial statements, where does the parent’s equity in the net income of the subsidiary account appear? a. b. c. d.

On the consolidated income statement, as an deduction from income On the consolidated income statement, as a revenue On the consolidated balance sheet, as an equity Doesn’t appear on the consolidated financial statements

ANS:

d

Topic: Overview of consolidation in subsequent years LO 1 Consolidation eliminating entries (C), (E), (R), and (O) fully eliminate the parent’s Investment in Subsidiary account at what stage? a. b. c. d.

After eliminating entry (C) After eliminating entries (C) and (E) After eliminating entries (C), (E) and (R) After eliminating entries (C), (E), (R) and (O)

© Cambridge Business Publishers, 2023 4-4

Advanced Accounting, 5th Edition

ANS: 15.

c

Topic: Overview of consolidation in subsequent years LO 1 Consolidated retained earnings at the end of the year equals: a.

Beginning retained earnings of the parent plus beginning retained earnings of the subsidiary, plus consolidated net income less declared dividends of the parent and the subsidiary. Beginning retained earnings of the parent plus consolidated net income and consolidated other comprehensive income, less declared dividends of the parent and the subsidiary. Beginning retained earnings of the parent plus consolidated net income less declared dividends of the parent. Beginning retained earnings of the parent plus consolidated net income less declared dividends of the parent and the subsidiary.

b. c. d. ANS:

c

Use the following information to answer Questions 16 – 18. A subsidiary is acquired on January 1, 2023 for $10,000. The subsidiary’s book value at the date of acquisition was $2,000. Following is revaluation information for the subsidiary’s identifiable net assets at the date of acquisition: Inventories Identifiable intangibles

Fair Value – Book Value $ 200 5,000

FIFO, sold in 2023 Straight-line, 5 years

Goodwill recognized in the acquisition was unimpaired in 2023 but became fully impaired during 2024. The subsidiary did not declare any dividends during this period and reported no other comprehensive income. The subsidiary reported net income as follows: Year 2023 2024 2025

Net Income $1,500 5,000 2,000

The parent uses the complete equity method to report its investment on its own books. 16.

Topic: Complete equity method LO 1 Equity in net income for 2023, reported on the parent’s books, is: a. b. c. d.

$ 300 $ 500 $1,300 $1,500

Test Bank, Chapter 4

© Cambridge Business Publishers, 2023 4-5

ANS:

17.

a

Reported net income Inventory write-off Intangibles write-off Equity in net income

$5,000/5

Topic: Complete equity method LO 1 Equity in net income for 2024, reported on the parent’s books, is: a. b. c. d.

$1,000 $2,200 $1,200 $4,000

ANS:

c

Acquisition cost Book value Excess paid Revaluations: Inventory Identifiable intangibles Goodwill Reported net income Intangibles write-off Goodwill write-off Equity in net income

18.

$ 1,500 (200) (1,000) $ 300

$10,000 2,000 8,000 200 5,000

$5,000/5

(5,200) $ 2,800 $ 5,000 (1,000) (2,800) $ 1,200

Topic: Complete equity method LO 1 Equity in net income for 2025, reported on the parent’s books, is: a. b. c. d.

$1,150 $1,000 $ 850 $1,350

ANS:

b

Reported net income Intangibles write-off Equity in net income for 2021

© Cambridge Business Publishers, 2023 4-6

$5,000/5

$ 2,000 (1,000) $ 1,000

Advanced Accounting, 5th Edition

19.

20.

21.

Topic: Subsequent reporting for revaluations LO 2 At the date of acquisition, a subsidiary’s plant assets (20-year life, straight-line) have a fair value that is $8,000 above the subsidiary’s book value. At the end of the third year following acquisition, revaluation (R) debits plant assets, net of accumulated depreciation, by a. b. c. d.

$8,000 $7,200 $6,800 $7,600

ANS:

b $8,000 – (2 x ($8,000/20)) = $7,200

Topic: Subsequent reporting for revaluations LO 2 At the date of acquisition, a subsidiary’s plant assets (10-year life, straight-line) have a fair value of $60,000 and are carried on the subsidiary’s books at an original cost of $80,000 and accumulated depreciation of $30,000. In the third year following acquisition, write-off (O) increases (decreases) depreciation expense by a. b. c. d.

$(2,000) $ 6,000 $(6,000) $ 1,000

ANS:

d ($60,000 – ($80,000 - $30,000))/10 = $1,000 increase

Topic: Subsequent reporting for revaluations LO 2 At the date of acquisition, a subsidiary’s bonds payable are carried at a par value of $100,000 but have a fair value of $102,000. The bonds have a 5-year life, and any premium or discount is straight-line amortized. In the third year following acquisition, write-off (O) increases (decreases) interest expense by a. b. c. d.

$ (400) $ 400 $ (800) $ 1,200

ANS:

a $2,000/5 = $400 premium amortization reduces interest expense

Test Bank, Chapter 4

© Cambridge Business Publishers, 2023 4-7

22.

23.

Topic: Write-offs of identifiable intangibles LO 2 Which of the following previously unreported intangible assets is most likely to be classified as an indefinite life identifiable intangible asset at the date of acqquisition? a. b. c. d.

Favorable leaseholds Production backlog Customer lists In-process research & development

ANS:

d

Topic: Impairment testing of identifiable intangibles LO 2 Which statement is true regarding the U.S. GAAP impairment test for limited life intangibles? a.

d.

Even if the fair value of the intangible is less than its book value, it is possible that no impairment loss will be reported. No impairment testing is necessary if it is more likely than not that the intangibles are not impaired. Impairment loss always equals the difference between book and fair value of the intangibles, if book value exceeds fair value. The impairment loss is calculated as the difference between fair value and original cost.

ANS:

a

b. c.

24.

Topic: Impairment of identifiable intangibles, first year following acquisition LO 2 Previously unreported identifiable intangible assets with a fair value of $100 million and a 4-year life were recognized in an acquisition. At the end of the first year following acquisition, impairment testing reveals that total expected undiscounted future cash inflows for the intangible assets are $78 million, and total expected discounted future cash inflows are $72 million. What is the impairment loss for the identifiable intangible assets for the year? a. b. c. d.

$ 3 million $22 million $28 million None

ANS:

d Book value, end of year = $100 – ($100/4) = $75 million. $75 million < $78 million, so no impairment is recognized.

© Cambridge Business Publishers, 2023 4-8

Advanced Accounting, 5th Edition

25.

Topic: Impairment of identifiable intangibles, subsequent years LO 2 Identifiable intangible assets with a fair value of $72 million and a 6-year life were recognized in an acquisition. The intangible assets were not impaired in the first three years following acquisition. It is now four years since acquisition. Impairment testing reveals that total expected undiscounted future cash inflows for the intangible assets are $22 million, and total expected discounted future cash inflows are $18 million. What is the impairment loss for the intangible assets for the year? a. b. c. d.

$50 million $ 6 million $ 2 million None

ANS:

b Book value, end of fourth year = $72 – ($72/6 x 4) = $24 million. $24 million > $22 million, so the impairment loss is ($24 million - $18 million) = $6 million.

Use the following information to answer Questions 26 and 27: A subsidiary’s bonds payable (five-year remaining life) are undervalued by $5,000 at the date of acquisition. The premium/discount is straight-line amortized, and premium/discount amortization directly adjusts bonds payable. 26.

27.

Topic: Revaluation write-offs in subsequent years LO 2, 4 On the consolidation working paper prepared at the end of the second year following acquisition, eliminating entry (R) includes: a. b. c. d.

A credit to interest expense of $1,000. A debit to interest expense of $1,000. A debit to bonds payable of $5,000. A credit to bonds payable of $4,000.

ANS:

d $4,000 = $5,000 – (($5,000)/5) x 1)

Topic: Revaluation write-offs in subsequent years LO 2 On the consolidation working paper prepared at the end of the fourth year following acquisition, eliminating entry (O) includes: a. b. c. d.

A credit to interest expense of $1,000. A credit to bonds payable of $1,000. A debit to bonds payable of $2,000. A credit to bonds payable of $2,000.

Test Bank, Chapter 4

© Cambridge Business Publishers, 2023 4-9

ANS:

a Eliminating entry (O) is: Bonds payable

1,000 Interest expense

1,000

$1,000 = $5,000/5. 28.

29.

30.

Topic: Revaluation write-offs LO 2 A parent acquires all of a subsidiary’s voting stock. At the date of acquisition, the fair value of the subsidiary’s long-term debt is $100 greater than its book value. The debt has a 5-year remaining life at the date of acquisition. When consolidating the subsidiary’s financial statements for the first year following acquisition, how will eliminating entry (O) affect long-term debt and interest expense? a. b. c. d.

$80 debit to long-term debt, $80 credit to interest expense $20 debit to long-term debt, $20 credit to interest expense $80 credit to long-term debt, $80 debit to interest expense $20 credit to long-term debt, $20 debit to interest expense

ANS:

b

Topic: Revaluation write-offs, long-term debt LO 3 The interest rate at which an acquired company issued its long-term bonds payable is higher than the current market rate. The bonds have a four-year remaining life at the date of acquisition. Which statement is true concerning the write-off of revaluation of these bonds in the fourth year after acquisition (eliminating entry O)? a. b. c. d.

Interest expense will increase Bonds payable will increase Interest expense will decrease No eliminating entry (O) is needed

ANS:

c

Topic: Revaluation write-offs, long-term debt LO 3 A parent acquired all of the stock of a subsidiary. The subsidiary had originally issued long-term debt when the market rate of interest was 3%. The market rate of interest for the debt at the date of acquisition was 5%. How does the change in market interest rate affect the consolidated financial statements? a. b. c. d.

Goodwill is lower. Acquired long-term debt is valued at a higher amount. Future interest expense is lower. There is no effect on consolidated account balances.

ANS:

a

© Cambridge Business Publishers, 2023 4-10

Advanced Accounting, 5th Edition

31.

Topic: Impairment testing for identifiable intangibles LO 2 Which statement is true concerning impairment testing of identifiable intangible assets, following U.S. GAAP? a.

c. d.

For limited life intangibles, the impairment loss is the difference between the sum of undiscounted expected cash flows and book value. If the sum of undiscounted expected cash flows is less than book value, the impairment loss calculation for limited life intangibles is the same as for indefinite life intangibles. A qualitative test may be used for limited life intangibles but not indefinite life intangibles. A qualitative test may be used for both limited life and indefinite life intangibles.

ANS:

b

b.

32.

33.

Topic: Impairment testing of intangibles revaluations LO 2, 3 The U.S. GAAP option to use a qualitative assessment for impairment testing applies to: a. b. c. d.

Limited life intangibles only Limited life and indefinite life intangibles and goodwill Indefinite life intangibles and goodwill Goodwill only

ANS:

c

Topic: Goodwill impairment testing LO 3 Which statement below is most likely to be false concerning the qualitative assessment for goodwill impairment? a. b. c. d. ANS:

34.

The assessment allows entities to avoid the cost of impairment testing when it is likely that no impairment would be identified through quantitative tests. The assessment results in fewer earnings manipulations regarding impairment recognition. The less time that has passed between the last fair value measurement and the current testing date, the easier it is to make a qualitative assessment of impairment. If it is determined that there is a 45% chance the goodwill is impaired, no quantitative testing is required. b

Topic: Goodwill impairment testing LO 3 The major justification for adding a qualitative test to the U.S. GAAP impairment test for goodwill is that it: a. b. c. d.

Enhances the accuracy of the estimated impairment loss Results in more timely recognition of impairment losses Saves money spent estimating fair values Reduces the fee paid to outside auditors

Test Bank, Chapter 4

© Cambridge Business Publishers, 2023 4-11

ANS: 35.

Topic: Goodwill impairment testing LO 3 Which statement is true concerning U.S. GAAP for the qualitative evaluation of goodwill? a. b. c. d. ANS:

36.

37.

c

You don’t have to quantitively evaluate goodwill for impairment if it is more likely than not that the reporting unit’s book value is less than its fair value. You don’t have to quantitatively evaluate goodwill for impairment if it is more likely than not that the reporting unit’s fair value is less than its book value. You don’t have to quantitatively evaluate goodwill for impairment if the acquired subsidiary is expected to continue operating in the foreseeable future. The qualitative goodwill evaluation is based on general information on the economy, rather than specific information about the reporting unit’s performance. a

Topic: Goodwill impairment testing LO 3 Assume a U.S. company decides to quantitatively test its goodwill for impairment. A division’s book value exceeds its fair value by $8 million, and its goodwill has a book value of $10 million. The division’s goodwill impairment loss is a. b. c. d.

$10 million. $0 $8 million. $2 million.

ANS:

c

Topic: Goodwill impairment testing LO 3 Assume a U.S. company decides to quantitatively test its goodwill for impairment. A division’s book value exceeds its fair value by $12 million, and its goodwill has a book value of $10 million. The division’s goodwill impairment loss is a. b. c. d.

$0 $10 million. $2 million. $12 million.

ANS:

b

© Cambridge Business Publishers, 2023 4-12

Advanced Accounting, 5th Edition

38.

Topic: Goodwill impairment LO 3 A company reports $11.2 million in goodwill and decides to quantitatively test it for impairment at the end of year. The following information is collected:

Book value of goodwill Fair value of division Book value of division

Division 1 $ 7,000,000 40,000,000 45,000,000

Division 2 $ 200,000 6,000,000 6,500,000

Division 3 $ 4,000,000 20,000,000 21,000,000

What is the amount of goodwill impairment loss for the year? a. b. c. d.

$ 6,200,000 $11,200,000 $ 6,500,000 $ 6,000,000

ANS:

a Fair value of division Book value of division Possible goodwill impairment Exceeds book value of goodwill? Goodwill impairment loss

39.

Division 1 $ 40,000,000 45,000,000 5,000,000 No $5,000,000

Division 2 $ 6,000,000 6,500,000 500,000 Yes $ 200,000

Division 3 $ 20,000,000 21,000,000 1,000,000 No $ 1,000,000

Topic: Goodwill impairment LO 3 A U.S. company reports $11,600 in goodwill and decides to quantitatively test it for impairment at the end of the year. The following information is collected:

Book value of goodwill Fair value of division Book value of division

Division 1 $ 5,000 65,000 62,000

Division 2 $ 1,000 9,000 9,500

Division 3 $ 6,200 30,000 29,000

What is the amount of goodwill impairment loss for the year? a. b. c. d.

$ 500 $ 3,500 $ 1,500 $ 4,000

ANS:

a Fair value of division Book value of division Possible goodwill impairment Exceeds book value of goodwill? Goodwill impairment loss

Test Bank, Chapter 4

Division 1 $ 65,000 62,000 None N/A $ 0

Division 2 $9,000 9,500 $ 500 No $ 500

Division 3 $ 30,000 29,000 None N/A $ 0

© Cambridge Business Publishers, 2023 4-13

40.

Topic: Goodwill impairment LO 3 A merger generates goodwill of $50,000,000, which is properly allocated to three divisions of the organization. At the end of the first year following acquisition, the following information is available:

Beginning balance of goodwill Fair value of division Book value of division

Division 1 $ 30,000,000 65,000,000 70,000,000

Division 2 $ 15,000,000 44,000,000 43,000,000

Division 3 $ 5,000,000 15,000,000 17,000,000

Due to a downturn in the economy during the year, it is more likely than not that goodwill is impaired in all three divisions. What is the amount of goodwill impairment loss for the year? a. b. c. d.

$ 8,000,000 $ 5,000,000 $ 2,000,000 $ 7,000,000

ANS:

d Fair value of division Book value of division Possible goodwill impairment Exceeds book value of goodwill? Goodwill impairment loss

41.

42.

Division 1 $ 65,000,000 70,000,000 5,000,000 No $ 5,000,000

Division 2 $44,000,000 43,000,000 None N/A $ 0

Division 3 $ 15,000,000 17,000,000 2,000,000 No $ 2,000,000

Topic: Goodwill impairment LO 3 Following U.S. GAAP, goodwill acquired in a merger must be allocated to business units before it can be tested for impairment. How are these “business units” defined? a. b. c. d.

The choice of business units is at the discretion of management. The business units are defined geographically. The business units are defined by product line. The business units are the reportable units used for segment reporting.

ANS:

d

Topic: Goodwill impairment LO 3 An impairment test results in a division’s estimated goodwill impairment that is an amount greater than the carrying value of its goodwill. Which statement is most likely to be true? a. b. c. d.

No goodwill impairment is recognized. The division’s identifiable net assets are impaired. It is more likely than not that the goodwill is not impaired. Goodwill originally allocated to the division was overstated.

ANS:

b

© Cambridge Business Publishers, 2023 4-14

Advanced Accounting, 5th Edition

43.

44.

45.

Topic: Consolidation in subsequent years LO 4 A subsidiary has plant assets with a fair value of $80 million and book value of $50 million at the date of acquisition. The plant assets have a remaining life, as of the date of acquisition, of 15 years, straight-line. You are consolidating the accounts at the end of the third year since acquisition, and the subsidiary still owns the plant assets. The amount by which the plant assets are revalued in eliminating entry (R) is: a. b. c. d.

$26 million $30 million $24 million $28 million

ANS:

a Entry (R) recognizes revaluation as of the beginning of the third year. Total revaluation was $80 million - $50 million = $30 million, and the revaluation declines by $30 million/15 = $2 million each year. $30 million – (2 x $2 million) = $26 million.

Topic: Consolidation in subsequent years LO 4 A subsidiary has previously unreported brand names valued at $50 million at the date of acquisition. The brand names have an indefinite life. It is now the end of the second year since acquisition, and you are consolidating the accounts. The subsidiary still owns the brand names. Impairment testing reveals that the brand names were impaired by $5 million in the first year and $7 million in the second year. The amount by which the brand names are recognized in eliminating entry (R) is: a. b. c. d.

$50 million $38 million $45 million None since the brand names have an indefinite life

ANS:

c Entry (R) recognizes revaluation as of the beginning of the second year. $50 million - $5 million = $45 million.

Topic: Consolidation in subsequent years LO 4 At the date of acquisition, a subsidiary’s assets and liabilities are reported at amounts approximating fair value, except it has previously unreported identifiable intangibles of $30 million (5-year life, straight-line), and its plant assets are overvalued by $70 million (10-year life, straight-line). Revaluation write-offs are reported as adjustments to operating expenses. Eliminating entry (O) at the end of the second year following acquisition: a. b. c. d.

Increases operating expenses by $6 million. Reduces operating expenses by $1 million. Increases operating expenses by $13 million. Increases operating expenses by $1 million.

ANS:

b ($30 million/5) – ($70 million/10) = $1 million decrease in operating expenses

Test Bank, Chapter 4

© Cambridge Business Publishers, 2023 4-15

46.

Topic: Consolidation in subsequent years LO 1, 4 A wholly-owned subsidiary reports income of $5 million, other comprehensive income of $100,000, and dividends of $1 million. There are no revaluation write-offs. Eliminating entry (C) reduces Investment in Subsidiary by: a. b. c. d.

$4,100,000. $4,000,000. $5,100,000. $5,000,000.

ANS:

a Eliminating entry (C) is as follows: Equity in NI of subsidiary Equity in OCI of subsidiary

5,000,000 100,000 Dividends Investment in subsidiary

47.

Topic: Consolidation in subsequent years LO 1, 4 A wholly-owned subsidiary reports a loss of $2 million on its income statement, and an other comprehensive gain of $100,000. The subsidiary’s revalued net assets consist of indefinite life identifiable intangible assets. Impairment testing for the year reveals $250,000 in impairment on these intangibles. The subsidiary did not declare any dividends. The parent uses the complete equity method to report its investment in the subsidiary on its own books. Eliminating entry (C) had what effect on the Investment in Subsidiary account? a. b. c. d.

$1,650,000 increase $2,150,000 decrease $1,650,000 decrease $2,150,000 increase

ANS:

b Eliminating entry (C) is as follows: Equity in OCI of subsidiary Investment in subsidiary

100,000 2,150,000 Equity in NL of subsidiary

48.

1,000,000 4,100,000

2,250,000

Topic: Consolidation in subsequent years LO 1, 4 A wholly-owned subsidiary reports income of $600,000 and an other comprehensive loss of $50,000. The subsidiary’s revalued net assets consist of indefinite life identifiable intangible assets, which are not impaired this year. The subsidiary declared dividends of $200,000 during the year. Eliminating entry (C) reduces Investment in Subsidiary by: a. b. c. d.

$450,000 $350,000 $600,000 $400,000

© Cambridge Business Publishers, 2023 4-16

Advanced Accounting, 5th Edition

ANS:

b Eliminating entry (C) is as follows: Equity in NI of subsidiary

600,000 Equity in OCL of subsidiary Dividends Investment in subsidiary

49.

50.

50,000 200,000 350,000

Topic: Consolidation in subsequent years LO 4 A wholly-owned subsidiary’s revalued net assets at the date of acquisition consist of indefinite life identifiable intangible assets valued at $500,000 at the date of acquisition. Impairment of these intangibles as of the beginning of the current year is $10,000, and impairment testing for the current year reveals $100,000 in additional impairment on these intangibles. Consolidation eliminating entry (O) at the end of the current year reduces identifiable intangible assets by: a. b. c. d.

$500,000. $ 10,000. $110,000. $100,000.

ANS:

d

Topic: Consolidation in subsequent years LO 4 A wholly-owned subsidiary’s plant assets have a book value of $40 million and a fair value of $35 million at the date of acquisition. The plant assets have a remaining life at the date of acquisition of 10 years, straight-line. It is now three years since the acquisition. Assume an accumulated depreciation account is not used, i.e. all adjustments are made directly to the net plant assets account. Consolidation eliminating entry (R) at the end of the current year has what effect on the net plant assets account? a. b. c. d.

Increase of $4,000,000. Decrease of $4,000,000. Increase of $3,500,000. Decrease of $3,500,000.

ANS:

b The original revaluation reduced plant assets by $5,000,000. In the third year, the revaluation at the beginning of the year reduces plant assets by: $5,000,000 – (($5,000,000/10) x 2) = $4,000,000.

Test Bank, Chapter 4

© Cambridge Business Publishers, 2023 4-17

51.

52.

Topic: Consolidation in subsequent years LO 4 A parent company acquires a subsidiary on January 1, 2022. The subsidiary’s equipment (6-year remaining life, straight-line) is undervalued by $30 million at the date of acquisition. On the consolidation working paper prepared at December 31, 2027 (6 years later), by how much does eliminating entry (R) increase the equipment account? a. b. c. d.

$ 5 million $30 million $10 million $0

ANS:

a Eliminating entry (R) recognizes the revaluation to fair value as of the beginning of the sixth year. $30 – [($30/6) x 5] = $5 million increase to the equipment account.

Topic: Consolidation in subsequent years LO 4 A parent company acquires a subsidiary on January 1, 2022. The subsidiary’s equipment (6-year remaining life, straight-line) is undervalued by $30 million at the date of acquisition. On the consolidation working paper prepared at December 31, 2027 (6 years later), what is the net effect of eliminating entries (R) and (O) on the equipment account? a. b. c. d.

$ 5 million increase $30 million increase $10 million increase $0

ANS:

d

Use the information below to answer questions 53 and 54. A parent acquired previously unreported intangible assets in an acquisition, consisting of developed technology with a fair value of $25,000, and $150,000 in goodwill. The developed technology has a 5year life, straight-line. Both are allocated to the Communications reporting unit. At the end of the first year following the acquisition, the following information is available: Sum of expected future undiscounted cash flows, developed technology Sum of expected future discounted cash flows, developed technology Fair value of Communications reporting unit Book value of Communications reporting unit, before any intangibles write-offs 53.

$ 18,000 12,000 500,000 550,000

Topic: Intangibles write-offs LO 2, 3 On the consolidation working paper, in eliminating entry (O), what is the total write-off for developed technology? a. b. c. d.

$ 5,000 $ 7,000 $13,000 $20,000

© Cambridge Business Publishers, 2023 4-18

Advanced Accounting, 5th Edition

ANS:

54.

55.

Topic: Goodwill impairment LO 3 What is the amount of goodwill impairment for the year? a. b. c. d.

$35,000 $45,000 $50,000 $37,000

ANS:

d Book value of reporting unit = $550,000 - $13,000 = $537,000 Fair value of reporting unit = $500,000

Topic: Consolidation eliminations LO 4 An acquisition requires revaluation of a subsidiary’s date-of-acquisition inventory from a book value of $5 million to fair value of $3 million. The subsidiary uses FIFO and sells the inventory in the first year following acquisition. Which statement is true concerning the consolidation eliminating entries for this revaluation? a.

d.

Each year following acquisition, entry (R) reduces inventory and entry (O) increases cost of goods sold by $2 million. After the first year, entry (R) reduces inventory by $2 million, but entry (O) is not required. No entry (R) is required after the first year, but eliminating entry (O) reduces cost of goods sold by $2 million in the first year. No entries are required in any year.

ANS:

c

b. c.

56.

c Amortization = $25,000/5 = $5,000 Step one of the impairment test: ($25,000 - $5,000) > $18,000; Therefore impairment is $20,000 - $12,000 = $8,000; $5,000 + $8,000 = $13,000.

Topic: Consolidation eliminations LO 4 An acquisition requires revaluation of a subsidiary’s date-of-acquisition inventory from a book value of $5 million to fair value of $2 million. The subsidiary uses LIFO and inventory purchases exceed sales in every year following acquisition. Which statement is true concerning the consolidation eliminating entries for this revaluation? a.

d.

Each year following acquisition, entry (R) reduces inventory and entry (O) increases cost of goods sold by $3 million. Each year following acquisition, entry (R) reduces inventory by $3 million, but entry (O) is not required. No entry (R) is required after the first year, but eliminating entry (O) reduces cost of goods sold by $3 million in the first year. No entries are required in any year.

ANS:

b

b. c.

Test Bank, Chapter 4

© Cambridge Business Publishers, 2023 4-19

57.

Topic: Consolidation eliminations LO 4 An acquisition requires revaluation of a subsidiary’s date-of-acquisition plant assets from a book value of $40 million to a fair value of $25 million. The plant assets have a 10-year remaining life at the date of acquisition. Which statement is true concerning the eliminating entries for this revaluation? a. b. c. d. ANS:

58.

59.

In the second year following acquisition, eliminating entry (O) reduces depreciation expense by $1.5 million. In the third year following acquisition, eliminating entry (R) increases plant assets by $3 million. In the first year following acquisition, the net effect of eliminating entries (R) and (O) is to reduce plant assets by $15 million. In the second year following acquisition, eliminating entry (R) reduces plant assets by $3 million. a

Topic: Consolidation eliminations LO 4 Mojo Corporation acquires all the voting stock of Ninja Company. Ninja has $1,000,000 in bonds payable, issued at par value, on its books. The bonds have a 5-year remaining life at the date of acquisition, and 4% interest is paid annually. The fair value of the bonds at the date of acquisition is $1,010,000. The premium is straight-line amortized. Which statement is true concerning the consolidation of Mojo with Ninja two years after the acquisition? a. b. c. d.

Consolidated interest expense on the bonds is $42,000. Eliminating entry (R) increases bonds payable by $6,000. If market interest rates are 4% at the date of consolidation, no entry (O) is needed. Eliminating entry (O) decreases interest expense by $2,000.

ANS:

d

Topic: Revaluation write-offs LO 4 A parent company acquires all of a subsidiary’s voting stock at the beginning of 2022. At the date of acquisition, the subsidiary’s equipment had a book value of $40 million and a fair value of $25 million. The equipment had a 10-year remaining life, straight-line. Consolidation eliminating entry (R), on the consolidation working paper for 2025, reduces the net equipment account by what amount? a. b. c. d.

$10.5 million $15.0 million $ 9.0 million $17.5 million

ANS:

a $15 million – [($15 million/10) x 3] = $10.5 million.

© Cambridge Business Publishers, 2023 4-20

Advanced Accounting, 5th Edition

60.

Topic: Revaluation write-offs LO 2, 4 A parent company acquires all of a subsidiary’s voting stock at the beginning of 2022. At the date of acquisition, the subsidiary’s equipment’s fair value was $20 million below book value. The equipment had a 10-year remaining life, straight-line. Consolidation eliminating entry (O), on the consolidation working paper for 2025, has what effect on consolidated depreciation expense? a. b. c. d.

Debit for $2 million Debit for $8 million Credit for $2 million Credit for $8 million

ANS:

c $20 million/10 = $2 million credit to depreciation expense.

Use the following information to answer Questions 61 – 66. On January 1, 2022, Pearson Company acquired all of Sundisk Company’s voting stock for $20,000 in cash. Sundisk’s total shareholders’ equity at January 1, 2022 was $5,000. Some of Sundisk’s assets and liabilities at the date of acquisition had fair values that were different from reported values, as follows: Plant assets, net (10 years, straight-line) Identifiable intangibles (indefinite life)

Book Value $15,000 0

Fair Value $ 10,000 9,000

It is now December 31, 2024 (3 years later). Impairment of recognized identifiable intangibles through the end of 2023 totals $400, and there is no impairment in 2024. There is no goodwill impairment as of the beginning of 2024, but goodwill impairment for 2024 is $1,200. Pearson uses the complete equity method to account for its investment. December 31, 2024 trial balances for Pearson and Sundisk follow:

Current assets Plant assets, net Identifiable intangibles Investment in Sundisk Goodwill Liabilities Capital stock Retained earnings, beginning Sales revenue Equity in net income of Sundisk Cost of goods sold Operating expenses

Pearson Dr (Cr) $ 5,000 28,700 – 28,400 – (20,300) (15,000) (25,000) (25,000) (800) 20,000 4,000 $ 0

Sundisk Dr (Cr) $ 2,500 22,000 – – – (11,000) (2,000) (10,000) (14,000) – 9,000 3,500 $ 0

The following questions relate to consolidation eliminating entries for 2024.

Test Bank, Chapter 4

© Cambridge Business Publishers, 2023 4-21

61.

62.

Topic: Consolidation eliminating entries LO 4 Eliminating entry (R) debits goodwill in the amount of: a. b. c. d.

$1,000 $11,000 $10,000 $15,000

ANS:

b Original goodwill = $20,000 - $5,000 - $9,000 + $5,000 = $11,000. There has been no impairment as of the beginning of 2024.

Topic: Consolidation eliminating entries LO 4 Eliminating entry (C) credits Investment in Sundisk in the amount of: a. b. c. d.

$800 $100 $300 $200

ANS:

a Eliminating entry (C) is: Equity in NI of Sundisk

800 Investment in Sundisk

63.

Topic: Consolidation eliminating entries LO 4 Eliminating entry (E) credits Investment in Sundisk in the amount of: a. b. c. d.

$ 2,000 $25,900 $12,000 $13,500

ANS:

c Eliminating entry (E) is: Capital stock Retained earnings, beginning

2,000 10,000 Investment in Sundisk

64.

800

12,000

Topic: Consolidation eliminating entries LO 4 Eliminating entry (R): a. b. c. d.

Credits plant assets, net $4,000 Debits plant assets, net $5,000 Debits intangibles $8,000 Debits intangibles $9,000

© Cambridge Business Publishers, 2023 4-22

Advanced Accounting, 5th Edition

ANS:

a Eliminating entry (R) is: Intangibles Goodwill

8,600 11,000 Plant assets, net Investment in Sundisk

65.

4,000 15,600

Topic: Consolidation eliminating entries LO 4 Eliminating entry (O) debits operating expenses for a total of: a. b. c. d.

$1,200 $400 $100 $700

ANS:

d Eliminating entry (O) is: Plant assets, net Operating expenses

500 700 Goodwill

66.

