Consolidated Financial Statements and Outside Ownership

File: Chapter 04 – Consolidated Financial Statements and Outside Ownership

 

Multiple Choice:

 

[QUESTION]

1. For business combinations involving less than 100 percent ownership, the acquirer recognizes and measures all of the following at the acquisition date except:
2. A) Identifiable assets acquired, at fair value.
3. B) Liabilities assumed, at book value.
4. C) Non-controlling interest, at fair value.
5. D) Goodwill, or a gain from bargain purchase.
6. E) None of these choices is correct.

Answer: B

Learning Objective: 04-02

Topic: Acquisition-date―Consolidated balance sheet

Difficulty: 2 Medium

Blooms: Remember

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

REFERENCE: 04-01

When Jolt Co. acquired 75% of the common stock of Yelts Corp., Yelts owned land with a book value of $70,000 and a fair value of $100,000.

 

[QUESTION]

REFER TO: 04-01

2. What amount should have been reported for the land in a consolidated balance sheet at the acquisition date?
3. A) $ 52,500.
4. B) $ 70,000.
5. C) $ 75,000.
6. D) $ 92,500.
7. E) $100,000.

Answer: E

Learning Objective: 04-02

Topic: Acquisition-date―Consolidated balance sheet

Difficulty: 1 Easy

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: $100,000 FV of Land at Acquisition

 

[QUESTION]

REFER TO: 04-01

3. What is the total amount of excess land allocation at the acquisition date?
4. A) $
5. B) $30,000.
6. C) $22,500.
7. D) $25,000.
8. E) $17,500.

Answer: B

Learning Objective: 04-05

Topic: Acquisition-date―Fair value allocation

Difficulty: 1 Easy

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: FV $100,000 – BV $70,000 = $30,000

 

[QUESTION]

REFER TO: 04-01

4. What is the amount of excess land allocation attributed to the controlling interest at the acquisition date?
5. A) $
6. B) $30,000.
7. C) $22,500.
8. D) $25,000.
9. E) $17,500.

Answer: C

Learning Objective: 04-05

Topic: Acquisition-date―Fair value allocation

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: FV – BV ($30,000) × .75 = $22,500

 

[QUESTION]

REFER TO: 04-01

5. What is the amount of excess land allocation attributed to the noncontrolling interest at the acquisition date?
6. A) $
7. B) $30,000.
8. C) $22,500.
9. D) $ 7,500.
10. E) $17,500.

Answer: D

Learning Objective: 04-05

Topic: Acquisition-date―Fair value allocation

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: FV – BV ($30,000) × .25 = $7,500

 

[QUESTION]

6. Which of the following methods is not used to value a noncontrolling interest under circumstances where a control premium is applied to determine the appropriate value for such interest?
7. A) Valuation models based on subsidiary discounted cash flows.
8. B) Valuation models based on subsidiary residual income projections.
9. C) Comparison with comparable investments.
10. D) The application of a safe harbor discount rate.
11. E) Fair value based on market trades.

Answer: D

Learning Objective: 04-02

Learning Objective: 04-07

Topic: Acquisition-date―Fair value of subsidiary

Topic: Goodwill―With control premium

Difficulty: 2 Medium

Blooms: Understand

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

REFERENCE: 04-02

Perch Co. acquired 80% of the common stock of Float Corp. for $1,600,000.  The fair value of Float’s net assets was $1,850,000, and the book value was $1,500,000.  The noncontrolling interest shares of Float Corp. are not actively traded.

 

[QUESTION]

REFER TO: 04-02

7. What is the total amount of goodwill recognized at the date of acquisition?
8. A) $150,000.
9. B) $250,000.
10. C) $
11. D) $120,000.
12. E) $170,000.

Answer: A

Learning Objective: 04-03

Topic: Goodwill―No control premium

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: FV $1,850,000 – FV of 100% of Float’s Stock based on Purchase Price  ($1,600,000 / .80) $2,000,000 = ($150,000) Goodwill

 

[QUESTION]

REFER TO: 04-02

8. What amount of goodwill should be attributed to Perch at the date of acquisition?
9. A) $150,000.
10. B) $250,000.
11. C) $
12. D) $120,000.
13. E) $170,000.

Answer: D

Learning Objective: 04-03

Topic: Goodwill―No control premium

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: (Purchase Price for 80%) $1,600,000 – (FV $1,850,000 × .80 = $1,480,000) = $120,000

 

[QUESTION]

REFER TO: 04-02

9. What amount of goodwill should be attributed to the noncontrolling interest at the date of acquisition?
10. A) $
11. B) $ 20,000.
12. C) $ 30,000.
13. D) $100,000.
14. E) $120,000.

Answer: C

Learning Objective: 04-03

Topic: Goodwill―No control premium

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: $150,000 Goodwill × .20 = $30,000 to Noncontrolling Interest

 

[QUESTION]

REFER TO: 04-02

10. What is the dollar amount of noncontrolling interest that should appear in a consolidated balance sheet prepared at the date of acquisition?
11. A) $350,000.
12. B) $300,000.
13. C) $400,000.
14. D) $370,000.
15. E) $0.

Answer: C

Learning Objective: 04-02

Learning Objective: 04-05

Learning Objective: 04-06

Topic: Acquisition-date―Consolidated balance sheet

Topic: Acquisition-date―Fair value of subsidiary

Topic: Noncontrolling interest―Calculate balance

Topic: Noncontrolling interest―Statement presentation

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: FV of Stock at Acquisition Date for 100% ($1,600,000 / .80) $2,000,000 × .20 = $400,000

 

[QUESTION]

REFER TO: 04-02

11. What is the dollar amount of Float Corp.’s net assets that would be represented in a consolidated balance sheet prepared at the date of acquisition?
12. A) $1,600,000.
13. B) $1,480,000.
14. C) $1,200,000.
15. D) $1,780,000.
16. E) $1,850,000.

Answer: E

Learning Objective: 04-02

Learning Objective: 04-05

Topic: Acquisition-date―Consolidated balance sheet

Topic: Acquisition-date―Fair value allocation

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: FV of Assets Acquired = $1,850,000

 

[QUESTION]

REFER TO: 04-02

12. What is the dollar amount of fair value over book value differences attributed to Perch at the date of acquisition?
13. A) $120,000.
14. B) $150,000.
15. C) $280,000.
16. D) $350,000.
17. E) $370,000.

Answer: C

Learning Objective: 04-05

Topic: Acquisition-date―Fair value allocation

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: FV $1,850,000 – BV $1,500,000 = $350,000 × .80 = $280,000

 

REFERENCE: 04-03

Femur Co. acquired 70% of the voting common stock of Harbor Corp. on January 1, 2019.  During 2019, Harbor had revenues of $2,500,000 and expenses of $2,000,000.  The amortization of fair value allocations totaled $60,000 in 2019. Not including its investment in Harbor, Femur Co. had its own revenues of $4,500,000 and expenses of $3,000,000 for the year 2019.

 

[QUESTION]

REFER TO: 04-03

13. The noncontrolling interest’s share of the earnings of Harbor Corp. for 2019 is calculated to be
14. A) $132,000.
15. B) $150,000.
16. C) $168,000.
17. D) $160,000.
18. E) $0.

Answer: A

Learning Objective: 04-04

Topic: Consolidated net income―Allocation

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Revenue $2,500,000 – Expenses $2,000,000 = $500,000 – $60,000 = $440,000 × .30 = $132,000

 

[QUESTION]

REFER TO: 04-03

14. What amount would Femur Co. report as consolidated net income for 2019?
15. A) $440,000.
16. B) $500,000.
17. C) $1,500,000.
18. D) $1,940,000.
19. E) $2,000,000.

Answer: D

Learning Objective: 04-04

Topic: Consolidated net income

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Femur Net Income (Femur Revenue $4,500,000 less Femur Expenses $3,000,000 = $1,500,000) + Harbor Net Income (Harbor Revenue $2,500,000 – Harbor Expenses $2,000,000 – Amortizations for Excess Fair Value over Book Value = $500,000 – $60,000 = $440,000) = $1,500,000 + $440,000 = $1,940,000

 

[QUESTION]

REFER TO: 04-03

15. What amount of consolidated net income for 2019 should be allocated to Femur’s controlling interest in Harbor?
16. A) $ 582,000
17. B) $1,050,000
    C) $1,358,000
    D) $1,808,000
    E) $2,140,000

Answer: D

Learning Objective: 04-04

Topic: Consolidated net income―Allocation

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Total Consolidated Net Income ($1,940,000 – 132,000 to NCI) = $1,808,000

 

REFERENCE: 04-04

Denber Co. acquired 60% of the common stock of Kailey Corp. on September 1, 2019.  For 2019, Kailey reported revenues of $810,000 and expenses of $630,000, not including its investment in Denber, and all reflected evenly throughout the year.  The annual amount of amortization related to this acquisition was $15,000.

 

[QUESTION]

REFER TO: 04-04

16. In consolidation, the total amount of expenses related to Kailey, and to Denber’s acquisition of Kailey, for 2019 is determined to be
17. A) $153,750.
18. B) $161,250.
19. C) $205,000.
20. D) $210,000.
21. E) $215,000.

Answer: E

Learning Objective: 04-08

Topic: Midyear acquisition

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Expenses $630,000 × 4/12 = $210,000; Amortization $15,000 × 4/12 = $5,000 =  $215,000

 

[QUESTION]

REFER TO: 04-04

17. What is the effect of including Kailey in consolidated net income for 2019?
18. A) $31,000.
19. B) $33,000.
20. C) $55,000.
21. D) $60,000.
22. E) $39,000.

Answer: C

Learning Objective: 04-08

Topic: Midyear acquisition

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Revenue $810,000 – Expenses $630,000 = Income $180,000 × 4/12 = $60,000 – Annual Amortization ($15,000 × 4/12) = $55,000

 

[QUESTION]

REFER TO: 04-04

18. What is the amount of Kailey’s net income to the controlling interest for 2019?
19. A) $31,000.
20. B) $33,000.
21. C) $55,000.
22. D) $60,000.
23. E) $39,000.

