Multiple-choice questions. Select the best one that answers the question. Show your procedure and calculations. Partial credits will be given if you procedure is correct, but answers are not. Each question is 3 points. Total: 78 points.
1. Angelo uses the equity method to account for its investment in Fischer on January 1. On the date of acquisition, Fischer’s land and buildings were undervalued on its balance sheet. During the year following the acquisition, how do these excesses of fair values over book values affect Angelo’s Equity Income from Fischer?
a. Building, Decrease; Land, No Effect
b. Building, Decrease; Land, Decrease
c. Building, Increase; Land, Increase
d. Building, Increase; Land, No Effect
2. On January 2, 2020, Campbell, Inc. purchased a 20% interest in Renner Corp. for $2,000,000 cash. During 2020, Renner’s net income was $2,500,000 and it paid dividends of $750,000.
Equity Investment balance should Campbell report at December 31, 2020?
b. $ 500,000
3. On December 31, 2020, Park Inc. paid $500,000 for all of the common stock of Smith Corp. On that date, Smith had assets and liabilities with book values of $400,000 and $100,000; and fair values of $450,000 and $125,000, respectively.
What amount of goodwill will be reported on the December 31, 2020 balance sheet?
a. $ 50,000
4. Francis, Inc. acquired 40% of Park’s voting stock on January 1, 2020 for $420,000. During 2020, Park earned $120,000 and paid dividends of $60,000. During 2021, Park earned $160,000 and paid dividends of $50,000 on April 1 and $40,000 on December 1. On July 1, 2021, Francis sold half of its stock in Park for $275,000 cash.
The Equity Investment balance at December 31, 2020 is:
5. On January 1, 2020, Cracker Co. purchased 40% of Dallas Corp.’s common stock at book value of net assets. The balance in Cracker’s Equity Investment account was $820,000 at December 31, 2020. Dallas reported net income of $500,000 for the year ended December 31, 2020, and paid dividends totaling $150,000 during 2020.
How much did Cracker pay for its 40% interest in Dallas?
The following three Questions are based on the following set of facts.
Lucky’s Company acquires Waterview, Inc., by issuing 40,000 shares of $1 par common stock with a market price of $25 per share on the acquisition date and paying $125,000 cash. The assets and liabilities on Waterview’s balance sheet were valued at fair values except equipment that was undervalued by $300,000. There was also an unrecorded patent valued at $40,000, as well as an unrecorded trademark valued at $75,000. In addition, the agreement provided for additional consideration, valued at $60,000, if certain earnings targets were met.
The pre-acquisition balance sheets for the two companies at acquisition date are presented below.
|Lucky’s Company||Waterview, Inc.|
|Property, plant, and equipment||2,300,000||356,500|
|Salaries and taxes payable||450,000||46,000|
|Additional paid-in capital||950,000||106,500|
6. At what amount is the investment recorded on Lucky’s books?
7. Compute consolidated property, plant & equipment.
8. What is consolidated retained earnings?
a. $ 582,500
b. $ 909,000
The following two questions are based on the following set of facts.
On January 1, 2021, Consolidated Company purchased 100% of the common stock Avergy Industries for $720,000. On that date, Avergy had common stock of $100,000 and retained earnings of $420,000. Equipment and land were each undervalued by $50,000 on Avergy’s books. There was a $40,000 overvaluation of Bonds Payable, as well a $60,000 undervaluation of inventory.
9. What is the amount of goodwill recorded in connection with this combination?
b. $ 50,000
c. $ 80,000
10. The consolidation entries necessary for a date of acquisition balance sheet include all of the following, except:
a. Land debit, $50,000
b. Inventory debit, $60,000
c. Bonds Payable credit, $40,000
d. Equipment debit, $50,000
The following information applies to the following 3 Questions:
On January 1, 2020, Coldspring Corp. paid $770,000 to acquire Whitt Co. Coldspring used the equity method to account for the investment. The following information is available for the assets, liabilities, and stockholders’ equity accounts of Whitt:
|Book Value||Fair Value|
|Building (twenty year life)||255,000||310,000|
|Equipment (five year life)||185,000||190,000|
|Additional paid-in capital||300,000|
Whitt earned net income for 2020 of $125,000 and paid dividends of $18,000 during the year.
11. What is the AAP amortization expense for 2020?
a. $3,750 Debit
b. $1,750 Debit
c. $3,750 Credit
d. $1,750 Credit
12. For 2020, what is the balance in Equity Income on Coldspring’s books?
13. What is the balance in Equity Investment at the end of 2020?
14. Cleaverland purchased 100% of Omaha on January 1, 2019 for $650,000. On that date, Omaha’s stockholders’ equity was $650,000, and the recognized book values of Ottowa’s individual net assets approximated their fair values. Omaha had net incomes of $150,000 and $190,000 for 2019 and 2020, respectively. The subsidiary paid dividends amounting to $30,000 in both years. Cleaverland uses the equity method to account for its pre-consolidation investment in Omaha.
