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Advanced Financial Accounting 10e Theodore Christensen David Cottrell Richard Baker (Test Bank All Chapters, 100% Original Verified, A+ Grade) Answers At The End Of Each Chapter Chapter 01 Intercorporate Acquisitions and Investments in Other Entities

Multiple Choice Questions

1. Assuming no impairment in value prior to transfer, assets transferred by a parent company to another entity it has created should be recorded by the newly created entity at the assets':

A. cost to the parent company. B. book value on the parent company's books at the date of transfer. C. fair value at the date of transfer. D. fair value of consideration exchanged by the newly created entity.

2. Given the increased development of complex business structures, which of the following regulators is responsible for the continued usefulness of accounting reports?

A. Securities and Exchange Commission (SEC) B. Public Company Accounting Oversight Board (PCAOB) C. Financial Accounting Standards Board (FASB) D. All of these

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3. A business combination in which the acquired company's assets and liabilities are combined with those of the acquiring company into a single entity is defined as:

A. Stock acquisition B. Leveraged buyout C. Statutory Merger D. Reverse statutory rollup

4. In which of the following situations do accounting standards not require that the financial statements of the parent and subsidiary be consolidated:

A. A corporation creates a new 100 percent owned subsidiary B. A corporation purchases 90 percent of the voting stock of another company C. A corporation has both control and majority ownership of an unincorporated company D. A corporation owns less-than a controlling interest in an unincorporated company

5. During its inception, Devon Company purchased land for $100,000 and a building for $180,000. After exactly 3 years, it transferred these assets and cash of $50,000 to a newly created subsidiary, Regan Company, in exchange for 15,000 shares of Regan's $10 par value stock. Devon uses straight-line depreciation. Useful life for the building is 30 years, with zero residual value. An appraisal revealed that the building has a fair value of $200,000. Based on the information provided, at the time of the transfer, Regan Company should record:

A. Building at $180,000 and no accumulated depreciation. B. Building at $162,000 and no accumulated depreciation. C. Building at $200,000 and accumulated depreciation of $24,000. D. Building at $180,000 and accumulated depreciation of $18,000.

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6. During its inception, Devon Company purchased land for $100,000 and a building for $180,000. After exactly 3 years, it transferred these assets and cash of $50,000 to a newly created subsidiary, Regan Company, in exchange for 15,000 shares of Regan's $10 par value stock. Devon uses straight-line depreciation. Useful life for the building is 30 years, with zero residual value. An appraisal revealed that the building has a fair value of $200,000. Based on the information provided, what amount would be reported by Devon Company as investment in Regan Company common stock?

A. $312,000 B. $180,000 C. $330,000 D. $150,000

7. During its inception, Devon Company purchased land for $100,000 and a building for $180,000. After exactly 3 years, it transferred these assets and cash of $50,000 to a newly created subsidiary, Regan Company, in exchange for 15,000 shares of Regan's $10 par value stock. Devon uses straight-line depreciation. Useful life for the building is 30 years, with zero residual value. An appraisal revealed that the building has a fair value of $200,000. Based on the preceding information, Regan Company will report

A. additional paid-in capital of $0. B. additional paid-in capital of $150,000. C. additional paid-in capital of $162,000. D. additional paid-in capital of $180,000.

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8. Which of the following situations best describes a business combination to be accounted for as a statutory merger?

A. Both companies in a combination continue to operate as separate, but related, legal entities. B. Only one of the combining companies survives and the other loses its separate identity. C. Two companies combine to form a new third company, and the original two companies are dissolved. D. One company transfers assets to another company it has created.

9. A statutory consolidation is a type of business combination in which:

A. one of the combining companies survives and the other loses its separate identity. B. one company acquires the voting shares of the other company and the two companies continue to operate as separate legal entities. C. two publicly traded companies agree to share a board of directors. D. each of the combining companies is dissolved and the net assets of both companies are transferred to a newly created corporation.

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10. In order to reduce the risk associated with a new line of business, Conservative Corporation established Spin Company as a wholly owned subsidiary. It transferred assets and accounts payable to Spin in exchange for its common stock. Spin recorded the following entry when the transaction occurred:

Based on the preceding information, what number of shares of $7 par value stock did Spin issue to Conservative?

A. 10,000 B. 7,000 C. 8,000 D. 25,000

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11. In order to reduce the risk associated with a new line of business, Conservative Corporation established Spin Company as a wholly owned subsidiary. It transferred assets and accounts payable to Spin in exchange for its common stock. Spin recorded the following entry when the transaction occurred:

Based on the preceding information, what was Conservative's book value of assets transferred to Spin Company?

A. $243,000 B. $263,000 C. $221,000 D. $201,000

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12. In order to reduce the risk associated with a new line of business, Conservative Corporation established Spin Company as a wholly owned subsidiary. It transferred assets and accounts payable to Spin in exchange for its common stock. Spin recorded the following entry when the transaction occurred:

Based on the preceding information, what amount did Conservative report as its investment in Spin after the transfer of assets and liabilities?

A. $181,000 B. $221,000 C. $263,000 D. $243,000

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13. In order to reduce the risk associated with a new line of business, Conservative Corporation established Spin Company as a wholly owned subsidiary. It transferred assets and accounts payable to Spin in exchange for its common stock. Spin recorded the following entry when the transaction occurred:

Based on the preceding information, immediately after the transfer,

A. Conservative's total assets decreased by $23,000. B. Conservative's total assets decreased by $20,000. C. Conservative's total assets increased by $56,000. D. Conservative's total assets remained the same.

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14. Rivendell Corporation and Foster Company merged as of January 1, 20X9. To effect the merger, Rivendell paid finder's fees of $40,000, legal fees of $13,000, audit fees related to the stock issuance of $10,000, stock registration fees of $5,000, and stock listing application fees of $4,000. Based on the preceding information, under the acquisition method, what amount relating to the business combination would be expensed?

A. $72,000 B. $19,000 C. $53,000 D. $63,000

15. Rivendell Corporation and Foster Company merged as of January 1, 20X9. To effect the merger, Rivendell paid finder's fees of $40,000, legal fees of $13,000, audit fees related to the stock issuance of $10,000, stock registration fees of $5,000, and stock listing application fees of $4,000. Based on the preceding information, under the acquisition method:

A. $72,000 of stock issue costs are treated as goodwill. B. $19,000 of stock issue costs are treated as a reduction in the issue price. C. $19,000 of stock issue costs are expensed. D. $72,000 of stock issue costs are expensed.

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16. Burrough Corporation paid $80,000 to acquire all of Helyar Company's net assets. Helyar reported assets with a book value of $60,000 and fair value of $98,000 and liabilities with a book value and fair value of $23,000 on the date of combination. Burrough also paid $3,000 to a search firm for finder's fees related to the acquisition. What amount will be recorded as goodwill by Burrough Corporation while recording its investment in Helyar?

A. $0 B. $5,000 C. $8,000 D. $13,000

17. Plummet Corporation reported the book value of its net assets at $400,000 when Zenith Corporation acquired 100 percent ownership. The fair value of Plummet's net assets was determined to be $510,000 on that date. Based on the preceding information, what amount of goodwill will be reported in consolidated financial statements presented immediately following the combination if Zenith paid $550,000 for the acquisition?