Answer: B

Learning Objective: 04-08

Topic: Midyear acquisition

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Revenue $810,000 – Expenses $630,000 = Income $180,000 × 4/12 = $60,000 – Annual Amortization ($15,000 × 4/12) = $55,000 × .60 = $33,000

 

[QUESTION]

REFER TO: 04-04

19. What is the amount of the noncontrolling interest’s share of Kailey’s income for 2019?
20. A) $22,000.
21. B) $24,000.
22. C) $48,000.
23. D) $66,000.
24. E) $72,000.

Answer: A

Learning Objective: 04-08

Topic: Midyear acquisition

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Total Income for September-December = $55,000 – Controlling Interest Portion $33,000 = $22,000. Revenue $810,000 – Expenses $630,000 = Income $180,000 × 4/12 = $60,000 – Annual Amortization ($15,000 × 4/12) = $55,000 × .40 = $22,000

 

 

[QUESTION]

20. MacHeath Inc. bought 60% of the outstanding common stock of Nomes Inc. in an acquisition that resulted in the recognition of goodwill. Nomes owned a piece of land that cost $250,000 but was worth $600,000 at the date of acquisition.  What value would be attributed to this land in a consolidated balance sheet at the date of acquisition?

1. A) $250,000.
2. B) $150,000.
3. C) $600,000.
4. D) $360,000.
5. E) $460,000.

Answer: C

Learning Objective: 04-02

Topic: Acquisition-date―Consolidated balance sheet

Difficulty: 1 Easy

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: FV of the Land $600,000

 

[QUESTION]

21. Kordel Inc. acquired 75% of the outstanding common stock of Raxston Corp. Raxston currently owes Kordel $500,000 for inventory acquired over the past few months.  In preparing consolidated financial statements, what amount of Raxston’s liability should be eliminated?
22. A) $375,000
23. B) $125,000
24. C) $300,000
25. D) $500,000
26. E) $0.

Answer: D

Learning Objective: 04-05

Topic: Worksheet procedures

Difficulty: 1 Easy

Blooms: Understand

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: BV & FV of the Existing Receivable $500,000

 

REFERENCE: 04-05

Royce Co. acquired 60% of Park Co. for $420,000 on December 31, 2019 when Park’s book value was $560,000.  The Royce stock was not actively traded.  On the date of acquisition, Park had equipment (with a ten-year life) that was undervalued in the financial records by $140,000.  One year later, the two companies provided the selected amounts shown below. Additionally, no dividends have been paid.

[QUESTION]

REFER TO: 04-05

22. What amount of consolidated net income for 2020 is attributable to Royce’s controlling interest?
23. A) $686,000.
24. B) $560,000.
25. C) $644,000.
26. D) $635,600.
27. E) $691,600.

Answer: D

Learning Objective: 04-04

Topic: Consolidated net income―Allocation

Difficulty:  2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: [Parent’s Income ($1,260,000 – $700,000 = $560,000)] + [Sub’s Income ($560,000 – $420,000) × .60 = $84,000] – [Excess Equipment Amortization for 2020 ($140,000 / 10) × .60 = $8,400] = $635,600

 

[QUESTION]

REFER TO: 04-05

23. What is the noncontrolling interest’s share of the subsidiary’s net income for the year ended December 31, 2020 and what is the ending balance of the noncontrolling interest in the subsidiary at December 31, 2020?
24. A) $56,000 and $280,000.
25. B) $50,400 and $218,400.
26. C) $56,000 and $224,000.
27. D) $56,000 and $336,000.
28. E) $50,400 and $330,400.

Answer: E

Learning Objective: 04-04

Learning Objective: 04-05

Topic: Consolidated net income―Allocation

Topic: Noncontrolling interest―Calculate balance

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: [Sub’s Income ($560,000 – $420,000) × .40 = $56,000] – [Excess Equipment Amortization for 2020 ($140,000 / 10) × .40 = $5,600] = $50,400

[Noncontrolling Interest at Acquisition (FV $700,000 × .40) = $280,000] + [Noncontrolling Interest 2020 Income $56,000] – [Excess Equipment Amortization ($140,000 / 10) × .40] = $330,400

 

[QUESTION]

REFER TO: 04-05

24. What is the consolidated balance of the Equipment account at December 31, 2020?
25. A) $644,400.
26. B) $784,000.
27. C) $719,600.
28. D) $770,000.
29. E) $775,600.

Answer: D

Learning Objective: 04-05

Topic: Consolidated totals―Individual items

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: [Parent’s Equipment $364,000] + [Sub’s Equipment $280,000] + [Fair value allocation less one year of  Amortization $140,000 – $14,000] = $770,000

 

REFERENCE: 04-06

On January 1, 2019, Palk Corp. and Spraz Corp. had condensed balance sheets as follows:

 

 

On January 2, 2019, Palk borrowed the entire $84,000 it needed to acquire 80% of the outstanding common shares of Spraz.  Shares of Spraz are not actively traded on the market. The loan was to be paid in ten equal annual principal payments, plus interest, beginning December 31, 2019.  The excess consideration transferred over the underlying book value of the acquired net assets was allocated 60% to inventory and 40% to goodwill.

 

[QUESTION]

REFER TO: 04-06

25. What amount represents consolidated current assets at January 2, 2019?
26. A) $127,000.
27. B) $129,800.
28. C) $143,800.
29. D) $148,000.
30. E) $135,400.

Answer: D

Learning Objective: 04-02

Learning Objective: 04-05

Topic: Acquisition-date―Consolidated balance sheet

Topic: Acquisition-date―Fair value allocation

Topic: Consolidated totals―Individual items

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: [Parent’s Current Assets $99,000] + [Sub’s Current Assets $28,000] + [Excess Consideration to Inventory ($105,000 – $70,000 = $35,000 × .60) $21,000] = $148,000

 

[QUESTION]

REFER TO: 04-06

26. What is the amount attributable to consolidated noncurrent assets at January 2, 2019?
27. A) $195,000.
28. B) $192,200.
29. C) $186,600.
30. D) $181,000.
31. E) $169,800.

Answer: A

Learning Objective: 04-02

Learning Objective: 04-03

Learning Objective: 04-05

Topic: Acquisition-date―Consolidated balance sheet

Topic: Goodwill―No control premium

Topic: Consolidated totals―Individual items

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: [Parent’s Non-Current Assets $125,000] + [Sub’s Non-Current Assets $56,000] + [Excess Consideration to Goodwill ($105,000 – $70,000 = $35,000 × .40) $14,000] = $195,000

 

[QUESTION]

REFER TO: 04-06

27. What are the total consolidated current liabilities at January 2, 2019?
28. A) $53,200.
29. B) $56,000.
30. C) $64,400.
31. D) $42,000.
32. E) $70,000.

Answer: C

Learning Objective: 04-02

Learning Objective: 04-05

Topic: Acquisition-date―Consolidated balance sheet

Topic: Consolidated totals―Individual items

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: [Parent’s Current Liabilities $42,000] + [Sub’s Current Liabilities $14,000] + [Current Portion of Acquisition Loan ($84,000 / 10) = $8,400] = $64,400

 

[QUESTION]

REFER TO: 04-06

28. What is consolidated stockholders’ equity at January 2, 2019?
29. A) $112,000.
30. B) $133,000.
31. C) $168,000.
32. D) $182,000.
33. E) $203,000.

Answer: B

Learning Objective: 04-02

Learning Objective: 04-05

Learning Objective: 04-06

Topic: Acquisition-date―Consolidated balance sheet

Topic: Consolidated totals―Individual items

Topic: Noncontrolling interest―Statement presentation

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Parent’s Equity $112,000 + Noncontrolling Interest $21,000 = $133,000

 

[QUESTION]

29. In measuring the noncontrolling interest immediately following the date of acquisition, which of the following would not be indicative of the value attributed to the noncontrolling interest?
30. A) Fair value based on stock trades of the acquired company.
31. B) Subsidiary cash flows discounted to present value.
32. C) Book value of subsidiary net assets.
33. D) Projections of residual income.
34. E) Consideration transferred by the parent company that implies a total subsidiary value.

Answer: C

Learning Objective: 04-02

Topic: Acquisition-date―Fair value of subsidiary

Difficulty: 2 Medium

Blooms: Remember

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

30. When a parent uses the equity method throughout the year to account for its 80% investment in an acquired subsidiary, which of the following statements is false at the date immediately preceding the date on which adjustments are made on the consolidated worksheet?
31. A) Parent company net income equals controlling interest in consolidated net income.
32. B) Parent company retained earnings equals consolidated retained earnings.
33. C) Parent company total assets equals consolidated total assets.
34. D) Parent company dividends equals consolidated dividends.
35. E) Goodwill is not recorded on the parent’s books.

Answer: C

Learning Objective: 04-04

Learning Objective: 04-05

Topic: Consolidated net income―Allocation

Topic: Investment account balance―Equity method

Topic: Worksheet procedures

Difficulty: 2 Medium

Blooms: Analyze

AACSB: Analytical Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

31. When a parent uses the initial value method throughout the year to account for its 80% investment in an acquired subsidiary, which of the following statements is true at the date immediately preceding the date on which adjustments are made on the consolidated worksheet?
32. A) Parent company net income equals consolidated net income.
33. B) Parent company retained earnings equals consolidated retained earnings.
34. C) Parent company total assets equals consolidated total assets.
35. D) Parent company dividends equal consolidated dividends.
36. E) Goodwill is recorded on the parent’s books.

Answer: D

Learning Objective: 04-05

Topic: Initial value or Partial equity accounting

Topic: Worksheet procedures

Difficulty: 2 Medium

Blooms: Understand

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

32. When a parent uses the partial equity method throughout the year to account for its 80% investment in an acquired subsidiary, which of the following statements is true at the date immediately preceding the date on which adjustments are made on the consolidated worksheet?
33. A) Parent company net income equals consolidated net income.
34. B) Parent company retained earnings equals consolidated retained earnings.
35. C) Parent company total assets equals consolidated total assets.
36. D) Parent company dividends equal consolidated dividends.
37. E) Goodwill is recorded on the parent’s books.