1,200

Topic: Consolidation eliminating entries, subsequent year, cost method LO 6 Now assume Pearson uses the cost method to account for its investment in Sundisk. You are doing consolidation eliminating entries at December 31, 2024. Before doing eliminating entries (C), (E), (R), (O), in eliminating entry (A) you must increase Pearson’s Investment in Sundisk by: a. b. c. d.

$7,000 $5,600 $7,600 $8,000

ANS:

c

Sundisk’s total equity, January 1, 2024 Sundisk’s total equity, date of acquisition Increase in Sundisk’s retained earnings Cumulative write-offs of revaluations to January 1, 2024 Plant assets $5,000/10 x 2 Identifiable intangibles Amount of adjustment (A) to Investment in Sundisk

Test Bank, Chapter 4

$12,000 (5,000) 7,000 1,000 (400) $ 7,600

© Cambridge Business Publishers, 2023 4-23

Use the following information to answer Questions 67 – 71 below. Potash Corporation acquired the voting stock of Safestyle Company on January 1, 2023 for $40 million. Safestyle’s book value at the time was $10 million, consisting of $2 million of capital stock and $8 million of retained earnings. The $30 million difference between fair and book value was attributed to goodwill. It is now December 31, 2024, the end of the accounting year and two years after the acquisition. Safestyle’s January 1, 2024 retained earnings balance is $10 million, and it reports net income of $1.5 million for 2024. Safestyle declares no dividends and has no other comprehensive income. Goodwill from the acquisition was not impaired in 2023 but is impaired by $100,000 in 2024. Potash uses the complete equity method to report its investment in Safestyle on its own books. 67.

68.

Topic: Complete equity method LO 1 What is 2024 equity in net income of Safestyle, reported on Potash’s books? a. b. c. d.

$1,500,000 $1,600,000 $1,400,000 $1,700,000

ANS:

c $1,500,000 - $100,000 = $1,400,000

Topic: Complete equity method LO 1 What is the December 31, 2024 balance for Investment in Safestyle, reported on Potash’s books? a. b. c. d.

$40,000,000 $42,000,000 $41,400,000 $43,400,000

ANS:

d Investment, January 1, 2023 Change in retained earnings to January 1, 2024 Investment, January 1, 2024 Equity in NI, 2024 Investment, December 31, 2024

69.

$40,000,000 2,000,000 42,000,000 1,400,000 $43,400,000

Topic: Consolidation eliminating entries LO 4 On the December 31, 2024 consolidation working paper, eliminating entry (E) credits the Investment in Safestyle account by: a. b. c. d.

$12,000,000 $10,000,000 $ 8,000,000 $13,500,000

© Cambridge Business Publishers, 2023 4-24

Advanced Accounting, 5th Edition

ANS:

a Eliminating entry (E) is: Capital stock Retained earnings, beginning

2,000,000 10,000,000 Investment in Safestyle

70.

Topic: Consolidation eliminating entries LO 4 On the December 31, 2024 consolidation working paper, eliminating entry (R) credits the Investment in Safestyle account by: a. b. c. d.

$30,100,000 $30,000,000 $29,900,000 $28,500,000

ANS:

b Eliminating entry (R) is: Goodwill

30,000,000 Investment in Safestyle

71.

12,000,000

30,000,000

Topic: Consolidation eliminating entries LO 4 On the December 31, 2024 consolidation working paper, eliminating entry (O) debits goodwill impairment loss by: a. b. c. d.

$ 100,000 $29,900,000 $ 1,500,000 $ 1,400,000

ANS:

a

Use the following information to answer Questions 72 – 78. Park Corporation acquired the voting stock of Sequoia Company on January 1, 2024 for $25 million in cash and stock. At the date of acquisition, Sequoia’s book value totaled $3 million, consisting of $1.6 million in capital stock, $1.8 million in retained earnings, and $400,000 in accumulated other comprehensive losses. Sequoia’s reported net assets at the date of acquisition were carried at amounts approximating fair value, except its inventory was overvalued by $500,000 (sold in 2024), its plant assets (10-year life, straight-line) were overvalued by $3,500,000, and its long-term debt (premium amortized over 10 years, straight-line) is undervalued by $100,000. Sequoia also had previously unreported identifiable intangibles (5-year life, straight-line) valued at $5,000,000. It is now December 31, 2024. Sequoia reports net income of $1,200,000 and other comprehensive income of $50,000 for 2024 and declares and pays dividends of $200,000. None of the revaluations are impaired in 2024. Park uses the complete equity method to account for its investment.

Test Bank, Chapter 4

© Cambridge Business Publishers, 2023 4-25

72.

Topic: Complete equity method LO 1 What is 2024 equity in net income of Sequoia, reported on Park’s books?

73.

a. b. c. d.

$1,040,000 $ 560,000 $1,200,000 $1,060,000

ANS:

d Sequioa’s reported income Cost of goods sold adjustment Depreciation expense adjustment Amortization expense Interest expense adjustment Equity in net income

Topic: Complete equity method LO 1 What is the December 31, 2024 balance for Investment in Sequoia, reported on Park’s books? a. b. c. d.

$26,060,000 $25,860,000 $25,910,000 $26,000,000 ANS:

c Beginning investment balance + Equity in NI + Equity in OCI - Dividends Ending investment balance

74.

$ 1,200,000 500,000 350,000 (1,000,000) 10,000 $ 1,060,000

$25,000,000 1,060,000 50,000 (200,000) $25,910,000

Topic: Consolidation eliminating entries LO 4 Eliminating entry (E) credits Investment in Sequoia by: a. b. c. d.

$3,600,000 $3,000,000 $3,300,000 $1,500,000

ANS:

b Eliminating entry (E) is: Capital stock Retained earnings, beginning

1,600,000 1,800,000 AOCL Investment in Sequoia

© Cambridge Business Publishers, 2023 4-26

400,000 3,000,000

Advanced Accounting, 5th Edition

75.

76.

77.

Topic: Consolidation eliminating entries LO 4 Eliminating entry (R) debits goodwill in the amount of: a. b. c. d.

$21,100,000 $20,900,000 $20,100,000 $19,100,000

ANS:

a Investment Book value Excess paid Revaluations Inventory Plant assets Identifiable intangibles Long-term debt Goodwill

$25,000,000 3,000,000 22,000,000 (500,000) (3,500,000) 5,000,000 (100,000)

900,000 $21,100,000

Topic: Consolidation eliminating entries LO 4 How does eliminating entry (O) change consolidated cost of goods sold? a. b. c. d.

$500,000 debit $500,000 credit $100,000 credit No effect

ANS:

b

Topic: Consolidated balances in subsequent years LO 4 The balance for acquired identifiable intangibles on the December 31, 2024 consolidated balance sheet is: a. b. c. d.

$4,000,000 $5,000,000 $4,500,000 $1,000,000

ANS:

a $5,000,000 – (($5,000,000/5) x 1) = $4,000,000

Test Bank, Chapter 4

© Cambridge Business Publishers, 2023 4-27

78.

79.

Topic: Consolidated balances in subsequent years LO 4 Park’s beginning balance of accumulated other comprehensive income is $175,000, and it reports $250,000 in other comprehensive income for 2024 on its own books. The balance for accumulated other comprehensive income on the December 31, 2024 consolidated balance sheet is: a. b. c. d.

$425,000 $ 25,000 $475,000 $825,000

ANS:

c $175,000 + $250,000 + $50,000 = $475,000

Topic: Impairment of identifiable intangibles, IFRS and U.S. GAAP LO 2, 5 Identifiable intangible assets with a fair value of $100 million and a 5-year life were recognized in an acquisition occurring on June 30, 2023, the end of the accounting year. The intangible assets were not impaired in fiscal 2024. It is now June 30, 2025. Impairment testing reveals that total expected undiscounted future cash inflows for the intangible assets are $65 million, and total expected discounted future cash inflows are $35 million. What is the impairment loss for the intangible assets for fiscal 2025, following IFRS and following U.S. GAAP? a. b. c. d. ANS:

80.

IFRS $25 million $10 million $25 million $0

U.S. GAAP $0 $65 million $25 million $0

a Book value, end of fiscal 2025 = $100 – ($100/5 x 2) = $60 million. IFRS: $60 million - $35 million = $25 million. U.S. GAAP: $65 million > $60 million, so no impairment

Topic: Identifiable intangibles impairment, U.S. GAAP and IFRS LO 2, 5 Which statement is true regarding a comparison of the U.S. GAAP versus the IFRS impairment test for identifiable intangibles? a. b. c. d.

Impairment loss for limited life intangibles is generally higher for U.S. GAAP than for IFRS. Impairment loss for indefinite life intangibles is generally the same for IFRS and U.S. GAAP. Impairment loss for limited life intangibles is generally the same for IFRS and U.S. GAAP. Impairment loss for indefinite life intangibles is generally higher for IFRS than for U.S. GAAP.

ANS:

b

© Cambridge Business Publishers, 2023 4-28

Advanced Accounting, 5th Edition

81.

82.

83.

Topic: Intangibles reporting, IFRS LO 5 A company uses IFRS and chooses to report certain generic intangible assets at fair value. On January 1, 2023, it acquires software for €100,000, with an estimated life of 5 years, straight-line. On December 31, 2023, the intangible has a fair value of €110,000. How is this change in value reported on the 2023 financial statements? a. b. c. d.

Other comprehensive gain, €10,000 Other comprehensive gain, €30,000 Gain on the income statement, €30,000 Not reported

ANS:

b Book value at the end of 2023 = €100,000 – (€100,000/5) = €80,000. €110,000 - €80,000 = €30,000 gain, reported in OCI.

Topic: Intangibles reporting, IFRS LO 5 A company follows IFRS and chooses to report certain generic intangible assets at fair value. On January 1, 2023, it acquires software for €300,000. Estimated life is 3 years, straight-line. On December 31, 2023, the intangible has a fair value of €330,000. How is this change in value reported on the 2023 financial statements? a. b. c. d.

Other comprehensive gain, €30,000 Gain on the income statement, €30,000 Other comprehensive gain, €130,000 Gain on the income statement, €130,000

ANS:

c Book value at the end of 2023 = €300,000 – (€300,000/3) = €200,000. €330,000 - €200,000 = €130,000 gain, reported in OCI.

Topic: Intangibles reporting, IFRS LO 5 A company follows IFRS and chooses to report certain intangible assets at fair value. On January 1, 2023, it acquires software for €600,000. Estimated life is 5 years, straight-line. On December 31, 2023, the intangible has a fair value of €500,000. On December 31, 2024, its fair value is €390,000. How is this information reported on the 2024 financial statements? a. b. c. d.

Amortization expense €120,000; other comprehensive gain €30,000 Amortization expense €120,000; other comprehensive gain €140,000 Amortization expense €125,000; other comprehensive gain €20,000 Amortization expense €125,000; other comprehensive gain €15,000

ANS:

d Book value at the end of 2023 = €600,000 – (€600,000/5) = €480,000; €500,000 - €480,000 = €20,000 gain, reported in OCI. Amortization expense for 2024 = €500,000/4 = €125,000; book value at the end of 2024 = €500,000 – €125,000 = €375,000; €390,000 - €375,000 = €15,000 gain, reported in OCI.

Test Bank, Chapter 4

© Cambridge Business Publishers, 2023 4-29

84.

Topic: Intangibles reporting, IFRS LO 5 Which statement is false concerning IFRS for intangibles? a. b.

d.

Intangibles may be marked to market only if they are traded in an active market. Increases in market value of intangibles reported using the revaluation model are reported in other comprehensive income. Amortization expense on intangibles reported using the revaluation model is reported in income. Goodwill may be marked to market if the acquisition occurred in an active market.

ANS:

d

c.

85.

Topic: Goodwill impairment, IFRS LO 5 An IFRS company reports $11,600 in goodwill and tests it for impairment at the end of the year. The following information is collected:

Book value of goodwill Fair value of division Book value of division

CGU 1 $ 5,000 60,000 62,000

CGU 2 $ 400 10,000 9,500

CGU 3 $ 2,200 5,000 2,000

CGU 4 $4,000 20,000 22,000

What is the amount of goodwill impairment loss for the year, following IFRS? a. $5,000 b. $2,000 c. $4,000 d. $7,500 ANS:

c Fair value of division Book value of division Goodwill impairment loss

86.

CGU 1 $60,000 62,000 $ 2,000

CGU 2 $10,000 9,500 $ 0

CGU 3 $5,000 2,000 $ 0

CGU 4 $20,000 22,000 $ 2,000

Topic: Goodwill impairment, IFRS LO 5 An IFRS company reports $25,000 in goodwill and tests it for impairment. The following information is collected:

Book value of goodwill Fair value of CGU Book value of CGU

© Cambridge Business Publishers, 2023 4-30

CGU 1 $ 2,000 10,000 8,500

CGU 2 $ 9,000 25,000 30,000

CGU 3 $ 14,000 55,000 75,000

Advanced Accounting, 5th Edition

Which statement is true, following IFRS? a. b. c. d.

Goodwill impairment is $25,000. Identifiable net assets of CGU 3 are written down by $6,000. Goodwill impairment is $27,500. Identifiable net assets of CGU 1 are written up by $2,500.

ANS:

b CGU 1 CGU 2 CGU 3 Fair value of CGU $ 10,000 $ 25,000 $ 55,000 Book value of CGU 8,500 30,000 75,000 Goodwill impairment loss $ 0 $ 5,000 $ 14,000 Because the goodwill writedown for CGU 3 does not write the CGU down to its fair value, identifiable net assets are evaluated for impairment and appropriately written down.

87.

Topic: Goodwill impairment, IFRS LO 5 A division’s goodwill is not impaired, per IFRS, if: a. b. c. d. ANS:

88.

89.

The fair value of the division is less than the book value of the division. The fair value of the division is more than the book value of the division. The fair value of the identifiable net assets of the division is greater than the book value of its identifiable net assets. The fair value of the identifiable net assets of the division is less than the book value of the division. b

Topic: Goodwill impairment, IFRS LO 5 Which statement is true concerning IFRS goodwill impairment reporting? a. b. c. d.

IFRS does not allow qualitative evaluation of goodwill impairment. IFRS does not require goodwill impairment recognition. IFRS allows goodwill impairment to be reported in other comprehensive income. IFRS allows goodwill impairment to adjust fair value reserves in equity.

ANS:

a

Topic: Adjusting entry, parent uses the cost method LO 6 When the parent uses the cost method, eliminating entry (A) adjusts the parent’s balance sheet accounts to the amounts reported using the complete equity method. Which of the parent’s accounts must be adjusted? a. b. c. d.

Identifiable intangibles, goodwill, and investment in subsidiary Goodwill and retained earnings, beginning of year Accumulated other comprehensive income, beginning of year, and investment in subsidiary Investment in subsidiary, and retained earnings and accumulated other comprehensive income, beginning of year

Test Bank, Chapter 4

© Cambridge Business Publishers, 2023 4-31

ANS: 90.

Topic: Adjusting entry, parent uses the cost method LO 6 If a parent company uses the cost method to account for its investment in subsidiary on its own books, after eliminating entry (C), the parent’s investment account must be adjusted before doing elimination (E), in an amount equal to a. b. c. d. ANS:

91.

d

the change in the subsidiary’s retained earnings and AOCI, adjusted for revaluation write-offs, from the date of acquisition to the beginning of the current year. the subsidiary’s retained earnings and AOCI balances, adjusted for revaluation write-offs from the date of acquisition to the beginning of the current year. the change in the subsidiary’s retained earnings and AOCI, adjusted for revaluation write-offs, from the date of acquisition to the end of the current year. the change in the subsidiary’s retained earnings and AOCI from the date of acquisition to the beginning of the current year. a

Topic: Eliminating entries, parent uses cost method LO 6 A parent acquires its subsidiary on January 1, 2023, at a cost that exceeds the subsidiary’s book value by $10,000. The subsidiary’s assets and liabilities are reported at amounts approximating book value, and there are no previously unreported assets or liabilities. Goodwill from the acquisition is impaired by $200 in 2023 and $300 in 2024. The subsidiary reports net income of $5,000 in 2023 and $3,000 in 2024. The subsidiary has no other comprehensive income and declares no dividends during 2023 or 2024. On the consolidation working paper at December 31, 2024, eliminating entry (A) includes a debit to the investment in subsidiary account in the amount of: a. b. c. d.

$5,000 $2,700 $7,500 $4,800

ANS:

d $5,000 - $200 = $4,800

© Cambridge Business Publishers, 2023 4-32

Advanced Accounting, 5th Edition

Use the following information to answer Questions 92 and 93. A parent acquires the voting stock of a subsidiary on January 1, 2023. Required revaluations of the subsidiary’s net assets are: • •

Previously unreported identifiable intangibles valued at $3 million, with a remaining life of 10 years, straight-line Goodwill

It is now December 31, 2025, three years after the acquisition. The goodwill is unimpaired during this period. The parent reports its investment in the subsidiary using the cost method. The subsidiary reports the following net income, other comprehensive income (loss), and dividends in the three years since the acquisition:

2023 2024 2025

Net Income $600,000 700,000 750,000

Other Comprehensive Income (Loss) $100 120 (50)

Dividends $100,000 100,000 150,000

The following questions related to eliminating entries on the December 31, 2025 consolidation working paper. 92.

93.

Topic: Eliminating entries, parent uses the cost method LO 6 Eliminating entry (A) includes: a. b. c. d.

A debit to Investment in Subsidiary of $1,300,000 A credit to beginning AOCI of $220 A credit to beginning retained earnings of $500,220 A credit to beginning retained earnings of $950,000

ANS:

b Increase in retained earnings: $600,000 + $700,000 – [($3,000,000/10) x 2] - $100,000 $100,000 = $500,000 Increase in AOCI: $100 + $120 = $220 Increase in investment: $500,000 + $220 = $500,220

Topic: Eliminating entries, parent uses the cost method LO 6 Eliminating entry (C) includes a debit of $150,000 to: a. b. c. d.

Dividend income Beginning retained earnings Investment in Subsidiary Beginning AOCI

ANS:

a

Test Bank, Chapter 4

© Cambridge Business Publishers, 2023 4-33

PROBLEMS 1.

Topic: Complete equity method, first year LO 1 A subsidiary is acquired at the beginning of the current year for $20 million in cash. The subsidiary’s book value at the date of acquisition was $3 million. At the date of acquisition, the subsidiary’s inventory (sold during the first year following acquisition) was reported on the subsidiary’s books at an amount that was $300,000 above its fair value. The subsidiary also had previously unreported identifiable intangible assets (5-year life, straight-line) valued at $2 million. The remainder of acquisition cost was allocated to goodwill. During the year, the subsidiary reported net income of $800,000, and other comprehensive income of $10,000. There are no revaluation impairments. The parent uses the complete equity method to report its investment on its own books. Required a. Calculate equity in net income for the year, reported on the parent’s books. b. Prepare the parent’s entries to account for the investment during the year. c. What is the end-of-year balance in the investment account, reported on the parent’s books? ANS: a.

Reported net income Inventory write-off Amortization of ID intangibles Equity in net income

$2,000,000/5

$800,000 300,000 (400,000) $700,000

b. Investment in subsidiary

20,000,000 Cash

Investment in subsidiary

710,000 Equity in OCI Equity in net income

c.

20,000,000

10,000 700,000

$20,000,000 + $710,000 = $20,710,000

© Cambridge Business Publishers, 2023 4-34

Advanced Accounting, 5th Edition

2.

Topic:

Complete equity method, first year

LO 1 Prairie Inc. pays $25,000 for the voting stock of Straw Inc. at the beginning of the current year. Straw’s book value at the date of acquisition is $5,600. The following items are reported on Straw’s books at amounts that are different from their fair values:

Inventories Property, plant & equipment In-process R&D

Fair Value – Book Value $ 400 (3,000) 4,000

Reporting Method FIFO (sold during year) 10-year life, straight-line Indefinite life

For the current year, Straw reported net income of $2,500 and declared and paid dividends of $400. Prairie uses the complete equity method to report its investment on its own books. An impairment test at year-end reveals that 10% of the goodwill arising from this acquisition is impaired. Required a. Calculate equity in net income of Straw Inc. for the year, reported by Prairie on its own books. b. What is the ending balance for Investment in Straw Inc., reported by Prairie on its own books? ANS: a.

Straw’s reported net income Revaluation write-offs: Cost of goods sold increase Depreciation expense decrease Goodwill impairment loss Equity in net income

$ 2,500 $(3,000)/10 10% x $18,000

(400) 300 (1,800) $ 600

Calculation of goodwill: Acquisition cost Book value Excess of acquisition cost over book value Revaluations: Inventory Property, plant & equipment In-process R&D Total revaluations Goodwill b.

$25,000 5,600 19,400 $ 400 (3,000) 4,000

1,400 $18,000

$25,000 + $600 - $400 = $25,200

Test Bank, Chapter 4

© Cambridge Business Publishers, 2023 4-35

3.

Topic: Complete equity method, first and second years LO 1 Princeton Corporation acquired the voting stock of Sheridan Company on January 1, 2023 for $100,000 in cash. Sheridan’s book value at the date of acquisition was $35,000. Sheridan’s net assets were reported at amounts approximating fair value. However, it had previously unreported identifiable intangibles (5-year life, straight-line), valued at $25,000. During 2023, Sheridan reported net income of $7,200 and declared and paid dividends of $400. During 2024, Sheridan reported net income of $6,500 and declared and paid dividends of $300. Goodwill from this acquisition was not impaired in 2023 but was impaired by $1,000 in 2024. Princeton uses the complete equity method to report its investment in Sheridan on its own books. Required a. Calculate equity in net income of Sheridan, reported on Princeton’s books, for 2023 and 2024. b. Calculate the December 31, 2023 and December 31, 2024 balance for Investment in Sheridan, reported on Princeton’s books. ANS: a.

2023 Reported net income Amortization of ID intangibles Equity in net income 2024 Reported net income Amortization of ID intangibles Goodwill impairment Equity in net income

b. 4.

$7,200 (5,000) $2,200

$25,000/5

$6,500 (5,000) (1,000) $ 500

$25,000/5

$100,000 + $2,200 - $400 = $101,800 on December 31, 2023 $101,800 + $500 - $300 = $102,000 on December 31, 2024

Topic: Complete equity method, second year LO 1 A parent acquired the voting stock of its subsidiary at the beginning of 2023, at a $45 million acquisition cost. The subsidiary’s book value at the date of acquisition was $8.5 million. The difference between acquisition cost and book value was allocated to previously unreported inprocess R&D, valued at $3 million, brand names (5-year life, straight-line) valued at $10 million, and goodwill of $23.5 million. There was no impairment of any revaluations in 2023, but goodwill was impaired by $500,000 in 2024. The subsidiary’s retained earnings increased by $2.5 million and its AOCI decreased by $50,000 during 2023. In 2024, the subsidiary reported net income of $2.6 million and an other comprehensive loss of $150,000. The subsidiary did not declare any dividends in 2024. The parent uses the complete equity method to report its investment in the subsidiary on its own books. Required a. Calculate equity in net income for 2024, reported on the parent’s books. b. Calculate the balance for investment in subsidiary, reported on the parent’s books at the end of 2024.

© Cambridge Business Publishers, 2023 4-36

Advanced Accounting, 5th Edition

ANS: a. $2,600,000 – ($10,000,000/5) - $500,000 = $100,000 b. Acquisition cost Change in RE-2023 Change in AOCI-2023 Revaluation write-off-2023 Investment, beginning of 2024 Equity in NI-2024 Equity in OCL-2024 Investment, end of 2024 5.

$45,000,000 2,500,000 (50,000) (2,000,000) 45,450,000 100,000 (150,000) $45,400,000

Topic: Complete equity method, three years after acquisition LO 1 A subsidiary is acquired on January 1, 2023 at an acquisition cost of $100 million. The subsidiary’s book value at the date of acquisition was $25 million, consisting of these accounts: Capital stock Retained earnings Accumulated other comprehensive loss

$ 8,000,000 18,000,000 (1,000,000)

Following is revaluation information for the subsidiary’s identifiable net assets at the date of acquisition: Fair Value Book Value Plant assets, net $30,000,000 $40,000,000 Straight-line, 5 years Identifiable intangible assets 48,000,000 0 Straight-line, 6 years It is now December 31, 2025, three years since the acquisition. The subsidiary reported the following amounts during the period 2023 - 2025:

Net income Other comprehensive income (loss)

2023 $10,000,000 200,000

2024 $8,000,000 150,000

2025 $12,000,000 (25,000)

The subsidiary did not declare any dividends during this period. Goodwill for this acquisition is not impaired as of the end of 2025. The parent uses the complete equity method to report its investment on its own books. Required a. Calculate equity in net income, reported on the parent’s books, for 2025. b. Prepare the parent’s entry or entries to account for the investment during 2025. c. What is the December 31, 2025 balance in the investment account, reported on the parent’s books?

Test Bank, Chapter 4

© Cambridge Business Publishers, 2023 4-37

ANS: a.

Reported net income for 2025 Depreciation adjustment, plant assets Amortization of ID intangibles Equity in net income for 2025

$10,000,000/5 $48,000,000/6

$12,000,000 2,000,000 (8,000,000) $ 6,000,000

b. Equity in OCL Investment in subsidiary

25,000 5,975,000 Equity in net income

c.

6.

6,000,000

Equity in net income for 2023 and 2024:

Reported net income Depreciation adjustment, plant assets Amortization of ID intangibles Equity in net income

2023 $10,000,000 2,000,000 (8,000,000) $ 4,000,000

Investment, January 1, 2023 Equity in net income, 2023 Equity in OCI, 2023 Equity in net income, 2024 Equity in OCI, 2024 Equity in net income, 2025 Equity in OCL, 2025 Investment, December 31, 2025

$100,000,000 4,000,000 200,000 2,000,000 150,000 6,000,000 (25,000) $112,325,000

2024 $8,000,000 2,000,000 (8,000,000) $ 2,000,000

Topic: Complete equity method, four years after acquisition LO 1 Pointer Company acquired the voting common stock of Setter Industries on January 1, 2021 for $35,000. The $30,000 excess of acquisition cost over Setter’s book value was allocated as follows: Inventories Plant & equipment Internet domain name Customer order backlog

$ (2,500) (5,000) 6,000 1,000

Goodwill Total excess of acquisition cost over book value

30,500

© Cambridge Business Publishers, 2023 4-38

FIFO (sold in 2021) 10 years, straight-line 3 years, straight-line 2 years, straight-line Cumulative impairment, 2021 – 2023 = $200 2024 impairment = $150

$30,000

Advanced Accounting, 5th Edition

Setter’s book value on January 1, 2021 was: Capital stock Retained earnings Accumulated other comprehensive income Treasury stock Total

$

500 4,550 150 (200) $ 5,000

Setter reported 2024 net income of $5,000 and other comprehensive income of $80. Its retained earnings balance on December 31, 2023 was $9,200, and its December 31, 2023 balance for accumulated other comprehensive income was $200. On its own books, Pointer accounts for its investment in Setter using the complete equity method. Required a. Calculate equity in net income of Setter for 2024, reported on Pointer’s books. b. Prepare the journal entry or entries Pointer makes on its own books in 2024 to account for its investment in Setter. c. Calculate the balance for Investment in Setter at December 31, 2024, reported on Pointer’s books. ANS: a.

Setter’s reported income Revaluation write-offs: Plant & equipment Goodwill Equity in net income for 2024

$5,000 $5,000/10

500 (150) $5,350

b. Investment in Setter

5,430 Equity in net income of Setter Equity in OCI of Setter

c.

Investment balance, date of acquisition Change in RE to beginning of 2024 Change in AOCI to beginning of 2024 Write-offs of revaluations, 2021 – 2023: Inventory Plant & equipment Internet domain name Customer order backlog Goodwill Investment balance, 1/1/24 Equity in net income, 2024 Equity in OCI, 2024 Investment balance, 12/31/24

Test Bank, Chapter 4

$9,200 – $4,550 $200 - $150 full amount ($5,000/10) x 3 full amount full amount

5,350 80 $35,000 4,650 50 2,500 1,500 (6,000) (1,000) (200) 36,500 5,350 80 $41,930

© Cambridge Business Publishers, 2023 4-39

7.

Topic: Impairment testing of identifiable intangible assets LO 2 When Practime acquired Stratus Technologies on January 1, 2022, the following previously unreported intangible assets were recognized as part of the acquisition: Fair Value, January 1, 2022 $ 8,000 6,000

Intangible Asset Brand names Royalty agreements

Asset Type Indefinite life Limited life, 5 years, SL

It is now December 31, 2024, the end of the accounting year, and three years since the acquisition. No impairment has been reported on either of the intangibles in 2022 or 2023. Practime bypasses the qualitative impairment test for all intangibles, where this option is available. You have the following information regarding the identifiable intangibles at December 31, 2024: Total Expected Future Net Cash Inflows, Undiscounted $ 8,500 2,200

Intangible asset Brand names Royalty agreements

Total Expected Future Net Cash Inflows, Discounted $ 6,500 1,800

Required Calculate the impairment loss on each of the identifiable intangibles for 2024, following U.S. GAAP. ANS:

Brand names Royalty agreements Total impairment loss 8.

BV $8,000 2,400

BV > Sum of Undiscounted CFs? N/A $2,400 > $2,200? Yes

Loss = BV - DCF $8,000 – $6,500 = $2,400 - $1,800 =

Loss $1,500 600 $2,100

Topic: Identifiable intangibles impairment testing LO 2 When Prestige Inc. acquired Squiggle Technologies, the following previously unreported intangible assets were recognized as part of the acquisition: Intangible Asset Developed product technology Royalty agreements Customer relationships

Book Value at December 31, 2024 $ 750 115 170

Asset Type Indefinite life Limited life Limited life

It is now December 31, 2024, the end of the accounting year. Amortization for 2024 has already been properly recorded.

© Cambridge Business Publishers, 2023 4-40

Advanced Accounting, 5th Edition

You have the following information regarding these intangibles: Intangible Asset Developed product technology Royalty agreements Customer relationships

Total Expected Future Net Cash Inflows, Undiscounted $ 800 105 175

Total Expected Future Net Cash Inflows, Discounted $ 550 85 110

Required Calculate the impairment loss on each of the intangibles for 2024, following U.S. GAAP. ANS:

Developed product technology Royalty agreements Customer relationships Total impairment loss 9.

BV > Sum of Undiscounted CFs? N/A Yes No

$750 – $550 = $115 - $85 = --

Loss $200 30 0 $230

Topic: Goodwill allocation and impairment LO 3 Primera Company acquired Stargaze Corporation on January 1, 2024, at a cost of $32,000. Stargaze consists of three reporting units, Uno, Dos, and Tres. Relevant data for the acquisition is as follows: Uno Dos Tres Fair value of identifiable tangible and intangible assets $25,000 $11,000 $14,000 Fair value of liabilities 15,000 9,000 6,000 Fair value of reporting unit 20,000 6,000 10,000 On December 31, 2024, the following amounts were estimated: Uno Book value of unit $21,500 Fair value of unit 22,000

Dos $ 4,500 3,500

Tres $ 10,000 9,500

Required a. Determine the total goodwill and its allocation to reporting units at January 1, 2024. b. Calculate the goodwill impairment loss for 2024, if any. Assume that it is more likely than not that goodwill is impaired in all three reporting units.

Test Bank, Chapter 4

© Cambridge Business Publishers, 2023 4-41

ANS: a.

