Chapter 01 The Equity Method of Accounting for Investments

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Chapter 01 The Equity Method of Accounting for Investments Answer

Key

Multiple Choice Questions

1. Gaw Company owns 15% of the common stock of Trace Corporation and used the fair-value

method to account for this investment. Trace reported net income of $110,000 for 2013 and

paid dividends of $60,000 on October 1, 2013. How much income should Gaw recognize on

this investment in 2013?

A. $16,500.

B. $9,000.

C. $25,500.

D. $7,500.

E. $50,000.

$60,000 × .15 = $9,000

AACSB: Analytic

AICPA BB: Critical Thinking

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: 01-01 Describe in general the various methods of accounting for an investment in equity shares of another

company.



2. Yaro Company owns 30% of the common stock of Dew Co. and uses the equity method to

account for the investment. During 2013, Dew reported income of $250,000 and paid

dividends of $80,000. There is no amortization associated with the investment. During 2013,

how much income should Yaro recognize related to this investment?

A. $24,000.

B. $75,000.

C. $99,000.

D. $51,000.

E. $80,000.

$250,000 × .30 = $75,000

AACSB: Analytic




Blooms: Apply

Difficulty: 1 Easy

Learning Objective: 01-02 Identify the sole criterion for applying the equity method of accounting and guidance in assessing

whether the criterion is met.



3. On January 1, 2013, Pacer Company paid $1,920,000 for 60,000 shares of Lennon Co.'s

voting common stock which represents a 45% investment. No allocation to goodwill or other

specific account was made. Significant influence over Lennon was achieved by this

acquisition. Lennon distributed a dividend of $2.50 per share during 2013 and reported net

income of $670,000. What was the balance in the Investment in Lennon Co. account found in

the financial records of Pacer as of December 31, 2013?

A. $2,040,500.

B. $2,212,500.

C. $2,260,500.

D. $2,171,500.

E. $2,071,500.

$1,920,000 + ($670,000 × .45) - ($2.50 × 60,000) = $2,071,500

AACSB: Analytic




Blooms: Apply

Difficulty: 2 Medium





4. A company should always use the equity method to account for an investment if:

A. It has the ability to exercise significant influence over the operating policies of the investee.

B. It owns 30% of another company's stock.

C. It has a controlling interest (more than 50%) of another company's stock.

D. The investment was made primarily to earn a return on excess cash.

E. It does not have the ability to exercise significant influence over the operating policies of

the investee.

AACSB: Reflective thinking




Blooms: Remember

Difficulty: 1 Easy


company.



5. On January 1, 2011, Dermot Company purchased 15% of the voting common stock of Horne

Corp. On January 1, 2013, Dermot purchased 28% of Horne's voting common stock. If Dermot

achieves significant influence with this new investment, how must Dermot account for the

change to the equity method?

A. It must use the equity method for 2013 but should make no changes in its financial

statements for 2012 and 2011.

B. It should prepare consolidated financial statements for 2013.

C. It must restate the financial statements for 2012 and 2011 as if the equity method had been

used for those two years.

D. It should record a prior period adjustment at the beginning of 2013 but should not restate

the financial statements for 2012 and 2011.

E. It must restate the financial statements for 2012 as if the equity method had been used

then.

AACSB: Analytic




Blooms: Understand


Learning Objective: 01-03 Prepare basic equity method journal entries for an investor and describe the financial reporting for

equity method investments.



6. During January 2012, Wells, Inc. acquired 30% of the outstanding common stock of Wilton Co.

for $1,400,000. This investment gave Wells the ability to exercise significant influence over

Wilton. Wilton's assets on that date were recorded at $6,400,000 with liabilities of $3,000,000.

Any excess of cost over book value of Wells' investment was attributed to unrecorded patents

having a remaining useful life of ten years.

In 2012, Wilton reported net income of $600,000. For 2013, Wilton reported net income of

$750,000. Dividends of $200,000 were paid in each of these two years. What was the reported

balance of Wells' Investment in Wilson Co. at December 31, 2013?

A. $1,609,000.

B. $1,485,000.

C. $1,685,000.

D. $1,647,000.

E. $1,054,300.

$6,400,000 - $3,000,000 = $3,400,000 × 30% = $1,020,000

$1,400,000 - $1,020,000 = $380,000/10yrs = $38,000 Unrecorded Patents Amortization

$1,400,000 + $180,000 + $225,000 - $60,000 - $60,000 - $38,000 - $38,000 = $1,609,000

AACSB: Analytic




Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 01-04 Allocate the cost of an equity method investment and compute amortization expense to match

revenues recognized from the investment to the excess of investor cost over investee book value.