Answer: D

Learning Objective: 04-05

Topic: Initial value or Partial equity accounting

Topic: Worksheet procedures

Difficulty: 2 Medium

Blooms: Understand

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

33. In a step acquisition, which of the following statements is false?
34. A) The acquisition method views a step acquisition essentially the same as a single step acquisition.
35. B) Income from subsidiary is computed by applying a partial year for a new purchase acquired during the year.
36. C) Income from subsidiary is computed for the entire year for a new purchase acquired during the year.
37. D) Obtaining control through a step acquisition is a significant measurement event.
38. E) Pre-acquisition earnings are not included in the consolidated income statement.

Answer: C

Learning Objective: 04-09

Topic: Step acquisition―Additional shares post-control

Topic: Step acquisition―Resulting in control

Difficulty: 2 Medium

Blooms: Remember

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

34. Which of the following statements is false regarding multiple acquisitions of a subsidiary’s existing common stock?
35. A) The parent recognizes a larger percent of subsidiary income.
36. B) A step acquisition resulting in control may result in a parent recognizing a gain on revaluation.
37. C) The book value of the subsidiary will increase.
38. D) The parent’s percent ownership in subsidiary will increase.
39. E) Noncontrolling interest in subsidiary’s net income will decrease.

Answer: C

Learning Objective: 04-09

Topic: Step acquisition―Resulting in control

Topic: Step acquisition―Additional shares post-control

Difficulty: 2 Medium

Blooms: Understand

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

35. When a subsidiary is acquired sometime after the first day of the fiscal year, which of the following statements is true?
36. A) Income from subsidiary is not recognized until there is an entire year of consolidated operations.
37. B) Income from subsidiary is recognized from date of acquisition to year-end.
38. C) Excess cost over acquisition value is recognized at the beginning of the fiscal year.
39. D) No goodwill can be recognized.
40. E) Income from subsidiary is recognized for the entire year.

Answer: B

Learning Objective: 04-08

Topic: Midyear acquisition

Difficulty: 1 Easy

Blooms: Remember

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

36. When consolidating a subsidiary that was acquired on a date other than the first day of the fiscal year, which of the following statements is true of the subsidiary with respect to the presentation of consolidated financial statement information?
37. A) Pre-acquisition earnings are deducted from consolidated revenues and expenses.
38. B) Pre-acquisition earnings are added to consolidated revenues and expenses.
39. C) Pre-acquisition earnings are deducted from the beginning consolidated stockholders’ equity.
40. D) Pre-acquisition earnings are added to the beginning consolidated stockholders’ equity.
41. E) Pre-acquisition earnings are ignored in the consolidated income statement.

Answer: E

Learning Objective: 04-08

Topic: Midyear acquisition

Difficulty: 2 Medium

Blooms: Remember

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

37. When a parent uses the acquisition method for business combinations and sells shares of its subsidiary, which of the following statements is false?
38. A) If majority control is still maintained, consolidated financial statements are still required.
39. B) If majority control is not maintained but significant influence exists, the equity method to account for the investment is still used but consolidated financial statements are not required.
40. C) If majority control is not maintained but significant influence exists, the equity method is still used to account for the investment and consolidated financial statements are still required.
41. D) If majority control is not maintained and significant influence no longer exists, a prospective change in accounting principle to the fair value method is required.
42. E) A gain or loss calculation must be prepared if control is lost.

Answer: C

Learning Objective: 04-10

Topic: Sale of shares―Control maintained

Topic: Sale of shares―Control lost

Difficulty: 2 Medium

Blooms: Remember

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

38. All of the following statements regarding the sale of subsidiary shares are true except which of the following?
39. A) The use of specific identification based on serial number is acceptable.
40. B) The use of the FIFO assumption is acceptable.
41. C) The use of the averaging assumption is acceptable.
42. D) The use of specific LIFO assumption is acceptable.
43. E) The parent company must determine whether consolidation is still appropriate for the remaining shares owned.

Answer: D

Learning Objective: 04-10

Topic: Sale of shares―Control maintained

Topic: Sale of shares―Control lost

Difficulty: 2 Medium

Blooms: Remember

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

39. Which of the following statements is true regarding the sale of subsidiary shares when using the acquisition method for accounting for business combinations?
40. A) If control continues, the difference between selling price and acquisition value is recorded as a realized gain or loss.
41. B) If control continues, the difference between selling price and acquisition value is an unrealized gain or loss.
42. C) If control continues, the difference between selling price and carrying value is recorded as an adjustment to additional paid-in capital.
43. D) If control continues, the difference between selling price and carrying value is recorded as a realized gain or loss.
44. E) If control continues, the difference between selling price and carrying value is recorded as an adjustment to retained earnings.

Answer: C

Learning Objective: 04-10

Topic: Sale of shares―Control maintained

Difficulty: 2 Medium

Blooms: Remember

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

40. Jax Company used the acquisition method when it acquired its investment in Saxton Company. Jax now sells some of its shares of Saxton such that neither control nor significant influence exists.  Which of the following statements is true?
41. A) The difference between selling price and acquisition value is recorded as a realized gain or loss.
42. B) The difference between selling price and acquisition value is recorded as an unrealized gain or loss.
43. C) The difference between selling price and carrying value is recorded as a realized gain or loss.
44. D) The difference between selling price and carrying value is recorded as an unrealized gain or loss.
45. E) The difference between selling price and carrying value is recorded as an adjustment to retained earnings.

Answer: C

Learning Objective: 04-10

Topic: Sale of shares―Control lost

Difficulty: 2 Medium

Blooms: Understand

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

41. Keefe, Inc., a calendar-year corporation, acquires 70% of George Company on September 1, 2019, and an additional 10% on January 1, 2020. Total annual amortization of $6,000 relates to the first acquisition. George reports the following figures for 2020:

 

Revenues	$500,000
Expenses	400,000
Retained earnings, 1/1/20	300,000
Dividends paid	50,000
Common stock	200,000

 

Without regard for this investment, Keefe independently earns $300,000 in net income during 2020.

All net income is earned evenly throughout the year.

What is the controlling interest in consolidated net income for 2020?

1. A) $380,000.
2. B) $375,200.
3. C) $375,800.
4. D) $376,000.
5. E) $400,000.

Answer: B

Learning Objective: 04-09

Topic: Step acquisition―Additional shares post-control

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Keefe owns 80% of George for the entire year of 2020. Keefe’s share of consolidated net income: 100,000 sub income – 6,000 amortization = 94,000 × .80= 75,200 from Sub + 300,000 internally generated

 

REFERENCE: 04-07

McGuire Company acquired 90 percent of Hogan Company on January 1, 2019, for $234,000 cash.  This amount is reflective of Hogan’s total acquisition-date fair value.  Hogan’s stockholders’ equity consisted of common stock of $160,000 and retained earnings of $80,000.  An analysis of Hogan’s net assets revealed the following:

 

Any excess consideration transferred over fair value is attributable to an unamortized patent with a useful life of 5 years.

 

[QUESTION]

REFER TO: 04-07

42. The acquisition value attributable to the noncontrolling interest at January 1, 2019 is:
43. A) $23,400.
44. B) $24,000.
45. C) $24,900.
46. D) $26,000.
47. E) $20,000.

Answer: D

Learning Objective: 04-02

Topic: Acquisition-date―Fair value of subsidiary

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: $234,000 / .90 = $260,000 × .10 = $26,000

 

[QUESTION]

REFER TO: 04-07

43. In consolidation at January 1, 2019, what adjustment is necessary for Hogan’s Buildings account?
44. A) $2,000 increase.
45. B) $2,000 decrease.
46. C) $1,800 increase.
47. D) $1,800 decrease.
48. E) No change.

Answer: B

Learning Objective: 04-05

Topic: Acquisition-date―Fair value allocation

Topic: Worksheet procedures

Difficulty: 1 Easy

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: FV $8,000 – BV $10,000 = <$2,000> Reduction

 

[QUESTION]

REFER TO: 04-07

44. In consolidation at December 31, 2019, what adjustment is necessary for Hogan’s Buildings account?
45. A) $1,620 increase.
46. B) $1,620 decrease.
47. C) $1,800 increase.
48. D) $1,800 decrease.
49. E) No adjustment is necessary.

Answer: D

Learning Objective: 04-05

Topic: Acquisition-date―Fair value allocation

Topic: Amortization of fair value allocations

Topic: Worksheet procedures

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: <$2,000> Reduction – 2019 Excess Amortization of <$200> = <$1,800> Reduction

 

[QUESTION]

REFER TO: 04-07

45. In consolidation at December 31, 2020, what adjustment is necessary for Hogan’s Buildings account?
46. A) $1,440 increase.
47. B) $1,440 decrease.
48. C) $1,600 increase.
49. D) $1,600 decrease.
50. E) No adjustment is necessary.

Answer: D

Learning Objective: 04-05

Topic: Acquisition-date―Fair value allocation

Topic: Amortization of fair value allocations

Topic: Worksheet procedures

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: <$1,800> 2019 BV – 2020 Excess Amortization of <$200> = <$1,600> Reduction

 

[QUESTION]

REFER TO: 04-07

46. In consolidation at January 1, 2019, what adjustment is necessary for Hogan’s Equipment account?
47. A) $4,000 increase.
48. B) $4,000 decrease.
49. C) $3,600 increase.
50. D) $3,600 decrease.
51. E) No adjustment is necessary.

Answer: A

Learning Objective: 04-05

Topic: Acquisition-date―Fair value allocation

Topic: Worksheet procedures

Difficulty: 1 Easy

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: FV $18,000 – BV $14,000 = Increase $4,000

 

[QUESTION]

REFER TO: 04-07

47. In consolidation at December 31, 2019, what adjustment is necessary for Hogan’s Equipment account?
48. A) $3,000 increase.
49. B) $3,000 decrease.
50. C) $2,700 increase.
51. D) $2,700 decrease.
52. E) No adjustment is necessary.