Fair value of identifiable assets acquired Fair value of liabilities assumed Fair value of net identifiable assets acquired Acquisition cost Goodwill

Fair value of identifiable assets Liabilities Fair value of identifiable net assets Fair value of reporting unit Tentative goodwill 25% reduction Goodwill allocation

$ 50,000 (30,000) 20,000 32,000 $ 12,000

Uno $25,000 15,000

Dos $ 11,000 9,000

Tres $14,000 6,000

10,000 20,000 10,000 (2,500) $ 7,500

2,000 6,000 4,000 (1,000) $ 3,000

8,000 10,000 2,000 (500) $ 1,500

Uno 22,000 21,500 $ 0

Dos 3,500 4,500 $ 1,000

Tres 9,500 10,000 $ 500

b. Fair value of unit Book value of unit Impairment loss

Total goodwill impairment for 2024 = $1,500. 10.

Topic: Goodwill impairment LO 3 Millbrook Industries reports $6,700 million in goodwill, allocated to the following reporting units (in millions): U.S. Retail $5,000 International 150 Bakeries and Food Service 1,550 Total $6,700 At the end of 2024, Millbrook determines that it is more likely than not that goodwill is impaired for all three reporting units. It collects the following information (in millions): Reporting unit U.S. Retail International Bakeries and Food Service

© Cambridge Business Publishers, 2023 4-42

Fair Value $45,000 3,000 10,000

Book Value $46,000 3,125 9,500

Advanced Accounting, 5th Edition

Required Calculate the total goodwill impairment loss for 2024, following U.S. GAAP. ANS (in millions):

Fair value Book value Goodwill impairment loss

U.S. Retail $45,000 46,000 $1,000

International $3,000 3,125 $ 125

Bakeries and Food Service $10,000 9,500 $ 0

Total impairment loss is $1,000 + $125 = $1,125 11.

Topic: Complete equity method and eliminating entries, first year LO 1, 4 On January 1, 2024, Panadrone Inc. acquired all of the stock of Skyline Telecom for $75,000 in cash. At the date of acquisition, Skyline’s shareholders’ equity accounts were as follows: Common stock, $1 par……………………………………………………………………….. $ 1,000 Additional paid-in capitial………………………………………………………………….. 14,000 Retained earnings……………………………………………………………………………… (4,900) Treasury stock…………………………………………………………………………………… (100) Total………………………………………………………………………………………………….. $ 10,000 Both companies have a December 31 year-end. At the date of acquisition, Skyline’s reported net assets had book values approximating fair value. However, it had previously unreported indefinite life identifiable intangibles valued at $25,000, meeting ASC Topic 805 requirements for capitalization. Goodwill from this acquisition was impaired by $1,000 in 2024. Skyline reported net income of $1,500 in 2024, and declared no dividends. Panadrome uses the complete equity method to report its investment in Skyline on its own books. Required a. Calculate the original amount of goodwill for this acquisition. b. Calculate equity in net income of Skyline, reported on Panadrone’s books in 2024. c. Prepare eliminating entries (C), (E), (R) and (O), required to consolidate Panadrone’s trial balance accounts with those of Skyline on December 31, 2024. ANS: a. Acquisition cost Book value Excess of acquisition cost over book value Identifiable intangibles Goodwill

$ 75,000 (10,000) 65,000 (25,000) $ 40,000

b. Reported net income Impairment loss Equity in net income

$ 1,500 (1,000) $ 500

Test Bank, Chapter 4

© Cambridge Business Publishers, 2023 4-43

c. (C) Equity in net income of Skyline Investment in Skyline

500 500

(E) Common stock, $1 par Additional paid-in capital Retained earnings, January 1 Treasury stock Investment in Skyline

12.

1,000 14,000 4,900 100 10,000

(R) Identifiable intangibles Goodwill Investment in Skyline

25,000 40,000

(O) Impairment loss Goodwill

1,000

65,000

1,000

Topic: Equity method, consolidation eliminating entries, end of first year LO 1, 4 Pacific Corporation acquired all of the voting stock of Seagate Inc. at an acquisition cost of $96.9 million on January 1, 2024. Seagate’s book value at the date of acquisition was $75 million, consisting of $10 million in capital stock, $60 million in retained earnings, and $5 million in AOCI. Seagate’s identifiable net assets were revalued as follows: Plant assets, net Customer lists Bonds payable

Fair Value $15,000,000 1,800,000 1,000,000

Book Value $25,000,000 0 1,100,000

10-year life 3-year life 5-year life

During 2024, Seagate reported net income of $4,000,000 and other comprehensive income of $80,000. No revaluations were impaired. The bond discount is straight-line amortized. Pacific reports its investment in Seagate on its own books using the complete equity method. Required a. Calculate equity in net income for 2024, reported on Pacific’s books. b. Prepare eliminating entries (C), (E), (R) and (O), to consolidate the trial balances of Pacific and Seagate at December 31, 2024. Assume revaluation write-offs of customer lists and plant assets are reported as adjustments to operating expenses, while the write-off of the bonds revaluation is an adjustment to nonoperating expenses.

© Cambridge Business Publishers, 2023 4-44

Advanced Accounting, 5th Edition

ANS: a.

b.

Reported net income Plant asset revaluation write-off Customer lists amortization Bonds payable discount amortization Equity in net income

$10,000,000/10 $1,800,000/3 $100,000/5

(C) Equity in net income Equity in OCI

$4,000,000 1,000,000 (600,000) (20,000) $4,380,000 4,380,000 80,000

Investment in Seagate (E) Capital stock Retained earnings, beginning AOCI, beginning

4,460,000

10,000,000 60,000,000 5,000,000 Investment in Seagate

(R) Bonds payable Customer lists Goodwill

75,000,000

100,000 1,800,000 30,000,000 Plant assets, net Investment in Seagate

10,000,000 21,900,000

Goodwill calculation: Acquisition cost Book value Excess Revaluations: Plant assets Customer lists Bonds payable Goodwill

$96,900,000 75,000,000 21,900,000 $(10,000,000) 1,800,000 100,000

(8,100,000) $30,000,000

(O) Plant assets, net Nonoperating expenses

1,000,000 20,000 Customer lists Bonds payable Operating expenses

Test Bank, Chapter 4

600,000 20,000 400,000

© Cambridge Business Publishers, 2023 4-45

13.

Topic: Equity method, consolidation eliminating entries, first year LO 1, 4 Prism Corporation acquires the voting stock of Streetspace Inc. on January 1, 2024, for $80,000 in cash. Streetspace’s book value at the date of acquisition was: Common stock, $1 par Additional paid-in capital Retained earnings Accumulated other comprehensive loss Total

$

100 5,900 6,000 (200) $11,800

All of Streetspace’s recorded assets and liabilities are carried at amounts approximating fair value, but it has previously unrecorded customer-related intangible assets valued at $40,000 that are capitalizable under the requirements of ASC Topic 805. These intangibles have an estimated life of 5 years, straight-line. Streetspace reports net income of $12,000 and other comprehensive income of $50 for 2024, and declares and pays dividends of $1,500. It is determined through impairment testing that acquired goodwill is impaired by $1,000 and the customer-related intangible assets are not impaired. Prism uses the complete equity method to account for its investment in Streetspace on its own books. Required a. Calculate the amount Prism reports for 2024 as equity in net income of Streetspace on its own books. b. Present, in journal entry form, the four eliminating entries needed to consolidate the trial balances of Prism and Streetspace at December 31, 2024. Revaluation write-offs are adjustments to operating expenses. ANS: a.

b.

Streetspace’s reported net income Less amortization of previously unreported intangibles Less goodwill impairment loss Equity in net income of Streetspace

$ 12,000 (8,000) (1,000) $ 3,000

(C) Equity in NI of Streetspace Equity in OCI of Streetspace

3,000 50 Dividends Investment in Streetspace

(E) Common stock Additional paid-in capital Retained earnings, beg.

100 5,900 6,000 AOCL, beg. Investment in Streetspace

© Cambridge Business Publishers, 2023 4-46

1,500 1,550

200 11,800

Advanced Accounting, 5th Edition

(R) ID intangible assets Goodwill

40,000 28,200 Investment in Streetspace

68,200

Goodwill at acquisition = $80,000 - $11,800 - $40,000 = $28,200. (O) Operating expenses

9,000 ID intangible assets Goodwill

14.

Topic: Equity method, acquisition cost, consolidation eliminating entries, first year LO 1, 4 On January 2, 2025, Park issued no-par capital stock with a market value of $1,000 for all of the voting stock of Sun. Registration fees in connection with issuing the stock are $100, paid in cash. Consulting, accounting, and legal fees connected with the merger are $250, paid in cash. In addition, Park enters into an earnings contingency agreement, whereby Park will pay the former shareholders of Sun an additional amount if Sun’s performance meets certain minimum levels. The present value of the contingency is estimated at $200. Sun Corporation’s trial balance at the date of acquisition is as follows:

Cash and receivables Inventories Property, plant and equipment, net Accounts payable Long-term debt Capital stock Treasury stock Retained earnings Accumulated other comprehensive income Total

Dr (Cr) $ 400 500 4,500 (300) (3,800) (1,200) 50 (135) (15) $ 0

An analysis of Sun’s assets and liabilities reveals that book values of some reported items do not reflect their fair values at the date of acquisition: • Inventories are undervalued by $300. • Property, plant and equipment is overvalued by $1,000. • Long-term debt is undervalued by $50. Acquisition-date inventories were sold in 2025. Property, plant and equipment has a 10-year remaining life, straight-line. The long-term debt has an average remaining term of two years, and the premium is straight-line amortized.

Test Bank, Chapter 4

© Cambridge Business Publishers, 2023 4-47

8,000 1,000

The following items are not currently reported on Sun’s balance sheet: • Favorable lease agreements, valued at $25. • Signed customer contracts for product development, valued at $22. • In-process research and development, valued at $120. • There are lawsuits pending against Sun. The best estimate of likely losses on these lawsuits, at present value, is $7. The in-process research and development is an indefinite life intangible. The lease agreements have limited lives of 5 years, and customer contracts have limited lives of two years, both amortized on a straight-line basis. It is now December 31, 2025. Sun reported net income of $500, an other comprehensive loss of $5, and declared no dividends. Required a. Calculate Park’s acquisition cost for its investment in Sun, and the initial balance for goodwill. b. Calculate equity in net income of Sun for 2025. c. Calculate the December 31, 2025 balance in Investment in Sun, on Park’s books. d. Prepare the consolidation working paper eliminating entries for 2025. ANS: a.

Park’s entry to record the acquisition is: Investment in Sun Merger expenses Capital stock Earnings contingency liability Cash Therefore, its acquisition cost is $1,200. Acquisition cost Book value Revaluations: Inventories Plant & equipment Long-term debt Lease agreements Customer contracts In-process R&D Lawsuit liability Goodwill

b.

Sun’s net income Inventory write-off Plant & equipment write-off Long-term debt write-off Lease agreements write-off Customer contracts write-off Equity in net income

© Cambridge Business Publishers, 2023 4-48

$ 300 (1,000) (50) 25 22 120 (7)

$(1,000)/10 $(50)/2 $25/5 $22/2

1,200 250 900 200 350 $1,200 1,300 (100)

(590) $ 490 $ 500 (300) 100 25 (5) (11) $ 309

Advanced Accounting, 5th Edition

c.

d.

Acquisition cost Equity in net income Other comprehensive loss Investment balance, December 31, 2025

$1,200 309 (5) $1,504

(C) Equity in net income

309 Equity in OCL Investment in Sun

(E) Capital stock Retained earnings, beg. AOCI, beg.

5 304 1,200 135 15

Treasury stock Investment in Sun (R) Inventories Lease agreements Customer contracts In-process R&D Goodwill Investment in Sun

50 1,300 300 25 22 120 490 100

Plant & equipment Long-term debt Lawsuit liability (O) Cost of goods sold Amortization expense Plant & equipment Long-term debt

300 16 100 25 Inventories Lease agreements Customer contracts Depreciation expense Interest expense

Test Bank, Chapter 4

1,000 50 7

300 5 11 100 25

© Cambridge Business Publishers, 2023 4-49

15.

Topic: Acquisition cost, complete equity method, eliminating entries, second year LO 1, 4 Photec Corporation acquires the voting stock of Solarcentury Inc. on January 1, 2024. In preparing to consolidate the trial balances of Photec and Solarcentury at December 31, 2025 (two years after the acquisition), you assemble the following information: Date-of-acquisition information: 1. Value of stock issued to Solarcentury shareholders: $79,500. 2. Direct merger costs are $600 and stock registration fees are $250, all paid in cash. 3. Solarcentury shareholders’ equity: capital stock, $1,000; retained earnings, $16,000; accumulated other comprehensive income, $400. 4. Fair value of earnings contingency agreement to be paid in cash: $500. 5. Fair value of previously unrecorded identifiable intangibles (5-year life): $18,000. There are no revaluations of Solarcentury’s reported net assets. Information for 2024 and 2025: 6. Solarcentury’s reported net income for 2024: $6,000; for 2025: $7,500. 7. Solarcentury’s reported other comprehensive income for 2024: $150 gain; for 2025: $120 loss. 8. Solarcentury declared and paid dividends of $400 each year. 9. Goodwill and identifiable intangibles are not impaired in 2024; goodwill is impaired by $500 in 2025. Required a. Prepare the 2024 and 2025 journal entries made by Photec to record its investment, using the complete equity method. b. Prepare the consolidation eliminating entries (C), (E), (R) and (O), made at December 31, 2025. ANS: a. The acquisition entry is as follows: Investment in Solarcentury Merger expenses Capital stock Contingent consideration liability Cash Calculation of equity in net income: Solarcentury’s reported net income Revaluation write-off: Identifiable intangibles $18,000/5 Goodwill impairment loss Equity in net income of Solarcentury

© Cambridge Business Publishers, 2023 4-50

80,000 600 79,250 500 850 2024 $ 6,000

2025 $ 7,500

(3,600) -$ 2,400

(3,600) (500) $ 3,400

Advanced Accounting, 5th Edition

Photec’s equity method entries for 2024 and 2025: 2024: Investment in Solarcentury Equity in net income of Solarcentury Equity in OCI of Solarcentury

2,550 2,400 150

Cash

400 Investment in Solarcentury

400

2025: Investment in Solarcentury Equity in OCL of Solarcentury Equity in net income of Solarcentury

3,280 120 3,400

Cash

400 Investment in Solarcentury

b.

400

Consolidation working paper eliminating entries for 2025: (C) Equity in net income of Solarcentury Equity in OCL of Solarcentury Dividends – Solarcentury Investment in Solarcentury

3,400 120 400 2,880

(E) Capital stock, 1/1 Retained earnings, 1/1 (1) Accumulated OCI, 1/1 (2) Investment in Solarcentury (1) (2)

1,000 21,600 550 23,150

$16,000 + $6,000 - $400 = $21,600. $400 + $150 = $550.

(R) Identifiable intangibles (3) Goodwill (4) Investment in Solarcentury (3) (4)

59,000

$18,000 - $3,600 = $14,400. $80,000 - $1,000 - $16,000 - $400 - $18,000 - = $44,600.

(O) Amortization expense Goodwill impairment loss Identifiable intangibles Goodwill

Test Bank, Chapter 4

14,400 44,600

3,600 500 3,600 500

© Cambridge Business Publishers, 2023 4-51

16.

Topic: Equity method, consolidation eliminating entries, second year LO 1, 4 On January 1, 2023, Penn Corporation acquired the voting stock of Shea Company at an acquisition cost of $116,000. Some of Shea’s assets and liabilities at the date of acquisition had fair values that were different from reported values, as follows:

Plant and equipment, net Favorable leaseholds Warranty liabilities

Book Value Dr (Cr) $300,000 0 0

Fair Value Dr (Cr) $ 220,000 35,000 (25,000)

At the date of acquisition, the plant and equipment had a 20-year remaining life, and the favorable leases had a 5-year remaining life, straight-line. Goodwill from this acquisition is not impaired as of the end of 2024. Warranty payments connected with the revaluation liability were $1,000 in 2023 and $2,000 in 2024. Shea’s total shareholders’ equity at January 1, 2023 appears below: Capital stock $ 20,000 Retained earnings 45,000 Accumulated other comprehensive income 1,000 Total $ 66,000 Shea did not declare any dividends in 2023 or 2024. It is now December 31, 2024 (2 years later). Penn uses the complete equity method to account for its investment. Shea’s December 31, 2024 trial balance is as follows: Dr (Cr) Current assets $ 22,000 Plant and equipment, net 270,000 Identifiable intangible assets – Goodwill – Liabilities (200,000) Capital stock (20,000) Retained earnings, beginning (55,000) Accumulated other comprehensive income, beginning (1,200) Sales revenue (1,000,000) Cost of goods sold 800,000 Operating expenses 185,000 Other comprehensive income (800) Total $ 0 Required a. Calculate the goodwill recognized with this acquisition. b. Calculate equity in net income for 2023 and 2024, reported on Penn’s books. c. Calculate the December 31, 2024 balance for Investment in Shea, reported on Penn’s books. d. Present consolidation eliminating entries (C), (E), (R) and (O) to consolidate the December 31, 2024 trial balances of Penn and Shea. © Cambridge Business Publishers, 2023 4-52

Advanced Accounting, 5th Edition

ANS: a.

Acquisition cost Book value Excess Revaluations: Plant and equipment Favorable leaseholds Warranty liabilities Goodwill

$116,000 66,000 50,000 $(80,000) 35,000 (25,000)

(70,000) $120,000

b. 2023 $10,000

c.

d.

2024 $15,000

Reported net income Revaluation write-offs: Plant and equipment 4,000 4,000 Favorable leases (7,000) (7,000) Warranties 1,000 2,000 Equity in net income $ 8,000 $14,000 Note: 2023 NI = $55,000 - $45,000; 2024 NI = $1,000,000 - $800,000 - $185,000. Investment, January 1, 2023 Equity in net income, 2023 Equity in net income, 2024 Change in AOCI, 2023-2024 Investment, December 31, 2024

$116,000 8,000 14,000 1,000 $139,000

(C) Equity in net income Equity in OCI

14,000 800 Investment in Shea

(E) Capital stock Retained earnings, beginning AOCI, beginning

14,800

20,000 55,000 1,200 Investment in Shea

(R) Favorable leaseholds Goodwill

76,200

28,000 120,000 Plant and equipment, net Warranty liabilities Investment in Shea

(O) Operating expenses Plant and equipment, net Warranty liabilities

1,000 4,000 2,000 Favorable leases

Test Bank, Chapter 4

76,000 24,000 48,000

7,000

© Cambridge Business Publishers, 2023 4-53

17.

Topic: Equity method, consolidation eliminating entries, third year LO 1, 4 Playlink Corporation acquired the voting stock of Squaredeal Company on January 1, 2023 for $10,000 in cash. Squaredeal’s book value was $3,700 at the date of acquisition, comprised of the following accounts: Dr (Cr) Capital stock $ (2,500) Retained earnings, beginning (1,300) Accumulated other comprehensive loss 100 Total $ (3,700) The $6,300 excess of acquisition cost over book value was allocated as follows:

Inventory Plant & equipment Lease agreements Trademarks Goodwill

Fair Value less Book Value $ (200) 1,000 2,000 3,000 500

Total

Subsequent Measurement Sold in 2023 25-year remaining life, straight-line 2-year remaining life, straight-line 6-year remaining life, straight-line $100 total impairment during 2023-2024, no impairment in 2025

$6,300

It is now December 31, 2025, three years since the acquisition. Playlink uses the complete equity method to account for its investment in Squaredeal on its own books. Squaredeal’s trial balance at December 31, 2025 is as follows: Dr (Cr) Cash, receivables $ 600 Inventory 1,400 Plant & equipment, net 8,400 Liabilities (1,425) Capital stock (2,500) Retained earnings, beginning (5,000) Accumulated other comprehensive income, beg. (150) Dividends 200 Sales revenue (15,000) Cost of goods sold 12,000 Operating expenses 1,500 Other comprehensive income (25) Total $ 0 Required a. Calculate 2025 equity in net income of Squaredeal, appearing in Playlink’s December 31, 2025 trial balance. b. Prepare a schedule calculating Playlink’s December 31, 2025 Investment in Squaredeal balance. c. Prepare the eliminating entries necessary to consolidate the trial balances of Playlink and Squaredeal at December 31, 2025. © Cambridge Business Publishers, 2023 4-54

Advanced Accounting, 5th Edition

ANS: a.

b.

c.

Squaredeal’s reported net income Adjustments: Plant & equipment Trademarks Equity in net income of Squaredeal

$1,500 (40) (500)

Acquisition cost Change in retained earnings, 2023-2024 Change in AOCI, 2023-2024 Revaluation write-offs, 2023-2024: Inventory Plant & equipment Lease agreements Trademarks Goodwill Investment balance, January 1, 2025 Equity in net income, 2025 Equity in OCI, 2025 Dividends Investment balance, December 31, 2025

(540) $ 960

$5,000 - $1,300 = $100 + $150 = Entire amount ($1,000/25) x 2 Entire amount ($3,000/6) x 2

(C) Equity in net income Equity in OCI

$ 10,000 3,700 250 200 (80) (2,000) (1,000) (100) 10,970 960 25 (200) $ 11,755

960 25 Dividends Investment in Squaredeal

(E) Capital stock Retained earnings, beginning AOCI, beginning

200 785

2,500 5,000 150 Investment in Squaredeal

(R) Plant & equipment, net Trademarks Goodwill

7,650

920 2,000 400 Investment in Squaredeal

(O) Operating expenses

540 Plant & equipment, net Trademarks

Test Bank, Chapter 4

3,320

40 500

© Cambridge Business Publishers, 2023 4-55

18.

Topic: Equity method, consolidation eliminating entries, third year LO 1, 4 Prism Corporation acquires the voting stock of Streetspace Inc. on January 1, 2024, for $80,000 in cash. Streetspace’s book value at the date of acquisition was: Common stock, $1 par Additional paid-in capital Retained earnings Accumulated other comprehensive loss Total

$ 2,000 4,000 6,000 (200) $11,800

All of Streetspace’s recorded assets and liabilities are carried at amounts approximating fair value, but it has previously unrecorded customer-related intangible assets valued at $40,000 that are capitalizable under the requirements of ASC Topic 805. These intangibles have an estimated life of 5 years, straight-line. It is determined through impairment testing that acquired goodwill is impaired by $1,000 in 2024, and is unimpaired in 2025 and 2026. Customer-related intangible assets are not impaired during the three years following acquisition. Streetspace reports net income, other comprehensive income, and declared and paid dividends as follows for 2024, 2025, and 2026:

Net income Other comprehensive income (loss) Dividends

2024 $12,000 50 1,500

2025 $8,000 (40) 1,500

2026 $10,000 90 1,500

Prism uses the complete equity method to account for its investment in Streetspace on its own books. Required a. Calculate the amount Prism reports for 2026 as equity in net income of Streetspace on its own books. b. Present, in journal entry form, the four eliminating entries needed to consolidate the trial balances of Prism and Streetspace at December 31, 2026. Revaluation write-offs are adjustments to operating expenses. ANS: a.

Streetspace’s reported net income Less amortization of previously unreported intangibles Equity in net income of Streetspace

© Cambridge Business Publishers, 2023 4-56

$10,000 (8,000) $ 2,000

Advanced Accounting, 5th Edition

b.

(C) Equity in NI of Streetspace Equity in OCI of Streetspace

2,000 90 Dividends Investment in Streetspace

(E) Common stock Additional paid-in capital Retained earnings, beg.

1,500 590

2,000 4,000 23,000

AOCL, beg. 190 Investment in Streetspace 28,810 Retained earnings, beginning of 2026 = $6,000+$12,000-$1,500+$8,000-$1,500 = $23,000 AOCL, beginning of 2026 = $(200) + $50 - $40 = $(190) (R) ID intangible assets Goodwill

24,000 27,200

Investment in Streetspace Goodwill at acquisition = $80,000 - $11,800 - $40,000 = $28,200; Goodwill to beginning of 2026 = $28,200 - $1,000 = $27,200. (O) Operating expenses

8,000 ID intangible assets

19.

51,200

8,000

Topic: Consolidation eliminating entries, four years since acquisition LO 4 A parent acquired the voting stock of its subsidiary on January 1, 2022. The excess of acquisition cost over the subsidiary’s book value was allocated as indicated in the table below.

Property

Fair Value less Book Value $(100,000)

Identifiable intangible assets

60,000

Goodwill

800,000

Long-term debt

20,000

Subsequent Measurement 10-year life, straight-line, no impairment in any year 3-year life, straight-line, no impairment in any year Total impairment of $100,000 in years 20222024; no impairment in 2025 5-year life, straight-line

It is now December 31, 2025, the fourth year since acquisition. Required a. Prepare eliminating entry (R) on the December 31, 2025 consolidation working paper. b. Prepare eliminating entry (O) on the December 31, 2025 consolidation working paper. Use “operating expenses” for any adjustments to depreciation, amortization, or impairment losses. Use “nonoperating expenses” for any adjustments to interest expense.

Test Bank, Chapter 4

© Cambridge Business Publishers, 2023 4-57

ANS: a.

(R) Goodwill

700,000 Property 70,000 Long-term debt 8,000 Investment in subsidiary 622,000 To recognize revaluations as of the beginning of 2025. Note: ID intangibles revaluation is completely written off as of the beginning of 2025. b.

(O) Property Long-term debt

10,000 4,000

Operating expenses Nonoperating expenses To write off the revaluations for 2025. 20.

10,000 4,000

Topic: Investment balance and consolidation eliminating entries, four years since acquisition LO 1, 2, 4 A parent acquired all of the voting stock of its subsidiary at an acquisition cost of $20,000. The subsidiary’s book value at the date of acquisition was $4,000, consisting of $500 capital stock, $3,400 retained earnings, and $100 accumulated other comprehensive income. The $16,000 difference between acquisition cost and book value was attributed as follows: Plant and equipment Favorable lease agreements Developed technology Goodwill Total

$(2,000) 4,200 3,000 10,800 $16,000

5-year life, straight-line 6-year life, straight-line 3-year life, straight-line Not impaired

It is now four years since the acquisition, and the parent is consolidating the subsidiary’s trial balance. The subsidiary’s book value as of the beginning of the year is $8,700, consisting of $500 capital stock, $8,000 retained earnings, and $200 accumulated other comprehensive income. For the current year, the subsidiary reported net income of $1,500 and other comprehensive income of $15. Required a. The parent uses the complete equity method to report its investment in subsidiary on its own books. Calculate the investment balance as of the end of the fourth year. b. Prepare eliminating entries (C), (E), (R) and (O) to consolidate the trial balances of the parent and subsidiary at the end of the fourth year.

© Cambridge Business Publishers, 2023 4-58

Advanced Accounting, 5th Edition

ANS: a. Acquisition cost Change in RE and AOCI to beginning of year Revaluation write-offs to beginning of year: P&E Favorable lease agreements Developed technology Investment, beginning of year Equity in NI for year Equity in OCI for year Investment, end of year b.

$8,200 - $3,500 $((2,000)/5) x 3 $((4,200/6) x 3

$1,500 + $(2,000/5) - $(4,200/6)

(C) Equity in NI Equity in OCI

$20,000 4,700 1,200 (2,100) (3,000) 20,800 1,200 15 $22,015

1,200 15 Investment in subsidiary

(E) Capital stock Retained earnings, beg. AOCI, beg.

1,215

500 8,000 200 Investment in subsidiary

(R) Favorable leases Goodwill

8,700

2,100 10,800 P&E Investment in subsidiary

(O) Operating expenses P&E

800 12,100

300 400 Favorable leases

21.

Topic: Consolidation working paper, first year LO 1, 4 Portobello Company bought all of Strata Company’s voting stock on January 1, 2024 for $25,000. Strata’s assets and liabilities at the date of acquisition were reported at amounts approximating fair value. However, previously unreported identifiable intangibles, meeting the criteria for capitalization, are valued at $4,000. These intangibles have indefinite lives, but testing reveals impairment of $500 in 2024. Goodwill reported for this acquisition is not impaired in 2024. Portobello uses the complete equity method to account for its investment in Strata on its own books. Trial balances for both companies at December 31, 2024 are in the consolidation working paper below.

Test Bank, Chapter 4

© Cambridge Business Publishers, 2023 4-59

700

Current assets Property & equipment, net Identifiable intangible assets Investment in Strata Goodwill Liabilities Capital stock Retained earnings, Jan. 1 Accumulated other comprehensive loss (income), Jan. 1 Treasury stock Dividends Sales revenue Equity in NI of Strata Equity in OCI of Strata Cost of goods sold Operating expenses Other comprehensive loss (income) Total

Portobello Dr (Cr) $ 15,000 120,000

Strata Dr (Cr) $10,000 60,000

-27,600 -(89,950) (30,000) (41,000)

---(58,900) (1,000) (7,050)

1,000 2,000 500 (85,000) (2,500) (100) 60,000 22,000

(50) 100 – (40,000) – -25,000 12,000

$

450 0

$

Dr

Cr

Consol. Dr (Cr)

(100) 0

Required a. Calculate the initial goodwill recognized for this acquisition. b. Calculate equity in net income, reported on Portobello’s books, for 2024. c. Fill in the working paper to consolidate the trial balances of the two companies at December 31, 2024. d. Prepare, in good form, the 2024 consolidated statement of income and comprehensive income and the consolidated balance sheet at December 31, 2024. ANS: a.

b.

Acquisition cost Book value, date of acquisition Excess of acquisition cost over book value Revaluations: ID intangibles Goodwill

$25,000 8,000 17,000 4,000 $13,000

Strata’s reported net income Revaluation write-off: ID intangibles Equity in NI

$3,000 (500) $2,500

© Cambridge Business Publishers, 2023 4-60

Advanced Accounting, 5th Edition

c.

December 31, 2024 consolidation working paper

Current assets Property & equipment, net Identifiable intangible assets Investment in Strata

Portobello Dr (Cr) $ 15,000

Strata Dr (Cr) $ 10,000

120,000

60,000

-27,600

---

Goodwill Liabilities Capital stock Retained earnings, Jan. 1 Accumulated other comprehensive loss (income), Jan. 1 Treasury stock Dividends Sales revenue Equity in NI of Strata Equity in OCI of Strata Cost of goods sold Operating expenses Other comprehensive loss (income) Total

$

Dr

Cr

180,000 (R)

4,000

-(89,950) (30,000) (41,000)

-- (R) 13,000 (58,900) (1,000) (E) 1,000 (7,050) (E) 7,050

1,000 2,000 500 (85,000) (2,500) (100) 60,000 22,000

(50) 100 – (40,000) --25,000 12,000

450 0

$

(100) 0

Consol. Dr (Cr) $ 25,000

(E)

500(O) 2,600 (C) 8,000 (E) 17,000 (R)

13,000 (148,850) (30,000) (41,000)

50 100 (E)

(C) (C)

2,500 100

(O)

500

$28,200

3,500 --

$28,200

1,000 2,000 500 (125,000) --85,000 34,500

$

350 0

d. Consolidated Statement of Income and Comprehensive Income For the year ending December 31, 2024 Sales revenue Cost of goods sold Gross margin Operating expenses Net income Other comprehensive loss Comprehensive income

Test Bank, Chapter 4

$ 125,000 (85,000) 40,000 (34,500) 5,500 (350) $ 5,150

© Cambridge Business Publishers, 2023 4-61

Consolidated Balance Sheet December 31, 2024 Assets Liabilities Current assets $ 25,000 Property & equipment, net 180,000 Equity Identifiable intangible assets 3,500 Capital stock Goodwill 13,000 Retained earnings (1) Accumulated other comprehensive loss (2) Treasury stock ________ Total equity Total assets $ 221,500 Total liabilities & equity

$ 148,850

30,000 46,000 (1,350) (2,000) 72,650 $ 221,500

(1) $41,000 + $5,500 - $500 = $46,000 (2) $1,000 + $350 = $1,350

22.

