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

 

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Sample Test

Chapter_03_Consolidated_Statements_Subsequent_to_Acquisition   1. The method of accounting for subsidiaries that better reflects the investment account on parent-only financial statements is the   a. ​cost method.   b. ​simple equity method.   c. ​investment method.   d. ​sophisticated equity method.   ANSWER:   d RATIONALE:   Under the sophisticated equity method the subsidiary income, and therefore, the investment account, is adjusted for the amortizations of the excess fair value over book value of the net assets acquired. DIFFICULTY:   E LEARNING OBJECTIVES:   ADAC.FISC.3-1

 

2. The method of accounting for subsidiaries that is required for influential investments is the   a. ​cost method.   b. ​simple equity method.   c. ​investment method.   d. ​sophisticated equity method.   ANSWER:   d RATIONALE:   The sophisticated equity method is required by GAAP for unconsolidated investments over which the investor has significant influence. DIFFICULTY:   E LEARNING OBJECTIVES:   ADAC.FISC.3-1

 

3. The method of accounting for subsidiaries where investment income is limited to dividends received is the   a. ​cost method.   b. ​simple equity method.   c. ​investment method.   d. ​sophisticated equity method.   ANSWER:   a RATIONALE:   Under the cost method, dividends received from the subsidiary are recorded as income. DIFFICULTY:   E LEARNING OBJECTIVES:   ADAC.FISC.3-1

 

4. Which of the following statements applying to the use of the equity method versus the cost method is true?   a. ​A parent company may incur a delay in closing its books while waiting for a subsidiary that it accounts for using the cost method to determine its income.   b. ​If no dividends were paid by the subsidiary, the investment account would have the same balance under both methods.   c. ​The method used has no impact on consolidated financial statements.   d. ​An advantage of the equity method is that no amortization of excess adjustments needs to be made on the consolidated worksheet.   ANSWER:   c RATIONALE:   Regardless of the method the parent uses to account for the subsidiary, the consolidated financial statements will have the same result. DIFFICULTY:   E LEARNING OBJECTIVES:   ADAC.FISC.3-1

 

5. On January 1, 2016, Rabb Corp. purchased 80% of Sunny Corp.’s $10 par common stock for $975,000. On this date, the carrying amount of Sunny’s net assets was $1,000,000. The fair values of Sunny’s identifiable assets and liabilities were the same as their carrying amounts except for plant assets (net), which were $100,000 in excess of the carrying amount. ​ In the January 1, 2016, consolidated balance sheet, goodwill should be reported at ____.   a. ​$0   b. ​$75,750   c. ​$95,000   d. ​$118,750   ANSWER:   d RATIONALE:   Determination and Distribution of Excess Schedule: ​ Implied Fair Value Parent Price 80% NCI Value 20% Fair value of subsidiary $1,218,750 $975,000 $243,750 Less book value of interest acquired 1,000,000 800,000 200,000 Excess of book value over fair value $ 218,750 $175,000 $ 43,750 ​ ​ ​ ​ Adjustment of identifiable accounts ​ ​ ​ Plant assets $100,000 ​ ​ Goodwill 118,750 ​ ​ Total $218,750 ​ ​ DIFFICULTY:   M LEARNING OBJECTIVES:   ADAC.FISC.3-1

 

6. On January 1, 2016, Promo, Inc. purchased 70% of Set Corporation for $469,000. On that date the book value of the net assets of Set totaled $500,000. Based on the appraisal done at the time of the purchase, all assets and liabilities had book values equal to their fair values except as follows: ​ ​ Book Value Fair Value Inventory $100,000 $120,000 Land 75,000 85,000 Equipment (useful life 4 years) 125,000 165,000 ​ The remaining excess of cost over book value was allocated to a patent with a 10-year useful life. ​ During 2016 Promo reported net income of $200,000 and Set had net income of $100,000. ​ What income from subsidiary did Promo include in its net income if Promo uses the simple equity method?   a. ​$33,000   b. ​$42,000   c. ​$70,000   d. ​$100,000   ANSWER:   c RATIONALE:   Promo’s subsidiary income under the simple equity method would be $70,000 ($100,000 x 70%) DIFFICULTY:   M LEARNING OBJECTIVES:   ADAC.FISC.3-1

