Test bank advanced accounting 10e by beams chapter 08

On December 31, 2006, Giant-Petrel Corporation’s Investment in Penguin Corporation account had a balance of $525,000.. Bristlebird Corporation purchased an 80% interest in UnderbrushCor

Chapter 8 Test Bank CONSOLIDATIONS - CHANGES IN OWNERSHIP INTERESTS

Multiple Choice Questions

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1 Which of the following is correct? The direct sale of

additional shares to the parent company from a subsidiary

a decreases the parent’s interest and decreases the

noncontrolling shareholders’ interest

b decreases the parent’s interest and increases the

noncontrolling shareholders’ interest

c increases the parent’s interest and increases the

noncontrolling shareholders’ interest

d increases the parent’s interest and decreases the

noncontrolling shareholders’ interest

Use the following information in answering questions 2 and 3

On December 31, 2006, Giant-Petrel Corporation’s Investment in

Penguin Corporation account had a balance of $525,000 The balance

consisted of 80% of Penguin’s $600,000 stockholders’ equity on that date and $45,000 of goodwill On January 2, 2007, Penguin increased its outstanding common stock from 15,000 to 18,000 shares

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2 Assume that Penguin sold the additional 3,000 shares directly

to Giant-Petrel for $150,000 on January 2, 2007 Giant-Petrel’s percentage ownership in Penguin immediately after the purchase

of the additional stock is

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3 Assume that Penguin sold the additional 3,000 shares to outside

interests for $150,000 on January 2, 2007 Giant-Petrel’s percentage ownership immediately after the sale of stock would

Use the following information in answering questions 4 and 5

Bristlebird Corporation purchased an 80% interest in UnderbrushCorporation on July 1, 2005 at its book value, and on January 1, 2006its Investment in Underbrush account was $300,000, equal to its book value Underbrush’s net income for 2006 was $99,000; no dividends were declared On March 1, 2006, Bristlebird reduced its interest in Underbrush by selling a 20% interest, one-fourth of its investment, for $84,000

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4 If Bristlebird uses a “beginning-of-the-year” sale assumption,

its gain on sale and income from Underbrush for 2006 will be

5 If Bristlebird uses the “actual-sale-date” sales assumption,

its gain on the sale and income from Underbrush for 2006 will be:

Gain on Sale Income from Underbrush

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6 On January 1, 2006, Finch Corporation owned a 90% interest in

Nest Corporation at which time the Investment in Nest account

had a balance of $350,000, which was 90% of Nest’s $370,000 in stockholders’ equity and $17,000 of goodwill During 2006, Nesthad income of $35,000 and paid dividends of $3,000 on June 1 and another $3,000 on November 1 On May 1, 2006, Finch sold one-fifth of its interest in Nest for $92,000 If the

“beginning-of-the-period” sales assumption is used, the balance

in the Investment in Nest account on December 31, 2006 is

7 On January 1, 2006, Finch Corporation owned a 90% interest in

Nest Corporation at which time the Investment in Nest account

had a balance of $350,000, which was 90% of Nest’s $370,000 in stockholders’ equity and $17,000 of goodwill During 2006, Nest had income of $35,000 and paid dividends of $3,000 on June 1 and another $3,000 on November 1 What would be the balance in

the Investment in Nest account on December 31, 2006 if Finch

sold one-ninth of its interest in Nest on May 1, 2006 for

$47,000 and the “beginning-of-the-period” sales assumption is used?

Button-quail Corporation owned a 70% interest in Savannah Corporation

on December 31, 2006, and Button-quail’s Investment in Savannah

account had a balance of $3,900,000 Savannah’s stockholders’ equity

on this date was as follows:

Capital stock, $10 par value $ 3,000,000

Total Stockholders’ Equity $ 5,400,000

On January 1, 2007, Savannah issues 80,000 new shares of common stock

to Button-quail for $16 each

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8 What is Button-quail’s percentage ownership in Savannah after

Savannah issues its stock to Button-quail?

9 Assuming that Savannah has no fixed assets, what is the amount

of goodwill associated with the issuance of shares to quail?

12/31/05 12/31/06 Capital stock, $10 par $ 600,000 $ 600,000Additional paid-in capital 30,000 30,000

10 If Slipstream sold the additional shares to the general public,

Great Frigatebird’s Investment in Slipstream account after the

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11 If Slipstream sold the additional shares directly to Great

Frigatebird, Great Frigatebird’s Investment in Slipstream

account after the sale would be

12 Which of the following is correct about the treatment of

preacquisition earnings on consolidated financial statements?

