Fundamentals of Advanced Accounting Joe Hoyle 7th Edition-Test Bank

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Fundamentals of Advanced Accounting Joe Hoyle 7th Edition-Test Bank

 Sample Questions

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File: Chapter02 – Consolidation of Financial Information

 

Multiple Choice:

 

[QUESTION]

1. At the date of an acquisition which is not a bargain purchase, the acquisition method
2. A) Consolidates the subsidiary’s assets at fair value and the liabilities at book value.
3. B) Consolidates all subsidiary assets and liabilities at book value.
4. C) Consolidates all subsidiary assets and liabilities at fair value.
5. D) Consolidates current assets and liabilities at book value, and long-term assets and liabilities at fair value.
6. E) Consolidates the subsidiary’s assets at book value and the liabilities at fair value.

Answer: C

Learning Objective: 02-04

Learning Objective: 02-05

Topic: Acquisition―Valuation principles

Topic: Acquisition―Allocate fair value

Difficulty: 1 Easy

Blooms: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

2. In an acquisition where 100% control is acquired, how would the land accounts of the parent and the land accounts of the subsidiary be reported on consolidated financial statements?

 

	Parent	Subsidiary
A)	Book Value	Book Value
B)	Book Value	Fair Value
C)	Fair Value	Fair Value
D)	Fair Value	Book Value
E)	Cost	Cost

 

Answer: B

Learning Objective: 02-04

Learning Objective: 02-05

Topic: Acquisition―Valuation principles

Topic: Acquisition―Allocate fair value

Difficulty: 2 Medium

Blooms: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

3. Lisa Co. paid cash for all of the voting common stock of Victoria Corp. Victoria will continue to exist as a separate corporation. Entries for the consolidation of Lisa and Victoria would be recorded in
4. A) A worksheet.
5. B) Lisa’s general journal.
6. C) Victoria’s general journal.
7. D) Victoria’s secret consolidation journal.
8. E) The general journals of both companies.

Answer: A

Learning Objective: 02-07

Topic: Consolidation worksheet

Difficulty: 1 Easy

Blooms: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

4. Using the acquisition method for a business combination, goodwill is generally calculated as the:
5. A) Cost of the investment less the subsidiary’s book value at the beginning of the year.
6. B) Cost of the investment less the subsidiary’s book value at the acquisition date.
7. C) Cost of the investment less the subsidiary’s fair value at the beginning of the year.
8. D) Cost of the investment less the subsidiary’s fair value at acquisition date.
9. E) Zero, it is no longer allowed under federal law.

Answer: D

Learning Objective: 02-04

Learning Objective: 02-05

Topic: Acquisition―Valuation principles

Topic: Acquisition―Calculate goodwill or bargain

Difficulty: 2 Medium

Blooms: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

5. Direct combination costs and amounts incurred to register and issue stock in connection with a business combination. How should those costs be accounted for in a pre-2009 business combination?

 

Answer: B

Learning Objective: 02-09

Topic: Legacy methods―Purchase and pooling

Difficulty: 2 Medium

Blooms: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

6. How are direct and indirect costs accounted for when applying the acquisition method for a business combination?

Answer: A

Learning Objective: 02-06b

Topic: Costs of combination

Difficulty: 1 Easy

Blooms: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

7. What is the primarydifference between: (i) accounting for a business combination when the subsidiary is dissolved; and (ii) accounting for a business combination when the subsidiary retains its incorporation?
8. A) If the subsidiary is dissolved, it will not be operated as a separate division.
9. B) If the subsidiary is dissolved, assets and liabilities are consolidated at their book values.
10. C) If the subsidiary retains its incorporation, there will be no goodwill associated with the acquisition.
11. D) If the subsidiary retains its incorporation, assets and liabilities are consolidated at their book values.
12. E) If the subsidiary retains its incorporation, the consolidation is not formally recorded in the accounting records of the acquiring company.