 

7. Pete purchased 100% of the common stock of the Sanburn Company on January 1, 2016, for $500,000. On that date, the stockholders’ equity of Sanburn Company was $380,000. On the purchase date, inventory of Sanburn Company, which was sold during 2016, was understated by $20,000. Any remaining excess of cost over book value is attributable to patent with a 20-year life. The reported income and dividends paid by Sanburn Company were as follows: ​ ​ 2016 2017 Net income $80,000 $90,000 Dividends paid 10,000 10,000 ​ Using the simple equity method, which of the following amounts are correct? ​ Investment Income      Investment Account Balance 2016                    December 31, 2016   a. ​$80,000                  $570,000   b. ​$70,000                  $570,000   c. ​$70,000                  $550,000   d. ​$80,000                  $550,000   ANSWER:   a RATIONALE:   Investment in Sanburn 500,000 ​       Cash ​ 500,000 ​ ​ ​ Investment in Sanburn 80,000 ​       Subsidiary Income ​ 80,000 ​ ​ ​ Cash 10,000 ​       Investment in Sanburn ​ 10,000 ​ ​ ​ Investment Balance, December 31, 2016 ​ $570,000 ​ DIFFICULTY:   M LEARNING OBJECTIVES:   ADAC.FISC.3-1

 

8. Pete purchased 100% of the common stock of the Sanburn Company on January 1, 2016, for $500,000. On that date, the stockholders’ equity of Sanburn Company was $380,000. On the purchase date, inventory of Sanburn Company, which was sold during 2016, was understated by $20,000. Any remaining excess of cost over book value is attributable to patent with a 20-year life. The reported income and dividends paid by Sanburn Company were as follows: ​ ​ 2016 2017 Net income $80,000 $90,000 Dividends paid 10,000 10,000 ​ Using the sophisticated (full) equity method, which of the following amounts are correct? ​ Investment Income      Investment Account Balance 2016                    December 31, 2016   a. ​$55,000                   $555,000   b. ​$55,000                   $545,000   c. ​$75,000                   $565,000   d. $80,000                   $570,000   ANSWER:   b RATIONALE:   Investment in Sanburn 500,000 ​       Cash ​ 500,000 ​ ​ ​ Investment in Sanburn 55,000 ​       Subsidiary Income ($80,000 – $25,000**) ​ 55,000 ​ ​ ​ Cash 10,000 ​       Investment in Sanburn ​ 10,000 ​ ​ ​ Investment Balance, December 31, 2016 ​ $545,000 ​ **Determination and Distribution of Excess Schedule: ​ Implied Fair Value ​ ​ Fair value of subsidiary $500,000 ​ ​ Less book value of interest acquired 380,000 ​ ​ Excess of book value over fair value $120,000 ​ ​ ​ ​ ​ ​ Adjustment of identifiable accounts ​ Amortization Life Inventory $ 20,000 $20,000 FIFO Patent 100,000 5,000 20 years Total $120,000 $25,000 ​ ​ DIFFICULTY:   M LEARNING OBJECTIVES:   ADAC.FISC.3-1

 

9. Pete purchased 100% of the common stock of the Sanburn Company on January 1, 2016, for $500,000. On that date, the stockholders’ equity of Sanburn Company was $380,000. On the purchase date, inventory of Sanburn Company, which was sold during 2016, was understated by $20,000. Any remaining excess of cost over book value is attributable to patent with a 20-year life. The reported income and dividends paid by Sanburn Company were as follows: ​ ​ 2016 2017 Net income $80,000 $90,000 Dividends paid 10,000 10,000 ​ Using the cost method, which of the following amounts are correct? ​ Investment Income      Investment Account Balance 2016                    December 31, 2016   a. ​$10,000                   $500,000   b. ​$10,000                   $570,000   c. ​          $0                   $570,000   d. ​$80,000                   $500,000   ANSWER:   a RATIONALE:   Investment in Sanburn 500,000 ​       Cash ​ 500,000 ​ ​ ​ Cash 10,000 ​       Subsidiary Income ​ 10,000 ​ ​ ​ Investment Balance, December 31, 2016 ​ $500,000 ​ DIFFICULTY:   M LEARNING OBJECTIVES:   ADAC.FISC.3-1

