Test bank advanced accounting 10e by beams chapter 03

Balance sheets for Alarm Bird and Clock on January 2, 2005, immediately after the business combination, are presented in the first two columns of the consolidated balance sheet working

Any question in bold print has been either

replaced or edited in some manner

Chapter 3 Test Bank

AN INTRODUCTION TO CONSOLIDATED FINANCIAL STATEMENTS

Multiple Choice Questions

LO1

1 What method must be used if FASB 94 prohibits full

consolidation of a 70% owned subsidiary?

a The cost method

b The Liquidation value

c Market value

d Equity method

LO1

2 From the standpoint of accounting theory, which of the

following statements is the best justification for the preparation of consolidated financial statements?

c In substance and form the companies are one entity

d In substance and form the companies are separate entities

LO2

3 Penguin Corporation owns 90% of the outstanding voting stock of

Crevice Company and Burrow Corporation owns the remaining 10%

of Crevice’s voting stock On the consolidated financial statements of Penguin Corporation and Subsidiary, Burrow is

LO2

4 A major motivation for FASB’s creation of Statement No 94 was

a temporary control was not being disclosed properly

b the elimination off-balance sheet financing

c situations occurred where subsidiary control did not lie with the parent company

d the risk of subsidiary legal reorganization or bankruptcy was not disclosed

LO2

5 Muttonbird Inc has 90% ownership of Beach Company, but should

exclude Beach under FASB 94 if

a Beach is in a regulated industry

b Muttonbird uses the equity method for Beach

c Muttonbird expects to sell Beach within a year

d Beach is in a foreign country and records its books in a foreign currency

LO2

6 Subsequent to an acquisition, the parent company and

consolidated financial statement amounts would not be the same for

a investments in unconsolidated subsidiaries

b investments in consolidated subsidiaries

c capital stock

d ending retained earnings

LO3

7 On June 1, 2005, Gull Company acquired 100% of the stock of

Scrap Inc On this date, Gull had Retained Earnings of $200,000 and Scrap had Retained Earnings of $100,000 On December 31,

2005, Gull had Retained Earnings of $240,000 and Scrap had

LO3

8 Scrubwren Corporation acquired a 100% interest in Heath Company

for $1,780,000 when Heath had no liabilities The book values and fair values of Heath's assets were

Book Value Fair Value Current assets $ 400,000 $ 700,000 Equipment 200,000 400,000 Land & buildings 600,000 800,000 Total assets $1,200,000 $1,900,000

Immediately following the acquisition, equipment will be

included on the consolidated balance sheet at

9 A newly acquired subsidiary had pre-existing goodwill on its

books The parent company's consolidated balance sheet will

a not show any value for the subsidiary's pre-existing goodwill

b treat the goodwill similarly to other intangible assets of the acquired company

c not show any value for the pre-existing goodwill unless all other assets of the subsidiary are stated at their full fair value

d always show the pre-existing goodwill of the subsidiary at its book value

d the excess purchase cost that is attributable to goodwill

LO5

11

On January 1, 2005, Tern purchased 90% of Costal Corporation’s outstanding shares for $1,400,000 when the fair value of Costal’s assets were equal to the book values The balance sheets of Tern and Costal Corporations at year-end 2004 are summarized as follows:

12 On July 1, 2005, when Worm Company’s total stockholders’ equity

was $180,000, Bird Corporation purchased 7,000 shares of Worm’s common stock at $30 per share Worm Company had 10,000 shares

of common stock outstanding both before and after the purchase

by Bird, and the book value of Worm’s net assets on July 1,

2005 was equal to the fair value On a consolidated balance sheet prepared at July 1, 2005, goodwill would be

LO5

14 In the preparation of consolidated financial statements, which

of the following intercompany transactions must be eliminated

as part of the preparation of the consolidation working papers?

a All revenues, expenses, gains, deductions, receivables, and payables

b All revenues, expenses, gains, and deductions but not receivables and payables

c Receivables and payables but not revenues, expenses, gains, and deductions

d only sales revenue and cost of goods sold

LO6

15 Pardolate Corporation paid $200,000 for a 60% interest in

Arthropod Inc on January 1, 2005, when Arthropod had Capital Stock of $200,000 and Retained Earnings of $100,000 Fair values of identifiable net assets were the same as recorded book values During 2005, Arthropod had income of $30,000, declared dividends of $10,000, and paid $5,000 of dividends.

On December 31, 2005, Pardolate will have

a investment in Salem account of $240,000

b investment in Salem account of $218,000

c goodwill of $33,333

d dividends receivable of $3,000

LO6

16 Spinebill Corporation bought 80% of Nectar Company’s common

stock at its book value of $500,000 on January 1, 2005 During

2005, Nectar reported net income of $150,000 and paid dividends

of $45,000 At what amount should Spinebill’s Investment in Nectar account be reported on December 31, 2005?

