At the acquisition date, the date on which the investor company gains control of the investee compan

Topic: Goodwill Impairment Allocation

LO: 2

1. Allocation of goodwill impairment losses to the parent and the noncontrolling interests should be based on:

a. Relative interests of parent and noncontrolling interests in the carrying value of goodwill

b. Parent and noncontrolling interests relative ownership percentages in the subsidiary

c. The entire impairment loss is reported on the parent company’s books only

d. None of the above

Answer: a

Topic: Subsidiary Net Income LO: 6

2. When a subsidiary is acquired sometime after the first day of the fiscal year, which of the following statements is true?

a. Income from subsidiary is not recognized until there is an entire year of consolidated operations.

b. Income from subsidiary is recognized from date of acquisition to year-end.

c. Excess cost over acquisition value is recognized at the beginning of the fiscal year.

d. No goodwill can be recognized.

e. Income from subsidiary is recognized for the entire year.

Answer: b

Topic: Consolidated Balance Sheet LO: 2

3. When preparing a consolidated balance sheet, the noncontrolling interest amount must be presented:

a. It is not disclosed on the balance sheet

b. As a part of liabilities

c. As a part of stockholders' equity

d. In the notes to financial statements

Answer: c

Topic: Changes in Ownership Occurring During the Fiscal Year LO: 6

4. When one company buys a controlling interest in another company on April 1 (assuming a calendar year). How should the pre-acquisition subsidiary revenues and expenses be disclosed in the consolidated balances for the year of acquisition?

a. It is combined with parent company income statement balances

b. It is disclosed in consolidated retained earnings

c. Only post-acquisition revenues and expenses are included in consolidated totals.

d. Only post-acquisition revenues and expenses are included in consolidated totals on the financial statements, however, the revenue and earnings of the combined entity for the current reporting period as though the acquisition date for all business combinations that occurred during the year had been as of the beginning of the annual reporting period are included in supplemental pro forma information.

Answer: d

Topic: Sale of common Stock by the Subsidiary to Outside Parties LO: 6

5. How does a parent corporation account for the sale of a portion of an investment in a subsidiary?

a. If control is maintained after the sale, then the difference between the sales proceeds and the book value is an adjustment to the parent's owners' equity (APIC).

b. Sale proceeds are included as a part of consolidated revenues.

c. It is only footnoted.

d. Reported as a gain only if the equity method is used.

Answer: a

Topic: Deconsolidation of a Subsidiary LO: 6

6. When accounting for the deconsolidation of a subsidiary (parent loses control)

a. The parent recognizes a gain or loss on the deconsolidation.

b. The parent recognizes the would be gain or loss as a part of APIC.

c. The parent’s common shares are adjusted to reflect the new amount of outstanding shares.

d. Deconsolidation is only required when the parent company maintains control.

Answer: a

Topic: Goodwill Impairment Apportionment

LO: 1

7. Which of the following does not affect the computation of the noncontrolling interest in the net assets of a partially owned subsidiary?

a. Dividends declared by the subsidiary

b. Impairment of goodwill recognized in the business combination

c. Depreciation and amortization of differences between current fair values and carrying amounts of the subsidiary's identifiable net assets on the date of the business combination

d. All of the above answers are correct

Answer: d

Topic: Accounting for an Acquisition on the Date When Control Is Achieved LO: 6

8. At the acquisition date, the date on which the investor company gains control of the investee company, which of the following occur(s)?

a. All of the Equity Investments made by the investor in the investee must be revalued.

b. Any gains or losses as a result of the revaluation should be recognized currently in income.

c. Goodwill is measured (this only occurs on the date that the parent obtains control of the investee).

d. All of the above answers are correct.

Answer: d

Topic: Required Disclosure for Noncontrolling Interest LO: 6

9. When accounting for a noncontrolling interest, a parent company must disclose in the notes to the consolidated financial statements:

a. A separate schedule that shows the effects of any changes in a parent’s ownership in the subsidiary.

b. The nature of the parent’s continuing involvement with the subsidiary or entity acquiring the group of assets after it has been discontinued.

c. Whether the transaction that resulted in the deconsolidation was with a related party.

d. All of the above answers are correct.