7. On January 1, 2013, Bangle Company purchased 30% of the voting common stock of Sleat

Corp. for $1,000,000. Any excess of cost over book value was assigned to goodwill. During

2013, Sleat paid dividends of $24,000 and reported a net loss of $140,000. What is the

balance in the investment account on December 31, 2013?

A. $950,800.

B. $958,000.

C. $836,000.

D. $990,100.

E. $956,400.

$1,000,000 - $42,000 - $7,200 = $950,800

AACSB: Analytic




Blooms: Apply






8. On January 1, 2013, Jordan Inc. acquired 30% of Nico Corp. Jordan used the equity method

to account for the investment. On January 1, 2014, Jordan sold two-thirds of its investment in

Nico. It no longer had the ability to exercise significant influence over the operations of Nico.

How should Jordan have accounted for this change?

A. Jordan should continue to use the equity method to maintain consistency in its financial

statements.

B. Jordan should restate the prior years' financial statements and change the balance in the

investment account as if the fair-value method had been used since 2013.

C. Jordan has the option of using either the equity method or the fair-value method for 2013

and future years.

D. Jordan should report the effect of the change from the equity to the fair-value method as a

retrospective change in accounting principle.

E. Jordan should use the fair-value method for 2014 and future years but should not make a

retrospective adjustment to the investment account.

AACSB: Analytic




Blooms: Understand






9. Tower Inc. owns 30% of Yale Co. and applies the equity method. During the current year,

Tower bought inventory costing $66,000 and then sold it to Yale for $120,000. At year-end,

only $24,000 of merchandise was still being held by Yale. What amount of intra-entity

inventory profit must be deferred by Tower?

A. $6,480.

B. $3,240.

C. $10,800.

D. $16,200.

E. $6,610.

$120,000 - $66,000 = $54,000

$24,000/$120,000 = 20% × $54,000 = $10,800 × 30% = $3,240

AACSB: Analytic




Blooms: Apply


Learning Objective: 01-06 Describe the rationale and computations to defer unrealized gains on intra-entity inventory transfers

until the goods are either consumed or sold to outside parties.



10. On January 4, 2013, Watts Co. purchased 40,000 shares (40%) of the common stock of

Adams Corp., paying $800,000. There was no goodwill or other cost allocation associated with

the investment. Watts has significant influence over Adams. During 2013, Adams reported

income of $200,000 and paid dividends of $80,000. On January 2, 2014, Watts sold 5,000

shares for $125,000. What was the balance in the investment account after the shares had

been sold?

A. $848,000.

B. $742,000.

C. $723,000.

D. $761,000.

E. $925,000.

$800,000 + $80,000 - $32,000 = $848,000 - (5,000/40,000 × $848,000) = $742,000

AACSB: Analytic




Blooms: Apply

Difficulty: 3 Hard



Learning Objective: 01-05d Understand the financial reporting consequences for sales of equity method investments.



11. On January 3, 2013, Austin Corp. purchased 25% of the voting common stock of Gainsville

Co., paying $2,500,000. Austin decided to use the equity method to account for this

investment. At the time of the investment, Gainsville's total stockholders' equity was

$8,000,000. Austin gathered the following information about Gainsville's assets and liabilities:

For all other assets and liabilities, book value and fair value were equal. Any excess of cost

over fair value was attributed to goodwill, which has not been impaired.

What is the amount of goodwill associated with the investment?

A. $500,000.

B. $200,000.

C. $0.

D. $300,000.

E. $400,000.

Blgs $500,000 - $400,000 = $100,000 FV > BV

Equipment $1,300,000 - $1,000,000 = $300,000 FV > BV

Franchises $400,000 - 0 = $400,000 FV > BV

$100,000 + $300,000 + $400,000 = $800,000 × 25% = $200,000 Identifiable Excess Paid

$8,000,000 × 25% = $2,000,000 BV

($2,500,000 Paid) - ($2,000,000 BV) = ($500,000 FV > BV) - ($200,000 Identifiable Excess

Paid) = $300,000 Unidentifiable Excess Paid (Goodwill)



AACSB: Analytic



Blooms: Apply

Difficulty: 3 Hard





12. On January 3, 2013, Austin Corp. purchased 25% of the voting common stock of Gainsville

Co., paying $2,500,000. Austin decided to use the equity method to account for this

investment. At the time of the investment, Gainsville's total stockholders' equity was

$8,000,000. Austin gathered the following information about Gainsville's assets and liabilities:

For all other assets and liabilities, book value and fair value were equal. Any excess of cost

over fair value was attributed to goodwill, which has not been impaired.