 

10. What is the effect if an unconsolidated subsidiary is accounted for by the equity method but consolidated statements are being prepared for the parent company and other subsidiaries?   a. ​All of the unconsolidated subsidiary’s accounts will be included individually in the consolidated statements.   b. ​The consolidated retained earnings will not reflect the earnings of the unconsolidated subsidiary.   c. ​The consolidated retained earnings will be the same as if the subsidiary had been included in the consolidation.   d. ​Dividend revenue from the unconsolidated subsidiary will be reflected in consolidated net income.   ANSWER:   c RATIONALE:   When using the equity method, the amount the parent records as its investment income or loss is the same that would be recognized in consolidated financial statements, namely, the parent’s ownership interest multiplied by the subsidiary’s reported income. DIFFICULTY:   D LEARNING OBJECTIVES:   ADAC.FISC.3-1

 

11. In consolidated financial statements, it is expected that:   a. ​Dividends declared equals the sum of the total parent company’s declared dividends and the total subsidiary’s declared dividends.   b. ​Retained Earnings equals the sum of the controlling interest’s separate retained earnings and the non-controlling interest’s separate retained earnings.   c. ​Common Stock equals the sum of the parent company’s outstanding shares and the subsidiary’s outstanding shares.   d. ​Consolidated Net Income equals the sum of the income distributed to the controlling interest and the income distributed to the non-controlling interest.   ANSWER:   d RATIONALE:   Consolidated net income is distributed to the controlling and non-controlling interest. DIFFICULTY:   E LEARNING OBJECTIVES:   ADAC.FISC.3-2

 

12. How is the portion of consolidated earnings to be assigned to non-controlling interest in consolidated financial statements determined?​   a. ​The net income of the parent is subtracted from the subsidiary’s net income to determine the non-controlling interest.   b. ​The subsidiary’s net income is extended to the non-controlling interest.   c. ​The amount of the subsidiary’s earnings is multiplied by the non-controlling’s percentage ownership and is adjusted for the excess cost amortization applicable to the NCI.   d. ​The amount of consolidated earnings determined on the consolidated working papers is multiplied by the non-controlling interest percentage at the balance-sheet date.   ANSWER:   c RATIONALE:   All amortizations of excess resulting from the consolidation process are adjusted to the subsidiary’s income. The adjusted income is then distributed to the controlling and non-controlling interest based on their respective portion of ownership. DIFFICULTY:   M LEARNING OBJECTIVES:   ADAC.FISC.3-2

 

13. ​If in the consolidation process the investment in subsidiary account is increased or decreased by the amount determined by the following calculation: the investment account is being converted from ​   a. ​cost to simple equity.   b. ​cost to sophisticated equity.   c. ​simple equity to sophisticated equity.   d. ​simple equity to cost.   ANSWER:   a RATIONALE:   Rather than develop a separate set of procedures for elimination of an investment under the cost method, the cost method investment is converted to its simple equity balance at the beginning of the period to create date alignment. DIFFICULTY:   M LEARNING OBJECTIVES:   ADAC.FISC.3-3

 

