Advanced Financial Accounting 11e Theodore Christensen David Cottrell Richard Baker (Test Bank All Chapters, 100% Original Verified, A+ Grade) Chapter 1 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. Answer: B Learning Objective: 01-01 Learning Objective: 01-04 Topic: Internal Expansion: Creating a Business Entity Topic: Valuation of Business Entities Blooms: Remember AACSB: Reflective Thinking AICPA: FN Decision Making Difficulty: 1 Easy 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 the above Answer: D Learning Objective: 01-01 Topic: An Introduction to Complex Business Structures Blooms: Remember AACASB: Reflective Thinking AICPA: FN Reporting Difficulty: 1 Easy
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Chapter 1 Intercorporate Acquisitions and Investments in Other Entities
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 Answer: C Learning Objective: 01-01 Topic: Organizational Structure and Financial Reporting Blooms: Remember AACASB: Reflective Thinking AICPA: FN Decision Making Difficulty: 1 Easy 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 Answer: D Learning Objective: 01-01 Topic: Organizational Structure and Financial Reporting Blooms: Remember AACASB: Reflective Thinking AICPA: FN Decision Making Difficulty: 1 Easy
The following data applies to Questions 5 – 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.
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Chapter 1 Intercorporate Acquisitions and Investments in Other Entities
5. 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. Answer: D Learning Objective: 01-03 Learning Objective: 01-04 Topic: Accounting for Internal Expansion: Creating Business Entities Topic: Valuation of Business Entities Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium 6. 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 Answer: A Learning Objective: 01-03 Learning Objective: 01-02 Topic: Accounting for Internal Expansion: Creating Business Entities Topic: The Development of Accounting for Business Combinations Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium
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Chapter 1 Intercorporate Acquisitions and Investments in Other Entities
7. 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. Answer: C Learning Objective: 01-03 Topic: Accounting for Internal Expansion: Creating Business Entities Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium The following data applies to Questions 8 – 10: At its inception, Peacock Company purchased land for $50,000 and a building for $220,000. After exactly 4 years, it transferred these assets and cash of $75,000 to a newly created subsidiary, Selvick Company, in exchange for 25,000 shares of Selvick’s $5 par value stock. Peacock uses straight-line depreciation. When purchased, the building had a useful life of 20 years with no expected salvage value. An appraisal at the time of the transfer revealed that the building has a fair value of $250,000. 8. Based on the information provided, at the time of the transfer, Selvick Company should record A. the building at $220,000 and accumulated depreciation of $44,000. B. the building at $220,000 with no accumulated depreciation. C. the building at $176,000 with no accumulated depreciation. D. the building at $250,000 with no accumulated depreciation. Answer: A Learning Objective: 01-03 Learning Objective: 01-04 Topic: Accounting for Internal Expansion: Creating Business Entities Topic: Valuation of Business Entities Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium 9. Based on the information provided, what amount would be reported by Peacock Company as investment in Selvick Company common stock? A. $125,000 B. $250,000 C. $301,000 D. $345,000 Answer: C 1-4
Chapter 1 Intercorporate Acquisitions and Investments in Other Entities
Learning Objective: 01-03 Learning Objective: 01-02 Topic: Accounting for Internal Expansion: Creating Business Entities Topic: The Development of Accounting for Business Combinations Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium
10. Based on the preceding information, Selvick Company will report additional paid-in capital of A. $125,000. B. $176,000. C. $220,000. D. $250,000. Answer: B Learning Objective: 01-03 Topic: Accounting for Internal Expansion: Creating Business Entities Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium 11. 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. Answer: B Learning Objective: 01-04 Topic: Forms of Business Combinations Blooms: Remember AACSB: Reflective Thinking AICPA: FN Decision Making Difficulty: 1 Easy
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12. 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. Answer: D Learning Objective: 01-04 Topic: Forms of Business Combinations Blooms: Remember AACSB: Reflective Thinking AICPA: FN Decision Making Difficulty: 1 Easy The following data applies to Questions 13 - 16: 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:
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13. 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 Answer: C Learning Objective: 01-05 Topic: Combination Effected through Acquisition of Stock Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium 14. 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 Answer: D Learning Objective: 01-01 Learning Objective: 01-03 Topic: Internal Expansion: Creating a Business Entity Topic: Accounting for Internal Expansion: Creating Business Entities Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium
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15. 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 Answer: A Learning Objective: 01-03 Learning Objective: 01-02 Topic: Accounting for Internal Expansion: Creating Business Entities Topic: The Development of Accounting for Business Combinations Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium 16. 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. Answer: B Learning Objective: 01-03 Topic: Accounting for Internal Expansion: Creating Business Entities Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium
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Chapter 1 Intercorporate Acquisitions and Investments in Other Entities
The following data applies to Questions 17 – 18: 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. 17. 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 Answer: C Learning Objective: 01-05 Topic: Applying the Acquisition Method Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium 18. Based on the preceding information, under the acquisition method: A. $72,000 of stock issue costs are treated as goodwill. B. B. $19,000 of stock issue costs are treated as a reduction in the issue price. C. C. $19,000 of stock issue costs are expensed. D. D. $72,000 of stock issue costs are expensed. Answer: B Learning Objective: 01-05 Topic: Applying the Acquisition Method Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium
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The following data applies to Questions 19 – 20: Miguel Corporation and Forest Company merged as of January 1, 20X3. Miguel paid finder’s fees of $36,000 and legal fees of $8,000. Miguel also paid audit fees related to the stock issuance of $12,000, stock registration fees of $7,000, and stock listing application fees of $3,000. 19. Based on the preceding information, under the acquisition method, what amount relating to the business combination would be expensed? A. $22,000 B. $36,000 C. $44,000 D. $66,000 Answer: C Learning Objective: 01-05 Topic: Applying the Acquisition Method Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium 20. Based on the preceding information, under the acquisition method A. $22,000 of stock issue costs are treated as a reduction in the issue price. B. $22,000 of stock issue costs are expensed. C. $66,000 of stock issue costs are classified as goodwill. D. $66,000 of stock issue costs are expensed. Answer: A Learning Objective: 01-05 Topic: Applying the Acquisition Method Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium
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21. 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 Answer: B Learning Objective: 01-05 Topic: Goodwill Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium 22. Simmons Corporation paid $170,000 to acquire all of Bush Company’s net assets. Bush reported assets with a book value of $189,000 and a fair value of $206,000 and liabilities with a book value and fair value of $48,000 on the date of the combination. Simmons also paid $8,000 to a search firm for finder’s fees related to the acquisition. What amount will be recorded as goodwill by Simmons Corporation when recording its investment in Bush? A. $29,000 B. $20,000 C. $12,000 D. $10,000 Answer: C Learning Objective: 01-05 Topic: Goodwill Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium The following data applies to Questions 23 – 25: 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.
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23. 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 Answer: D Learning Objective: 01-05 Topic: Goodwill Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium 24. 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 Answer: D Learning Objective: 01-05 Learning Objective: 01-02 Topic: Combination Effected through the Acquisition of Net Assets Topic: The Development of Accounting for Business Combinations Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium
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25. 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 Answer: A Learning Objective: 01-05 Topic: Goodwill Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium The following information applies to Questions 26 – 28: Mercury Corporation acquired 100 percent of the stock of Jupiter Company when the book value of Jupiter’s net assets was $250,000. The fair value of Jupiter’s net assets was $280,000 on the acquisition date. 26. Based on the preceding information, what amount of goodwill will be reported in consolidated financial statements presented immediately following the combination if Mercury paid $295,000 for the acquisition? A. $0 B. $5,000 C. $15,000 D. $45,000 Answer: C Learning Objective: 01-05 Topic: Goodwill Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium 27. Based on the preceding information, what amount will be recorded by Mercury as its investment in Jupiter if it paid $275,000 for the acquisition? A. $250,000 B. $275,000 C. $280,000 D. $300,000 Answer: C Learning Objective: 01-05 1-13
Chapter 1 Intercorporate Acquisitions and Investments in Other Entities
Learning Objective: 01-02 Topic: Combination Effected through the Acquisition of Net Assets Topic: The Development of Accounting for Business Combinations Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium 28. Based on the preceding information, what amount of goodwill will be reported in consolidated financial statements presented immediately following the combination if Mercury paid $275,000 for the acquisition? A. ($5,000) B. $0 C. $5,000 D. $25,000 Answer: B Learning Objective: 01-05 Topic: Goodwill Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium 29. 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 Answer: C Learning Objective: 01-05 Topic: Goodwill Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard
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30. 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 Answer: B Learning Objective: 01-05 Topic: Goodwill Topic: Fair Value Measurements Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard The following data applies to Questions 31 – 33: 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:
31. 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 Answer: D Learning Objective: 01-05 Topic: Goodwill Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard
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32. 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 Answer: D Learning Objective: 01-05 Topic: Goodwill Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard 33. 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 Answer: B Learning Objective: 01-05 Topic: Goodwill Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard The following data applies to Questions 34 – 36: 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.
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34. 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 Answer: C Learning Objective: 01-05 Learning Objective: 01-01 Topic: Combination Effected through Acquisition of Stock Topic: External Expansion: Business Combinations Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 1 Easy 35. Based on the preceding information, what is the par value of Public's common stock? A. $10 B. $1 C. $5 D. $4 Answer: D Learning Objective: 01-05 Learning Objective: 01-01 Topic: Combination Effected through Acquisition of Stock Topic: External Expansion: Business Combinations Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 1 Easy
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36. 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 Answer: C Learning Objective: 01-05 Learning Objective: 01-02 Topic: Combination Effected through Acquisition of Stock Topic: Fair Value Measurements Topic: The Development of Accounting for Business Combinations Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium The following data applies to Questions 37 – 39: Nash Company acquired Seel Corporation through an exchange of common shares. All of Seel’s assets and liabilities were immediately transferred to Nash. Nash’s common stock was trading at $25 per share at the time of the exchange. The total par value of Nash’s stock outstanding before and after the acquisition was $750,000 and $840,000, respectively. Nash’s additional paid-in capital before and after the acquisition were $200,000 and $560,000, respectively. 37. Based on the preceding information, what number of shares did Nash issue at the time of the exchange? A. 3,600 B. 5,000 C. 14,400 D. 18,000 Answer: D Learning Objective: 01-05 Learning Objective: 01-01 Topic: Combination Effected through Acquisition of Stock Topic: External Expansion: Business Combinations Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 1 Easy 38. Based on the preceding information, what is the par value of Nash’s common stock? A. $1 B. $5 C. $6 1-18
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D. $18 Answer: B Learning Objective: 01-05 Learning Objective: 01-01 Topic: Combination Effected through Acquisition of Stock Topic: External Expansion: Business Combinations Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 1 Easy 39. Based on the preceding information, what is the fair value of Seel’s net assets if goodwill of $20,000 is recorded in the acquisition? A. $430,000 B. $470,000 C. $540,000 D. $580,000 Answer: A Learning Objective: 01-05 Learning Objective: 01-02 Topic: Combination Effected through Acquisition of Stock Topic: Fair Value Measurements Topic: The Development of Accounting for Business Combinations Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium The following data applies to Questions 40 – 44: 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:
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40. 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 Answer: B Learning Objective: 01-05 Topic: Goodwill Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard 41. 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 Answer: C Learning Objective: 01-05 Topic: Goodwill Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard 42. 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. Answer: A Learning Objective: 01-05 Topic: Goodwill Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard
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43. 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. Answer: B Learning Objective: 01-05 Topic: Goodwill Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard 44. 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 Answer: B Learning Objective: 01-05 Topic: Goodwill Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard
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45. 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 Answer: C Learning Objective: 01-05 Topic: Applying the Acquisition Method Blooms: Remember AACSB: Reflective Thinking AICPA: FN Reporting Difficulty: 1 Easy 46. 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. Answer: C Learning Objective: 01-05 Topic: Applying the Acquisition Method Blooms: Remember AACSB: Reflective Thinking AICPA: FN Reporting Difficulty: 1 Easy
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47. 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. Answer: A Learning Objective: 01-05 Topic: Goodwill Blooms: Remember AACSB: Reflective Thinking AICPA: FN Reporting Difficulty: 1 Easy 48. Big Company acquired the following assets and liabilities of Little Company (fair values listed below) for $470,000 cash. Inventory Land Buildings and Equipment Current Liabilities
$ 70,000 100,000 320,000 50,000
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 Answer: A Learning Objective: 01-05 Topic: Bargain Purchase Blooms: Understand AACASB: Analytic AICPA: FN Measurement Difficulty: 2 Medium
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49. 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:
Paul Corp. Sam Inc.