Answer: E

Learning Objective: 02-03

Learning Objective: 02-06a

Learning Objective: 02-06c

Topic: Business combination―Differentiate across forms

Topic: Journal entry―Dissolution

Topic: Journal entry―Investment with no dissolution

Difficulty: 2 Medium

Blooms: Understand

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

8. According to GAAP, which of the following is true with respect to the pooling of interest method of accounting for business combinations?
9. A) It was the only method used prior to 2002.
10. B) It must be used for all new acquisitions.
11. C) GAAP allowed its use prior to 2002.
12. D) It, or the acquisition method, may be used at the acquirer’s discretion.
13. E) GAAP requires it to be used instead of the acquisition method for business combinations for which $50 billion or more in consideration is transferred.

Answer: C

Learning Objective: 02-09

Topic: Legacy methods―Purchase and pooling

Difficulty: 1 Easy

Blooms: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

9. Which of the following examples accurately describes a difference in the types of business combinations?
10. A) A statutory merger can only be effected through an asset acquisition while a statutory consolidation can only be effected through a capital stock acquisition.
11. B) A statutory merger can only be effected through a capital stock acquisition while a statutory consolidation can only be effected through an asset acquisition.
12. C) A statutory merger requires the dissolution of the acquired company while a statutory consolidation requires dissolution of the companies involved in the combination following the transfer of assets or stock to a newly formed entity.
13. D) A statutory consolidation requires dissolution of the acquired company while a statutory merger does not require dissolution.
14. E) Both a statutory merger and a statutory consolidation can only be effected through an asset acquisition but only a statutory consolidation requires dissolution of the acquired company.

Answer: C

Learning Objective: 02-03

Topic: Business combination―Differentiate across forms

Difficulty: 3 Hard

Blooms: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

10. Acquired in-process research and development is considered as
11. A) A definite-lived asset subject to amortization.
12. B) A definite-lived asset subject to testing for impairment.
13. C) An indefinite-lived asset subject to amortization.
14. D) An indefinite-lived asset subject to testing for impairment.
15. E) A research and development expense at the date of acquisition.

Answer: D

Learning Objective: 02-08

Topic: In-process research and development

Difficulty: 1 Easy

Blooms: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

11. Which of the following statements is true regarding the acquisition method of accounting for a business combination?
12. A) The combination must involve the exchange of equity securities only.
13. B) The transaction establishes an acquisition fair value basis for the company being acquired.
14. C) The two companies may be about the same size, and it is difficult to determine the acquired company and the acquiring company.
15. D) The transaction may be considered to be the uniting of the ownership interests of the companies involved.
16. E) The acquired subsidiary must be smaller in size than the acquiring parent.

Answer: B

Learning Objective: 02-04

Topic: Acquisition―Valuation principles

Difficulty: 1 Easy

Blooms: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

12. With respect to recognizing and measuring the fair value of a business combination in accordance with the acquisition method of accounting, which of the following should the acquirer consider when determining fair value?
13. A) Only assets received by the acquirer.
14. B) Only consideration transferred by the acquirer.
15. C) The consideration transferred by the acquirer plus the fair value of assets received less liabilities assumed.
16. D) The par value of stock transferred by the acquirer, and the book value of identifiable assets transferred by the entity acquired.
17. E) The book value of identifiable assets transferred to the acquirer as part of the business combination less any liabilities assumed.

Answer: C

Learning Objective: 02-04

Topic: Acquisition―Valuation principles

Difficulty: 3 Hard

Blooms: Understand

AACSB: Reflective Thinking
AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

13. A statutory merger is a(n)
14. A) Business combination in which only one of the two companies continues to exist as a legal corporation.
15. B) Business combination in which both companies continue to exist.
16. C) Acquisition of a competitor.
17. D) Acquisition of a supplier or a customer.
18. E) Legal proposal to acquire outstanding shares of the target’s stock.