14. Balance sheet information for Pawn Company and its 90%-owned subsidiary, Sox Corporation, at December 31, 2016, is summarized as follows: ​ ​ Pawn Sox Current assets-net $ 200,000 $ 50,000 Property, plant, and equipment-net 1,000,000 600,000 Investment in Sox 558,000 ​ ​ $1,758,000 $650,000 ​ ​ ​ Current liabilities $ 100,000 $ 30,000 Capital stock 800,000 400,000 Retained earnings 858,000 220,000 ​ $1,758,000 $650,000 ​ Pawn acquired its interest in Sox for cash at book value several years ago when Sox’s assets and liabilities were equal to their fair values. ​ Consolidated total assets of Pawn and Sox, at December 31, 2016, will be ____.   a. ​$1,785,000   b. ​$1,850,000   c. ​$2,343,000   d. ​$2,408,000   ANSWER:   b RATIONALE:   Pawn total assets $1,758,000 Sox total assets 650,000 Combined total assets 2,408,000 Elimination of investment account (558,000) Consolidated total assets $1,850,000 DIFFICULTY:   M LEARNING OBJECTIVES:   ADAC.FISC.3-2 ADAC.FISC.3-3 ADAC.FISC.3-4

 

15. ​Balance sheet information for Pawn Company and its 90%-owned subsidiary, Sox Corporation, at December 31, 2016, is summarized as follows: ​ ​ Pawn Sox Current assets-net $ 200,000 $ 50,000 Property, plant, and equipment-net 1,000,000 600,000 Investment in Sox 558,000 ​ ​ $1,758,000 $650,000 ​ ​ ​ Current liabilities $ 100,000 $ 30,000 Capital stock 800,000 400,000 Retained earnings 858,000 220,000 ​ $1,758,000 $650,000 ​ Pawn acquired its interest in Sox for cash at book value several years ago when Sox’s assets and liabilities were equal to their fair values. ​ The consolidated balance sheet of Pawn and Sox at December 31, 2016 will show   a. ​Investment in Sioux, $558,000.   b. ​Capital stock, $800,000.   c. ​Retained earnings, $1,078,000.   d. ​Non-controlling interest, $65,000.   ANSWER:   b RATIONALE:   The consolidated balance sheet will show capital stock of $800,000 as the consolidated financial statements will reflect the amount of the equity with outside shareholders, which is that of the parent and that attributable to the NCI. The NCI would be 10% of the net assets, or $62,000. ​ The Investment in Sox account will be eliminated in consolidation.   DIFFICULTY:   M LEARNING OBJECTIVES:   ADAC.FISC.3-2 ADAC.FISC.3-3 ADAC.FISC.3-4

 

16. On January 1, 2016, Promo, Inc. purchased 70% of Set Corporation for $469,000. On that date the book value of the net assets of Set totaled $500,000. Based on the appraisal done at the time of the purchase, all assets and liabilities had book values equal to their fair values except as follows: ​ ​ Book Value Fair Value Inventory $100,000 $120,000 Land 75,000 85,000 Equipment (useful life 4 years) 125,000 165,000 ​ The remaining excess of cost over book value was allocated to a patent with a 10-year useful life. ​ During 2016 Promo reported net income of $200,000 and Set had net income of $100,000. ​ What is consolidated net income if Promo recognizes income from Set using the sophisticated equity method?   a. ​$242,000   b. ​$249,000   c. ​$270,000   d. ​$300,000   ANSWER:   a RATIONALE:   Determination and Distribution of Excess Schedule: ​ Implied Fair Value Parent Price 70% NCI Value 30% Fair value of subsidiary $670,000 $469,000 $201,000 Less book value of interest acquired 500,000 350,000 150,000 Excess of book value over fair value $170,000 $119,000 $ 51,000 ​ ​ ​ ​ Adjustment of identifiable accounts ​ Amortization Life Inventory ($120,000 – $100,000) $ 20,000 $20,000 FIFO Land ($85,000 – $75,000) 10,000 ​ ​ Equipment ($165,000 – $125,000) 40,000 10,000 4 years Patent 100,000 10,000 10 years Total $170,000 $40,000 ​ ​ Promo reported net income ​ $200,000 Set reported net income $100,000 ​ Less amortizations (40,000) ​ ​ 60,000 ​ Promo’s interest in Set 70% 42,000 Consolidated net income ​ $242,000 DIFFICULTY:   D LEARNING OBJECTIVES:   ADAC.FISC.3-5