Answer: A

Learning Objective: 04-05

Topic: Acquisition-date―Fair value allocation

Topic: Amortization of fair value allocations

Topic: Worksheet procedures

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Fair Value Differential $4,000 – Amortization for 2019 $1,000 = $3,000 Increase

 

[QUESTION]

REFER TO: 04-07

48. In consolidation at December 31, 2020, what adjustment is necessary for Hogan’s Equipment account?
49. A) $2,000 increase.
50. B) $2,000 decrease.
51. C) $1,800 increase.
52. D) $1,800 decrease.
53. E) No adjustment is necessary.

Answer: A

Learning Objective: 04-05

Topic: Acquisition-date―Fair value allocation

Topic: Amortization of fair value allocations

Topic: Worksheet procedures

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Fair Value Differential $4,000 – Amortization for 2019 & 2020 $2,000 = $2,000 Increase

 

[QUESTION]

REFER TO: 04-07

49. In consolidation at January 1, 2019, what adjustment is necessary for Hogan’s Land account?
50. A) $7,000 increase.
51. B) $7,000 decrease.
52. C) $6,300 increase.
53. D) $6,300 decrease.
54. E) No adjustment is necessary.

Answer: A

Learning Objective: 04-05

Topic: Acquisition-date―Fair value allocation

Topic: Worksheet procedures

Difficulty: 1 Easy

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Fair Value Differential at Acquisition $7,000 – No Amortization = $7,000 Increase

 

[QUESTION]

REFER TO: 04-07

50. In consolidation at December 31, 2019, what adjustment is necessary for Hogan’s Land account?
51. A) $8,000 decrease .
52. B) $7,000 increase.
53. C) $6,300 increase.
54. D) $6,300 decrease.
55. E) No adjustment is necessary.

Answer: B

Learning Objective: 04-05

Topic: Acquisition-date―Fair value allocation

Topic: Worksheet procedures

Difficulty: 1 Easy

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Fair Value Differential at Acquisition $7,000 – No Amortization = $7,000 Increase

 

[QUESTION]

REFER TO: 04-07

51. In consolidation at December 31, 2020, what adjustment is necessary for Hogan’s Land account?
52. A) $7,000 decrease.
53. B) $7,000 increase.
54. C) $6,300 increase.
55. D) $6,300 decrease.
56. E) No adjustment is necessary.

Answer: B

Learning Objective: 04-05

Topic: Acquisition-date―Fair value allocation

Topic: Worksheet procedures

Difficulty: 1 Easy

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Fair Value Differential at Acquisition $7,000 – No Amortization = $7,000 Increase

 

[QUESTION]

REFER TO: 04-07

52. In consolidation at January 1, 2019, what adjustment is necessary for Hogan’s Patent account?
53. A) $7,000.
54. B) $6,300.
55. C) $11,000.
56. D) $9,900.
57. E) No adjustment is necessary.

Answer: C

Learning Objective: 04-05

Topic: Acquisition-date―Fair value allocation

Topic: Worksheet procedures

Difficulty: 1 Easy

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: BV Equity $240,000 – Fair Value Equity at Acquisition $260,000 = $20,000 – Identified Net FV Increase $9,000 (Blgs + Equipt + Land) = $11,000 Excess Attributed to Patent

 

[QUESTION]

REFER TO: 04-07

53. In consolidation at December 31, 2019, what net adjustment is necessary for Hogan’s Patent account?
54. A) $5,600.
55. B) $8,800.
56. C) $7,000.
57. D) $7,700.
58. E) No adjustment is necessary.

Answer: B

Learning Objective: 04-05

Topic: Acquisition-date―Fair value allocation

Topic: Amortization of fair value allocations

Topic: Worksheet procedures

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Attributed Fair Value Patent $11,000 – Amortization for 2019 $2,200 = $8,800

 

[QUESTION]

REFER TO: 04-07

54. In consolidation at December 31, 2020, what net adjustment is necessary for Hogan’s Patent account?
55. A) $4,200.
56. B) $5,500.
57. C) $8,000.
58. D) $6,600.
59. E) No adjustment is necessary.

Answer: D

Learning Objective: 04-05

Topic: Acquisition-date―Fair value allocation

Topic: Amortization of fair value allocations

Topic: Worksheet procedures

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Attributed Fair Value Patent $11,000 – Amortization for 2019 & 2020 $4,400 = $6,600

 

REFERENCE: 04-08

Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2019.  Demers reported common stock of $300,000 and retained earnings of $210,000 on that date.  Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life.  Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life.  Based on an annual review, goodwill has not been impaired.

Demers earns income and pays dividends as follows:

 

Assume the equity method is applied.

 

[QUESTION]

REFER TO: 04-08

55. Compute Pell’s Investment in Demers account balance at December 31, 2019.
56. A) $580,000.
57. B) $574,400.
58. C) $548,000.
59. D) $542,400.
60. E) $541,000.

Answer: D

Learning Objective: 04-05

Topic: Investment account balance―Equity method

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Initial Investment $500,000 + Controlling Interest Share of [Net Income for 2019 ($100,000 × .80) – Dividends for 2019 ($40,000 × .80) – Excess FV Annual Amortization ($7,000 × .80)] = $542,400

 

[QUESTION]

REFER TO: 04-08

56. Compute Pell’s investment account balance in Demers at December 31, 2020.
57. A) $577,200.
58. B) $604,000.
59. C) $592,800.
60. D) $632,800.
61. E) $572,000.

Answer: C

Learning Objective: 04-05

Topic: Investment account balance―Equity method

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: December 2019 Investment Balance $542,400 + Controlling Interest Share of [Net Income for 2020 ($120,000 × .80) – Dividends for 2020 ($50,000 × .80) – Excess FV Annual Amortization ($7,000 × .80)] = $592,800

 

[QUESTION]

REFER TO: 04-08

57. Compute Pell’s investment account balance in Demers at December 31, 2021.
58. A) $639,000.
59. B) $643,200.
60. C) $763,200.
61. D) $676,000.
62. E) $620,000.

Answer: B

Learning Objective: 04-05

Topic: Investment account balance―Equity method

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: December 2020 Investment Balance $592,800 + Controlling Interest Share of [Net Income for 2021 ($130,000 × .80) – Dividends for 2020 ($60,000 × .80) – Excess FV Annual Amortization ($7,000 × .80)] = $643,200

 

[QUESTION]

REFER TO: 04-08

58. Compute Pell’s income from Demers for the year ended December 31, 2019.
59. A) $74,400.
60. B) $73,000.
61. C) $42,400.
62. D) $41,000.
63. E) $80,000.

Answer: A

Learning Objective: 04-04

Topic: Consolidated net income―Allocation

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Controlling Interest Share of [Net Income for 2019 ($100,000 × .80) – Excess FV Annual Amortization ($7,000 × .80)] = $74,400

 

[QUESTION]

REFER TO: 04-08

59. Compute Pell’s income from Demers for the year ended December 31, 2020.
60. A) $90,400.
61. B) $89,000.
62. C) $50,400.
63. D) $56,000.
64. E) $96,000.

Answer: A

Learning Objective: 04-04

Topic: Consolidated net income―Allocation

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Controlling Interest Share of [Net Income for 2020 ($120,000 × .80) – Excess FV Annual Amortization ($7,000 × .80)] = $90,400

 

[QUESTION]

REFER TO: 04-08

60. Compute Pell’s income from Demers for the year ended December 31, 2021.
61. A) $50,400.
62. B) $56,000.
63. C) $98,400.
64. D) $97,000.
65. E) $104,000.

Answer: C

Learning Objective: 04-04

Topic: Consolidated net income―Allocation

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Controlling Interest Share of [Net Income for 2021 ($130,000 × .80) – Excess FV Annual Amortization ($7,000 × .80)] = $98,400

 

[QUESTION]

REFER TO: 04-08

61. Compute the noncontrolling interest in the net income of Demers at December 31, 2019.
62. A) $20,000.
63. B) $12,000.
64. C) $18,600.
65. D) $10,600.
66. E) $14,400.

Answer: C

Learning Objective: 04-04

Topic: Consolidated net income―Allocation

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Noncontrolling Interest Share of [Net Income for 2019 ($100,000 × .20) – Excess FV Annual Amortization ($7,000 × .20)] = $18,600

 

[QUESTION]

REFER TO: 04-08

62. Compute the noncontrolling interest in the net income of Demers at December 31, 2020.
63. A) $18,400.
64. B) $14,400.
65. C) $22,600.
66. D) $24,000.
67. E) $12,600.

Answer: C

Learning Objective: 04-04

Topic: Consolidated net income―Allocation

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Noncontrolling Interest Share of [Net Income for 2020 ($120,000 × .20) – Excess FV Annual Amortization ($7,000 × .20)] = $22,600

 

[QUESTION]

REFER TO: 04-08

63. Compute the noncontrolling interest in the net income of Demers at December 31, 2021.
64. A) $20,400.
65. B) $24,600.
66. C) $26,000.
67. D) $14,000.
68. E) $12,600.

Answer: B

Learning Objective: 04-04

Topic: Consolidated net income―Allocation

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Noncontrolling Interest Share of [Net Income for 2021 ($130,000 × .20) – Excess FV Annual Amortization ($7,000 × .20)] = $24,600

 

[QUESTION]

REFER TO: 04-08

64. Compute the noncontrolling interest in Demers at December 31, 2019.
65. A) $135,600.
66. B) $137,000.
67. C) $112,000.
68. D) $100,000.
69. E) $118,600.