Answer: d

Topic: Intercompany Profit Elimination LO: 3

10. Deferred profit on intercompany asset sales:

a. Is always 100% eliminated

b. Is eliminated only on upstream sales

c. Is accounted only by the noncontrolling interests

d. Is not considered as part of consolidating elimination entries

Answer: a

Topic: Intercompany Profit Elimination LO: 3

11. On November 8, 2013, Power Corp. sold land to Wood Co., its wholly owned subsidiary. The land cost $61,500 and was sold to Wood for $89,000. From the perspective of the combination, when is the gain on the sale of the land realized?

a. Proportionately over a designated period of years

b. When Wood Co. sells the land to a third party

c. No gain can be recognized

d. As Wood uses the land

Answer: b

Topic: Intercompany Profit Elimination

LO: 3

12. Baijan Company sells inventory to its parent, Cruz Company, at a profit during 2013. Which of the following would be a debit entry in the consolidated worksheet for 2013? a. Retained earnings

b. Cost of goods sold

c. Inventory

d. Additional paid-in capital

Answer: b

Topic: Intercompany Profit Elimination

LO: 3

13. Baijan Company sells inventory to its parent, Cruz Company, at a profit during 2014. Which of the following would be a credit entry in the consolidated worksheet for 2014? a. Retained earnings

b. Cost of goods sold

c. Inventory

d. Additional paid-in capital

Answer: c

Topic: Intercompany Profit Elimination LO: 3

14. Baijan Company sells inventory to its parent, Cruz Company, at a profit during 2013. Which of the following would be debited in the consolidated worksheet for 2014? a. Retained earnings

b. Cost of goods sold

c. Inventory

d. Investment Cruz Company

Answer: a

Topic: Intercompany Profit Elimination LO: 3

15. Baijan Company sells inventory to its subsidiary, Cruz Company, at a profit during 2013. If Baijan uses the equity method to account for its investment in Cruz, which of the following choices would be a debit entry in the consolidated worksheet for 2014? a. Retained earnings

b. Cost of goods sold

c. Inventory

d. Investment in Cruz Company

Answer: d

Topic: Intercompany Profit Elimination

LO: 3

16. What is the impact on the non-controlling interest of a subsidiary when there are downstream transfers of inventory between the parent and subsidiary companies?

a. A pro rata portion of deferred gain or loss is recognized in the income statement

b. Any resulting gain or loss is reported (in total) in the current period income statement

c. Any cash received is reported in Accumulated Other Comprehensive Income

d. None

Answer: d

Multiple Choice – Computational

Topic: Goodwill Accounting LO: 1

17. Porter Co. acquired 80% of the common stock of Kriz Corp. for $700,000. The fair value of Kriz's net assets was $800,000 and the book value was $725,000. The non-controlling interest shares of Kriz Corp. are not actively traded. Determine the total amount of goodwill to be recognized. a. $125,000

b. $75,000

c. $-0-

d. $60,000

e. $85,000

Answer: b

Topic: Allocation of Profit to Noncontrolling Interests LO: 2

18. Montrose Co. owns 80% of the voting common stock of Concord Corp. During 2014, Concord had revenues of $3,600,000 and expenses of $3,000,000. The amortization of excess cost allocations totaled $160,000 in 2014. The non-controlling interest's share of the earnings of Concord Corp. should be? a. $88,000

b. $120,000

c. $84,000

d. $80,000

e. $66,000

Answer: a

Topic: Sale of Common Stock by the Subsidiary to Outside Parties LO: 6

19. On January 1, 2013, Company P owns 100% of Company S that reports a Stockholders’ Equity of $500,000 and 20,000 shares of $1 par value common stock outstanding. This acquisition was made at book value. During the year, Company S sells 10,000 of its shares to outsiders for $30 per share. What is the amount that must be reported in Company P’s Equity Investment Account at December 31, 2013? a. $650,000

b. $795,000

c. $520,000

d. $-0Answer: c The following information pertains to questions 20 - 25.

On January 1, 2014, Woody Company acquires 80% of the outstanding common stock of Buzz, for a purchase price of $785,000. It was determined that the fair market value of the noncontrolling interest in the subsidiary is $190,000. The book value of the Buzz’s stockholders’ equity on the date of acquisition is $500,000 and its fair market value of identifiable tangible and intangible assets is $900,000. The excess fair market value over book value is allocated $200,000 to equipment with a remaining useful life of 10 years, and $200,000 to a patent with a remaining useful life of 8 years.

Topic: Acquisition Accounting Premium LO: 1

20. The journal entry (on Woody’s books) to recognize the acquisition date AAP assets and allocate the ownership interest in those assets to the parent and noncontrolling interests (entry A) includes:

a. Equity investment, credit, $400,000

b. Noncontrolling interest, credit, $100,000

c. Buzz retained earnings, debit, $332,500

d. Noncontrolling interest, credit, $90,000

Answer: d

Topic: Acquisition Accounting Premium LO: 1

21. What is the acquisition accounting premium (AAP)?

a. $475,000

b. $375,000

c. $400,000

d. $425,000

Answer: a

Topic: Goodwill LO: 1

22. Buzz’s property, plant and equipment balance is undervalued by $500,000. Woody has assigned a useful life of 50 years. Determine the total goodwill to be recognized at acquisition date. a. $125,000

b. $80,000

c. $75,000

d. None of the above answers is correct

Answer: c

Topic: Acquisition Accounting Premium LO: 1

23. What portion of the AAP should be assigned to noncontrolling interest?

a. $90,000

b. $75,000

c. $-0-

d. $100,000

Answer: a

Topic: Allocating Profit to Controlling Interest LO: 2

24. Assume that during the year ended December 31, 2014, Buzz reports net income of $210,000 and pays dividends of $21,000. Determine the December 31, 2014 ending balance in Woody Company’s equity investment account. (Hint: Do not overlook the effect of amortization AAP assets).