Answer: A

Learning Objective: 02-03

Topic: Business combination―Differentiate across forms

Difficulty: 2 Medium

Blooms: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

14. In a business combination where a subsidiary retains its incorporation and which is accounted for under the acquisition method, how should stock issuance costs and direct combination costs be treated?
15. A) Stock issuance costs and direct combination costs are expensed as incurred.
16. B) Direct combination costs are ignored, and the stock issuance costs result in a reduction to additional paid-in capital.
17. C) Direct combination costs are expensed as incurred and stock issuance costs result in a reduction to additional paid-in capital.
18. D) Both are treated as part of the acquisition consideration transferred.
19. E) Both reduce additional paid-in capital.

Answer: C

Learning Objective: 02-06b

Topic: Costs of combination

Difficulty: 2 Medium

Blooms: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

REFERENCE: 02-01

Bullen Inc. acquired 100% of the voting common stock of Vicker Inc. on January 1, 2018. The book value and fairvalueof Vicker’s accounts on that date (prior to creating the combination) are as follows, along with the book value of Bullen’s accounts:

 

	Bullen	Vicker	Vicker
	Book	Book	Fair
	Value	Value	Value
Retained earnings, 1/1/20	$250,000	$240,000
Cash and receivables	170,000	70,000	$70,000
Inventory	230,000	170,000	210,000
Land	280,000	220,000	240,000
Buildings (net)	480,000	240,000	270,000
Equipment (net)	120,000	90,000	90,000
Liabilities	650,000	430,000	420,000
Common stock	360,000	80,000
Additional paid-in capital	20,000	40,000

 

 

[QUESTION]

REFER TO: 02-01

15. Assume that Bullen issued 12,000 shares of common stock, with a $5 par value and a $47 fair value, to obtain all of Vicker’s outstanding stock. In this acquisition transaction, how much goodwill should be recognized?
16. A) $144,000.
17. B) $104,000.
18. C) $ 64,000.
19. D) $ 60,000.
20. E) $

Answer: B

Learning Objective: 02-05

Topic: Acquisition―Calculate consideration transferred

Topic: Acquisition―Calculate goodwill or bargain

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Goodwill = Consideration Transferred less Acquisition Date Fair Value of Net Assets Acquired and Liabilities Assumed

Consideration Transferred: $47 × 12,000 = $564,000

Fair Value of Assets Acquired: 70,000 (cash and receivables) + 210,000 (inventory) + 240,000 (land) + 270,000 (buildings) + 90,000 (equipment) = $880,000

Fair Value of Liabilities Assumed: $420,000

Consideration Less Net Assets/Liabilities = $880,000 – $420,000 = $460,000

Goodwill: $564,000 – $460,000 = $104,000

 

[QUESTION]

REFER TO: 02-01

16. Assume that Bullen issued 12,000 shares of common stock with a $5 par value and a $47 fair value for all of the outstanding stock of Vicker. What is the consolidated balance for Land as a result of this acquisition transaction?
17. A) $460,000.
18. B) $510,000.
19. C) $500,000.
20. D) $520,000.
21. E) $490,000.

Answer: D

Learning Objective: 02-05

Learning Objective: 02-06a

Learning Objective: 02-07

Topic: Acquisition―Allocate fair value

Topic: Acquisition―Calculate consolidated balances

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: $280,000 (Bullen Land) + $240,000 (Vicker Land) = $520,000

 

[QUESTION]

REFER TO: 02-01

17. Assume that Bullen issued 12,000 shares of common stock with a $5 par value and a $47 fairvalue for all of the outstanding shares of Vicker. What will be the consolidated Additional Paid-In Capital and Retained Earnings (January 1, 2018 balances) as a result of this acquisition transaction?
18. A) $60,000 and $490,000.
19. B) $60,000 and $250,000.
20. C) $380,000 and $250,000.
21. D) $524,000 and $250,000.
22. E) $524,000 and $420,000.