 

17. On January 1, 2016, Promo, Inc. purchased 70% of Set Corporation for $469,000. On that date the book value of the net assets of Set totaled $500,000. Based on the appraisal done at the time of the purchase, all assets and liabilities had book values equal to their fair values except as follows: ​ ​ Book Value Fair Value Inventory $100,000 $120,000 Land 75,000 85,000 Equipment (useful life 4 years) 125,000 165,000 ​ The remaining excess of cost over book value was allocated to a patent with a 10-year useful life. ​ During 2016 Promo reported net income of $200,000 and Set had net income of $100,000. ​ What income from subsidiary did Promo include in its net income if Promo uses the sophisticated equity method?   a. ​$42,000   b. ​$49,000   c. ​$70,000   d. ​$100,000   ANSWER:   a RATIONALE:   Determination and Distribution of Excess Schedule: ​ Implied Fair Value Parent Price 70% NCI Value 30% Fair value of subsidiary $670,000 $469,000 $201,000 Less book value of interest acquired 500,000 350,000 150,000 Excess of book value over fair value $170,000 $119,000 $ 51,000 ​ ​ ​ ​ Adjustment of identifiable accounts ​ Amortization Life Inventory ($120,000 – $100,000) $ 20,000 $20,000 FIFO Land ($85,000 – $75,000) 10,000 ​ ​ Equipment ($165,000 – $125,000) 40,000 10,000 4 years Patent 100,000 10,000 10 years Total $170,000 $40,000 ​ ​ Set reported net income $100,000 ​ Less amortizations (40,000) ​ ​ 60,000 ​ Promo’s interest in Set 70% ​ Promo’s investment income $ 42,000 ​ ​ DIFFICULTY:   M LEARNING OBJECTIVES:   ADAC.FISC.3-5

 

18. On January 1, 2016, Payne Corp. purchased 70% of Shayne Corp.’s $10 par common stock for $900,000. On this date, the carrying amount of Shayne’s net assets was $1,000,000. The fair values of Shayne’s identifiable assets and liabilities were the same as their carrying amounts except for plant assets (net), which were $200,000 in excess of the carrying amount. For the year ended December 31, 2016, Shayne had net income of $150,000 and paid cash dividends totaling $90,000. Excess attributable to plant assets is amortized over 10 years. ​ In the December 31, 2016, consolidated balance sheet, non-controlling interest should be reported at ____.   a. ​$282,714   b. ​$300,500   c. ​$397,714   d. ​$345,500   ANSWER:   c RATIONALE:   Determination and Distribution of Excess Schedule: ​ Implied Fair Value Parent Price 70% NCI Value 30% Fair value of subsidiary $1,285,714 $900,000 $385,714 Less book value of interest acquired 1,000,000 700,000 300,000 Excess of book value over fair value $ 285,714 $200,000 $ 85,714 ​ ​ ​ ​ Adjustment of identifiable accounts ​ Amortization Estimated life Plant assets $200,000 $20,000 10 years Goodwill 85,714 ​ ​ Total $285,714 ​ ​ ​ NCI value at acquisition date ​ $385,714 Shayne net income $150,000 ​ Amortization (20,000) ​ ​ 130,000 ​ NCI portion 30% 39,000 NCI portion of dividends ($90,000 x 30%) ​ (27,000) NCI balance at December 31, 2016 ​ $397,714 DIFFICULTY:   M LEARNING OBJECTIVES:   ADAC.FISC.3-5

 

19. In a mid-year purchase when the subsidiary’s books are not closed until the end of the year, the consolidated net income contains the parent’s share of the   a. ​subsidiary’s income earned for the entire year.   b. ​subsidiary’s income earned from the beginning of the year to the date of acquisition.   c. ​subsidiary’s income earned from the date of acquisition to the end of the year.   d. ​dividends received from the subsidiary during the period of ownership.   ANSWER:   c RATIONALE:   The parent’s share of subsidiary income that was earned prior to the purchase date was earned by stockholders that are not members of the consolidated company. This income is not included in consolidated net income.​ DIFFICULTY:   E LEARNING OBJECTIVES:   ADAC.FISC.3-6