For 2013, what is the total amount of excess amortization for Austin's 25% investment in

Gainsville?

A. $27,500.

B. $20,000.

C. $30,000.

D. $120,000.

E. $70,000.

$500,000 - $400,000 = $100,000/10yrs = $10,000

$1,300,000 - $1,000,000 = $300,000/5yrs = $60,000

$400,000 - 0 = $400,000/8yrs = $50,000

$10,000 + $60,000 + $50,000 = $120,000 × 25% = $30,000



AACSB: Analytic



Blooms: Apply

Difficulty: 3 Hard



13. Club Co. appropriately uses the equity method to account for its investment in Chip Corp. As

of the end of 2013, Chip's common stock had suffered a significant decline in fair value, which

is expected to be recovered over the next several months. How should Club account for the

decline in value?

A. Club should switch to the fair-value method.

B. No accounting because the decline in fair value is temporary.

C. Club should decrease the balance in the investment account to the current value and

recognize a loss on the income statement.

D. Club should not record its share of Chip's 2013 earnings until the decline in the fair value of

the stock has been recovered.

E. Club should decrease the balance in the investment account to the current value and

recognize an unrealized loss on the balance sheet.





Blooms: Remember

Difficulty: 1 Easy





14. An upstream sale of inventory is a sale:

A. between subsidiaries owned by a common parent.

B. with the transfer of goods scheduled by contract to occur on a specified future date.

C. in which the goods are physically transported by boat from a subsidiary to its parent.

D. made by the investor to the investee.

E. made by the investee to the investor.





Blooms: Remember

Difficulty: 1 Easy





15. Atlarge Inc. owns 30% of the outstanding voting common stock of Ticker Co. and has the

ability to significantly influence the investee's operations and decision making. On January 1,

2013, the balance in the Investment in Ticker Co. account was $402,000. Amortization

associated with the purchase of this investment is $8,000 per year. During 2013, Ticker

earned income of $108,000 and paid cash dividends of $36,000. Previously in 2012, Ticker

had sold inventory costing $28,800 to Atlarge for $48,000. All but 25% of this merchandise

was consumed by Atlarge during 2012. The remainder was used during the first few weeks of

2013. Additional sales were made to Atlarge in 2013; inventory costing $33,600 was

transferred at a price of $60,000. Of this total, 40% was not consumed until 2014.

What amount of equity income would Atlarge have recognized in 2013 from its ownership

interest in Ticker?

A. $19,792.

B. $27,640.

C. $22,672.

D. $24,400.

E. $21,748.

2013 Income $108,000 × 30% = $32,400

2012 Inventory Profit Realized $48,000 - $28,800 = $19,200 × 25% = $4,800 × 30% = $1,440

2013 Inventory Profit Deferred $60,000 - $33,600 = $26,400 × 40% = $10,560 × 30% = $3,168

2013 Purchase Amortization $8,000

$32,400 + $1,440 - $3,168 - $8,000 = $22,672 Equity Income 2013



AACSB: Analytic




Blooms: Apply

Difficulty: 3 Hard









16. Atlarge Inc. owns 30% of the outstanding voting common stock of Ticker Co. and has the

ability to significantly influence the investee's operations and decision making. On January 1,

2013, the balance in the Investment in Ticker Co. account was $402,000. Amortization

associated with the purchase of this investment is $8,000 per year. During 2013, Ticker

earned income of $108,000 and paid cash dividends of $36,000. Previously in 2012, Ticker

had sold inventory costing $28,800 to Atlarge for $48,000. All but 25% of this merchandise

was consumed by Atlarge during 2012. The remainder was used during the first few weeks of

2013. Additional sales were made to Atlarge in 2013; inventory costing $33,600 was

transferred at a price of $60,000. Of this total, 40% was not consumed until 2014.

