Name: Advanced Accounting 12th Edition Paul M Fischer William J Taylor Rita H Cheng - Test Bank - Eazyquizes
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Advanced Accounting 12th Edition Paul M Fischer William J Taylor Rita H Cheng – Test Bank

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Chapter_02_Consolidated_Statements_Date_of_Acquisition

Multiple Choice

1. An investor receives dividends from its investee and records those dividends as dividend income because:

	a.	The investor has a controlling interest in its investee.
	b.	The investor has a passive interest in its investee.
	c.	The investor has an influential interest in its investee.
	d.	The investor has an active interest in its investee.

ANSWER:	b
RATIONALE:	An investor having a passive interest in its investee (generally resulting from less than 20% ownership) records dividends as dividend income.
DIFFICULTY:	E
LEARNING OBJECTIVES:	ADAC.FISC.2-1

2. An investor prepares a single set of financial statements which encompasses the financial results for both it and its investee because:

	a.	The investor has a controlling interest in its investee.
	b.	The investor has a passive interest in its investee.
	c.	The investor has an influential interest in its investee.
	d.	The investor has an active interest in its investee.

ANSWER:	a
RATIONALE:	An investor having a controlling interest in its investee (generally resulting from more than 50% ownership) will prepare consolidated financial statements which encompass the financial results of both it and its investee.
DIFFICULTY:	E
LEARNING OBJECTIVES:	ADAC.FISC.2-1

3. An investor records its share of its investee’s income as a separate source of income because:

	a.	The investor has a controlling interest in its investee.
	b.	The investor has a passive interest in its investee.
	c.	The investor has an influential interest in its investee.
	d.	The investor has an active interest in its investee.

ANSWER:	c
RATIONALE:	An investor having an influential interest in its investee (generally resulting from 20% – 50% ownership) records its share of its investee’s net income as a separate source of income. This amount also increases the investor’s investment in the investee.
DIFFICULTY:	E
LEARNING OBJECTIVES:	ADAC.FISC.2-1

Account	Investor	Investee
Sales	$500,000	$300,000
Cost of Goods Sold	230,000	170,000
Gross Profit	$270,000	$130,000
Selling & Admin. Expenses	120,000	100,000
Net Income	$150,000	$ 30,000

Dividends paid	50,000	10,000

Assuming Investor owns 70% of Investee. What is the amount that will be recorded as Net Income for the Controlling Interest?

	a.	$164,000
	b.	$171,000
	c.	$178,000
	d.	$180,000

ANSWER:

RATIONALE:

Investor net income		$150,000
Investor’s portion of Investee income	($30,000 x 70%)	21,000
		$171,000

DIFFICULTY:

LEARNING OBJECTIVES:

ADAC.FISC.2-1

5. Consolidated financial statements are designed to provide:

	a.	informative information to all shareholders.
	b.	the results of operations, cash flow, and the balance sheet in an understandable and informative manner for creditors.
	c.	the results of operations, cash flow, and the balance sheet as if the parent and subsidiary were a single entity.
	d.	subsidiary information for the subsidiary shareholders.

ANSWER:	c
RATIONALE:	Consolidated financial statements are designed to provide the results of operations, cash flow and the balance sheet as if the parent and subsidiary were a single entity. Generally, these are more informative for shareholders of the controlling company.
DIFFICULTY:	E
LEARNING OBJECTIVES:	ADAC.FISC.2-2

6. Which of the following statements about consolidation is not true?

	a.	Consolidation is not required when control is temporary.
	b.	Consolidation may be appropriate in some circumstances when an investor owns less than 51% of the voting common stock.
	c.	Consolidation is not required when a subsidiary’s operations are not homogeneous with those of its parent.
	d.	Unprofitable subsidiaries may not be obvious when combined with other entities in consolidation.

ANSWER:	c
RATIONALE:	Generally, statements are to be consolidated when a parent firm owns over 50% of the voting stock of another company. The only exceptions are when control is temporary or does not rest with the majority owner. There may be instances when a parent firm effectively has control with less than 51% of the voting stock because no other ownership interest exercises significant influence on management. Because many entities may be combined in a consolidation, unprofitable subsidiaries may not be obvious when combined with profitable entities.
DIFFICULTY:	M
LEARNING OBJECTIVES:	ADAC.FISC.2-2

7. Consolidated financial statements are appropriate even without a majority ownership if which of the following exists:

	a.	the subsidiary has the right to appoint members of the parent company’s board of directors.
	b.	the parent company has the right to appoint a majority of the members of the subsidiary’s board of directors because other ownership interests are widely dispersed.
	c.	the subsidiary owns a large minority voting interest in the parent company.
	d.	the parent company has an ability to assume the role of general partner in a limited partnership with the approval of the subsidiary’s board of directors.

ANSWER:	b
RATIONALE:	SEC Regulation S-X defines control in terms of power to direct or cause the direction of management and policies of a person, whether through ownership of voting securities, by contract, or otherwise. Thus, control may exist when less than a 51% ownership interest exists but where there is no other large ownership interest that can exert influence on management.
DIFFICULTY:	M
LEARNING OBJECTIVES:	ADAC.FISC.2-2

8. Consolidation might not be appropriate even when the majority owner has control if:

	a.	The subsidiary is in bankruptcy.
	b.	A manufacturing-based parent has a subsidiary involved in banking activities.
	c.	The subsidiary is located in a foreign country.
	d.	The subsidiary has a different fiscal-year end than the parent.

ANSWER:	a
RATIONALE:	Control is presumed not to rest with the majority owner when the subsidiary is in bankruptcy, in legal reorganization, or when foreign exchange restrictions or foreign government controls cast doubt on the ability of the parent to exercise control over the subsidiary.
DIFFICULTY:	M
LEARNING OBJECTIVES:	ADAC.FISC.2-2

9. Which of the following is true of the consolidation process?

	a.	Even though the initial accounting for asset acquisitions and 100% stock acquisitions differs, the consolidation process should result in the same balance sheet.
	b.	Account balances are combined when recording a stock acquisition so the consolidation is automatic.
	c.	The assets of the non-controlling interest will be predominately displayed on the consolidated balance sheet.
	d.	The investment in subsidiary account will be displayed on the consolidated balance sheet.

ANSWER:	a
RATIONALE:	The consolidation process will result in the same balance sheet regardless of whether the acquisition was a stock or asset acquisition. The consolidation process is automatic when an asset acquisition has taken place. The assets of the non-controlling interest are not displayed on the balance sheet, but its share of the equity is included in the equity section of the balance sheet. The consolidation process results in the elimination of the investment in subsidiary account.
DIFFICULTY:	E
LEARNING OBJECTIVES:	ADAC.FISC.2-3

10. In an asset acquisition:

	a.	A consolidation must be prepared whenever financial statements are issued.
	b.	The acquiring company deals only with existing shareholders, not the company itself.
	c.	The assets and liabilities are recorded by the acquiring company at their book values.
	d.	Statements for the single combined entity are produced automatically and no consolidation process is needed.

ANSWER:	d
RATIONALE:	Since account balances are combined in recording an asset acquisition, statements for the single combined reporting entity are produced automatically.
DIFFICULTY:	M
LEARNING OBJECTIVES:	ADAC.FISC.2-3

11. Which of the following is not true of the consolidation process for a stock acquisition?

	a.	Journal entries for the elimination process are made to the parent’s or subsidiary’s books.
	b.	The investment account balance on the parent’s books will be eliminated.
	c.	The balance sheets of two companies are combined into a single balance sheet.
	d.	The shareholder equity accounts of the subsidiary are eliminated.