 

20. Alpha purchased an 80% interest in Beta on June 30, 2016. Both Alpha’s and Beta’s reporting periods end December 31. Which of the following represents the controlling interest in consolidated net income for 2016?   a. ​100% of Alpha’s July 1-December 31 income plus 80% of Beta’s July 1-December 31 income   b. ​100% of Alpha’s July 1-December 31 income plus 100% of Beta’s July 1-December 31 income   c. ​100% of Alpha’s January 1-December 31 income plus 80% of Beta’s July 1-December 31 income   d. ​100% of Alpha’s January 1-December 31 income plus 80% of Beta’s January 1-December 31 income   ANSWER:   c RATIONALE:   The parent’s share of subsidiary income that was earned prior to the purchase date was earned by stockholders that are not members of the consolidated company. This income is not included in consolidated net income. DIFFICULTY:   M LEARNING OBJECTIVES:   ADAC.FISC.3-6

 

21. Under IASB for small and medium entities, goodwill:   a. ​is subject to impairment procedures.   b. ​is never adjusted.   c. ​is amortized over ten years.   d. ​is not recorded in an acquisition.   ANSWER:   c RATIONALE:   Under IASB for small and medium entities, goodwill is amortized over ten years. DIFFICULTY:   M LEARNING OBJECTIVES:   ADAC.FISC.3-6

 

22. Prossart Company owned 70% of the outstanding stock of Say Company. During the annual goodwill impairment test, the following information pertaining to Say was noted: ​ Book value of net assets $2,000,000 Fair value of Say Company 1,800,000 Estimated fair value of net identifiable assets 1,700,000 Recorded goodwill 200,000 ​ The amount of goodwill impairment loss that would be recorded on Prossart’s books would be:   a. ​$200,000   b. ​$140,000   c. ​$100,000   d. ​$70,000   ANSWER:   d RATIONALE:   Results of impairment test: The book value of Say’s net assets exceeds the fair value of the company. ​ Calculation of impairment loss: Fair value of Say Company $1,800,000 Less fair value of identifiable assets 1,700,000 Estimated goodwill 100,000 Recorded goodwill 200,000 Goodwill impairment loss $ (100,000) ​ ​ Prossart will record $70,000 ($100,000 x 70%) on its books. The remaining 30% will be booked to the NCI on the consolidating worksheet. DIFFICULTY:   D LEARNING OBJECTIVES:   ADAC.FISC.3-7

 

23. On January 1, 2016, Piston, Inc. acquired Spur Corp. While recording the acquisition, Piston established a deferred tax liability. It is most likely that this account was created because   a. ​The transaction was a tax-free exchange to Piston.   b. ​Piston had not paid all of the income taxes due the government when acquiring Spur.   c. ​The transaction was a tax-free exchange to Spur.   d. ​Spur had not paid all of the income taxes due the government prior to the acquisition by Piston.   ANSWER:   a RATIONALE:   A deferred tax liability results when the fair value of an asset may not be used in future depreciation calculations for tax purposes. This happens in a tax-free exchange to the seller. DIFFICULTY:   M LEARNING OBJECTIVES:   ADAC.FISC.3-9

 

24. Which of the following is not true regarding a subsidiary’s tax loss carryovers in an acquisition?   a. ​The resulting deferred tax asset should be considered when determining the amount of goodwill.   b. ​The parent will always be able to use a portion of the tax loss carryovers in the current period.   c. ​A valuation allowance should be provided if it is probable the benefit will not be used.   d. ​The resulting deferred tax asset should be separated into current and noncurrent components.   ANSWER:   b RATIONALE:   The parent may not be able to use a portion of the tax loss carryovers in the current period for a number of reasons including the lack of taxable income or the circumstances of the acquisition do not meet IRS requirements for the parent to be able to do so. DIFFICULTY:   D LEARNING OBJECTIVES:   ADAC.FISC.3-9