What was the balance in the Investment in Ticker Co. account at the end of 2013?

A. $401,136.

B. $413,872.

C. $418,840.

D. $412,432.

E. $410,148.

2013 Beginning Balance = $402,000

2013 Income Recognized = $22,672

2013 Dividend Received = ($36,000 × 30%) = $10,800

2013 Ending Balance = ($402,000 + $22,672 - $10,800) = $413,872



AACSB: Analytic




Blooms: Apply

Difficulty: 3 Hard









17. On January 1, 2013, Deuce Inc. acquired 15% of Wiz Co.'s outstanding common stock for

$62,400 and categorized the investment as an available-for-sale security. Wiz earned net

income of $96,000 in 2013 and paid dividends of $36,000. On January 1, 2014, Deuce bought

an additional 10% of Wiz for $54,000. This second purchase gave Deuce the ability to

significantly influence the decision making of Wiz. During 2014, Wiz earned $120,000 and paid

$48,000 in dividends. As of December 31, 2014, Wiz reported a net book value of $468,000.

For both purchases, Deuce concluded that Wiz Co.'s book values approximated fair values

and attributed any excess cost to goodwill.

On Deuce's December 31, 2014 balance sheet, what balance was reported for the Investment

in Wiz Co. account?

A. $139,560.

B. $143,400.

C. $310,130.

D. $186,080.

E. $182,250.

2013 Purchase = $62,400

2013 Income = ($96,000 × 15%) = $14,400

2013 Dividend = ($36,000 × 15%) = $5,400

2014 Purchase = $54,000

2014 Income = ($120,000 × 25%) = $30,000

2014 Dividend = ($48,000 × 25%) = $12,000

Ending 2014 Balance = ($62,400 + $14,400 - $5,400 + $54,000 + $30,000 - $12,000) =

$143,400



AACSB: Analytic




Blooms: Apply

Difficulty: 3 Hard







18. On January 1, 2013, Deuce Inc. acquired 15% of Wiz Co.'s outstanding common stock for

$62,400 and categorized the investment as an available-for-sale security. Wiz earned net

income of $96,000 in 2013 and paid dividends of $36,000. On January 1, 2014, Deuce bought

an additional 10% of Wiz for $54,000. This second purchase gave Deuce the ability to

significantly influence the decision making of Wiz. During 2014, Wiz earned $120,000 and paid

$48,000 in dividends. As of December 31, 2014, Wiz reported a net book value of $468,000.

For both purchases, Deuce concluded that Wiz Co.'s book values approximated fair values

and attributed any excess cost to goodwill.

What amount of equity income should Deuce have reported for 2014?

A. $30,000.

B. $16,420.

C. $38,340.

D. $18,000.

E. $32,840.

2014 Income = ($120,000 × 25%) = $30,000

AACSB: Analytic




Blooms: Apply






19. In a situation where the investor exercises significant influence over the investee, which of the

following entries is not actually posted to the books of the investor?

1) Debit to the Investment account, and a Credit to the Equity in Investee Income account.

2) Debit to Cash (for dividends received from the investee), and a Credit to Dividend Revenue.

3) Debit to Cash (for dividends received from the investee), and a Credit to the Investment

account.

A. Entries 1 and 2.

B. Entries 2 and 3.

C. Entry 1 only.

D. Entry 2 only.

E. Entry 3 only.





Blooms: Remember






20. All of the following would require use of the equity method for investments except:

A. material intra-entity transactions.

B. investor participation in the policy-making process of the investee.

C. valuation at fair value.

D. technological dependency.

E. significant control.





Blooms: Remember

Difficulty: 1 Easy


company.



21. All of the following statements regarding the investment account using the equity method are

true except:

A. The investment is recorded at cost.

B. Dividends received are reported as revenue.

C. Net income of investee increases the investment account.

D. Dividends received reduce the investment account.

E. Amortization of fair value over cost reduces the investment account.





Blooms: Remember

Difficulty: 1 Easy





22. A company has been using the fair-value method to account for its investment. The company

now has the ability to significantly control the investee and the equity method has been

deemed appropriate. Which of the following statements is true?

A. A cumulative effect change in accounting principle must occur.

B. A prospective change in accounting principle must occur.

C. A retrospective change in accounting principle must occur.

D. The investor will not receive future dividends from the investee.

E. Future dividends will continue to be recorded as revenue.





Blooms: Understand


Learning Objective: 01-05a Understand the financial reporting consequences for a change to the equity method.