A. $0 B. $50,000 C. $150,000 D. $40,000

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18. Plummet Corporation reported the book value of its net assets at $400,000 when Zenith Corporation acquired 100 percent ownership. The fair value of Plummet's net assets was determined to be $510,000 on that date. Based on the preceding information, what amount will be recorded by Zenith as its investment in Plummet, if it paid $500,000 for the acquisition?

A. $610,000 B. $400,000 C. $500,000 D. $510,000

19. Plummet Corporation reported the book value of its net assets at $400,000 when Zenith Corporation acquired 100 percent ownership. The fair value of Plummet's net assets was determined to be $510,000 on that date. Based on the preceding information, what amount of goodwill will be reported in consolidated financial statements presented immediately following the combination if Zenith paid $500,000 for the acquisition?

A. $0 B. $50,000 C. $150,000 D. $40,000

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20. The fair value of net identifiable assets of a reporting unit of X Company is $300,000. On X Company's books, the carrying value of this reporting unit's net assets is $350,000, including $60,000 goodwill. If the fair value of the reporting unit as a whole is $335,000, what amount of goodwill impairment will be recognized for this unit?

A. $0 B. $10,000 C. $25,000 D. $35,000

21. The fair value of net identifiable assets of a reporting unit of Y Company is $270,000. The carrying value of the reporting unit's net assets on Y Company's books is $320,000, including $50,000 goodwill. If the reported goodwill impairment for the unit is $10,000, what would be the fair value of the reporting unit?

A. $320,000 B. $310,000 C. $270,000 D. $290,000

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22. Following its acquisition of the net assets of Dan Company, Empire Company assigned goodwill of $60,000 to one of the reporting divisions. Information for this division follows:

Based on the preceding information, what amount of goodwill (after any impairment) will be reported for this division if its fair value is determined to be $200,000?

A. $0 B. $60,000 C. $30,000 D. $10,000

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23. Following its acquisition of the net assets of Dan Company, Empire Company assigned goodwill of $60,000 to one of the reporting divisions. Information for this division follows:

Based on the preceding information, what amount of goodwill impairment will be recognized for this division if its fair value is determined to be $195,000?

A. $5,000 B. $30,000 C. $60,000 D. $55,000

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24. Following its acquisition of the net assets of Dan Company, Empire Company assigned goodwill of $60,000 to one of the reporting divisions. Information for this division follows:

Based on the preceding information, what amount of amount of goodwill impairment will be recognized for this division if its fair value is determined to be $245,000?

A. $0 B. $5,000 C. $60,000 D. $55,000

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25. Public Equity Corporation acquired Lenore Company through an exchange of common shares. All of Lenore's assets and liabilities were immediately transferred to Public Equity. Public's common stock was trading at $20 per share at the time of exchange. Following selected information is also available.

Based on the preceding information, what number of shares was issued at the time of the exchange?

A. 5,000 B. 17,500 C. 12,500 D. 10,000

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26. Public Equity Corporation acquired Lenore Company through an exchange of common shares. All of Lenore's assets and liabilities were immediately transferred to Public Equity. Public's common stock was trading at $20 per share at the time of exchange. Following selected information is also available.

Based on the preceding information, what is the par value of Public's common stock?

A. $10 B. $1 C. $5 D. $4

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27. Public Equity Corporation acquired Lenore Company through an exchange of common shares. All of Lenore's assets and liabilities were immediately transferred to Public Equity. Public's common stock was trading at $20 per share at the time of exchange. Following selected information is also available.

Based on the preceding information, what is the fair value of Lenore's net assets, if goodwill of $56,000 is recorded?

A. $306,000 B. $244,000 C. $194,000 D. $300,000

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28. Pursuing an inorganic growth strategy, Wilson Company acquired Venus Company's net assets and assigned them to four separate reporting divisions. Wilson assigned total goodwill of $134,000 to the four reporting divisions as given below:

Based on the preceding information, what amount of goodwill will be reported for Alpha at year-end?

A. $0 B. $20,000 C. $30,000 D. $10,000

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29. Pursuing an inorganic growth strategy, Wilson Company acquired Venus Company's net assets and assigned them to four separate reporting divisions. Wilson assigned total goodwill of $134,000 to the four reporting divisions as given below:

Based on the preceding information, what amount of goodwill will be reported for Beta at year-end?

A. $0 B. $14,000 C. $34,000 D. $50,000

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30. Pursuing an inorganic growth strategy, Wilson Company acquired Venus Company's net assets and assigned them to four separate reporting divisions. Wilson assigned total goodwill of $134,000 to the four reporting divisions as given below:

Based on the preceding information, for Gamma:

A. no goodwill should be reported at year-end. B. goodwill impairment of $30,000 should be recognized at year-end. C. goodwill impairment of $20,000 should be recognized at year-end. D. goodwill of $30,000 should be reported at year-end.

31. Pursuing an inorganic growth strategy, Wilson Company acquired Venus Company's net assets and assigned them to four separate reporting divisions. Wilson assigned total goodwill of $134,000 to the four reporting divisions as given below:

Based on the preceding information, for Delta:

A. no goodwill should be reported at year-end. B. goodwill impairment of $15,000 should be recognized at year-end. C. goodwill impairment of $20,000 should be recognized at year-end. D. goodwill of $30,000 should be reported at year-end.

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32. Pursuing an inorganic growth strategy, Wilson Company acquired Venus Company's net assets and assigned them to four separate reporting divisions. Wilson assigned total goodwill of $134,000 to the four reporting divisions as given below:

Based on the preceding information, what would be the total amount of goodwill that Wilson should report at year-end?

A. $0 B. $69,000 C. $79,000 D. $94,000

33. Which of the following observations is (are) consistent with the acquisition method of accounting for business combinations? I. Expenses related to the business combination are expensed. II. Stock issue costs are treated as a reduction in the issue price. III. All merger and stock issue costs are expensed. IV. No goodwill is ever recorded.

A. III B. IV C. I and II D. I, II, and IV

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34. Which of the following observations refers to the term differential?

A. Excess of consideration exchanged over fair value of net identifiable assets. B. Excess of fair value over book value of net identifiable assets. C. Excess of consideration exchanged over book value of net identifiable assets. D. Excess of fair value over historical cost of net identifiable assets.

35. Which of the following observations concerning "goodwill" is NOT correct?

A. Once written down, it may be written up for recoveries. B. It must be tested for impairment at least annually. C. Goodwill impairment losses are recognized in income from continuing operations or income before extraordinary gains and losses. D. It must be reported as a separate line item in the balance sheet.

36. Big Company acquired the following assets and liabilities of Little Company (fair values listed below) for $470,000 cash.

Assuming these items are all recorded at their acquisition date fair values, what additional item needs to be recorded and how will it be accounted for in the future?

A. $30,000 Goodwill, capitalized and tested for impairment B. $30,000 Bargain purchase, recognized in current earnings C. $30,000 Bargain purchase, capitalized and recognized over time D. $30,000 Goodwill, capitalized and amortized over time

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37. Paul Corp. acquired 100 percent of Sam Inc.'s voting stock on July 1, 20X1. The following information was available as of December 31, 20X1:

How much net income should be reported in Paul Corp's income statement for 20X1?