What was the balance in Equity Investment at December 31, 2020?
15. Brendon, Inc. acquired 100% of Weston Enterprises on January 2, 2020. During 2020, Brendon sold Weston for $700,000 goods which had cost $500,000. Weston still owned 40% of the goods at the end of the year. In 2021, Brendon sold goods with a cost of $500,000 to Weston for $700,000, and the buyer still owned 40% of the goods at year-end. For 2021, cost of goods sold was $1,000,000 for Brendon and $990,000 for Weston.
What was consolidated cost of goods sold for 2021?
Clearwater Co. owned all of the voting common stock of Kelley, Inc. On January 2, 2020 Clearwater sold equipment to Kelley for $350,000. The equipment had cost Clearwater $425,000. At the time of the sale, the balance in accumulated depreciation was $125,000. The equipment had a remaining useful life of eight years and no salvage value.
16. For the consolidated balance sheet at December 31, 2021, at would amount would the equipment (net) be included?
On April 1, 2020, Republic Company sold equipment to its wholly owned subsidiary, Barre Corporation, for $40,000. At the time of the transfer, the asset had an original cost (to Republic) of $60,000 and accumulated depreciation of $25,000. The equipment has a five year estimated remaining life.
Barre reported net income of $250,000, $270,000 and $310,000 in 2020, 2021, and 2022, respectively. Republic received dividends from Barre of $90,000, $105,000 and $120,000 for 2020, 2021, and 2022, respectively.
17. What was the amount of the gain or loss on the sale of equipment reported by Republic on its pre-consolidation income statement in 2020?
b. $ 5,000 gain
c. $20,000 loss
d. $35,000 gain
18. What was the amount of the credit to depreciation expense on the 2021 consolidation worksheet?
a. $ 750
Renner Company sold land to Bethany Enterprises, its parent, on June 1, 2020. The sale price was $218,000. The land originally cost Renner $239,000. Renner reported net income of $400,000 and $496,000 for 2020 and 2021, respectively. Bethany sold the land it purchased from Renner for $228,000 in 2022.
19. What is the consolidated amount of gain or loss on sale of land for 2022?
a. $10,000 gain
b. $10,000 loss
c. $11,000 loss
d. $21,000 loss
The following information pertains to the following 2 Questions.
On January 1, 2021, Gooch Company acquires 80% of the outstanding common stock of House Inc., for a purchase price of $12,400,000. It was determined that the fair value of the noncontrolling interest in the subsidiary is $3,100,000. The book value of the House’s stockholders’ equity on the date of acquisition is $10,000,000 and its fair value of net assets is $11,000,000. The acquisition-date acquisition accounting premium (AAP) is allocated $600,000 to equipment with a remaining useful life of 10 years, and $250,000 to a patent with a remaining useful life of 5 years.
20. The [A] consolidating journal entry (on Gooch’s books) to recognize the acquisition date AAP and allocate the ownership interest in those assets to the parent and noncontrolling interests includes:
a. Equity investment, credit, $5,350,000
b. Noncontrolling interest, credit, $3,100,000
c. House’s retained earnings, debit, $2,00,000
d. Noncontrolling interest, credit, $1,070,000
21. What is the acquisition accounting premium (AAP)?
The following information pertains to the following 2 Questions.
Assume the following facts relating to an 80% owned subsidiary company:
|BOY Stockholders’ Equity||$1,000,000|
|BOY unamortized AAP||125,000|
|Net income of subsidiary (not including AAP amortization)||210,000|
|AAP amortization expense||40,000|
|Dividends declared and paid to noncontrolling shareholders||10,000|
22. What is the net income attributable to noncontrolling interests for the year?
23. What is the amount reported as noncontrolling equity at the end of the year?
24. On January 1, 2021, a Parent company has a debt outstanding that was originally issued at a discount and was purchased, on issuance, by an unaffiliated party. On July 1, 2021, a Subsidiary of the Parent purchased the debt from the unaffiliated party. The debt was purchased by the Subsidiary at a slight premium.
The Parent is a calendar year company. Which one of the following statements is true?
a. The consolidated balance sheet at December 31, 2021 will report none of the debt, and the consolidated income statement for the year ended December 31, 2021 will not report any interest expense from the debt.
b. The consolidated balance sheet at December 31, 2021 will report none of the debt, and the consolidated income statement for the year ended December 31, 2021 will report a gain or loss from the constructive retirement of the debt and will report some interest expense from the debt.
c. The consolidated balance sheet at December 31, 2021 will report none of the debt, and the consolidated income statement for the year ended December 31, 2021 will report a gain or loss from the constructive retirement of the debt and will not report any interest expense from the debt.
d. The consolidated balance sheet at December 31, 2021 will report the debt, and the consolidated income statement for the year ended December 31, 2021 will report a gain or loss from the constructive retirement of the debt and will not report any interest expense from the debt.