23. A company has been using the equity method to account for its investment. The company

sells shares and does not continue to have significant control. Which of the following

statements is true?

A. A cumulative effect change in accounting principle must occur.

B. A prospective change in accounting principle must occur.

C. A retrospective change in accounting principle must occur.

D. The investor will not receive future dividends from the investee.

E. Future dividends will continue to reduce the investment account.





Blooms: Understand





24. An investee company incurs an extraordinary loss during the period. The investor

appropriately applies the equity method. Which of the following statements is true?

A. Under the equity method, the investor only recognizes its share of investee's income from

continuing operations.

B. The extraordinary loss would reduce the value of the investment.

C. The extraordinary loss should increase equity in investee income.

D. The extraordinary loss would not appear on the income statement but would be a

component of comprehensive income.

E. The loss would be ignored but shown in the investor's notes to the financial statements.





Blooms: Understand






25. How should a permanent loss in value of an investment using the equity method be treated?

A. The equity in investee income is reduced.

B. A loss is reported the same as a loss in value of other long-term assets.

C. The investor's stockholders' equity is reduced.

D. No adjustment is necessary.

E. An extraordinary loss would be reported.





Blooms: Remember

Difficulty: 3 Hard

Learning Objective: 01-05c Understand the financial reporting consequences for investee losses.



26. Under the equity method, when the company's share of cumulative losses equals its

investment and the company has no obligation or intention to fund such additional losses,

which of the following statements is true?

A. The investor should change to the fair-value method to account for its investment.

B. The investor should suspend applying the equity method until the investee reports income.

C. The investor should suspend applying the equity method and not record any equity in

income of investee until its share of future profits is sufficient to recover losses that have

not previously been recorded.

D. The cumulative losses should be reported as a prior period adjustment.

E. The investor should report these losses as extraordinary items.





Blooms: Understand

Difficulty: 3 Hard

Learning Objective: 01-05b Understand the financial reporting consequences for investee other comprehensive income.



27. When an investor sells shares of its investee company, which of the following statements is

true?

A. A realized gain or loss is reported as the difference between selling price and original cost.

B. An unrealized gain or loss is reported as the difference between selling price and original

cost.

C. A realized gain or loss is reported as the difference between selling price and carrying

value.

D. An unrealized gain or loss is reported as the difference between selling price and carrying

value.

E. Any gain or loss is reported as part as comprehensive income.





Blooms: Understand





28. When applying the equity method, how is the excess of cost over book value accounted for?

A. The excess is allocated to the difference between fair value and book value multiplied by

the percent ownership of current assets.

B. The excess is allocated to the difference between fair value and book value multiplied by

the percent ownership of total assets.

C. The excess is allocated to the difference between fair value and book value multiplied by

the percent ownership of net assets.

D. The excess is allocated to goodwill.

E. The excess is ignored.





Blooms: Remember






29. After allocating cost in excess of book value, which asset or liability would not be amortized

over a useful life?

A. Cost of goods sold.

B. Property, plant, & equipment.

C. Patents.

D. Goodwill.

E. Bonds payable.





Blooms: Remember

Difficulty: 1 Easy





30. Which statement is true concerning unrealized profits in intra-entity inventory transfers when

an investor uses the equity method?

A. The investee must defer upstream ending inventory profits.

B. The investee must defer upstream beginning inventory profits.

C. The investor must defer downstream ending inventory profits.

D. The investor must defer downstream beginning inventory profits.

E. The investor must defer upstream beginning inventory profits.





Blooms: Understand






31. Which statement is true concerning unrealized profits in intra-entity inventory transfers when

an investor uses the equity method?

A. The investor and investee make reciprocal entries to defer and realize inventory profits.

B. The same adjustments are made for upstream and downstream transfers.

C. Different adjustments are made for upstream and downstream transfers.

D. No adjustments are necessary.

E. Adjustments will be made only when profits are known upon sale to outsiders.





Blooms: Understand






32. On January 1, 2012, Dawson, Incorporated, paid $100,000 for a 30% interest in Sacco

Corporation. This investee had assets with a book value of $550,000 and liabilities of

$300,000. A patent held by Sacco having a book value of $10,000 was actually worth $40,000

with a six year remaining life. Any goodwill associated with this acquisition is considered to

have an indefinite life. During 2012, Sacco reported income of $50,000 and paid dividends of

$20,000 while in 2013 it reported income of $75,000 and dividends of $30,000. Assume

Dawson has the ability to significantly influence the operations of Sacco.