Topic: Consolidation working paper, first year LO 4 Portsdown Company bought all of Speedwell Company’s voting stock on January 1, 2024 for $125,000. Fair value information on Speedwell’s assets and liabilities at the date of acquisition is as follows: • • • • •

Inventories are overvalued by $5,000. Speedwell uses FIFO to report its inventories, and acquisition-date inventories were sold in 2024. Property and equipment is overvalued by $20,000. P&E has a 10-year remaining life, straight-line. Liabilities are understated by $500. Assume a 5-year remaining life, and straight-line amortization of any premium/discount. Previously unreported identifiable intangibles are valued at $35,000. These intangibles have indefinite lives, but testing reveals impairment of $3,000 in 2024. Goodwill reported for this acquisition is not impaired in 2024.

Portsdown uses the complete equity method to account for its investment in Speedwell on its own books. Trial balances for both companies at December 31, 2024 are in the consolidation working paper that follows.

© Cambridge Business Publishers, 2023 4-62

Advanced Accounting, 5th Edition

Current assets Property and equipment, net Identifiable intangibles Investment in Speedwell

Portsdown Dr (Cr) $ 15,000 90,000 -131,790

Speedwell Dr (Cr) $ 10,000 60,000 ---

Goodwill Liabilities Capital stock Retained earnings, Jan. 1 Accumulated OCI, Jan. 1 Sales revenue Equity in NI of Speedwell Equity in OCI of Speedwell Cost of goods sold Operating expenses Interest expense Other comprehensive income Total

-(156,600) (40,000) (29,000) (1,000) (84,000) (6,750) (40) 55,000 25,000 750 (150) $ 0

-(28,635) (15,000) (23,500) (175) (50,000) – -35,000 12,000 350 (40) $ 0

Dr

Cr

Consol Dr (Cr)

Required a. Fill in the working paper as necessary to consolidate the trial balances of the two companies. b. Compute the following consolidated balances: (1) 2024 net income (2) December 31, 2024 retained earnings (3) 2024 comprehensive income (4) December 31, 2024 accumulated other comprehensive income

Test Bank, Chapter 4

© Cambridge Business Publishers, 2023 4-63

ANS: a.

December 31, 2024 consolidation working paper Current assets Property and equipment, net Identifiable intangibles Investment in Speedwell Goodwill Liabilities Capital stock Retained earnings, Jan. 1 Accumulated OCI, Jan. 1 Sales revenue Equity in NI of Speedwell Equity in OCI of Speedwell Cost of goods sold Operating expenses Interest expense Other comprehensive income Total

b.

23.

(1) (2) (3) (4)

Portsdown Dr (Cr) $ 15,000

Speedwell Dr (Cr) $ 10,000

90,000 -131,790 -(156,600) (40,000) (29,000) (1,000) (84,000) (6,750) (40) 55,000 25,000 750

$

(150) 0

$

Dr (O)

5,000

60,000 ---

(O) (R)

2,000 35,000

-(28,635) (15,000) (23,500) (175) (50,000) --35,000 12,000 350

(R) (O) (E) (E) (E)

76,825 100 15,000 23,500 175

(C) (C)

6,750 40

(40) 0

(O)

3,000

______ $167,390

Consol Dr (Cr) $ 25,000

Cr 5,000 (R) 20,000 (R) 3,000 (O) 6,790 (C) 38,675 (E) 86,325 (R)

132,000 32,000 -76,825 (185,635) (40,000) (29,000) (1,000) (134,000) --85,000 38,000 1,000

500 (R)

5,000 (O) 2,000 (O) 100 (O) _______ $167,390

$

$134,000 - $85,000 - $38,000 - $1,000 = $10,000 $29,000 + $10,000 = $39,000 $10,000 + $190 = $10,190 $1,000 + $190 = $1,190

Topic: Consolidation working paper, second year LO 4 Powerplan Industries bought Springfield Inc.’s voting stock on January 1, 2023 for $42,000, when Springfield’s book value was $8,000. Fair value information on Springfield’s assets and liabilities at the date of acquisition is as follows: • • •

Property and equipment is overvalued by $7,000. P&E has a 10-year remaining life, straightline. Previously unreported identifiable intangibles are valued at $8,000. These intangibles have indefinite lives, but testing reveals impairment of $2,000 in 2023 and $1,000 impairment in 2024. Goodwill reported for this acquisition is not impaired in 2023, but is impaired by $3,000 in 2024.

Powerplan uses the complete equity method to account for its investment in Springfield on its own books. It is now December 31, 2024, two years since the acquisition. The consolidation working paper at December 31, 2024 follows.

© Cambridge Business Publishers, 2023 4-64

Advanced Accounting, 5th Edition

(190) 0

Current assets Property & equipment, net Identifiable intangibles Investment in Springfield Goodwill Liabilities Capital stock Retained earnings, Jan. 1 Treasury stock Dividends Sales revenue Equity in NI of Springfield Cost of goods sold Operating expenses Total

Powerplan Dr (Cr) $ 15,000 90,000 -44,900

Springfield Dr (Cr) $ 10,000 63,000 ---

-(76,200) (40,000) (30,000) 2,000 -(84,000) (1,700) 55,000 25,000 _______ $ 0

-(57,500) (5,000) (6,100) 100 500 (50,000) – 30,000 15,000 _______ $ 0

Dr

Cr

Consol Dr (Cr)

Required a. Prepare a schedule calculating the initial value of goodwill for this acquisition. b. Calculate Powerplan’s equity in net income of Springfield for 2024. c. Fill in the consolidation working paper as necessary to consolidate the trial balances of the two companies at December 31, 2024. ANS: a.

Acquisition cost Book value, date of acquisition Excess Fair value – book value: Plant and equipment, net Identifiable intangibles Goodwill

b.

Springfield’s 2024 reported net income Revaluation write-offs: P&E depreciation Identifiable intangibles impairment loss Goodwill impairment loss Equity in net income

Test Bank, Chapter 4

$ 42,000 (8,000) 34,000 $ (7,000) 8,000

1,000 $ 33,000

$ 5,000 700 (1,000) (3,000) $ 1,700

© Cambridge Business Publishers, 2023 4-65

c.

December 31, 2024 consolidation working paper Powerplan Dr (Cr) $ 15,000

Springfield Dr (Cr) $ 10,000

90,000 -44,900

63,000 ---

(O) (R)

700 6,000

Goodwill Liabilities Capital stock Retained earnings, Jan. 1 Treasury stock Dividends Sales revenue Equity in NI of Springfield Cost of goods sold Operating expenses

-(76,200) (40,000) (30,000) 2,000 -(84,000) (1,700) 55,000 25,000

-(57,500) (5,000) (6,100) 100 500 (50,000) -– 30,000 15,000

(R)

33,000

(E) (E)

5,000 6,100

Total

$

$

Current assets Property & equipment, net Identifiable intangibles Investment in Springfield

© Cambridge Business Publishers, 2023 4-66

0

0

Dr

Cr

6,300 (R) 1,000 (O) 1,200 (C) 11,000 (E) 32,700 (R) 3,000 (O)

100 (E) 500 (C) (C)

1,700

(O) (O)

1,000 3,000 $56,500

700 (O) _____ $56,500

Consol Dr (Cr) $ 25,000 147,400 5,000 -30,000 (133,700) (40,000) (30,000) 2,000 -(134,000) -85,000 43,300 _______ $ 0

Advanced Accounting, 5th Edition

24.

Topic: Consolidation working paper, fourth year LO 1, 4 On January 2, 2021, Putney Industries acquired all of Steico Corporation’s voting stock for $12,000. Steico’s book value at the date of acquisition was $6,000. Steico’s reported assets and liabilities had book values that approximated fair value at the date of acquisition, but it had previously unreported identifiable intangible assets (5-year life, straight-line) valued at $800. It is now December 31, 2024, four years after the date of acquisition. No impairment losses have occurred since acquisition for any revaluations. December 31, 2024 trial balances for Putney and Steico are shown in the consolidation working paper that follows.

Current assets Fixed assets, net ID intangibles Investment in Steico Goodwill Liabilities Capital stock Retained earnings, Jan. 1 AOCI, Jan. 1 Sales revenue Equity in NI—Steico Equity in OCI —Steico Cost of goods sold Operating expenses Other comprehensive income Total

Putney Dr (Cr) $ 3,030 49,300 -15,060

Steico Dr (Cr) $ 2,500 24,200 ---

-(22,000) (15,000) (27,900) (600) (25,000) (840) (50) 20,000 4,000

-(17,000) (500) (8,000) (150) (12,000) --8,000 3,000

________-$ 0

$

Dr

Cr

Consol. Dr (Cr)

(50) 0

Required a. Calculate 2024 equity in net income of Steico, reported on Putney’s separate books. Putney uses the complete equity method to account for its investment in Steico. b. Calculate the December 31, 2024 balance for Investment in Steico, reported on Putney’s separate books. c. Fill in the eliminating entries (C), (E), (R), and (O) to consolidate the accounts of the two companies at December 31, 2024, using the consolidation working paper. d. Present Putney’s consolidated statement of income and comprehensive income for 2024, and its consolidated balance sheet at December 31, 2024.

Test Bank, Chapter 4

© Cambridge Business Publishers, 2023 4-67

ANS: a.

b.

Steico’s reported net income Amortization expense $800/5 Equity in net income of Steico

$ 1,000 (160) $ 840

Acquisition cost Change in Steico’s RE and AOCI to beginning of 2024 (1) Revaluation write-off to beginning of 2024 (2) Investment, beginning of 2024 Equity in NI for 2024 Equity in OCI for 2024 Investment, end of 2024 (1) $500 + $8,000 + $150 - $6,000 = $2,650 (2) ($800/5) x 3 = $480

$12,000 2,650 (480) 14,170 840 50 $15,060

c. Current assets Fixed assets, net ID intangibles Investment in Steico Goodwill Liabilities Capital stock Retained earnings, Jan. 1 AOCI, Jan. 1 Sales revenue Equity in NI of Steico Equity in OCI of Steico Cost of goods sold Operating expenses Other comprehensive income Total

Putney Dr (Cr) $ 3,030 49,300 -15,060

Steico Dr (Cr) $ 2,500 24,200 -- (R) --

-(22,000) (15,000) (27,900) (600) (25,000) (840) (50) 20,000 4,000

-- (R) (17,000) (500) (E) (8,000) (E) (150) (E) (12,000) -- (C) -- (C) 8,000 3,000 (O)

5,200

(50) 0

___ $15,220

__ $

-0

$

Dr

Consol Dr (Cr) $ 5,530 73,500 160 --

Cr

320

160 (O) 890 (C) 8,650 (E) 5,520 (R)

5,200 (39,000) (15,000) (27,900) (600) (37,000) --28,000 7,160

500 8,000 150 840 50 160 _______ $15,220

$

d. Consolidated Statement of Comprehensive Income for 2024 Sales revenue Cost of goods sold Gross margin Operating expenses Net income Other comprehensive income Comprehensive income

© Cambridge Business Publishers, 2023 4-68

$ 37,000 (28,000) 9,000 (7,160) 1,840 50 $ 1,890

Advanced Accounting, 5th Edition

(50) 0

Assets Current assets Fixed assets, net Identifiable intangibles Goodwill

Total assets

Consolidated Balance Sheet December 31, 2024 Liabilities $ 5,530 73,500 Equity 160 Capital stock 5,200 Retained earnings (3) AOCI (4) ________ Total equity $ 84,390 Total liabilities & equity

$ 39,000

15,000 29,740 650 45,390 $ 84,390

(3) $27,900 + $1,840 = $29,740 (4) $600 + $50 = $650

25.

Topic: Consolidation working paper, sixth year LO 4 Pyroplex Corporation acquires the voting stock of Systembox Co. on January 1, 2019 at an acquisition cost of $15,300. Systembox’s trial balance at the date of acquisition is as follows, along with fair value information for its identifiable net assets: Systembox trial balance, January 1, 2019 (in thousands) Current assets Plant & equipment Patents Customer order backlog Trademarks Current liabilities Long-term liabilities Common stock Additional paid-in capital Retained earnings Total

Book Value Dr (Cr)

Fair Value Dr (Cr)

$

$

300 5,000 0 0 0 (200) (1,400) (400) (2,000) (1,300) $ 0

300 2,000 5,000 2,500 1,000 (200) (1,300)

Goodwill connected with this acquisition is $6,000. As of January 1, 2019, the revaluations have the following estimated lives (all straight-line): Plant & equipment Patents Customer order backlog Trademarks Goodwill Long-term liabilities

20 years 10 years 5 years 10 years Impairment to beginning of 2024: $200 Impairment in 2024: none 5 years

Pyroplex uses the complete equity method to account for its investment in Systembox on its own books. The December 31, 2024 trial balances for Pyroplex and Systembox (six years after acquisition) appear in the consolidation working paper provided. Test Bank, Chapter 4

© Cambridge Business Publishers, 2023 4-69

Pyroplex Dr (Cr) Current assets Plant & equipment, net Patents Investment in Systembox

Customer order backlog Trademarks Goodwill Current liabilities Long-term liabilities Common stock Additional paid-in capital Retained earnings, Jan. 1 Dividends Sales revenue Equity in net income of Systembox Cost of goods sold Operating expenses Total

$ 4,200 260,000

Systembox Dr (Cr) $

Dr

Cr

Consol. Dr (Cr)

650 20,000

17,600

(11,300)

(250)

(152,850) (4,000) (40,000) (70,000) 800 (25,000)

(8,900) (400) (2,000) (7,300) 100 (10,000)

(1,450) 15,000 7,000 $ 0

6,000 2,100 $ 0

Required a. Fill in the consolidation working paper as necessary to consolidate the trial balances of Pyroplex and Systembox at December 31, 2024. b. Present the 2024 consolidated income statement and the December 31, 2024 consolidated balance sheet, in good form.

© Cambridge Business Publishers, 2023 4-70

Advanced Accounting, 5th Edition

ANS: a. Current assets

Pyroplex Dr (Cr) $ 4,200

Systembox Dr (Cr) $ 650

Plant & equipment, net

260,000

20,000

Patents Investment in Systembox

Dr

Consol Dr (Cr)

Cr

$ 4,850 (O)

150

2,250 (R)

277,900

(R)

2,500

500 (O) 1,350 (C) 9,700 (E) 6,550 (R)

2,000 --

17,600

Customer order backlog

--

Trademarks Goodwill

(R)

500

(R)

5,800

100 (O)

400 5,800

Current liabilities

(11,300)

(250)

(11,550)

Long-term liabilities

(152,850)

(8,900)

(161,750)

Common stock

(4,000)

(400)

(E)

400

(4,000)

Additional paid-in capital

(40,000)

(2,000)

(E)

2,000

(40,000)

Retained earnings, Jan. 1

(70,000) 800 (25,000)

(7,300) 100 (10,000)

(E)

7,300

Dividends Sales revenue Equity in net income of Systembox Cost of goods sold Operating expenses Total

(1,450) 15,000 7,000 $ 0

6,000 2,100 $ 0

100 (C)

(C)

1,450

(O)

450 $20,550

______ $20,550

(70,000) 800 (35,000) -21,000 9,550 $ 0

b. Consolidated Income Statement for 2024 Sales revenue Cost of goods sold Gross margin Operating expenses Net income

$ 35,000 (21,000) 14,000 (9,550) $ 4,450 Consolidated Balance Sheet December 31, 2024

Assets Current assets Plant & equipment, net Identifiable intangible assets Goodwill

Total assets

$ 4,850 277,900 2,400 5,800

________ $290,950

Liabilities & equity Current liabilities Long-term liabilities Total liabilities

$ 11,550 161,750 173,300

Common stock Add’l paid-in capital Retained earnings (1) Total equity Total liabilities and equity

4,000 40,000 73,650 117,650 $290,950

(1) $70,000 + $4,450 - $800 = $73,650 Test Bank, Chapter 4

© Cambridge Business Publishers, 2023 4-71

26.

Topic: Identifiable intangibles impairment testing, IFRS LO 5 In its acquisition of Spitfire Company on January 1, 2023, Philips Industries identifies the following intangibles belonging to Spitfire but not reported on its books. All are separately capitalized per ASC Topic 805.

Licensing agreements Brand names Customer lists

Fair Value, January 1, 2023 $ 800 5,000 20,000

Useful Life 5 years, SL Indefinite 4 years, SL

Philips follows IFRS and is consolidating Spitfire at December 31, 2025 (3 years after the acquisition). No impairment losses were reported on the licensing agreements or customer lists in 2023 or 2024. An impairment loss of $1,000 was reported on the brand names in 2024. On December 31, 2025, the following information is available: Intangible Asset Licensing agreements Brand names Customer lists

Total Expected Future Cash Inflows, Undiscounted $ 350 3,000 5,100

Total Expected Future Cash Inflows, Discounted $ 280 2,500 4,200

Required What is the impairment loss for the identifiable intangibles for 2025, following IFRS? ANS:

Licensing agreements Brand names Customer lists Total impairment loss 27.

Book Value, December 31, 2025 $ 320 4,000 5,000

Fair Value, December 31, 2025 $ 280 2,500 4,200

Impairment Loss $ 40 1,500 800 $2,340

Topic: Goodwill impairment testing, IFRS and U.S. GAAP LO 3, 5 At the end of 2024, you are evaluating the goodwill of TeliaSonera, a company headquartered in Sweden, which uses IFRS. The amount of goodwill originally allocated to cash generating units, and goodwill impairment recognized through 2023 (in millions of Swedish krona, or SEK) are: Cash Generating Unit Mobility services Finland Mobility services Norway Broadband services Finland Eurasia Azerbaijan Eurasia Uzbekistan Total

© Cambridge Business Publishers, 2023 4-72

Original Goodwill SEK 20,000 25,000 10,000 5,000 2,500 SEK 62,500

Total Impairment Through 2023 SEK 0 7,000 2,000 0 500 SEK 9,500

Advanced Accounting, 5th Edition

Information on the CGUs as of 31 December 2024 (in millions of SEK): 31 Dec. 2024 31 Dec. 2024 Cash Generating Unit Fair Value of CGU Book Value of CGU Mobility services Finland SEK 100,000 SEK 110,000 Mobility services Norway 60,000 40,000 Broadband services Finland 16,000 12,000 Eurasia Azerbaijan 30,000 33,000 Eurasia Uzbekistan 20,000 21,000 Required (all amounts are in millions of SEK) a. What is TeliaSonera’s total goodwill impairment loss for 2024, following IFRS? b. TeliaSonera wants to know what its goodwill impairment loss would be for 2024, if it followed U.S. GAAP. Below is reporting unit information. Reporting Unit Mobility services Broadband services Eurasia Total

Original Goodwill SEK 45,000 10,000 7,500 SEK 62,500

Total Impairment Through 2023 SEK 7,000 2,000 500 SEK 9,500

Reporting Unit Mobility services Broadband services Eurasia

31 Dec. 2024 Fair Value of Unit SEK 160,000 16,000 50,000

31 Dec. 2024 Book Value of Unit SEK 150,000 12,000 54,000

Calculate TeliaSonera’s goodwill impairment loss for 2024, following U.S. GAAP. Assume that TeliaSonera skips the qualitative evaluation of goodwill. ANS: a.

Mobility services Finland Mobility services Norway Broadband services Finland Eurasia Azerbaijan Eurasia Uzbekistan Total impairment loss

Potential Loss = BV – FV of CGU SEK 10,000 FV>BV FV>BV 3,000 1,000

Exceeds BV of GW? no --no no

Potential Loss = BV – FV of CGU FV>BV FV>BV SEK 4,000

Exceeds BV of GW? --no

Loss SEK 10,000 --3,000 1,000 SEK 14,000

b.

Mobility services Broadband services Eurasia Total impairment loss Test Bank, Chapter 4

Loss --SEK 4,000 SEK 4,000

© Cambridge Business Publishers, 2023 4-73

28.

Topic: Goodwill impairment testing, U.S. GAAP and IFRS LO 3, 5 A company reports total goodwill of $4,000. On December 31, 2024, the following information is available for the reporting units of a company: North American Division $ 1,000 8,000 8,700

Book value of goodwill Fair value of division Book value of division

International Division $ 3,000 6,000 5,800

Required a. Management determines that it is more likely than not that book value exceeds fair value for both reporting units. What is the amount of goodwill impairment loss for 2024, following U.S. GAAP? b. Now assume the company follows IFRS and allocates the $4,000 in goodwill to the following cash generating units.

Book value of goodwill Fair value of division Book value of division

North American CGU $ 1,000 8,000 8,700

South American CGU $ 2,500 4,000 3,600

Asian CGU $ 500 2,000 2,200

What is the amount of goodwill impairment loss for 2024, following IFRS? ANS: a. NA Division Fair value $8,000 Book value 8,700 Potential GW impairment 700 Exceeds reported GW? No Actual GW impairment $ 700 Total goodwill impairment = $700

Int’l Division $6,000 5,800 None N/A $ 0

b. NA CGU Fair value $8,000 Book value 8,700 Potential GW impairment 700 Exceeds reported GW? No Actual GW impairment $ 700 Total goodwill impairment = $700 + $200 = $900

© Cambridge Business Publishers, 2023 4-74

SA CGU $4,000 3,600 None N/A $ 0

Asian CGU $2,000 2,200 200 No $ 200

Advanced Accounting, 5th Edition

29.

Topic: Consolidation eliminating entries, second year, cost method LO 6 Panaz Company acquires the voting stock of Sydney Company for $40,000 in cash on January 1, 2024. Panaz accounts for its investment using the cost method. Sydney’s shareholders’ equity at the date of acquisition was $2,500, consisting of capital stock of $1,900 and retained earnings of $600. The $37,500 excess of acquisition cost over book value is attributed as follows: Inventories $ 300 FIFO, sold in 2024 Plant & equipment 2,000 5-year life, straight-line ID intangibles 4,000 4-year life, straight-line Goodwill 31,200 Impaired by $50 in 2025 Total $37,500 It is now December 31, 2025. Sydney’s retained earnings at the beginning of 2025 was $2,500. Sydney reported net income of $1,800 and declared and paid dividends of $100 in 2025. Required Prepare the eliminating entries (C), (A), (E), (R), and (O), in journal form, necessary to consolidate the financial statements of Panaz and Sydney at December 31, 2025. ANS: The adjustment to beginning retained earnings to convert Panaz’ accounts to the complete equity method is calculated as follows: Change in Sydney retained earnings to beginning of year ($2,500 – $600) One year of revaluation write-offs: Increase in cost of goods sold Increase in depreciation expense ($2,000/5) Increase in amortization expense ($4,000/4) Credit to beginning retained earnings (C) Dividend income

$ 1,900 (300) (400) (1,000) $ 200 100

Dividends

100

(A) Investment in Sydney

200 Retained earnings, Jan 1

(E) Capital stock Retained earnings, 1/1

200

1,900 2,500 Investment in Sydney

(R) Plant & equipment, net Identifiable intangibles Goodwill

4,400

1,600 3,000 31,200 Investment in Sydney

Test Bank, Chapter 4

© Cambridge Business Publishers, 2023 4-75

35,800

(O) Depreciation expense Amortization expense Goodwill impairment loss

400 1,000 50 Plant & equipment, net Identifiable intangibles Goodwill

30.

400 1,000 50

Topic: Consolidation eliminating entries, third year, cost method LO 6 Panel Corporation acquired the voting stock of Shutter Company on January 1, 2023 for $15,000 in cash and stock. Shutter’s equity at the date of acquisition consisted of $1,000 in capital stock, a retained deficit of $300, and accumulated other comprehensive income of $50. Shutter’s net assets were reported at amounts approximating fair value, but Panel’s accountants identified the following unreported intangibles, capitalized per ASC Topic 805: Fair Value 1,000 2,250

Internet domain name Customer order backlog

Both intangibles are straight-line amortized over five years. There is no goodwill impairment in the first three years following acquisition. Shutter declared no dividends in 2025. Its shareholders’ equity at January 1, 2025 consists of $1,000 in capital stock, retained earnings of $1,200, and accumulated other comprehensive income of $65. Panel uses the cost method to report its investment in Shutter on its own books. Required a. Calculate goodwill arising from this acquisition. b. Prepare the consolidation working paper eliminating entries (A), (E), (R), and (O) for 2025, in journal form. ANS: Calculation of goodwill: Acquisition cost Book value Excess of cost over book value Revaluations: Internet domain name Customer order backlog Goodwill

$15,000 750 14,250 1,000 2,250

3,250 $11,000

Calculation of the amount needed to adjust Panel’s accounts to the complete equity method: Change in Shutter’s retained earnings to beginning of year ($300 + $1,200) $1,500 Identifiable intangibles write-off [$3,250/5] x 2 (1,300) Credit to retained earnings $ 200 Adjustment to AOCI = $65 - $50 = $15 credit

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Advanced Accounting, 5th Edition

(A) Investment in Shutter

215 Retained earnings, 1/1 AOCI, 1/1

(E) Capital stock Retained earnings, 1/1 AOCI, 1/1

200 15

1,000 1,200 65 Investment in Shutter

(R) Identifiable intangibles (1) Goodwill (1)

2,265

1,950 11,000

Investment in Shutter $3,250 – (($3,250/5) x 2) = $1,950

(O) Amortization expense

12,950

650 Identifiable intangibles

31.

650

Topic: Consolidation eliminating entries, fourth year, cost method LO 6 Premier Industries paid $50,000 for the voting stock of Simon Company, on July 1, 2020, the beginning of the fiscal year. At the date of acquisition, Simon’s book value was $15,000, consisting of $3,000 in capital stock, $12,200 in retained earnings, and $200 in accumulated other comprehensive loss. The $35,000 excess of acquisition cost over book value was attributed to $5,000 in indefinite life identifiable intangible assets and $30,000 in goodwill. It is now June 30, 2024. Simon’s retained earnings at the beginning of fiscal 2024 was $17,000, and its beginning accumulated other comprehensive loss was $150. Identifiable intangibles impairment to the beginning of fiscal 2024 was $800 and goodwill impairment to the beginning of fiscal 2024 was $600. Identifiable intangibles impairment in fiscal 2024 was $100 and there was no goodwill impairment. Simon declares no dividends. Premier uses the cost method to account for its investment in Simon on its own books. Required Prepare the eliminating entries (A), (E), (R), and (O), in journal form, necessary to consolidate the financial statements of Premier and Simon at June 30, 2024. ANS: The adjustment to beginning retained earnings to convert Premier’s accounts to the complete equity method is calculated as follows: Change in Simon’s retained earnings to beginning of year $17,000 – $12,200 $4,800 Revaluation write-offs to beginning of fiscal 2024: Identifiable intangibles impairment (800) Goodwill impairment (600) Credit to beginning retained earnings $3,400 Change in Simon’s AOCL to beginning of year $150 - $200 = $50 credit to AOCL

Test Bank, Chapter 4

© Cambridge Business Publishers, 2023 4-77

(A) Investment in Simon

3,450 Retained earnings, Jan 1 AOCL

(E) Capital stock Retained earnings, 1/1

3,400 50

3,000 17,000 AOCL Investment in Simon

150 19,850

(R) Identifiable intangibles Goodwill

4,200 29,400 Investment in Simon

33,600

(O) Impairment loss

100 Identifiable intangibles

© Cambridge Business Publishers, 2023 4-78

Advanced Accounting, 5th Edition

100

32.

Topic: Consolidation eliminating adjustment, third year, cost method LO 6 Propyl Corporation acquired the voting stock of Systoc Company on January 1, 2023 at an acquisition cost of $40,000. Systoc’s equity at the date of acquisition consisted of $5,000 in capital stock, retained earnings of $8,000, and accumulated other comprehensive income of $200. Systoc’s net assets were reported at amounts approximating fair value, but unreported indefinite life identifiable intangibles, capitalized per ASC Topic 805 were valued at $10,000. The identifiable intangibles are impaired by $1,000 in 2023 and $500 in 2024. Half of the goodwill was written off as of the beginning of 2025. Systoc declared no dividends in 2025. Its shareholders’ equity at January 1, 2025 consists of $5,000 in capital stock, retained earnings of $20,000, and accumulated other comprehensive income of $140. Propyl uses the cost method to report its investment in Systoc on its own books. Required You are preparing the consolidation working paper at December 31, 2025. Prepare the entry (A) needed to adjust Propyl’s accounts to the complete equity method, before doing consolidation eliminating entries (E), (R), and (O). ANS: Change in RE to beginning of 2025 $20,000 - $8,000 = Intangibles write-off to beginning of 2025 $1,000 + $500 = Goodwill write-off to beginning of 2025 (1) $16,800 x ½ Adjustment to RE, 1/1 (1) $16,800 = $40,000 – ($5,000 + $8,000 + $200) - $10,000.

$12,000 (1,500) (8,400) $ 2,100

Adjustment to AOCI, 1/1 = $140 - $200 = $(60). (A) Investment in Systoc AOCI, 1/1

2,040 60 Retained earnings, 1/1

Test Bank, Chapter 4

© Cambridge Business Publishers, 2023 4-79

2,100

TEST BANK CHAPTER 5 Consolidated Financial Statements: Outside Interests MULTIPLE CHOICE 1.

2.

3.

Topic: Goodwill allocation at the date of acquisition LO 1 Peters Inc. paid $400 in cash and $6,000 fair value of stock to acquire 65% of the voting stock of Stony Company. Stock registration fees were $100 and outside consulting fees were $50. Peters also agreed to an earnout, valued at $85, whereby additional cash will be paid to the former shareholders of Stony if certain performance goals are reached. The fair value of the noncontrolling interest was $3,415. Stony’s book value was $2,000 at the date of acquisition, and revaluations consisted of previously unrecorded intangible assets valued at $6,900. What percentage of the total goodwill is allocated to Peters? a. b. c. d.

68% 70% 73% 75%

ANS:

b Acquisition cost = $6,000 + $400 + $85 = $6,485 Total goodwill = $6,485 + $3,415 - $2,000 - $6,900 = $1,000 Goodwill to the controlling interest = $6,485 – (65% x $8,900) = $700, or 70%

Topic: Valuation of noncontrolling interest LO 1 Which method is most appropriate for valuing a noncontrolling interest at the date of acquisition? a. b. c. d.

Stock price of the acquired company in an active market. Stock price of the acquiring company in an active market. Capitalization of the acquired company’s future cash flows. Capitalization of the acquired company’s future cash flows plus a control premium.

ANS:

a

Topic: Goodwill allocation at date of acquisition LO 1 Palco acquires 80% of the voting stock of Sidney at an acquisition cost of $5,760. The noncontrolling interest is valued at $1,240. Sidney’s book value at the date of acquisition is $5,000, and there are no revaluations of Sidney’s identifiable net assets. What percentage of the goodwill is allocated to the controlling interest? a. b. c. d.

None 82% 86% 88%

Test Bank, Chapter 5

©Cambridge Business Publishers, 2023 5-1

ANS:

4.

5.

6.

d Total goodwill = $5,760 + $1,240 - $5,000 = $2,000 Allocation to controlling interest = $5,760 – (80% x $5,000) = $1,760/$2,000 = 88%

Topic: Goodwill to noncontrolling interest at the date of acquisition LO 1 A company pays $70 million in cash to acquire 70% of the voting stock of another company. The fair value of the noncontrolling interest at the date of acquisition is $25 million, and the book value of the acquired company is $20 million. There are no revaluations of the acquired company’s identifiable net assets. Goodwill to the noncontrolling interest is: a. b. c. d.

$0 $19 million $22.5 million $15 million

ANS:

b Total goodwill = $70 million + $25 million - $20 million = $75 million Goodwill to the controlling interest = $70 million – (70% x $20 million) = $56 million Goodwill to the noncontrolling interest = $75 million - $56 million = $19 million

Topic: Goodwill to controlling interest at the date of acquisition LO 1 A company pays $130,500 in cash and stock to acquire 75% of the voting stock of another company. The fair value of the noncontrolling interest is $39,500, and the fair value of the acquired company’s identifiable net assets is $70,000. What percentage of total goodwill is allocated to the controlling interest? a. b. c. d.