Net Income Jan 1 – June 30, 20X1 $300,000 $150,000
Net Income July 1, 20X1 – Dec 31, 20X1 $420,000 $220,000
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 Answer: C Learning Objective: 01-05 Topic: Financial Reporting Subsequent to a Business Combination Blooms: Understand AACASB: Analytic AICPA: FN Measurement Difficulty: 2 Medium (Note: This is a Kaplan CPA Review Question) 50. 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 Answer: B Learning Objective: 01-05 Topic: Applying the Acquisition Method Blooms: Understand AACASB: Analytic AICPA: FN Measurement Difficulty: 1 Easy (Note: This is a Kaplan CPA Review Question)
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51. 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 longterm debt acquired from Company Y? Inventories
Long-term debt
A. Fair value B. Fair value C. Recorded value D. Recorded value
Fair value Recorded value Fair value Recorded value
Answer: A Learning Objective: 01-05 Topic: Applying the Acquisition Method Blooms: Remember AACASB: Reflective Thinking AICPA: FN Reporting Difficulty: 1 Easy 52. 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 Answer: B LO 01-06 Topic: Noncontrolling Equity Held Prior to Combination Blooms: Understand AACASB: Reflective Thinking AICPA: FN Measurement Difficulty: 2 Medium
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53. 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 Answer: D LO 01-06 Topic: Uncertainty in Business Combinations--Measurement Period Blooms: Remember AACASB: Reflective Thinking AICPA: FN Decision Making Difficulty: 1 Easy 54. 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 Answer: B LO 01-06 Topic: Uncertainty in Business Combinations--Contingent Consideration Blooms: Remember AACASB: Reflective Thinking AICPA: FN Reporting Difficulty: 1 Easy 55. 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 Answer: A LO 01-06 Topic: Uncertainty in Business Combinations--Acquiree Contingencies Blooms: Remember AACASB: Reflective Thinking AICPA: FN Decision Making Difficulty: 1 Easy
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Chapter 1 Intercorporate Acquisitions and Investments in Other Entities
56. 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 Answer: C LO 01-06 Topic: In-Process Research and Development Blooms: Remember AACASB: Reflective Thinking AICPA: FN Reporting Difficulty: 1 Easy
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Chapter 1 Intercorporate Acquisitions and Investments in Other Entities
Essay Questions: 57. 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. Answer: Cash Accounts Receivable Inventory Patents Buildings and Equipment Goodwill Accounts Payable Notes Payable Cash
30,000 22,000 36,000 40,000 150,000 17,000 55,000 80,000 160,000
Or if the cash paid is reported net of cash received:
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Chapter 1 Intercorporate Acquisitions and Investments in Other Entities
Accounts Receivable Inventory Patents Buildings and Equipment Goodwill Accounts Payable Notes Payable Cash
22,000 36,000 40,000 150,000 17,000 55,000 80,000 130,000
Learning Objective: 01-02 Learning Objective: 01-05 Topic: The Development of Accounting for Business Combinations Topic: Goodwill Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium 58. 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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Chapter 1 Intercorporate Acquisitions and Investments in Other Entities
Answer: 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. Learning Objective: 01-05 Topic: Goodwill Blooms: Apply AACSB: Analytic, Communication AICPA: FN Measurement Difficulty: 3 Hard
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Chapter 1 Intercorporate Acquisitions and Investments in Other Entities
59. 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. Answer:
Total Goodwill reported = $70,000 Learning Objective: 01-05 Topic: Goodwill Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard
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Chapter 2 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential
Chapter 2 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 Answer: B Learning Objective: 02-01 Topic: Accounting for Investments in Common Stock Blooms: Remember AACSB: Reflective Thinking AICPA: FN Reporting Difficulty: 1 Easy 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 Answer: B Learning Objective: 02-01 Topic: Accounting for Investments in Common Stock Blooms: Remember AACSB: Reflective Thinking AICPA: FN Reporting Difficulty: 1 Easy
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Chapter 2 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential
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. Answer: B Learning Objective: 02-02 Topic: The Cost Method Blooms: Remember AACSB: Reflective Thinking AICPA: FN Decision Making Difficulty: 1 Easy
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. Answer: A Learning Objective: 02-02 Topic: The Cost Method Blooms: Remember AACSB: Reflective Thinking AICPA: FN Decision Making Difficulty: 1 Easy
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Chapter 2 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential
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 Answer: B Learning Objective: 02-03 Learning Objective: Appendix 2A Topic: The Equity Method Topic: Investor’s Share of Other Comprehensive Income Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium The following data applies to Questions 6 - 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. 6. 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 Answer: C Learning Objective: 02-03 Learning Objective: Appendix 2A Topic: The Equity Method Topic: Additional Requirements of ASC 323-10 Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard
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Chapter 2 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential
7. 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 Answer: B Learning Objective: 02-03 Learning Objective: Appendix 2A Topic: The Equity Method Topic: Additional Requirements of ASC 323-10 Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard 8. 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 Answer: B Learning Objective: 02-03 Learning Objective: Appendix 2A Topic: The Equity Method Topic: Additional Requirements of ASC 323-10 Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard The following data applies to Questions 9 – 11: On January 1, 20X4, Timber Company acquired 25% of Johnson Company’s common stock at underlying book value of $200,000. Johnson has 80,000 shares of $10 par value, 6 percent cumulative preferred stock outstanding. No dividends are in arrears. Johnson reported net income of $270,000 for 20X4 and paid total dividends of $140,000. Timber uses the equity method to account for this investment. 9. Based on the preceding information, what amount would Timber Company receive as dividends from Johnson for the year? A. $23,000 B. $35,000 C. $37,500 2-4
Chapter 2 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential
D. $92,000 Answer: A Learning Objective: 02-03 Learning Objective: Appendix 2A Topic: The Equity Method Topic: Additional Requirements of ASC 323-10 Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard 10. Based on the preceding information, what amount of investment income will Timber Company report from its investment in Johnson for the year? A. $140,000 B. $67,500 C. $55,500 D. $35,000 Answer: C Learning Objective: 02-03 Learning Objective: Appendix 2A Topic: The Equity Method Topic: Additional Requirements of ASC 323-10 Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard 11. Based on the preceding information, what amount would be reported by Timber Company as the balance in its investment account on December 31, 20X4? A. $200,000 B. $220,500 C. $232,500 D. $255,500 Answer: C Learning Objective: 02-03 Learning Objective: Appendix 2A Topic: The Equity Method Topic: Additional Requirements of ASC 323-10 Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard
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Chapter 2 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential
The following data applies to Questions 12–16: 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. 12. 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 Answer: C Learning Objective: 02-03 Topic: The Equity Method Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium
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Chapter 2 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential
13. 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 Answer: D Learning Objective: 02-03 Topic: The Equity Method Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium 14. 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 Answer: A Learning Objective: 02-05 Topic: The Fair Value Option Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard
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Chapter 2 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential
15. 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 Answer: B Learning Objective: 02-05 Topic: The Fair Value Option Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard
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Chapter 2 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential
16. 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 Answer: A Learning Objective: 02-05 Topic: The Fair Value Option Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium
17. 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. Answer: D Learning Objective: 02-03 Topic: Changes in the Number of Shares Held Blooms: Remember AACSB: Reflective Thinking AICPA: FN Reporting Difficulty: 1 Easy
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Chapter 2 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential
18. 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. Answer: A Learning Objective: 02-03 Topic: The Equity Method Blooms: Remember AACSB: Reflective Thinking AICPA: FN Decision Making Difficulty: 1 Easy
19. 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. Answer: D Learning Objective: 02-03 Topic: The Equity Method Blooms: Remember AACSB: Reflective Thinking AICPA: FN Decision Making Difficulty: 1 Easy (Note: This is a Kaplan CPA Review Question) 20. 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 Answer: C Learning Objective: 02-03 Topic: The Equity Method Blooms: Apply 2-10
Chapter 2 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential
AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard 21. On October 1, 20X7, Chicago Corporation purchased 6,000 shares of Buffalo Company’s 15,000 outstanding share of common stock for $25 per share. On December 15, 20X7, Buffalo paid $120,000 in dividends to its common stockholders. Buffalo’s net income for the year ended December 31, 20X7 was $300,000, earned evenly throughout the year. In its 20X7 income statement, what amount of income from this investment should Chicago report? A. $12,000 B. $30,000 C. $48,000 D. $120,000 Answer: B Learning Objective: 02-03 Topic: The Equity Method Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard (Note: This is a Kaplan CPA Review Question) 22. 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 Answer: D Learning Objective: 02-03 Topic: The Equity Method Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium 23. On January 2, 20X1, Pencil Co. purchased 15 percent of Eraser, Inc.’s outstanding common shares for $500,000. Pencil is the largest single shareholder in Eraser and is able to exercise significant influence over Eraser. Eraser reported net income of $400,000 for 20X1 and paid
2-11
Chapter 2 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential
dividends of $100,000. In its December 31, 20X1, balance sheet, what amount should Pencil report as investment in Eraser? A. $485,000 B. $500,000 C. $545,000 D. $560,000 Answer: C Learning Objective: 02-03 Topic: The Equity Method Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium (Note: This is a Kaplan CPA Review Question) 24. 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 Answer: A Learning Objective: 02-03 Topic: The Equity Method Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard 25. Clocktower Corporation reported net income for the current year of $370,000 and paid cash dividends of $50,000. Slide Company holds 40 percent of the outstanding voting stock of Clocktower. However, another corporation holds the other 60 percent ownership and does not take Slide’s wants and wishes into consideration when making financing and operating decisions for Clocktower. What investment income should Slide recognize for the current year? A. $0 B. $20,000 C. $128,000 D. $148,000
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Chapter 2 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential
Answer: B Learning Objective: 02-03 Topic: The Equity Method Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard The following data applies to Questions 26-28: 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. (Note: This is a Kaplan CPA Review Questions) 26. 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 Answer: B Learning Objective: 02-03 Topic: The Equity Method Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium (Note: This is a Kaplan CPA Review Questions) 27. 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 Answer: D Learning Objective: 02-03 Topic: The Equity Method Blooms: Apply 2-13
Chapter 2 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential
AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium (Note: This is a Kaplan CPA Review Questions) 28. 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 Answer: C Learning Objective: 02-03 Topic: The Equity Method Topic: Changes in the Number of Shares Held Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard
29. 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 Answer: D Learning Objective: 02-06 Topic: Overview of the Consolidation Process Blooms: Remember AACSB: Reflective Thinking AICPA: FN Decision Making Difficulty: 1 Easy
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Chapter 2 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential
30. 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. Answer: C Learning Objective: 02-06 Topic: Overview of the Consolidation Process Blooms: Remember AACSB: Reflective Thinking AICPA: FN Decision Making Difficulty: 1 Easy The following data applies to Questions 31 - 34: 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. 31. 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 Answer: B Learning Objective: 02-07 Topic: Consolidation Worksheets Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium
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Chapter 2 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential
32. 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 Answer: B Learning Objective: 02-07 Topic: Consolidation Worksheets Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard 33. 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 Answer: D Learning Objective: 02-07 Topic: Consolidation Worksheets Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard 34. 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 Answer: A Learning Objective: 02-07 Topic: Consolidation Worksheets Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard The following data applies to Questions 35 – 38: 2-16
Chapter 2 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential
Alpha Company acquired 100 percent of the voting common shares of Gamma Corporation by issuing bonds with a par value and fair value of $200,000. Immediately prior to the acquisition, Alpha reported total assets of $600,000, liabilities of $370,000, and stockholders’ equity of $230,000. At that date, Gamma reported total assets of $500,000, liabilities of $300,000, and stockholders’ equity of $200,000. Included in Gamma’s liabilities was an account payable to Alpha in the amount of $50,000, which Alpha included in its accounts receivable. 35. Based on the preceding information, what amount of total assets did Alpha report in its balance sheet immediately after the acquisition? A. $1,100,000 B. $1,000,000 C. $800,000 D. $1600,000 Answer: C Learning Objective: 02-07 Topic: Consolidation Worksheets Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium 36. Based on the preceding information, what amount of total assets was reported in the consolidated balance sheet immediately after acquisition? A. $600,000 B. $800,000 C. $1,050,000 D. $1,150,0000 Answer: C Learning Objective: 02-07 Topic: Consolidation Worksheets Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard 37. Based on the preceding information, what amount of total liabilities was reported in the consolidated balance sheet immediately after the acquisition? A. $370,000 B. $670,000 C. $820,000 D. $870,000 Answer: C Learning Objective: 02-07 2-17
Chapter 2 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential
Topic: Consolidation Worksheets Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard 38. Based on the preceding information, what amount of stockholders’ equity was reported in the consolidated balance sheet immediately after acquisition? A. $200,000 B. $230,000 C. $380,000 D. $430,000 Answer B Learning Objective: 02-07 Topic: Consolidation Worksheets Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard The following data applies to Questions 39 - 41: 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. 39. 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 Answer: D Learning Objective: 02-07 Topic: Consolidation Subsequent to Acquisition Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium
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Chapter 2 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential
40. 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 Answer: C Learning Objective: 02-07 Topic: Consolidation Subsequent to Acquisition Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 1 Easy 41. 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 Answer: C Learning Objective: 02-07 Topic: Consolidation Subsequent to Acquisition Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium The following data applies to Questions 42 – 44: Phips Co. purchases 100 percent of Sips Company on January 1, 20X2, when Phips’ retained earnings balance is $320,000 and Sips’ is $120,000. During 20X2, Sips reports $20,000 of net income and declares $8,000 of dividends. Phips reports $125,000 of separate operating earnings plus $20,000 of equity-method income from its 100 percent interest in Sips; Phips declares dividends of $35,000. 42. Based on the preceding information, what is Phips’ post-closing retained earnings balance on December 31, 20X2? A. $305,000 B. $410,000 C. $430,000 D. $465,000 Answer: C Learning Objective: 02-07 2-19
Chapter 2 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential
Topic: Consolidation Subsequent to Acquisition Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium 43. Based on the preceding information, what is Sips’ post-closing retained earnings balance on December 31, 20X2? A. $108,000 B. $120,000 C. $132,000 D. $140,000 Answer: C Learning Objective: 02-07 Topic: Consolidation Subsequent to Acquisition Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 1 Easy 44. Based on the preceding information, what is the consolidated retained earnings balance on December 31, 20X2? A. $402,000 B. $410,000 C. $430,000 D. $562,000 Answer: C Learning Objective: 02-07 Topic: Consolidation Subsequent to Acquisition Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium
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Chapter 2 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential
45. 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. Answer: C Learning Objective: Appendix 2A Topic: Additional Requirements of ASC 323-10 Blooms: Remember AACSB: Reflective Thinking AICPA: FN Reporting Difficulty: 1 Easy The following data applies to Questions 46 –50: 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: Plimsol Co. Item
Debit
Credit
Shipping Corp. Debit
Current Assets
$100,000
$ 75,000
Depreciable Assets (net)
200,000
150,000
Investment in Shipping Corp.
125,000
Other Expenses
60,000
45,000
Depreciation Expense
20,000
15,000
Dividends Declared
25,000
Credit
15,000
Current Liabilities
$ 40,000
$ 25,000
Long-Term Debt
75,000
50,000
Common Stock
100,000
50,000
Retained Earnings
150,000
75,000
Sales
150,000
100,000
Dividend Income
15,000 $530,000
$530,000
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$300,000
$300,000
Chapter 2 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential
46. 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 Answer: C Learning Objective: Appendix 2B Topic: Consolidation and the Cost Method Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium 47. 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 Answer: B Learning Objective: Appendix 2B Topic: Consolidation and the Cost Method Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium 48. 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 Answer: A Learning Objective: Appendix 2B Topic: Consolidation and the Cost Method) Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard
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Chapter 2 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential
49. 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 Answer: D Learning Objective: Appendix 2B Topic: Consolidation and the Cost Method Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium 50. 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 Answer: B Learning Objective: Appendix 2B Topic: Consolidation and the Cost Method Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard The following data applies to Questions 51 - 52: 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.