a. $794,500

b. $785,000

c. $860,600

d. $824,600

Answer: d

Topic: Allocating Profit to Noncontrolling Interest LO: 2

25. Given the information in the previous question, determine the December 31, 2014 amount of the noncontrolling interest.

a. $190,000

b. $199,900

c. $211,000

d. $208,900

Answer: b

Topic: Accounting for an Acquisition Achieved in Stages LO: 6

26. Assume that Seiden Company gains control of Rimco, its subsidiary, with the purchase of a 40% interest paid in cash. The Equity Investment account reports a balance of $75,000 on the acquisition date and represents a 30% interest in Rimco. The total value of Rimco on the acquisition date is $300,000 (assume no premium for control). The journal entry to record the acquisition includes:

a. Cash, credit, $300,000

b. Gain on revaluation of Rimco, credit, $15,000

c. Loss on revaluation of Rimco, debit, $15,000

d. None of the above

Answer: b

Topic: Sale of Equity investment by the Investor LO: 6

27. Simi Company sells 40% of the shares it owns in Milburn Company for $300,000. The Equity Investment relating to these shares is $275,000 on the date of sale. The journal entry to record the sale assuming Simi keeps control over Milburn includes: a. APIC, credit, $22,500

b. Equity investment, credit, $300,000

c. APIC, credit, $25,000

d. APIC, debit, $25,000

Answer: c

The following information pertains to questions 28 and 29.

Assume that, on January 1, 2013, a P Company acquired an 80% interest in its subsidiary for a purchase price that was $250,000 over the book value of the S Company’s Stockholders’ Equity on the acquisition date. The parent allocated the excess to the following [A] assets:

[A] Asset

Initial Fair Value

Useful Life (years)

PPE, net

$ 50,000

10

Customer List

75,000

10

Goodwill Indefinite

P Company and S Company report the following financial statements at December 31, 2017:

Income Statement

Parent

Subsidiary

Sales $ 7,330,000

$ 935,250

Cost of goods sold (5,131,000)

(561 ,150)

Gross Profit 2,199,000

374,100

Equity income 92,248

Operating expenses (1,392,700)

(243 ,165)

Net income $ 898 ,548

$ 130 ,935

Statement of Retained Earnings

Parent

Subsidiary

BOY Retained Earnings $3,682,592

$483,213

Net income 898,548

130,935

Dividends (199 ,159)

(19 ,641)

EOY Retained Earnings $4,381,981

$594 ,507

Balance Sheet

Parent

Subsidiary

Assets:

Cash

$ 411,313

$ 65,756

Accounts receivable

938,240

216,978

Inventory

1,422,020

278,705

Equity Investment

1,378,423

PPE, net

5,374,356

640 ,335

$9,524,352

$1,201,773

Liabilities and Stockholders’ Equity:

Current Liabilities

$1,053,321

$ 216,978

Long-term Liabilities

2,000,000

500,000

Common Stock

1,198,455

62,350

APIC

890,595

77,938

Retained Earnings

4,381,981

594 ,507

$9,524,352

$1,201,773

Topic: Allocation of Profit to Controlling Interest LO: 2

28. Based on the given financial statements, the computation of the equity income of $92,248 reported by the parent includes a deduction for:

a. Amount attributed to depreciation and amortization, $35,000

b. Amount attributed to noncontrolling interest, $21,187

c. Dividends declared and paid by S Company, $25,000

d. Goodwill amortization, $20,000

Answer: b

Topic: Apportionment of Goodwill in the Presence of Noncontrolling Interests LO: 1

29. The EOY Equity Investment balance of $1,378,423 (4 years subsequent to the acquisition) includes:

a. Dividends of $247,400

b. Goodwill allocation of $200,000

c. Goodwill allocation of $125,000

d. BOY [A] assets excluding Goodwill, $200,000

Answer: c

The following information pertain to questions 30 and 31

Assume the following facts relating to an 80% owned subsidiary company:

BOY Stockholders’ Equity

$600,000

BOY AAP assets

Net income of subsidiary (not including [A] asset depreciation

50,000

and amortization)