 

25. ​On January 1, 2016, Parent Company purchased 80% of the common stock of Subsidiary Company for $316,000. On this date, Subsidiary had common stock, other paid-in capital, and retained earnings of $40,000, $120,000, and $190,000, respectively. Net income and dividends for 2 years for Subsidiary Company were as follows: ​ ​ 20X1 20X2 Net income $50,000 $90,000 Dividends 10,000 20,000 ​ On January 1, 2016, the only tangible assets of Subsidiary that were undervalued were inventory and building. Inventory, for which FIFO is used, was worth $5,000 more than cost. The inventory was sold in 2016. Building, which was worth $15,000 more than book value, has a remaining life of 8 years, and straight-line depreciation is used. Any remaining excess is goodwill. ​ Prepare Parent’s 2016 and 2017 journal entries (after the purchase has been recorded) to record the transactions related to its investment in Subsidiary under the a. cost method b. simple equity method   ANSWER:   a. cost method journal entries: ​ 2016 2017 ​ Debit Credit Debit Credit Cash 8,000 (1) ​ 16,000 (2) ​         Dividend Income ​ 8,000 ​ 16,000 ​ (1) 80% of $10,000 dividends (2) 80% of $20,000 dividends ​ b. simple equity method: ​ 2016 2017 ​ Debit Credit Debit Credit Investment in Subsidiary 40,000 (1) ​ 72,000 (2) ​        Subsidiary Income ​ 40,000 ​ 72,000 ​ ​ ​ ​ ​ Cash 8,000 (3) ​ 16,000 (4) ​         Investment in Subsidiary ​ 8,000 ​ 16,000 ​ (1) 80% of $50,000 net income (2) 80% of $90,000 net income (3) 80% of $10,000 dividends (4) 80% of $20,000 dividends DIFFICULTY:   M LEARNING OBJECTIVES:   ADAC.FISC.3-1

 

26. On January 1, 2016, Parent Company purchased 80% of the common stock of Subsidiary Company for $316,000. On this date, Subsidiary had common stock, other paid-in capital, and retained earnings of $40,000, $120,000, and $190,000, respectively. Net income and dividends for 2 years for Subsidiary Company were as follows: ​ ​ 2016 2017 Net income $50,000 $90,000 Dividends 10,000 20,000 ​ On January 1, 2016, the only tangible assets of Subsidiary that were undervalued were inventory and building. Inventory, for which FIFO is used, was worth $5,000 more than cost. The inventory was sold in 2016. Building, which was worth $15,000 more than book value, has a remaining life of 8 years, and straight-line depreciation is used. Any remaining excess is goodwill. ​ Prepare Parent’s 2016 and 2017 journal entries (after the purchase has been recorded) to record the transactions related to its investment in Subsidiary under the sophisticated equity method. ​ ANSWER:   ​ ​ 20X1 20X2 ​ ​ Debit Credit Debit Credit ​ Investment in Subsidiary 34,500 (1) ​ 70,500 (2) ​ ​        Subsidiary Income ​ 34,500 ​ 70,500 ​ ​ ​ ​ ​ ​ ​ Cash 8,000 (3) ​ 16,000 (4) ​ ​        Investment in Subsidiary ​ 8,000 ​ 16,000 ​ ​ ​ (1) 80% of $50,000 net income less amortization of $5,500 ​ (2) 80% of $90,000 net income less amortization of $1,500 ​ (3) 80% of $10,000 dividends ​ (4) 80% of $20,000 dividends ​ Amortization: 20X1 20X2      Inventory: $5,000 ´ 80% 4,000 ​      Building: $15,000 ´ 80% ÷ 8 years 1,500 1,500 ​ $5,500 $1,500 ​ DIFFICULTY:   M LEARNING OBJECTIVES:   ADAC.FISC.3-1