The amount allocated to goodwill at January 1, 2012, is

A. $25,000.

B. $13,000.

C. $9,000.

D. $16,000.

E. $10,000.

Beginning 2012 Asset Value = ($550,000 + $30,000) = $580,000

Beginning 2012 Liabilities = $300,000

Beginning 2012 Equity = ($580,000 - $300,000) = $280,000

Equity Purchased at Fair Value = ($280,000 × 30%) = $84,000

Price Paid - Equity Purchased = Goodwill $100,000 - $84,000 = $16,000

AACSB: Analytic




Blooms: Apply













The equity in income of Sacco for 2012, is

A. $9,000.

B. $13,500.

C. $15,000.

D. $7,500.

E. $50,000.

2012 Equity Income = ($50,000 × 30%) = $15,000

2012 Excess Patent Amortization = ($30,000/6 = $5,000) × 30%) = $1,500

$15,000 - $1,500 = $13,500

AACSB: Analytic




Blooms: Apply













The equity in income of Sacco for 2013, is

A. $22,500.

B. $21,000.

C. $12,000.

D. $13,500.

E. $75,000.

2013 Equity Income = ($75,000 × 30%) = $22,500

2013 Excess Patent Amortization = ($30,000/6 = $5,000) × 30%) = $1,500

$22,500 - $1,500 = $21,000

AACSB: Analytic




Blooms: Apply













The balance in the Investment in Sacco account at December 31, 2012, is

A. $100,000.

B. $112,000.

C. $106,000.

D. $107,500.

E. $140,000.

$100,000 + $13,500 - ($20,000 × 30%) = $107,500

AACSB: Analytic




Blooms: Apply













The balance in the Investment in Sacco account at December 31, 2013, is

A. $119,500.

B. $125,500.

C. $116,500.

D. $118,000.

E. $100,000.

$107,500 + $21,000 - ($30,000 × 30%) = $119,500

AACSB: Analytic




Blooms: Apply

Difficulty: 3 Hard





37. Dodge, Incorporated acquires 15% of Gates Corporation on January 1, 2013, for $105,000

when the book value of Gates was $600,000. During 2013 Gates reported net income of

$150,000 and paid dividends of $50,000. On January 1, 2014, Dodge purchased an additional

25% of Gates for $200,000. Any excess cost over book value is attributable to goodwill with an

indefinite life. The fair-value method was used during 2013 but Dodge has deemed it

necessary to change to the equity method after the second purchase. During 2014 Gates

reported net income of $200,000 and reported dividends of $75,000.

The income reported by Dodge for 2013 with regard to the Gates investment is

A. $7,500.

B. $22,500.

C. $15,000.

D. $100,000.

E. $150,000.

$7,500 = Dividends received in 2013

AACSB: Analytic




Blooms: Apply



company.










The income reported by Dodge for 2014 with regard to the Gates investment is

A. $80,000.

B. $30,000.

C. $50,000.

D. $15,000.

E. $75,000.

$200,000 × 40% = $80,000

AACSB: Analytic




Blooms: Apply













Which adjustment would be made to change from the fair-value method to the equity method?

A. A debit to additional paid-in capital for $15,000.

B. A credit to additional paid-in capital for $15,000.

C. A debit to retained earnings for $15,000.

D. A credit to retained earnings for $15,000.

E. A credit to a gain on investment.

$22,500 - $7,500 = $15,000 CR to R/E

AACSB: Analytic




Blooms: Apply

Difficulty: 3 Hard












The balance in the investment account at December 31, 2014, is

A. $370,000.

B. $355,000.

C. $305,000.

D. $400,000.

E. $105,000.

$105,000 + $22,500 - $7,500 = $120,000 Balance 2013 Year End

$120,000 + $200,000 + $80,000 - $30,000 = $370,000 Balance 2014 Year End

AACSB: Analytic




Blooms: Apply






41. Clancy Incorporated, sold $210,000 of its inventory to Reid Company during 2013 for

$350,000. Reid sold $224,000 of this merchandise in 2013 with the remainder to be disposed

of during 2014. Assume Clancy owns 30% of Reid and applies the equity method.