I Exclude the subsidiary sales and expenses prior to acquisition from consolidated sales and expenses

II Include the subsidiary sales and expenses prior to acquisition and deduct preacquisition income as a separate item

13 If a parent company and outside investors purchase shares of a

subsidiary in relation to existing stock ownership (ratably)

a there will be no adjustment to additional paid-in capital regardless whether the stock is sold above or below book value

b the transaction will requirement an investment account adjustment

c the transaction will require the elimination of a gain if

it was conducted at economic arm's length

d the transaction will require the elimination of a loss if

it was conducted at economic arm's length

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14 Heron Corporation acquired 40% of WatersEdge Inc.’s common

stock for $400,000 book value on January 1, 2006 when WatersEdge equity consisted of $500,000 capital stock and

$500,000 retained earnings On September 1, 2006 Heron bought

an additional 30% interest in WatersEdge for $210,000 In both cases, Watersedge book value equaled the fair value

WatersEdge had income of $120,000 earned evenly through 2006 and paid dividends quarterly of $25,000

The consolidated income statement of Heron Corporation and Subsidiary for the year 2006 should show pre-acquisition income of:

Use the following information to answer questions 15 through 18

Bowerbird Corporation purchased a 70% interest in Stage Corporation

on June 1, 2006 at a purchase price of $390,400 On this date, Stage’s book values were equal to its fair values except for an unrecorded copyright, and its stockholders’ equity consisted of

$290,000 of Common Stock and $210,000 of Retained Earnings All book differentials were attributed to the copyright, which had an estimated economic life of ten years

cost-During 2006, Stage earned $120,000 of net income earned uniformly throughout the year and paid $6,000 of dividends on March 1 and another $6,000 on September 1

17 The value of the copyright that is included in Bowerbird’

Investment in Stage account on June 1, 2006 is

a the parent company investment account to decrease

b the parent company investment account to remain the same

c the parent company investment account to decrease

d any noncontrolling interest equity to increase

1 Compute the balance in Goshawk’s Investment in Treetop account

on January 1, 2005 after the new investment is recorded

At the beginning of 2006, Starling Corporation held an 80% interest

in Twig Corporation The investment account balance was $900,000, consisting of 80% of Twig’s $1,095,000 of net assets and $24,000 of goodwill

During 2006, Twig uniformly earned $234,000 and paid dividends of

$37,500 on April 1 and again on October 1 On August 1, 2006, Starling sold 30% of its investment in Twig for $262,500, thereby reducing its interest in Twig to 56%

Required: Compute the following using the actual sales date assumption:

Exercise 3

At the beginning of 2006, Flycatcher Corporation held a 60% interest

in Lichen Corporation The investment account balance was $2,100,000, consisting of 60% of Lichen’s $3,226,666 of net assets and $164,000

on July 1, 2006, Openground paid dividends of $40,000

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Exercise 5

On April 1, 2006, Gouldian Corporation paid $120,000 for a 25% interest in Termite Mound Corporation On July 1, 2006, Gouldianacquired an additional 45% (based on the January 1, 2006 number of Termite Mound shares outstanding) for $236,400 Termite Mound’s stockholders’ equity on January 1, 2006 consisted of $300,000 of $10 par value Common Stock and $100,000 of Retained Earnings Termite Mound’s net income for 2006 was $144,000 earned uniformly throughout the year

Required: Calculate each of the following amounts:

2006 stockholders’ equity of Bug plus first quarter income less dividends Dividends are paid quarterly Any excess cost over book value acquired is goodwill with a 10-year amortization period

Complete the working papers to consolidate the financial statements

of Catbird and Bug Corporations for the year 2006

Catbird Corporation and Subsidiary Consolidation Working Papers for the year ended December 31, 2006 Catbird Bug

Eliminations

Non-cntl

Consol- idated Debit Credit

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Exercise 7

Swallow Corporation paid $62,000 to acquire 100% of GullyCorporation’s outstanding voting common stock at book value on May 1,

2006 The stockholders’ equity of Gully on January 1, 2006 consisted

of $40,000 Capital Stock and $20,000 Retained Earnings Gully’s total dividends for 2006 were $6,000, paid equally on April 1 and October

1 Gully’s net income was earned uniformly throughout 2006

During 2006, Swallow made sales of $10,000 to Gully at a gross profit

of $3,000 One-half of this merchandise was inventoried by Gully at year-end, and one-half of the 2006 intercompany sales were unpaid at year-end 2006

Swallow sold equipment with a ten-year remaining useful life to Gully

at a $2,000 gain on December 31, 2006 The straight-line depreciation method is used

Financial statements of Swallow and Gully Corporations for 2006appear in the first two columns of the partially completed consolidation working papers

Swallow Corporation and Subsidiary Consolidation Working Papers for the year ended December 31, 2006 Swallow Gully