Answer: A

Learning Objective: 04-05

Topic: Noncontrolling interest―Calculate balance

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Noncontrolling Interest at Acquisition $125,000 + Noncontrolling Interest Share of [Net Income for 2019 ($100,000 × .20) – Dividends for 2019 ($40,000 × .20) – Excess FV Annual Amortization ($7,000 × .20)] = $135,600

 

[QUESTION]

REFER TO: 04-08

65. Compute the noncontrolling interest in Demers at December 31, 2020.
66. A) $107,000.
67. B) $126,000.
68. C) $109,200.
69. D) $149,600.
70. E) $148,200.

Answer: E

Learning Objective: 04-05

Topic: Noncontrolling interest―Calculate balance

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: December 2019 Noncontrolling Interest Balance $135,600 + Noncontrolling Interest Share of [Net Income for 2020 ($120,000 × .20) – Dividends for 2020 ($50,000 × .20) – Excess FV Annual Amortization ($7,000 × .20)] = $148,200

 

[QUESTION]

REFER TO: 04-08

66. Compute the noncontrolling interest in Demers at December 31, 2021.
67. A) $107,800.
68. B) $140,000.
69. C) $165,200.
70. D) $160,800.
71. E) $146,800.

Answer: D

Learning Objective: 04-05

Topic: Noncontrolling interest―Calculate balance

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: December 2020 Noncontrolling Interest Balance $148,200 + Noncontrolling Interest Share of [Net Income for 2021 ($130,000 × .20) – Dividends for 2021 ($60,000 × .20) – Excess FV Annual Amortization ($7,000 × .20)] = $160,800

 

REFERENCE: 04-09

Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2019.  Demers reported common stock of $300,000 and retained earnings of $210,000 on that date.  Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life.  Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life.  Based on an annual review, goodwill has not been impaired.

Demers earns income and pays dividends as follows:

 

Assume the initial value method is applied.

 

[QUESTION]

REFER TO: 04-09

67. Compute Pell’s investment in Demers at December 31, 2019.
68. A) $500,000.
69. B) $574,400.
70. C) $625,000.
71. D) $542,400.
72. E) $532,000.

Answer: A

Learning Objective: 04-05

Topic: Initial value or Partial equity accounting

Difficulty: 1 Easy

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Initial Investment = $500,000

 

[QUESTION]

REFER TO: 04-09

68. Compute Pell’s investment in Demers at December 31, 2020.
69. A) $625,000.
70. B) $664,800.
71. C) $592,400.
72. D) $500,000.
73. E) $572,000.

Answer: D

Learning Objective: 04-05

Topic: Initial value or Partial equity accounting

Difficulty: 1 Easy

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Initial Investment = $500,000

 

[QUESTION]

REFER TO: 04-09

69. Compute Pell’s investment in Demers at December 31, 2021.
70. A) $592,400.
71. B) $500,000.
72. C) $625,000.
73. D) $676,000.
74. E) $620,000.

Answer: B

Learning Objective: 04-05

Topic: Initial value or Partial equity accounting

Difficulty: 1 Easy

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Initial Investment = $500,000

 

[QUESTION]

REFER TO: 04-09

70. How much does Pell record as Income from Demers for the year ended December 31, 2019?
71. A) $32,000.
72. B) $74,400.
73. C) $73,000.
74. D) $42,400.
75. E) $41,000.

Answer: A

Learning Objective: 04-04

Topic: Initial value or Partial equity accounting

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: 2019 Dividends $40,000 × .80 = $32,000

 

[QUESTION]

REFER TO: 04-09

71. How much does Pell record as Income from Demers for the year ended December 31, 2020?
72. A) $90,400.
73. B) $40,000.
74. C) $89,000.
75. D) $50,400.
76. E) $56,000.

Answer: B

Learning Objective: 04-05

Topic: Initial value or Partial equity accounting

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: 2020 Dividends $50,000 × .80 = $40,000

 

[QUESTION]

REFER TO: 04-09

72. How much does Pell record as Income from Demers for the year ended December 31, 2021?
73. A) $48,000.
74. B) $56,000.
75. C) $98,400.
76. D) $97,000.
77. E) $50,400.

Answer: A

Learning Objective: 04-04

Topic: Initial value or Partial equity accounting

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: 2021 Dividends $60,000 × .80 = $48,000

 

[QUESTION]

REFER TO: 04-09

73. Compute the noncontrolling interest in the net income of Demers at December 31, 2019.
74. A) $12,000.
75. B) $10,600.
76. C) $18,600.
77. D) $20,000.
78. E) $14,400.

Answer: C

Learning Objective: 04-05

Topic: Noncontrolling interest―Calculate balance

Topic: Initial value or Partial equity accounting

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Noncontrolling Interest Share of [Net Income for 2019 ($100,000 × .20) – Excess FV Annual Amortization ($7,000 × .20)] = $18,600

 

[QUESTION]

REFER TO: 04-09

74. Compute the noncontrolling interest in the net income of Demers at December 31, 2020.
75. A) $18,400.
76. B) $14,000.
77. C) $22,600.
78. D) $24,000.
79. E) $12,600.

Answer: C

Learning Objective: 04-04

Topic: Consolidated net income―Allocation

Topic: Initial value or Partial equity accounting

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Noncontrolling Interest Share of [Net Income for 2020 ($120,000 × .20) – Excess FV Annual Amortization ($7,000 × .20)] = $22,600

 

[QUESTION]

REFER TO: 04-09

75. Compute the noncontrolling interest in the net income of Demers at December 31, 2021.
76. A) $24,600.
77. B) $14,000.
78. C) $26,000.
79. D) $20,400.
80. E) $12,600.

Answer: A

Learning Objective: 04-04

Topic: Consolidated net income―Allocation

Topic: Initial value or Partial equity accounting

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Noncontrolling Interest Share of [Net Income for 2021 ($130,000 × .20) – Excess FV Annual Amortization ($7,000 × .20)] = $24,600

 

[QUESTION]

REFER TO: 04-09

76. Compute the noncontrolling interest in Demers at December 31, 2019.
77. A) $135,600.
78. B) $ 80,000.
79. C) $117,000.
80. D) $100,000.
81. E) $110,600.

Answer: A

Learning Objective: 04-05

Topic: Noncontrolling interest―Calculate balance

Topic: Initial value or Partial equity accounting

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Noncontrolling Interest at Acquisition $125,000 + Noncontrolling Interest Share of [Net Income for 2019 ($100,000 × .20) – Dividends for 2019 ($40,000 × .20) – Excess FV Annual Amortization ($7,000 × .20)] = $135,600

 

[QUESTION]

REFER TO: 04-09

77. Compute the noncontrolling interest in Demers at December 31, 2020.
78. A) $126,000.
79. B) $106,000.
80. C) $109,200.
81. D) $149,600.
82. E) $148,200.

Answer: E

Learning Objective: 04-05

Topic: Noncontrolling interest―Calculate balance

Topic: Initial value or Partial equity accounting

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: December 2019 Noncontrolling Interest Balance $135,600 + Noncontrolling Interest Share of [Net Income for 2020 ($120,000 × .20) – Dividends for 2020 ($50,000 × .20) – Excess FV Annual Amortization ($7,000 × .20)] = $148,200

 

[QUESTION]

REFER TO: 04-09

78. Compute the noncontrolling interest in Demers at December 31, 2021.
79. A) $107,800.
80. B) $140,000.
81. C) $ 80,000.
82. D) $ 50,000.
83. E) $160,800.

Answer: E

Learning Objective: 04-05

Topic: Noncontrolling interest―Calculate balance

Topic: Initial value or Partial equity accounting

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: December 2020 Noncontrolling Interest Balance $148,200 + Noncontrolling Interest Share of [Net Income for 2021 ($130,000 × .20) – Dividends for 2021 ($60,000 × .20) – Excess FV Annual Amortization ($7,000 × .20)] = $160,800

 

REFERENCE: 04-10

Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2019.  Demers reported common stock of $300,000 and retained earnings of $210,000 on that date.  Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life.  Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life.  Based on an annual review, goodwill has not been impaired.

Demers earns income and pays dividends as follows:

 

Assume the partial equity method is applied.

 

[QUESTION]

REFER TO: 04-10

79. Compute Pell’s investment in Demers at December 31, 2019.
80. A) $625,000.
81. B) $574,400.
82. C) $548,000.
83. D) $542,400.
84. E) $532,000.

Answer: C

Learning Objective: 04-05

Topic: Initial value or Partial equity accounting

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Initial Investment $500,000 + Controlling Interest Share of [Net Income for 2019 ($100,000 × .80) – Dividends for 2019 ($40,000 × .80)] = $548,000

 

[QUESTION]

REFER TO: 04-10

80. Compute Pell’s investment in Demers at December 31, 2020.
81. A) $676,000.
82. B) $629,000.
83. C) $580,000.
84. D) $604,000.
85. E) $572,000.

Answer: D

Learning Objective: 04-05

Topic: Initial value or Partial equity accounting

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: December 2019 Investment Balance $548,000 + Controlling Interest Share of [Net Income for 2020 ($120,000 × .80) – Dividends for 2020 ($50,000 × .80)] = $604,000

 

[QUESTION]

REFER TO: 04-10

81. Compute Pell’s investment in Demers at December 31, 2021.
82. A) $780,000.
83. B) $660,000.
84. C) $785,000.
85. D) $676,000.
86. E) $620,000.

Answer: B

Learning Objective: 04-05

Topic: Initial value or Partial equity accounting

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: December 2020 Investment Balance $604,000 + Controlling Interest Share of [Net Income for 2021 ($130,000 × .80) – Dividends for 2020 ($60,000 × .80)] = $660,000

 

[QUESTION]

REFER TO: 04-10

82. How much does Pell record as Income from Demers for the year ended December 31, 2019?
83. A) $80,000.
84. B) $74,400.
85. C) $73,000.
86. D) $42,400.
87. E) $41,000.

Answer: A

Learning Objective: 04-05

Topic: Initial value or Partial equity accounting

Difficulty: 1 Easy

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Controlling Interest Share of Net Income for 2019 ($100,000 × .80) = $80,000

 

[QUESTION]

REFER TO: 04-10

83. How much does Pell record as income from Demers for the year ended December 31, 2020?
84. A) $90,400.
85. B) $89,000.
86. C) $50,400.
87. D) $96,000.
88. E) $56,000.