A. $370,000 B. $720,000 C. $940,000 D. $1,090,000

38. Note: This is a Kaplan CPA Review Question On August 31, 20X1, Wood Corp. issued 100,000 shares of its $20 par value common stock for the net assets of Pine, Inc. in a business combination accounted for by the acquisition method. The market value of Wood's common stock on August 31 was $36 per share. Wood paid a fee of $160,000 to the consultant who arranged this acquisition. Costs of registering and issuing the equity securities amounted to $80,000. No goodwill was involved in the purchase. What amount should Wood capitalize as the cost of acquiring Pine's net assets?

A. $3,680,000 B. $3,600,000 C. $3,760,000 D. $3,840,000

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39. Note: This is a Kaplan CPA Review Question Company X acquired for cash all of the outstanding common stock of Company Y. How should Company X determine in general the amounts to be reported for the inventories and long-term debt acquired from Company Y?

A. Option A B. Option B C. Option C D. Option D

40. Point Co. purchased 90% of Sharpe Corp.'s voting stock on January 1, 20X2 for $5,580,000. Prior to the acquisition, Point held a 10% equity position in Sharpe Company. On January 1, 20X2 Pointe's 10% investment in Sharpe has a book value of $340,000 and a fair value of $620,000. On January 1, 20X2 Point records the following:

A. Debit Gain on revaluation of Sharpe's stock $280,000 B. Credit Gain on revaluation of Sharpe's stock $280,000 C. Credit Investment in Sharpe stock $5,860,000 D. Debit Investment in Sharpe stock $6,200,000

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41. The length of the measurement period allowed to value the assets and liabilities in an acquired business combination starts on the date of acquisition and lasts until:

A. All necessary information about the facts of the acquisition is obtained B. All necessary information about the facts of the acquisition is obtained, not to exceed one month C. All necessary information about the facts of the acquisition is obtained, not to exceed one reporting period D. All necessary information about the facts of the acquisition is obtained, not to exceed one year

42. ASC 805 requires contingent consideration in a business combination to be classified as:

A. An asset B. A liability or equity C. An asset or equity D. An asset or a liability

43. For all acquired contingencies, the acquirer should do all of the following except:

A. Provide documentation from the acquirer's attorney regarding pending lawsuits and loan guarantees B. Provide a description of each contingency C. Disclose the amount recognized at the acquisition date D. Describe the estimated range of possible undiscounted outcomes of the contingency

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44. ASC 805 requires that ongoing research and development projects be treated in all of the following ways except:

A. Recorded at acquisition-date fair values B. Classified as intangible assets having indefinite lives C. Expensed immediately D. Tested for impairment periodically

Essay Questions

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45. On January 1, 20X8, Alaska Corporation acquired Mercantile Corporation's net assets by paying $160,000 cash. Balance sheet data for the two companies and fair value information for Mercantile Corporation immediately before the business combination are given below:

Required: Prepare the journal entry to record the acquisition of Mercantile Corporation.

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46. On January 1, 20X8, Line Corporation acquired all of the common stock of Staff Company for $300,000. On that date, Staff's identifiable net assets had a fair value of $250,000. The assets acquired in the purchase of Staff are considered to be a separate reporting unit of Line Corporation. The carrying value of Staff's investment at December 31, 20X8, is $310,000. The fair value of the net assets (excluding goodwill) at that date is $220,000 and the fair value of the reporting unit is determined to be 260,000. Required: 1) Explain how goodwill is tested for impairment for a reporting unit. 2) Determine the amount, if any, of impairment loss to be recognized at December 31, 20X8.

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47. SeaLine Corporation is involved in the distribution of processed marine products. The fair values of assets and liabilities held by three reporting units and other information related to the reporting units owned by SeaLine are as follows:

Required: Determine the amount of goodwill that SeaLine should report in its current financial statements.

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Chapter 01 Intercorporate Acquisitions and Investments in Other Entities Answer Key

Multiple Choice Questions

Assuming no impairment in value prior to transfer, assets transferred by a parent company to another entity it has created should be recorded by the newly created entity at the assets':

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-01 Understand and explain the reasons for and different methods of business expansion; the types of organizational structures; and the types of acquisitions. Learning Objective: 01-04 Understand and explain the differences between different forms of business combinations. Topic: Internal Expansion: Creating a Business Entity Topic: Valuation of Business Entities

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Given the increased development of complex business structures, which of the following regulators is responsible for the continued usefulness of accounting reports?

A. Securities and Exchange Commission (SEC) B. Public Company Accounting Oversight Board (PCAOB) C. Financial Accounting Standards Board (FASB) D. All of these

AACSB: Reflective Thinking AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-01 Understand and explain the reasons for and different methods of business expansion; the types of organizational structures; and the types of acquisitions. Topic: An Introduction to Complex Business Structures

A business combination in which the acquired company's assets and liabilities are combined with those of the acquiring company into a single entity is defined as:

A. Stock acquisition B. Leveraged buyout C. Statutory Merger D. Reverse statutory rollup

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In which of the following situations do accounting standards not require that the financial statements of the parent and subsidiary be consolidated:

During its inception, Devon Company purchased land for $100,000 and a building for $180,000. After exactly 3 years, it transferred these assets and cash of $50,000 to a newly created subsidiary, Regan Company, in exchange for 15,000 shares of Regan's $10 par value stock. Devon uses straight-line depreciation. Useful life for the building is 30 years, with zero residual value. An appraisal revealed that the building has a fair value of $200,000. Based on the information provided, at the time of the transfer, Regan Company should record:

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Difficulty: 2 Medium Learning Objective: 01-03 Make calculations and prepare journal entries for the creation and purchase of a business entity. Learning Objective: 01-04 Understand and explain the differences between different forms of business combinations. Topic: Accounting for Internal Expansion: Creating Business Entities Topic: Valuation of Business Entities

During its inception, Devon Company purchased land for $100,000 and a building for $180,000. After exactly 3 years, it transferred these assets and cash of $50,000 to a newly created subsidiary, Regan Company, in exchange for 15,000 shares of Regan's $10 par value stock. Devon uses straight-line depreciation. Useful life for the building is 30 years, with zero residual value. An appraisal revealed that the building has a fair value of $200,000. Based on the information provided, what amount would be reported by Devon Company as investment in Regan Company common stock?

A. $312,000 B. $180,000 C. $330,000 D. $150,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-02 Understand the history of the development of standards related to acquisition accounting over time. Learning Objective: 01-03 Make calculations and prepare journal entries for the creation and purchase of a business entity. Topic: Accounting for Internal Expansion: Creating Business Entities Topic: The Development of Accounting for Business Combinations

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A. additional paid-in capital of $0. B. additional paid-in capital of $150,000. C. additional paid-in capital of $162,000. D. additional paid-in capital of $180,000.

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-03 Make calculations and prepare journal entries for the creation and purchase of a business entity. Topic: Accounting for Internal Expansion: Creating Business Entities

Which of the following situations best describes a business combination to be accounted for as a statutory merger?