2-23
Chapter 2 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential
51. 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 Answer: B Learning Objective: Appendix 2B Topic: Consolidation and the Cost Method Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium 52. 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 Answer: D Learning Objective: Appendix 2B Topic: Consolidation and the Cost Method Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium The following data applies to Questions 53 – 54: Pone Company purchased 100 percent of Sone Inc. on January 1, 20X9 for $625,000. Sone reported earnings of $76,000 and declared dividends of $8,000 during 20X9. 53. Based on the preceding information and assuming Pone uses the cost method to account for its investment in Sone, what is the balance in Pone’s Investment in Sone account on December 31, 20X9, prior to consolidation? A. $617,000 B. $625,000 C. $633,000 D. $693,000 Answer: B Learning Objective: Appendix 2B 2-24
Chapter 2 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential
Topic: Consolidation and the Cost Method Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium 54. Based on the preceding information and assuming Pone uses the equity method to account for its investment in Sone, what is the balance in Pone’s Investment in Sone account on December 31, 20X9, prior to consolidation? A. $617,000 B. $625,000 C. $633,000 D. $693,000 Answer: D Learning Objective: Appendix 2B Topic: Consolidation and the Cost Method Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium
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Chapter 2 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential
Essay Questions: 55. 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. Answer: A dividend represents earnings of a company being returned to its shareholders. A liquidating dividend occurs when an investee declares dividends in excess of the earnings from the purchase date of the investment. An individual investor must treat a liquidating dividend associated with its investment as a return of capital and reduce the investment account accordingly. It is possible for blocks of stock acquired at different times to have different amounts associated with a potential liquidating dividend. Learning Objective: 02-02 Topic: The Cost Method Blooms: Understand AACSB: Communication AICPA: FN Decision Making Difficulty: 2 Medium 56. 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 consolidation entries used? Answer: 1. Dear is the parent and Therry is the subsidiary. 2. A subsidiary is an entity in which another entity, the parent company, holds a controlling financial interest. 3. A parent company holds a controlling financial interest in another company. 4. The parent, Dear, prepares the consolidated worksheet. 5. Consolidation entries are used to adjust the amounts reported by the parent and all of the subsidiaries to reflect the amounts that would be reported if the separate legal entities were a single company. Learning Objective: 02-06 Topic: Overview of the Consolidation Process Blooms: Understand AACSB: Reflective Thinking AICPA: FN Decision Making 2-26
Chapter 2 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential
Difficulty: 1 Easy 57. 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:
Item Current Assets Depreciable Assets Investment in Standard Co. Other Expenses Depreciation Expense Dividends Declared Accumulated Depreciation Current Liabilities Long-Term Debt Common Stock Retained Earnings Sales Income from Standard Co.
Zigma Co. Debit Credit $238,000 300,000 100,000 90,000 30,000 32,000 $120,000 50,000 120,000 100,000 175,000 200,000 25,000 $790,000 $790,000
Standard Co. Debit Credit $95,000 170,000 70,000 17,000 10,000 $ 85,000 30,000 50,000 50,000 35,000 112,000 $362,000
$362,000
Required: 1. Prepare the consolidation entries needed as of December 31, 20X9, to complete a consolidation worksheet. 2. Prepare a three-part consolidation worksheet as of December 31, 20X9.
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Chapter 2 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential
Problem 57 (continued): Answer: 1. Book Value Calculations: Total Book Value 85,000 25,000 (10,000) 100,000
Beginning Book Value + Net Income - Dividends Ending Book Value
Basic consolidation entry: Common Stock Retained Earnings Income from Standard Co. Dividends Declared Investment in Standard Co.
=
Common Stock 50,000
50,000
+
Retained Earnings 35,000 25,000 (10,000) 50,000
50,000 35,000 25,000 10,000 100,000
Optional accumulated depreciation consolidation entry: Accumulated Depreciation 75,000 Depreciable Assets 75,000
(T-Accounts not required)
Beginning Balance 100% Net Income Ending Balance
Investment in Standard Co. 85,000 25,000 10,000 100,000 100,000 0
Income from Standard Co. 25,000
100% Net Income
25,000
Ending Balance
100% Dividends Basic
25,000 0
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Chapter 2 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential
Problem 57 (continued): 2. Zigma Co.
Standard Co.
Income Statement Sales Less: Other Expenses Less: Depreciation Expense Income from Standard Co. Net Income
200,000 (90,000) (30,000) 25,000 105,000
112,000 (70,000) (17,000) 0 25,000
Statement of Retained Earnings Beginning Balance Net Income Less: Dividends Declared Ending Balance
175,000 105,000 (32,000) 248,000
35,000 25,000 (10,000) 50,000
Balance Sheet Current Assets Depreciable Assets Less: Accumulated Depreciation Investment in Standard Co. Total Assets
238,000 300,000 (120,000) 100,000 518,000
95,000 170,000 (85,000)
Current Liabilities Long-Term Debt Common Stock Retained Earnings Total Liabilities & Equity
50,000 120,000 100,000 248,000 518,000
30,000 50,000 50,000 50,000 180,000
180,000
Learning Objective: 02-07 Topic: Consolidation Worksheets Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard
2-29
Consolidation Entries DR CR
25,000 25,000
35,000 25,000 60,000
Consolidated
0
312,000 (160,000) (47,000) 0 105,000
0 10,000 10,000
175,000 105,000 (32,000) 248,000
100,000 175,000
333,000 395,000 (130,000) 0 598,000
10,000 10,000
80,000 170,000 100,000 248,000 598,000
75,000 75,000 75,000
50,000 60,000 110,000
Chapter 2 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential
58. 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? Answer: APB stated that these include: 1. Representation on board of directors 2. Participation in policy making 3. Material intercompany transactions 4. Interchange of managerial personnel 5. Technological dependency 6. Size of investment in relation to concentration of other shareholdings Learning Objective: Appendix 2A Topic: Determination of Significant Influence Blooms: Remember AACSB: Communication AICPA: FN Decision Making Difficulty: 1 Easy
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Chapter 2 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential
59. 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: Plimsol Co. Item
Debit
Credit
Shipping Corp. Debit
Current Assets
$160,000
$115,000
Depreciable Assets (net)
180,000
135,000
Investment in Shipping Corp.
125,000
Other Expenses
85,000
60,000
Depreciation Expense
20,000
15,000
Dividends Declared
30,000
15,000
Current Liabilities
Credit
$ 25,000
$ 20,000
Long-Term Debt
75,000
50,000
Common Stock
100,000
50,000
Retained Earnings
210,000
100,000
Sales
175,000
120,000
Dividend Income
15,000 $600,000
$600,000
$340,000
$340,000
Required: 1. Provide all consolidating 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.
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Chapter 2 - Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential
Problem 59 (continued): Answer: 1. Basic consolidation entry: Common Stock Retained Earnings Investment in Standard Co.
50,000 75,000
Dividend consolidation entry: Dividend Income Dividends Declared
15,000
125,000
15,000
2.
Income Statement Sales Less: Other Expenses Less: Depreciation Expense Dividend Income Net Income
Plimsol Co.
Shipping Corp.
175,000 (85,000) (20,000) 15,000 85,000
120,000 (60,000) (15,000)
Statement of Retained Earnings Beginning Balance 210,000 Net Income 85,000 Less: Dividends Declared (30,000) Ending Balance 265,000
45,000
100,000 45,000 (15,000) 130,000
Balance Sheet Current Assets Depreciable Assets (net) Investment in Shipping Corp. Total Assets
160,000 180,000 125,000 465,000
115,000 135,000
Current Liabilities Long-Term Debt Common Stock Retained Earnings Total Liabilities & Equity
25,000 75,000 100,000 265,000 465,000
20,000 50,000 50,000 130,000 250,000
250,000
Learning Objective: Appendix 2B Topic: Consolidation and the Cost Method Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard
2-32
Consolidation Entries DR CR
15,000 15,000
75,000 15,000 90,000
0
50,000 90,000 140,000
Consolidated
0
295,000 (145,000) (35,000) 0 115,000
0 15,000 15,000
235,000 115,000 (30,000) 320,000
125,000 125,000
275,000 315,000 0 590,000
15,000 15,000
45,000 125,000 100,000 320,000 590,000
Chapter 3-The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differentials
Chapter 3 The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differentials Multiple Choice Questions: 1. Consolidated financial statements tend to be most useful for: A. Creditors of a consolidated subsidiary. B. Investors and long-term creditors of the parent company. C. Short-term creditors of the parent company. D. Stockholders of a consolidated subsidiary. Answer: B Learning Objective: 03-01 Topic: The Usefulness and Limitations of Consolidated Financial Statements Blooms: Understand AACSB: Reflective Thinking AICPA: FN Reporting Difficulty: 2 Medium 2. Company Pea owns 90 percent of Company Essone which in turn owns 80 percent of Company Esstwo. Company Esstwo owns 100 percent of Company Essthree. Consolidated financial statements should be prepared to report the financial status and results of operations for: A. Pea. B. Pea plus Essone. C. Pea plus Essone plus Esstwo. D. Pea plus Essone plus Esstwo plus Essthree. Answer: D Learning Objective: 03-02 Topic: Direct and Indirect Control Blooms: Understand AACSB: Analytic AICPA: FN Decision Making Difficulty: 2 Medium
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Chapter 3-The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differentials
3. In which of the following cases would consolidation be inappropriate? A. The subsidiary is in bankruptcy. B. Subsidiary's operations are dissimilar from those of the parent. C. The parent owns 90 percent of the subsidiary's common stock, but all of the subsidiary's nonvoting preferred stock is held by a single investor. D. Subsidiary is foreign. Answer: A Learning Objective: 03-02 Topic: Direct and Indirect Control Blooms: Remember AACSB: Reflective Thinking AICPA: FN Reporting Difficulty: 1 Easy 4. On January 1, 20X8, Zeta Company acquired 85 percent of Theta Company's common stock for $100,000 cash. The fair value of the noncontrolling interest was determined to be 15 percent of the book value of Theta at that date. What portion of the retained earnings reported in the consolidated balance sheet prepared immediately after the business combination is assigned to the noncontrolling interest? A. None B. 15 percent C. 100 percent D. Cannot be determined Answer: A Learning Objective: 03-03 Topic: Noncontrolling interest Blooms: Understand AACSB: Reflective Thinking AICPA: FN Reporting Difficulty: 2 Medium
3-2
Chapter 3-The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differentials
The following data applies to Questions 5-7: On January 3, 20X9, Redding Company acquired 80 percent of Frazer Corporation's common stock for $344,000 in cash. At the acquisition date, the book values and fair values of Frazer's assets and liabilities were equal, and the fair value of the noncontrolling interest was equal to 20 percent of the total book value of Frazer. The stockholders' equity accounts of the two companies at the acquisition date are:
Noncontrolling interest was assigned income of $11,000 in Redding's consolidated income statement for 20X9. 5. Based on the preceding information, what amount will be assigned to the noncontrolling interest on January 3, 20X9, in the consolidated balance sheet? A. $86,000 B. $44,000 C. $68,800 D. $50,000 Answer: A Learning Objective: 03-03 Topic: Noncontrolling interest Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard
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Chapter 3-The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differentials
6. Based on the preceding information, what is the total stockholders' equity in the consolidated balance sheet as of January 3, 20X9? A. $1,580,000 B. $1,064,000 C. $1,150,000 D. $1,236,000 Answer: D Learning Objective: 03-05 Topic: Prepare a Consolidated Worksheet Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium 7. Based on the preceding information, what will be the amount of net income reported by Frazer Corporation in 20X9? A. $44,000 B. $55,000 C. $66,000 D. $36,000 Answer: B Learning Objective: 03-04 Topic: The Effect of Noncontrolling Interest (NI and RE) Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard The following data applies to Questions 8 – 10: On January 2, 20X2, Kentucky Company acquired 70% of Bluegrass Corporation’s common stock for $420,000 cash. At the acquisition date, the book values and fair values of Bluegrass’ assets and liabilities were equal, and the fair value of the noncontrolling interest was equal to 30% of the total book value of Bluegrass. The stockholders’ equity accounts of the two companies at the acquisition date are as follows:
Common Stock ($10 par value) Additional Paid-In Capital Retained Earnings Total Stockholders’ Equity
Kentucky $600,000 450,000 250,000 $1,300,000
Bluegrass $350,000 50,000 200,000 $600,000
Noncontrolling interest was assigned income of $15,000 in Kentucky’s consolidated income statement for 20X2.
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Chapter 3-The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differentials
8. Based on the preceding information, what amount will be assigned to noncontrolling interest on January 2, 20X2, in the consolidated balance sheet? A. $120,000 B. $126,000 C. $180,000 D. $420,000 Answer: C Learning Objective: 03-03 Topic: Noncontrolling interest Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard 9. Based on the preceding information, what is the total stockholders’ equity in the consolidated balance sheet as of January 2, 20X2? A. $1,120,000 B. $1,300,000 C. $1,480,000 D. $1,900,000 Answer: C Learning Objective: 03-05 Topic: Prepare a Consolidated Worksheet Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium 10. Based on the preceding information, what will be the amount of net income reported by Bluegrass Corporation in 20X2? A. $45,000 B. $50,000 C. $75,000 D. $105,000 Answer: B Learning Objective: 03-04 Topic: The Effect of Noncontrolling Interest (NI and RE) Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard
3-5
Chapter 3-The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differentials
The following data applies to Questions 11 – 12: On January 3, 20X9, Jane Company acquired 75 percent of Miller Company's outstanding common stock for cash. The fair value of the noncontrolling interest was equal to a proportionate share of the book value of Miller Company's net assets at the date of acquisition. Selected balance sheet data at December 31, 20X9, are as follows:
11. Based on the preceding information, what amount should be reported as noncontrolling interest in net assets in Jane Company's December 31, 20X9, consolidated balance sheet? A. $90,000 B. $54,000 C. $36,000 D. $0 Answer: C Learning Objective: 03-04 Topic: The Effect of Noncontrolling Interest (NI and RE) Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium 12. Based on the preceding information, what amount will Jane Company report as common stock outstanding in its consolidated balance sheet at December 31, 20X9? A. $120,000 B. $180,000 C. $156,000 D. $264,000 Answer: A Learning Objective: 03-05 Topic: Prepare a Consolidated Worksheet Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium The following data applies to Questions 13 – 14: On January 1, 20X6, Joseph Company acquired 80% of Salt Company’s outstanding stock for cash. The fair value of the noncontrolling interest was equal to a proportionate share of the book 3-6
Chapter 3-The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differentials
value of Salt Company’s net assets at the date of acquisition. Selected balance sheet data at December 31, 20X6 are as follows:
Total Assets Liabilities Common Stock Retained Earnings
Joseph $564,000 $180,000 150,000 234,000 $564,000
Salt $241,000 $65,000 80,000 96,000 $241,000
13. Based on the preceding information, what amount should be reported as noncontrolling interest in net assets in Joseph Company’s December 31, 20X6, consolidated balance sheet? A. $35,200 B. $48,200 C. $76,800 D. $112,800 Answer: A Learning Objective: 03-04 Topic: The Effect of Noncontrolling Interest (NI and RE) Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium 14. Based on the preceding information, what amount will Joseph Company report as common stock outstanding in its consolidated balance sheet at December 31, 20X6? A. $214,000 B. $150,000 C. $184,000 D. $230,000 Answer: B Learning Objective: 03-05 Topic: Prepare a Consolidated Worksheet Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium
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Chapter 3-The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differentials
15. Xing Corporation owns 80 percent of the voting common shares of Adams Corporation. Noncontrolling interest was assigned $24,000 of income in the 20X9 consolidated income statement. What amount of net income did Adams Corporation report for the year? A. $150,000 B. $96,000 C. $120,000 D. $30,000 Answer: C Learning Objective: 03-04 Topic: The Effect of Noncontrolling Interest (NI and RE) Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium 16. Orange Corporation owns 70 percent of the voting common shares of McNichols Corporation, purchased at book value. Noncontrolling interest was assigned $21,000 of income in the 20X0 consolidated income statement. What amount of net income did McNichols Corporation report for the year? A. $70,000 B. $63,000 C. $30,000 D. $147,000 Answer: A Learning Objective: 03-04 Topic: The Effect of Noncontrolling Interest (NI and RE) Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium
3-8
Chapter 3-The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differentials
17. Zeta Corporation and its subsidiary reported consolidated net income of $320,000 for the year ended December 31, 20X8. Zeta owns 80 percent of the common shares of its subsidiary, acquired at book value. Noncontrolling interest was assigned income of $30,000 in the consolidated income statement for 20X8. What is the amount of separate operating income reported by Zeta for the year? A. $170,000 B. $150,000 C. $120,000 D. $200,000 Answer: A Learning Objective: 03-04 Topic: The Effect of Noncontrolling Interest (NI and RE) Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard 18. Maple Corporation and its subsidiary reported consolidated net income of $380,000 for the year ended December 31, 20X5. Maple owns 75% of the common shares of its subsidiary, acquired at book value. Noncontrolling interest was assigned income of $25,000 in the consolidated income statement for 20X5. What is the amount of separate operating income reported by Maple for the year? A. $95,000 B. $100,000 C. $280,000 D. $285,000 Answer: C Learning Objective: 03-04 Topic: The Effect of Noncontrolling Interest (NI and RE) Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard
3-9
Chapter 3-The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differentials
The following data applies to Questions 19 – 24: On January 1, 20X8, Wilhelm Corporation acquired 90 percent of Kaiser Company's voting stock, at underlying book value. The fair value of the noncontrolling interest was equal to 10 percent of the book value of Kaiser at that date. Wilhelm uses the equity method in accounting for its ownership of Kaiser. On December 31, 20X9, the trial balances of the two companies are as follows:
19. Based on the preceding information, what amount would be reported as total assets in the consolidated balance sheet at December 31, 20X9? A. $805,000 B. $712,000 C. $742,000 D. $1,102,000 Answer: C Learning Objective: 03-05 Topic: Prepare a Consolidated Worksheet Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium
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Chapter 3-The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differentials
20. Based on the preceding information, what amount would be reported as total liabilities in the consolidated balance sheet at December 31, 20X9? A. $330,000 B. $712,000 C. $318,000 D. $130,000 Answer: A Learning Objective: 03-05 Topic: Prepare a Consolidated Worksheet Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium 21. Based on the preceding information, what amount would be reported as retained earnings in the consolidated balance sheet prepared at December 31, 20X9? A. 314,000 B. 294,000 C. 150,000 D. 424,000 Answer: B Learning Objective: 03-05 Topic: Prepare a Consolidated Worksheet Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 1 Easy 22. Based on the preceding information, what amount would be reported as noncontrolling interest in the consolidated balance sheet at December 31, 20X9? A. $27,000 B. $4,000 C. $15,000 D. $18,000 Answer: D Learning Objective: 03-03 Topic: Noncontrolling interest Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard
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Chapter 3-The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differentials
23. Based on the preceding information, what amount would be reported as total stockholder's equity in the consolidated balance sheet at December 31, 20X9? A. $412,000 B. $394,000 C. $542,000 D. $348,000 Answer: A Learning Objective: 03-05 Topic: Prepare a Consolidated Worksheet Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium 24. Based on the preceding information, what amount would be reported as income to controlling interest in the consolidated financial statements for 20X9? A. $168,000 B. $138,000 C. $164,000 D. $150,000 Answer: C Learning Objective: 03-04 Topic: The Effect of Noncontrolling Interest (NI and RE) Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium
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Chapter 3-The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differentials
25. Blue Company owns 80 percent of the common stock of White Corporation. During the year, Blue reported sales of $1,000,000, and White reported sales of $500,000, including sales to Blue of $80,000. The amount of sales that should be reported in the consolidated income statement for the year is: A. $500,000. B. $1,300,000. C. $1,420,000. D. $1,500,000. Answer: C Learning Objective: 03-05 Topic: Prepare a Consolidated Worksheet Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard 26. Silver Company owns 60 percent of the common stock of Gold Corporation. During the year, Silver reported sales of $500,000, and Gold reported sales of $200,000, including sales to Silver of $50,000. The amount of sales that should be reported in the consolidated income statement for the year is A. $500,000 B. $650,000 C. $700,000 D. $750,000 Answer B Learning Objective: 03-05 Topic: Prepare a Consolidated Worksheet Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard (Note: This is a Kaplan CPA Review Question) 27. For which of the following reporting units is the preparation of combined financial statements most appropriate? A. A corporation and a foreign subsidiary with nonintegrated homogeneous operations. B. A corporation and a majority-owned subsidiary with nonhomogeneous operations. C. Several corporations with related operations owned by one individual. D. Several corporations with related operations with some common individual owners. Answer: C Learning Objective: 03-06 Topic: Combined Financial Statements 3-13
Chapter 3-The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differentials
Blooms: Remember AACSB: Reflective Thinking AICPA: FN Reporting Difficulty: 1 Easy
28. Which of the following usually does not represent a variable interest? A. Common stock, with no special features or provisions B. Senior debt C. Subordinated debt D. Loan or asset guarantees Answer: B Learning Objective: 03-07 Topic: Variable Interest Entities Blooms: Understand AACSB: Reflective Thinking AICPA: FN Reporting Difficulty: 2 Medium 29. All of the following statements accurately describe Special Purpose Entities (SPEs) except for: A. SPEs are corporations, trust or partnerships created for a single specified purpose. B. SPEs usually have no substantive operations and are used for financing operations. C. SPEs are used for asset securitization, risk sharing and taking advantage of tax statues. D. A variable interest entity (VIE) is a type of SPE with a limited number of equity investors. Answer: D Learning Objective: 03-07 Topic: Off-Balance Sheet Financing Blooms: Remember AACSB: Reflective Thinking AICPA: FN Decision Making Difficulty: 1 Easy
3-14
Chapter 3-The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differentials
30. On December 31, 20X9, Rudd Company acquired 80 percent of the common stock of Wilton Company. At the time, Rudd held land with a book value of $100,000 and a fair value of $260,000; Wilton held land with a book value of $50,000 and fair value of $600,000. Using the parent company theory, at what amount would land be reported in a consolidated balance sheet prepared immediately after the combination? A. $550,000 B. $590,000 C. $700,000 D. $860,000 Answer: B Learning Objective: Appendix 3B Topic: Theories of Consolidation Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard 31. Princeton Company acquired 75 percent of the common stock of Sheffield Corporation on December 31, 20X9. On the date of acquisition, Princeton held land with a book value of $150,000 and a fair value of $300,000; Sheffield held land with a book value of $100,000 and fair value of $500,000. Using the entity theory, at what amount would land be reported in a consolidated balance sheet prepared immediately after the combination? A. $650,000 B. $500,000 C. $550,000 D. $375,000 Answer: A Learning Objective: Appendix 3B Topic: Theories of Consolidation Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard 32. Pepper Company acquired 60 percent of the common stock of Safton Corporation on December 31, 20X9. On the date of acquisition, Pepper held land with a book value of $200,000 and a fair value of $350,000; Safton held land with a book value of $150,000 and fair value of $300,000. At what amount would land be reported in a consolidated balance sheet prepared immediately after the combination? A. $290,000 B. $500,000 C. $590,000 D. $650,000
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Chapter 3-The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differentials
Answer: B Learning Objective: Appendix 3B Topic: Theories of Consolidation Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard 33. Under ASC 805, consolidation follows largely which theory approach? A. Proprietary B. Parent company C. Entity D. Variable Answer: C Learning Objective: Appendix 3B Topic: Theories of Consolidation Blooms: Remember AACSB: Reflective Thinking AICPA: FN Reporting Difficulty: 1 Easy 34. For a less-than-wholly-owned subsidiary, goodwill under the parent theory: A. exceeds goodwill under the proprietary theory. B. exceeds goodwill under the entity theory. C. is less than goodwill under the entity theory. D. is less than goodwill under the proprietary theory. Answer: C Learning Objective: Appendix 3B Topic: Theories of Consolidation Blooms: Understand AACSB: Reflective Thinking AICPA: FN Reporting Difficulty: 2 Medium The following data applies to Questions 35 – 37: Small-Town Retail owns 70 percent of Supplier Corporation's common stock. For the current financial year, Small-Town and Supplier reported sales of $450,000 and $300,000 and expenses of $290,000 and $240,000, respectively.
3-16
Chapter 3-The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differentials
35. Based on the preceding information, what is the amount of net income to be reported in the consolidated income statement for the year under the parent company theory approach? A. $220,000 B. $202,000 C. $160,000 D. $200,000 Answer: B Learning Objective: Appendix 3B Topic: Theories of Consolidation Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard 36. Based on the preceding information, what is the amount of net income to be reported in the consolidated income statement for the year under the proprietary theory approach? A. $210,000 B. $202,000 C. $160,000 D. $200,000 Answer: B Learning Objective: Appendix 3B Topic: Theories of Consolidation Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard 37. Based on the preceding information, what is the amount of net income to be reported in the consolidated income statement for the year under the entity theory approach? A. $210,000 B. $202,000 C. $160,000 D. $220,000 Answer: D Learning Objective: Appendix 3B Topic: Theories of Consolidation Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard
3-17
Chapter 3-The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differentials
38. Quid Corporation acquired 75 percent of Pro Company's common stock on December 31, 20X6. Goodwill (attributable to Quid's acquisition of Pro shares) of $300,000 was reported in the consolidated financial statements at December 31, 20X6. Parent company approach was used in determining this amount. What is the amount of goodwill to be reported under proprietary theory approach? A. $300,000 B. $400,000 C. $150,000 D. $100,000 Answer: A Learning Objective: Appendix 3B Topic: Theories of Consolidation Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium 39. Quid Corporation acquired 60 percent of Pro Company's common stock on December 31, 20X4. Goodwill (attributable to Quid's acquisition of Pro shares) of $150,000 was calculated under the proprietary theory approach. What is the amount of goodwill that should be reported under entity theory approach? A. $150,000 B. $200,000 C. $250,000 D. $100,000 Answer: C Learning Objective: Appendix 3B Topic: Theories of Consolidation Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium The following data applies to Questions 40 – 41: On January 1, 20X9, Heathcliff Corporation acquired 80 percent of Garfield Corporation's voting common stock. Garfield's buildings and equipment had a book value of $300,000 and a fair value of $350,000 at the time of acquisition.
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Chapter 3-The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differentials
40. Based on the preceding information, what will be the amount at which Garfield's buildings and equipment will be reported in consolidated statements using the parent company approach? A. $350,000 B. $340,000 C. $280,000 D. $300,000 Answer: B Learning Objective: Appendix 3B Topic: Theories of Consolidation Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard 41. Based on the preceding information, what will be the amount at which Garfield's buildings and equipment will be reported in consolidated statements using the current accounting practice? A. $350,000 B. $340,000 C. $280,000 D. $300,000 Answer: A Learning Objective: Appendix 3B Topic: Theories of Consolidation Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium 42. Cosby Corporation acquired 60 percent of Huxtable Corporation’s voting common stock. Huxtable’s buildings and equipment had a book value of $200,000 and a fair value of $250,000 at the time of the acquisition. What will be the amount at which Huxtable’s buildings and equipment will be reported in consolidated statements on the acquisition date? A. $150,000 B. $200,000 C. $230,000 D. $250,000 Answer: D Learning Objective: Appendix 3B Topic: Theories of Consolidation Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium 3-19
Chapter 3-The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differentials
43. On January 1, 20X9, Gold Rush Company acquires 80 percent ownership in California Corporation for $200,000. The fair value of the noncontrolling interest at that time is determined to be $50,000. It reports net assets with a book value of $200,000 and fair value of $230,000. Gold Rush Company reports net assets with a book value of $600,000 and a fair value of $650,000 at that time, excluding its investment in California. What will be the amount of goodwill that would be reported immediately after the combination under current accounting practice? A. $50,000 B. $30,000 C. $40,000 D. $20,000 Answer: D Learning Objective: Appendix 3B Topic: Theories of Consolidation Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard 44. On January 1, 20X5, Seaside Company acquires 90 percent ownership in Rainbow Corporation for $180,000. The fair value of the noncontrolling interest at that time is determined to be $20,000. Rainbow reports net assets with a book value of $160,000 and fair value of $175,000. Seaside Company reports net assets with a book value of $480,000 and a fair value of $525,000 at that time, excluding its investment in Rainbow. What will be the amount of goodwill that would be reported immediately after the combination? A. $5,000 B. $20,000 C. $25,000 D. $40,000 Answer: C Learning Objective: Appendix 3B Topic: Theories of Consolidation Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard
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Chapter 3-The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differentials
Essay Questions: 45. Consolidated financial statements are required by GAAP in certain circumstances. This information can be very useful to stockholders and creditors. Yet, there are limitations to these financial statements for which the users must be aware. What are at least three (3) limitations of consolidated financial statements? Answer: Limitations to consolidated financial statements include: 1) The operating results and financial position of individual companies included in the consolidation are not disclosed. Therefore, the poor performance or position of one or more companies may be hidden by the good performance and position of others. 2) The consolidated statements include the subsidiary's assets, not all assets shown are available to dividend distributions of the parent company. 3) Financial ratios are based upon the aggregated consolidated information; therefore, these ratios may not be representative of any single company in the consolidation, including the parent. 4) Similar accounts of different companies that are consolidated may not be entirely comparable. For example, the length of operating cycles of different subsidiaries may vary, causing receivables of similar length to be classified differently. 5) Additional information about individual companies or groups of companies that have been consolidated may be necessary for fair presentation, resulting in voluminous footnote disclosures. Learning Objective: 03-01 Topic: The Usefulness and Limitations of Consolidated Financial Statements Blooms: Remember AACSB: Communication AICPA: FN Reporting Difficulty: 1 Easy
3-21
Chapter 3-The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differentials
46. In reading a set of consolidated financial statements you are surprised to see the term noncontrolling interest not reported under the Liability section of the Balance Sheet. Required: a. What is a non-controlling interest? b. Why must it be reported in the financial statements as an element of equity rather than a liability? Answer: a. Noncontrolling interest occurs when less than 100 percent equity is acquired in a subsidiary. It represents the fact that the parent may control but not own the entire subsidiary. The noncontrolling shareholders have a claim on the subsidiary's assets and earnings through their percentage ownership of the stock. b. Noncontrolling interest clearly does not meet the definition of a liability. ASC 810 makes clear that the noncontrolling interest's claim on net assets is an element of equity, not a liability. It requires reporting the noncontrolling interest in equity. Learning Objective: 03-03 Topic: Noncontrolling interest Blooms: Understand AACSB: Communication AICPA: FN Reporting Difficulty: 2 Medium
3-22
Chapter 3-The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differentials
47. Parent Company acquired 90% of Son Inc. on January 31, 20X2 in exchange for cash. The book value of Son’s individual assets and liabilities approximated their acquisition-date fair values. On the date of acquisition, Son reported the following: Cash Inventory Plant Assets (net) Property Total Asses
$ 350,000 100,000 320,000 500,000 $1,270,000
Current Liabilities
$
120,000
Common Stock Retained Earnings Total Liabilities & Equity
100,000 1,050,000 $ 1,270,000
During the year Son Inc. reported $310,000 in net income and declared $15,000 in dividends. Parent Company reported $520,000 in net income and declared $25,000 in dividends. Parent accounts for their investment using the equity method. Required: 1) What journal entry will Parent make on the date of acquisition to record the investment in Son Inc.? 2) If Parent were to prepare a consolidated balance sheet on the acquisition date (January 31, 20X2), what is the basic consolidation entry Parent would use in the consolidation worksheet? 3) What is Parent’s balance in “Investment in Son Inc.” prior to consolidation on December 31, 20X2? 4) What is the basic consolidation entry Parent would use in the consolidation worksheet on December 31, 20X2?
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Chapter 3-The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differentials
Problem 47 (continued): Answer: 1) Investment in Son Inc. Cash
1,035,000 1,035,000
2) Basic consolidation entry: Common Stock Retained Earnings Investment in Son Inc. NCI in NA of Son Inc.
100,000 1,050,000 1,035,000 115,000
3) $1,300,500 (T-Account not required): Beginning Balance 90% Net Income Ending Balance
Investment in Son Inc. 1,035,000 279,000 13,500 1,300,500
90% Dividends
4) Basic consolidation entry: Common Stock Retained Earnings Income from Son Inc. NCI in N`I of Son Inc. Dividends declared Investment in Son Inc. NCI in NA of Son Inc.
100,000 1,050,000 279,000 31,000 15,000 1,300,500 144,500
Learning Objective: 03-04; 03-05 Topic: Basic Consolidation Entry; Prepare a consolidation worksheet for a less-than-whollyowned consolidation. Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard
3-24
Chapter 3-The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differentials
48. On January 1, 20X8, Gregory Corporation acquired 90 percent of Nova Company's voting stock, at underlying book value. The fair value of the noncontrolling interest was equal to 10 percent of the book value of Nova at that date. Gregory uses the equity method in accounting for its ownership of Nova. On December 31, 20X8, the trial balances of the two companies are as follows:
Required: 1) Provide all consolidating entries required as of December 31, 20X8, to prepare consolidated financial statements. 2) Prepare a three-part consolidation worksheet.
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Chapter 3-The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differentials
Problem 48 (continued): Answer: 1) Book Value Calculations: NCI 10% 14,000 2,500 (1,000) 15,500
Beginning Book Value + Net Income - Dividends Ending Book Value
Basic consolidation entry: Common Stock Retained Earnings Income from Nova Co. NCI in NI of Nova Co. Dividends declared Investment in Nova Co. NCI in NA of Nova Co.
+
Gregory Corp. 90% 126,000 22,500 (9,000) 139,500
=
Common Stock 75,000
Retained Earnings 65,000 25,000 (10,000) 80,000
+
75,000
75,000 65,000 22,500 2,500 10,000 139,500 15,500
Optional accumulated depreciation consolidation entry: Accumulated Depreciation 50,000 Buildings and Equipment 50,000
(T-Accounts not required)
Beginning Balance 90% Net Income Ending Balance
Investment in Nova Co. 126,000 22,500 9,000 139,500 139,500 0
Income from Nova Co. 22,500
90% Net Income
22,500
Ending Balance
90% Dividends Basic
22,500 0
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Chapter 3-The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differentials
Problem 48 (continued): 2) Gregory Corp.
Nova Co.
300,000 (100,000) (30,000) 22,500 192,500
110,000 (60,000) (25,000) 0 25,000
192,500
Statement of Retained Earnings Beginning Balance Net Income Less: Dividends Declared Ending Balance Balance Sheet Current Assets Depreciable Assets Less: Accumulated Depreciation Investment in Nova Co. Total Assets
Income Statement Sales Less: Other Expenses Less: Depreciation Expense Income from Nova Co. Consolidated Net Income NCI in Net Income Controlling Interest in Net Income
Current Liabilities Long-Term Debt Common Stock Retained Earnings NCI in NA of Nova Co. Total Liabilities & Equity
Consolidation Entries DR CR
Consolidated 410,000 (160,000) (55,000) 0 195,000 (2,500)
22,500 22,500 2,500
0
25,000
25,000
0
192,500
120,000 192,500 (30,000) 282,500
65,000 25,000 (10,000) 80,000
65,000 25,000
0 10,000 10,000
120,000 192,500 (30,000) 282,500
200,000 300,000 (120,000) 139,500 519,500
120,000 225,000 (75,000)
50,000
270,000
50,000
62,000 75,000 100,000 282,500
25,000 90,000 75,000 80,000
75,000 90,000
519,500
270,000
165,000
Learning Objective: 03-05 Topic: Prepare a Consolidated Worksheet Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard
3-27
90,000
139,500 189,500
320,000 475,000 (145,000) 0 650,000
10,000 15,500 10,000
87,000 165,000 100,000 282,500 15,500 650,000
50,000
Chapter 3-The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differentials
49. On January 1, 20X8, Gregory Corporation acquired 90 percent of Nova Company's voting stock, at underlying book value. The fair value of the noncontrolling interest was equal to 10 percent of the book value of Nova at that date. Gregory uses the equity method in accounting for its ownership of Nova. On December 31, 20X9, the trial balances of the two companies are as follows:
Required: 1) Give all consolidating entries required on December 31, 20X8, to prepare consolidated financial statements. 2) Prepare a three-part consolidation worksheet as of December 31, 20X8.
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Chapter 3-The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differentials
Problem 49 (continued): Answer: 1) Book Value Calculations: NCI 10% Beginning Book Value 15,500 + Net Income 1,500 - Dividends (1,000) Ending Book Value 16,000
Basic consolidation entry: Common Stock Retained Earnings Income from Nova Co. NCI in NI of Nova Co. Dividends declared Investment in Nova Co. NCI in NA of Nova Co.
+
Gregory Corp. 90%
=
Common Stock
139,500 13,500 (9,000) 144,000
+
Retained Earnings
75,000
80,000 15,000 (10,000) 85,000
75,000
75,000 80,000 13,500 1,500 10,000 144,000 16,000
Optional accumulated depreciation consolidation entry: Accumulated Depreciation 50,000 Buildings and Equipment 50,000
(T-Accounts not required)
Beginning Balance 90% Net Income Ending Balance
Investment in Nova Co. 139,500 13,500 9,000 144,000 144,000 0
Income from Nova Co. 13,500
90% Net Income
13,500
Ending Balance
90% Dividends Basic
13,500 0
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Chapter 3-The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differentials
Problem 49 (continued): 2) Gregory Corp.
Nova Co.
253,500 (180,000) (30,000) 13,500 57,000
125,000 (85,000) (25,000) 0 15,000
57,000
Statement of Retained Earnings Beginning Balance Net Income Less: Dividends Declared Ending Balance Balance Sheet Current Assets Depreciable Assets Less: Accumulated Depreciation Investment in Nova Co. Total Assets
Income Statement Sales Less: Other Expenses Less: Depreciation Expense Income from Nova Co. Consolidated Net Income NCI in Net Income Controlling Interest in Net Income
Current Liabilities Long-Term Debt Common Stock Retained Earnings NCI in NA of Nova Co. Total Liabilities & Equity
Consolidation Entries DR CR
Consolidated 378,500 (265,000) (55,000) 0 58,500 (1,500)
13,500 13,500 1,500
0
15,000
15,000
0
57,000
282,500 57,000 (40,000) 299,500
80,000 15,000 (10,000) 85,000
80,000 15,000
0 10,000 10,000
282,500 57,000 (40,000) 299,500
225,500 300,000 (150,000) 144,000 519,500
145,000 225,000 (100,000) 0 270,000
45,000 75,000 100,000 299,500
20,000 90,000 75,000 85,000
75,000 95,000
519,500
270,000
170,000
Learning Objective: 03-05 Topic: Second and Subsequent Year Worksheet Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard
3-30
95,000
144,000 194,000
370,500 475,000 (200,000) 0 645,500
10,000 16,000 10,000
65,000 165,000 100,000 299,500 16,000 645,500
50,000 50,000 50,000
Chapter 3-The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differentials
50. ASC 805 is related to the Consolidation of Variable Interest Entities. Describe what a Variable Interest Entity is and discuss why the FASB has difficulty in prescribing when these entities are consolidated? Answer: A Variable Interest Entity (VIE) is a legal structure used for business purposes that either: 1. Does not have equity investors that: a. have voting rights or b. doesn't share in all of the entity's profits or losses. 2. Has equity investors that do not provide sufficient financial resources to support the entity's activities. Therefore, FASB has been trying to define the Primary Beneficiary and from this lead to consolidation not just control as presumed under ASC 805. Learning Objective: 03-07 Topic: Variable Interest Entities Blooms: Understand AACSB: Communication AICPA: FN Reporting Difficulty: 2 Medium
3-31
Chapter 4-Consolidation of Wholly Owned Subsidiaries Acquired at More than Book Value
Chapter 4 Consolidation of Wholly Owned Subsidiaries Acquired at More than Book Value Multiple Choice Questions The following data applies to Questions 1-2: On July 1, 20X9, Link Corporation paid $340,000 for all of Tinsel Company's outstanding common stock. On that date, the costs and fair values of Tinsel's recorded assets and liabilities were as follows:
1. Based on the preceding information, the differential reflected in a consolidation worksheet to prepare a consolidated balance sheet immediately after the business combination is: A. $0. B. $25,000. C. $70,000. D. $45,000. Answer: C Learning Objective: 04-01 Topic: Journal Entries related to Differential (beginning, amort.) Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 1 Easy
4-1
Chapter 4-Consolidation of Wholly Owned Subsidiaries Acquired at More than Book Value
2. Based on the preceding information, what amount should be allocated to goodwill in the consolidated balance sheet, prepared after this business combination? A. $0 B. $25,000 C. $70,000 D. $45,000 Answer: B Learning Objective: 04-03 Topic: Calculations/Consolidation Entries for Complex Differential Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium The following data applies to Questions 3 – 4: On October 1, 20X3, Green Corporation paid $450,000 for all of Yellow Company’s outstanding common stock. On that date, the book values and fair values of Yellow’s recorded assets and liabilities were as follows:
Cash and Receivables Inventory Buildings and Equipment (net) Liabilities Net Assets
Book Value $75,000 155,000 260,000 (150,000) $340,000
Fair Value $75,000 160,000 320,000 (150,000) $405,000
3. Based on the preceding information, the differential implicit in this acquisition is A. $0 B. $45,000 C. $65,000 D. $110,000 Answer: D Learning Objective: 04-01 Topic: Journal Entries related to Differential (beginning, amort.) Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 1 Easy
4. Based on the preceding information, what amount should be allocated to goodwill in the consolidated balance sheet prepared immediately after the combination? A. $110,000 B. $65,000 4-2
Chapter 4-Consolidation of Wholly Owned Subsidiaries Acquired at More than Book Value
C. $45,000 D. $0 Answer: C Learning Objective: 04-03 Topic: Calculations/Consolidation Entries for Complex Differential Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium
The following data applies to Questions 5-7: On December 31, 20X9, Add-On Company acquired 100 percent of Venus Corporation's common stock for $300,000. Balance sheet information Venus just prior to the acquisition is given here:
At the date of the business combination, Venus's net assets and liabilities approximated fair value except for inventory, which had a fair value of $60,000, land which had a fair value of $125,000, and buildings and equipment (net), which had a fair value of $250,000.