Answer: D

Learning Objective: 02-05

Learning Objective: 02-06a

Learning Objective: 02-07

Topic: Acquisition―Calculate consideration transferred

Topic: Acquisition―Calculate consolidated balances

Difficulty: 3 Hard

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Consolidated Additional Paid-In Capital = Bullen APIC ($20,000) + APIC related to stock issued in connection with Vicker business combination ($42 × 12,000) = $20,000 + $504,000 = $524,000

Bullen’s Retained Earnings: $250,000

 

[QUESTION]

REFER TO: 02-01

18. Assume that Bullen issued preferred stock with a par value of $240,000 and a fair value of $500,000 for all of the outstanding shares of Vicker in an acquisition business combination. What will be the balance in the consolidated Inventory and Land accounts?
19. A) $440,000, $496,000.
20. B) $440,000, $520,000.
21. C) $425,000, $505,000.
22. D) $400,000, $500,000.
23. E) $427,000, $510,000.

Answer: B

Learning Objective: 02-05

Learning Objective: 02-06a

Learning Objective: 02-07

Topic: Acquisition―Allocate fair value

Topic: Acquisition―Calculate consolidated balances

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Inventory$230,000 BV + $210,000 FV = $440,000

Land$280,000 BV + $240,000 FV = $520,000

 

[QUESTION]

REFER TO: 02-01

19. Assume that Bullen paid a total of $480,000 in cash for all of the shares of Vicker. In addition, Bullen paid $35,000 for secretarial and management time allocated to the acquisition transaction.  What will be the balance in consolidated goodwill?
20. A) $
21. B) $20,000.
22. C) $35,000.
23. D) $55,000.
24. E) $65,000.

Answer: B

Learning Objective: 02-05

Learning Objective: 02-06b

Topic: Acquisition―Calculate goodwill or bargain

Topic: Costs of combination

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Fair value of consideration transferred less fair value of net assets = goodwill

$480,000 – (70,000+210,000+240,000+270,000+90,000-420,000) = $20,000 Excess

 

REFERENCE: 02-02

Prior to being united in a business combination, Botkins Inc. and Volkerson Corp. had the following stockholders’ equity figures:

Botkins issued 56,000 new shares of its common stock valued at $3.25 per share for all of the outstanding stock of Volkerson.

 

[QUESTION]

REFER TO: 02-02

20. Assume that Botkins acquired Volkerson on January 1, 2017 and that Volkerson maintains a separate corporate existence. At what amount did Botkins record the investment in Volkerson?
21. A) $ 56,000.
22. B) $182,000.
23. C) $209,000.
24. D) $261,000.
25. E) $312,000.

Answer: B

Learning Objective: 02-06c

Topic: Journal entry―Investment with no dissolution

Difficulty: 1 Easy

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: $3.25 × 56,000 = $182,000

 

[QUESTION]

REFER TO: 02-02

21. Assume that Botkins acquired Volkerson on January 1, 2017. Immediately afterwards, what is the value of the consolidated Common Stock?
22. A) $456,000.
23. B) $402,000.
24. C) $274,000.
25. D) $276,000.
26. E) $330,000.

Answer: D

Learning Objective: 02-05

Learning Objective: 02-06a

Learning Objective: 02-07

Topic: Acquisition―Calculate consideration transferred

Topic: Acquisition―Calculate consolidated balances

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: $220,000 + ($1.00 × 56,000) = $276,000

 

[QUESTION]

22. Chapel Hill Company had common stock of $350,000 and retained earnings of $490,000. Blue Town Inc. had common stock of $700,000 and retained earnings of $980,000.  On January 1, 2018, Blue Town issued 34,000 shares of common stock with a $12 par value and a $35 fair value for all of Chapel Hill Company’s outstanding common stock.  This combination was accounted for using the acquisition method. Immediately after the combination, what was the amount of total consolidated net assets?
23. A) $2,520,000.
24. B) $1,190,000.
25. C) $1,680,000.
26. D) $2,870,000.
27. E) $2,030,000.