What journal entry will be recorded at the end of 2013 to defer the unrealized intra-entity

profits?

A. Entry A.

B. Entry B.

C. Entry C.

D. Entry D.

E. No entry is necessary.

$350,000 - $210,000 = $140,000 × (1 - ($224,000/$350,000)) = $50,400 × 30% = $15,120

Profit deferred by reduction <CR> in the Investment in Reid Account

AACSB: Analytic



Blooms: Apply

Difficulty: 3 Hard





42. Clancy Incorporated, sold $210,000 of its inventory to Reid Company during 2013 for

$350,000. Reid sold $224,000 of this merchandise in 2013 with the remainder to be disposed

of during 2014. Assume Clancy owns 30% of Reid and applies the equity method.

What journal entry will be recorded in 2014 to realize the intra-entity profit that was deferred in

2013?

A. Entry A.

B. Entry B.

C. Entry C.

D. Entry D.

E. No entry is necessary.

Reversal of the previous deferral entry in 2013, thus recognizing the profit in 2014 income

AACSB: Analytic



Blooms: Apply

Difficulty: 3 Hard





43. On January 1, 2012, Mehan, Incorporated purchased 15,000 shares of Cook Company for

$150,000 giving Mehan a 15% ownership of Cook. On January 1, 2013 Mehan purchased an

additional 25,000 shares (25%) of Cook for $300,000. This last purchase gave Mehan the

ability to apply significant influence over Cook. The book value of Cook on January 1, 2012,

was $1,000,000. The book value of Cook on January 1, 2013, was $1,150,000. Any excess of

cost over book value for this second transaction is assigned to a database and amortized over

five years.

Cook reports net income and dividends as follows. These amounts are assumed to have

occurred evenly throughout the years:

On April 1, 2014, just after its first dividend receipt, Mehan sells 10,000 shares of its

investment.

What is the balance in the investment account at December 31, 2012?

A. $150,000.

B. $172,500.

C. $180,000.

D. $157,500.

E. $170,000.

$150,000; The Initial Investment in Cook Company



AACSB: Analytic



Blooms: Apply

Difficulty: 1 Easy


company.









five years.




investment.

How much income did Mehan report from Cook during 2012?

A. $30,000.

B. $22,500.

C. $7,500.

D. $0.

E. $50,000.

$7,500 Dividends Received



AACSB: Analytic



Blooms: Apply



company.









five years.




investment.

How much income did Mehan report from Cook during 2013?

A. $90,000.

B. $110,000.

C. $67,500.

D. $87,500.

E. $78,750.

$225,000 × 40% = $90,000

$300,000 - $287,500 = $12,500/5 = $2,500

$90,000 - $2,500 = $87,500



AACSB: Analytic



Blooms: Apply












five years.




investment.

What was the balance in the investment account at December 31, 2013?

A. $517,500.

B. $537,500.

C. $520,000.

D. $540,000.

E. $211,250.

$150,000 + $30,000 - $7,500 = $172,500 Balance 2012 Year End

$172,500 + $300,000 + ($90,000 - $2,500) - $20,000 = $540,000 Balance 2013 Year End



AACSB: Analytic



Blooms: Apply

Difficulty: 3 Hard











five years.




investment.

What was the balance in the investment account at April 1, 2014 just before the sale of

shares?

A. $468,281.

B. $468,750.

C. $558,375.

D. $616,000.

E. $624,375.

$540,000 + ($25,000 - $625) - $6,000 = $558,375

2014 Begin Investment Acct Balance + (40% of 1st Qtr Income - 1st Qtr Amort) - 1st Qtr Div



AACSB: Analytic



Blooms: Apply

Difficulty: 3 Hard










five years.




investment.

How much of Cook's net income did Mehan report for the year 2014?

A. $61,750.

B. $81,250.

C. $72,500.

D. $59,250.

E. $75,000.

(First Qtr Income × 40%) + (2nd thru 4th Qtr Income × 30%)

$25,000 + $56,250 = $81,250



AACSB: Analytic



Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 01-05a Understand the financial reporting consequences for a change to the equity method.

49. On January 4, 2012, Harley, Inc. acquired 40% of the outstanding common stock of Bike Co.

for $2,400,000. This investment gave Harley the ability to exercise significant influence over

Bike. Bike's assets on that date were recorded at $10,500,000 with liabilities of $4,500,000.