Answer: D

Learning Objective: 04-05

Topic: Initial value or Partial equity accounting

Difficulty: 1 Easy

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Controlling Interest Share of Net Income for 2020 ($120,000 × .80) = $96,000

 

[QUESTION]

REFER TO: 04-10

84. How much does Pell record as income from Demers for the year ended December 31, 2021?
85. A) $ 98,400.
86. B) $ 56,000.
87. C) $104,000.
88. D) $ 97,000.
89. E) $ 50,400.

Answer: C

Learning Objective: 04-05

Topic: Initial value or Partial equity accounting

Difficulty: 1 Easy

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Controlling Interest Share of Net Income for 2021 ($130,000 × .80) = $104,000

 

[QUESTION]

REFER TO: 04-10

85. Compute the noncontrolling interest in the net income of Demers at December 31, 2019.
86. A) $20,000.
87. B) $12,000.
88. C) $18,600.
89. D) $10,600.
90. E) $14,400.

Answer: C

Learning Objective: 04-04

Topic: Consolidated net income―Allocation

Topic: Initial value or Partial equity accounting

Difficulty: 1 Easy

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Noncontrolling Interest Share of [Net Income for 2019 ($100,000 × .20) – Excess FV Annual Amortization ($7,000 × .20)] = $18,600

 

[QUESTION]

REFER TO: 04-10

86. Compute the noncontrolling interest in the net income of Demers at December 31, 2020.
87. A) $18,400.
88. B) $14,000.
89. C) $22,600.
90. D) $24,000.
91. E) $12,600.

Answer: C

Learning Objective: 04-04

Topic: Consolidated net income―Allocation

Topic: Initial value or Partial equity accounting

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Noncontrolling Interest Share of [Net Income for 2020 ($120,000 × .20) – Excess FV Annual Amortization ($7,000 × .20)] = $22,600

 

[QUESTION]

REFER TO: 04-10

87. Compute the noncontrolling interest in the net income of Demers at December 31, 2021.
88. A) $20,400.
89. B) $26,000.
90. C) $24,600.
91. D) $14,000.
92. E) $12,600.

Answer: C

Learning Objective: 04-04

Topic: Consolidated net income―Allocation

Topic: Initial value or Partial equity accounting

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Noncontrolling Interest Share of [Net Income for 2021 ($130,000 × .20) – Excess FV Annual Amortization ($7,000 × .20)] = $24,600

 

[QUESTION]

REFER TO: 04-10

88. Compute the noncontrolling interest in Demers at December 31, 2019.
89. A) $135,600.
90. B) $114,000.
91. C) $112,000.
92. D) $100,000.
93. E) $110,600.

Answer: A

Learning Objective: 04-05

Topic: Noncontrolling interest―Calculate balance

Topic: Initial value or Partial equity accounting

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Noncontrolling Interest at Acquisition $125,000 + Noncontrolling Interest Share of [Net Income for 2019 ($100,000 × .20) – Dividends for 2019 ($40,000 × .20) – Excess FV Annual Amortization ($7,000 × .20)] = $135,600

 

[QUESTION]

REFER TO: 04-10

89. Compute the noncontrolling interest in Demers at December 31, 2020.
90. A) $124,000.
91. B) $126,000.
92. C) $109,200.
93. D) $149,600.
94. E) $ 148,200.

Answer: E

Learning Objective: 04-05

Topic: Noncontrolling interest―Calculate balance

Topic: Initial value or Partial equity accounting

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: December 2019 Noncontrolling Interest Balance $135,600 + Noncontrolling Interest Share of [Net Income for 2020 ($120,000 × .20) – Dividends for 2020 ($50,000 × .20) – Excess FV Annual Amortization ($7,000 × .20)] = $148,200

 

[QUESTION]

REFER TO: 04-10

90. Compute the noncontrolling interest in Demers at December 31, 2021.
91. A) $107,800.
92. B) $140,000.
93. C) $ 80,000.
94. D) $160,800.
95. E) $146,800.

Answer: D

Learning Objective: 04-05

Topic: Noncontrolling interest―Calculate balance

Topic: Initial value or Partial equity accounting

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: December 2020 Noncontrolling Interest Balance $148,200 + Noncontrolling Interest Share of [Net Income for 2021 ($130,000 × .20) – Dividends for 2021 ($60,000 × .20) – Excess FV Annual Amortization ($7,000 × .20)] = $160,800

 

REFERENCE: 04-11

Parsons Company acquired 90% of Roxy Company several years ago for which the consideration transferred included an amount paid for goodwill of $200,000 at that date.  During 2020 an analysis of the fair value of Roxy’s assets determined an impairment of goodwill in the amount of $50,000.

 

[QUESTION]

REFER TO: 04-11

91. At what amount would consolidated goodwill be reported for 2020?
92. A) $150,000
93. B) $200,000.
94. C) $ 50,000.
95. D) $
96. E) $135,000.

Answer: A

Learning Objective: 04-05

Topic: Consolidated totals―Individual items

Difficulty: 1 Easy

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: (Recorded Goodwill $200,000) – (2020 Goodwill Impairment $50,000) = $150,000 Reported Goodwill for 2020

 

[QUESTION]

92. In comparing U.S. GAAP and International Financial Reporting Standards (IFRS) with regard to a basis for measurement of a noncontrolling interest, which of the following is true?
93. A) U.S. GAAP requires acquisition-date fair value measurement and IFRS requires the acquiree’s identifiable net asset fair value measurement.
94. B) U.S. GAAP and IFRS both require acquisition-date fair value measurement.
95. C) U.S. GAAP and IFRS both require the acquiree’s identifiable net asset fair value measurement.
96. D) U.S. GAAP requires acquisition-date fair value measurement, but IFRS allows an option for acquisition-date fair value measurement.
97. E) U.S. GAAP and IFRS both apportion goodwill to the parent only.

Answer:  D

Learning Objective: 04-02

Topic: Acquisition-date―Fair value of subsidiary

Difficulty:  2 Medium

Blooms: Remember

AACSB: Reflective Thinking

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

 

Essay:

 

[QUESTION]

93. Where should a noncontrolling interest appear on a consolidated balance sheet?

 

Answer: The noncontrolling interest should appear as a part of stockholders’ equity where it would be clearly identified, labeled and distinguished from the parent’s controlling interest in subsidiaries.

Learning Objective: 04-06

Topic: Noncontrolling interest―Statement presentation

Difficulty: 1 Easy

Blooms: Remember

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

94. What is pre-acquisition income?

 

Answer: When a company acquires control of a subsidiary during a fiscal year, pre-acquisition income is the income attributed to the previous owners of the shares of the common stock for the portion of the year before the acquisition.

Learning Objective: 04-08

Topic: Midyear acquisition

Difficulty: 1 Easy

Blooms: Remember

AACSB: Reflective Thinking

AACSB: Communication

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

95. Beta Corp. owns less than one hundred percent of the voting common stock of Shedds Co. Under what conditions will Beta be required to prepare consolidated financial statements?

 

Answer: Beta will be required to prepare consolidated financial statements if it has control of Shedds.  If Beta has more than 50% of the voting common stock of Shedds, it has control and must prepare consolidated financial statements.  Occasionally, ownership of less than 50% of the voting common stock can confer control.  In this situation, an argument can be made that the company with control should prepare consolidated financial statements, although such reporting is not currently required.

Learning Objective: 04-02

Topic: Acquisition-date―Fair value of subsidiary

PreDifficulty: 2 Medium

Blooms: Understand

AACSB: Reflective Thinking

AACSB: Communication

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

96. Why is it important to know if the parent paid a premium to acquire control of a subsidiary?

 

Answer: It is necessary to ascertain the subsidiary’s total fair value at the acquisition date so that the value can be appropriately attributed to the parent and to the noncontrolling interest. If there is a control premium, then the total fair value of the subsidiary cannot be implied by the parent’s consideration transferred unless the premium amount is first removed from the consideration value.  If separate share fair values are specifically known for the shares acquired by the parent and the shares held by the noncontrolling interest, then the total fair value can be directly calculated.  In either calculation, the control premium affects primarily the parents’ shares acquired, and thus goodwill is disproportionately (relative to the ownership percentages) allocated to the controlling and noncontrolling interests. This disproportionate allocation of goodwill is essential to know because the resulting allocation of goodwill affects Entry A for the worksheet and thus affects the resulting balance of the noncontrolling interest reported on the consolidated balance sheet.

Learning Objective: 04-07

Topic: Goodwill―With control premium

Difficulty: 2 Medium

Blooms: Remember

AACSB: Reflective Thinking

AACSB: Communication

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

97. How would you determine the amount of goodwill to be recognized at date of acquisition when there is a noncontrolling interest present?

 

Answer:  The noncontrolling interest fair value may be implied by the parent’s consideration transferred or by a separate value calculation.  The total acquisition fair value is then the sum of both parent and noncontrolling interest shares.

The fair value of the net assets acquired is apportioned to the parent and to the noncontrolling interest.

Then, the difference between acquisition fair value and relative fair value of net assets acquired is goodwill attributed respectively to the parent and to the noncontrolling interest.

Learning Objective: 04-03

Learning Objective: 04-07

Topic: Goodwill―No control premium

Topic: Goodwill―With control premium

Difficulty: 2 Medium

Blooms: Remember

AACSB: Reflective Thinking

AACSB: Communication

AACSB: Communication

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

98. How is a noncontrolling interest in the net income of an entity reported in the income statement?

 

Answer: The noncontrolling interest would appear as a clearly identifiable portion of consolidated net income such that the controlling portion plus the noncontrolling portion equals the consolidated net income presented.

Learning Objective: 04-06

Topic: Noncontrolling interest―Statement presentation

Difficulty: 2 Medium

Blooms: Remember

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

99. One company buys a controlling interest in another company on April 1 during a company’s calendar year of operations. How should the pre-acquisition subsidiary revenues and expenses be handled in the consolidated balances for the year of acquisition?