Answer: D

Learning Objective: 02-05

Learning Objective: 02-06a

Learning Objective: 02-07

Topic: Acquisition―Calculate goodwill or bargain

Topic: Acquisition―Calculate consolidated balances

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Consideration Transferred = Net Fair Value of Assets Acquired and Liabilities Assumed

Consideration Transferred: $35 per share × 34,000 shares = $1,190,000

Net Fair Value of Assets/Liabilities: $700,000 + $980,000 = $1,680,000

Total: $1,190,000 + $1,680,000 = $2,870,000

 

[QUESTION]

23. Which of the following is a not a reason for a business combination to take place?
24. A) Cost savings through elimination of duplicate facilities.
25. B) Quick entry for new and existing products into domestic and foreign markets.
26. C) Diversification of business risk.
27. D) Vertical integration.
28. E) Increase in stock price of the acquired company.

Answer: E

Learning Objective: 02-01

Topic: Business combination―Reasons to combine

Difficulty: 1 Easy

Blooms: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

24. Which of the following statements is true regarding a statutory merger?
25. A) The original companies dissolve while remaining as separate divisions of a newly created company.
26. B) Both companies remain in existence as legal corporations with one corporation now a subsidiary of the acquiring company.
27. C) The acquired company dissolves as a separate corporation and becomes a division of the acquiring company.
28. D) The acquiring company acquires the stock of the acquired company as an investment.
29. E) A statutory merger is no longer a legal option.

Answer: C

Learning Objective: 02-03

Topic: Business combination―Differentiate across forms

Difficulty: 2 Medium

Blooms: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

25. Which of the following statements is true regarding a statutory consolidation?
26. A) The original companies dissolve while remaining as separate divisions of a newly created company.
27. B) Both companies remain in existence as legal corporations with one corporation now a subsidiary of the acquiring company.
28. C) The acquired company dissolves as a separate corporation and becomes a division of the acquiring company.
29. D) The acquiring company acquires the stock of the acquired company as an investment.
30. E) A statutory consolidation is no longer a legal option.

Answer: A

Learning Objective: 02-03

Topic: Business combination―Differentiate across forms

Difficulty: 2 Medium

Blooms: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

26. In a transaction accounted for using the acquisition method where consideration transferred exceeds book value of the acquired company, which statement is true for the acquiring company with regard to its investment?
27. A) Net assets of the acquired company are revalued to their fair values and any excess of consideration transferred over fair value of net assets acquired is allocated to goodwill.
28. B) Net assets of the acquired company are maintained at book value and any excess of consideration transferred over book value of net assets acquired is allocated to goodwill.
29. C) Acquired assets are revalued to their fair values. Acquired liabilities are maintained at book values. Any excess is allocated to goodwill.
30. D) Acquired long-term assets are revalued to their fair values. Any excess is allocated to goodwill.

Answer: A

Learning Objective: 02-04

Learning Objective: 02-05

Topic: Acquisition―Valuation principles

Topic: Acquisition―Allocate fair value

Difficulty: 2 Medium

Blooms: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

27. In a transaction accounted for using the acquisition method where consideration transferred is less than fair value of net assets acquired, which statement is true?
28. A) Negative goodwill is recorded.
29. B) A deferred credit is recorded.
30. C) A gain on bargain purchase is recorded.
31. D) Long-term assets of the acquired company are reduced in proportion to their fair values. Any excess is recorded as a deferred credit.
32. E) Long-term assets and liabilities of the acquired company are reduced in proportion to their fair values. Any excess is recorded as gain.

Answer: C

Learning Objective: 02-04

Learning Objective: 02-05

Topic: Acquisition―Valuation principles

Topic: Acquisition―Calculate goodwill or bargain

Difficulty: 1 Easy

Blooms: Analyze

AACSB: Analytical Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

28. Which of the following statements is true regarding the acquisition method of accounting for a business combination?
29. A) Net assets of the acquired company are reported at their fair values.
30. B) Net assets of the acquired company are reported at their book values.
31. C) Any goodwill associated with the acquisition is reported as a development cost.
32. D) The acquisition can only be effected by a mutual exchange of voting common stock.
33. E) Indirect costs of the combination reduce additional paid-in capital.

Answer: A

Learning Objective: 02-04

Topic: Acquisition―Valuation principles

Difficulty: 2 Medium

Blooms: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

[QUESTION]

29. Which of the following statements is true?
30. A) The pooling of interests for business combinations is an alternative to the acquisition method.
31. B) The purchase method for business combinations is an alternative to the acquisition method.
32. C) Neither the purchase method nor the pooling of interests method is allowed for new business combinations.
33. D) Any previous business combination originally accounted for under purchase or pooling of interests accounting method will now be accounted for under the acquisition method of accounting for business combinations.
34. E) Companies previously using the purchase or pooling of interests accounting method must report a change in accounting principle when consolidating those subsidiaries with new acquisition combinations.

Answer: C

Learning Objective: 02-09

Topic: Legacy methods―Purchase and pooling

Difficulty: 2 Medium

Blooms: Remember

AACSB: Reflective Thinking

AICPA: BB Critical Thinking

AICPA: FN Measurement

 

REFERENCE: 02-03

The financial statements for Goodwin, Inc., and Corr Company for the year ended December 31, 2018, prior to the business combination whereby Goodwin acquired Corr, are as follows (in thousands):

On December 31, 2018, Goodwin obtained a loan for $600 and used the proceeds, along with the transfer of 30 shares of its $10 par value common stock, in exchange for all of Corr’s common stock.  At the time of the transaction, Goodwin’s common stock had a fair value of $40 per share.

 

In connection with the business combination, Goodwin paid $25 to a broker for arranging the transaction and $35 in stock issuance costs.  At the time of the transaction, Corr’s equipment was actually worth $1,400 but its buildings were only valued at $560.

 

[QUESTION]

REFER TO: 02-03

30. Assuming that Corr retains a separate corporate existence after this acquisition, at what amount is the investment recorded on Goodwin’s books?
31. A) $1,540.
32. B) $1,800.
33. C) $1,860.
34. D) $1,825.
35. E) $1,625.

Answer: B

Learning Objective: 02-06b

Learning Objective: 02-06c

Topic: Costs of combination

Topic: Journal entry―Investment with no dissolution

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: $600 Cash + ($40 per share × 30 shares) = $1,800 Investment

 

[QUESTION]

REFER TO: 02-03

31. In this acquisition business combination, what total amount of common stock and additional paid-in capital should Goodwin recognize on its consolidated financial statements?
32. A) $
33. B) $1,165.
34. C) $1,200.
35. D) $1,235.
36. E) $1,765.

Answer: B

Learning Objective: 02-05

Learning Objective: 02-06a

Learning Objective: 02-06b

Learning Objective: 02-07

Topic: Acquisition―Calculate consideration transferred

Topic: Costs of combination

Topic: Acquisition―Calculate consolidated balances

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Total for Common Stock equals par value of stock; with respect to stock issued, APIC is adjusted by the amount fair value exceeds par value + stock issuance costs.

Common Stock: $10 par value per share x 30 shares = $300

APIC: Excess Value of Stock Over Par = $30 x 30 shares = $900

APIC: Stock Issuance Costs = $35

Total APIC =  $300 + $900 – $35 = $1,165

 

[QUESTION]

REFER TO: 02-03

32. Compute the consolidated revenues for 2018.
33. A) $2,700.
34. B) $
35. C) $
36. D) $3,300.
37. E) $1,540.

Answer: A

Learning Objective: 02-06a

Learning Objective: 02-07

Topic: Acquisition―Calculate consolidated balances

Difficulty: 1 Easy

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: $2,700 Parent’s Revenue Only

 

[QUESTION]

REFER TO: 02-03

33. Compute the consolidated receivables and inventory for 2018.
34. A) $1,200.
35. B) $1,515.
36. C) $1,540.
37. D) $1,800.
38. E) $2,140.

Answer: C

Learning Objective: 02-05

Learning Objective: 02-06a

Learning Objective: 02-07

Topic: Acquisition―Allocate fair value

Topic: Acquisition―Calculate consolidated balances

Difficulty: 1 Easy

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: $1,200 + $340 = $1,540

 

[QUESTION]

REFER TO: 02-03

34. Compute the consolidated expenses for 2018.
35. A) $1,980.
36. B) $2,005.
37. C) $2,040.
38. D) $2,380.
39. E) $2,405.

Answer: B

Learning Objective: 02-06a

Learning Objective: 02-06b

Learning Objective: 02-07

Topic: Costs of combination

Topic: Acquisition―Calculate consolidated balances

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Consolidated Expenses = Goodwin’s Expenses + Corr’s Expenses immediately following the transaction

Goodwin’s Expenses = $1,980 (2018 Expenses Reported on Financial Statements) + $25 (Fees Expensed as Incurred) = $2,005

 

[QUESTION]

REFER TO: 02-03

35. Compute the consolidated cash account at December 31, 2018.
36. A) $460.
37. B) $425.
38. C) $400.
39. D) $435.
40. E) $240.

Answer: C

Learning Objective: 02-05

Learning Objective: 02-06a

Learning Objective: 02-06b

Learning Objective: 02-07

Topic: Acquisition―Calculate consideration transferred

Topic: Costs of combination

Topic: Acquisition―Calculate consolidated balances

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Consolidated Cash Equals Goodwin’s Cash + Corr’s Cash – Cash to Pay Costs and Expenses Related to Business Combination

Goodwin’s Cash: $240

Corr’s Cash: $220

Costs and Expenses: $25 + $35 = $60

Consolidated Total = $240 + $220 = $460 – ($25 + $35) = $400

 

[QUESTION]

REFER TO: 02-03

36. Compute the consolidated buildings (net) account at December 31, 2018.
37. A) $2,700.
38. B) $3,370.
39. C) $3,300.
40. D) $3,260.
41. E) $3,340.

Answer: D

Learning Objective: 02-05

Learning Objective: 02-06a

Learning Objective: 02-07

Topic: Acquisition―Allocate fair value

Topic: Acquisition―Calculate consolidated balances

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Consolidated Value of Buildings Determined by adding the book value of Goodwin’s buildings ($2,700)to the Fair Value of Corr’s buildings ($560 FV) = $3,260

 

[QUESTION]

REFER TO: 02-03

37. Compute the consolidated equipment (net) account at December 31, 2018.
38. A) $2,100.
39. B) $3,500.
40. C) $3,300.
41. D) $3,000.
42. E) $3,200.

Answer: B

Learning Objective: 02-05

Learning Objective: 02-06a

Learning Objective: 02-07

Topic: Acquisition method―Allocate fair value

Topic: Acquisition―Calculate consolidated balances

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Consolidated Value of Equipment (net) Determined by adding the book value of Goodwin’s Equipment Account ($2,100)to the Fair Value of Corr’s Equipment (net)($1,400) for a totalconsolidated fair value of $3,500

 

[QUESTION]

REFER TO: 02-03

38. Compute the consideration transferred for this acquisition at December 31, 2018.
39. A) $
40. B) $1,165.
41. C) $1,200.
42. D) $1,765.
43. E) $1,800.

Answer: E

Learning Objective: 02-05

Topic: Acquisition―Calculate consideration transferred

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Consideration transferred equals fair value of cash($600) + fair value of Goodwin stock issued ($40 per share × 30 shares) = $600 + $1,200 = $1,800

 

[QUESTION]

REFER TO: 02-03

39. Compute the goodwill arising from this acquisition at December 31, 2018.
40. A) $
41. B) $100.
42. C) $125.
43. D) $160.
44. E) $

Answer: B

Learning Objective: 02-05

Topic: Acquisition―Calculate goodwill or bargain

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Goodwill equals excess of: (i) fair value of assets received and liabilities assumed; less (ii) consideration paid.

Fair value of assets received: $220 cash + $340 receivables and inventory + $560 fair value of buildings (net) + $1,400 fair value of equipment (net) = $2,520

Fair value of liabilities assumed: $820

Consideration paid: $600 cash + FV of common stock ($40 × 30 = $1,200) = $1,800

Goodwill = Consideration Paid ($1,800) less Fair Value of assets received and liabilities assumed ($2,520 assets received – $820 liabilities assumed = $1,700) = $1,800 – $1,700 = $100

 

[QUESTION]

REFER TO: 02-03

40. Compute the consolidated common stock account at December 31, 2018.
41. A) $1,080.
42. B) $1,480.
43. C) $1,380.
44. D) $2,280.
45. E) $2,680.