ANSWER:	a
RATIONALE:	The consolidation process is separate from the existing accounting records of the companies and requires completion of a worksheet; no entries are made to the parent’s or the subsidiary’s books.
DIFFICULTY:	M
LEARNING OBJECTIVES:	ADAC.FISC.2-3

12. A subsidiary was acquired for cash in a business combination on December 31, 2016. The purchase price exceeded the fair value of identifiable net assets. The acquired company owned equipment with a fair value in excess of the book value as of the date of the combination. A consolidated balance sheet prepared on December 31, 2016, would

	a.	report the excess of the fair value over the book value of the equipment as part of goodwill.
	b.	report the excess of the fair value over the book value of the equipment as part of the plant and equipment account.
	c.	reduce retained earnings for the excess of the fair value of the equipment over its book value.
	d.	make no adjustment for the excess of the fair value of the equipment over book value. Instead, it is an adjustment to expense over the life of the equipment.

ANSWER:	b
RATIONALE:	The consolidated balance sheet includes the subsidiary accounts at full fair value.
DIFFICULTY:	D
LEARNING OBJECTIVES:	ADAC.FISC.2-4

13. Parr Company purchased 100% of the voting common stock of Super Company for $2,000,000. There are no liabilities. The following book and fair values pertaining to Super Company are available:

	Book Value	Fair Value
Current assets	$300,000	$600,000
Land and building	600,000	900,000
Machinery	500,000	600,000
Goodwill	100,000	?

The amount of machinery that will be included in on the consolidated balance sheet is:

	a.	$560,000
	b.	$860,000
	c.	$600,000
	d.	$900,000

ANSWER:	c
RATIONALE:	The consolidated balance sheet includes the subsidiary accounts at full fair value.
DIFFICULTY:	M
LEARNING OBJECTIVES:	ADAC.FISC.2-4

14. Pagach Company purchased 100% of the voting common stock of Rage Company for $1,800,000. The following book and fair values are available:

	Book Value	Fair Value
Current assets	$150,000	$300,000
Land and building	280,000	280,000
Machinery	400,000	700,000
Bonds payable	(300,000)	(250,000)
Goodwill	150,000	?

The bonds payable will appear on the consolidated balance sheet

	a.	at $300,000 (with no premium or discount shown).
	b.	at $300,000 less a discount of $50,000.
	c.	at $0; assets are recorded net of liabilities.
	d.	at an amount less than $250,000 since it is a bargain purchase.

ANSWER:	b
RATIONALE:	The consolidated balance sheet includes the subsidiary accounts at full fair value.
DIFFICULTY:	D
LEARNING OBJECTIVES:	ADAC.FISC.2-4

15. Which of the following is not an advantage of the parent issuing shares of stock in exchange for the subsidiary common shares being acquired?

	a.	It is not necessary to determine the fair values of the subsidiary’s net assets.
	b.	It may allow the subsidiary’s shareholders to have a tax free exchange.
	c.	It avoids the depletion of cash.
	d.	If the parent is publicly held, the share price is readily determinable.

ANSWER:	a
RATIONALE:	The fair values of the subsidiary’s net assets would need to be determined in any acquisition.
DIFFICULTY:	E
LEARNING OBJECTIVES:	ADAC.FISC.2-5

16. When it purchased Sutton, Inc. on January 1, 2016, Pavin Corporation issued 500,000 shares of its $5 par voting common stock. On that date the fair value of those shares totaled $4,200,000. Related to the acquisition, Pavin had payments to the attorneys and accountants of $200,000, and stock issuance fees of $100,000. Immediately prior to the purchase, the equity sections of the two firms appeared as follows:

	Pavin	Sutton
Common stock	$ 4,000,000	$ 700,000
Paid-in capital in excess of par	7,500,000	900,000
Retained earnings	5,500,000	500,000
Total	$17,000,000	$2,100,000

Immediately after the purchase, the consolidated balance sheet should report paid-in capital in excess of par of

	a.	$8,900,000
	b.	$9,100,000
	c.	$9,200,000
	d.	$9,300,000

ANSWER:

RATIONALE:

Fair value of shares issued	$ 4,200,000
Par value of shares issued (500,000 shares @ $5)	(2,500,000)
	1,700,000
Less stock issuance fees	(100,000)
	1,600,000
Pavin’s original paid-in capital in excess of par	7,500,000
Paid-in capital in excess of par per consolidated balance sheet	$9,100,000

Sutton’s paid-in capital in excess of par would be eliminated in consolidation.

DIFFICULTY:

LEARNING OBJECTIVES:

ADAC.FISC.2-5

17. Pinehollow acquired all of the outstanding stock of Stonebriar by issuing 100,000 shares of its $1 par value stock. The shares have a fair value of $15 per share. Pinehollow also paid $25,000 in direct acquisition costs. Prior to the transaction, the companies have the following balance sheets:

Assets	Pinehollow	Stonebriar
Cash	$ 150,000	$ 50,000
Accounts receivable	500,000	350,000
Inventory	900,000	600,000
Property, plant, and equipment (net)	1,850,000	900,000
Total assets	$3,400,000	$1,900,000

Liabilities and Stockholders’ Equity
Current liabilities	$ 300,000	$ 100,000
Bonds payable	1,000,000	600,000
Common stock ($1 par)	300,000	100,000
Paid-in capital in excess of par	800,000	900,000
Retained earnings	1,000,000	200,000
Total liabilities and equity	$3,400,000	$1,900,000

The fair values of Stonebriar’s inventory and plant, property and equipment are $700,000 and $1,000,000, respectively. The journal entry to record the purchase of Stonebriar would include a

	a.	credit to common stock for $1,500,000.
	b.	credit to paid-in capital in excess of par for $1,100,000.
	c.	debit to investment for $1,500,000.
	d.	debit to investment for $1,525,000.

ANSWER:

RATIONALE:

The entries to record the acquisition of Stonebriar and issuance of stock would be:

Investment in Stonebriar	$1,500,000
Common Stock (100,000 shares @ $1)		$ 100,000
Paid-in Capital in Excess of Par		1,400,000

Paid-in Capital in Excess of Par	25,000
Cash		25,000

DIFFICULTY:

LEARNING OBJECTIVES:

ADAC.FISC.2-5

18. When it purchased Sutton, Inc. on January 1, 2016, Pavin Corporation issued 500,000 shares of its $5 par voting common stock. On that date the fair value of those shares totaled $4,200,000. Related to the acquisition, Pavin had payments to the attorneys and accountants of $200,000, and stock issuance fees of $100,000. Immediately prior to the purchase, the equity sections of the two firms appeared as follows:

	Pavin	Sutton
Common stock	$ 4,000,000	$ 700,000
Paid-in capital in excess of par	7,500,000	900,000
Retained earnings	5,500,000	500,000
Total	$17,000,000	$2,100,000

Immediately after the purchase, the consolidated balance sheet should report retained earnings of:

	a.	$6,000,000
	b.	$5,800,000
	c.	$5,500,000
	d.	$5,300,000

ANSWER:

RATIONALE:

Pavin’s retained earnings	$5,500,000
Less payments to attorneys and accountants	(200,000)
Retained earnings per consolidated balance sheet	$5,300,000

Sutton’s retained earnings would be eliminated in consolidation. The payments to attorneys and accountants would be charged to acquisition expense, which would be closed to retained earnings.