 

Answer: Only post-acquisition revenues and expenses are included in consolidated totals.  The noncontrolling interest is thereby viewed as beginning as of the acquisition date.

Learning Objective: 04-08

Topic: Midyear acquisition

Difficulty: 2 Medium

Blooms: Understand

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

100. Prevatt, Inc. owns 80% of Franklin Company. During the current year, a portion of the investment in Franklin is sold. Prior to recording the sale, Prevatt adjusts the carrying value of its investment.  What is the purpose of the adjustment?

Answer: 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.  If control is not maintained, then such difference is a gain or loss on sale of investment.  In either situation, the carrying value of the investment should be on the equity method basis in order to calculate the proper entry for the sale.  Therefore, if Prevatt adjusts the carrying value of its investment, it is in order to bring an initial value method or partial equity method investment basis to an equity method basis.

Learning Objective: 04-10

Topic: Sale of shares―Control maintained

Topic: Sale of shares―Control lost

Difficulty: 2 Medium

Blooms: Understand

AACSB: Reflective Thinking

AACSB: Communication

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

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

 

Answer:   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).  If control is not maintained, then such difference is a gain or loss on sale of investment.  In either situation, the book value of the investment should be on the equity method basis in order to calculate the proper entry for the sale.  Therefore, if the investment has been kept under the initial value or the partial equity method, the investor adjusts the book value of its investment in order to bring an initial value method or partial equity method investment basis to an equity method basis.

Learning Objective: 04-10

Topic: Sale of shares―Control maintained

Topic: Sale of shares―Control lost

Difficulty: 2 Medium

Blooms: Remember

AACSB: Reflective Thinking

AACSB: Communication

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

 

Problems:

 

[QUESTION]

102. Alonzo Co. acquired 60% of Beazley Corp. by paying $240,000 cash. There is no active trading market for Beazley Corp.  At the time of the acquisition, the book value of Beazley’s net assets was $300,000.

Required:

What amount should have been assigned to the noncontrolling interest immediately after the combination?

 

Answer:

Implied value of Beazley Corp. ($240,000 ÷ 60%)		$ 400,000
Noncontrolling percentage	x	40%
Noncontrolling interest in Beazley Corp.		$ 160,000

 

Learning Objective: 04-02

Topic: Acquisition-date―Fair value of subsidiary

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

103. Tosco Co. paid $540,000 for 80% of the stock of Martz Co. when the book value of Martz’s net assets was $600,000. For all of Martz’s assets and liabilities, book value and fair value were approximately equal. There was no active market for the shares of Martz Co.

Required:

Using the acquisition method, what amount of goodwill should appear in a consolidated balance sheet prepared immediately after the combination?

 

Answer:

Implied fair value ($540,000/80%)		$ 675,000
Book value		(600,000)
Goodwill		$   75,000

 

Learning Objective: 04-03

Topic: Goodwill―No control premium

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

104. On January 1, 2020, Elva Corp. paid $750,000 for 80% of Fenton Co. when the book value of Fenton’s net assets was $800,000. Fenton owned a building with a fair value of $150,000 and a book value of $120,000.

Required:

At what amount would the building appear on a consolidated balance sheet prepared immediately after the combination, under the acquisition method of accounting for business combinations?

 

Answer:

Book value of building		$ 120,000
Allocation of difference		30,000
Fenton’s building for consolidation		$ 150,000

 

Learning Objective: 04-02

Learning Objective: 04-05

Topic: Acquisition-date―Consolidated balance sheet

Topic: Consolidated totals―Individual items

Difficulty: 1 Easy

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

105. Pennant Corp. owns 70% of the common stock of Scarvens Co. Scarvens’ revenues for 2020 totaled $200,000.

Required:

What amount of Scarvens’ revenues would be included in the consolidated revenues under the acquisition method of accounting for business combinations?

 

Answer:

 

Learning Objective: 04-05

Topic: Consolidated totals―Individual items

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

REFERENCE: 04-12

Caldwell Inc. acquired 65% of Club Corp. for $2,600,000.  There was no active market for the shares of Club Corp. Club owned a building and equipment with ten-year useful lives.  The combined book value of these assets was $830,000, and the fair value was $950,000.  For Club’s other assets and liabilities, book value was equal to fair value.  The total acquisition-date fair value of Club’s net assets was $3,500,000.

 

[QUESTION]

REFER TO: 04-12

106. Using the acquisition method, determine the amount of goodwill associated with Caldwell’s purchase of Club.

 

Answer:

Learning Objective: 04-03

Topic: Goodwill―No control premium

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

REFER TO: 04-12

107. Determine the amount of the noncontrolling interest as of the date of the acquisition.

 

Answer:

Implied value of Club Corp. ($2,600,000/ 65%)  $ 4,000,000

Noncontrolling interest percentage                                   x           35%

Noncontrolling interest in Club Corp.                   $1,400,000

Learning Objective: 04-02

Topic: Acquisition-date―Fair value of subsidiary

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

REFERENCE: 04-13

On January 1, 2019, Glenville Co. acquired an 80% interest in Acron Corp. for $500,000.  There is no active trading market for Acron’s stock.  The fair value of Acron’s net assets was $600,000 and Glenville accounts for its interest using the acquisition method.

 

[QUESTION]

REFER TO: 04-13

108. Determine the amount of goodwill to be recognized in this acquisition.

Answer:

Consideration transferred $500,000 for 80% implies value for 100% ($500,000/80%)		$       625,000
Fair value net assets		(600,000)
Goodwill		$   25,000

 

Learning Objective: 04-03

Topic: Goodwill―No control premium

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

REFER TO: 04-13

109. Determine the value assigned to the noncontrolling interest as of the date of the acquisition.

 

Answer:

Implied value $625,000 × 20%

$        125,000

Learning Objective: 04-02

Topic: Acquisition-date―Fair value of subsidiary

Difficulty: 1 Easy

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

 

REFERENCE: 04-14

On January 1, 2019, Jannison Inc. acquired 90% of Techron Co. by paying $477,000 cash. There is no active trading market for Techron stock.  Techron Co. reported a Common Stock account balance of $140,000 and Retained Earnings of $280,000 at that date.  The fair value of Techron Co. was appraised at $530,000.    The total annual amortization was $11,000 as a result of this transaction.  The subsidiary earned $98,000 in 2019 and $126,000 in 2020 with dividend payments of $42,000 each year.  Without regard for this investment, Jannison had income of $308,000 in 2019 and $364,000 in 2020.

 

[QUESTION]

REFER TO: 04-14

110. Prepare a proper presentation of consolidated net income and its allocation for 2019.

Answer:

 

Jannison’s income – 2019	$308,000
Techron’s income – 2019	98,000
Amortization expense (given)	(11,000)
Consolidated net income	$395,000
To noncontrolling interest (10%) ($98,000-11,000)	(8,700)
To controlling interest	$386,300

 

Learning Objective: 04-04

Learning Objective: 04-06

Topic: Consolidated net income

Topic: Consolidated net income―Allocation

Topic: Noncontrolling interest―Statement presentation

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

REFER TO: 04-14

111. Prepare a proper presentation of consolidated net income and its allocation for 2020.

 

Answer:

 

Jannison’s income – 2020	$364,000
Techron’s income – 2020	126,000
Amortization expense (given)	(11,000)
Consolidated net income	$479,000
To noncontrolling interest (10%) ($126,000-11,000)	(11,500)
To controlling interest	$467,500

 

Learning Objective: 04-04

Learning Objective: 04-06

Topic: Consolidated net income

Topic: Consolidated net income―Allocation

Topic: Noncontrolling interest―Statement presentation

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

REFER TO: 04-14

112. What is the noncontrolling interest balance as of December 31, 2020?

 

Answer:

 

Learning Objective: 04-05

Topic: Noncontrolling interest―Calculate balance

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

113. On January 1, 2018, Vacker Co. acquired 70% of Carper Inc. by paying $650,000. This included a $20,000 control premium.  Carper reported common stock on that date of $420,000 with retained earnings of $252,000.  A building was undervalued in the company’s financial records by $28,000.  This building had a ten-year remaining life.  Copyrights of $80,000 were to be recognized and amortized over 20 years.

Carper earned income and paid cash dividends as follows:

On December 31, 2020, Vacker owed $30,800 to Carper.  There have been no changes in Carper’s common stock account since the acquisition.

Required:

If the equity method had been applied by Vacker for this acquisition, what were the consolidation entries needed as of December 31, 2020?

 

Answer:

From the acquisition value, $28,000 was allocated based on the fair value of the building. With a ten-year remaining life, amortization will be $2,800 per year of which $1,960 is attributed to the controlling interest.

Copyright amortization would have been $4,000 per year of which $2,800 is attributed to the controlling interest.

Entry S
Common Stock-Carper Inc.		420,000
Retained Earnings, 1/1/20- Carper Inc.		375,200
Investment in Carper Inc. (70%)			556,640
Noncontrolling Interest in Carper Inc., 1/1/20			238,560
Entry A
Building     (28,000 less 2 yrs. Deprn.)		22,400
Copyright  (80,000 less 2 yrs. Amort.)		72,000
Goodwill		140,000
Investment in Carper Inc.			170,080
Noncontrolling Interest			64,320
Entry I
Equity in Subsidiary Earnings		103,040
Investment in Carper Inc.			103,040
Entry D
Investment in Carper Inc.		58,800
Dividends Paid			58,800
Entry E
Depreciation Expense		2,800
Amortization Expense		4,000
Buildings			2,800
Copyright			4,000
Entry P
Accounts Payable		30,800
Accounts receivable			30,800
Noncontrolling Interest items:
Dividends	(25,200)
Income of Carper	44,160

 

Learning Objective: 04-05

Learning Objective: 04-07

Topic: Acquisition-date―Fair value allocation

Topic: Investment account balance―Equity method

Topic: Worksheet procedures

Topic: Goodwill―With control premium

Difficulty: 3 Hard

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Beginning NCI = $270,000 + $29,460 (income) – $16,380 (divs)  + $38,280 (income) – $18,480 (divs) = $302,880

Goodwill: Vacker paid $650,000 which includes $20,000 premium. Thus, $630,000 represents 70% of the shares without the premium. $630,000/.70 = $900,000 value of the company without the premium. 30% x $900,000 = $270,000. The total fair value of the company is thus $650,000 that Vacker paid + $270,000 value of the noncontrolling interest shares = $920,000. The fair value of the net assets acquired is $780,000  (= $672,000 + $28,000 + $80,000). Goodwill attributable to Vacker is $104,000 (= $650,000 – [70% x $780,000]) and the goodwill attributable to the noncontrolling interest is $36,000 (= $270,000 – [30% x $780,000]).