Eliminations

Non-contl

Consol- idated Debit Credit

Interest

TOTAL LIAB &

EQUITY

$ 170,000 $80,000

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Exercise 8

Swift Corporation paid $40,000 cash for an 80% interest in the voting

common stock of Weather Front Corporation on July 1, 2005, when

Weather Front’s stockholders’ equity consisted of $30,000 of $10 par

common stock and $15,000 retained earnings The excess cost over the

book value of the investment was assigned $2,000 to undervalued

inventory items that were sold in 2005, with the remaining excess

being assigned to goodwill During the last half of 2005, Weather

Front reported $4,000 net income and declared dividends of $2,000,

and Swift reported income from Weather Front of $1,100

There were no intercompany sales during the last half of 2005, but

during 2006 Swift sold inventory items that cost $8,000 to Weather

Front for $12,000 Half of these inventory items were included in

Weather Front Corporation’s Inventory at December 31, 2006, with

$1,000 unpaid by Weather Front at December 31, 2006

On January 5, 2006, Swift sold a plant asset with a book value of

$2,500 and a remaining useful life of 5 years to Weather Front for

$4,000 Weather Front Corporation owned the plant asset at year-end

Swift Corporation uses the equity method to account for its

investment in Weather Front, and the changes in Swift’s Investment in

Weather Front account from

Acquisition until year-end 2006 are as follows:

Investment in Weather Front, July 1, 2005 $ 40,000

Income from Weather Front July 1 – December 31, 2005 1,200

Less: Share of dividends received ( 1,600 )

Investment in Weather Front at December 31, 2005 39,600

Add: Income from Weather Front for 2006 4,800

Investment in Weather Front at December 31, 2006 $ 41,200

Required:

Complete the working papers at the end of the year December 31, 2006

that are given below

Swift Corporation and Subsidiary Consolidation Working Papers for the year ended December 31, 2006 Swift

Weather Front

Eliminations

Non-cntl

Consol- idated Debit Credit

INCOME STATEMENT

Net Sales $

60,000

$34,000 Income from

Weather Front

4,800 Gain on sale of

Interest

TOTAL LIAB &

EQUITIES

$ 80,300 $60,000

During 2006, Reed uniformly earned $78,000 and paid dividends of

$9,000 on each of four dates: February 1, June 1, August 1, and December 1

Required: Compute the following:

3 Minority interest income for 2006

Trunk’s net income for 2005 was $40,000 Raven’s Investment in Trunk

account balance on December 31, 2005 was equal to its underlying equity on December 31, 2005 Trunk Corporation issued 10,000 additional shares of common stock directly to Raven on January 1,

2006 at $12 per share

Required: Compute the following:

1 Compute the balance in Raven’s Investment in Trunk account on

January 1, 2006 after its purchase of the additional Trunkshares

2 Calculate any positive or negative goodwill stemming from Raven’s investment in the 10,000 Trunk shares

Percentage of interest sold 20%

Book value applied 62,640 62,640

Income from Underbrush:

Jan 1 – Mar 1 $16,500 x 80% = $ 13,200Mar 1 – Dec 31 $82,500 x 60% = 49,500

Finch’s share of Nest’s Income: $35,000 x (90%-18%) = $ 25,200

Less: Book value of interest

Plus: Income from Nest 25,200 Less: Dividends $6,000 x 72% ( 4,320 ) Investment account balance at

12/31/2006

$ 300,880

Book value of interest sold:

($350,000 x 1/9)

38,889

Finch’s share of Nest’s Income: $35,000 x (90%-10%) = $ 28,000

Finch’s Investment account

balance at December 31, 2006:

Jan 1, 2006 balance $ 350,000 Less: Book value of interest

Plus: Income from Nest 28,000 Less: Dividends $6,000 x 80% ( 4,800 ) Investment account balance at

9 a Savannah’s equity after the

issuance of the new shares ($5,400,000 + $1,280,000) $ 6,680,000 Button-quail’s ownership

percentage

76.32% Button-quail’s share of

Savannah’s equity now $ 5,098,176 Button-quail’s previous share of

10 b Slipstream’s stockholders’ equity

prior to the stock issuance $ 1,050,000 Plus: Capital received from new

New stockholders’ equity $ 1,500,000

Great Frigatebird’s ownership

Total stockholders’ equity after

Goshawk’s percentage

Goshawk’s share of Treetop’s

Goshawk’s share of Treetop’s

Exercise 2

Preliminary computations

Investment balance, January 1 $ 900,000

Income from Twig ($234,000 x 7/12

Proceeds from sale $ 262,500

Book value of interest sold

Requirement 2

Income from Twig from Jan 1

through July 31 (from above)

Exercise 3

Preliminary computations

Investment balance, January 1 $ 2,100,000

Income from Lichen ($300,000 x

Book value at September 30, 2006 $ 2,235,000

Requirement 1

Proceeds from sale $ 364,000

Book value of interest sold

Requirement 2

Income from Lichen from Jan 1

through September 30 (from above)

$ 135,000Income from October 1–December 31

Percentage of interest sold 20%

Book value applied 43,750 43,750

Exercise 5

Stockholders’ equity at January 1 $ 400,000

Plus: Income through March 36,000

Stockholders’ equity at January 1 $ 400,000

Income through June 30 72,000