DIFFICULTY:

LEARNING OBJECTIVES:

ADAC.FISC.2-5

19. Pinehollow acquired all of the outstanding stock of Stonebriar by issuing 100,000 shares of its $1 par value stock. The shares have a fair value of $15 per share. Pinehollow also paid $25,000 in direct acquisition costs. Prior to the transaction, the companies have the following balance sheets:

Assets	Pinehollow	Stonebriar
Cash	$ 150,000	$ 50,000
Accounts receivable	500,000	350,000
Inventory	900,000	600,000
Property, plant, and equipment (net)	1,850,000	900,000
Total assets	$3,400,000	$1,900,000

Liabilities and Stockholders’ Equity
Current liabilities	$ 300,000	$ 100,000
Bonds payable	1,000,000	600,000
Common stock ($1 par)	300,000	100,000
Paid-in capital in excess of par	800,000	900,000
Retained earnings	1,000,000	200,000
Total liabilities and equity	$3,400,000	$1,900,000

The fair values of Stonebriar’s inventory and plant, property and equipment are $700,000 and $1,000,000, respectively. What is the amount of goodwill that will be included in the consolidated balance sheet immediately following the acquisition?

	a.	$100,000
	b.	$125,000
	c.	$300,000
	d.	$325,000

ANSWER:

RATIONALE:

Fair value of subsidiary (100,000 shares @ $15)	$1,500,000
Less book value of interest acquired:
Common stock ($1 par)	100,000
Paid-in capital in excess of par	900,000
Retained earnings	200,000
Total equity	1,200,000
Excess of fair value over book value	$ 300,000

Adjustment of identifiable accounts:
Inventory ($700,000 fair – $600,000 book value)	$ 100,000
Property, plant and equipment ($1,000,000 fair – $900,000
net book value)	100,000
Goodwill	100,000
Total	$ 300,000

DIFFICULTY:

LEARNING OBJECTIVES:

ADAC.FISC.2-6

20. On April 1, 2016, Paape Company paid $950,000 for all the issued and outstanding stock of Simon Corporation. The recorded assets and liabilities of the Simon Corporation on April 1, 2016, follow:

Cash	$ 80,000
Inventory	240,000
Property and equipment (net of accumulated depreciation of $320,000)	480,000
Liabilities	(180,000)

On April 1, 2016, it was determined that the inventory of Simon had a fair value of $190,000, and the property and equipment (net) had a fair value of $560,000. What is the amount of goodwill resulting from the business combination?

	a.	$0
	b.	$120,000
	c.	$300,000
	d.	$230,000

ANSWER:

RATIONALE:

Fair value of subsidiary	$950,000
Less book value of interest acquired:
Cash	80,000
Inventory	240,000
Property, plant and equipment, net	480,000
Liabilities	(180,000)
Total net assets	620,000
Excess of fair value over book value	$330,000

Adjustment of identifiable accounts:
Inventory ($190,000 fair – $240,000 book value)	$ (50,000)
Property, plant and equipment ($560,000 fair – $480,000
net book value)	80,000
Goodwill	300,000
Total	$330,000

DIFFICULTY:

LEARNING OBJECTIVES:

ADAC.FISC.2-6

21. On April 1, 2016, Paape Company paid $950,000 for all the issued and outstanding stock of Simon Corporation. The recorded assets and liabilities of the Simon Corporation on April 1, 2016, follow:

Cash	$ 80,000
Inventory	240,000
Property and equipment (net of accumulated depreciation of $320,000)	480,000
Liabilities	(180,000)

On April 1, 2016, it was determined that the inventory of Simon had a fair value of $190,000, and the property and equipment (net) had a fair value of $560,000. The entry to distribute the excess of fair value over book value will include:

	a.	A debit to inventory of $50,000
	b.	A credit to the investment in Simon Corporation of $620,000
	c.	A debit to goodwill of $330,000
	d.	A credit to the investment in Simon Corporation of $330,000

ANSWER:

RATIONALE:

Fair value of subsidiary	$950,000
Less book value of interest acquired:
Cash	80,000
Inventory	240,000
Property, plant and equipment, net	480,000
Liabilities	(180,000)
Total net assets	620,000
Excess of fair value over book value	$330,000

Adjustment of identifiable accounts:
Inventory ($190,000 fair – $240,000 book value)	$ (50,000)
Property, plant and equipment ($560,000 fair – $480,000
net book value)	80,000
Goodwill	300,000
Total	$330,000

The entry to distribute the excess of fair value over book value will be:

Property, Plant and Equipment	80,000
Goodwill	300,000
Inventory		50,000
Investment in Simon Corporation		330,000

DIFFICULTY:

LEARNING OBJECTIVES:

ADAC.FISC.2-6

22. On June 30, 2016, Naeder Corporation purchased for cash at $10 per share all 100,000 shares of the outstanding common stock of the Tedd Company. The total fair value of all identifiable net assets of Tedd was $1,400,000. The only noncurrent asset is property with a fair value of $350,000. The consolidated balance sheet of Naeder and its wholly owned subsidiary on June 30, 2016, should report

	a.	a retained earnings balance that is inclusive of a gain of $400,000.
	b.	goodwill of $400,000.
	c.	a retained earnings balance that is inclusive of a gain of $350,000.
	d.	a gain of $400,000

ANSWER:

RATIONALE:

Fair value of consideration (100,000 shares @ $10)	$1,000,000
Less fair value of identifiable net assets acquired	1,400,000
Gain on acquisition	$ (400,000)

DIFFICULTY:

LEARNING OBJECTIVES:

ADAC.FISC.2-6

23. Pinehollow acquired 80% of the outstanding stock of Stonebriar by issuing 80,000 shares of its $1 par value stock. The shares have a fair value of $15 per share. Pinehollow also paid $25,000 in direct acquisition costs. Prior to the transaction, the companies have the following balance sheets:

Assets	Pinehollow	Stonebriar
Cash	$ 150,000	$ 50,000
Accounts receivable	500,000	350,000
Inventory	900,000	600,000
Property, plant, and equipment (net)	1,850,000	900,000
Total assets	$3,400,000	$1,900,000

Liabilities and Stockholders’ Equity
Current liabilities	$ 300,000	$ 100,000
Bonds payable	1,000,000	600,000
Common stock ($1 par)	300,000	100,000
Paid-in capital in excess of par	800,000	900,000
Retained earnings	1,000,000	200,000
Total liabilities and equity	$3,400,000	$1,900,000

	a.	$300,000
	b.	$100,000
	c.	$200,000
	d.	$240,000

ANSWER:

RATIONALE:

	Company Implied Fair Value	Parent Price	NCI
Fair value of subsidiary *	$1,500,000	$1,200,000	$ 300,000
Less book value of interest acquired:
Common stock ($1 par)	100,000
Paid-in capital in excess of par	900,000
Retained earnings	200,000
Total equity	1,200,000	1,200,000	1,200,000
Interest acquired		80%	20%
Book value		960,000	240,000
Excess of fair value over book value	$ 300,000	$ 240,000	$ 60,000

Adjustment of identifiable accounts:
Inventory ($700,000 fair – $600,000 book value)	$ 100,000
Property, plant and equipment ($1,000,000 fair – $900,000
net book value)	100,000
Goodwill	100,000
Total	$ 300,000

* Fair value derived as follows:

Fair value of consideration given (80,000 shares @ $15)	$1,200,000

Implied fair value of subsidiary ($1,200,000 / 80%)	$1,500,000

Fair value of NCI ($1,500,000 x 20%)	$ 300,000

DIFFICULTY:

LEARNING OBJECTIVES:

ADAC.FISC.2-7

24. Paro Company purchased 80% of the voting common stock of Sabon Company for $900,000. There are no liabilities. The following book and fair values are available for Sabon:

	Book Value	Fair Value
Current assets	$100,000	$200,000
Land and building	200,000	200,000
Machinery	300,000	600,000
Goodwill	100,000	?