76% 77% 78% 80%

ANS:

c Total goodwill = $130,500 + $39,500 - $70,000 = $100,000 Goodwill to controlling interest = $130,500 – (75% x $70,000) = $78,000, or 78%

Topic: Goodwill allocation with noncontrolling interest LO 1 Pratt Company buys 65% of the voting stock of Sully Corporation at a 40% premium over the market price of Sully’s stock. Which statement is most likely to be true concerning the goodwill resulting from this acquisition? a. b. c. d.

Goodwill is allocated 60% to Pratt and 40% to the noncontrolling interest in Sully. All goodwill is allocated to the noncontrolling interest in Sully. Goodwill is allocated 65% to Pratt and 35% to the noncontrolling interest in Sully. The goodwill allocation to Pratt is more than 65% of the total goodwill.

ANS:

d

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Advanced Accounting, 5th Edition

Use the following information to answer Questions 7 and 8. A company pays $50,000 in cash and stock to acquire 65% of the voting stock of another company. The fair value of the 35% noncontrolling interest in the acquired company is $12,000. The book value of the acquired company is $25,000. At the date of acquisition, the acquired company’s plant assets are overvalued by $6,000 and it has previously unreported identifiable intangible assets valued at $10,000. 7.

8.

Topic: Goodwill calculation with noncontrolling interest LO 1 What is the total amount of goodwill recognized for this acquisition? a. b. c. d.

$37,000 $11,000 $33,000 $21,000

ANS:

c $50,000 + $12,000 – ($25,000 - $6,000 + $10,000) = $33,000

Topic: Goodwill to noncontrolling interest LO 1 What is the amount of goodwill allocated to the noncontrolling interest at the date of acquisition? a. b. c. d.

$1,850 $2,150 $8,150 none

ANS:

a $50,000 – (($25,000 - $6,000 + $10,000) x 65%) = $31,150 $33,000 - $31,150 = $1,850

Use the following information to answer Questions 9 and 10. A parent acquired 90% of the voting stock of a subsidiary for $20,000. The fair value of the noncontrolling interest was $2,000. The subsidiary’s book value at the date of acquisition was $1,000. Following is revaluation information for the subsidiary’s identifiable net assets at the date of acquisition:

Inventories Equipment Identifiable intangibles

Test Bank, Chapter 5

Fair Value – Book Value $ (400) (10,000) 16,000

©Cambridge Business Publishers, 2023 5-3

9.

10.

Topic: Consolidated goodwill, noncontrolling interest, date of acquisition LO 1 What is total consolidated goodwill at the date of acquisition, following U.S. GAAP? a. b. c. d.

$14,400 $13,400 $15,400 $16,400

ANS:

c

Acquisition cost Noncontrolling interest Total fair value Book value Revaluations: Inventories Equipment Identifiable intangibles Goodwill

$ 1,000 (400) (10,000) 16,000

$20,000 2,000 22,000

6,600 $15,400

Topic: Consolidated goodwill, noncontrolling interest, date of acquisition LO 1 What is the amount of consolidated goodwill attributed to the noncontrolling interest at the date of acquisition, following U.S. GAAP? a. b. c. d.

$0 $1,340 $1,540 $1,440

ANS:

b Goodwill to the controlling interest = $20,000 – (90% x $6,600) = $14,060 Goodwill to the noncontrolling interest = $15,400 - $14,060 = $1,340

Use the following information to answer Questions 11 – 15. A company issues new stock with a fair value of $140,000 to acquire 90% of the voting stock of another company. The fair value of the noncontrolling interest at the date of acquisition is $12,000, and the book value of the acquired company is $15,000. The new subsidiary’s net assets are reported at amounts approximating fair value at the date of acquisition, except that its plant assets are overvalued by $30,000, its reported license agreements are undervalued by $60,000, and it has previously unreported identifiable intangible assets with a fair value of $40,000. 11.

Topic: Goodwill at the date of acquisition LO 1 What is the total reported goodwill on this acquisition, following U.S. GAAP? a. b. c. d.

$ 9,500 $55,000 $67,000 none

©Cambridge Business Publishers, 2023 5-4

Advanced Accounting, 5th Edition

ANS:

12.

13.

14.

c Acquisition cost Fair value of noncontrolling interest Total FV of IDNA: Book value Revalued plant assets Revalued license agreements ID intangible assets Goodwill

$ 140,000 12,000 152,000 $ 15,000 (30,000) 60,000 40,000

85,000 $ 67,000

Topic: Goodwill to the noncontrolling interest at the date of acquisition LO 1 What is the goodwill to the noncontrolling interest, following U.S. GAAP? a. b. c. d.

$3,500 $1,850 $6,700 $0

ANS:

a Goodwill to controlling interest = $140,000 – (90% x $85,000) = $63,500 Goodwill to noncontrolling interest = $67,000 - $63,500 = $3,500

Topic: Noncontrolling interest valuation at the date of acquisition LO 1 At what value does the noncontrolling interest appear on the date-of-acquisition consolidated balance sheet, following U.S. GAAP? a. b. c. d.

$12,000 $15,500 $ 8,500 $ 4,500

ANS:

a The noncontrolling interest is valued at its fair value at the date of acquisition.

Topic: Goodwill valuation at the date of acquisition, IFRS alternative LO 4 At what amount is goodwill valued at the date of acquisition, following the alternative method allowed by IFRS? a. b. c. d.

$56,950 $62,150 $63,500 $67,000

ANS:

c Only the parent’s goodwill is recognized.

Test Bank, Chapter 5

©Cambridge Business Publishers, 2023 5-5

15.

16.

Topic: Noncontrolling interest valuation at the date of acquisition, IFRS alternative LO 4 At what amount is the noncontrolling interest valued at the date of acquisition, following the alternative method allowed by IFRS? a. b. c. d.

$12,000 $ 8,500 $ 4,500 $ 6,150

ANS:

b 10% x $85,000 = $8,500

Topic: Noncontrolling interest valuation at the date of acquisition, U.S. GAAP LO 1 How is the noncontrolling interest in a subsidiary valued at the date of acquisition, following U.S. GAAP? a. b. c. d. ANS:

17.

18.

Fair value at the date of acquisition The noncontrolling interest’s share of the fair value of the subsidiary’s identifiable net assets at the date of acquisition The noncontrolling interest’s share of the book value of the subsidiary at the date of acquisition The noncontrolling interest’s share of the book value of the subsidiary at the date of acquisition plus its share of date-of-acquisition goodwill a

Topic: Valuation of noncontrolling interest, U.S. GAAP LO 1 Following U.S. GAAP, a 20% noncontrolling interest in a subsidiary is reported on the consolidated balance sheet at the date of acquisition at what amount? a. b. c. d.

20% of the subsidiary’s book value 20% of the fair value of the subsidiary’s identifiable net assets 20% of the acquisition price paid by the parent The fair value of the noncontrolling interest

ANS:

d

Topic: Noncontrolling interest valuation at the date of acquisition, U.S. GAAP LO 1 What is the preferred way to value the noncontrolling interest in a subsidiary at the date of acquisition, per U.S. GAAP? a. b. c. d.

Level 3 measurement of the expected present value of future dividends paid to the noncontrolling interest The stock price of noncontrolling shares in an active market The appraised market value of the noncontrolling interest’s share of the subsidiary’s assets less liabilities The stock price of noncontrolling shares in an active market, discounted for lack of control

©Cambridge Business Publishers, 2023 5-6

Advanced Accounting, 5th Edition

ANS: 19.

20.

Topic: Display of noncontrolling interest on consolidated balance sheet LO 1 Noncontrolling interest is reported on the consolidated balance sheet as: a. b. c. d.

A noncurrent tangible asset account An identifiable intangible asset account A noncurrent liability account An equity account

ANS:

d

Topic: Display of noncontrolling interest on consolidated balance sheet LO 1 Noncontrolling interest is reported in the equity section of the consolidated balance sheet: a.

c. d.

In separate lines representing the noncontrolling interest’s share of the consolidated entity’s shareholders’ equity accounts (capital stock, retained earnings, etc.) In two separate lines representing the noncontrolling interest’s share of (1) the consolidated entity’s stock accounts and (2) retained earnings and accumulated other comprehensive income accounts As one line as a component of consolidated shareholders’ equity As one line, as a contra to total consolidated shareholders’ equity

ANS:

c

b.

21.

Topic: Goodwill valuation with noncontrolling interest, U.S. GAAP LO 1 A parent acquires 80% of the voting stock of its subsidiary. Following U.S. GAAP, on the consolidated balance sheet less than 20% of the total goodwill will likely be allocated to the noncontrolling interest because: a. b.

22.

b

c. d.

U.S. GAAP allows companies the option of only recognizing the parent’s share of goodwill. The price per share of the noncontrolling interest’s stock reflects a premium over the price per share paid by the parent. U.S. GAAP does not allow goodwill to be allocated to the noncontrolling interest. The parent usually pays a higher price per share because it acquires a controlling interest.

ANS:

d

Topic: Consolidated balance sheet, noncontrolling interest, date of acquisition LO 1 A parent owns 90% of a subsidiary’s voting stock. On the consolidated balance sheet at the date of acquisition, at what value are total consolidated liabilities reported? a. b. c. d.

The parent’s book value of liabilities. The parent’s fair value of liabilities plus the subsidiary’s fair value of liabilities. The parent’s book value of liabilities plus the subsidiary’s fair value of liabiities. The parent’s book value of liabilities plus 90% of the subsidiary’s fair value of liabilities.

Test Bank, Chapter 5

©Cambridge Business Publishers, 2023 5-7

ANS: 23.

Topic: Consolidation eliminating entries at acquisition date LO 1 A subsidiary has a 20% noncontrolling interest. At the date of acquisition, eliminating entry (E) recognizes what part of the noncontrolling interest? a. b. c.

24.

c

d.

The noncontrolling interest’s share of the subsidiary’s book value The fair value of the noncontrolling interest The noncontrolling interest’s share of the revaluations of the subsidiary’s identifiable net assets The noncontrolling interest’s share of the subsidiary’s fair value

ANS:

a

Topic: Consolidation eliminating entries at acquisition date LO 1 A subsidiary has a 20% noncontrolling interest. At the date of acquisition, eliminating entry (R) recognizes what part of the noncontrolling interest? a. b. c. d.

The noncontrolling interest’s share of the subsidiary’s book value The noncontrolling interest’s share of the revaluations of the subsidiary’s net assets The noncontrolling interest’s share of the revaluations of the subsidiary’s identifiable net assets The noncontrolling interest’s share of the subsidiary’s fair value

ANS:

b

Use the following information to answer Questions 25 – 27. Playco acquires 70% of Sunny’s voting stock at an acquisition cost of $100,000. The 30% noncontrolling interest has an estimated fair value of $38,000. Sunny’s identifiable net assets are carried at amounts approximating fair value at the date of acquisition. Sunny’s total shareholders’ equity is $110,000. 25.

Goodwill at acquisition date LO 1 Total goodwill recognized at the date of acquisition is a. b. c. d.

$23,000 $10,000 $25,000 $28,000

ANS:

d $100,000 + $38,000 - $110,000 = $28,000

©Cambridge Business Publishers, 2023 5-8

Advanced Accounting, 5th Edition

26.

27.

Consolidation eliminating entries at acquisition date LO 1 When consolidating the accounts of Playco and Sunny at the date of acquisition, the credit to noncontrolling interest in eliminating entry (E) is a. b. c. d.

$28,000 $30,000 $33,000 $38,000

ANS:

c $110,000 x 30% = $33,000

Consolidation eliminating entries at acquisition date LO 1 When consolidating the accounts of Playco and Sunny at the date of acquisition, the credit to noncontrolling interest in eliminating entry (R) is a. b. c. d.

$10,000 $ 8,000 $ 5,000 $0

ANS:

c NCI’s share of goodwill = $28,000 – ($100,000 – (70% x $110,000)) = $5,000; or $5,000 = $38,000 - $33,000.

Use the following information to answer Questions 28 and 29. Protec Company acquired 75% of Sussex Company’s voting stock for $40,000 in cash. The noncontrolling interest had an estimated fair value of $11,000. Some of Sussex’s identifiable assets and liabilities at the date of acquisition had fair values that were different from reported values, as follows:

Property, net Identifiable intangibles

Book Value $ 2,000 0

Fair Value $ 8,000 25,000

Sussex’s total shareholders’ equity at the date of acquisition was as follows: Capital stock Retained earnings Treasury stock Total

Test Bank, Chapter 5

$ 1,000 3,000 (100) $ 3,900

©Cambridge Business Publishers, 2023 5-9

28.

29.

Topic: Eliminating entries, date of acquisition LO 1 On a date-of-acquisition consolidation working paper, eliminating entry (E) credits Investment in Sussex in the amount of a. b. c. d.

$ 4,100 $ 2,925 $ 3,900 $ 3,075

ANS:

b

Topic: Eliminating entries, date of acquisition LO 1 On a date-of-acquisition consolidation working paper, eliminating entry (R) credits Investment in Sussex in the amount of a. b. c. d.

$35,100 $37,075 $36,100 $36,925

ANS:

b

Eliminating entries for questions 28 and 29: (E) Capital stock Retained earnings Treasury stock Investment in Sussex (75%) Noncontrolling interest in Sussex (25%) (R) Property, net Identifiable intangibles Goodwill (1)

1,000 3,000 100 2,925 975

6,000 25,000 16,100 Investment in Sussex (2) Noncontrolling interest in Sussex

37,075 10,025

(1) Goodwill = $40,000 + $11,000 – ($3,900 + $6,000 + $25,000) = $16,100. (2) Investment credit = $40,000 - $2,925 = $37,075; or (75% x ($6,000 + $25,000)) + ($40,000 – (75% x $34,900)) = $37,075

©Cambridge Business Publishers, 2023 5-10

Advanced Accounting, 5th Edition

Use the following information to answer Questions 30 – 33. Polypipe Company acquired 80% of Svedex Company’s voting stock for $95,000 in cash. The noncontrolling interest had an estimated fair value of $20,000. Some of Svedex’s identifiable assets and liabilities at the date of acquisition had fair values that were different from reported values, as follows:

Property, net Licensing agreements

Book Value $ 6,000 1,000

Fair Value $ 4,000 25,000

Svedex’s total shareholders’ equity at the date of acquisition was as follows: Capital stock Retained deficit Treasury stock Total 30.

31.

32.

$5,000 (400) (50) $ 4,550

Topic: Goodwill calculation, date of acquisition LO 1 Total goodwill from this acquisition is: a. b. c. d.

$84,450 $68,450 $87,550 $88,450

ANS:

d $95,000 + $20,000 – ($4,550 - $2,000 + $24,000) = $88,450

Topic: Goodwill allocation, date of acquisition LO 1 Goodwill allocated to the noncontrolling interest in Svedex is: a. b. c. d.

$0 $14,690 $10,690 $13,790

ANS:

b Goodwill to controlling interest = $95,000 – (80% x ($4,550 - $2,000 + $24,000)) = $73,760 Goodwill to noncontrolling interest = $88,450 - $73,760 = $14,690

Topic: Eliminating entries, date of acquisition LO 1 On a date-of-acquisition consolidation working paper, eliminating entry (E) credits Investment in Svedex in the amount of a. b. c. d.

$4,360 $3,640 $4,000 $3,980

Test Bank, Chapter 5

©Cambridge Business Publishers, 2023 5-11

ANS: 33.

b 80% x $4,550 = $3,640

Topic: Eliminating entries, date of acquisition LO 1 On a date-of-acquisition consolidation working paper, eliminating entry (R) credits the noncontrolling interest in Svedex in the amount of a. b. c. d.

$20,000 $15,450 $19,090 $18,600

ANS:

c 20% x ($24,000 - $2,000) + $14,690 = $19,090

Date-of-acquisition eliminating entries for questions 32 and 33 are: (E) Capital stock Retained deficit Treasury stock Investment in Svedex Noncontrolling interest in Svedex (R) Licensing agreements Goodwill Property, net Investment in Svedex Noncontrolling interest in Svedex 34.

5,000 400 50 3,640 910 24,000 88,450 2,000 91,360 19,090

Topic: Consolidation of VIE at date of acquisition LO 1 Purus Corporation has a financial relationship with Swift Financial Inc. Although Purus owns none of Swift’s voting stock, analysis determines that Swift is a variable interest entity and Purus is its primary beneficiary. How is the noncontrolling interest in Swift reported on Purus’ consolidated balance sheet at the date Purus first consolidates it, assuming Swift and Purus were already under common control? a. b. c. d. ANS:

In the equity section of the consolidated balance sheet, at Swift’s book value. As an investment account in the asset section of Purus’ consolidated balance sheet, at Swift’s book value. In the equity section of the consolidated balance sheet, at Swift’s fair value. As an investment account in the asset section of Purus’ consolidated balance sheet, at Swift’s fair value. a

©Cambridge Business Publishers, 2023 5-12

Advanced Accounting, 5th Edition

35.

Topic: Consolidation of VIE at date of acquisition LO 1 Purus Corporation has a financial relationship with Swift Financial Inc. Although Purus owns none of Swift’s voting stock, analysis determines that Swift is a variable interest entity and Purus is its primary beneficiary. How is the noncontrolling interest in Swift reported on Purus’ consolidated balance sheet at the date Purus first consolidates it, assuming Purus and Swift were not previously under common control? a. b. c. d. ANS:

36.

37.

In the equity section of the consolidated balance sheet, at Swift’s book value. As an investment account in the asset section of Purus’ consolidated balance sheet, at Swift’s book value. In the equity section of the consolidated balance sheet, at Swift’s fair value. As an investment account in the asset section of Purus’ consolidated balance sheet, at Swift’s fair value. c

Topic: Consolidation of variable interest entities LO 1 Seaton Company is a variable interest entity. Pracker Company has no equity ownership in Seaton, but is its primary beneficiary. Pracker and Seaton were not previously under common control. Which statement is true at the date Pracker becomes Seaton’s primary beneficiary? a. b. c. d.

Pracker does not consolidate Seaton. There is no consolidated noncontrolling interest. Consolidated noncontrolling interest equals the book value of Seaton’s net assets. Consolidated noncontrolling interest equals the fair value of Seaton’s net assets.

ANS:

d

Topic: Consolidation of variable interest entities LO 1 Seaton Company is a variable interest entity. Pracker Company has no equity ownership in Seaton, but is its primary beneficiary. Pracker and Seaton were previously under common control. Which statement is true at the date Pracker becomes Seaton’s primary beneficiary? a. b. c. d.

Pracker does not consolidate Seaton. There is no consolidated noncontrolling interest. Consolidated noncontrolling interest equals the book value of Seaton’s net assets. Consolidated noncontrolling interest equals the fair value of Seaton’s net assets.

ANS:

c

Test Bank, Chapter 5

©Cambridge Business Publishers, 2023 5-13

Use the following information to answer questions 38 and 39: Pomery Company has a financial relationship with Styro Inc., a separate legal entity, but does not own any of Styro’s voting stock. Pomery determines that Styro is a variable interest entity and that Pomery is Styro’s prime beneficiary. Styro’s shareholders’ equity is as follows: Capital stock Retained earnings Total

$2,000 7,000 $9,000

Styro’s net assets are reported at values approximating fair value, except that its receivables are overvalued by $2,000 and its warranty obligations are undervalued by $5,000. The fair value of Styro is $15,000. Pomery and Styro were not under common control prior to Pomery’s determination that it must consolidate Styro. 38.

39.

Topic: Eliminating entries, VIE LO 1 On a consolidation working paper at the time Pomery decides it must consolidate Styro, eliminating entry (E) credits the noncontrolling interest in Styro by: a. b. c. d.

$ 9,000 $0 $ 5,000 $13,000

ANS:

a Styro’s equity accounts are recategorized as a noncontrolling interest.

Topic: Eliminating entries, VIE LO 1 On a consolidation working paper at the time Pomery decides it must consolidate Styro, eliminating entry (R) credits (debits) the noncontrolling interest in Styro by a. b. c. d.

$(7,000) $0 $6,000 $7,000

ANS:

c Goodwill = $15,000 – ($9,000 - $2,000 - $5,000) = $13,000 Revaluations = $13,000 - $2,000 - $5,000 = $6,000; or $15,000 - $9,000 = $6,000

©Cambridge Business Publishers, 2023 5-14

Advanced Accounting, 5th Edition

Use the following information to answer questions 40 - 44: Posit Company has a financial relationship with Sparkle Inc., a separate legal entity, but does not own any of Sparkle’s voting stock. On January 1, 2024, Posit determines that Sparkle is a variable interest entity and that Posit is Sparkle’s prime beneficiary. Sparkle’s shareholders’ equity on January 1, 2024 is as follows: Capital stock $3,000 Retained deficit (500) Total $2,500 Sparkle’s net assets are reported at values approximating fair value, but it has previously unreported identifiable intangible assets valued at $7,000. The fair value of Sparkle at January 1, 2024 is $16,000. 40.

41.

42.

Topic: Date-of-acquisition goodwill, VIE LO 1 Assume Posit and Sparkle were already under common control. On a January 1, 2024 consolidated balance sheet, goodwill is reported at: a. b. c. d.

$16,000 $10,000 $13,500 $0

ANS:

d No revaluations occur if the two companies were already under common control.

Topic: Date-of-acquisition noncontrolling interest, VIE LO 1 Assume Posit and Sparkle were already under common control. On a January 1, 2024 consolidated balance sheet, the noncontrolling interest in Sparkle is reported at: a. b. c. d.

$0 $ 2,500 $16,000 $ 8,000

ANS:

b There is no revaluation of Sparkle’s net assets, so the NCI = Sparkle’s book value.

Topic: Date-of-acquisition goodwill, VIE LO 1 Assume Posit and Sparkle were not already under common control. On a January 1, 2024 consolidated balance sheet, goodwill is reported at: a. b. c. d.

$16,000 $ 9,500 $ 7,000 $ 6,500

ANS:

d $16,000 – ($2,500 + $7,000) = $6,500

Test Bank, Chapter 5

©Cambridge Business Publishers, 2023 5-15

43.

44.

45.

46.

Topic: Date-of-acquisition eliminating entries, VIE LO 1 Assume Posit and Sparkle were not already under common control. On a January 1, 2024 consolidation working paper, eliminating entry (E) credits noncontrolling interest in Sparkle by: a. b. c. d.

$0 $ 2,500 $ 3,000 $16,000

ANS:

b

Topic: Date-of-acquisition eliminating entries, VIE LO 1 Assume Posit and Sparkle were not already under common control. On a January 1, 2024 consolidation working paper, eliminating entry (R) credits noncontrolling interest in Sparkle by: a. b. c. d.

$0 $ 7,000 $13,500 $16,000

ANS:

c $6,500 + $7,000 = $13,500

Topic: Consolidated financial statements, subsequent years LO 2 The consolidated financial statements of a parent and its 80%-owned subsidiary reports income to the noncontrolling interest a. b. c. d.

On the consolidated balance sheet, as a liability. On the consolidated balance sheet, as one of the equity accounts. On the consolidated income statement, as a deduction from consolidated income. On the consolidated income statement, as an expense.

ANS:

c

Topic: Consolidated income statement, noncontrolling interest LO 2 A parent owns less than 100% of the voting stock of its subsidiary. On its consolidated income statement, the earnings per share number is calculated using which of the following amounts in the numerator? a. b. c. d.

Consolidated net income Consolidated net income less consolidated dividends Consolidated net income plus noncontrolling interest in net income Consolidated net income less noncontrolling interest in net income

ANS:

d

©Cambridge Business Publishers, 2023 5-16

Advanced Accounting, 5th Edition

Use the following information to answer Questions 47 – 49. Provided are the consolidated trial balances of a parent and its less-than-wholly-owned subsidiary. Account Current assets Property, net Intangible assets, net Goodwill Liabilities Capital stock Retained earnings, beginning Accumulated other comprehensive income, beginning Noncontrolling interest Dividends Sales revenue Cost of sales and operating expenses Other comprehensive income Noncontrolling interest in net income Noncontrolling interest in other comprehensive income Total 47.

48.

Dr (Cr) $ 5,000 105,000 10,000 80,000 (162,405) (10,000) (15,000) (200) (2,500) 1,000 (400,000) 390,000 (1,000) 100 5 $ 0

Topic: Consolidated financial statements with noncontrolling interest, subsequent years LO 2 On the consolidated statement of income and comprehensive income, consolidated net income for the year is: a. b. c. d.

$11,000 $10,895 $11,105 $10,000

ANS:

d $400,000 - $390,000 = $10,000

Topic: Consolidated financial statements with noncontrolling interest, subsequent years LO 2 On the consolidated balance sheet, consolidated retained earnings at the end of the year is: a. b. c. d.

$23,900 $15,000 $24,000 $24,100

ANS:

a $15,000 + ($10,000 - $100) - $1,000 = $23,900

Test Bank, Chapter 5

©Cambridge Business Publishers, 2023 5-17

49.

50.

Topic: Consolidated financial statements with noncontrolling interest, subsequent years LO 2 On the consolidated balance sheet, consolidated accumulated other comprehensive income at the end of the year is: a. b. c. d.

$1,200 $1,195 $1,205 $1,305

ANS:

b $200 + $1,000 - $5 = $1,195

Topic: Consolidated financial statements with noncontrolling interest, subsequent years LO 2 Sometimes the consolidated trial balance for a parent and its subsidiary reports consolidated other comprehensive income, but a noncontrolling interest in other comprehensive loss. What is the reason for the discrepancy? a. b. c. d. ANS:

The noncontrolling interest is subtracted from consolidated income to obtain income to the controlling interest. The subsidiary declared dividends in excess of reported income for the year. The subsidiary reports an other comprehensive loss for the year, while the parent reports other comprehensive income for the year. The revaluation write-offs of identifiable intangible assets previously unreported by the subsidiary are in excess of the subsidiary’s reported comprehensive income. c

Use the following information to answer Questions 51 – 54. At the beginning of the year, Portal Corporation acquired 90% of Squaredeal Company’s voting stock for an acquisition cost of $62,000. The 10% noncontrolling interest in Squaredeal had a fair value of $5,000. The entire excess of fair value over book value was attributable to goodwill, which is not impaired during the year. It is now the end of the year, and Squaredeal’s trial balance is as follows: Squaredeal’s trial balance, end of year Current assets Plant assets, net Liabilities Capital stock Retained earnings, beginning Dividends Sales revenue Cost of sales and operating expenses Total

Dr (Cr) $ 3,000 97,000 (59,000) (12,700) (25,300) 1,000 (280,000) 276,000 $ 0

Portal uses the complete equity method to report its investment in Squaredeal on its own books. Questions 51 – 54 relate to consolidation of Portal and Squaredeal at the end of the year.

©Cambridge Business Publishers, 2023 5-18

Advanced Accounting, 5th Edition

51.

52.

53.

54.

Topic: Consolidation working paper, first year LO 2 On the consolidation working paper, eliminating entry (E) credits the noncontrolling interest in Squaredeal by: a. b. c. d.

$1,270 $2,530 $3,800 $3,840

ANS:

c ($12,700 + $25,300) x 10% = $3,800

Topic: Consolidation working paper, first year LO 2 On the consolidation working paper, eliminating entry (R) recognizes goodwill in the amount of: a. b. c. d.

$33,000 $29,000 $27,800 $41,700

ANS:

b $62,000 + $5,000 – ($12,700 + $25,300) = $29,000

Topic: Consolidation working paper, first year LO 2 On the consolidation working paper, eliminating entry (N) recognizes noncontrolling interest in net income of: a. b. c. d.

$400 $300 $0 $325

ANS:

a 10% x ($280,000 - $276,000) = $400

Topic: Consolidated financial statements, first year LO 2 On the consolidated balance sheet at the end of the year, the noncontrolling interest is valued at a. b. c. d.

$5,000 $3,800 $5,300 $5,400

ANS:

c $5,000 + 10% x ($4,000 - $1,000) = $5,300

Test Bank, Chapter 5

©Cambridge Business Publishers, 2023 5-19

Use the following information to answer Questions 55 – 60. On January 1, 2024, Peppermill Company acquired 60% of Salty Company’s voting stock for $6,610. The fair value of the 40% noncontrolling interest was $3,990. Salty’s net assets were reported at amounts approximating book value, but Peppermill determined that Salty had the following previously unreported intangible assets: • •

Developed technology, fair value $2,000, 5-year life Favorable leases, fair value $400, 4-year life

Salty’s shareholders’ equity on January 1, 2024 was $3,200. It is now December 31, 2025 (two years later). There are no impairments of identifiable intangibles in 2024 or 2025, but goodwill is impaired by $100 in 2025. Peppermill uses the complete equity method to report its investment in Salty on its own books. Salty’s December 31, 2025 trial balance appears below. Dr (Cr) $ 2,000 30,000 (27,100) (1,000) (3,000) (40,000) 35,000 4,100 $ 0

Current assets Property and equipment, net Liabilities Capital stock Retained earnings, January 1 Sales revenue Cost of goods sold Operating expenses Total 55.

56.

Topic: Goodwill at date of acquisition LO 1 What is the amount of goodwill recognized for this acquisition at the date of acquisition? a. b. c. d.

$4,500 $5,000 $6,000 $6,500

ANS:

b $6,610 + $3,990 - $3,200 - $2,000 - $400 = $5,000

Topic: Goodwill allocation at date of acquisition LO 1 What percentage of the total goodwill is allocated to the controlling interest? a. b. c. d.

60% 62% 65% 70%

©Cambridge Business Publishers, 2023 5-20

Advanced Accounting, 5th Edition

ANS:

57.

58.

59.

c $6,610 – (($3,200 + $2,000 + $400) x 60%) = $3,250 $3,250/$5,000 = 65%

Topic: Equity in net income calculation LO 2 What is the amount of equity in net income of Salty, reported in Peppermill’s December 31, 2025 trial balance? a. b. c. d.

$540 $240 $180 $175

ANS:

d (60% x ($900 - $400 - $100)) – (65% x $100) = $175

Topic: Consolidation eliminating entries, second year LO 2 When consolidating the trial balances of Peppermill and Salty at December 31, 2025, eliminating entry (E) credits Investment in Salty by a. b. c. d.

$2,400 $2,600 $3,200 $4,000

ANS:

a ($1,000 + $3,000) x 60% = $2,400

Topic: Consolidation eliminating entries, second year LO 2 When consolidating the trial balances of Peppermill and Salty at December 31, 2025, eliminating entry (R) credits the noncontrolling interest by a. b. c. d.

$ 800 $2,800 $2,760 $2,510

ANS:

d [(($2,000 - $400) + ($400 - $100)) x 40%] + ($5,000 x 35%) = $2,510

Test Bank, Chapter 5

©Cambridge Business Publishers, 2023 5-21

60.

Topic: Consolidation eliminating entries, second year LO 2 When consolidating the trial balances of Peppermill and Salty at December 31, 2025, eliminating entry (N) credits Investment in Salty by a. b. c. d.

$160 $125 $120 $360

ANS:

b (($900 - $400 - $100) x 40%) – ($100 x 35%) = $125

Use the following information to answer Questions 61 – 68. On January 1, 2023, Pali Company acquired 75% of Silicon Company’s voting stock for $44,300 in cash. The noncontrolling interest had an estimated fair value of $12,700. Silicon’s assets and liabilities at the date of acquisition were reported at amounts approximating fair value, but it had previously unreported indefinite life identifiable intangibles valued at $21,000. Silicon’s total shareholders’ equity at January 1, 2023 was as follows: Capital stock Retained earnings Accumulated other comprehensive income Total

$ 2,000 2,900 100 $ 5,000

It is now December 31, 2025 (three years later). Identifiable intangibles impairment through the end of 2024 was $1,000 and goodwill impairment through the end of 2024 was $400. There is no impairment of either identifiable intangibles or goodwill in 2025. Pali uses the complete equity method to account for its investment. December 31, 2025 trial balances for Pali and Silicon follow.