Answer: C

Learning Objective: 02-05

Learning Objective: 02-06a

Learning Objective: 02-07

Topic: Acquisition―Calculate consideration transferred

Topic: Acquisition―Calculate consolidated balances

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

AICPA: FN Measurement

Feedback: Goodwin Stock (par value $1,080) + Stock Issued for Corr (par value $10 × 30 shares) = $1,080 + $300 = $1,380

 

[QUESTION]

REFER TO: 02-03

41. Compute the consolidated additional paid-in capital at December 31, 2018.
42. A) $
43. B) $1,350.
44. C) $1,675.
45. D) $1,910.
46. E) $1,875.

Answer: C

Learning Objective: 02-05

Learning Objective: 02-06a

Learning Objective: 02-06b

Learning Objective: 02-07

Topic: Acquisition―Calculate consideration transferred

Topic: Costs of combination

Topic: Acquisition―Calculate consolidated balances

Difficulty: 3 Hard

Blooms: Apply

AACSB: Knowledge Application

AICPA: BB Critical Thinking

 

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 ofexcess land allocation at the acquisition date?
4. A) $0.
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 ofexcess land allocation attributed to the controlling interest at the acquisition date?
5. A) $0.
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 ofexcess land allocation attributed to the noncontrolling interest at the acquisition date?
6. A) $0.
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 goodwillrecognized at the date of acquisition?
8. A) $150,000.
9. B) $250,000.
10. C) $0.
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 basedon Purchase Price  ($1,600,000 / .80) $2,000,000 = ($150,000) Goodwill

 

[QUESTION]

REFER TO: 04-02

8. What amount of goodwillshould be attributed to Perchat the date of acquisition?
9. A) $150,000.
10. B) $250,000.
11. C) $0.
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 interestat the date of acquisition?
10. A) $0.
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 interestthat 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 representedin 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 wouldFemur Co. report asconsolidated 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?

A)$   582,000

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 sheetat 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’sliabilityshould 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, 2019when 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 providedthe selected amounts shown below. Additionally, no dividends have been paid.

Royce Co.

Park Co.

Book

Book

Fair

Value

Value

Value

Current assets

$      868,000

$   420,000

$   448,000

Equipment

364,000

280,000

400,000

Buildings

574,000

210,000

210,000

Liabilities

(    546,000)

( 168,000)

( 168,000)

Revenues

( 1,260,000)

( 560,000)

Expenses

700,000

420,000

Investment income

Not Given

[QUESTION]

REFER TO: 04-05

22. What amount ofconsolidated net income for 2020is attributable toRoyce’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, 2020and what is the ending balance of the noncontrolling interest in the subsidiary at December 31, 2020?
24. A) $56,000and $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 acquire80% 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 representsconsolidated 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 toconsolidated 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 arethe 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 thenoncontrolling 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 its80% investment in an acquired subsidiary, which of the following statements is falseat 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 isnot 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 its80% investment in an acquired subsidiary, which of the following statements is trueat the date immediately preceding the date on which adjustments are madeon 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 methodthroughout the year to account for its80% investment in an acquired subsidiary, which of the following statements is trueat the date immediately preceding the date on which adjustments are madeon 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 includedin 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 forthe 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 trueof the subsidiary with respect to the presentation of consolidated financial statement information?
37. A) Pre-acquisition earnings are deducted from consolidatedrevenues and expenses.
38. B) Pre-acquisition earnings are added to consolidatedrevenues 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 usedthe acquisition method when it acquiredits 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:

 

Book Value

Fair Value

Buildings (10

–

year life)

$10,000

$ 8,000

Equipment (4

–

year life)

14,000

18,000

Land

5,000

12,000

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