The machinery will appear on the consolidated balance sheet at ____.

	a.	$600,000
	b.	$540,000
	c.	$480,000
	d.	$300,000

ANSWER:	a
RATIONALE:	The consolidated balance sheet includes the subsidiary accounts at full fair value, even if less than 100% of the subsidiary’s common stock is acquired.
DIFFICULTY:	M
LEARNING OBJECTIVES:	ADAC.FISC.2-7

25. Pinehollow acquired 70% of the outstanding stock of Stonebriar by issuing 70,000 shares of its $1 par value stock. The shares have a fair value of $15 per share. Pinehollow also paid $25,000 in direct acquisition costs. Prior to the transaction, the companies have the following balance sheets:

Assets	Pinehollow	Stonebriar
Cash	$ 150,000	$ 50,000
Accounts receivable	500,000	350,000
Inventory	900,000	600,000
Property, plant, and equipment (net)	1,850,000	900,000
Total assets	$3,400,000	$1,900,000

Liabilities and Stockholders’ Equity
Current liabilities	$ 300,000	$ 100,000
Bonds payable	1,000,000	600,000
Common stock ($1 par)	300,000	100,000
Paid-in capital in excess of par	800,000	900,000
Retained earnings	1,000,000	200,000
Total liabilities and equity	$3,400,000	$1,900,000

The fair values of Stonebriar’s inventory and plant, property and equipment are $700,000 and $1,000,000, respectively. What is the amount of the non-controlling interest that will be included in the consolidated balance sheet immediately after the acquisition?

	a.	$450,000
	b.	$360,000
	c.	$315,000
	d.	$420,000

ANSWER:

RATIONALE:

	Company Implied Fair Value	Parent Price	NCI
Fair value of subsidiary *	$1,500,000	$1,050,000	$ 450,000
Less book value of interest acquired:
Common stock ($1 par)	100,000
Paid-in capital in excess of par	900,000
Retained earnings	200,000
Total equity	1,200,000	1,200,000	1,200,000
Interest acquired		70%	30%
Book value		840,000	360,000
Excess of fair value over book value	$300,000	$ 210,000	$ 90,000

Adjustment of identifiable accounts:
Inventory ($700,000 fair – $600,000 book value)	$ 100,000
Property, plant and equipment ($1,000,000 fair – $900,000
net book value)	100,000
Goodwill	100,000
Total	$ 300,000

* Fair value derived as follows:

Fair value of consideration given (70,000 shares @ $15)	$1,050,000

Implied fair value of subsidiary ($1,050,000 / 70%)	$1,500,000

Fair value of NCI ($1,500,000 x 30%)	$ 450,000

DIFFICULTY:

LEARNING OBJECTIVES:

ADAC.FISC.2-7

26. How is the non-controlling interest treated in the consolidated balance sheet?

	a.	It is included in long-term liabilities.
	b.	It appears between the liability and equity sections of the balance sheet.
	c.	It is included in total as a component of shareholders’ equity.
	d.	It is included in shareholders’ equity and broken down into par, paid-in capital in excess of par and retained earnings.

ANSWER:	c
RATIONALE:	The non-controlling interest is shown on the consolidated balance sheet in total as a component of shareholders’ equity.
DIFFICULTY:	E
LEARNING OBJECTIVES:	ADAC.FISC.2-7

27. Pinehollow acquired all of the outstanding stock of Stonebriar by issuing 100,000 shares of its $1 par value stock. The shares have a fair value of $15 per share. Pinehollow also paid $25,000 in direct acquisition costs. Prior to the transaction, the companies have the following balance sheets:

Assets	Pinehollow	Stonebriar
Cash	$ 150,000	$ 50,000
Accounts receivable	500,000	350,000
Inventory	900,000	600,000
Property, plant, and equipment (net)	1,850,000	900,000
Total assets	$3,400,000	$1,900,000

Liabilities and Stockholders’ Equity
Current liabilities	$ 300,000	$ 100,000
Bonds payable	1,000,000	600,000
Common stock ($1 par)	300,000	100,000
Paid-in capital in excess of par	800,000	900,000
Retained earnings	1,000,000	200,000
Total liabilities and equity	$3,400,000	$1,900,000

The fair values of Stonebriar’s inventory and plant, property and equipment are $700,000 and $1,000,000, respectively. What is the amount of property, plant and equipment that will be included in the consolidated balance sheet immediately after the acquisition?

	a.	$2,570,000
	b.	$2,750,000
	c.	$2,850,000
	d.	$2,650,000

ANSWER:

RATIONALE:

Property, plant and equipment:
Pinehollow (at net book value)	$1,850,000
Stonebriar (at full fair value)	1,000,000
Per consolidated balance sheet	$2,850,000

DIFFICULTY:

LEARNING OBJECTIVES:

ADAC.FISC.2-7

28. Pesto Company paid $10 per share to acquire 80% of Sauce Company’s 100,000 outstanding shares; however the market price of the remaining shares was $8.50. The fair value of Sauce’s net assets at the time of the acquisition was $850,000. In this case, where Pesto paid a premium to achieve control:

	a.	The total value assigned to the NCI at the date of the acquisition may be less than the NCI percentage of the fair value of the net assets.
	b.	Goodwill is assigned 80% to Pesto and 20% to the NCI.
	c.	The NCI share of goodwill would be reduced to zero.
	d.	Pesto would recognize a gain on the acquisition.

ANSWER:

RATIONALE:

	Company Implied Fair Value	Parent Price	NCI Value
Company fair value *	$970,000	$800,000	$170,000
Fair value of net assets	850,000	680,000	170,000
Goodwill	$120,000	$120,000	$ 0

* Fair value of parent price is 80,000 shares x $10 per share. This would ordinarily imply a company subsidiary fair value of $1,000,000 ($800,000 / 80%). However, the shares attributable to the NCI have a value of $170,000 (20,000 shares x $8.50).

DIFFICULTY:

LEARNING OBJECTIVES:

ADAC.FISC.2-7

29. Pesto Company paid $8 per share to acquire 80% of Sauce Company’s 100,000 outstanding shares. The fair value of Sauce’s net assets at the time of the acquisition was $850,000. In this case:

	a.	The total value assigned to the NCI at the date of the acquisition may be less than the NCI percentage of the fair value of the net assets.
	b.	Goodwill will be recognized by Pesto.
	c.	Pesto and the NCI would both recognize a gain on the acquisition.
	d.	Pesto only would recognize a gain on the acquisition.

ANSWER:

RATIONALE:

	Company Implied Fair Value	Parent Price	NCI Value
Company fair value *	$810,000	$640,000	$170,000
Fair value of net assets	850,000	680,000	170,000
Gain on acquisition	$(40,000)	$(40,000)	$ 0

* Fair value of parent price is 80,000 shares x $8 per share. This would ordinarily imply a company subsidiary fair value of $800,000 ($640,000 / 80%). However, the net assets attributable to the NCI have a fair value of $170,000, and the NCI value cannot be less than this amount.

DIFFICULTY:

LEARNING OBJECTIVES:

ADAC.FISC.2-7

30. When a company purchases another company that has existing goodwill and the transaction is accounted for as a stock acquisition, the goodwill should be treated in the following manner:

	a.	The goodwill on the books of an acquired company should be written off.
	b.	Goodwill is recorded prior to recording fixed assets.
	c.	The fair value of the goodwill is ignored in the calculation of goodwill of the new acquisition.
	d.	Goodwill is treated in a manner consistent with tangible assets.

ANSWER:	c
RATIONALE:	If a subsidiary is purchased and it has goodwill on its books, that goodwill is ignored in the value analysis.
DIFFICULTY:	M
LEARNING OBJECTIVES:	ADAC.FISC.2-8

Chapter_04_Intercompany_Transactions_Merchandise_Plant_Assets_and_Notes

Multiple Choice

1. Which of the following should appear in consolidated financial statements?

	a.	All intercompany transactions properly recorded on each affiliate’s books.
	b.	Transactions between the consolidated company and outside parties.
	c.	Transactions not accounted for by the simple equity method.
	d.	Lease transactions between a parent and subsidiary.

ANSWER:	b
RATIONALE:	Only the effects of transactions between the consolidated companies and outside entities should appear on the consolidated financial statements.
DIFFICULTY:	E
LEARNING OBJECTIVES:	Introduction

2. Which of the following intercompany transactions would not require a worksheet elimination in the consolidation process?

	a.	The subsidiary’s payment of rent to its parent.
	b.	The sale of merchandise by a parent to its subsidiary.
	c.	The amount of a loan to the subsidiary made by its parent.
	d.	None of the above.

ANSWER:	d
RATIONALE:	Only the effects of transactions between the consolidated companies and outside entities should appear on the consolidated financial statements.
DIFFICULTY:	E
LEARNING OBJECTIVES:	Introduction

3. Schiff Company owns 100% of the outstanding common stock of the Viel Company. During 2016, Schiff sold merchandise to Viel that Viel, in turn, sold to unrelated firms. There were no such goods in Viel’s ending inventory. However, some of the intercompany purchases from Schiff had not yet been paid. Which of the following amounts will be incorrect in the consolidated statements if no adjustments are made?

	a.	inventory, accounts payable, net income
	b.	inventory, sales, cost of goods sold, accounts receivable
	c.	sales, cost of goods sold, accounts receivable, accounts payable.
	d.	accounts receivable, accounts payable

ANSWER:	c
RATIONALE:	When consolidating affiliates are engaged in intercompany merchandise sales, the following procedures must be taken: 1. Intercompany sales must be eliminated to avoid double counting. DR Sales CR Cost of goods sold 2. Internal debt must be eliminated. DR Accounts payable CR Accounts receivable 3. No profit on intercompany sales may be recognized until the profit is realized by a sale to a third party. This is not applicable in this case since all of the inventory has been sold.
DIFFICULTY:	M
LEARNING OBJECTIVES:	ADAC.FISC.4-1 ADAC.FISC.4-2

4. The sale of inventory items by a parent company to an affiliated company

	a.	enters the consolidated revenue computation only if the transfer was the result of arm’s length bargaining.
	b.	affects consolidated net income under a periodic inventory system but not under a perpetual inventory system.
	c.	does not result in consolidated income until the merchandise is sold to outside entities.
	d.	does not require a working paper adjustment if the merchandise was transferred at cost.

ANSWER:	c
RATIONALE:	No profit may be recognized on intercompany sales until the profit is realized by a sale to an outside party.
DIFFICULTY:	E
LEARNING OBJECTIVES:	ADAC.FISC.4-1 ADAC.FISC.4-2

5. This year, Rose Company acquired all of the common stock of Hayley Company. At the end of the current year, balances of selected accounts and other information for each of the companies were as follows:

	Rose	Hayley
Sales	$2,582,000	$1,734,000
Accounts receivable	580,000	235,000

Sales to Hayley during year	80,000
Sales to Rose during year		20,000
Gross profit on all sales	25%	30%

At the end of the year, 50% of the inventory that Rose sold to Hayley remained in Hayley’s inventory, and $30,000 of the amount of the sales was unpaid. Rose still owes half of the amount of its purchases to Hayley, but had sold all of the inventory it had acquired from Hayley by the end of the year.

What is the amount of consolidated sales at the end of the year?

	a.	$4,216,000
	b.	$4,316,000
	c.	$4,276,000
	d.	$4,246,000

ANSWER:

RATIONALE:

Sales:
Rose	$2,582,000
Hayley	1,734,000
Combined sales	4,316,000
Adjustment to eliminate amounts Rose sold to Hayley	(80,000)
Adjustment to eliminate amounts Hayley sold to Rose	(20,000)
Consolidated sales	$4,216,000

DIFFICULTY:

LEARNING OBJECTIVES:

ADAC.FISC.4-1
ADAC.FISC.4-2

6. This year, Rose Company acquired all of the common stock of Hayley Company. At the end of the current year, balances of selected accounts and other information for each of the companies were as follows:

	Rose	Hayley
Sales	$2,582,000	$1,734,000
Accounts receivable	580,000	235,000

Sales to Hayley during year	80,000
Sales to Rose during year		20,000
Gross profit on all sales	25%	30%

What is the consolidated Accounts receivable balance at the end of the year?

	a.	$815,000
	b.	$795,000
	c.	$789,000
	d.	$775,000

ANSWER:

RATIONALE:

Accounts receivable
Rose	$580,000
Hayley	235,000
Combined accounts receivable	815,000
Adjustment to eliminate amounts Hayley owes Rose	(30,000)
Adjustment to eliminate amounts Rose owes Hayley	(10,000)
Consolidated accounts receivable	$775,000

DIFFICULTY:

LEARNING OBJECTIVES:

ADAC.FISC.4-1
ADAC.FISC.4-2

7. Diller owns 80% of Lake Company common stock. During October 2016, Lake sold merchandise to Diller for $300,000. On December 31, 2016, one-half of this merchandise remained in Diller’s inventory. For 2016, gross profit percentages were 30% for Diller and 40% for Lake. The amount of unrealized profit in the ending inventory on December 31, 2016 that should be eliminated in consolidation is ____.

	a.	$80,000
	b.	$60,000
	c.	$32,000
	d.	$30,000

ANSWER:

RATIONALE:

	Lake Sales to Diller	Goods in Diller ending inventory
	$300,000	$150,000
Gross profit percentage – Lake		40%

Unrealized profit in ending inventory ($150,000 x 40%)		$60,000

DIFFICULTY:

LEARNING OBJECTIVES:

ADAC.FISC.4-1
ADAC.FISC.4-2

8. Cattle Company sold inventory with a cost of $40,000 to its 90%-owned subsidiary, Range Corp., for $100,000 in 2016. Range resold $75,000 of this inventory for $100,000 in 2016. Based on this information, the amount of inventory reported on the consolidated financial statements at the end of 2016 is:

	a.	$10,000.
	b.	$18,000.
	c.	$21,000.
	d.	$30,000.

ANSWER:

RATIONALE:

	Cattle Sales to Range	Goods sold to others	Goods in ending inventory
Sales	$100,000	$75,000	$25,000
Cost of goods sold	40,000

Cost of goods as a percentage of sales	40%

The goods in ending inventory should be reflected in the financial statements at the cost at which they were purchased from outside parties; in this case, $10,000. ($25,000 x 40%)

DIFFICULTY:

LEARNING OBJECTIVES:

ADAC.FISC.4-2

9. This year, Rose Company acquired all of the common stock of Hayley Company. At the end of the current year, balances of selected accounts and other information for each of the companies were as follows:

	Rose	Hayley
Sales	$2,582,000	$1,734,000
Accounts receivable	580,000	235,000

Sales to Hayley during year	80,000
Sales to Rose during year		20,000
Gross profit on all sales	25%	30%

What is the amount of consolidated cost of goods sold at the end of the year?

	a.	$3,107,900
	b.	$3,150,300
	c.	$3,040,300
	d.	$3,050,300

ANSWER:

RATIONALE:

Cost of goods sold:
Rose ($2,582,000 x 75%)	$1,936,500
Hayley ($1,734,000 x 70%)	1,213,800
Combined cost of goods sold	3,150,300
Adjustment to eliminate amounts Rose sold to Hayley	(80,000)
Adjustment to eliminate amounts Hayley sold to Rose	(20,000)
Adjustment to defer intercompany profits in Hayley’s ending inventory ($80,000 x 50% x 25%)	(10,000)
Consolidated cost of goods sold	$3,040,300

DIFFICULTY:

LEARNING OBJECTIVES:

ADAC.FISC.4-2

10. Perry, Inc. owns a 90% interest in Brown Corp. During 2016, Brown sold $100,000 in merchandise to Perry at a 30% gross profit. Ten percent of the goods are unsold by Perry at year end. The non-controlling interest will receive what gross profit as a result of these sales?

	a.	$0
	b.	$2,700
	c.	$3,000
	d.	$27,000

ANSWER:

RATIONALE:

	Brown Sales to Perry	Goods sold to others	Goods in ending inventory
Sales	$100,000	$90,000	$10,000
Gross profit percentage	30,000	30%
Gross profit realized		27,000
NCI portion		10%
NCI gross profit		2,700

DIFFICULTY:

LEARNING OBJECTIVES:

ADAC.FISC.4-2

11. Sally Corporation, an 80%-owned subsidiary of Reynolds Company, buys half of its raw materials from Reynolds. The transfer price is exactly the same price as Sally pays to buy identical raw materials from outside suppliers and the same price as Reynolds sells the materials to unrelated customers. In preparing consolidated statements for Reynolds Company and Subsidiary Sally Corporation,

	a.	the intercompany transactions can be ignored because the transfer price represents arm’s length bargaining.
	b.	any unrealized profit from intercompany sales remaining in Reynolds’ ending inventory must be offset against the unrealized profit in Reynolds’ beginning inventory.
	c.	any unrealized profit on the intercompany transactions in Sally’s ending inventory is eliminated in its entirety.
	d.	eighty percent of any unrealized profit on the intercompany transactions in Sally’s ending inventory is eliminated.

ANSWER:	c
RATIONALE:	No profit may be recognized on intercompany sales until the profit is realized by a sale to an outside party.
DIFFICULTY:	M
LEARNING OBJECTIVES:	ADAC.FISC.4-2

12. Williard Corporation regularly sells inventory items to its subsidiary, Petty, Inc. If unrealized profits in Petty’s 2016 year-end inventory exceed the unrealized profits in its 2017 year-end inventory, 2017 combined

	a.	cost of sales will be less than consolidated cost of sales in 2017.
	b.	gross profit will be greater than consolidated gross profit in 2017.
	c.	sales will be less than consolidated sales in 2017.
	d.	cost of sales will be greater than consolidated cost of sales in 2017.

ANSWER:

RATIONALE:

Assumptions:

Cost of Goods Sold:
Williard	$50,000
Petty	25,000
Unrealized profits in year-end inventory:
2016	2,000
2017	1,000

Calculations:
Cost of goods sold:
Williard	$50,000
Petty	25,000
Combined cost of goods sold	$75,000
Deferral of 2017 profit	1,000
Recognition of 2016 profit	(2,000)
Consolidated cost of goods sold	$74,000

DIFFICULTY:

LEARNING OBJECTIVES:

ADAC.FISC.4-2

13. On January 1, 2016 Bullock, Inc. sells land to its 80%-owned subsidiary, Humphrey Corporation, at a $20,000 gain. The land is sold by Humphrey to an outside party in 2018. What is the effect of the intercompany sale of land on 2016 consolidated net income?

	a.	Consolidated net income will be the same as it would have been had the sale not occurred.
	b.	Consolidated net income will be $20,000 less than it would have been had the sale not occurred.
	c.	Consolidated net income will be $16,000 less than it would have been had the sale not occurred.
	d.	Consolidated net income will be $20,000 greater than it would have been had the sale not occurred.

ANSWER:	a
RATIONALE:	The gain on the sale of the land is deferred in the year of the intercompany sale and realized in the year that the land is sold to an outside party.
DIFFICULTY:	E
LEARNING OBJECTIVES:	ADAC.FISC.4-3

14. On January 1, 2016 Bullock, Inc. sells land to its 80%-owned subsidiary, Humphrey Corporation, at a $20,000 gain. The land is sold by Humphrey to an outside party in 2018. What is the effect of the intercompany sale of land on 2018 consolidated net income?

	a.	Consolidated net income will be the same as it would have been had the intercompany sale not occurred.
	b.	Consolidated net income will be $20,000 less than it would have been had the intercompany sale not occurred.
	c.	Consolidated net income will be $16,000 less than it would have been had the intercompany sale not occurred.
	d.	Consolidated net income will be $20,000 greater than it would have been had the intercompany sale not occurred.

ANSWER:	a
RATIONALE:	The gain on the sale of the land is deferred in the year of the intercompany sale and realized in the year that the land is sold to an outside party. Assuming the land would have been sold for the same price, the total gain is the same.
DIFFICULTY:	M
LEARNING OBJECTIVES:	ADAC.FISC.4-3

15. Stroud Corporation is an 80%-owned subsidiary of Pennie, Inc., acquired by Pennie several years ago. On January 1, 2017, Pennie sold land with a book value of $60,000 to Stroud for $90,000. Stroud resold the land to an unrelated party for $100,000 on September 26, 2018. The gain from sale of land that will appear in the consolidated income statements for 2017 and 2018, respectively, is ____.

	a.	$0 and $10,000
	b.	$0 and $40,000
	c.	$30,000 and $10,000
	d.	$30,000 and $40,000

ANSWER:	b
RATIONALE:	The gain on the sale of the land is deferred in the year of the intercompany sale and realized in the year that the land is sold to an outside party. The land will be carried on the consolidated balance sheet at the amount by which it was acquired from the outside party, in this case, $60,000. When the land is sold in 2018, the total gain of $40,000 ($100,000 – 60,000) will be realized.
DIFFICULTY:	E
LEARNING OBJECTIVES:	ADAC.FISC.4-3

16. Stroud Corporation is an 80%-owned subsidiary of Pennie, Inc., acquired by Pennie several years ago. On January 1, 2017, Pennie sold land with a book value of $60,000 to Stroud for $90,000. Stroud resold the land to an unrelated party for $100,000 on September 26, 2018. The land will be included in the December 31, 2017 consolidated balance sheet of Pennie, Inc. and Subsidiary at ____.

	a.	$48,000
	b.	$60,000
	c.	$72,000
	d.	$90,000

ANSWER:	b
RATIONALE:	The gain on the sale of the land is deferred in the year of the intercompany sale and realized in the year that the land is sold to an outside party. The land will be carried on the consolidated balance sheet at the amount by which it was acquired from the outside party, in this case, $60,000.
DIFFICULTY:	M
LEARNING OBJECTIVES:	ADAC.FISC.4-3

17. Emron Company owns a 100% interest in the common stock of the Dietz Company. On January 1, 2017, Emron sold Dietz a fixed asset that Dietz will use over a 5-year period. The asset was sold at a $5,000 profit. In the consolidated statements, this profit will

	a.	not be recorded.
	b.	be recognized over 5 years.
	c.	be recognized in the year of sale.
	d.	be recognized when the asset is resold to outside parties at the end of its period of use.

ANSWER:	b
RATIONALE:	When a depreciable asset is sold in an intercompany transaction, the gain or loss on that sale is deferred and recognized over the asset’s remaining useful life; in this case, 5 years.
DIFFICULTY:	M
LEARNING OBJECTIVES:	ADAC.FISC.4-3

18. Pease Corporation owns 100% of Sade Corporation common stock. On January 2, 2016, Pease sold machinery with a carrying amount of $30,000 to Sade for $50,000. Sade is depreciating the acquired machinery over a 5-year life using the straight-line method. The related net adjustments to compute the 2016 and 2017 consolidated income before income tax would be an increase (decrease) of

2016 2017

	a.	$(16,000) $4,000
	b.	$(16,000) $0
	c.	$(20,000) $4,000
	d.	$(20,000) $0

ANSWER:

RATIONALE:

When a depreciable asset is sold in an intercompany transaction, the gain or loss on that sale is deferred and recognized over the asset’s remaining useful life; in this case, 5 years.

Selling price of asset	$50,000
Net book value of asset sold	30,000
Gain on sale of asset – deferred	$20,000
Annual adjustment to depreciation in 2016 ($20,000 / 5)	( 4,000)
Adjustment to decrease income in 2016	$16,000

The impact in 2017 would be to increase income by the $4,000 depreciation adjustment.

DIFFICULTY:

LEARNING OBJECTIVES:

ADAC.FISC.4-3

19. On January 1, 2016, Poe Corp. sold a machine for $900,000 to Saxe Corp., its wholly-owned subsidiary. Poe paid $1,100,000 for this machine. On the sale date, accumulated depreciation was $250,000. Poe estimated a $100,000 salvage value and depreciated the machine on the straight-line method over 20 years, a policy that Saxe continued. In Poe’s December 31, 2016, consolidated balance sheet, this machine should be included in cost and accumulated depreciation as

Cost Accumulated Depreciation

	a.	$1,100,000 $300,000
	b.	$1,100,000 $290,000
	c.	$ 900,000 $ 40,000
	d.	$ 850,000 $ 42,500

ANSWER:

RATIONALE:

When a depreciable asset is sold in an intercompany transaction, the gain or loss on that sale is deferred, and the asset should appear in the consolidated financial statements as if the intercompany transaction had not occurred. Therefore, the cost of the asset in the consolidated balance sheet should be $1,100,000. Accumulated depreciation should be $300,000 as follows:

Cost of machine	$1,100,000
Salvage value	100,000
Depreciable basis	$1,000,000

Annual depreciation based on 20-year life	$ 50,000
Accumulated depreciation 1/1/2016	250,000
Accumulated depreciation 12/31/2016	$300,000

DIFFICULTY:

LEARNING OBJECTIVES:

ADAC.FISC.4-3

20. Porch Company owns a 90% interest in the Screen Company. Porch sold Screen a milling machine on January 1, 2016, for $50,000 when the book value of the machine on Porch’s books was $40,000. Porch financed the sale with Screen signing a 3-year, 8% interest, and note for the entire $50,000. The machine will be used for 10 years and depreciated using the straight-line method. The following amounts related to this transaction were located on the company’s trial balances:

Interest Revenue	$4,000
Interest Expense	$4,000
Depreciation Expense	$5,000

Based upon the information related to this transaction what will be the amounts eliminated in preparing the 2016 consolidated financial statements?

Interest Revenue Interest Expense Depreciation Expense

	a.	4,000 4,000 5,000
	b.	4,000 4,000 1,000
	c.	3,600 3,600 900
	d.	3,600 3,600 4,500

ANSWER:

RATIONALE:

Selling price of asset	$50,000
Net book value of asset sold	40,000
Gain on sale of asset – deferred	$10,000

Annual adjustment to depreciation ($10,000 / 10)	$1,000

Annual intercompany interest revenue and expense ($50,000 x 8%)	$4,000

DIFFICULTY:

LEARNING OBJECTIVES:

ADAC.FISC.4-3
ADAC.FISC.4-5

21. On 1/1/16 Peck sells a machine with a $20,000 book value to its subsidiary Shea for $30,000. Shea intends to use the machine for 4 years, which was the remaining life that Peck had at the time of the sale. Neither company had assigned a salvage value to the machine. On 12/31/17 Shea sells the machine to an outside party for $14,000. What amount of gain or (loss) for the sale of assets is reported on the consolidated financial statements in 2017?

	a.	loss of $6,000
	b.	loss of $1,000
	c.	gain of $4,000
	d.	gain of $14,000

ANSWER:

RATIONALE:

When a depreciable asset is sold in an intercompany transaction, the gain or loss on that sale is deferred, and the asset should appear in the consolidated financial statements as if the intercompany transaction had not occurred. Therefore, the 2017 gain in the consolidated income statement should be $4,000 as follows:

Book value of asset at 1/1/2016	$20,000
Remaining life in years	/ 4
Annual depreciation expense on a consolidated basis	$ 5,000
Years held by Shea	x 2
Additional depreciation on a consolidated basis	$10,000

Sale amount to outside party	$14,000
Net book value of machine ($20,000 – 10,000)	10,000
Gain on sale of machine	$ 4,000

DIFFICULTY:

LEARNING OBJECTIVES:

ADAC.FISC.4-3

22. Company P owns 100% of the common stock of Company S. Company P is constructing an asset for Company S that will be used in Company S’s manufacturing operations over a 5-year period. The asset was 50% complete at the end of 2016 and was completed on December 31, 2017. Company P is recording the construction under the percentage of completion method. The asset was put into use by Company S on January 1, 2018. The profit on the asset was estimated to be $50,000. Actual results complied with the estimate. On the consolidated statements, the profit recognized will be

2016 2017 2018 2019 – 2017

	a.	0 50,000 0 0
	b.	25,000 25,000 0 0
	c.	0 0 10,000 10,000/year
	d.	0 0 50,000 0

ANSWER:	c
RATIONALE:	Under the percentage of completion method for long-term projects, any gains on an intercompany construction project must be eliminated and recognized through depreciation adjustments. In 2018, the $50,000 gain recognized by Company P will be deferred and depreciation expense will be adjusted by $10,000 per year ($50,000 / 5-year life) in years 2018 through 2017.
DIFFICULTY:	D
LEARNING OBJECTIVES:	ADAC.FISC.4-4

23. The following accounts were noted in reviewing the trial balance for Parent Co. and Subsidiary Corp.:

	Assets under Construction
	Contracts Receivable
	Billings on Construction in Progress
	Earned Income on Long-Term Contracts
	Contracts Payable

If these accounts pertain to a contract where Subsidiary Corp. is building an asset for Parent Co., which of these accounts do you expect to eliminate when producing Parent Co. consolidated financial statements?

	a.	Assets under Construction; Billings on Construction in Progress; Earned Income on Long-Term Contracts
	b.	Contracts Receivable; Billings on Construction in Progress; Earned Income on Long-Term Contracts
	c.	Assets under Construction; Contracts Receivable; Billings on Construction in Progress; Earned Income on Long-Term Contracts; Contracts Payable
	d.	Contracts Receivable; Billings on Construction in Progress; Earned Income on Long-Term Contracts; Contracts Payable

ANSWER:	d
RATIONALE:	All intercompany receivables and debt (Contracts Receivable, Contracts Payable and Billing on Construction in Progress) should be eliminated, as well as any intercompany profit (Earned Income on Long-Term Contracts), which will be deferred and recognized through depreciation adjustments in subsequent years.
DIFFICULTY:	E
LEARNING OBJECTIVES:	ADAC.FISC.4-4

24. On January 1, 2016, a parent loaned $30,000 to its 100%-owned subsidiary on a 5-year, 8% note. The note requires a principal payment at the end of each year of $6,000 plus payment of interest accrued to date. The following accounts require adjustment in the consolidation process:

Controlling

Assets Debt Retained Earnings

	a.	Yes Yes Yes
	b.	No No Yes
	c.	Yes Yes No
	d.	No No No

ANSWER:	c
RATIONALE:	The parent’s asset account of $30,000 and any interest receivable should be eliminated, as should the subsidiary’s debt of $30,000 and any interest payable. The parent’s interest revenue should be eliminated, as should the subsidiary’s interest expense. However, as these amounts are equal, consolidated net income and retained earnings are not impacted; only the individual line items in the consolidated income statement.
DIFFICULTY:	M
LEARNING OBJECTIVES:	ADAC.FISC.4-5

25. Patti Corp. has several subsidiaries (Aeta, Beta, and Gaeta) that are included in its consolidated financial statements. In its 12/31/16 separate balance sheet, Patti had the following intercompany balances before eliminations:

	Debit	Credit
Current Receivable due from Aeta	$ 40,000
Noncurrent Receivable due from Beta	100,000
Cash Advance to Beta	26,000
Cash Advance from Gaeta		$75,000
Intercompany Payable to Gaeta		40,000

In its 12/31/16 consolidated balance sheet, what amount should Patti report as intercompany receivables?

	a.	$166,000
	b.	$51,000
	c.	$26,000
	d.	$0

ANSWER:	d
RATIONALE:	All intercompany debt and receivable balances are eliminated.
DIFFICULTY:	M
LEARNING OBJECTIVES:	ADAC.FISC.4-5

26. During 2018, a parent company billed its 100%-owned subsidiary for computer services at the rate of $1,000 per month. At year end, one month’s bill remained unpaid. As a part of the consolidation process, net income

	a.	should be reduced $12,000.
	b.	should be reduced $1,000.
	c.	needs no adjustment.
	d.	needs an adjustment, but the amount is not provided by this information.

ANSWER:	c
RATIONALE:	The parent’s revenue of $12,000 should be eliminated, as should the subsidiary’s expense. However, as these amounts are equal, consolidated net income is not impacted; only the individual line items in the consolidated income statement.
DIFFICULTY:	M
LEARNING OBJECTIVES:	ADAC.FISC.4-5

27. Phelps Co. uses the sophisticated equity method to account for the 80% investment in its subsidiary Shore Corp. At the time of the acquisition, the fair values of the net asset required approximated their book values. Based upon the following information, what is consolidated net income?

Phelps internally generated income:	$ 250,000
Shore internally generated income:	$ 50,000
Intercompany profit on Shore beginning inventory:	$ 10,000
Intercompany profit on Shore ending inventory:	$ 15,000

	a.	$300,000
	b.	$295,000
	c.	$286,000
	d.	$305,000

ANSWER:

RATIONALE:

Phelps internally generated income	$250,000
Shore internally generated income	50,000
Adjustment to recognize intercompany profit in Shore beginning inventory	10,000
Adjustment to defer intercompany profit in Shore ending inventory	(15,000)
Consolidated net income	$295,000

DIFFICULTY:

LEARNING OBJECTIVES:

ADAC.FISC.4-6

28. Phelps Co. uses the sophisticated equity method to account for the 80% investment in its subsidiary Shore Corp. At the time of the acquisition, the fair values of the net asset required approximated their book values. Based upon the following information, what amount does Phelps Co. record as subsidiary income?

Phelps internally generated income:	$250,000
Shore internally generated income:	$ 50,000
Intercompany profit on Shore beginning inventory:	$ 10,000
Intercompany profit on Shore ending inventory:	$ 15,000

	a.	$50,000
	b.	$44,000
	c.	$40,000
	d.	$36,000

ANSWER:

RATIONALE:

Subsidiary Company Income Distribution Schedule
Deferred profit in ending inventory	15,000	Internally generated net income	50,000
		Realized profit in beginning inventory	10,000

		Adjusted income	45,000
		Parent share	80%
		Subsidiary income	36,000

DIFFICULTY:

LEARNING OBJECTIVES:

ADAC.FISC.4-6

29. Phelps Co. uses the sophisticated equity method to account for the 80% investment in its subsidiary Shore Corp. At the time of the acquisition, the fair values of the net asset required approximated their book values. Based upon the following information, what amount of income is attributable to the non-controlling interest?

Phelps internally generated income:	$250,000
Shore internally generated income:	$ 50,000
Intercompany profit on Shore beginning inventory:	$ 10,000
Intercompany profit on Shore ending inventory:	$ 15,000

	a.	$10,000
	b.	$9,000
	c.	$11,000
	d.	$7,000

ANSWER:

RATIONALE:

Subsidiary Company Income Distribution Schedule
Deferred profit in ending inventory	15,000	Internally generated net income	50,000
		Realized profit in beginning inventory	10,000

		Adjusted income	45,000
		NCI share	20%
		Income attributable to the NCI	9,000

DIFFICULTY:

LEARNING OBJECTIVES:

ADAC.FISC.4-6

30. To consolidate affiliated companies, intercompany sales must be eliminated. Assume that Company P sold merchandise costing $5,000 to a subsidiary Company S, for $5,200. Company S then sells the merchandise to an outside company for $5,600. If the affiliated companies do not eliminate the intercompany sale, the following would occur:

	a.	The gross profit of $600 would be overstated and the cost of goods of $10,200 would be understated.
	b.	The gross profit of $600 would be correct, sales and cost of goods sold are inflated because they are included twice.
	c.	The gross profit percentage would be overstated.
	d.	Sales are overstated but cost of goods sold and gross profit are correct.

ANSWER:	b
DIFFICULTY:	MED
LEARNING OBJECTIVES:	ADAC.FISC.4-1

31. If subsidiary net income is $15,000 for Company S and parent Company P has a 75% interest in subsidiary Company S, what would be the elimination entry for the current-year equity income of Company S:

	a.	Debit Investment in Company S $15,000 and credit Subsidiary Income $15,000
	b.	Debit Subsidiary Income $11,250 and credit Investment in Company S $11,250
	c.	Debit Subsidiary Income $15,000 and credit Subsidiary Income $15,000
	d.	Debit Investment in Company S $11,250 and credit Subsidiary Income $11,250

ANSWER:	b
DIFFICULTY:	MED
LEARNING OBJECTIVES:	ADAC.FISC.4-3

Subjective Short Answer

Advanced Accounting 12th Edition Paul M Fischer William J Taylor Rita H Cheng – Test Bank

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