The Reporting Entity and Consolidated Financial Statements

Multiple Choice Questions

On January 3, 2009, 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, 2009, are as follows:

Based on the preceding information, what amount should be reported as noncontrolling interest in net assets in Jane Company’s December 31, 2009, consolidated balance sheet? A. $90,000

B. $54,000 C. $36,000 D. $0

Based on the preceding information, what amount will Jane Company report as common stock outstanding in its consolidated balance sheet at December 31, 2009?

A. $120,000 B. $180,000 C. $156,000 D. $264,000

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Chapter 03 – The Reporting Entity and Consolidated Financial Statements

Beta Company acquired 100 percent of the voting common shares of Standard Video

Corporation, its bitter rival, by issuing bonds with a par value and fair value of $150,000.

Immediately prior to the acquisition, Beta reported total assets of $500,000, liabilities of

$280,000, and stockholders’ equity of $220,000. At that date, Standard Video reported total

assets of $400,000, liabilities of $250,000, and stockholders’ equity of $150,000. Included in

Standard’s liabilities was an account payable to Beta in the amount of $20,000, which Beta

included in its accounts receivable.

Based on the preceding information, what amount of total assets did Beta report in its balance sheet immediately after the acquisition?

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

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

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

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Chapter 03 – The Reporting Entity and Consolidated Financial Statements

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

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.

Xing Corporation owns 80 percent of the voting common shares of Adams Corporation. Noncontrolling interest was assigned $24,000 of income in the 2009 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

On December 31, 2009, 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

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Chapter 03 – The Reporting Entity and Consolidated Financial Statements

Princeton Company acquired 75 percent of the common stock of Sheffield Corporation on December 31, 2009. 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

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

Under FASB 141R, consolidation follows largely which theory approach?

Proprietary

Parent company

Entity

Variable

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Chapter 03 – The Reporting Entity and Consolidated Financial Statements

On January 3, 2009, 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 2009.

Based on the preceding information, what amount will be assigned to the noncontrolling interest on January 3, 2009, in the consolidated balance sheet?

A. $86,000 B. $44,000 C. $68,800 D. $50,000

Based on the preceding information, what will be the total stockholders’ equity in the consolidated balance sheet as of January 3, 2009?

A. $1,580,000 B. $1,064,000 C. $1,150,000 D. $1,236,000

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Chapter 03 – The Reporting Entity and Consolidated Financial Statements

Based on the preceding information, what will be the amount of net income reported by Frazer Corporation in 2009?

A. $44,000 B. $55,000 C. $66,000 D. $36,000

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.

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.

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

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

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Chapter 03 – The Reporting Entity and Consolidated Financial Statements

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

Quid Corporation acquired 75 percent of Pro Company’s common stock on December 31, 2006. Goodwill (attributable to Quid’s acquisition of Pro shares) of $300,000 was reported in the consolidated financial statements at December 31, 2006. 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

Quid Corporation acquired 60 percent of Pro Company’s common stock on December 31, 2004. Goodwill (attributable to Quid’s acquisition of Pro shares) of $150,000 was reported in the consolidated financial statements at December 31, 2004. Proprietary theory approach was used in determining this amount. What is the amount of goodwill to be reported under entity theory approach?

A. $150,000 B. $200,000 C. $250,000 D. $100,000

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.

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Chapter 03 – The Reporting Entity and Consolidated Financial Statements

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.

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.

On January 1, 2009, 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.

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

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

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Chapter 03 – The Reporting Entity and Consolidated Financial Statements

On January 1, 2009, 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