 

REFERENCE: 04-15

On January 1, 2020, John Doe Enterprises (JDE) acquired a 55% interest in Bubba Manufacturing, Inc. (BMI).  JDE paid for the transaction with $3 million cash and 500,000 shares of JDE common stock (par value $1.00 per share).  At the time of the acquisition, BMI’s book value was $16,970,000.

On January 1, JDE stock had a market value of $14.90 per share and there was no control premium in this transaction.  Any consideration transferred over book value is assigned to goodwill.  BMI had the following balances on January 1, 2020.

	Book	Fair
	Value	Value
Land	$1,700,000	$2,550,000
Buildings (seven-year remaining life)	2,700,000	3,400,000
Equipment (five-year remaining life)	3,700,000	3,300,000

 

For internal reporting purposes, JDE employed the equity method to account for this investment.

 

[QUESTION]

REFER TO: 04-15

114. Prepare a schedule to determine goodwill, and the amortization and allocation amounts.

Answer:

 

			Annual	Controlling	Noncontrolling
		Life	Amortization	Interest share	Interest Share
Consideration transferred for Bubba Mfg.	$10,450,000
Implied fair value $10,450,000/55%	$19,000,000
Book value	(16,970, 000)
Fair value in excess of book value	$ 2,030,000
Excess cost assigned to specific
accounts based on fair values
Land	850,000
Buildings	700,000	7 years	$100,000	$55,000	$45,000
Equipment	(400,000)	5 years	(80,000)	( 44,000)	(36,000)
Goodwill	$   880,000
Total			$20,000	$11,000	$9,000

 

Learning Objective: 04-03

Learning Objective: 04-05

Topic: Goodwill―No control premium

Topic: Acquisition-date―Fair value allocation

Topic: Amortization of fair value allocations

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

REFER TO: 04-15

115. The following account balances are for the year ending December 31, 2020 for both companies.

 

	John Doe	Bubba
	Enterprises	Manufacturing
Revenues	$(298,000,000)	$(103,750,000)
Expenses	271,000,000	95,800,000
Equity in income of Bubba Manufacturing	(     4,361,500)	0
Net income	$( 31,361,500)	$(    7,950,000)
Retained earnings, January 1, 2020	$(   2,500,000)	$(       100,000)
Net income (above)	(   31,361,500)	(    7,950,000)
Dividends paid	5,000,000	3,000,000
Retained earnings, December 31, 2020	$( 28,861,500)	$(     5,050,000)
Current Assets	$  30,500,000	$    20,800,000
Investment in Bubba Manufacturing	13,161,500
Land	1,500,000	1,700,000
Buildings	5,600,000	2,360,000
Equipment (net)	3,100,000	2,960,000
Total assets	$   53,861,500	$     27,820,000
Accounts payable	$(   3,100,000)	$    (4,900,000)
Notes payable		(      1,000,000)
Common stock	(     2,900,000)	(      6,000,000)
Additional paid-in capital	(   19,000,000)	(    10,870,000)
Retained earnings, Dec. 31, 2020 (above)	(   28,861,500)	(      5,050,000)
Total liabilities and stockholders’ equity	$ (53,861,500)	$(   27,820,000)

 

Required:

Prepare a consolidation worksheet for this business combination.  Assume goodwill has been reviewed and there is no goodwill impairment.

 

Answer:

Consolidation Worksheet for John Doe Enterprises and Bubba Manufacturing at 12/31/20.

CONSOLIDATION WORKSHEET

For the year ended 12/31/2020

 

					Non-
	John Doe	Bubba	Consolidation	Entries	controlling		Consolidated
Account	Ent.	MFG.	DR	CR	Interest	Balance
Revenues	(298,000,000)	(103,750,000)				(401,750,000)
Expenses	271,000,000	95,800,000	(E)      20,000			366,820,000
Equity in Sub Income	(4,361,500)	–	(I)   4,361,500
Separate Net Income	(31,361,500)	(7,950,000)
Consolidated Net Income						(34,930,000)
Noncontrolling Interest in  Bubba’s Income	__________	___________			(3,568,500)	3,568,500
Net income to controlling interest						(31,361,500)
R/E, 1/1/20	(2,500,000)	(100,000)	(S)       100,000			(2,500,000)
Net Income	(31,361,500)	(7,950,000)				(31,361,500)
Dividends	5,000,000	3,000,000		(D) 1,650,000	1,350,000	5,000,000
R/E, 12/31/20	(28,861,500)	(5,050,000)				(28,861,500)
Current assets	30,500,000	20,800,000				51,300,000
Investment in Bubba Mfg.	13,161,500		(D)  1,650,000	(S) 9,333,500
				(A) 1,116,500
				(I)  4,361,500
Land	1,500,000	1,700,000	(A)     850,000			4,050,000
Building (net)	5,600,000	2,360,000	(A)     700,000	(E)   100,000		8,560,000
Equipment (net)	3,100,000	2,960,000	(E)       80,000	(A)   400,000		5,740,000
Goodwill	___________	___________	(A)     880,000			880,000
Total Assets	53,861,500	27,820,000				70,530,000
Liabilities	(3,100,000)	(4,900,000)				(8,000,000)
Notes Payable		(1,000,000)				(1,000,000)
Noncontrolling Interest 1/1/20				(S)  7,636,500 (A)   913,500	(8,550,000)
Noncontrolling Interest 12/31/20					(10,768,500)	(10,768,500)
Common Stock	(2,900,000)	(6,000,000)	(S)   6,000,000			(2,900,000)
Additional Paid-in Capital	(19,000,000)	(10,870,000)	(S)  10,870,000			(19,000,000)
R/E, 12/31/20	(28,861,500)	(5,050,000)	____________	___________		(28,861,500)
Total liabilities&
Stockholders’ Equity	(53,861,500)	(27,820,000)	25,511,500	25,511,500		(70,530,000)

 

Learning Objective: 04-05

Topic: Worksheet procedures

Difficulty: 3 Hard

Blooms: Apply

Blooms: Create

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

116. McLaughlin, Inc. acquires 70 percent of Ellis Corporation on September 1, 2019, and an additional 10 percent on November 1, 2020. Annual amortization of $12,000 relates to the first acquisition. Ellis reports the following figures for 2020:

 

Revenues	$500,000
Expenses	350,000
Retained earnings, 1/1/20	3,500,000
Dividends paid	40,000
Common stock	400,000

 

Without regard for this investment, McLaughlin earns $480,000 in net income ($840,000 revenues less $360,000 expenses; incurred evenly through the year) during 2020.

Required: Prepare a schedule of consolidated net income and apportionment to noncontrolling and controlling interests for 2020.

 

Answer:

 

Revenues ($840,000+500,000)		$1,340,000
Expenses ($360,000+350,000+amort.12,000)	*	722,000
Consolidated net income		$   618,000
To noncontrolling interest	**	(39,100)
To controlling interest		$  578,900

 

Noncontrolling interest:	**
Revenues		$  500,000
Expenses ($350,000+amort.12,000)		362,000
Net income		$   138,000
30% x10/12 (for months) × 138,000 = $34,500
20% x 2/12 (for months)  × 138,000 =     4,600		$     39,100

* Amortization of $12,000 = original $8,400 for 70% grossed up to the 100% amount of $12,000.

 

Learning Objective: 04-09

Topic: Step acquisition―Additional shares post-control

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

 

[QUESTION]

117. Select True (T) or False (F) for each of the following statements:

 

_____ 1. A parent will recognize a gain or loss if it sells a portion of its investment in a subsidiary and maintains control after the sale.

_____ 2. A parent sells a portion of its investment in a subsidiary and no longer maintains control.  This sale of shares represents a remeasurement event for the investee.

_____ 3. International financial reporting standards (IFRS) allow an option to value the noncontrolling interest with goodwill or to value the noncontrolling interest without goodwill.

_____ 4. Consolidated net income represents the combined net income of the parent and subsidiary after subtracting the noncontrolling interest in the net income of the subsidiary.

_____ 5. The total acquisition-date fair value of an acquired firm is the sum of the fair value of the controlling interest and the fair value of the noncontrolling interest.

_____ 6. When control of a subsidiary is acquired on a date other than the first day of a fiscal year, excess amortization expenses are pro-rated to include only the post-acquisition period.

_____ 7. For a mid-year acquisition following an equity method investment of the same company, the consolidated income statement will report consolidated revenues and expenses for the entire year.

_____ 8. In a step acquisition where the parent previously held a noncontrolling interest in the acquired firm, the parent remeasures the prior interest to fair value.

_____ 9. When a parent has control over a subsidiary with less than 100 percent ownership, and thereafter increases its ownership, the parent remeasures the prior interest to fair value.

 

Answer: (1) F; (2) F; (3) T; (4) F; (5) T; (6) T; (7) F; (8) T; (9) F

Learning Objective: 04-02

Learning Objective: 04-04

Learning Objective: 04-08

Learning Objective: 04-10

Topic: Consolidated net income―Allocation

Topic: Acquisition-date―Fair value allocation

Topic: Midyear acquisition

Topic: Sale of shares―Control lost

Topic: Sale of shares―Control maintained

Difficulty: 2 Medium

Blooms: Understand

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement