Test Bank For Advanced Accounting 10th Edition By Fischer

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Test Bank For Advanced Accounting 10th Edition By Fischer

Chapter 3—Consolidated Statements: Subsequent to Acquisition

MULTIPLE CHOICE

Scenario 3-1

Pedro purchased 100% of the common stock of the Sanburn Company on January 1, 20X1, for $500,000. On that date, the stockholders’ equity of Sanburn Company was $380,000. On the purchase date, inventory of Sanburn Company, which was sold during 20X1, was understated by $20,000. Any remaining excess of cost over book value is attributable to patent with a 20-year life. The reported income and dividends paid by Sanburn Company were as follows:

20X1

20X2

Net income

$80,000

$90,000

Dividends paid

10,000

10,000

1.Refer to Scenario 3-1. Using the simple equity method, which of the following amounts are correct?

  Investment Income      Investment Account Balance

    20X1                    December 31, 20X1

a.

$80,000                  $570,000

b.

$70,000                  $570,000

c.

$70,000                  $550,000

d.

$80,000                  $550,000

ANS: A DIF: M OBJ: 3-1

2.Refer to Scenario 3-1. Using the sophisticated (full) equity method, which of the following amounts are correct?

  Investment Income      Investment Account Balance

    20X1                    December 31, 20X1

a.

$55,000                   $555,000

b.

$55,000                   $545,000

c.

$75,000                   $565,000

d.

$80,000                   $570,000

ANS: B DIF: M OBJ: 3-1

3.Refer to Scenario 3-1. Using the cost method, which of the following amounts are correct?

  Investment Income      Investment Account Balance

    20X1                    December 31, 20X1

a.

$10,000                   $500,000

b.

$10,000                   $570,000

c.

     $0                   $570,000

d.

$80,000                   $500,000

ANS: A DIF: M OBJ: 3-1

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

a.

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

b.

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

c.

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

d.

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

ANS:CDIF:MOBJ:3-1 | 3-2 | 3-4

Scenario 3-2

On January 1, 20X1, Promo, Inc. purchased 70% of Set Corporation for $469,000. On that date the book value of the net assets of Set totaled $500,000. Based on the appraisal done at the time of the purchase, all assets and liabilities had book values equal to their fair values except as follows:

Book Value

Fair Value

Inventory

$100,000

$120,000

Land

75,000

85,000

Equipment (useful life 4 years)

125,000

165,000

The remaining excess of cost over book value was allocated to a patent with a 10-year useful life.

During 20X1 Promo reported net income of $200,000 and Set had net income of $100,000.

5.Refer to Scenario 3-2. What is consolidated net income if Promo recognizes income from Set using the sophisticated equity method?

a.

$42,000

b.

$70,000

c.

$200,000

d.

$270,000

ANS:DDIF:MOBJ:3-1 | 3-4 | 3-6

6.Refer to Scenario 3-2. What income from subsidiary did Promo include in its net income if Promo uses the simple equity method?

a.

$33,000

b.

$42,000

c.

$70,000

d.

$100,000

ANS: C DIF: D OBJ: 3-1 | 3-6

7.Refer to Scenario 3-2. What income from subsidiary did Promo include in its net income if Promo uses the sophisticated equity method?

a.

$33,000

b.

$49,000

c.

$70,000

d.

$100,000

ANS: B DIF: D OBJ: 3-1 | 3-6

8.On January 1, 20X1, Rabb Corp. purchased 80% of Sunny Corp.’s $10 par common stock for $975,000. On this date, the carrying amount of Sunny’s net assets was $1,000,000. The fair values of Sunny’s identifiable assets and liabilities were the same as their carrying amounts except for plant assets (net), which were $100,000 in excess of the carrying amount.

In the January 1, 20X1, consolidated balance sheet, goodwill should be reported at ____.

a.

$0

b.

$75,750

c.

$95,000

d.

$118,750

ANS:DDIF:EOBJ:3-2 | 3-3 | 3-4

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

a.

The equity method is required when one firm owns 20% or more of the common stock of another firm.

b.

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

c.

The method used has no significance to consolidated statements.

d.

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

ANS: C DIF: E OBJ: 3-2 | 3-3

10.In consolidated financial statements, it is expected that:

a.

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

b.

Retained Earnings equals the sum of the controlling interest’s separate retained earnings and the noncontrolling interest’s separate retained earnings.

c.

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

d.

Net Income equals the sum of the income distributed to the controlling interest and the income distributed to the noncontrolling interest.

ANS:DDIF:EOBJ:3-2 | 3-3 | 3-4

11.How is the portion of consolidated earnings to be assigned to noncontrolling interest in consolidated financial statements determined?

a.

The net income of the parent is subtracted from the subsidiary’s net income to determine the noncontrolling interest.

b.

The subsidiary’s net income is extended to the noncontrolling interest.

c.

The amount of the subsidiary’s earnings is multiplied by the noncontrolling’s percentage ownership and is adjusted for the excess cost amortization applicable to the NCI.

d.

The amount of consolidated earnings determined on the consolidated working papers is multiplied by the noncontrolling interest percentage at the balance-sheet date.

ANS:CDIF:MOBJ:3-2 | 3-3 | 3-4

12.Patti Corp. has several subsidiaries (Aeta, Beta, and Gaeta) that are included in its consolidated financial statements. In its 12/31/X1 separate balance sheet, Patti had the following intercompany balances before eliminations:

Debit

Credit

Current Receivable due from Aeta

$  40,000

Noncurrent Receivable due from Beta

100,000

Cash Advance to Beta

26,000

Cash Advance from Gaeta

$75,000

Intercompany Payable to Gaeta

40,000

In its 12/31/X1 consolidated balance sheet, what amount should Patti report as intercompany receivables?

a.

$166,000

b.

$51,000

c.

$26,000

d.

$0

ANS:DDIF:EOBJ:3-2 | 3-3 | 3-4

Scenario 3-3

Balance sheet information for Pawnee Company and its 90%-owned subsidiary, Sioux Corporation, at December 31, 20X1, is summarized as follows:

Pawnee

Sioux

Current assets-net

$   200,000

$  50,000

Property, plant, and equipment-net

1,000,000

600,000

Investment in Sioux

     558,000

               

$1,758,000

$650,000

Current liabilities

$   100,000

$  30,000

Capital stock

800,000

400,000

Retained earnings

     858,000

  220,000

$1,758,000

$650,000

Pawnee acquired its interest in Sioux for cash at book value several years ago when Sioux’s assets and liabilities were equal to their fair values.

13.Refer to Scenario 3-3. Consolidated total assets of Pawnee and Sioux, at December 31, 20X1, will be ____.

a.

$1,785,000

b.

$1,850,000

c.

$2,343,000

d.

$2,408,000

ANS:BDIF:EOBJ:3-2 | 3-3 | 3-4 | 3-7

14.Refer to Scenario 3-3. The consolidated balance sheet of Pawnee and Sioux at December 31, 20X1 will show

a.

Investment in Sioux, $558,000.

b.

Capital stock, $800,000.

c.

Retained earnings, $1,078,000.

d.

Noncontrolling interest, $65,000.

ANS:BDIF:EOBJ:3-2 | 3-3 | 3-4 | 3-7

15.Pahl Corporation owns a 60% interest in Sauer Corporation, acquired at book value equal to fair value at the beginning of 20X1. On December 20, 20X1 Sauer declares dividends of $80,000, and the dividends remain unpaid at year end. Pahl has not recorded the dividends receivable at December 31. A consolidated working paper entry is necessary to

a.

Enter the $80,000 dividends receivable in the consolidated balance sheet.

b.

Enter $48,000 dividends receivable in the consolidated balance sheet.

c.

Reduce the dividend payable account to $32,000 in the consolidated balance sheet.

d.

Eliminate the dividend payable account in the consolidated balance sheet.

ANS: C DIF: M OBJ: 3-3

16.If the investment in subsidiary account is increased or decreased by the amount determined by the following calculation:

the investment account is being converted from

a.

cost to simple equity.

b.

cost to sophisticated equity.

c.

simple equity to sophisticated equity.

d.

simple equity to cost.

ANS: A DIF: M OBJ: 3-3

17.On January 1, 20X1, Payne Corp. purchased 70% of Shayne Corp.’s $10 par common stock for $900,000. On this date, the carrying amount of Shayne’s net assets was $1,000,000. The fair values of Shayne’s identifiable assets and liabilities were the same as their carrying amounts except for plant assets (net), which were $200,000 in excess of the carrying amount. For the year ended December 31, 20X1, Shayne had net income of $150,000 and paid cash dividends totaling $90,000. Excess attributable to plant assets is amortized over 10 years.

In the December 31, 20X1, consolidated balance sheet, noncontrolling interest should be reported at ____.

a.

$282,714

b.

$300,500

c.

$397,714

d.

$345,500

ANS: C DIF: M OBJ: 3-5

18.Alpha purchased an 80% interest in Beta on June 30, 20X1. Both Alpha’s and Beta’s reporting periods end December 31. Which of the following represents the controlling interest in consolidated net income for 20X1?

a.

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

b.

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

c.

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

d.

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

ANS: C DIF: D OBJ: 3-6

19.In a mid-year purchase when the subsidiary’s books are not closed until the end of the year, the purchased income account contains the parent’s share of the

a.

subsidiary’s income earned for the entire year.

b.

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

c.

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

d.

Consolidated Net Income.

ANS: B DIF: E OBJ: 3-6

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