4-3
Chapter 4-Consolidation of Wholly Owned Subsidiaries Acquired at More than Book Value
5. Based on the information provided, what amount of inventory will be included in the consolidated balance sheet immediately following the acquisition? A. $60,000 B. $75,000 C. $15,000 D. $45,000 Answer: A Learning Objective: 04-01 Topic: Journal Entries related to Differential (beginning, amort.) Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 1 Easy 6. Based on the information provided, what amount of goodwill will be included in the consolidated balance sheet immediately following the acquisition? A. $30,000 B. $15,000 C. $85,000 D. $45,000 Answer: D Learning Objective: 04-03 Topic: Calculations/Consolidation Entries for Complex Differential Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium 7. Based on the information provided, what amount will be included as investment in Venus Corporation in the consolidated balance sheet immediately following the acquisition? A. $0 B. $395,000 C. $255,000 D. $300,000 Answer: A Learning Objective: 04-02 Topic: Consolidation procedures: 100% ownership, differential Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium
4-4
Chapter 4-Consolidation of Wholly Owned Subsidiaries Acquired at More than Book Value
The following data applies to Questions 8-9: Enya Corporation acquired 100 percent of Celtic Corporation's common stock on January 1, 20X9. Summarized balance sheet information for the two companies immediately after the combination is provided:
8. Based on the preceding information, the amount of differential associated with the acquisition is: A. $0. B. $58,000. C. $22,000. D. $36,000. Answer: B Learning Objective: 04-01 Topic: Journal Entries related to Differential (beginning, amort.) Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium
4-5
Chapter 4-Consolidation of Wholly Owned Subsidiaries Acquired at More than Book Value
9. Based on the information provided, the consolidated balance sheet of Enya and Celtic will reflect goodwill in the amount of: A. $0. B. $58,000. C. $22,000. D. $36,000. Answer: C Learning Objective: 04-03 Topic: Calculations/Consolidation Entries for Complex Differential Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium 10. Tanner Company, a subsidiary acquired for cash, owned equipment with a fair value higher than the book value as of the date of combination. A consolidated balance sheet prepared immediately after the acquisition would include this difference in: A. goodwill. B. retained earnings. C. deferred charges. D. equipment. Answer: D Learning Objective: 04-01 Topic: Journal Entries related to Differential (beginning, amort.) Blooms: Remember AACSB: Reflective Thinking AICPA: FN Reporting Difficulty: 1 Easy
4-6
Chapter 6 - Intercompany Inventory Transactions
Problem 64 (continued) Answer: a. Reversal of 20X7 downstream gross profit deferral: Investment in Moss Co. 9,000 Cost of Goods Sold
9,000
Reversal of 20X7 upstream gross profit deferral: Investment in Moss Co. 12,000 NCI in NA of Moss Co. 3,000 Cost of Goods Sold Inventory
9,000 6,000
Deferral of 20X8 unrealized profits on downstream transfer: Sales 52,000 Cost of Goods Sold 47,750 Inventory 4,250 Deferral of 20X8 unrealized profits on upstream transfer: Sales 280,000 Cost of Goods Sold 250,000 Inventory 30,000
b.
Learning Objective: 06-03 Learning Objective: 06-04 Topic: Downstream - Year Two Topic: Upstream - Year Two + Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard
6-34
Chapter 6 - Intercompany Inventory Transactions
65. On January 1, 20X7, Jones Company acquired 90 percent of the outstanding common stock of Smith Corporation for $1,242,000. On that date, the fair value of noncontrolling interest was equal to $138,000. The entire differential was related to land held by Smith. At the date of acquisition, Smith had common stock outstanding of $520,000, additional paid-in capital of $200,000, and retained earnings of $540,000. During 20X7, Smith sold inventory to Jones for $440,000. The inventory originally cost Smith $360,000. By year-end, 30 percent was still in Jones' ending inventory. During 20X8, the remaining inventory was resold to an unrelated customer. Both Jones and Smith use perpetual inventory systems. Income and dividend information for both Jones and Smith for 20X7 and 20X8 are as follows:
20X7 20X8
Jones Company Smith Corp. Operating Income Dividends Net Income Dividends $860,000 $160,000 $360,000 $200,000 910,000 200,000 420,000 200,000
Assume Jones uses the fully adjusted equity method to account for its investment in Smith. Required: a. Present the worksheet consolidation entries necessary to prepare consolidated financial statements for 20X7. b. Present the worksheet consolidation entries necessary to prepare consolidated financial statements for 20X8.
6-35
Chapter 6 - Intercompany Inventory Transactions
Problem 65 (continued) Answer: a. Book Value Calculations: NCI 10% Beginning Book Value 126,000 + Net Income 36,000 - Dividends (20,000) Ending Book Value 142,000
Jones Co. 90%
+
1,134,000 324,000 (180,000) 1,278,000
Reversal/Deferred GP Calculations: Total = Upstream Deferred GP 24,000 Total 24,000 Basic consolidation entry: Common Stock Additional paid-in capital Retained Earnings Income from Smith Corp. NCI in NI of Smith Corp. Dividends declared Investment in Smith Corp. NCI in NA of Smith Corp.
Common Stock
=
APIC 200,000
520,000
200,000
520,000 200,000 540,000 302,400 33,600 200,000 1,256,400 139,600
+
=
Jones Co. 90% 108,000 0 108,000
Re-sold 308,000 252,000 56,000
+
Deferral of 20X7 unrealized profits on inventory transfers Sales 440,000 Cost of Goods Sold 416,000 Inventory 24,000
6-36
Retained Earnings 540,000 360,000 (200,000) 700,000
NCI's share 2,400 2,400
← Common Stock ← Beginning balance in APIC ← Beginning balance in RE ← Jones’ % of NI - Def. GP ← NCI share of NI - Def. GP ← 100% of Smith Co.'s dividends ← Net book value - Def. GP ← NCI share of BV - Def. GP
=
Land 120,000 120,000
Excess value (differential) reclassification entry: Land 120,000 Investment in Smith Corp. 108,000 NCI in NA of Smith Corp. 12,000 Current Year Upstream Transactions Total Sales 440,000 COGS 360,000 Gross Profit 80,000 Gross Profit % 18.18%
+
520,000
Jones Co. share 21,600 21,600
Excess Value (Differential) Calculations: NCI 10% + Beginning balance 12,000 Changes 0 Ending balance 12,000
+
Ending Inventory 132,000 108,000 24,000
Chapter 6 - Intercompany Inventory Transactions
Problem 65 (continued) b. Book Value Calculations: NCI 10% Beginning Book Value 142,000 + Net Income 42,000 - Dividends (20,000) Ending Book Value 164,000
+
Jones Co. 90% 1,278,000 378,000 (180,000) 1,476,000
Reversal/Deferred GP Calculations: Total = Upstream Reversal 24,000 Total 24,000 Basic consolidation entry: Common Stock Additional paid-in capital Retained Earnings Income from Smith Corp. NCI in NI of Smith Corp. Dividends declared Investment in Smith Corp. NCI in NA of Smith Corp.
=
Common Stock
200,000
520,000
200,000
Jones Co.'s share 21,600 21,600
200,000 1,497,600 166,400
Excess value (differential) reclassification entry: Land 120,000 Investment in Smith Corp. 108,000 NCI in NA of Smith Corp. 12,000
24,000
Learning Objective: 06-04 Topic: Upstream - Year Two + Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard
6-37
+
+
Retained Earnings 700,000 420,000 (200,000) 920,000
NCI's share 2,400 2,400
← Common Stock ← Beginning balance in APIC ← Beginning balance in RE ← Jones' % of NI + Def. GP ← NCI share of NI + Def. GP ← 100% of Smith Co.'s dividends ← Net book value + Def. GP ← NCI share of BV + Def. GP
Jones Co. 90% 108,000 0 108,000
Reversal of last year’s gross profit deferral: Investment in Smith Corp. 21,600 NCI in NA of Smith Corp. 2,400 Cost of Goods Sold
APIC
520,000
520,000 200,000 700,000 399,600 44,400
Excess Value (Differential) Calculations: NCI 10% + Beginning balance 12,000 Changes 0 Ending balance 12,000
+
=
Land 120,000 120,000
Chapter 6 - Intercompany Inventory Transactions
66. Pisa Company acquired 75 percent of Siena Company on January 1, 20X3 for $712,500. The fair value of the noncontrolling interest was equal to 25 percent of book value. On the date of acquisition, Siena had common stock outstanding of $300,000 and a balance in retained earnings of $650,000. During 20X3, Siena purchased inventory for $35,000 and sold it to Pisa for $50,000. Of this amount, Pisa reported $20,000 in ending inventory in 20X3 and later sold it in 20X4. In 20X4, Pisa sold inventory it had purchased for $40,000 to Siena for $60,000. Siena sold $45,000 of this inventory in 20X4. Income and dividend information for Siena for 20X3 and 20X4 are as follows: Year 20X3 20X4
Net Income $150,000 $200,000
Dividends $40,000 $50,000
Pisa Company uses the fully adjusted equity method. Required: a. Present the worksheet consolidation entries necessary to prepare consolidated financial statements for 20X3. b. Present the worksheet consolidation entries necessary to prepare consolidated financial statements for 20X4.
6-38
Chapter 6 - Intercompany Inventory Transactions
Problem 66 (continued) Answer: a. Book Value Calculations: NCI 25% Beginnning Book Value 237,500 + Net Income 37,500 - Dividends (10,000) Ending Book Value 265,000
+
Pisa Co. 75%
=
712,500 112,500 (30,000) 795,000
Common Stock 300,000
300,000
+
Retained Earnings 650,000 150,000 (40,000) 760,000
Reversal/Deferred GP Calculations:
20X3 Upstream Deferred GP Total
Basic consolidation entry: Common Stock Retained Earnings Income from Siena Co. NCI in NI of Siena Co. Dividends declared Investment in Siena Co. NCI in NA of Siena Co.
Total 6,000 6,000
Pisa Co.'s share 4,500 4,500
=
300,000 650,000 108,000 36,000 40,000 790,500 263,500
20X3 Upstream Sale
Sales COGS
Total 50,000 35,000
Gross Profit
15,000
Gross Profit %
30.00%
=
Re-sold 30,000 21,000
+
9,000
Deferral of 20X3 upstream gross profit: Sales 50,000 Cost of Goods Sold Inventory
Ending Inventory 20,000 14,000 6,000
44,000 6,000
6-39
+
NCI's share 1,500 1,500
← Common Stock ← Beginning balance in RE ← Pisa Co.'s % of NI - Def. GP ← NCI share of NI - Def. GP ← 100% of Siena Co.'s dividends ← Net book value - Def. GP ← NCI share of BV - Def. GP
Chapter 6 - Intercompany Inventory Transactions
Problem 66 (continued) b. Book Value Calculations: NCI 25% Beginning Book Value 265,000 + Net Income 50,000 - Dividends (12,500) Ending Book Value 302,500
+
Pisa Co. 75%
=
Common Stock
795,000 150,000 (37,500) 907,500
+
300,000
Retained Earnings 760,000 200,000 (50,000) 910,000
300,000
Reversal/Deferred GP Calculations:
20X3 Upstream Reversal 20X4 Downstream Deferred GP Total Basic consolidation entry: Common Stock Retained Earnings Income from Siena Co. NCI in NI of Siena Co. Dividends declared Investment in Siena Co. NCI in NA of Siena Co.
Total 6,000 (5,000) (5,000)
=
Pisa Co.'s share 4,500 (5,000) (500)
300,000 760,000 149,500 51,500 50,000 907,000 304,000
Reversal of 20X3 upstream gross profit: Investment in Siena Co. 4,500 NCI in NA of Siena Co. 1,500 Cost of Goods Sold 20X4 Downstream Sale Total = Re-sold + Sales 60,000 45,000 COGS 40,000 30,000 Gross Profit 20,000 15,000 Gross Profit % 33.33% Deferral of 20X4 downstream gross profit: Sales 60,000 Cost of Goods Sold Inventory
Ending Inventory 15,000 10,000 5,000
55,000 5,000
6-40
NCI's share 1,500 1,500
← Common Stock ← Beginning balance in RE ← Pisa Co.'s % of NI + 20X3 Def. GP - 20X4 Def. GP ← NCI share of NI + 20X3 Def. GP ← 100% of Siena Co.'s dividends ← Net book value + 20X3 Def. GP - 20X4 Def. GP ← NCI share of BV + 20X3 Def. GP
6,000
Learning Objective: 06-04 Learning Objective: 06-03 Topic: Upstream - Year Two + Topic: Downstream - Year One Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard
+
Chapter 6 - Intercompany Inventory Transactions
67. On January 1, 20X7, Jones Company acquired 90 percent of the outstanding common stock of Smith Corporation for $1,242,000. On that date, the fair value of noncontrolling interest was equal to $138,000. The entire differential was related to land held by Smith. At the date of acquisition, Smith had common stock outstanding of $520,000, additional paid-in capital of $200,000, and retained earnings of $540,000. During 20X7, Smith sold inventory to Jones for $440,000. The inventory originally cost Smith $360,000. By year-end, 30 percent was still in Jones' ending inventory. During 20X8, the remaining inventory was resold to an unrelated customer. Both Jones and Smith use perpetual inventory systems. Income and dividend information for both Jones and Smith for 20X7 and 20X8 are as follows:
20X7 20X8
Jones Company Smith Corp. Operating Income Dividends Net Income Dividends $860,000 $160,000 $360,000 $200,000 910,000 200,000 420,000 200,000
Assume Jones uses the modified equity method to account for its investment in Smith. Required: a. Present the worksheet consolidation entries necessary to prepare consolidated financial statements for 20X7. b. Present the worksheet consolidation entries necessary to prepare consolidated financial statements for 20X8.
6-41
Chapter 6 - Intercompany Inventory Transactions
Problem 67 (continued) Answer: a. Book Value Calculations:
Beginning Book Value + Net Income - Dividends Ending Book Value
NCI 10% 126,000 36,000 (20,000) 142,000
Jones Co. 90% 1,134,000 324,000 (180,000) 1,278,000
+
Reversal/Deferred GP Calculations: Total = Upstream Deferred GP 24,000 Total 24,000
Basic consolidation entry: Common Stock Additional paid-in capital Retained Earnings Income from Smith Corp. NCI in NI of Smith Corp. Dividends declared Investment in Smith Corp. NCI in NA of Smith Corp.
=
Common Stock 520,000
+
520,000
Unrecorded share 21,600 21,600
520,000 200,000 540,000 324,000 33,600 200,000 1,278,000 139,600
Excess Value (Differential) Calculations: NCI 10% + Jones Co. 90% Beginning balance 12,000 108,000 Changes 0 0 Ending balance 12,000 108,000
+
APIC 200,000
200,000
Gross Profit
80,000
Gross Profit %
18.18%
=
Re-sold 308,000 252,000
+
← Common Stock ← Beginning balance in APIC ← Beginning balance in RE ← Jones’ % of NI ← NCI share of NI - Def. GP ← 100% of Smith Co.'s dividends ← Net book value ← NCI share of BV - Def. GP
=
Land 120,000 120,000
Ending Inventory 132,000 108,000
56,000
Deferral of this year's unrealized profits on inventory transfers: Sales 440,000 Cost of Goods Sold 416,000 Inventory 24,000
6-42
Retained Earnings 540,000 360,000 (200,000) 700,000
NCI's share 2,400 2,400
Excess value (differential) reclassification entry: Land 120,000 Investment in Smith Corp. 108,000 NCI in NA of Smith Corp. 12,000 Current Year Upstream Transactions Total Sales 440,000 COGS 360,000
+
24,000
Chapter 6 - Intercompany Inventory Transactions
Problem 67 (continued) b. Book Value Calculations:
Beginning Book Value + Net Income - Dividends Ending Book Value
NCI 10% 142,000 42,000 (20,000) 164,000
Jones Co. 90% 1,278,000 378,000 (180,000) 1,476,000
+
Reversal/Deferred GP Calculations: Total = Upstream Reversal 24,000 Total 24,000
Basic consolidation entry: Common Stock Additional paid-in capital Retained Earnings Income from Smith Corp. NCI in NI of Smith Corp. Dividends declared Investment in Smith Corp. NCI in NA of Smith Corp.
=
Common Stock 520,000
+
520,000
Unrecorded share 21,600 21,600
+
200,000
200,000 1,476,000 166,400
Beginning balance Changes Ending balance
Jones Co. 90% 108,000 0 108,000
Excess value (differential) reclassification entry: Land 120,000 Investment in Smith Corp. 108,000 NCI in NA of Smith Corp. 12,000 Reversal of last year’s gross profit deferral: Retained Earnings 21,600 NCI in NA of Smith Corp. 2,400 Cost of Goods Sold
24,000
Learning Objective: Appendix 6A Topic: Modified Equity Method Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard
6-43
Retained Earnings 700,000 420,000 (200,000) 920,000
← Common Stock ← Beginning balance in APIC ← Beginning balance in RE ← Jones’ % of NI ← NCI share of NI + Def. GP ← 100% of Smith Co.'s dividends ← Net book value ← NCI share of BV + Def. GP
520,000 200,000 700,000 378,000 44,400
+
+
NCI's share 2,400 2,400
Excess Value (Differential) Calculations: NCI 10% 12,000 0 12,000
APIC 200,000
=
Land 120,000 120,000
Chapter 6 - Intercompany Inventory Transactions
68. On January 1, 20X7, Jones Company acquired 90 percent of the outstanding common stock of Smith Corporation for $1,242,000. On that date, the fair value of noncontrolling interest was equal to $138,000. The entire differential was related to land held by Smith. At the date of acquisition, Smith had common stock outstanding of $520,000, additional paid-in capital of $200,000, and retained earnings of $540,000. During 20X7, Smith sold inventory to Jones for $440,000. The inventory originally cost Smith $360,000. By year-end, 30 percent was still in Jones' ending inventory. During 20X8, the remaining inventory was resold to an unrelated customer. Both Jones and Smith use perpetual inventory systems. Income and dividend information for both Jones and Smith for 20X7 and 20X8 are as follows:
20X7 20X8
Jones Company Smith Corp. Operating Income Dividends Net Income Dividends $860,000 $160,000 $360,000 $200,000 910,000 200,000 420,000 200,000
Assume Jones uses the cost method to account for its investment in Smith. Required: a. Present the worksheet consolidation entries necessary to prepare consolidated financial statements for 20X7. b. Present the worksheet consolidation entries necessary to prepare consolidated financial statements for 20X8.
6-44
Chapter 6 - Intercompany Inventory Transactions
Problem 68 (continued) Answer: a. Basic consolidation entry: Common Stock Additional paid-in capital Retained Earnings Investment in Smith Corp. NCI in NA of Smith Corp. Dividend consolidation entry: Dividend Income NCI in NI of Smith Corp. Dividends Declared
1,134,000 126,000
← Common Stock ← APIC on acquisition date ← RE on acquisition date ← Original cost of investment ← NCI share of acquisition date BV
200,000
← Jones Co.'s share of dividends ← NCI's share of dividends ← 100% of Smith Corp.'s dividends
520,000 200,000 540,000
180,000 20,000
Assign Smith Corp.'s undistributed income to NCI: NCI in NI of Smith Corp. 13,600 NCI in NA of Smith Corp. 13,600 Excess value (differential) reclassification entry: Land 120,000 Investment in Smith Corp. 108,000 NCI in NA of Smith Corp. 12,000
← NCI's 10% share of 20X7 undistributed NI - 10% GP deferral ← NCI's 10% share of 20X7 undistributed NI - 10% GP deferral
← Amount of land excess ← Jones Co.'s 90% share ← NCI's 10% share
Deferral of this year's unrealized profits on inventory transfers Sales 440,000 Cost of Goods Sold 416,000 Inventory 24,000
6-45
Chapter 6 - Intercompany Inventory Transactions
Problem 68 (continued) b. Basic consolidation entry: Common Stock Additional paid-in capital Retained Earnings Investment in Smith Corp. NCI in NA of Smith Corp. Dividend consolidation entry: Dividend Income NCI in NI of Smith Corp. Dividends Declared
1,134,000 126,000
← Common Stock ← APIC on acquisition date ← RE on acquisition date ← Original cost of investment ← NCI share of acquisition date BV
200,000
← Jones Co.'s share of dividends ← NCI's share of dividends ← 100% of Smith Corp.'s dividends
520,000 200,000 540,000
180,000 20,000
Assign Smith Corp.'s undistributed income to NCI: NCI in NI of Smith Corp. 24,400 Retained Earnings 16,000 NCI in NA of Smith Corp. 40,400 Excess value (differential) reclassification entry: Land 120,000 Investment in Smith Corp. 108,000 NCI in NA of Smith Corp. 12,000
← NCI's 10% share of 20X8 undistributed NI + 10% GP deferral ← NCI's 10% share of 20X7 undistributed NI - 10% GP deferral ← NCI's 10% share of cumulative undist. NI + 10% GP deferral
← Amount of land excess ← Jones Co.'s 90% share ← NCI's 10% share
Deferral of last year's unrealized profits on inventory transfers Retained Earnings 21,600 NCI in NA of Smith Corp. 2,400 Cost of Goods Sold 24,000
Learning Objective: Appendix 6A Topic: Cost Method Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard
6-46
Chapter 6 - Intercompany Inventory Transactions
69. Pisa Company acquired 75 percent of Siena Company on January 1, 20X3 for $712,500. The fair value of the noncontrolling interest was equal to 25 percent of book value. On the date of acquisition, Siena had common stock outstanding of $300,000 and a balance in retained earnings of $650,000. During 20X3, Siena purchased inventory for $35,000 and sold it to Pisa for $50,000. Of this amount, Pisa reported $20,000 in ending inventory in 20X3 and later sold it in 20X4. In 20X4, Pisa sold inventory it had purchased for $40,000 to Siena for $60,000. Siena sold $45,000 of this inventory in 20X4. Income and dividend information for Siena for 20X3 and 20X4 are as follows: Year 20X3 20X4
Net Income $150,000 $200,000
Dividends $40,000 $50,000
Pisa Company uses the modified equity method. Required: a. Present the worksheet consolidation entries necessary to prepare consolidated financial statements for 20X3. b. Present the worksheet consolidation entries necessary to prepare consolidated financial statements for 20X4.
6-47
Chapter 6 - Intercompany Inventory Transactions
Problem 69 (continued) Answer: a. Book Value Calculations: NCI 25% Beginning Book Value 237,500 + Net Income 37,500 - Dividends (10,000) Ending Book Value 265,000
+
Pisa Co. 75%
=
712,500 112,500 (30,000) 795,000
Common Stock
+
300,000
Retained Earnings 650,000 150,000 (40,000) 760,000
300,000
Reversal/Deferred GP Calculations:
20X3 Upstream Deferred GP Total
Basic consolidation entry: Common Stock Retained Earnings Income from Siena Co. NCI in NI of Siena Co. Dividends declared Investment in Siena Co. NCI in NA of Siena Co.
Total 6,000 6,000
=
Undistributed share 4,500 4,500
300,000 650,000 112,500 36,000 40,000 795,000 263,500
20X3 Upstream Sale
Sales COGS
Total 50,000 35,000
Gross Profit
15,000
Gross Profit %
30.00%
=
Re-sold 30,000 21,000
+
9,000
Deferral of 20X3 upstream gross profit: Sales 50,000 Cost of Goods Sold Inventory
Ending Inventory 20,000 14,000 6,000
44,000 6,000
6-48
+
NCI's share 1,500 1,500
← Common Stock ← Beginning balance in RE ← Pisa Co.'s % of NI ← NCI share of NI - Def. GP ← 100% of Siena Co.'s dividends ← Net book value ← NCI share of BV - Def. GP
Chapter 6 - Intercompany Inventory Transactions
Problem 69 (continued): b. Book Value Calculations: NCI 25% Beginning Book Value 265,000 + Net Income 50,000 - Dividends (12,500) Ending Book Value 302,500
+
Pisa Co. 75%
=
Common Stock
795,000 150,000 (37,500) 907,500
+
300,000
Retained Earnings 760,000 200,000 (50,000) 910,000
300,000
Reversal/Deferred GP Calculations: Total 6,000 (5,000) (5,000)
20X3 Upstream Reversal 20X4 Downstream Deferred GP Total Basic consolidation entry: Common Stock Retained Earnings Income from Siena Co. NCI in NI of Siena Co. Dividends declared Investment in Siena Co. NCI in NA of Siena Co.
=
300,000 760,000 150,000 51,500 50,000 907,500 304,000
Reversal of 20X3 upstream gross profit: Retained Earnings 4,500 NCI in NA of Siena Co. 1,500 Cost of Goods Sold 20X4 Downstream Sale Total Sales 60,000 COGS 40,000 Gross Profit 20,000 Gross Profit % 33.33%
Undistributed share 4,500 (5,000) (500)
=
Re-sold 45,000 30,000 15,000
+
Deferral of 20X4 downstream gross profit: Sales 60,000 Cost of Goods Sold Inventory
Ending Inventory 15,000 10,000 5,000
Learning Objective: Appendix 6A Topic: Modified Equity Method Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard 6-49
NCI's share 1,500 1,500
← Common Stock ← Beginning balance in RE ← Pisa Co.'s % of NI ← NCI share of NI + 20X3 Def. GP ← 100% of Siena Co.'s dividends ← Net book value ← NCI share of BV + 20X3 Def. GP
6,000
55,000 5,000
+
Chapter 6 - Intercompany Inventory Transactions
70. Pisa Company acquired 75 percent of Siena Company on January 1, 20X3 for $712,500. The fair value of the noncontrolling interest was equal to 25 percent of book value. On the date of acquisition, Siena had common stock outstanding of $300,000 and a balance in retained earnings of $650,000. During 20X3, Siena purchased inventory for $35,000 and sold it to Pisa for $50,000. Of this amount, Pisa reported $20,000 in ending inventory in 20X3 and later sold it in 20X4. In 20X4, Pisa sold inventory it had purchased for $40,000 to Siena for $60,000. Siena sold $45,000 of this inventory in 20X4. Income and dividend information for Siena for 20X3 and 20X4 are as follows: Year 20X3 20X4
Net Income $150,000 $200,000
Dividends $40,000 $50,000
Pisa Company uses the cost method. Required: a. Present the worksheet consolidation entries necessary to prepare consolidated financial statements for 20X3. b. Present the worksheet consolidation entries necessary to prepare consolidated financial statements for 20X4.
6-50
Chapter 6 - Intercompany Inventory Transactions
Problem 70 (continued) Answer: a. Basic consolidation entry: Common Stock Retained Earnings Investment in Siena Co. NCI in NA of Siena Co. Dividend consolidation entry: Dividend Income NCI in NI of Siena Co. Dividends Declared
712,500 237,500
← Common Stock ← RE on acquisition date ← Original cost of investment ← NCI share of acquisition date BV
40,000
← Pisa Co.'s share of dividends ← NCI's share of dividends ← 100% of Siena Co.'s dividends
300,000 650,000
30,000 10,000
Assign Siena Co.'s undistributed income to NCI: NCI in NI of Siena Co. 26,000 NCI in NA of Siena Co. 26,000 Deferral of 20X3 upstream gross profit: Sales 50,000 Cost of Goods Sold Inventory
44,000 6,000
6-51
← NCI's 25% share of 20X3 undistributed NI - 25% GP deferral ← NCI's 25% share of 20X3 undistributed NI - 25% GP deferral
Chapter 6 - Intercompany Inventory Transactions
Problem 70 (continued) b. Basic consolidation entry: Common Stock Retained Earnings Investment in Siena Co. NCI in NA of Siena Co. Dividend consolidation entry: Dividend Income NCI in NI of Siena Co. Dividends Declared
712,500 237,500
← Common Stock ← RE on acquisition date ← Original cost of investment ← NCI share of acquisition date BV
50,000
← Pisa Co.'s share of dividends ← NCI's share of dividends ← 100% of Siena Co.'s dividends
300,000 650,000
37,500 12,500
Assign Siena Co.'s undistributed income to NCI: NCI in NI of Siena Co. 39,000 Retained Earnings 27,500 NCI in NA of Siena Co. 66,500 Reversal of 20X3 upstream gross profit: Retained Earnings 4,500 NCI in NA of Siena Co. 1,500 Cost of Goods Sold
6,000
Deferral of 20X4 downstream gross profit: Sales 60,000 Cost of Goods Sold 55,000 Inventory 5,000
Learning Objective: Appendix 6A Topic: Cost Method Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard
6-52
← NCI's 25% share of 20X4 undistributed NI + 25% GP deferral ← NCI's 25% share of 20X3 undistributed NI - 25% GP deferral ← NCI's 25% share of cumulative undistributed NI + 25% GP deferral
Chapter 7 - Intercompany Transfers of Services and Noncurrent Assets
Chapter 7 Intercompany Transfers of Services and Noncurrent Assets Multiple Choice Questions 1. Blue Company owns 70 percent of Black Company's outstanding common stock. On December 31, 20X8, Black sold equipment to Blue at a price in excess of Black's carrying amount, but less than its original cost. On a consolidated balance sheet at December 31, 20X8, the carrying amount of the equipment should be reported at: A. Blue's original cost. B. Black's original cost. C. Blue's original cost less Black's recorded gain. D. Blue's original cost less 70 percent of Black's recorded gain. Answer: C Learning Objective: 07-01 Topic: Intercompany Long-Term Asset Transfers Blooms: Understand AACSB: Analytic AICPA: FN Reporting Difficulty: 2 Medium 2. A parent and its 80 percent owned subsidiary have made several intercompany sales of noncurrent assets during the past two years. The amount of income assigned to the noncontrolling interest for the second year should include the noncontrolling interest's share of gains: A. unrealized in the second year from upstream sales made in the second year. B. realized in the second year from downstream sales made in both years. C. realized in the second year from upstream sales made in both years. D. both realized and unrealized from upstream sales made in the second year. Answer: C Learning Objective: 07-01 Topic: Intercompany Long-Term Asset Transfers Blooms: Understand AACSB: Analytic AICPA: FN Reporting Difficulty: 2 Medium The following data applies to Questions 3 – 5: Parent Corporation purchased land from S1 Corporation for $220,000 on December 26, 20X8. This purchase followed a series of transactions between P-controlled subsidiaries. On February 15, 20X8, S3 Corporation purchased the land from a nonaffiliate for $160,000. It sold the land to S2 Company for $145,000 on October 19, 20X8, and S2 sold the land to S1 for $197,000 on November 27, 20X8. Parent has control of the following companies: 7-1
Chapter 7 - Intercompany Transfers of Services and Noncurrent Assets
Parent reported income from its separate operations of $200,000 for 20X8. 3. Based on the preceding information, at what amount should the land be reported in the consolidated balance sheet as of December 31, 20X8? A. $145,000 B. $220,000 C. $197,000 D. $160,000 Answer: D Learning Objective: 07-01 Topic: Intercompany Long-Term Asset Transfers Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 1 Easy 4. Based on the preceding information, what amount of gain or loss on sale of land should be reported in the consolidated income statement for 20X8? A. $60,000 B. $0 C. $75,000 D. $23,000 Answer: B Learning Objective: 07-01 Topic: Intercompany Long-Term Asset Transfers Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium 5. Based on the preceding information, what should be the amount of income assigned to the controlling shareholders in the consolidated income statement for 20X8? A. $369,400 B. $405,000 C. $465,000 D. $60,000
7-2
Chapter 7 - Intercompany Transfers of Services and Noncurrent Assets
Answer: A Learning Objective: 07-01 Topic: Intercompany Long-Term Asset Transfers Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard The following data applies to Questions 6 –8: Patch Corporation purchased land from Sub1 Corporation for $350,000 on December 3, 20X5. This purchase followed a series of transactions between Patch-controlled subsidiaries. On January 23, 20X5, Sub3 Corporation purchased the land from a nonaffiliate for $240,000. It sold the land to Sub2 Company for $220,000 on July 15, 20X5, and Sub2 sold the land to Sub1 for $305,000 on September 5, 20X5. Patch has control of the following companies: Subsidiary Sub3 Sub2 Sub1
Level of Ownership 60 percent 90 percent 70 percent
20X5 Net Income $60,000 $140,000 $90,000
Patch reported income from its separate operations of $345,000 for 20X5. 6. Based on the preceding information, at what amount should the land be reported in the consolidated balance sheet as of December 31, 20X5? A. $220,000 B. $240,000 C. $305,000 D. $350,000 Answer: B Learning Objective: 07-01 Topic: Intercompany Long-Term Asset Transfers Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 1 Easy 7. Based on the preceding information, what amount of gain or loss on the sale of land should be reported in the consolidated income statement for 20X5? A. $0 B. $20,000 loss C. $110,000 gain D. $130,000 gain Answer: A Learning Objective: 07-01 7-3
Chapter 7 - Intercompany Transfers of Services and Noncurrent Assets
Topic: Intercompany Long-Term Asset Transfers Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium 8. Based on the preceding information, what should be the amount of income assigned to the controlling shareholders in the consolidated income statement for 20X5? A. $110,000 B. $474,000 C. $525,000 D. $635,000 Answer B Learning Objective: 07-01 Topic: Intercompany Long-Term Asset Transfers Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard The following data applies to Questions 9 – 11: Big Corporation receives management consulting services from its 92 percent owned subsidiary, Small Inc. During 20X7, Big paid Small $125,432 for its services. For the year 20X8, Small billed Big $140,000 for such services and collected all but $7,900 by year-end. Small's labor cost and other associated costs for the employees providing services to Big totaled $86,000 in 20X7 and $121,000 in 20X8. Big reported $2,567,000 of income from its own separate operations for 20X8, and Small reported net income of $695,000. 9. Based on the preceding information, what amount of consolidated net income should be reported in 20X8? A. $3,262,000 B. $4,050,000 C. $3,254,100 D. $3,122,000 Answer: A Learning Objective: 07-01 Topic: Intercompany transfers of services Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium 10. Based on the preceding information, what amount of income should be assigned to the 7-4
Chapter 7 - Intercompany Transfers of Services and Noncurrent Assets
noncontrolling shareholders in the consolidated income statement for 20X8? A. $47,700 B. $44,400 C. $55,600 D. $60,000 Answer: C Learning Objective: 07-01 Topic: Intercompany transfers of services Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium 11. Based on the preceding information, what amount of receivable/payable should be eliminated in the 20X8 consolidated financial statements? A. $125,432 B. $7,900 C. $5,560 D. $140,000 Answer: B Learning Objective: 07-01 Topic: Intercompany transfers of services Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium 12. A wholly owned subsidiary sold land to its parent during the year at a gain. The parent continues to hold the land at the end of the year. The amount to be reported as consolidated net income for the year should equal: A. the parent's separate operating income, plus the subsidiary's net income. B. the parent's separate operating income, plus the subsidiary's net income, minus the intercompany gain. C. the parent's separate operating income, plus the subsidiary's net income, plus the intercompany gain. D. the parent's net income, plus the subsidiary's net income, minus the intercompany gain.
7-5
Chapter 7 - Intercompany Transfers of Services and Noncurrent Assets
Answer: B Learning Objective: 07-02 Topic: Overview of the Profit Consolidation Process Blooms: Remember AACSB: Analytic AICPA: FN Decision Making Difficulty: 1 Easy 13. Phobos Company holds 80 percent of Deimos Company's voting shares. During the preparation of consolidated financial statements for 20X9, the following consolidating entry was made: Investment in Deimos Land
50,000 50,000
Which of the following statements is correct? A. Phobos Company purchased land from Deimos Company during 20X9. B. Phobos Company purchased land from Deimos Company before January 1, 20X9. C. Deimos Company purchased land from Phobos Company during 20X9. D. Deimos Company purchased land from Phobos Company before January 1, 20X9. Answer: D Learning Objective: 07-02 Topic: Overview of the Profit Consolidation Process Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium 14. Any intercompany gain or loss on a downstream sale of land should be recognized in consolidated net income: I. in the year of the downstream sale. II. over the period of time the subsidiary uses the land. III. in the year the subsidiary sells the land to an unrelated party. A. I B. II C. III D. I or II
7-6
Chapter 7 - Intercompany Transfers of Services and Noncurrent Assets
Answer: C Learning Objective: 07-02 Topic: Overview of the Profit Consolidation Process Blooms: Remember AACSB: Analytic AICPA: FN Reporting Difficulty: 1 Easy The following data applies to Questions 15 – 17: ABC Corporation purchased land on January 1, 20X6, for $50,000. On July 15, 20X8, it sold the land to its subsidiary, XYZ Corporation, for $70,000. ABC owns 80 percent of XYZ's voting shares. 15. Based on the preceding information, what will be the worksheet consolidating entry to remove the effects of the intercompany sale of land in preparing the consolidated financial statements for 20X8? A. Gain on Sale of Land 20,000 Land 20,000 B.
C.
D.
Gain on Sale of Land Land
16,000
Land Gain on Sale of Land
16,000
Land Gain on Sale of Land
20,000
16,000
16,000
20,000
A. Option A B. Option B C. Option C D. Option D Answer: A Learning Objective: 07-03 Topic: Downstream Sale of Land Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium 16. Based on the preceding information, what will be the worksheet consolidating entry to remove the effects of the intercompany sale of land in preparing the consolidated financial statements for 20X9? A.
Investment in XYZ
20,000 7-7
Chapter 7 - Intercompany Transfers of Services and Noncurrent Assets
Land B.
C.
D.
20,000
Land Investment in XYZ
16,000
Investment in XYZ Land
16,000
Land Investment in XYZ
20,000
16,000
16,000
20,000
A. Option A B. Option B C. Option C D. Option D Answer: A Learning Objective: 07-03 Topic: Downstream Land Second Year Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium 17. Which worksheet consolidating entry will be made on December 31, 20X9, if XYZ Corporation had initially purchased the land for $50,000 and then sold it to ABC on July 15, 20X8, for $70,000? A.
B.
C.
D.
Investment in XYZ NCI in NA of XYZ Land
12,000 8,000
Investment in XYZ NCI in NA of XYZ Land
16,000 4,000
Land Investment in XYZ NCI in NA of XYZ
20,000
Land Investment in XYZ NCI in NA of XYZ
20,000
20,000
20,000
14,000 6,000
18,000 2,000
A. Option A B. Option B 7-8
Chapter 7 - Intercompany Transfers of Services and Noncurrent Assets
C. Option C D. Option D Answer: B Learning Objective: 07-03 Topic: Upstream Land Second Year Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium The following data applies to Questions 18 – 20: Hilldale Corporation purchased land on January 1, 20X0, for $60,000. On August 7, 20X2, it sold the land to its subsidiary, Allen Corporation, for $35,000. Hilldale owns 60 percent of Allen’s voting shares 18. Based on the preceding information, what will be the worksheet consolidation entry to remove the effects of the intercompany sale of land in preparing the consolidated financial statements for 20X2? A. Land 15,000 Loss on Sale of Land 15,000 B. Land 25,000 Loss on Sale of Land 25,000 C. Loss on Sale of Land Land D. Loss on Sale of Land Land
15,000 15,000 25,000 25,000
Answer: B Learning Objective: 07-03 Topic: Downstream Sale of Land Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium 19. Based on the preceding information, what will be the worksheet consolidation entry to remove the effects of the intercompany sale of land in preparing the consolidated financial statements for 20X3? A. Investment in Allen 25,000 Land 25,000 B. Land 15,000 Investment in Allen 15,000 C. Investment in Allen 15,000 Land 15,000 7-9
Chapter 7 - Intercompany Transfers of Services and Noncurrent Assets
D. Land Investment in Allen
25,000 25,000
Answer: D Learning Objective: 07-03 Topic: Downstream Land Second Year Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium 20. Which worksheet consolidation entry will be made on December 31, 20X3, if Allen Corporation had initially purchased the land for $60,000 and then sold it to Hilldale on August 7, 20X2, for $35,000? A. Investment in Allen 15,000 NCI in NA of Allen 10,000 Land 25,000 B. Investment in Allen 20,000 NCI in NA of Allen 5,000 Land 25,000 C. Land 25,000 Investment in Allen 15,000 NCI in NA of Allen 10,000 D. Land 25,000 Investment in Allen 20,000 NCI in NA of Allen 5,000 Answer: C Learning Objective: 07-03 Topic: Upstream Land Second Year Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium
21. A parent sold land to its partially owned subsidiary during the year at a loss. The subsidiary continues to hold the land at the end of the year. The amount to be reported as consolidated net income for the year should equal: A. the parent's separate operating income, plus the intercompany loss. B. the parent's separate operating income, plus the intercompany loss, plus the subsidiary's net income. C. the parent's separate operating income, minus the intercompany loss. D. the parent's separate operating income, minus the intercompany loss, plus the subsidiary's net income.
7-10
Chapter 7 - Intercompany Transfers of Services and Noncurrent Assets
Answer: B Learning Objective: 07-03 Topic: Downstream Sale of Land Blooms: Remember AACSB: Analytic AICPA: FN Reporting Difficulty: 1 Easy 22. Parent Company owns 70% of Son Company’s outstanding stock. During 20X1 Son Company sold land to Parent Company for a gain of $25,000. Parent company held the land all of 20X1. The gain on the sale to Parent should be: A. recorded on Son’s books as a gain of $25,000 and then eliminated during the consolidation process. B. deferred by Son until Parent sells the land to an outside party. C. recorded on Son’s books as a gain of $17,500 and eliminated during the consolidation process. D. recorded on Parent’s book as a gain of $17,500 and eliminated during the consolidation process. Answer: A Learning Objective: 07-04 Topic: Upstream Land Second Year Blooms: Understand AACSB: Analytic AICPA: FN Reporting Difficulty: 2 Medium
23. Using the fully adjusted equity method, an intercompany gain on an upstream sale of land is: A. recognized by the parent and the deferral is shared between the controlling and noncontrolling stockholders of the subsidiary. B. recognized by the subsidiary and the deferral is shared between the controlling and noncontrolling stockholders of the subsidiary. C. deferred by the subsidiary until the land is sold to an entity outside the consolidated group. D. recognized by the subsidiary and the deferral is completely allocated to the controlling stockholders of the subsidiary. Answer: B Learning Objective: 07-04 Topic: Upstream Land Second Year Blooms: Understand AACSB: Reflective Thinking AICPA: FN Decision Making Difficulty: 2 Medium The following data applies to Questions 24 – 27: 7-11