25. A Parent Company owns 100% of its Subsidiary. During 2020, the Parent company reports net income (by itself, without any investment income from its Subsidiary) of $800,000 and the subsidiary reports net income of $500,000. The Parent had a bond payable outstanding on July 1, 2019, with a carry value equal to $440,000. The Subsidiary acquired the bond on July 1, 2019 for $400,000. During 2020, the Parent reported interest expense (related to the bond) of $40,000 while the Subsidiary reported interest income (related to the bond) of $37,500.
What is consolidated net income for the year ended December 31, 2020?
26. There are several steps in determining whether a special purpose entity is a VIE. Which of the following is not a step in determining whether a special purpose entity is a VIE?
a. Determine whether the cash flows of the SPE are used to repay the securities holders.
b. Determine whether the company is the primary beneficiary of the VIE.
c. Determine whether the business-related scope exception applies.
d. Determine whether the total equity investment at risk is not sufficient to permit the legal entity to finance its activities without additional subordinated financial support.
e. None of the above.
Calculation Problems. Select and do any two (2) out of the following three (3) problems. Show your procedures and calculations to obtain partial credits. Each question is 11 points. Total: 22 points.
C1. On January 1, 2020, Skyline Co. paid $200,000 for a 40% interest in Allen Industries. Allen Industries’ stockholders’ equity amounted to $300,000 on that date. The excess of purchase price over book values was due to an unrecorded patent valued at $200,000 with a 5-year life. During 2020, Allen Industries reported income of $80,000 and paid dividends of $18,000. During 2021, it reported income of $90,000 and dividends of $48,000.
Assume that Skyline Co. has significant influence over the operations of Allen Industries.
a. What is the amount of goodwill?
b. What is Equity Income for 2020?
c. What is the balance in the Equity Investment account at December 31, 2020?
d. What is Equity Income for 2021?
e. What is the balance in the Equity Investment account at December 31, 2021?
C2. Parent acquired Subsidiary on January 2, 2019 at a price $400,000 in excess of book value. Of that excess, $160,000 was allocated to an unrecorded Customer List with a 8-year life, with the remainder to Goodwill. The parent uses the equity method to account for its investment in its subsidiary.
On January2, 2022, Subsidiary sold equipment to Parent for $120,000. The equipment had a cost of $85,000 and accumulated depreciation of $40,000. The remaining life of the equipment was estimated at 8 years. Financial statements for the two companies for the year ended December 31, 2023 are presented below.
|Cost of goods sold||-425,000||-350,000|
|Income (loss) from subsidiary||352,675||_________|
|Retained Earnings, 1/1/23||$620,400||$240,000|
|Retained Earnings, 12/31/23||$1,012,075||$591,300|
|Cash and receivables||$850,000||$750,000|
|Property, plant & equipment (Net)||1,387,625||1,337,860|
|Additional paid-in capital||750,000||230,450|
|Retained Earnings, 12/31/23||1,012,075||591,300|
|Total Liabilities and Equities||$3,612,075||$2,352,860|
a. Prepare the journal entries on the books of Parent and Subsidiary to record the equipment sale.
b. Compute the amount of unrealized gain at January 1, 2023.
c. Prepare entries required under the equity method on Parent’s pre-consolidation books for 2023.
d. Prepare the consolidation entries for 2023.
C3. On January 1, 2020, Wondersome Company acquired a 70% interest in Philmore Company for a purchase price that was $240,000 over the book value of the Philmore’s Stockholders’ Equity on the acquisition date. Wondersome uses the cost method to account for its investment in Philmore. On the date of acquisition, Philmore’s retained earnings balance was $350,000. Wondersome assigned the acquisition-date AAP as follows:
|AAP Items||Initial Fair Value||Useful Life (years)|
Philmore sells inventory to Wondersome (upstream) which includes that inventory in products that it, ultimately, sells to customers outside of the controlled group. You have compiled the following data for the years ending 2022 and 2023:
|Transfer price for inventory sale||$94,500||$70,000|
|Cost of goods sold||-64,500||-45,000|
|% inventory remaining||30%||20%|
|Gross profit deferred||$9,000||$5,000|
The inventory not remaining at the end of the year has been sold outside of the controlled group.
The parent and the subsidiary report the following financial statements at December 31, 2023:
|Cost of goods sold||-1,580,000||-465,398|
|Income (loss) from subsidiary||10,500|
|Statement of Retained Earnings|
|BOY Retained Earnings||$3,360,350||$608,000|
|EOY Retained Earnings||$3,394,650||$674,002|
|Investment in subsidiary||634,550|
|Liabilities and Stockholders’ Equity:|
a. Compute the EOY noncontrolling interest equity balance
b. Prepare the consolidation journal entries.
©Cambridge Business Publishers, 2020
3-20 Advanced Accounting, 4th Edition
©Cambridge Business Publishers, 2012
Test Bank, Chapter 3 3-2