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Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-04 Understand and explain the differences between different forms of business combinations. Topic: Forms of Business Combinations

A statutory consolidation is a type of business combination in which:

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10.

In order to reduce the risk associated with a new line of business, Conservative Corporation established Spin Company as a wholly owned subsidiary. It transferred assets and accounts payable to Spin in exchange for its common stock. Spin recorded the following entry when the transaction occurred:

Based on the preceding information, what number of shares of $7 par value stock did Spin issue to Conservative?

A. 10,000 B. 7,000 C. 8,000 D. 25,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-05 Make calculations and business combination journal entries in the presence of a differential; goodwill; or a bargain purchase element. Topic: Combination Effected through Acquisition of Stock

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11.

Based on the preceding information, what was Conservative's book value of assets transferred to Spin Company?

A. $243,000 B. $263,000 C. $221,000 D. $201,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-01 Understand and explain the reasons for and different methods of business expansion; the types of organizational structures; and the types of acquisitions. Learning Objective: 01-03 Make calculations and prepare journal entries for the creation and purchase of a business entity. Topic: Accounting for Internal Expansion: Creating Business Entities Topic: Internal Expansion: Creating a Business Entity

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12.

Based on the preceding information, what amount did Conservative report as its investment in Spin after the transfer of assets and liabilities?

A. $181,000 B. $221,000 C. $263,000 D. $243,000

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13.

Based on the preceding information, immediately after the transfer,

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14.

Rivendell Corporation and Foster Company merged as of January 1, 20X9. To effect the merger, Rivendell paid finder's fees of $40,000, legal fees of $13,000, audit fees related to the stock issuance of $10,000, stock registration fees of $5,000, and stock listing application fees of $4,000. Based on the preceding information, under the acquisition method, what amount relating to the business combination would be expensed?

A. $72,000 B. $19,000 C. $53,000 D. $63,000

15.

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AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-05 Make calculations and business combination journal entries in the presence of a differential; goodwill; or a bargain purchase element. Topic: Applying the Acquisition Method

16.

Burrough Corporation paid $80,000 to acquire all of Helyar Company's net assets. Helyar reported assets with a book value of $60,000 and fair value of $98,000 and liabilities with a book value and fair value of $23,000 on the date of combination. Burrough also paid $3,000 to a search firm for finder's fees related to the acquisition. What amount will be recorded as goodwill by Burrough Corporation while recording its investment in Helyar?

A. $0 B. $5,000 C. $8,000 D. $13,000

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17.

Plummet Corporation reported the book value of its net assets at $400,000 when Zenith Corporation acquired 100 percent ownership. The fair value of Plummet's net assets was determined to be $510,000 on that date. Based on the preceding information, what amount of goodwill will be reported in consolidated financial statements presented immediately following the combination if Zenith paid $550,000 for the acquisition?

A. $0 B. $50,000 C. $150,000 D. $40,000

18.

Plummet Corporation reported the book value of its net assets at $400,000 when Zenith Corporation acquired 100 percent ownership. The fair value of Plummet's net assets was determined to be $510,000 on that date. Based on the preceding information, what amount will be recorded by Zenith as its investment in Plummet, if it paid $500,000 for the acquisition?

A. $610,000 B. $400,000 C. $500,000 D. $510,000

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AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-02 Understand the history of the development of standards related to acquisition accounting over time. Learning Objective: 01-05 Make calculations and business combination journal entries in the presence of a differential; goodwill; or a bargain purchase element. Topic: Combination Effected through the Acquisition of Net Assets Topic: The Development of Accounting for Business Combinations

19.

A. $0 B. $50,000 C. $150,000 D. $40,000

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20.

The fair value of net identifiable assets of a reporting unit of X Company is $300,000. On X Company's books, the carrying value of this reporting unit's net assets is $350,000, including $60,000 goodwill. If the fair value of the reporting unit as a whole is $335,000, what amount of goodwill impairment will be recognized for this unit?

A. $0 B. $10,000 C. $25,000 D. $35,000

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 01-05 Make calculations and business combination journal entries in the presence of a differential; goodwill; or a bargain purchase element. Topic: Goodwill

21.

The fair value of net identifiable assets of a reporting unit of Y Company is $270,000. The carrying value of the reporting unit's net assets on Y Company's books is $320,000, including $50,000 goodwill. If the reported goodwill impairment for the unit is $10,000, what would be the fair value of the reporting unit?

A. $320,000 B. $310,000 C. $270,000 D. $290,000

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Topic: Fair Value Measurements Topic: Goodwill

22.

Following its acquisition of the net assets of Dan Company, Empire Company assigned goodwill of $60,000 to one of the reporting divisions. Information for this division follows:

Based on the preceding information, what amount of goodwill (after any impairment) will be reported for this division if its fair value is determined to be $200,000?

A. $0 B. $60,000 C. $30,000 D. $10,000

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23.

Following its acquisition of the net assets of Dan Company, Empire Company assigned goodwill of $60,000 to one of the reporting divisions. Information for this division follows:

Based on the preceding information, what amount of goodwill impairment will be recognized for this division if its fair value is determined to be $195,000?

A. $5,000 B. $30,000 C. $60,000 D. $55,000

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24.

Following its acquisition of the net assets of Dan Company, Empire Company assigned goodwill of $60,000 to one of the reporting divisions. Information for this division follows:

Based on the preceding information, what amount of amount of goodwill impairment will be recognized for this division if its fair value is determined to be $245,000?

A. $0 B. $5,000 C. $60,000 D. $55,000

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25.

Public Equity Corporation acquired Lenore Company through an exchange of common shares. All of Lenore's assets and liabilities were immediately transferred to Public Equity. Public's common stock was trading at $20 per share at the time of exchange. Following selected information is also available.

Based on the preceding information, what number of shares was issued at the time of the exchange?

A. 5,000 B. 17,500 C. 12,500 D. 10,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 1 Easy Learning Objective: 01-01 Understand and explain the reasons for and different methods of business expansion; the types of organizational structures; and the types of acquisitions. Learning Objective: 01-05 Make calculations and business combination journal entries in the presence of a differential; goodwill; or a bargain purchase element. Topic: Combination Effected through Acquisition of Stock Topic: External Expansion: Business Combinations

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26.

Based on the preceding information, what is the par value of Public's common stock?

A. $10 B. $1 C. $5 D. $4

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27.

Based on the preceding information, what is the fair value of Lenore's net assets, if goodwill of $56,000 is recorded?

A. $306,000 B. $244,000 C. $194,000 D. $300,000

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 01-02 Understand the history of the development of standards related to acquisition accounting over time. Learning Objective: 01-05 Make calculations and business combination journal entries in the presence of a differential; goodwill; or a bargain purchase element. Topic: Combination Effected through Acquisition of Stock Topic: Fair Value Measurements Topic: The Development of Accounting for Business Combinations

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28.

Pursuing an inorganic growth strategy, Wilson Company acquired Venus Company's net assets and assigned them to four separate reporting divisions. Wilson assigned total goodwill of $134,000 to the four reporting divisions as given below:

Based on the preceding information, what amount of goodwill will be reported for Alpha at year-end?

A. $0 B. $20,000 C. $30,000 D. $10,000

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29.

Based on the preceding information, what amount of goodwill will be reported for Beta at year-end?

A. $0 B. $14,000 C. $34,000 D. $50,000

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30.

Based on the preceding information, for Gamma:

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31.

Based on the preceding information, for Delta:

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32.

Based on the preceding information, what would be the total amount of goodwill that Wilson should report at year-end?

A. $0 B. $69,000 C. $79,000 D. $94,000

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33.

Which of the following observations is (are) consistent with the acquisition method of accounting for business combinations? I. Expenses related to the business combination are expensed. II. Stock issue costs are treated as a reduction in the issue price. III. All merger and stock issue costs are expensed. IV. No goodwill is ever recorded.

A. III B. IV C. I and II D. I, II, and IV

34.

Which of the following observations refers to the term differential?

AACSB: Reflective Thinking AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-05 Make calculations and business combination journal entries in the presence of a differential; goodwill; or a bargain purchase element. Topic: Applying the Acquisition Method 1-57 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

35.

Which of the following observations concerning "goodwill" is NOT correct?

36.

Big Company acquired the following assets and liabilities of Little Company (fair values listed below) for $470,000 cash.

Assuming these items are all recorded at their acquisition date fair values, what additional item needs to be recorded and how will it be accounted for in the future?

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Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-05 Make calculations and business combination journal entries in the presence of a differential; goodwill; or a bargain purchase element. Topic: Bargain Purchase

37.

Paul Corp. acquired 100 percent of Sam Inc.'s voting stock on July 1, 20X1. The following information was available as of December 31, 20X1:

How much net income should be reported in Paul Corp's income statement for 20X1?

A. $370,000 B. $720,000 C. $940,000 D. $1,090,000

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38.

Note: This is a Kaplan CPA Review Question On August 31, 20X1, Wood Corp. issued 100,000 shares of its $20 par value common stock for the net assets of Pine, Inc. in a business combination accounted for by the acquisition method. The market value of Wood's common stock on August 31 was $36 per share. Wood paid a fee of $160,000 to the consultant who arranged this acquisition. Costs of registering and issuing the equity securities amounted to $80,000. No goodwill was involved in the purchase. What amount should Wood capitalize as the cost of acquiring Pine's net assets?

A. $3,680,000 B. $3,600,000 C. $3,760,000 D. $3,840,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 1 Easy Learning Objective: 01-05 Make calculations and business combination journal entries in the presence of a differential; goodwill; or a bargain purchase element. Topic: Applying the Acquisition Method

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39.

Note: This is a Kaplan CPA Review Question Company X acquired for cash all of the outstanding common stock of Company Y. How should Company X determine in general the amounts to be reported for the inventories and long-term debt acquired from Company Y?

A. Option A B. Option B C. Option C D. Option D

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40.

Point Co. purchased 90% of Sharpe Corp.'s voting stock on January 1, 20X2 for $5,580,000. Prior to the acquisition, Point held a 10% equity position in Sharpe Company. On January 1, 20X2 Pointe's 10% investment in Sharpe has a book value of $340,000 and a fair value of $620,000. On January 1, 20X2 Point records the following:

AACSB: Reflective Thinking AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-06 Understand additional considerations associated with business combinations. Topic: Noncontrolling Equity Held Prior to Combination

41.

The length of the measurement period allowed to value the assets and liabilities in an acquired business combination starts on the date of acquisition and lasts until:

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42.

ASC 805 requires contingent consideration in a business combination to be classified as:

A. An asset B. A liability or equity C. An asset or equity D. An asset or a liability

AACSB: Reflective Thinking AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-06 Understand additional considerations associated with business combinations. Topic: Uncertainty in Business Combinations-Contingent Consideration

43.

For all acquired contingencies, the acquirer should do all of the following except:

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44.

ASC 805 requires that ongoing research and development projects be treated in all of the following ways except:

A. Recorded at acquisition-date fair values B. Classified as intangible assets having indefinite lives C. Expensed immediately D. Tested for impairment periodically

Essay Questions

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45.

On January 1, 20X8, Alaska Corporation acquired Mercantile Corporation's net assets by paying $160,000 cash. Balance sheet data for the two companies and fair value information for Mercantile Corporation immediately before the business combination are given below:

Required: Prepare the journal entry to record the acquisition of Mercantile Corporation.

Or if the cash paid is reported net of cash received:

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AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 01-02 Understand the history of the development of standards related to acquisition accounting over time. Learning Objective: 01-05 Make calculations and business combination journal entries in the presence of a differential; goodwill; or a bargain purchase element. Topic: Goodwill Topic: The Development of Accounting for Business Combinations

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46.

On January 1, 20X8, Line Corporation acquired all of the common stock of Staff Company for $300,000. On that date, Staff's identifiable net assets had a fair value of $250,000. The assets acquired in the purchase of Staff are considered to be a separate reporting unit of Line Corporation. The carrying value of Staff's investment at December 31, 20X8, is $310,000. The fair value of the net assets (excluding goodwill) at that date is $220,000 and the fair value of the reporting unit is determined to be 260,000. Required: 1) Explain how goodwill is tested for impairment for a reporting unit. 2) Determine the amount, if any, of impairment loss to be recognized at December 31, 20X8.

1) To test for the impairment of goodwill, the fair value of the reporting unit is compared with its carrying amount. If the fair value of the reporting unit exceeds its carrying amount, the goodwill of that reporting unit is considered unimpaired. On the other hand, if the carrying amount of the reporting unit exceeds its fair value, an impairment of the reporting unit's goodwill is implied. The amount of the reporting unit's goodwill impairment is measured as the excess of the carrying amount of the unit's goodwill over the implied value of its goodwill. The implied value of its goodwill is determined as the excess of the fair value of the reporting unit over the fair value of its net assets excluding goodwill. 2) The $310,000 carrying value exceeds the $260,000 fair value, implying impairment. Implied goodwill = $260,000 - $220,000 = $40,000. Impairment loss = $50,000 - $40,000 = $10,000.

AACSB: Analytic AACSB: Communication AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 01-05 Make calculations and business combination journal entries in the presence of a differential; goodwill; or a bargain purchase element. Topic: Goodwill

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47.

SeaLine Corporation is involved in the distribution of processed marine products. The fair values of assets and liabilities held by three reporting units and other information related to the reporting units owned by SeaLine are as follows:

Required: Determine the amount of goodwill that SeaLine should report in its current financial statements.

Total Goodwill reported = $70,000

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Chapter 02 Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential

Multiple Choice Questions

1. If Push Company owned 51 percent of the outstanding common stock of Shove Company, which reporting method would be appropriate?

A. Cost method B. Consolidation C. Equity method D. Merger method

2. Usually, an investment of 20 to 50 percent in another company's voting stock is reported under the:

A. cost method B. equity method C. full consolidation method D. fair value method

3. From an investor's point of view, a liquidating dividend from an investee is:

A. a dividend declared by the investee in excess of its earnings in the current year B. a dividend declared by the investee in excess of its earnings since acquisition by the investor C. any dividend declared by the investee since acquisition D. a dividend declared by the investee in excess of the investee's retained earnings

4. Which of the following observations is NOT consistent with the cost method of accounting?

A. Investee dividends from earnings since acquisition by investor are treated as a reduction of the investment. B. Investments are carried by the investor at historical cost. C. No journal entry is made regarding the earnings of the investee. D. It is consistent with the treatment normally accorded noncurrent assets.