125,000

AAP assets depreciation and amortization expense

20,000

Dividends declared and paid to noncontrolling shareholders

2,500

Topic: Allocation of Profit to Noncontrolling Interests LO: 2

30. What is the net income attributable to noncontrolling interests for the year?

a. $20,000

b. $25,000

c. $26,000

d. $21,000

Answer: d

Topic: Accounting for Noncontrolling Interests LO: 1, 2

31. What is the amount reported as noncontrolling equity at the end of the year?

a. $151,000

b. $148,500

c. $120,000

d. $153,500

Answer: b

The following information pertain to questions 32 and 33

Assume the following facts are about a parent and its 70% owned subsidiary company:

Parent

Subsidiary

Net income

$100,000

$60,000

Common shares outstanding

20,000

14,000

(20,000 = 70% owned by parent)

Convertible Preferred Stock

Dividends = $10,000

Convertible into 5,000 shares of common stock

Convertible Bonds

Interest expense after tax

= $8,000

Convertible into 2,500 shares of common stock

Topic: Consolidated Earnings per Share LO: 5

32. What is the basic earnings per share?

a. $2.89

b. $6.60

c. $6.80

d. $2.90

Answer: b

Topic: Consolidated Earnings per Share LO: 5

33. What is the diluted earnings per share?

a. $5.55

b. $6.58

c. $6.00

d. None of the above

Answer: d

Topic: Sale of Common Stock by the Subsidiary to Outside Parties LO: 6

34. Assume that a Shearer Company owns 100% of Skeran Corporation. Skeran reports a

Stockholders’ Equity of $250,000. The Equity investment was acquired at book value (i.e., no [A] assets). Skeran sells a 10% interest to outsiders for $75,000. The entry made by Shearer as a result of the sale of stock by Skeran includes: a. APIC credit, $25,000

b. APIC credit, $42,500

c. APIC credit, $75,000

d. APIC credit, $125,000

Answer: b

The following information pertains to questions 35 and 36:

Murphy Company increased its ownership in Lander Company from 80% to 90% by the purchase of additional shares of the Lander’s outstanding stock from noncontrolling shareholders for a purchase price of $100,000. The noncontrolling interest reports a balance of $400,000 on that date.

Topic: Additional Purchase of Stock LO: 6

35. The journal entry by Murphy to record the purchase includes:

a. Equity investment debit, $200,000

b. Equity investment debit, $100,000

c. Equity investment debit, $400,000

d. Equity investment debit, $300,000

Answer: a

Topic: Additional Purchase of Stock LO: 6

36. The journal entry by Murphy to record the purchase includes:

a. APIC credit, $400,000

b. APIC credit, $100,000

c. APIC credit, $200,000

d. Cash credit, $200,000

Answer: b

Topic: Allocation of Profit LO: 2

37. Beck Company is a wholly-owned subsidiary company which reports sales of $250,000 and net income of $50,000 for the calendar year in which it is acquired on July 1st. What amount of sales and net income are includable in consolidated income statement in the year of acquisition assuming that sales and net income are earned evenly over the year? a. Sales $125,000; Net income $25,000

b. Sales $100,000; Net income $20,000

c. Sales $75,000; Net income $12,500

d. Answer cannot be determined based on the given information

Answer: a

Topic: Allocation of Profit to Noncontrolling Interest LO: 2

38. Taylor Co. owns 70% of the voting common stock of Meehan Corp. During 2014, Meehan had revenues of $1,250,000 and expenses of $1,000,000. The amortization of excess cost allocations totaled $30,000 in 2014. The non-controlling interest's share of the earnings of Meehan Corp. is calculated to be: a. $75,000

b. $66,000

c. $84,000

d. $80,000

Answer: b

Topic: Allocation of Profit to Controlling Interest LO: 2

39. Taylor Co. owns 70% of the voting common stock of Meehan Corp. During 2014, Meehan had revenues of $1,250,000 and expenses of $1,000,000. The amortization of excess cost allocations totaled $30,000 in 2014. What is the net effect of the inclusion of Meehan on consolidated net income for 2014? a. $154,000

b. $175,000

c. $250,000

d. $220,000

Answer: a

Exercises 4. Thing Company acquired 65% of Label Corp. for $1,300,000. The total fair value of Label's net Stockholders’ Equity was $1,750,000. The book value of Label’s building and equipment were undervalued by $60,000. Each asset had a ten-year useful life. The book value of Label’s other assets and liabilities, were equal to fair value.

Required: Determine the amount of goodwill associated with Thing's purchase of Label.

Answer:

Implied value

$ 2,000,000

($1,300,000 / 0.65)

Fair value (Label’s)

(1,750,000)

Goodwill

$ 250,000