 

27. On January 1, 2016, Parent Company purchased 80% of the common stock of Subsidiary Company for $316,000. On this date, Subsidiary had common stock, other paid-in capital, and retained earnings of $40,000, $120,000, and $190,000, respectively. Net income and dividends for 2 years for Subsidiary Company were as follows: ​ ​ 20X1 20X2 Net income $50,000 $90,000 Dividends 10,000 20,000 ​ On January 1, 2016, the only tangible assets of Subsidiary that were undervalued were inventory and building. Inventory, for which FIFO is used, was worth $5,000 more than cost. The inventory was sold in 2016. Building, which was worth $15,000 more than book value, has a remaining life of 8 years, and straight-line depreciation is used. Any remaining excess is goodwill. ​ Required: a. Prepare a value analysis schedule b. Prepare a determination and distribution of excess schedule ANSWER:   ​ a: Value analysis schedule ​ Company Implied Fair Value Parent Price NCI Value Implied entity fair value $395,000 $316,000 $79,000 Fair value of entity net                Identifiable assets 370,000 296,000 74,000 Goodwill $ 25,000 $ 20,000 $ 5,000 ​ b. Determination and distribution schedule ​ Company Implied Fair Value Parent Price NCI Value Fair value of subsidiary ​ $395,000 $316,000 $79,000 Less book value: ​ ​ ​ Common stock ​ 40,000 ​ ​ Paid in capital in excess of par ​ 120,000 ​ ​ Retained earnings ​ 190,000 ​ ​ Total equity ​ 350,000 350,000 350,000 Interest Acquired ​ 80% 20% Book value ​ 280,000 ​ 70,000 Excess of fair over book $ 45,000 $ 36,000 $ 9,000 ​ ​ ​ ​ Adjust identifiable accounts: ​ Life Amort/Year Inventory $ 5,000 [ FIFO; sold in Yr 1] Building ​ 15,000 8 ​ 1,875 Goodwill ​ 25,000 ​ ​ Total ​ $45,000 ​ ​ DIFFICULTY:   M LEARNING OBJECTIVES:   ADAC.FISC.3-1 ADAC.FISC.3-5

 

28. On January 1, 20161, Parent Company purchased 80% of the common stock of Subsidiary Company for $316,000. On this date, Subsidiary had common stock, other paid-in capital, and retained earnings of $40,000, $120,000, and $190,000, respectively. Net income and dividends for 2 years for Subsidiary Company were as follows: ​ ​ 2016 2017 Net income $50,000 $90,000 Dividends 10,000 20,000 ​ On January 1, 2016, the only tangible assets of Subsidiary that were undervalued were inventory and building. Inventory, for which FIFO is used, was worth $5,000 more than cost. The inventory was sold in 2017. Building, which was worth $15,000 more than book value, has a remaining life of 8 years, and straight-line depreciation is used. Any remaining excess is goodwill. ​ Prepare the necessary date alignment entries for the consolidating worksheet for December 31, 2016 and December 31, 2017 assuming that Parent records its investment in Subsidiary using a. the cost method b. the simple equity method ​ If date alignment entries are not required, give rationale. ANSWER:   a. elimination entries for cost method ​ ​ 12/31/16 12/31/17 CV Investment in Subsidiary n/a ​ (1) 32,000 ​ ​     R/E-Parent ​ n/a ​ 32,000 ​ ​ ​ ​ ​ ​ CY2 Dividend Income (2) 8,000 ​ (3) 16,000 ​ ​      Dividends Declared-Sub ​ 8,000 ​ 16,000 n/a for first year: date alignment is automatic; the investment in subsidiary and the subsidiary retained earnings are both as of January 1, 2016. (1) (Sub RE 1/1/X2 – Sub RE 1/1/X1 = $40,000) ´ 80% (2) 80% of $10,000 dividends (3) 80% of $20,000 dividends ​ b. elimination entries for simple equity method