5. On January 1, 20X9 Athlon Company acquired 30 percent of the common stock of Opteron Corporation, at underlying book value. For the same year, Opteron reported net income of $55,000, which includes an extraordinary gain of 40,000. It did not pay any dividends during the year. By what amount would Athlon's investment in Opteron Corporation increase for the year, if Athlon used the equity method?

A. $0 B. $16,500 C. $4,500 D. $12,000

6. On January 1, 20X8, William Company acquired 30 percent of eGate Company's common stock, at underlying book value of $100,000. eGate has 100,000 shares of $2 par value, 5 percent cumulative preferred stock outstanding. No dividends are in arrears. eGate reported net income of $150,000 for 20X8 and paid total dividends of $72,000. William uses the equity method to account for this investment. Based on the preceding information, what amount would William Company receive as dividends from eGate for the year?

A. $62,000 B. $21,600 C. $18,600 D. $54,000

7. On January 1, 20X8, William Company acquired 30 percent of eGate Company's common stock, at underlying book value of $100,000. eGate has 100,000 shares of $2 par value, 5 percent cumulative preferred stock outstanding. No dividends are in arrears. eGate reported net income of $150,000 for 20X8 and paid total dividends of $72,000. William uses the equity method to account for this investment. Based on the preceding information, what amount of investment income will William Company report from its investment in eGate for the year?

A. $45,000 B. $42,000 C. $62,000 D. $35,000

8. On January 1, 20X8, William Company acquired 30 percent of eGate Company's common stock, at underlying book value of $100,000. eGate has 100,000 shares of $2 par value, 5 percent cumulative preferred stock outstanding. No dividends are in arrears. eGate reported net income of $150,000 for 20X8 and paid total dividends of $72,000. William uses the equity method to account for this investment. Based on the preceding information, what amount would be reported by William Company as the balance in its investment account on December 31, 20X8?

A. $100,000 B. $123,400 C. $120,400 D. $142,000

9. On January 1, 20X7, Yang Corporation acquired 25 percent of the outstanding shares of Spiel Corporation for $100,000 cash. Spiel Company reported net income of $75,000 and paid dividends of $30,000 for both 20X7 and 20X8. The fair value of shares held by Yang was $110,000 and $105,000 on December 31, 20X7 and 20X8 respectively. Based on the preceding information, what amount will be reported by Yang as income from its investment in Spiel for 20X8, if it used the equity method of accounting?

A. $7,500 B. $11,250 C. $18,750 D. $26,250

10. On January 1, 20X7, Yang Corporation acquired 25 percent of the outstanding shares of Spiel Corporation for $100,000 cash. Spiel Company reported net income of $75,000 and paid dividends of $30,000 for both 20X7 and 20X8. The fair value of shares held by Yang was $110,000 and $105,000 on December 31, 20X7 and 20X8 respectively. Based on the preceding information, what amount will be reported by Yang as balance in investment in Spiel on December 31, 20X8, if it used the equity method of accounting?

A. $108,250 B. $118,750 C. $100,000 D. $122,500

11. On January 1, 20X7, Yang Corporation acquired 25 percent of the outstanding shares of Spiel Corporation for $100,000 cash. Spiel Company reported net income of $75,000 and paid dividends of $30,000 for both 20X7 and 20X8. The fair value of shares held by Yang was $110,000 and $105,000 on December 31, 20X7 and 20X8 respectively. Based on the preceding information, what amount will be reported by Yang as income from its investment in Spiel for 20X7 if it used the fair value option to account for its investment in Spiel?

A. $17,500 B. $12,500 C. $11,250 D. $7,500

12. On January 1, 20X7, Yang Corporation acquired 25 percent of the outstanding shares of Spiel Corporation for $100,000 cash. Spiel Company reported net income of $75,000 and paid dividends of $30,000 for both 20X7 and 20X8. The fair value of shares held by Yang was $110,000 and $105,000 on December 31, 20X7 and 20X8 respectively. Based on the preceding information, what amount will be reported by Yang as income from its investment in Spiel for 20X8 if it used the fair value option to account for its investment in Spiel?

A. $11,250 B. $2,500 C. $6,250 D. $7,500

13. On January 1, 20X7, Yang Corporation acquired 25 percent of the outstanding shares of Spiel Corporation for $100,000 cash. Spiel Company reported net income of $75,000 and paid dividends of $30,000 for both 20X7 and 20X8. The fair value of shares held by Yang was $110,000 and $105,000 on December 31, 20X7 and 20X8 respectively. Based on the preceding information, what amount will be reported by Yang as balance in investment in Spiel on December 31, 20X8, if it used the fair value option to account for its investment in Spiel?

A. $105,000 B. $118,750 C. $100,000 D. $122,500

14. A change from the cost method to the equity method of accounting for an investment in common stock resulting from an increase in the number of shares held by the investor requires:

A. only a footnote disclosure B. that the cumulative amount of the change be shown as a line item on the income statement, net of tax C. that the change be accounted for as an unrealized gain included in other comprehensive income D. retroactive restatement as if the investor always had used the equity method

15. Under the equity method of accounting for a stock investment, the investment initially should be recorded at:

A. cost B. cost minus any differential C. proportionate share of the fair value of the investee company's net assets D. proportionate share of the book value of the investee company's net assets

16. Which of the following observations is consistent with the equity method of accounting?

A. Dividends declared by the investee are treated as income by the investor. B. It is used when the investor lacks the ability to exercise significant influence over the investee. C. It may be used in place of consolidation. D. Its primary use is in reporting nonsubsidiary investments.

17. Note: This is a Kaplan CPA Review Question On July 1, 20X4, Denver Corp. purchased 3,000 shares of Eagle Co.'s 10,000 outstanding shares of common stock for $20 per share. On December 15, 20X4, Eagle paid $40,000 in dividends to its common stockholders. Eagle's net income for the year ended December 31, 20X4, was $120,000, earned evenly throughout the year. In its 20X4 income statement, what amount of income from this investment should Denver report?

A. $12,000 B. $36,000 C. $18,000 D. $6,000

18. Note: This is a Kaplan CPA Review Question On January 2, 20X5, Well Co. purchased 10 percent of Rea, Inc.'s outstanding common shares for $400,000. Well is the largest single shareholder in Rea, and Well's officers are a majority on Rea's board of directors. As a result, Well is able to exercise significant influence over Rea. Rea reported net income of $500,000 for 20X5, and paid dividends of $150,000. In its December 31, 20X5, balance sheet, what amount should Well report as investment in Rea?

A. $385,000 B. $450,000 C. $400,000 D. $435,000

19. Note: This is a Kaplan CPA Review Question The Jamestown Corporation (Jamestown) reported net income for the current year of $200,000 and paid cash dividends of $30,000. The Stadium Company (Stadium) holds 22 percent of the outstanding voting stock of Jamestown. However, another corporation holds the other 78 percent ownership and does not take Stadium's wants and wishes into consideration when making financing and operating decisions for Jamestown. What investment income should Stadium recognize for the current year?

A. $6,600 B. $0 C. $44,000 D. $50,600

20. Note: This is a Kaplan CPA Review Question Grant, Inc. acquired 30 percent of South Co.'s voting stock for $200,000 on January 2, 20X4. Grant's 30 percent interest in South gave Grant the ability to exercise significant influence over South's operating and financial policies. During 20X4, South earned $80,000 and paid dividends of $50,000. South reported earnings of $100,000 for the six months ended June 30, 20X5, and $200,000 for the year ended December 31, 20X5. On July 1, 20X5, Grant sold half of its stock in South for $150,000 cash. South paid dividends of $60,000 on October 1, 20X5. What amount should Grant include in its 20X4 income statement as a result of the investment?

A. $15,000 B. $24,000 C. $50,000 D. $80,000

21. Note: This is a Kaplan CPA Review Question Grant, Inc. acquired 30 percent of South Co.'s voting stock for $200,000 on January 2, 20X4. Grant's 30 percent interest in South gave Grant the ability to exercise significant influence over South's operating and financial policies. During 20X4, South earned $80,000 and paid dividends of $50,000. South reported earnings of $100,000 for the six months ended June 30, 20X5, and $200,000 for the year ended December 31, 20X5. On July 1, 20X5, Grant sold half of its stock in South for $150,000 cash. South paid dividends of $60,000 on October 1, 20X5. In Grant's December 31, 20X4, balance sheet, what should be the carrying amount of this investment?

A. $224,000 B. $200,000 C. $234,000 D. $209,000

22. Note: This is a Kaplan CPA Review Question Grant, Inc. acquired 30 percent of South Co.'s voting stock for $200,000 on January 2, 20X4. Grant's 30 percent interest in South gave Grant the ability to exercise significant influence over South's operating and financial policies. During 20X4, South earned $80,000 and paid dividends of $50,000. South reported earnings of $100,000 for the six months ended June 30, 20X5, and $200,000 for the year ended December 31, 20X5. On July 1, 20X5, Grant sold half of its stock in South for $150,000 cash. South paid dividends of $60,000 on October 1, 20X5. In its 20X5 income statement, what amount should Grant report as a gain from the sale of half of its investment?

A. $35,000 B. $24,500 C. $30,500 D. $45,500

23. What portion of the subsidiary stockholders' equity account balances should be eliminated in preparing the consolidated balance sheet?

A. Common stock B. Additional paid-in capital C. Retained Earnings D. All of the balances are eliminated

24. The consolidation process consists of all the following except:

A. combining the financial statements of two or more legally separate companies B. eliminating intercompany transactions and holdings C. closing the individual subsidiary's revenue and expense accounts into the parent's retained earnings D. combining the accounts of separate companies, creating a single set of financial statements

25. Beta Company acquired 100 percent of the voting common shares of Standard Video Corporation, its bitter rival, by issuing bonds with a par value and fair value of $150,000. Immediately prior to the acquisition, Beta reported total assets of $500,000, liabilities of $280,000, and stockholders' equity of $220,000. At that date, Standard Video reported total assets of $400,000, liabilities of $250,000, and stockholders' equity of $150,000. Included in Standard's liabilities was an account payable to Beta in the amount of $20,000, which Beta included in its accounts receivable. Based on the preceding information, what amount of total assets did Beta report in its balance sheet immediately after the acquisition?

A. $500,000 B. $650,000 C. $750,000 D. $900,000

26. Beta Company acquired 100 percent of the voting common shares of Standard Video Corporation, its bitter rival, by issuing bonds with a par value and fair value of $150,000. Immediately prior to the acquisition, Beta reported total assets of $500,000, liabilities of $280,000, and stockholders' equity of $220,000. At that date, Standard Video reported total assets of $400,000, liabilities of $250,000, and stockholders' equity of $150,000. Included in Standard's liabilities was an account payable to Beta in the amount of $20,000, which Beta included in its accounts receivable. Based on the preceding information, what amount of total assets was reported in the consolidated balance sheet immediately after acquisition?

A. $650,000 B. $880,000 C. $920,000 D. $750,000

27. Beta Company acquired 100 percent of the voting common shares of Standard Video Corporation, its bitter rival, by issuing bonds with a par value and fair value of $150,000. Immediately prior to the acquisition, Beta reported total assets of $500,000, liabilities of $280,000, and stockholders' equity of $220,000. At that date, Standard Video reported total assets of $400,000, liabilities of $250,000, and stockholders' equity of $150,000. Included in Standard's liabilities was an account payable to Beta in the amount of $20,000, which Beta included in its accounts receivable. Based on the preceding information, what amount of total liabilities was reported in the consolidated balance sheet immediately after acquisition?

A. $500,000 B. $530,000 C. $280,000 D. $660,000

28. Beta Company acquired 100 percent of the voting common shares of Standard Video Corporation, its bitter rival, by issuing bonds with a par value and fair value of $150,000. Immediately prior to the acquisition, Beta reported total assets of $500,000, liabilities of $280,000, and stockholders' equity of $220,000. At that date, Standard Video reported total assets of $400,000, liabilities of $250,000, and stockholders' equity of $150,000. Included in Standard's liabilities was an account payable to Beta in the amount of $20,000, which Beta included in its accounts receivable. Based on the preceding information, what amount of stockholders' equity was reported in the consolidated balance sheet immediately after acquisition?

A. $220,000 B. $150,000 C. $370,000 D. $350,000

29. Parent Co. purchases 100 percent of Son Company on January 1, 20X1, when Parent's retained earnings balance is $520,000 and Son's is $150,000. During 20X1, Son reports $15,000 of net income and declares $6,000 of dividends. Parent reports $105,000 of separate operating earnings plus $15,000 of equity-method income from its 100 percent interest in Son; Parent declares dividends of $40,000. Based on the preceding information, what is Parent's post-closing retained earnings balance on December 31, 20X1?

A. $485,000 B. $505,000 C. $525,000 D. $600,000

30. Parent Co. purchases 100 percent of Son Company on January 1, 20X1, when Parent's retained earnings balance is $520,000 and Son's is $150,000. During 20X1, Son reports $15,000 of net income and declares $6,000 of dividends. Parent reports $105,000 of separate operating earnings plus $15,000 of equity-method income from its 100 percent interest in Son; Parent declares dividends of $40,000. Based on the preceding information, what is Son's post-closing retained earnings balance on December 31, 20X1:

A. $141,000 B. $150,000 C. $159,000 D. $165,000

31. Parent Co. purchases 100 percent of Son Company on January 1, 20X1, when Parent's retained earnings balance is $520,000 and Son's is $150,000. During 20X1, Son reports $15,000 of net income and declares $6,000 of dividends. Parent reports $105,000 of separate operating earnings plus $15,000 of equity-method income from its 100 percent interest in Son; Parent declares dividends of $40,000. Based on the preceding information, what is the consolidated retained earnings balance on December 31, 20X1?

A. $470,000 B. $585,000 C. $600,000 D. $759,000

32. The main guidance on equity-method reporting, found in ASC 323 and 325 requires all of the following except:

A. the investor's share of the investee's extraordinary items should be reported B. the investor's share of the investee's prior-period adjustments should be reported C. continued use of the equity-method even if continued losses results in a zero or negative balance in the investment account D. preferred dividends of the investee should be deducted from net income before the investor computes its share of investee earnings

33. On January 1, 20X4, Plimsol Company acquired 100 percent of Shipping Corporation's voting shares, at underlying book value. Plimsol uses the cost method in accounting for its investment in Shipping. Shipping's retained earnings was $75,000 on the date of acquisition. On December 31, 20X4, the trial balance data for the two companies are as follows:

Based on the information provided, what amount of net income will be reported in the consolidated financial statements prepared on December 31, 20X4?

A. $100,000 B. $85,000 C. $110,000 D. $125,000

34. On January 1, 20X4, Plimsol Company acquired 100 percent of Shipping Corporation's voting shares, at underlying book value. Plimsol uses the cost method in accounting for its investment in Shipping. Shipping's retained earnings was $75,000 on the date of acquisition. On December 31, 20X4, the trial balance data for the two companies are as follows:

Based on the information provided, what amount of total assets will be reported in the consolidated balance sheet prepared on December 31, 20X4?

A. $425,000 B. $525,000 C. $650,000 D. $630,000

35. On January 1, 20X4, Plimsol Company acquired 100 percent of Shipping Corporation's voting shares, at underlying book value. Plimsol uses the cost method in accounting for its investment in Shipping. Shipping's retained earnings was $75,000 on the date of acquisition. On December 31, 20X4, the trial balance data for the two companies are as follows:

Based on the information provided, what amount of retained earnings will be reported in the consolidated balance sheet prepared on December 31, 20X4?

A. $235,000 B. $210,000 C. $310,000 D. $225,000

36. On January 1, 20X4, Plimsol Company acquired 100 percent of Shipping Corporation's voting shares, at underlying book value. Plimsol uses the cost method in accounting for its investment in Shipping. Shipping's retained earnings was $75,000 on the date of acquisition. On December 31, 20X4, the trial balance data for the two companies are as follows:

Based on the information provided, what amount of total liabilities will be reported in the consolidated balance sheet prepared on December 31, 20X4?

A. $525,000 B. $115,000 C. $125,000 D. $190,000

37. On January 1, 20X4, Plimsol Company acquired 100 percent of Shipping Corporation's voting shares, at underlying book value. Plimsol uses the cost method in accounting for its investment in Shipping. Shipping's retained earnings was $75,000 on the date of acquisition. On December 31, 20X4, the trial balance data for the two companies are as follows:

Based on the information provided, what amount of total stockholder's equity will be reported in the consolidated balance sheet prepared on December 31, 20X4?

A. $190,000 B. $335,000 C. $460,000 D. $310,000

38. Parent Company purchased 100 percent of Son Inc. on January 1, 20X2 for $420,000. Son reported earnings of $82,000 and declared dividends of $4,000 during 20X2. Based on the preceding information and assuming Parent uses the cost method to account for its investment in Son, what is the balance in Parent's Investment in Son account on December 31, 20X2, prior to consolidation?

A. $416,000 B. $420,000 C. $424,000 D. $498,000

39. Parent Company purchased 100 percent of Son Inc. on January 1, 20X2 for $420,000. Son reported earnings of $82,000 and declared dividends of $4,000 during 20X2. Based on the preceding information and assuming Parent uses the equity method to account for its investment in Son, what is the balance in Parent's Investment in Son account on December 31, 20X2, prior to consolidation?

A. $416,000 B. $420,000 C. $424,000 D. $498,000

Essay Questions

40. A cash dividend returns assets to the stockholders while reducing corporate liquidity. Why are not all cash dividends considered to be "liquidating dividends"? In your response include a discussion of how an investor accounts for a liquidating dividend.

41. Dear Corporation acquired 100 percent of the voting shares of Therry Inc. by issuing 10,000 new shares of $5 par value common stock with a $30 market value. Required: 1. Which company is the parent and which is the subsidiary? 2. Define a subsidiary corporation. 3. Define a parent corporation. 4. Which entity prepares consolidated worksheet? 5. Why are elimination entries used?

42. On January 1, 20X9, Zigma Company acquired 100 percent of Standard Company's common shares at underlying book value. Zigma uses the equity method in accounting for its ownership of Standard. On December 31, 20X9, the trial balances of the two companies are as follows:

Required: 1. Prepare the eliminating entries needed as of December 31, 20X9, to complete a consolidation worksheet. 2. Prepare a three-part consolidation worksheet as of December 31, 20X9.

43. In the absence of other evidence, common stock ownership of between 20 and 50 percent is viewed as indicating that the investor is able to exercise significant influence over the investee. What are some of the other factors that could constitute evidence of the ability to exercise significant influence?

44. On January 1, 20X7, Plimsol Company acquired 100 percent of Shipping Corporation's voting shares, at underlying book value. Plimsol uses the cost method in accounting for its investment in Shipping. Shipping's reported retained earnings of $75,000 on the date of acquisition. The trial balances for Plimsol Company and Shipping Corporation as of December 31, 20X8, follow:

Required: 1. Provide all eliminating entries required to prepare a full set of consolidated statements for 20X8. 2. Prepare a three-part consolidation worksheet in good form as of December 31, 20X8.

Chapter 02 Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential Answer Key

Multiple Choice Questions

If Push Company owned 51 percent of the outstanding common stock of Shove Company, which reporting method would be appropriate?

A. Cost method B. Consolidation C. Equity method D. Merger method

AACSB: Reflective Thinking AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-01 Understand and explain how ownership and control can influence the accounting for investments in common stock. Topic: Accounting for Investments in Common Stock

Usually, an investment of 20 to 50 percent in another company's voting stock is reported under the:

A. cost method B. equity method C. full consolidation method D. fair value method

From an investor's point of view, a liquidating dividend from an investee is:

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-02 Prepare journal entries using the cost method for accounting for investments. Topic: The Cost Method

Which of the following observations is NOT consistent with the cost method of accounting?

On January 1, 20X9 Athlon Company acquired 30 percent of the common stock of Opteron Corporation, at underlying book value. For the same year, Opteron reported net income of $55,000, which includes an extraordinary gain of 40,000. It did not pay any dividends during the year. By what amount would Athlon's investment in Opteron Corporation increase for the year, if Athlon used the equity method?

A. $0 B. $16,500 C. $4,500 D. $12,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-03 Prepare journal entries using the equity method for accounting for investments. Section: Appendix 2A Topic: Investor's Share of other Comprehensive Income

Topic: The Equity Method

On January 1, 20X8, William Company acquired 30 percent of eGate Company's common stock, at underlying book value of $100,000. eGate has 100,000 shares of $2 par value, 5 percent cumulative preferred stock outstanding. No dividends are in arrears. eGate reported net income of $150,000 for 20X8 and paid total dividends of $72,000. William uses the equity method to account for this investment. Based on the preceding information, what amount would William Company receive as dividends from eGate for the year?

A. $62,000 B. $21,600 C. $18,600 D. $54,000

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 02-03 Prepare journal entries using the equity method for accounting for investments. Section: Appendix 2A Topic: Additional Requirements of ASC 323-10 Topic: The Equity Method