Current assets Property, net Intangibles Investment in Silicon Goodwill Liabilities Capital stock RE, beginning AOCI, beginning Sales revenue Equity in net income of Silicon Equity in OCI of Silicon Cost of goods sold Operating expenses Other comprehensive income Total ©Cambridge Business Publishers, 2023 5-22

Pali Dr (Cr) $ 5,000 42,000 – 45,732 – (53,887) (15,000) (19,680) (1,100) (25,000) (1,350) (15) 20,000 4,000 (700) $ 0

Silicon Dr (Cr) $ 1,000 28,000 – – – (20,664) (2,000) (4,400) (116) (14,000) – – 9,000 3,200 (20) $ 0

Advanced Accounting, 5th Edition

61.

62.

63.

64.

Topic: Goodwill calculation, noncontrolling interest LO 1 What is the initial goodwill related to this acquisition? a. b. c. d.

$52,000 $18,300 $31,000 $36,000

ANS:

c $44,300 + $12,700 – ($5,000 + $21,000) = $31,000

Topic: Goodwill calculation, noncontrolling interest LO 1 What percentage of initial goodwill is allocated to the controlling interest? a. b. c. d.

80% 85% 75% 70%

ANS:

a $44,300 – 75% x ($5,000 + $21,000) = $24,800; $24,800/$31,000 = 80%

Topic: Noncontrolling interest in income calculation, third year LO 2 On the consolidated income statement for 2025, what is the balance for noncontrolling interest in net income? a. b. c. d.

$320 $450 $364 $410

ANS:

b ($14,000 - $9,000 - $3,200) x 25% = $450

Topic: Consolidation working paper, noncontrolling interest, third year LO 2 On the consolidation working paper for 2025, what is the credit to noncontrolling interest in Silicon in eliminating entry (E)? a. b. c. d.

$ 500 $1,629 $1,600 $1,589

ANS:

b ($2,000 + $4,400 + $116) x 25% = $1,629

Test Bank, Chapter 5

©Cambridge Business Publishers, 2023 5-23

65.

66.

67.

68.

Topic: Consolidation working paper, noncontrolling interest, third year LO 2 On the consolidation working paper for 2025, what is the credit to noncontrolling interest in Silicon in eliminating entry (R)? a. b. c. d.

$12,750 $13,000 $11,200 $11,120

ANS:

d (25% x ($21,000 - $1,000)) + (20% x ($31,000 - $400)) = $11,120

Topic: Consolidated income statement, noncontrolling interest, third year LO 2 What is consolidated net income for 2025? a. b. c. d.

$2,080 $2,350 $2,800 $3,520

ANS:

c $39,000 - $29,000 - $7,200 = $2,800 See consolidation working paper below.

Topic: Consolidated balance sheet, third year LO 2 On the consolidated balance sheet at December 31, 2025, what is the balance for consolidated retained earnings? a. b. c. d.

$22,030 $21,760 $22,480 $23,200

ANS:

a Income to the controlling interest = $2,800 - $450 = $2,350 Consolidated retained earnings, December 31, 2025 = $19,680 + $2,350 = $22,030 See consolidation working paper below.

Topic: Consolidated statement of income and comprehensive income, noncontrolling interest, third year LO 2 What is consolidated comprehensive income for 2025? a. b. c. d.

$3,515 $3,520 $2,800 $3,255

©Cambridge Business Publishers, 2023 5-24

Advanced Accounting, 5th Edition

ANS:

b $2,800 + $720 = $3,520 See consolidation working paper below.

Consolidation working paper for Questions 61 – 68: Pali Dr (Cr) $ 5,000 42,000 – 45,732

Silicon Dr (Cr) $ 1,000 28,000 – –

Goodwill Liabilities Capital stock RE, beginning AOCI, beginning Noncontrolling interest

– (53,887) (15,000) (19,680) (1,100)

– (20,664) (2,000) (4,400) (116)

Sales revenue Equity in net income of Silicon Equity in OCI of Silicon Cost of goods sold Operating expenses Other comprehensive income Noncontrolling interest in NI Noncontrolling interest in OCI Total

(25,000) (1,350) (15) 20,000 4,000 (700) --$ 0

Current assets Property, net Intangibles Investment in Silicon

Dr

Cr

(R) 20,000 1,365 (C) 4,887 (E) 39,480 (R) (R) 30,600 (E) 2,000 (E) 4,400 (E) 116 1,629 (E) 11,120 (R) 455 (N)

(14,000) – 9,000 3,200 (20) --$ 0

(C) 1,350 (C) 15

(N) 450 (N) 5 $58,936

_____ $58,936

Consol Dr (Cr) $ 6,000 70,000 20,000 -30,600 (74,551) (15,000) (19,680) (1,100) (13,204) (39,000) --29,000 7,200 (720) 450 5 $ 0

Use the following information to answer Questions 69 - 72: Pomery Company has a financial relationship with Styro Inc., a separate legal entity, but does not own any of Styro’s voting stock. On January 1, 2023, Pomery determines that Styro is a variable interest entity and that Pomery is Styro’s prime beneficiary. Sparkle’s shareholders’ equity on January 1, 2023 is as follows: Capital stock Retained earnings Total

$2,000 7,000 $9,000

Styro’s net assets are reported at values approximating fair value, except that its equipment (5-year life, straight-line) is overvalued by $3,000 and it has previously unreported indefinite life identifiable intangibles valued at $4,000. The fair value of Styro at January 1, 2023 is $15,000. Pomery and Styro were not under common control prior to January 1, 2023. Styro reported net income of $800 in 2023, and identifiable intangibles were impaired by $200. Styro reported net income of $650 in 2024, and identifiable intangibles were not impaired. Goodwill was not impaired in either year.

Test Bank, Chapter 5

©Cambridge Business Publishers, 2023 5-25

69.

70.

71.

72.

Topic: Consolidating a VIE, first year LO 2 Noncontrolling interest in net income, reported on the 2023 consolidated income statement, is a. b. c. d.

$1,200 $ 800 $1,400 $ 600

ANS:

a $800 + ($3,000/5) - $200 = $1,200

Topic: Consolidating a VIE, first year LO 2 Noncontrolling interest, reported on the December 31, 2023 consolidated balance sheet, is a. b. c. d.

$15,600 $10,200 $16,200 $15,800

ANS:

c $15,000 + $1,200 = $16,200

Topic: Consolidating a VIE, second year LO 2 Noncontrolling interest in net income, reported on the 2024 consolidated income statement, is a. b. c. d.

$1,450 $ 650 $ 50 $1,250

ANS:

d $650 + ($3,000/5) = $1,250

Topic: Consolidating a VIE, second year LO 2 Noncontrolling interest, reported on the December 31, 2024 consolidated balance sheet, is a. b. c. d.

$16,200 $16,850 $17,450 $18,650

ANS:

c $16,200 + $1,250 = $17,450

©Cambridge Business Publishers, 2023 5-26

Advanced Accounting, 5th Edition

73.

Topic: Noncontrolling interests and bargain purchases LO 3 When a subsidiary has a 20% noncontrolling interest, and the acquisition is a bargain purchase, the gain on acquisition is: a. b. c. d. ANS:

The fair value of identifiable net assets acquired less acquisition cost The fair value of identifiable net assets acquired less acquisition cost less fair value of noncontrolling interest 80% of the fair value of identifiable net assets less acquisition cost 80% of the fair value of identifiable net assets less acquisition cost less fair value of noncontrolling interest b

Use the following information to answer Questions 74 – 77. Python acquires 80% of the voting stock of Slither on January 1, 2024 at an acquisition cost of $6,000. The fair value of the noncontrolling interest is $1,000. Slither’s balance sheet at the date of acquisition is as follows:

Tangible assets Identifiable intangibles Liabilities Capital stock Retained earnings 74.

75.

Book Value Dr (Cr) $4,500 – (3,000) (300) (1,200)

Fair Value Dr (Cr) $7,500 3,000 (3,100) – –

Topic: Bargain purchase, noncontrolling interest, gain on acquisition LO 3 The gain on acquisition is: a. b. c. d.

$1,400 $ 80 $ 400 $ 320

ANS:

c $7,500 + $3,000 - $3,100 - $6,000 - $1,000 = $400

Topic: Consolidation working paper, bargain purchase, date of acquisition LO 3 On the consolidation working paper at January 1, 2024, what is the credit to noncontrolling interest in Slither in eliminating entry (E)? a. b. c. d.

$0 $ 380 $ 300 $1,000

ANS:

c

Test Bank, Chapter 5

©Cambridge Business Publishers, 2023 5-27

(E) Capital stock Retained earnings

300 1,200 Investment in Slither NCI in Slither

76.

1,200 300

Topic: Consolidation working paper, bargain purchase, date of acquisition LO 3 On the consolidation working paper at January 1, 2024, what is the credit to Investment in Slither in eliminating entry (R)? a. b. c. d.

$4,800 $5,120 $5,300 $5,200

ANS:

d Python records its investment at $6,400 (= $6,000 cost + $400 gain). $1,200 is credited in entry (E), so $5,200 is credited in entry (R). (R) Tangible assets ID intangible assets

3,000 3,000 Liabilities NCI in Slither Investment in Slither

77.

100 700 5,200

Topic: Consolidation working paper, bargain purchase, date of acquisition LO 3 On the consolidation working paper at January 1, 2024, what is the credit to Noncontrolling Interest in Slither in eliminating entry (R)? a. b. c. d.

$620 $700 $636 $650

ANS:

b See eliminating entry (R) in question 76 above; $1,000 - $300 = $700 Use the information below to answer Questions 78 – 81.

Pearl acquires 90% of the voting stock of Spruce on January 1, 2024 for $5,000. The fair value of the noncontrolling interest is $550. Spruce’s equity is reported at $4,800 at the date of acquisition. Its net assets are reported at amounts approximating fair value, but it has previously unreported identifiable intangible assets (5-year life, straight-line), valued at $1,000. Pearl uses the complete equity method to account for its investment. Spruce reports net income of $300 for 2024.

©Cambridge Business Publishers, 2023 5-28

Advanced Accounting, 5th Edition

78.

79.

80.

81.

Topic: Bargain purchase gain LO 3 At what value does Pearl record its investment in Spruce at January 1, 2024? a. b. c. d.

$5,100 $5,000 $5,250 $4,900

ANS:

c Gain on acquisition = $4,800 + $1,000 - $5,000 - $550 = $250 Investment = $5,000 + $250 = $5,250

Topic: Consolidated income statement, bargain purchase, first year LO 3 What is the noncontrolling interest in net income for 2024? a. b. c. d.

$30 $20 $10 $40

ANS:

c 10% x [$300 – ($1,000/5)] = $10

Topic: Consolidated balance sheet, bargain purchase, first year LO 3 What is the noncontrolling interest in Spruce at December 31, 2024? a. b. c. d.

$550 $560 $580 $540

ANS:

b $550 + $10 = $560

Topic: Consolidation working paper, bargain purchase, first year LO 3 On the 2024 consolidation working paper, what is the credit to noncontrolling interest in eliminating entry (R)? a. b. c. d.

$85 $65 $80 $70

ANS:

d Eliminating entry (R) must bring the NCI balance to its beginning-of-year balance of $550. Eliminating entry (E) credits the NCI by $480 (= 10% x $4,800). $550 - $480 = $70

Test Bank, Chapter 5

©Cambridge Business Publishers, 2023 5-29

82.

Topic: Noncontrolling interest valuation at the date of acquisition, IFRS alternative LO 4 How is the noncontrolling interest in a subsidiary valued at the date of acquisition, following the IFRS alternative method of valuing acquired goodwill? a. b. c. d. ANS:

83.

Fair value at the date of acquisition The noncontrolling interest’s share of the fair value of the subsidiary’s identifiable net assets at the date of acquisition The noncontrolling interest’s share of the book value of the subsidiary at the date of acquisition The noncontrolling interest’s share of the book value of the subsidiary at the date of acquisition plus its share of date-of-acquisition goodwill b

Topic: IFRS for goodwill valuation, noncontrolling interest LO 4 IFRS allows an alternative method for valuing the acquired subsidiary’s goodwill. When is U.S. GAAP and IFRS valuation of goodwill the same regardless of which valuation method is used under IFRS? a. b. c. d.

There is no noncontrolling interest in the acquired subsidiary. There are no revaluations of the acquired subsidiary’s identifiable net assets. There is no goodwill impairment. It is the date of acquisition.

ANS:

a

Use the following information to answer Questions 84 and 85. On January 1, 2024, Panda, a U.K. company, acquired 75% of Sauer’s voting stock for £20,000 in cash. The noncontrolling interest had an estimated fair value of £5,000. Sauers’s net assets were reported at amounts approximating fair value, but Panda identified the following identifiable intangible assets that are not reported on Sauer’s balance sheet:

Developed technology Brand names

Fair Value £2,000 6,000

Sauer’s total shareholders’ equity at January 1, 2024 was £4,200. Panda uses IFRS and values the noncontrolling interest using the IFRS alternative method. 84.

Topic: IFRS for noncontrolling interests, date of acquisition LO 4 At what value will the noncontrolling interest in Sauer be reported on the consolidated balance sheet at the date of acquisition? a. b. c. d.

£1,050 £3,050 £3,750 £5,000

©Cambridge Business Publishers, 2023 5-30

Advanced Accounting, 5th Edition

ANS: 85.

b (£4,200 + £2,000 + £6,000) x 25% = £3,050

Topic: IFRS for noncontrolling interests, date of acquisition LO 4 Total goodwill recognized for this acquisition is: a. b. c. d.

£ 9,600 £12,800 £ 5,800 £10,850

ANS:

d £20,000 – 75% x (£4,200 + £2,000 + £6,000) = £10,850

Use the following information to answer Questions 86 - 89 below. On January 1, 2024, PC Power Company, a company located in Singapore, acquired 75% of Sandisk Company’s voting stock for S$25,000 in cash. Indefinite life identifiable intangible assets not previously reported on Sandisk’s balance sheet had a fair value of S$8,000. There were no other date-of-acquisition revaluations of Sandisk’s identifiable net assets. Sandisk’s book value at January 1, 2024 was S$3,000. It is now December 31, 2025 (two years later). There is no goodwill impairment in 2024, and goodwill impairment for 2025 is S$300. The previously unreported identifiable intangible assets were impaired by S$200 in 2024 and S$100 in 2025. PC Power uses the complete equity method to account for its investment, and follows IFRS, using the alternative method for valuing noncontrolling interests and goodwill. December 31, 2025 trial balances for PC Power and Sandisk appear below.

Tangible assets, net Investment in Sandisk Liabilities Capital stock Retained earnings, beginning Sales revenue Equity in net income of Sandisk Cost of sales and operating expenses Total 86.

PC Power Dr (Cr) S$ 46,000 26,725 (35,350) (15,000) (21,000) (25,000) (375) 24,000 S$ 0

Sandisk Dr (Cr) S$ 30,500 – (24,500) (1,000) (4,000) (13,500) – 12,500 S$ 0

Topic: Consolidated balance sheet, subsequent year, IFRS LO 4 On the consolidated balance sheet at December 31, 2025, what is the balance for goodwill? a. b. c. d.

S$13,700 S$14,000 S$16,450 S$16,750

Test Bank, Chapter 5

©Cambridge Business Publishers, 2023 5-31

ANS:

87.

88.

89.

c Total goodwill = S$25,000 – 75% x (S$3,000 + S$8,000) = S$16,750 Goodwill is impaired by S$300 through 2025, so its December 31, 2025 balance is S$16,750 - S$300 = S$16,450.

Topic: Consolidated income statement, subsequent year, IFRS LO 4 On the consolidated income statement for 2025, what is the balance for noncontrolling interest in net income? a. b. c. d.

S$175 S$150 S$250 S$225

ANS:

d Under the IFRS alternative, goodwill impairment is not deducted from noncontrolling interest in net income. S$225 = 25% x (S$1,000 reported income – S$100 ID intangibles impairment).

Topic: Consolidation working paper, subsequent year, IFRS LO 4 On the consolidation working paper for 2025, what is the credit to the noncontrolling interest for eliminating entry (R)? a. b. c. d.

S$1,950 S$3,050 S$6,300 S$2,825

ANS:

a Entry (R) establishes revaluations as of the beginning of 2025. The NCI only shares in the revaluation of ID intangibles. Identifiable intangible assets: S$8,000 – S$200 = S$7,800 x 25% = S$1,950

Topic: Consolidation working paper, subsequent year, IFRS LO 4 On the consolidated balance sheet at December 31, 2025, what amount is reported for noncontrolling interest? a. b. c. d.

S$3,375 S$3,425 S$3,450 S$3,175

ANS:

b ((S$1,000 + S$4,000) x 25%) + S$1,950 + S$225 = $S$3,425

©Cambridge Business Publishers, 2023 5-32

Advanced Accounting, 5th Edition

90.

91.

92.

93.

Topic: Consolidated statement of cash flows LO 5 In the operating section of the consolidated statement of cash flows, if using the indirect method, which item below is subtracted from consolidated net income? a. b. c. d.

Consolidated depreciation expense Cash dividends received on equity method investments Noncontrolling interest in net loss of subsidiary Undistributed equity method income

ANS:

d

Topic: Consolidated statement of cash flows LO 5 On the consolidated statement of cash flows, cash dividends paid to the shareholders of the parent company are: a. b. c. d.

Reported in the operating activities section Reported in the investing activities section Reported in the financing activities section Not reported

ANS:

c

Topic: Consolidated statement of cash flows LO 5 On the consolidated statement of cash flows, where should cash dividends paid to noncontrolling shareholders appear? a. b. c. d.

Operating activities section Investing activities section Financing activities section Does not appear on the statement

ANS:

c

Topic: Consolidated statement of cash flows LO 5 On the consolidated statement of cash flows, prepared using the indirect method, depreciation expense is a. b. c. d.

added to consolidated net income in the operating section. a use of cash in the investing section. a source of cash in the financing section. not included.

ANS:

a

Test Bank, Chapter 5

©Cambridge Business Publishers, 2023 5-33

94.

Topic: Consolidated statement of cash flows LO 5 On a consolidated statement of cash flows, cash from financing activities may include all of the following except: a. b. c. d.

increase in long-term debt dividends paid to controlling shareholders dividends paid to noncontrolling shareholders increase in current liabilities

ANS:

d

Use the following information for Questions 95 – 98. Penrose Corporation acquired 80% of the voting stock of Speedy Company several years ago. There were no revaluations of Speedy’s identifiable net assets, and the excess of acquisition cost over Speedy’s book value was attributed entirely to goodwill. Here are the consolidated balance sheets for Penrose and Speedy, the consolidated income statement for 2025, plus additional information: Consolidated Balance Sheets at December 31 Assets Cash Other current assets Plant assets Accumulated depreciation Goodwill Total assets Liabilities & Equity Current liabilities Long-term debt Controlling interest in equity Noncontrolling interest in equity Total liabilities & equity

2025

2024

$ 220 600 4,550 (1,237) 470 $4,603

$ 210 580 4,300 (1,090) 500 $4,500

$ 590 3,015 925 73 $4,603

$ 600 3,000 850 50 $4,500

Consolidated Statement of Income and Comprehensive Income for 2025 Sales revenue $2,000 Less: Cost of goods sold (1,400) Less: Operating expenses and losses (450) Consolidated net income 150 Less: Noncontrolling interest in net income (25) Net income attributable to controlling interest $ 125 Additional information for 2025: 1. 2. 3. 4.

Consolidated depreciation expense was $400, and the goodwill impairment loss was $30. Plant assets with an original cost of $300 were sold for $20. Penrose declared and paid $50 in cash dividends. Speedy declared and paid $10 in cash dividends.

©Cambridge Business Publishers, 2023 5-34

Advanced Accounting, 5th Edition

95.

96.

97.

98.

Topic: Consolidated statement of cash flows LO 5 In the operating section of the 2025 consolidated statement of cash flows, the loss on the sale of plant assets is an adjustment to consolidated net income. The loss is a. b. c. d.

$ 32 $195 $ 27 $280

ANS:

c

Topic: Consolidated statement of cash flows LO 5 In the investing section of the 2025 consolidated statement of cash flows, investment in plant assets is a use of cash. The amount of this investment is a. b. c. d.

$245 $550 $265 $585

ANS:

b

Topic: Consolidated statement of cash flows LO 5 On the consolidated statement of cash flows for 2025, total cash dividends paid is: a. b. c. d.

$40 $50 $52 $10

ANS:

c

Topic: Consolidated statement of cash flows LO 5 On the consolidated statement of cash flows for 2025, net cash from operating activities is: a. b. c. d.

$577 $547 $550 $607

ANS:

a

Test Bank, Chapter 5

©Cambridge Business Publishers, 2023 5-35

Notes to questions 95 - 98: Cash from operating activities Consolidated net income Add (subtract) items not affecting cash: Depreciation expense Goodwill impairment loss Loss on sale of plant assets (1) Changes in current assets and liabilities: Increase in other current assets Decrease in current liabilities Net cash from operating activities Cash from investing activities Acquisition of plant assets (2) Sale of plant assets Cash from financing activities Increase in long-term debt Dividends paid to controlling shareholders Dividends paid to noncontrolling shareholders (3) Net increase in cash Plus cash balance, January 1 Cash balance, December 31

$ 150 $ 400 30 27 (20) (10)

(550) 20 15 (50) (2)

457

(30) 577

(530)

(37) 10 210 $ 220

(1) $1,090 + $400 – X = $1,237; X = $253 accumulated depreciation on plant assets sold; $300 – $253 = $47 book value; $20 - $47 = $27 loss on sale of plant assets. (2) X = cost of plant assets acquired; $4,300 + X – $300 = $4,550; X = $550 (3) $10 x 20% = $2

©Cambridge Business Publishers, 2023 5-36

Advanced Accounting, 5th Edition

PROBLEMS 1.

Topic: Goodwill allocation, date of acquisition LO 1 Below is information on a U.S. company’s acquisition: • • • • •

Acquisition cost $75,000 for 65% of the voting stock Fair value of noncontrolling interest $35,000 Book value of acquired company $40,000 No revaluations of reported identifiable net assets Previously unreported license agreements valued at $10,000

Required Calculate total goodwill and its allocation to the controlling and noncontrolling interest. ANS: Acquisition cost Fair value of noncontrolling interest Book value License agreements Fair value of identifiable net assets Goodwill Goodwill to controlling interest: Goodwill to noncontrolling interest: 2.

$40,000 10,000

$ 75,000 35,000 110,000 50,000 $ 60,000

$75,000 – (65% x $50,000) = $42,500 $60,000 – $42,500 = $17,500

Topic: Goodwill allocation, date of acquisition LO 1 Below is information on a U.S. company’s acquisition: • • • •

Acquisition cost $70 million for 80% of the voting stock Fair value of noncontrolling interest $15 million Book value of acquired company $3 million Required revaluations of identifiable net assets: o Previously unrecorded deferred tax liabilities, $1 million o Previously unrecorded identifiable intangible assets are valued at $8 million o Plant assets are overvalued by $5 million

Required Calculate total goodwill and its allocation to the controlling and noncontrolling interest. Report your answers in millions of dollars.

Test Bank, Chapter 5

©Cambridge Business Publishers, 2023 5-37

ANS: (in millions) Acquisition cost Fair value of noncontrolling interest Book value Revaluations: Deferred tax liabilities Identifiable intangible assets Plant assets Fair value of identifiable net assets Goodwill Goodwill to controlling interest: Goodwill to noncontrolling interest: 3.

$ 70 15 85

$ 3 (1) 8 (5)

5 $ 80

$70 – (80% x $5) = $66 $80 – $66 = $14

Topic: Goodwill allocation, date of acquisition LO 19 Below is information on a U.S. company’s acquisition: • • • •

Acquisition cost $90,030 for 90% of the voting stock Fair value of noncontrolling interest $5,970 Book value of acquired company $20,000 Required revaluations of identifiable net assets: o Previously unrecorded warranty liabilities, $5,000 o Previously unrecorded developed technology, $30,000 o Inventories overvalued by $10,000 o Plant & equipment overvalued by $60,000

Required Calculate total goodwill and the percentage of goodwill allocated to the controlling interest. ANS: Acquisition cost Fair value of noncontrolling interest Book value Revaluations: Warranty liabilities Identifiable intangible asset Inventories Plant & equipment Fair value of identifiable net assets Goodwill

$20,000 (5,000) 30,000 (10,000) (60,000)

$90,030 5,970 96,000

(25,000) $121,000

Goodwill to controlling interest: $90,030 – (-$25,000 x 90%) = $112,530 $112,530/$121,000 = 93%

©Cambridge Business Publishers, 2023 5-38

Advanced Accounting, 5th Edition

4.

Topic: Acquisition cost, goodwill allocation, date of acquisition LO 1 A U.S. company acquires 65% of another company. The acquisition includes the following items: • • • • • • •

10,000 shares of new stock issued to the former shareholders of the acquired company, fair value $40/share $5/share in cash paid to the former shareholders of the acquired company, 25,000 shares acquired Registration fees for the stock, $2,000, paid in cash Legal and consulting fees, $3,000, paid in cash $5,000 in severance pay to former employees of the acquired company Vested stock options issued to employees of the acquired company, to replace options denominated in the acquired company’s stock, fair value $15,000 Unvested stock options issued to employees of the acquired company, to replace options denominated in the acquired company’s stock, terminated if the employee leaves the company, fair value $6,000

Fair value of the noncontrolling interest is $275,000. The acquired company’s book value at the date of acquisition is $25,000. The acquired company’s identifiable net assets are reported at amounts approximating fair value, except that it has previously unreported in-process research and development, valued at $75,000. Required a. Calculate acquisition cost. b. Calculate total goodwill and its allocation to the controlling and noncontrolling interest. ANS:

a.

b.

Fair value of stock issued Cash to former shareholders Severance pay Vested stock options Total acquisition cost

10,000 x $40 25,000 x $5

Acquisition cost Fair value of noncontrolling interest Book value Revaluation: Identifiable intangible assets Fair value of identifiable net assets Goodwill Goodwill to controlling interest: Goodwill to noncontrolling interest:

Test Bank, Chapter 5

$ 25,000 75,000

$ 400,000 125,000 5,000 15,000 $545,000 $ 545,000 275,000 820,000

100,000 $ 720,000

$545,000 – 65% x $100,000 = $480,000 $720,000 – $480,000 = $240,000

©Cambridge Business Publishers, 2023 5-39

5.

Topic: Consolidation eliminating entries, date of acquisition LO 1 Philker Corporation acquires 85% of the voting stock of Superfast Inc. at an acquisition cost of $300,000. The fair value of the noncontrolling interest is $45,000. Superfast’s equity at the date of acquisition is as follows: Capital stock Retained earnings Accumulated other comprehensive loss Total

$ 10,000 55,000 (5,000) $ 60,000

Superfast’s identifiable net assets are reported at values approximating fair value except that its inventories are overvalued by $2,000, its plant assets are overvalued by $15,000, and it has previously unreported identifiable intangible assets valued at $65,000. Required a. Calculate the date-of-acquisition goodwill, and its allocation to the controlling interest and noncontrolling interest. b. Prepare the eliminating entries (E) and (R) to consolidate Superfast at the date of acquisition. ANS: a.

Acquisition cost Fair value of noncontrolling interest Book value Revaluations: Inventories Plant assets Identifiable intangible assets Fair value of identifiable net assets Goodwill

$ 60,000 (2,000) (15,000) 65,000

$300,000 45,000 345,000

108,000 $237,000

$300,000 – (85% x $108,000) = $208,200 goodwill to controlling interest $237,000 - $208,200 = $28,800 goodwill to noncontrolling interest b.

(E) Capital stock Retained earnings

10,000 55,000 AOCL Investment in Superfast Noncontrolling interest in Superfast

©Cambridge Business Publishers, 2023 5-40

Advanced Accounting, 5th Edition

5,000 51,000 9,000

(R) Identifiable intangibles Goodwill

65,000 237,000 Inventories Plant assets, net Investment in Superfast (1) Noncontrolling interest in Superfast (2)

(1) (2)

6.

2,000 15,000 249,000 36,000

(85% x ($65,000 - $2,000 - $15,000)) + $208,200 = $249,000 (15% x ($65,000 - $2,000 - $15,000)) + $28,800 = $36,000

Topic: Date of acquisition consolidation eliminating entries LO 1 Page Company acquired 70 percent of Safari Corporation’s voting stock at an acquisition cost of $250,000. The estimated fair value of the noncontrolling interest was $90,000. At the date of acquisition, Safari’s book value was $50,000, consisting of capital stock of $3,000, additional paid-in capital of $49,000, accumulated other comprehensive income of $3,000, and treasury stock of $5,000. Safari reports its identifiable net assets at amounts approximating fair value, with these exceptions: property is overvalued by $20,000, deferred tax liabilities resulting from the acquisition are $3,000, previously unreported identifiable intangibles have a fair value of $45,000, and Safari has $15,000 of goodwill on its books from a previous acquisition. Required a. Calculate total goodwill for this acquisition and its allocation to the controlling and noncontrolling interests. b. Prepare working paper eliminating entries (E) and (R) needed to consolidate the accounts of Page and Safari at the date of acquisition. ANS: a.

Acquisition cost Fair value of noncontrolling interest Book value Revaluations: Property Deferred tax liabilities Identifiable intangible assets Goodwill (old) Fair value of identifiable net assets Goodwill

$ 50,000 (20,000) (3,000) 45,000 (15,000)

$250,000 90,000 340,000

57,000 $283,000

$250,000 – (70% x $57,000) = $210,100 goodwill to controlling interest $283,000 - $210,100 = $72,900 goodwill to noncontrolling interest

Test Bank, Chapter 5

©Cambridge Business Publishers, 2023 5-41

b.

(E) Capital stock Additional paid-in capital AOCI

3,000 49,000 3,000 Treasury stock Investment in Safari Noncontrolling interest in Safari

(R) Identifiable intangibles Goodwill (new)

5,000 35,000 15,000

45,000 283,000 Property Deferred tax liabilities Goodwill (old) Investment in Safari (1) Noncontrolling interest in Safari (2)

(1) (2)

7.

20,000 3,000 15,000 215,000 75,000

(70% x ($45,000 - $20,000 - $3,000 - $15,000)) + $210,100 = $215,000 (30% x ($45,000 - $20,000 - $3,000 - $15,000)) + $72,900 = $75,000

Topic: Consolidation working paper, noncontrolling interest, date of acquisition LO 1 The trial balances of Plough Company and Spin Corporation immediately following the acquisition of Spin by Plough on January 1, 2024, plus fair value information, is as follows:

Current assets Plant & equipment (net) Investment in Spin Current liabilities Long-term liabilities Capital stock Retained earnings Treasury stock Total

Plough Co. Book Value Dr (Cr) $ 4,000 60,000 40,000 (3,600) (81,000) (7,000) (12,700) 300 $ 0

Spin Corp. Book Value Dr (Cr) $ 2,000 25,000 -(1,800) (16,000) (8,600) (700) 100 $ 0

Spin Corp. Fair Value Dr (Cr) $ 1,500 20,000 -(2,000) (15,900)

In addition to the assets already reported by Spin Corporation, the following previously unreported identifiable intangible assets are appropriately recorded as assets per ASC Topic 805. Identifiable Intangible Asset Developed technology In-process R&D

Fair Value $3,000 5,000

Plough Company paid $40,000 in cash to acquire 80% of Spin Corporation’s voting stock. The fair value of the noncontrolling interest in Spin Corporation was $9,000.