`` Weebill Corporation bought 80% of Tree Company’s common stock

at its book value of $800,000 on January 2, 2005 for $700,000 The law firm of Dewey, Cheatam and Howe did $25,000 to facilitate the purchase At what amount should Weebill’s

Investment in Tree account be reported on January 2, 2005?

18 Bellbird Corporation acquired an 80% interest in Honey Inc for

$130,000 on January 1, 2005, when Honey had Capital Stock of

$125,000 and Retained Earnings of $25,000 Bellbird’s separate income statement and a consolidated income statement for Bellbird Corporation and Subsidiary as of December 31, 2005, are shown below

Net income $ 81,600 $ 81,600

Honey’s separate income statement must have reported net

19 In the consolidated income statement of Wattlebird Corporation

and its 85% owned Forest subsidiary, the noncontrolling interest income was reported at $45,000 What amount of net income did the Forest have for the year?

a requires a subsidiary to use the same accounting principles

as its parent company

b is required by the SEC if a subsidiary is wholly owned

Exercises

LO4

Exercise 1

Alarm Bird Inc acquired an 85% interest in Clock Corporation on

January 2, 2005 for $38,000 cash when Clock had Capital Stock of

$15,000 and Retained Earnings of $25,000 Clock’s assets and

liabilities had book values equal to their fair values except for

inventory that was undervalued by $2,000 Balance sheets for Alarm

Bird and Clock on January 2, 2005, immediately after the business

combination, are presented in the first two columns of the

consolidated balance sheet working papers

Alarm Bird Corporation and Subsidiary Consolidated Balance Sheet Working Papers

at January 2, 2005

Alarm Bird Clock

Eliminations

Balance Sheet Debit Credit

Required:

Complete the consolidation balance sheet working papers for Alarm Bird

and subsidiary at January 1, 2005

LO4

Exercise 2

On January 1, 2005, Myna Corporation issued 10,000 shares of its own

$10 par value common stock for 9,000 shares of the outstanding stock

of Berry Corporation in an acquisition Myna common stock at January

1, 2005 was selling at $70 per share Just before the business

combination, balance sheet information of the two corporations was as

follows:

Book Value

Berry Book Value

Berry

Fair Value

Capital stock, $10 par value 500,000 100,000

Additional paid-in capital 170,000 40,000

1 Prepare the journal entry on Myna Corporation’s books to account

for the business combination

2 Prepare a consolidated balance sheet for Myna Corporation and

Subsidiary immediately after the business combination

LO5

Exercise 3

The consolidated balance sheet of Treecreeper Corporation and Ants

Farm, its 90% owned subsidiary, as of December 31, 2005, contains the

following accounts and balances:

Treecreeper Corporation and Subsidiary

Consolidated Balance Sheet

January 1, 2005, when Ants Farm had $150,000 of Capital Stock and

$70,000 of Retained Earnings Ants Farm’s net assets had fair values

equal to their book values when Treecreeper acquired its interest No

changes have occurred in the amount of outstanding stock since the

date of the business combination Treecreeper uses the equity method

of accounting for its investment

Required: Determine the following amounts:

LO5

Exercise 4

Monarch Corporation paid $180,000 for a 75% interest in Stem Co.’s

outstanding Capital Stock on January 1, 2005, when Stem’s

stockholders’ equity consisted of $150,000 of Capital Stock and

$50,000 of Retained Earnings Book values of Stem’s net assets were

equal to their fair values on this date The adjusted trial balances

of Monarch and Stem on December 31, 2005 were as follows:

Required: Complete the partially prepared consolidated balance sheet

working papers that appear below

Monarch Corporation and Subsidiary Consolidated balance Sheet Working Papers

at December 31, 2005

Monarch Stem

Eliminations

Balance Sheet Debit Credit

LO5

Exercise 5

Zoo Inc paid $268,000 to purchase 80% of the outstanding stock of

Bird Corporation, on December 31, 2005 The following year-end

information was available just before the purchase:

Book Value

Bird Book Value

Bird

Fair Value

Bonds Payable 468,000 100,000 95,000

Capital stock, $10 par value 200,000

Capital stock, $15 par value 225,000

Additional paid-in capital 200,000 80,000

Retained earnings 320,000 30,000

Required:

1 Prepare Zoo’s consolidated balance sheet on December 31, 2005

LO5

Exercise 6

On July 1, 2005, Magpie Corporation issued 23,000 shares of its own

$2 par value common stock for 35,000 shares of the outstanding stock

of Insect Inc in an acquisition Magpie common stock at July 1, 2005

was selling at $14 per share Just before the business combination,

balance sheet information of the two corporations was as follows:

Book Value

Insect Book Value

Insect

Fair Value

Capital stock, $2 par value 500,000 100,000

Additional paid-in capital 170,000 90,000

1 Prepare the journal entry on Magpie Corporation’s books to

account for the business combination

2 Prepare a consolidated balance sheet for Magpie Corporation and

Subsidiary immediately after the business combination

LO5

Exercise 7

Manucode Corporation paid $279,000 for 70% of Trumpet Corporation’s

$10 par common stock on December 31, 2005, when Trumpet Corporation’s stockholders’ equity was made up of $200,000 of Common Stock, $60,000Additional Paid-in Capital and $40,000 of Retained Earnings Trumpet’s identifiable assets and liabilities reflected their fair values on December 31, 2005, except for Trumpet’s inventory which was undervalued by $50,000 and their land which was undervalued by

$20,000 Balance sheets for Manucode and Trumpet immediately after the business combination are presented in the partially completed working papers

Manucode Corporation and Subsidiary Consolidated Balance Sheet Working Papers

at December 31, 2005

Manucode Trumpet

Eliminations

Balance Sheet Debit Credit

Lizard reported net income of $75,000 during 2005; dividends of

$35,000 were declared and paid during the year

Book Value

Fair Value Inventories (sold in 2005) $ 80,000 $ 112,000

Buildings-net (15-year life) 200,000 170,000

Note Payable (paid in 2005) 20,000 21,250

Equipment share of shortfall:

$400,000/$1,200,000 X $120,000 = $ 40,000 Allocation to equipment:

Implied fair value of Arthropod ($200,000 / 60%)

333,333 Less: Book value ( 300,000 )

Goodwill acquired $ 33,333

16 c Investment cost + 80% (subsidiary

income) – (80%)(subsidiary dividends = $500,000 + $120,000

Book value of Clock’s net assets ( 40,000)

Excess cost over book value acquired = $ 4,706

Allocation of excess of cost over book value:

Excess of fair value over book value $ 4,706

Alarm Bird Corporation and Subsidiary Consolidated Balance Sheet Working Papers

at January 1, 2005

Alarm Bird

Clock

Eliminations Balance

Sheet Debit Credit

Allocation of excess of cost over book value:

Myna Corporation and Subsidiary Consolidated Balance Sheet Working Papers

at January 1, 2005

Myna Berry

Eliminations Balance

Sheet Debit Credit

$413,778 286,222 Total

Ant Farm’s stockholders’ equity = (minority

interest) divided by (minority interest percentage)

Requirement 4

Treecreeper’s book value in 90% of Ants Farm at

December 31, 2005 = ($400,000 (from above)) x 90% $ 360,000Plus: goodwill (from balance sheet) 39,000 Balance in Investment account at December 31, 2005 $ 399,000

Book value of Stem’s net assets $ 200,000

Excess cost over book value acquired $ 40,000

Initial investment cost $ 180,000

Income from Stem: (75%)($40,000)= 30,000

Dividends ($20,000)(75%) = -15,000

Balance in Investment in Stem at December 31,2005 $ 195,000

Monarch Corporation and Subsidiary Consolidated Balance Sheet Working Papers

at December 31, 2005

Monarch Stem

Eliminations Balance

Sheet Debit Credit

Book value of Bird’s net assets $ 335,000

Excess cost over book value acquired $ 0

Zoo Corporation and Subsidiary Consolidated Balance Sheet Working Papers

at December 31, 2005 Zoo Bird

Eliminations Balance

Sheet Debit Credit

Book value of Insect’s net assets ( 294,000)

Excess cost over book value acquired = $ 166,000

Allocation of excess of cost over book value:

Magpie Corporation and Subsidiary Consolidated Balance Sheet Working Papers

July 1, 2005

Magpie Insect

Eliminations Balance

Sheet Debit Credit

166,000 156,000 Total

Allocation of excess of cost over book value:

Manucode Corporation and Subsidiary Consolidated Balance Sheet Working Papers

at December 31, 2005

Manucode Trumpet

Eliminations Balance

Sheet Debit Credit

180,429 98,571

Allocation of excess of cost over book value:

Excess of fair value over book value $ 833

Bower Corporation and Subsidiary Consolidated Balance Sheet Working Papers

at December 31, 2006

Bower Fig

Eliminations Balance

Sheet Debit Credit

Book value of Lizard’s net assets ( 460,000)

Excess cost over book value acquired = $ 165,000

Currawong’s share of Lizard income =(80%)x(75,000) = $ 60,000

Less: Excess allocated in inventory which was sold

Add: Depreciation adjustment on building =

Add: Excess allocated to Note payable 1,000

Net adjustment to investment account due to

Currowong’s share of Lizard’s income $ 37,000