©Cambridge Business Publishers, 2023 5-42

Advanced Accounting, 5th Edition

Required a. Calculate total goodwill to be recognized on this acquisition. b. Complete a working paper to consolidate the trial balances of Plough and Spin as of January 1, 2024. ANS: a.

b.

Acquisition cost Noncontrolling interest Total Book value Revaluations: Current assets Plant & equipment Current liabilities Long-term liabilities Developed technology In-process R&D Fair value of identifiable net assets Goodwill

$ 9,200 (500) (5,000) (200) 100 3,000 5,000

$40,000 9,000 49,000

11,600 $37,400

Consolidation working paper, January 1, 2024

Current assets

Plough Dr (Cr) $ 4,000

Spin Dr (Cr) $ 2,000

Cr 500 (R)

Consol Dr (Cr) $ 5,500

Plant & equipment (net)

60,000

25,000

5,000 (R)

80,000

Investment in Spin

40,000

--

7,360 (E) 32,640 (R)

--

Developed technology

--

--

(R) 3,000

3,000

IPR&D

--

--

(R) 5,000

5,000

Goodwill

--

--

(R) 37,400

37,400

Current liabilities

(3,600)

(1,800)

Long-term liabilities

(81,000)

(16,000) (R)

--

--

Noncontrolling interest Capital stock

(7,000)

Retained earnings

(12,700)

Treasury stock Total

Test Bank, Chapter 5

0

200 (R) 100

(5,600) (96,900)

1,840 (E) 7,160 (R)

(9,000)

(8,600) (E) 8,600 (700) (E)

300 $

Dr

$

(7,000)

700

100

______

0

$54,800

(12,700) 100 (E) $54,800

300 $

0

©Cambridge Business Publishers, 2023 5-43

8.

Topic: Acquisition cost, goodwill, consolidation working paper, date of acquisition LO 1 Penny Corporation purchased 60% of the shares of Silver Company for $150,000 in cash. Accounting and legal costs connected with the acquisition were $1,500, paid in cash. The acquisition also includes an earnout, currently valued at $6,000. At the date of acquisition, the fair value of Silver’s plant and equipment was $300,000 less than carrying value. However, Silver had $350,000 in identifiable intangible assets, unreported on its balance sheet but meeting the criteria for capitalization as part of the acquisition. The trial balances of Penny and Silver immediately following the acquisition appear below. Penny

Silver Dr (Cr) $ 149,000 $ 70,000 1,200,000 593,000 156,000 -(805,000) (500,000) (10,000) (1,000) (400,000) (180,000) (370,000) 20,000 30,000 (4,000) 50,000 2,000 $ 0 $ 0

Current assets Plant & equipment, net Investment in Silver Liabilities Common stock Additional paid-in capital Retained deficit (earnings) Accumulated other comprehensive loss (income) Treasury stock Total

The fair value of the noncontrolling interest was $85,000 at the date of acquisition. Required a. Calculate the goodwill reported for this acquisition. b. Prepare a working paper to consolidate the trial balances of Penny and Silver at the date of acquisition. ANS: a.

Acquisition cost Fair value of noncontrolling interest Total fair value Book value Revaluations: Plant & equipment Developed technology Fair value of identifiable net assets Goodwill

©Cambridge Business Publishers, 2023 5-44

$ 163,000 (300,000) 350,000

$ 156,000 85,000 241,000

(213,000) $ 28,000

Advanced Accounting, 5th Edition

b. Current assets Plant & equipment, net Identifiable intangibles Goodwill Investment in Silver Liabilities Common stock Additional paid-in capital Retained earnings AOCI Treasury stock Noncontrolling interest in Silver Total

9.

Penny Dr (Cr) $ 149,000 1,200,000 --156,000

Silver Dr (Cr) $ 70,000 593,000 ----

(805,000) (10,000) (400,000) (370,000) 30,000 50,000

(500,000) (1,000) (E) 1,000 (180,000) (E) 180,000 20,000 (4,000) (E) 4,000 2,000

$

-0

$

Dr

Cr 300,000 (R)

(R) 350,000 (R) 28,000

-0

97,800 (E) 58,200 (R)

20,000 (E)

2,000 (E) 65,200 (E) _______ 19,800 (R) $563,000 $563,000

Consol Dr (Cr) $ 219,000 1,493,000 350,000 28,000 -(1,305,000) (10,000) (400,000) (370,000) 30,000 50,000

$

(85,000) 0

Topic: Consolidation of VIE at date of acquisition, eliminating entries LO 1 Pearson Resorts uses a financial entity to obtain secured debt. On January 1, 2025, Pearson determines that the financial entity is a variable interest entity and Pearson is the primary beneficiary. Pearson has no equity interest in the VIE. The VIE’s trial balance on January 1, 2025 is as follows: Dr (Cr) $ 65,000 10,000 (74,000) (1,200) 200 $ 0

Receivables Other assets Liabilities Capital stock Retained deficit Total

The VIE’s receivables have a fair value of $62,000 and its other assets have a fair value of $8,000. The fair value of the VIE is $12,000. Required Prepare the eliminating entries to consolidate the VIE with Pearson on January 1, 2025, assuming the VIE and Pearson are: a. Already under common control. b. Not previously under common control. ANS: a.

(E) Capital stock

1,200 Retained deficit Noncontrolling interest

Test Bank, Chapter 5

©Cambridge Business Publishers, 2023 5-45

200 1,000

b.

(E) Capital stock

1,200 Retained deficit Noncontrolling interest

200 1,000

(R) Goodwill

16,000 Receivables Other assets Noncontrolling interest

10.

3,000 2,000 11,000

Topic: Consolidation of VIE at date of acquisition, working paper LO 1 Pebble Hotels uses a financial entity to obtain secured debt. On January 1, 2024, Pebble determines that the financial entity is a variable interest entity and Pebble is the primary beneficiary. Pebble has no equity interest in the VIE. The VIE’s trial balance on January 1, 2024 is displayed in the consolidation working paper below. The VIE’s financial assets have a fair value of $21,000 and its other assets have a fair value of $4,000. The fair value of the VIE is $5,000. Pebble and the VIE were not previously under common control. Required Fill in the working paper below to consolidate the VIE with Pebble at January 1, 2024.

Financial assets Other assets Goodwill Liabilities Capital stock Retained (earnings) deficit AOCI Noncontrolling interest Total

Pebble Dr (Cr) $ 150,000 900,000 -(720,000) (20,000) (300,000) (10,000) -$ 0

VIE Dr (Cr) $ 20,000 6,000 -(29,000) (2,000) 5,000 --$ 0

Pebble Dr (Cr) $ 150,000 900,000 -(720,000) (20,000) (300,000) (10,000) -$ 0

VIE Dr (Cr) $ 20,000 6,000 -(29,000) (2,000) 5,000 --$ 0

Dr

Cr

Dr (R) 1,000

Cr

Consol Dr (Cr)

ANS: Financial assets Other assets Goodwill Liabilities Capital stock Retained (earnings) deficit AOCI Noncontrolling interest Total

©Cambridge Business Publishers, 2023 5-46

2,000 (R) (R) 9,000 (E) 2,000 5,000 (E) (E) 3,000 $15,000

8,000 (R) $15,000

Consol Dr (Cr) $ 171,000 904,000 9,000 (749,000) (20,000) (300,000) (10,000) (5,000) $ 0

Advanced Accounting, 5th Edition

11.

Topic: Equity in net income and noncontrolling interest in net income LO 2 At the beginning of the current year, Pacific Travel Inc acquired 60 percent of Star Resorts’ voting stock for an acquisition cost of $50 million. Star reports its identifiable net assets at amounts approximating fair value, with these exceptions: land is undervalued by $3 million, property (20-year remaining life) is overvalued by $10 million, and previously unreported technology with an indefinite life was valued at $15 million. For the year following acquisition, Star reports net income of $150,000. Impairment testing reveals $100,000 in impairment on the technology but no impairment of other assets. Pacific Travel reports its investment in Star Resorts on its own books using the complete equity method. Required Calculate equity in net income for the current year, reported on Pacific Travel’s books, and the noncontrolling interest in Star Resorts’ income, reported on the consolidated income statement. ANS:

Star reported net income $150,000, split 60:40 Property revaluation write-off $10,000,000/20, split 60:40 Technology impairment $100,000, split 60:40 12.

Equity in Net Income of Star $ 90,000 300,000 (60,000) $330,000

Noncontrolling Interest in Net Income of Star $ 60,000 200,000 (40,000) $220,000

Consolidation eliminating entries, first year LO 2 Petro Corporation buys 80% of the voting stock of Supremo Inc. on January 1, 2024, at an acquisition cost of $12,000. The fair value of the noncontrolling interest at the date of acquisition is $2,000. Supremo’s equity at the date of acquisition consists of $1,000 in capital stock and a retained deficit of $500. The book values of Supremo’s reported net assets approximate fair value, except for property with a 10-year remaining life that is overvalued by $2,500. Supremo also has $3,000 in previously unreported indefinite-life identifiable intangible assets, capitalizable per ASC Topic 805. Supremo reports a net loss of $100 for 2024. The previously unreported identifiable intangibles and goodwill related to this acquisition are unimpaired in 2024. Petro uses the complete equity method to account for its investment in Supremo on its own books. Required a. Calculate the goodwill reported for this acquisition, and its allocation to Petro and to the noncontrolling interest in Supremo. b. Calculate equity in net loss for 2024, reported on Petro’s books, and the noncontrolling interest in Supremo’s net loss for 2024, reported on the consolidated income statement. c. Prepare eliminating entries (C), (E), (R), (O) and (N) necessary to consolidate the separate trial balances of Petro and Supremo at December 31, 2024. d. At what amount is the noncontrolling interest in Supremo reported on the December 31, 2024 consolidated balance sheet?

Test Bank, Chapter 5

©Cambridge Business Publishers, 2023 5-47

ANS:

a. Acquisition cost Fair value of noncontrolling interest Total fair value Book value Revaluations: Property Identifiable intangibles Fair value of identifiable net assets Goodwill

$ 500 (2,500) 3,000

$ 12,000 2,000 14,000

1,000 $ 13,000

Goodwill to controlling interest = $12,000 – (80% x $1,000) = $11,200 Goodwill to noncontrolling interest = $13,000 - $11,200 = $1,800 b.

Supremo reported net loss $100, split 80:20 Property revaluation write-off $2,500/10, split 80:20

c.

Equity in Net Income of Supremo $ (80) 200 $120

(C) Equity in net income of Supremo

Noncontrolling Interest in Net Income of Supremo $ (20) 50 $30

120 Investment in Supremo

(E) Capital stock

120

1,000 Retained deficit Investment in Supremo Noncontrolling interest in Supremo

(R) Identifiable intangibles Goodwill

500 400 100

3,000 13,000 Property Investment in Supremo (1) Noncontrolling interest in Supremo (2)

(1) (2)

2,500 11,600 1,900

(80% x $500) + $11,200 = $11,600 (20% x $500) + $1,800 = $1,900

(O) Property

250 Depreciation expense

(N) ©Cambridge Business Publishers, 2023 5-48

Advanced Accounting, 5th Edition

250

Noncontrolling interest in net income of Supremo

30 Noncontrolling interest in Supremo

d. 13.

30

$100 + $1,900 + $30 = $2,030

Topic: Goodwill, equity method, eliminating entries, first year LO 2 On July 1, 2024, the beginning of the 2025 fiscal year, Pluto Corporation acquired 80% of the voting stock of Saturn Company for $250,000 in cash and stock. The fair value of Saturn’s noncontrolling interest was $60,000. At the date of acquisition, Saturn’s equity accounts were as follows: Capital stock Retained earnings AOCI Total

$ 20,000 85,000 5,000 $110,000

Both companies have a June 30 year-end. At the date of acquisition, Saturn’s reported net assets had book values approximating fair value. However, it had previously unreported indefinite life identifiable intangibles valued at $80,000, meeting ASC Topic 805 requirements for capitalization. Impairment losses in fiscal 2025 for the identifiable intangibles were $2,000. Goodwill from the acquisition is not impaired in fiscal 2025. Saturn reported net income of $6,000 and an other comprehensive loss of $50 in fiscal 2025, and paid no dividends. Pluto uses the complete equity method to report its investment in Saturn on its own books. Required a. Calculate the date-of-acquisition goodwill for this acquisition and its allocation to the controlling and noncontrolling interests. b. Calculate equity in net income of Saturn, reported on Pluto’s books in fiscal 2025, and the noncontrolling interest in net income, reported on the consolidated income statement. c. Prepare eliminating entries (C), (E), (R), (O), and (N), required to consolidate Pluto’s trial balance accounts with those of Saturn on June 30, 2025. ANS: a.

Total goodwill = $250,000 + $60,000 - ($110,000 + $80,000) = $120,000 Goodwill to controlling interest: $250,000 - 80% x ($110,000 + $80,000) = $98,000 Goodwill to noncontrolling interest: $120,000 - $98,000 = $22,000

b.

Saturn reported net income $6,000 split 80:20 Identifiable intangibles write-off: $2,000 split 80:20

Test Bank, Chapter 5

Equity in Net Income of Saturn $4,800 (1,600) $3,200

Noncontrolling Interest in Net Income of Saturn $1,200 (400) $ 800

©Cambridge Business Publishers, 2023 5-49

c.

(C) Equity in net income of Saturn

3,200 Equity in OCL of Saturn Investment in Saturn

(E) Capital stock Retained earnings, beginning AOCI, beginning

40 3,160

20,000 85,000 5,000 Investment in Saturn Noncontrolling interest in Saturn

(R) Identifiable intangibles Goodwill

88,000 22,000

80,000 120,000 Investment in Saturn (1) Noncontrolling interest in Saturn (2)

(3) (4)

162,000 38,000

(80% x $80,000) + $98,000 = $162,000 (20% x $80,000) + $22,000 = $38,000

(O) Impairment loss

2,000 Identifiable intangibles

(N) Noncontrolling interest in net income of Saturn

2,000

800 Noncontrolling interest in OCL of Saturn Noncontrolling interest in Saturn

©Cambridge Business Publishers, 2023 5-50

Advanced Accounting, 5th Edition

10 790

14.

Topic: Goodwill allocation, equity method, eliminating entries, first year LO 2 Preston Company acquired 75% of Sparkle Corporation’s stock for $1,420 in cash on January 1, 2024, when Sparkle Corporation’s book value was $480, consisting of $50 in capital stock and $430 in retained earnings. The fair value of the noncontrolling interest was $380 at the date of acquisition. Preston uses the complete equity method to account for the investment on its own books. At the time of acquisition, all of Sparkle’s assets and liabilities were reported at fair value, except for unreported identifiable intangible assets with a fair value of $320. These intangibles are appropriately recorded as assets per ASC Topic 805, and have a remaining life of 2 years, straightline as of the date of acquisition. Goodwill arising from this acquisition is tested annually for impairment, and impairment for 2024 is $300. It is now December 31, 2024, and you are preparing the consolidated financial statements. Sparkle reported net income of $600 and declared and paid dividends of $100 for 2024. Required a. Calculate total goodwill at the date of acquisition and its allocation to the controlling and noncontrolling interest. b. Calculate equity in net income of Sparkle for 2024, as reported on Preston’s separate books, and noncontrolling interest in net income of Sparkle for 2024, as reported on the consolidated income statement. c. Prepare the eliminating entries, in journal form, to consolidate Preston and Sparkle’s trial balances at December 31, 2024. ANS: a.

Total goodwill = $1,420 + $380 - ($480 + $320) = $1,000 Goodwill to controlling interest: $1,420 – (75% x ($480 + $320)) = $820 (82%) Goodwill to noncontrolling interest: $1,000 - $820 = $180 (18%)

b.

Sparkle reported net income $600 split 75:25 Revaluation write-offs: Identifiable intangibles $320/2 split 75:25 Goodwill impairment loss $300 split 82:18 c.

Equity in Net Income of Sparkle $450

Noncontrolling Interest in Net Income of Sparkle $150

(120) (246) $ 84

(40) (54) $ 56

(C) Equity in net income of Sparkle

84 Dividends Investment in Sparkle

(E) Capital stock Retained earnings, beginning

75 9

50 430 Investment in Sparkle Noncontrolling interest in Sparkle

Test Bank, Chapter 5

©Cambridge Business Publishers, 2023 5-51

360 120

(R) Identifiable intangibles Goodwill

320 1,000 Investment in Sparkle Noncontrolling interest in Sparkle

(O) Goodwill impairment loss Amortization expense

1,060 260

300 160 Goodwill Identifiable intangibles

(N) Noncontrolling interest in net income of Sparkle

300 160

56 Dividends Noncontrolling interest in Sparkle

15.

Topic: Consolidation working paper, first year LO 2 Pine Resorts paid $48,775 in cash and stock to acquire 60% of the stock of Sharbot Hotels on January 1, 2025. Sharbot’s identifiable net assets were reported at amounts approximating fair value, except that it had $40,000 in previously unrecorded favorable leases (8-year life, straightline). The fair value of the noncontrolling interest on the acquisition date was estimated at $31,225. Goodwill impairment loss for 2025 is $4,000. The trial balances of Pine and Sharbot on December 31, 2025, one year after the acquisition, follow. Pine uses the complete equity method to report its investment in Sharbot on its own books.

Current assets Plant & equipment, net Investment in Sharbot Hotels Current liabilities Long-term debt Common stock Additional paid-in capital Retained earnings, Jan. 1 Sales revenue Equity in net income Cost of goods sold Operating expenses Total

©Cambridge Business Publishers, 2023 5-52

Pine Resorts Dr (Cr) $ 15,000 200,000 52,875 (8,000) (169,775) (1,000) (25,000) (40,000) (400,000) (4,100) 250,000 130,000 $ 0

Sharbot Hotels Dr (Cr) $ 4,000 80,000 -(3,000) (56,000) (200) (3,800) (5,000) (200,000) -120,000 64,000 $ 0

Advanced Accounting, 5th Edition

25 31

Required a. Calculate the total goodwill for this acquisition and its allocation to the controlling and noncontrolling interest. b. Prepare a schedule calculating 2025 equity in net income of Sharbot Hotels, appearing on Pine Resorts’ separate books, and the 2025 noncontrolling interest in consolidated net income, appearing on the 2025 consolidated income statement. c. Prepare a working paper to consolidate the December 31, 2025 trial balances of Pine Resorts and Sharbot Hotels. ANS: a. Acquisition cost $48,775 Fair value of noncontrolling interest 31,225 80,000 Book value $ 9,000 Identifiable intangible: Leases 40,000 49,000 Goodwill $ 31,000 Goodwill to controlling interest: $48,775 – (60% x $49,000) = $19,375 (62.5%) Goodwill to noncontrolling interest: $31,000 – $19,375 = $11,625 (37.5%) b. Sharbot Hotels reported net income $16,000 Leases amortization ($40,000/8) Goodwill impairment loss $4,000 (62.5:37.5)

Test Bank, Chapter 5

Equity in NI $ 9,600 (3,000) (2,500) $ 4,100

NCI in NI $ 6,400 (2,000) (1,500) $ 2,900

©Cambridge Business Publishers, 2023 5-53

c. Pine Resorts

Sharbot Hotels

Dr (Cr)

Dr (Cr)

Current assets

$ 15,000

$ 4,000

$ 19,000

Plant & equipment, net

200,000

80,000

280,000

Investment in Sharbot Hotels

52,875

--

Intangible assets

--

--

(R)

Goodwill

--

--

(R)

Current liabilities

(8,000)

(3,000)

(11,000)

Long-term debt

(169,775)

(56,000)

(225,775)

Common stock

(1,000)

(200)

(E)

200

(1,000)

Additional paid-in capital

(25,000)

(3,800)

(E)

3,800

(25,000)

Retained earnings, Jan. 1

(40,000)

(5,000)

(E)

5,000

(40,000)

Noncontrolling interest

--

--

(400,000)

(200,000)

Equity in net income

(4,100)

--

Cost of goods sold

250,000

120,000

Operating expenses

130,000

64,000

--

--

Sales revenue

Noncontrolling int. in NI Total

16.

$

0

$

0

Consol Dr

Cr

Dr (Cr)

4,100 (C) 5,400 (E) 43,375 (R)

--

40,000

5,000(O-1)

35,000

31,000

4,000(O-2)

27,000

3,600 (E) 27,625 (R) 2,900 (N)

(34,125)

(600,000) (C)

4,100

-370,000

(O-1) 5,000 (O-2) 4,000 (N)

203,000

2,900

______

$96,000

$96,000

2,900 $

Topic: Consolidation working paper and consolidated financial statements, first year LO 2 Pacer Hotels bought 80% of Southern Resorts’ voting stock on January 1, 2024 for $35,000. The fair value of the noncontrolling interest in Southern was $7,000 at the date of acquisition. Fair value information on Southern’s assets and liabilities at the date of acquisition is as follows: • • •

Property and equipment is overvalued by $5,000. P&E has a 10-year remaining life, straightline. Previously unreported identifiable intangibles are valued at $15,000. These intangibles have indefinite lives but testing reveals impairment of $1,000 in 2024. Goodwill reported for this acquisition is not impaired in 2024.

©Cambridge Business Publishers, 2023 5-54

Advanced Accounting, 5th Edition

0

The December 31, 2024 trial balances for Pacer and Southern are as follows:

Current assets Property & equipment, net Investment in Southern Liabilities Capital stock Retained earnings, Jan. 1 Treasury stock Dividends Sales revenue Equity in NI of Southern Cost of goods sold Operating expenses Total

Pacer Dr (Cr) $ 21,900 90,000 38,200 (74,500) (40,000) (30,000) 2,000 – (84,000) (3,600) 55,000 25,000 $ 0

Southern Dr (Cr) $ 10,000 60,000 – (57,500) (5,000) (3,100) 100 500 (50,000) – 30,000 15,000 $ 0

Pacer uses the complete equity method to account for its investment in Southern on its own books. Required a. Prepare a schedule calculating the initial value of goodwill for this acquisition, and its allocation to the parent and to the noncontrolling interest. b. Calculate Pacer’s equity in net income of Southern for 2024, reported on Pacer’s books, and the noncontrolling interest in consolidated net income for 2024, shown on the 2024 consolidated income statement. c. Prepare a working paper to consolidate the December 31, 2024 trial balances of Pacer and Southern. d. Prepare the 2024 consolidated income statement and December 31, 2024 consolidated balance sheet. ANS: a.

Acquisition cost Fair value of NCI Total fair value Book value Fair value – Book value: P&E (10 year life) ID intangibles ($1,000 impairment in first year) Fair value of identifiable net assets Goodwill Goodwill to parent $35,000 – (80% x $18,000) Goodwill to NCI ($24,000 – $20,600)

Test Bank, Chapter 5

$ 8,000 (5,000) 15,000

$35,000 7,000 42,000

18,000 $24,000 20,600 3,400

©Cambridge Business Publishers, 2023 5-55

b. Southern’s reported net income Revaluation write-offs: Plant & equipment Identifiable intangibles

Total $ 5,000

Equity in NI $ 4,000

NCI in NI $ 1,000

500 (1,000) $ 4,500

400 (800) $ 3,600

100 (200) $ 900

c. Current assets Property & equipment, net Identifiable intangibles Investment in Southern

Goodwill Liabilities Capital stock Retained earnings, Jan. 1 Treasury stock Noncontrolling interest in Southern Dividends

Pacer Dr (Cr) $ 21,900 90,000 – 38,200

– (74,500) (40,000) (30,000) 2,000

–

Southern Dr (Cr) Dr $ 10,000 60,000 (O) 500 – (R) 15,000 –

– (R) (57,500) (5,000) (E) (3,100) (E) 100

5,000 (R) 1,000 (O) 3,200 (C) 6,400 (E) 28,600 (R)

24,000 5,000 3,100 100 (E) 1,600 (E) 5,400 (R) 800 (N) 400 (C) 100 (N)

500

Sales revenue Equity in NI of Southern Cost of goods sold Operating expenses

(84,000) (3,600) 55,000 25,000

(50,000) – (C) 30,000 15,000 (O)

Noncontrolling interest in net income of Southern Total

_______ $ 0

_______ (N) 900 $ 0 $53,100

©Cambridge Business Publishers, 2023 5-56

Cr

3,600 1,000

500 (O)

$53,100

Consol Dr (Cr) $ 31,900 145,500 14,000 -

24,000 (132,000) (40,000) (30,000) 2,000 (7,800) (134,000) 85,000 40,500

$

Advanced Accounting, 5th Edition

900 0

d.

Consolidated Income Statement for 2024 Sales revenue $134,000 Cost of goods sold 85,000 Gross margin 49,000 Operating expenses 40,500 Consolidated net income 8,500 Consolidated income to the noncontrolling interest (900) Consolidated income to the controlling interest $ 7,600 Consolidated Balance Sheet at December 31, 2024

17.

Assets Current assets Property & equipment, net Identifiable intangibles Goodwill

$ 31,900 145,500 14,000 24,000

Total assets

________ $215,400

Liabilities and equity Liabilities Equity Capital stock Retained earnings Treasury stock Equity to the parent Equity to noncontrolling interest Total equity Total liabilities and equity

$132,000

$ 40,000 37,600 (2,000) 75,600 7,800 83,400 $215,400

Topic: Consolidated financial statements, subsequent years, noncontrolling interests LO 2 The December 31, 2025 consolidated trial balance of a parent and its subsidiary is shown below. Current assets Property, net Intangible assets, net Goodwill Liabilities Capital stock Retained earnings, beginning Accumulated other comprehensive income, beginning Treasury stock Noncontrolling interest Dividends Sales revenue Cost of sales Operating expenses Other comprehensive income Noncontrolling interest in net income Noncontrolling interest in other comprehensive income Total

Dr (Cr) $ 6,000 150,000 25,000 95,000 (229,030) (15,000) (20,000) (700) 800 (3,000) 1,000 (500,000) 390,000 100,000 (200) 120 10 $ 0

Required Present the 2025 consolidated statement of income and comprehensive income, and the December 31, 2025 consolidated balance sheet, in good form.

Test Bank, Chapter 5

©Cambridge Business Publishers, 2023 5-57

ANS: Consolidated Statement of Income for 2025 Sales revenue Cost of sales Operating expenses Consolidated net income Noncontrolling interest in net income Consolidated net income to the parent

$ 500,000 (390,000) (100,000) 10,000 (120) $ 9,880

Consolidated Statement of Comprehensive Income for 2025 Consolidated net income $ 10,000 Other comprehensive income 200 Consolidated comprehensive income 10,200 Comprehensive income to the noncontrolling interest * (130) Consolidated comprehensive income to the parent $ 10,070 * $130 = $120 + $10

Assets Current assets Property, net Intangibles Goodwill

Total assets

Consolidated Balance Sheet, December 31, 2025 Liabilities $ 6,000 Total liabilities 150,000 25,000 Equity 95,000 Capital stock Retained earnings * Accumulated OCI ** Treasury stock Equity to the parent Noncontrolling interest ______ Total equity $276,000 Total liabilities and equity

$229,030

$ 15,000 28,880 890 (800) 43,970 3,000 46,970 $276,000

*$28,880 = $20,000 + $9,880 – $1,000 **$890 = $700 + $200 – $10

©Cambridge Business Publishers, 2023 5-58

Advanced Accounting, 5th Edition

18.

Topic: Goodwill, complete equity method, eliminating entries, second year LO 2 The trial balance of Salmon Company at January 1, 2023 is as follows, along with estimated fair values of its assets and liabilities:

Current assets Plant & equipment, net Client contracts Liabilities Capital stock Retained earnings Total

Book Value Dr (Cr) $ 200 29,800 0 (15,000) (14,000) (1,000) $ 0

Fair Value Dr (Cr) $ 100 30,800 16,000 (14,900) ---

Information on the revalued assets and liabilities is as follows: Revaluation Current assets (inventory) Plant & equipment Client contracts Liabilities Goodwill

Remaining Life as of January 1, 2023 FIFO, sold in 2023 10 years, straight-line 5 years, straight-line 2 years, straight-line No impairment

Perch Corporation paid $80,000 in cash to acquire 90% of the voting stock of Salmon Company on January 1, 2023. The noncontrolling interest was valued at $7,000 at the date of acquisition. It is now December 31, 2024, two years after the acquisition. Salmon reported net income of $4,000 in 2024 and declared no dividends. Salmon’s January 1, 2024 retained earnings balance is $1,600. Perch uses the complete equity method to account for the investment in Salmon on its own books. Required a. Calculate the total goodwill at January 1, 2023, and its allocation to the controlling and noncontrolling interest. b. Calculate equity in net income of Salmon and the noncontrolling interest in net income of Salmon for 2024. c. Calculate the December 31, 2024 Investment in Salmon balance, reported on Perch’s books. d. Prepare the eliminating entries, in journal form, to consolidate Perch and Salmon at December 31, 2024.

Test Bank, Chapter 5

©Cambridge Business Publishers, 2023 5-59

ANS: a.

Acquisition cost Noncontrolling interest Total fair value Book value Revaluations: Current assets Plant & equipment Client contracts Liabilities Goodwill

$80,000 7,000 87,000

$15,000 (100) 1,000 16,000 100

32,000 $55,000

Goodwill to controlling interest = $80,000 - (90% x $32,000) = $51,200 Goodwill to noncontrolling interest = $55,000 - $51,200 = $3,800 b. Equity in Net Income of Salmon

Noncontrolling Interest in Net Income of Salmon

$3,600

$400

(90) (2,880) (45) $ 585

(10) (320) (5) $ 65

Salmon’s reported net income; $4,000 split 90:10 Revaluation write-offs: Plant & equipment; $1,000/10 split 90:10 Client contracts; $16,000/5 split 90:10 Liabilities; $100/2, split 90:10 c. Investment, January 1, 2023 Change in retained earnings, 2023 Revaluation write-offs, 2023: Current assets Plant & equipment Client contracts Liabilities Investment, January 1, 2024 Equity in net income, 2024 Investment, December 31, 2024 d.

$80,000 540

90% x ($1,600 - $1,000) 90% x $100 90% x ($1,000/10) 90% x ($16,000/5) 90% x ($100/2)

(C) Equity in net income of Salmon

90 (90) (2,880) (45) 77,615 585 $78,200

585 Investment in Salmon

(E) Capital stock Retained earnings, beginning

14,000 1,600 Investment in Salmon Noncontrolling interest in Salmon

©Cambridge Business Publishers, 2023 5-60

585

14,040

Advanced Accounting, 5th Edition

1,560

(R) Plant & equipment, net Client contracts Liabilities Goodwill

900 12,800 50 55,000 Investment in Salmon (1) Noncontrolling interest in Salmon (2)

63,575 5,175

(1) [90% x ($900 + $12,800 + $50)] + $51,200 = $63,575 (2) [10% x ($900 + $12,800 + $50)] + $3,800 = $5,175

(O) Depreciation expense Amortization expense Interest expense

100 3,200 50 Plant & equipment, net Client contracts Liabilities

(N) Noncontrolling interest in net income of Salmon

100 3,200 50

65 Noncontrolling interest in Salmon

Test Bank, Chapter 5

©Cambridge Business Publishers, 2023 5-61

65

19.

Topic: Consolidation working paper, second year LO 2 Python acquired 75% of Slither’s stock for $316,000 in cash on January 2, 2023. The fair value of the noncontrolling interest in Slither was $89,000. Slither’s book value at that time was $120,000. The assets and liabilities reported on Slither’s balance sheet had balances that approximated fair value at the date of acquisition. However, Slither had previously unreported developed technology (10-year life, straight-line), valued at $40,000. There has been no impairment loss on the developed technology since acquisition. Goodwill was impaired by $6,000 in 2023, and by $3,000 in 2024. It is now December 31, 2024. The trial balances of Python and Slither appear below.

Current assets Plant assets, net Investment in Slither Liabilities Capital stock Retained earnings, Jan. 1 AOCI, Jan. 1 Treasury stock Sales revenue Equity in net income of Slither Equity in OCI of Slither Cost of goods sold Amortization and depreciation expense Other operating expenses Other comprehensive income Total

Python Dr (Cr) $ 113,500 1,200,000 323,800 (1,342,950) (40,000) (215,000) (15,000) – (400,000) (2,100) (2,250) 250,000 40,000 95,000 (5,000) $ 0

Slither Dr (Cr) $ 35,000 500,000 – (387,000) (20,000) (110,000) (10,000) 5,000 (100,000) – – 35,000 15,000 40,000 (3,000) $ 0

Required a. Calculate the initial goodwill for this acquisition, and its allocation to the controlling and noncontrolling interest. b. Prepare a schedule calculating equity in net income for 2024, reported on Python’s books, and noncontrolling interest in net income for 2024, reported on the consolidated income statement. c. Prepare a working paper consolidating the December 31, 2024 trial balances of Python and Slither.

©Cambridge Business Publishers, 2023 5-62

Advanced Accounting, 5th Edition

ANS: a.

Acquisition cost Fair value of NCI Total value Book value Developed technology Goodwill

$ 316,000 89,000 405,000

$ 120,000 40,000

160,000 $ 245,000

Goodwill to controlling interest: $316,000 – (75% x 160,000) = Goodwill to noncontrolling interest

$ 196,000 49,000

(80%) (20%)

b. Equity in NI $ 7,500 (3,000) (2,400) $ 2,100

Slither’s reported net income Amortization of developed technology Goodwill impairment loss

NCI in NI $ 2,500 (1,000) (600) $ 900

c. Current assets Plant assets, net Investment in Slither Identifiable intangibles Goodwill Liabilities Capital stock Retained earnings, Jan. 1 AOCI, Jan. 1 Treasury stock Noncontrolling interest Sales revenue Equity in net income of Slither Equity in OCI of Slither Cost of goods sold Amortization and depreciation expense Other operating expenses Noncontrolling interest in NI Noncontrolling interest in OCI OCI Total

Test Bank, Chapter 5

Python Dr (Cr) $ 113,500 1,200,000 323,800

Slither Dr (Cr) $ 35,000 500,000 –

– – (1,342,950) (40,000) (215,000) (15,000) –

– – (387,000) (20,000) (110,000) (10,000) 5,000

(400,000) (2,100) (2,250) 250,000 40,000

(100,000) – – 35,000 15,000

95,000

40,000

$

(5,000) 0

$

(3,000) 0

Dr

Cr

(R) 36,000 (R) 239,000

4,350 (C) 101,250 (E) 218,200 (R) 4,000 (O) 3,000 (O)

(E) 20,000 (E) 110,000 (E) 10,000 5,000 (E) 33,750 (E) 56,800 (R) 1,650 (N) (C) (C)

2,100 2,250

(O)

4,000

(O) (N) (N)

3,000 900 750

$428,000

Consol. Dr (Cr) $ 148,500 1,700,000 – 32,000 236,000 (1,729,950) (40,000) (215,000) (15,000) – (92,200) (500,000) – – 285,000 59,000

$428,000

©Cambridge Business Publishers, 2023 5-63

138,000 900 750 (8,000) $ 0

20.

Topic: Consolidation working paper, third year LO 2 Phantom Casinos bought 65% of Simpson Entertainment’s voting stock on January 1, 2023 for $33,900. The fair value of the noncontrolling interest in Simpson was $16,100, and Simpson’s book value was $6,000 on that date. Simpson’s net assets were valued at amounts approximating fair value, except previously unreported identifiable intangible assets, meeting the criteria for capitalization, were valued at $16,000. These intangibles have an 8-year life, straight-line. Goodwill from this acquisition is impaired by $5,000 to the beginning of 2025 and is impaired by $400 in 2025. Phantom uses the complete equity method to record its investment in Simpson on its own books. The separate trial balances of Phantom and Simpson at December 31, 2025 are as follows:

Current assets Property & equipment, net Investment in Simpson Liabilities Capital stock Retained earnings, Jan. 1 Accumulated other comprehensive loss (income), Jan. 1 Treasury stock Sales revenue Equity in NI of Simpson Equity in OCI of Simpson Cost of goods sold Operating expenses Other comprehensive loss (income) Total

Phantom Dr(Cr) $ 15,000 200,000 31,810 (189,700) (15,000) (40,000)

Simpson Dr (Cr) $ 5,000 80,000 – (70,400) (300) (12,100)

(400) 250 (200,000) (45) (65) 120,000 78,000 150 $ 0

300 100 (50,000) – – 35,000 12,500 (100) $ 0

Required a. Prepare a schedule calculating the initial value of goodwill for this acquisition, and its allocation to Phantom and to the noncontrolling interest in Simpson. b. Prepare a schedule calculating Phantom’s equity in net income of Simpson for 2025, and the noncontrolling interest in Simpson’s net income. c. Prepare a schedule calculating the December 31, 2025 balance for Investment in Simpson, reported on Phantom’s books. d. Prepare a working paper to consolidate the trial balances of Phantom and Simpson at December 31, 2025.

©Cambridge Business Publishers, 2023 5-64

Advanced Accounting, 5th Edition

ANS: a.

Acquisition cost Fair value of noncontrolling interest Total fair value of Simpson Book value of Simpson Revaluation of identifiable intangible assets Total fair value of Simpson’s identifiable net assets Goodwill

$ 6,000 16,000

$33,900 16,100 50,000 22,000 $28,000

Goodwill to Phantom: $33,900 – (65% x $22,000) = $19,600 (70%) Goodwill to noncontrolling interest: $28,000 – $19,600 = $8,400 (30%) b.

Simpson’s reported net income $2,500 ID revaluation write-off ($16,000/8 = $2,000) Goodwill impairment loss $400, split 70:30 Total c.

Equity in Net Income $1,625 (1,300) (280) $ 45

Acquisition cost 65% x change in book value of Simpson to beginning of year: ($12,000 – $6,000) x 65% Revaluation write-offs to beginning of year (2 years): ID intangibles: $2,000 x 2 x 65% Goodwill: $5,000 x 70% Investment, beginning of year Equity in net income for 2025 Equity in OCI for 2025 Investment, December 31, 2025

Test Bank, Chapter 5

Noncontrolling Interest in Net Income $ 875 (700) (120) $ 55 $ 33,900 3,900 (2,600) (3,500) 31,700 45 65 $ 31,810

©Cambridge Business Publishers, 2023 5-65

d. Phantom Dr (Cr) $ 15,000 200,000 – 31,810

Simpson Dr (Cr) $ 5,000 80,000 – –

Goodwill Liabilities Capital stock Retained earnings, Jan. 1 Accum. other comprehensive loss (income), Jan. 1 Treasury stock Noncontrolling interest in Simpson

– (189,700) (15,000) (40,000) (400)

– (70,400) (300) (12,100) 300

250 –

100 –

Sales revenue Equity in NI of Simpson Equity in OCI of Simpson Cost of goods sold Operating expenses Noncontrolling interest in NI Other comprehensive loss (income) Noncontrolling interest in OCI Total

(200,000) (45) (65) 120,000 78,000

(50,000) – – 35,000 12,500

150

(100)

Current assets Property & equipment, net Identifiable intangibles Investment in Simpson

©Cambridge Business Publishers, 2023 5-66

$

– 0

$

– 0

Dr

Cr

(R) 12,000

2,000 (O) 110 (C) 7,800 (E) 23,900 (R) 400 (O)

(R) 23,000 (E) 300 (E) 12,100

300 (E) 100 (E) 4,200 (E) 11,100 (R) 90 (N) (C) (C)

22,600 (260,100) (15,000) (40,000) (400) 250 (15,390) (250,000) --155,000 92,900 55 50

45 65

(O) 2,400 (N) 55

(N) 35 $50,000

Consol. Dr (Cr) $ 20,000 280,000 10,000 --

______ $50,000

$

Advanced Accounting, 5th Edition

35 0

21.

Topic: Consolidation working paper, financial statements, third year LO 2 Panerai acquired 60% of Stefanel’s voting stock for an acquisition cost of $35,550 on January 1, 2023, when Stefanel’s book value was $8,000. The fair value of the noncontrolling interest at the date of acquisition was $16,450. All of Stefanel’s assets and liabilities were reported at amounts approximating fair value, except buildings and equipment with a 20-year remaining life, straightline were overvalued by $10,000, and Stefanel has previously unreported identifiable intangible assets with a 10-year life, straight-line, valued at $25,000. There is no impairment of buildings and equipment or identifiable intangibles through the end of 2025. Total impairment of goodwill arising from this acquisition to the beginning of 2025 was $2,000. Goodwill impairment for 2025 is $1,000. You are preparing the consolidated financial statements for 2025. The trial balances of Panerai and Stefanel at December 31, 2025 appear in the consolidation working paper below. Panerai uses the complete equity method to report its investment on its own books. Panerai Dr (Cr) $ 26,000 140,000 -39,840

Stefanel Dr (Cr) $ 7,000 90,000 ---

Goodwill Total liabilities Capital stock Retained earnings, beginning Accumulated other comprehensive loss (income), beginning Noncontrolling interest

-(158,465) (5,000) (25,260) (850)

-(72,100) (2,000) (18,500) 500

--

--

Sales revenue Other comprehensive loss (income) Equity in income of Stefanel Equity in OCL of Stefanel Cost of goods sold Operating expenses

(150,000) (275) (1,050) 60 120,000 15,000

(50,000) 100 --30,000 15,000

--0

--0

Current assets Plant & equipment, net Identifiable intangible assets Investment in Stefanel

Noncontrolling interest in income Noncontrolling interest in OCL Total

Test Bank, Chapter 5

$

$

Dr

Cr

Consol. Dr (Cr)

©Cambridge Business Publishers, 2023 5-67

Required a. Calculate the total goodwill originally recognized for this acquisition, and its allocation to the controlling interest and the noncontrolling interest. b. Calculate 2025 equity in net income of Stefanel, reported on Panerai’s books, and noncontrolling interest in consolidated net income, reported on the 2025 consolidated income statement. c. Complete the working paper below to consolidate the December 31, 2025 trial balances of Panerai and Stefanel. d. Present, in good form, the consolidated statement of income and comprehensive income for 2025. ANS: a.

Acquisition cost Fair value of noncontrolling interest Total fair value Book value Revaluations: Buildings & equipment Identifiable intangibles Fair value of identifiable net assets Goodwill

$ 8,000 (10,000) 25,000

$ 35,550 16,450 52,000

23,000 $ 29,000

Goodwill to CI = $35,550 – (60% x $23,000) = $21,750 (75%) Goodwill to NCI = $29,000 - $21,750 = $7,250 (25%) b.

Stefanel’s reported net income for 2025 (total $5,000) Revaluation write-offs for 2025: Buildings & equipment $10,000/20 Identifiable intangibles $25,000/10 Goodwill $1,000 split 75:25

©Cambridge Business Publishers, 2023 5-68

Equity in NI $ 3,000

Noncontrolling Interest in NI $ 2,000

300 (1,500) (750) $ 1,050

200 (1,000) (250) $ 950

Advanced Accounting, 5th Edition

c.

Current assets Buildings & equipment, net Identifiable intangible assets Investment in Stefanel

Panerai Dr (Cr) $ 26,000 140,000 -39,840

Stefanel Dr (Cr) $ 7,000 90,000 ---

Goodwill Total liabilities Capital stock Retained earnings, beginning

-(158,465) (5,000) (25,260)

-- (R) 27,000 (72,100) (2,000) (E) 2,000 (18,500) (E) 18,500

Dr

Cr

(O) 500 (R) 20,000

9,000 (R) 2,500 (O) 990 (C) 12,000 (E) 26,850 (R) 1,000 (O)

Consol. Dr (Cr) $ 33,000 221,500 17,500 -26,000 (230,565) (5,000) (25,260)

Accumulated other comprehensive loss (income), beginning Noncontrolling interest

(850)

500

500 (E)

(850)

--

--

8,000 (E) 11,150 (R) 910 (N)

(20,060)

Sales revenue Other comprehensive loss (income) Equity in net income of Stefanel Equity in OCL of Stefanel Cost of goods sold Operating expenses

(150,000) (275) (1,050) 60 120,000 15,000

Noncontrolling interest in NI Noncontrolling interest in OCL Total

$

--0

(50,000) 100 -- (C) 1,050 -30,000 15,000 (O) 2,500 (O) 1,000 -- (N) 950 -______ $ 0 $73,500

500 (O)

(200,000) (175) --150,000 33,000

40 (N) $73,500

950 (40) 0

60 (C)

$

d. Consolidated Statement of Income and Comprehensive Income for 2025 Sales revenue $ 200,000 Cost of goods sold (150,000) Gross margin 50,000 Operating expenses (33,000) Consolidated net income 17,000 Consolidated net income to the noncontrolling interest (950) Consolidated net income to the controlling interest $ 16,050 Consolidated net income Other comprehensive income Consolidated comprehensive income Consolidated comprehensive income to the noncontrolling interest (1) Consolidated comprehensive income to the controlling interest

$ 17,000 175 17,175 (910) $ 16,265

(1) $910 = $950 – $40

Test Bank, Chapter 5

©Cambridge Business Publishers, 2023 5-69

22.

Topic: Consolidation eliminating entries, fourth year LO 2 Pillar Company acquired 60% of Sally Corporation’s stock for $2,970 in cash on January 1, 2022, when Sally’s book value was $1,000, consisting of $300 in capital stock, $600 in retained earnings, and $100 in accumulated other comprehensive income. The fair value of the noncontrolling interest was $1,530 at the date of acquisition. Pillar uses the complete equity method to account for the investment on its own books. At the time of acquisition, all of Sally’s assets and liabilities were reported at amounts approximating fair value, except for unreported customer lists with a fair value of $200, with a remaining life of 4 years, straight-line, and plant assets that were undervalued by $600, with a remaining life of 10 years, straight-line. Goodwill arising from this acquisition is tested annually for impairment. Goodwill impairment for the period 2022-2024 is $400. Goodwill impairment for 2025 is $100. It is now December 31, 2025, 4 years after the acquisition, and you are preparing the consolidated financial statements. Sally reported net income of $800, an other comprehensive loss of $20, and declared and paid dividends of $150 for 2025. Sally’s January 1, 2025 shareholders’ equity accounts, taken from its trial balance, are as follows: Capital stock Retained earnings, January 1 Accumulated other comprehensive income, January 1 Total shareholders’ equity, January 1

$ 300 1,550 140 $ 1,990

Required a. Calculate total goodwill at the date of acquisition and its allocation to the controlling and noncontrolling interest. b. Calculate equity in net income of Sally for 2025, as reported on Pillar’s separate books, and noncontrolling interest in net income of Sally for 2025, as reported on the consolidated income statement. c. Calculate the December 31, 2025 balance for Investment in Sally, as reported on Pillar’s separate books. d. Prepare the eliminating entries, in journal form, to consolidate Pillar’s and Sally’s trial balances at December 31, 2025. ANS: a.

Total goodwill = $2,970 + $1,530 - ($1,000 + $200 + $600) = $2,700 Goodwill to controlling interest: $2,970 – [60% x ($1,000 + $200 + $600)] = $1,890 (70%) Goodwill to noncontrolling interest: $2,700 - $1,890 = $810 (30%)

b.

Sally’s reported net income $800 split 60:40 Revaluation write-offs: Customer lists $200/4 split 60:40 Plant assets $600/10 split 60:40 Goodwill impairment loss $100 split 70:30 ©Cambridge Business Publishers, 2023 5-70

Equity in Net Income of Sally $480 (30) (36) (70) $344

Noncontrolling Interest in Net Income of Sally $320 (20) (24) (30) $246

Advanced Accounting, 5th Edition

c.

d.

Investment, January 1, 2022 60% x change in retained earnings, 2022-2024 60% x change in AOCI, 2022-2024 60% customer lists write-off 2022-2024 60% plant assets write-off 2022-2024 70% x GW impairment 2022-2024 Investment, January 1, 2025 Equity in net income, 2025 Equity in OCL, 2025 Dividends, 2025 Investment, December 31, 2025

60% x ($1,550 – $600) 60% x ($140 - $100) 60% x [3 x ($200/4)] 60% x [3 x ($600/10)] 70% x $400 60% x ($20) 60% x $150

(C) Equity in net income of Sally

$2,970 570 24 (90) (108) (280) 3,086 344 (12) (90) $3,328 344

Equity in OCL of Sally Dividends Investment in Sally (E) Capital stock Retained earnings, beginning AOCI, beginning

12 90 242 300 1,550 140

Investment in Sally Noncontrolling interest in Sally (R) Customer lists Plant assets, net Goodwill

1,194 796 50 420 2,300

Investment in Sally Noncontrolling interest in Sally (O) Amortization expense Depreciation expense Impairment loss

1,892 878 50 60 100

Customer lists Plant assets, net Goodwill (N) Noncontrolling interest in net income of Sally

50 60 100

246 Noncontrolling interest in OCL of Sally Dividends Noncontrolling interest in Sally

Test Bank, Chapter 5

©Cambridge Business Publishers, 2023 5-71

8 60 178

23.

Topic: Consolidation of VIE, third year LO 2 Pebble Hotels uses a financial entity to obtain secured debt. On January 1, 2023, Pebble determined that the financial entity was a variable interest entity and Pebble is the primary beneficiary. Pebble has no equity interest in the VIE. The VIE’s trial balance on January 1, 2023 is as follows: Dr (Cr) Financial assets $ 15,000 Other assets 5,000 Liabilities (25,000) Capital stock (1,000) Retained deficit 6,000 Total $ 0 The VIE’s financial assets had a fair value of $16,000 and its other assets had a fair value of $3,500. The fair value of the VIE was $1,500. Pebble and the VIE were not previously under common control. The financial assets existing at January 1, 2023 were all liquidated as of January 1, 2025. Other assets, still held by the VIE, have a 10-year life, straight-line. Goodwill impairment to the beginning of 2025 is $500, and there is no impairment for 2025. Required a. Calculate the goodwill recognized at the date of acquisition. b. Calculate noncontrolling interest in the net income of the VIE, appearing on the 2025 consolidated income statement. c. Fill in the working paper below to consolidate the VIE with Pebble at December 31, 2025, three years since the VIE was first consolidated.

Financial assets Other assets Goodwill Liabilities Capital stock Retained earnings, beg AOCI, beg Noncontrolling interest in VIE Revenues Operating expenses NCI in income of VIE Total

ANS: a.

Pebble Dr (Cr) $ 155,000 900,000 -(720,000) (20,000) (300,000) (10,000) -(500,000) 495,000 -$ 0

Fair value of VIE Book value Revaluations: Financial assets Other assets Fair value of identifiable net assets Goodwill

©Cambridge Business Publishers, 2023 5-72

VIE Dr (Cr) $ 40,000 8,000 -(31,500) (1,000) (15,000) --(85,000) 84,500 -$ 0

Dr

Consol Dr (Cr)

Cr

$ (5,000) 1,000 (1,500)

$1,500

(5,500) $ 7,000

Advanced Accounting, 5th Edition

b. Noncontrolling Interest in NI $500

VIE’s reported net income for 2025 Revaluation write-offs for 2025: Other assets $(1,500)/10

150 $650

c.

24.

Financial assets Other assets Goodwill Liabilities Capital stock Retained earnings, beg AOCI, beg Noncontrolling interest in VIE

Pebble Dr (Cr) $ 155,000 900,000 -(720,000) (20,000) (300,000) (10,000) --

VIE Dr (Cr) $ 40,000 8,000 -(31,500) (1,000) (15,000) ---

Revenues Operating expenses NCI in income of VIE Total

(500,000) 495,000 -$ 0

(85,000) 84,500 -- (N) 650 $ 0 $23,300

Dr

Cr

(O) 150 (R) 6,500

1,200 (R)

(E) 1,000 (E) 15,000 16,000 (E) 5,300 (R) 650 (N) 150 (O) ______ $23,300

Consol Dr (Cr) $ 195,000 906,950 6,500 (751,500) (20,000) (300,000) (10,000) (21,950) (585,000) 579,350 650 $ 0

Topic: Acquisition entry, bargain purchase LO 3 Pearl Corporation acquires 75% of the voting stock of Skyworth Company by issuing no-par common stock with a fair value of $6,000. Consulting fees are $300 and registration costs are $80, both paid in cash. Vested stock options issued to replace options held by Skyworth employees have a fair value of $500. The fair value of the noncontrolling interest is $2,000. Skyworth’s trial balance at the date of acquisition is as follows, along with fair value information on its assets and liabilities:

Tangible assets Identifiable intangibles Liabilities Capital stock Retained earnings Accumulated other comprehensive income Total

Book Value Dr (Cr) $40,000 – (37,800) (6,000) 4,000 (200) $ 0

Fair Value Dr (Cr) $36,000 10,500 (37,900) – –

Required a. Calculate the gain on acquisition, recorded by Pearl on its own books. b. Prepare the journal entry to record the acquisition on Pearl’s books.

Test Bank, Chapter 5

©Cambridge Business Publishers, 2023 5-73

ANS: a.

Fair value of identifiable net assets Less acquisition cost Less fair value of noncontrolling interest Gain on acquisition

$36,000 + $10,500 - $37,900 $6,000 + $500

$8,600 (6,500) (2,000) $ 100

b. Investment in Skyworth Acquisition expenses

6600 300 Capital stock Cash APIC—Stock options Gain on acquisition

25.

5,920 380 500 100

Topic: Consolidation eliminating entries, bargain purchase, date of acquisition LO 3 Packer Company acquired 80% of the shares of Skye Company at an acquisition cost of $58,000. The fair value of the noncontrolling interest was $9,500. At the date of acquisition, the fair values of Skye’s reported net assets equaled their book values, but Skye had previously unreported identifiable intangible assets with a fair value of $2,000. Skye’s trial balance at the date of acquisition appears below.

Current assets Plant & equipment, net Liabilities Capital stock Retained deficit Accumulated other comprehensive loss Total

Dr (Cr) $ 10,000 186,000 (130,000) (85,000) 15,000 4,000 $ 0

Required a. Calculate the gain on acquisition. At what amount did Packer value its investment in Skye at the date of acquisition? b. Prepare the eliminating entries (E) and (R) to consolidate the accounts of Packer and Skye at the date of acquisition. ANS: a.

Fair value of identifiable net assets Acquisition cost Fair value of NCI Gain on acquisition

$10,000 + $186,000 + 2,000 - $130,000 =

$ 68,000 (58,000) (9,500) $ 500

Investment in Skye, date of acquisition = $58,000 + $500 = $58,500

©Cambridge Business Publishers, 2023 5-74

Advanced Accounting, 5th Edition

b.

(E) Capital stock

85,000 Retained deficit AOCL Investment in Skye NCI in Skye

(R) Identifiable intangible assets NCI in Skye

2,000 3,700 Investment in Skye

26.

15,000 4,000 52,800 13,200

5,700

Topic: Consolidation working paper, noncontrolling interest, bargain purchase, first year LO 3 Price Company acquired 80% of Supervalu Corporation’s stock for $700 million in cash on January 1, 2025, when Supervalu Corporation’s book value was $550 million. The fair value of the noncontrolling interest was $100 million at the date of acquisition. Price uses the complete equity method to account for the investment on its own books. At the time of acquisition, all of Supervalu’s assets and liabilities were reported at amounts that approximated fair value, except for unreported identifiable intangible assets with a fair value of $500 million. These intangibles are appropriately recorded as assets per ASC Topic 805, and have a remaining life of 5 years, straight-line. It is now December 31, 2025, and you are preparing the consolidated financial statements. The separate trial balances of Price and Supervalu are below. Price Supervalu (in millions) Dr (Cr) Dr (Cr) Current assets $ 2,000 $ 400 Plant assets, net 5,320 3,300 Investment in Supervalu 1,390 -Current liabilities (700) (500) Long-term debt (3,860) (2,000) Common stock (200) (50) Retained earnings, beginning (2,800) (500) Dividends 400 -Revenues (8,000) (6,000) Equity in net income of Supervalu (440) -Gain on acquisition (250) -Cost of goods sold 6,250 4,000 Operating expenses 890 1,350 Total $ 0 $ 0 Required a. Calculate the gain on acquisition for this bargain purchase. b. Calculate equity in net income of Supervalu for 2025, as reported on Price’s separate books, and noncontrolling interest in net income of Supervalu for 2025, as reported on the consolidated income statement. c. Calculate the December 31, 2025 investment balance on Price’s separate books. d. Prepare a working paper to consolidate the trial balances of Price and Supervalue at December 31, 2025.

Test Bank, Chapter 5

©Cambridge Business Publishers, 2023 5-75

ANS: a.

(in millions) Book value Identifiable intangibles Fair value of identifiable net assets Acquisition cost Fair value of noncontrolling interest Gain on acquisition

$ 550 500 1,050 (700) (100) $ 250

b.

Supervalu reported NI; $650, split 80:20 Revaluation write-offs: ID intangibles; $500/5, split 80:20 c.

$700 + $250 + $440 = $1,390

d.

Consolidation working paper, December 31, 2025

Equity in Net Income of Supervalu $ 520

Noncontrolling Interest in Net Income of Supervalu $ 130

(80) $ 440

(20) $ 110

(in millions) Current assets Plant assets, net Investment in Supervalu

Price Dr (Cr) $ 2,000 5,320 1,390

Supervalu Dr (Cr) $ 400 3,300 --

Identifiable intangible assets Current liabilities Long-term debt Common stock RE, beginning Noncontrolling interest

-(700) (3,860) (200) (2,800) --

-(500) (2,000) (50) (500) --

Dividends Revenues Equity in NI of Supervalu Gain on acquisition Cost of goods sold Operating expenses Noncontrolling interest in NI Total

400 (8,000) (440) (250) 6,250 890 ____-$ 0

-(6,000) --4,000 1,350 ____-$ 0

©Cambridge Business Publishers, 2023 5-76

Dr

(R)

500

(E) (E) (R)

50 500 10

(C)

Cr 440 (C) 440 (E) 510 (R) 100 (O)

110 (E) 110 (N)

440

(O) 100 (N) 110 $1,710

_____ $1,710

Consol Dr (Cr) $ 2,400 8,620 -400 (1,200) (5,860) (200) (2,800) (210) 400 (14,000) -(250) 10,250 2,340 110 $ 0

Advanced Accounting, 5th Edition

27.

Topic: Consolidation eliminating entries, date of acquisition, IFRS alternative LO 4 Pergo Hotels, headquartered in Portugal, issued 2,500 shares of common stock with a market value of €25 per share to acquire 85% of Simmons Resorts’ voting stock. The fair value of the noncontrolling interest was €8,000. Simmons’ book value was €30,000, comprised of €5,000 in capital stock and €25,000 in retained earnings. Its net assets are reported at fair value, except for the following: • • • •

Current assets are overvalued by €2,000. Plant & equipment is overvalued by €4,000. Previously unrecorded customer lists are valued at €10,000. A preacquisition contingent liability (potential lawsuit), valued at €3,000, is not recorded on Simmons’ books.

Pergo follows IFRS and uses the alternative method for valuing the noncontrolling interest and goodwill. Required a. Calculate the goodwill for this acquisition. b. Prepare the eliminating entries to consolidate the trial balances of Pergo and Simmons at the date of acquisition. ANS: a.

Acquisition cost (2,500 x €25) Book value Revaluations: Current assets P&E Customer lists Contingent liability Fair value of identifiable net assets Goodwill

b.

€30,000 (2,000) (4,000) 10,000 (3,000) 31,000 x 85%

(E) Capital stock Retained earnings

€62,500

26,350 €36,150 5,000 25,000

Investment in Simmons NCI in Simmons (R) Customer lists Goodwill

10,000 36,150 Current assets Plant & equipment, net Long-term liabilities Investment in Simmons NCI in Simmons

Test Bank, Chapter 5

25,500 4,500

2,000 4,000 3,000 37,000 150

©Cambridge Business Publishers, 2023 5-77

28.

Topic: Consolidation working paper, first year, IFRS alternative LO 4 P&G, headquartered in Belgium, acquires 90% of the voting stock of Saucy Co. on January 1, 2024 for €18,000 in cash. Saucy’s trial balance at the date of acquisition is as follows: Assets Current assets Plant & equipment Patents Customer order backlog Trademarks Current liabilities Long-term liabilities Common stock Additional paid-in capital Retained earnings Accumulated other comprehensive income Total

Book Value Dr (Cr) € 100 5,000 200 0 0 (200) (1,400) (500) (2,000) (1,130) (70) € 0

Fair Value Dr (Cr) € 100 8,000 2,000 4,000 2,000 (200) (1,500)

As of January 1, 2024, the revaluations have the following estimated remaining lives: Plant & equipment 20 years, straight-line Patents 10 years, straight-line Customer order backlog 5 years, straight-line Trademarks 10 years, straight-line Goodwill Impairment in 2024: €300 Long-term liabilities 5 years, straight-line P&G follows IFRS and uses the alternative method to value goodwill and uses the complete equity method to account for its investment in Saucy on its own books. The separate trial balances of P&G and Saucy at December 31, 2024 appear below: P&G Saucy Dr (Cr) Dr (Cr) Current assets € 6,190 € 150 Plant & equipment, net 260,000 7,000 Patents -200 Investment in Saucy 18,231 Current liabilities (11,000) (250) Long-term liabilities (156,900) (1,500) Common stock, par (4,000) (500) Additional paid-in capital (40,000) (2,000) Retained earnings, beginning (70,000) (1,200) Dividends 800 100 Sales revenue (25,000) (10,000) Equity in net income of Saucy (321) -Cost of sales 15,000 6,000 Operating expenses 7,000 2,000 Total € 0 € 0 ©Cambridge Business Publishers, 2023 5-78

Advanced Accounting, 5th Edition

Required a. Calculate total goodwill for this acquisition, following the IFRS alternative method. b. Calculate equity in net income of Gillam and the noncontrolling interest in net income for 2024. c. Prepare a working paper to consolidate the trial balances of P&G and Gillam at December 31, 2024. ANS: a.

Book value Plant & equipment Patents Customer order backlog Trademarks Long-term liabilities Fair value of identifiable net assets

€ 3,700 3,000 1,800 4,000 2,000 (100) €14,400

Total goodwill = €18,000 – (90% x €14,400) = €5,040 b.

Saucy’s reported net income Revaluation write-offs: Plant & equipment; €3,000/20 Patents €1,800/10 Customer backlog; €4,000/5 Trademarks; €2,000/10 Goodwill impairment Long-term debt premium; €100/5 Equity in net income

Test Bank, Chapter 5

Equity in Net Income € 1,800

Noncontrolling Interest in Net Income € 200

(135) (162) (720) (180) (300) 18 € 321

(15) (18) (80) (20) -2 € 69

©Cambridge Business Publishers, 2023 5-79

c.

29.

Current assets Plant & equipment Patents Investment in Saucy

P&G Dr (Cr) € 6,190 260,000 -18,231

Saucy Dr (Cr) Dr € 150 7,000 (R) 3,000 200 (R) 1,800 --

Customer order backlog Trademarks Goodwill Current liabilities Long-term liabilities Common stock Additional paid-in capital Retained earnings, Jan. 1 Noncontrolling interest

---(11,000) (156,900) (4,000) (40,000) (70,000) --