There were no other differences between book and fair values.

During 2012, Bike reported net income of $500,000. For 2013, Bike reported net income of

$800,000. Dividends of $300,000 were paid in each of these two years.

How much income did Harley report from Bike for 2012?

A. $120,000.

B. $200,000.

C. $300,000.

D. $320,000.

E. $500,000.

$500,000 × 40% = $200,000

AACSB: Analytic




Blooms: Apply












How much income did Harley report from Bike for 2013?

A. $120,000.

B. $200,000.

C. $300,000.

D. $320,000.

E. $500,000.

$800,000 × 40% = $320,000

AACSB: Analytic




Blooms: Apply












What was the reported balance of Harley's Investment in Bike Co. at December 31, 2012?

A. $880,000.

B. $2,400,000.

C. $2,480,000.

D. $2,600,000.

E. $2,900,000.

$2,400,000 + $200,000 - $120,000 = $2,480,000

AACSB: Analytic




Blooms: Apply












What was the reported balance of Harley's Investment in Bike Co. at December 31, 2013?

A. $2,400,000.

B. $2,480,000.

C. $2,500,000.

D. $2,600,000.

E. $2,680,000.

$2,480,000 + $320,000 - $120,000 = $2,680,000

AACSB: Analytic




Blooms: Apply






53. On January 1, 2013, Anderson Company purchased 40% of the voting common stock of

Barney Company for $2,000,000, which approximated book value. During 2013, Barney paid

dividends of $30,000 and reported a net loss of $70,000.

What is the balance in the investment account on December 31, 2013?

A. $1,900,000.

B. $1,960,000.

C. $2,000,000.

D. $2,016,000.

E. $2,028,000.

$2,000,000 - $28,000 - $12,000 = $1,960,000

AACSB: Analytic




Blooms: Apply






54. On January 1, 2013, Anderson Company purchased 40% of the voting common stock of

Barney Company for $2,000,000, which approximated book value. During 2013, Barney paid

dividends of $30,000 and reported a net loss of $70,000.

What amount of equity income would Anderson recognize in 2013 from its ownership interest

in Barney?

A. $12,000 income.

B. $12,000 loss.

C. $16,000 loss.

D. $28,000 income.

E. $28,000 loss.

$70,000 Loss × 40% = $28,000 Loss

AACSB: Analytic




Blooms: Apply






55. Luffman Inc. owns 30% of Bruce Inc. and appropriately applies the equity method. During the

current year, Bruce bought inventory costing $52,000 and then sold it to Luffman for $80,000.

At year-end, all of the merchandise had been sold by Luffman to other customers. What

amount of unrealized intercompany profit must be deferred by Luffman?

A. $0.

B. $8,400.

C. $28,000.

D. $52,000.

E. $80,000.

$80,000 - $52,000 = $28,000 Income Recognized; None Deferred

AACSB: Analytic




Blooms: Apply

Difficulty: 1 Easy





56. On January 3, 2013, Roberts Company purchased 30% of the 100,000 shares of common

stock of Thomas Corporation, paying $1,500,000. There was no goodwill or other cost

allocation associated with the investment. Roberts has significant influence over Thomas.

During 2013, Thomas reported income of $300,000 and paid dividends of $100,000. On

January 4, 2014, Roberts sold 15,000 shares for $800,000.

What was the balance in the investment account before the shares were sold?

A. $1,560,000.

B. $1,600,000.

C. $1,700,000.

D. $1,800,000.

E. $1,860,000.

$1,500,000 + $90,000 - $30,000 = $1,560,000

AACSB: Analytic




Blooms: Apply










What is the gain/loss on the sale of the 15,000 shares?

A. $0

B. $10,000 gain.

C. $12,000 loss.

D. $15,000 loss.

E. $20,000 gain.

$1,560,000 × (15,000/30,000) = $780,000 Cost of Shares Sold

$800,000 Sales Price - $780,000 Cost of Shares Sold = $20,000 Gain on Sale of Shares

AACSB: Analytic




Blooms: Apply










What is the balance in the investment account after the sale of the 15,000 shares?

A. $750,000.

B. $760,000.

C. $780,000.

D. $790,000.

E. $800,000.

$1,560,000 × (15,000/30,000) = $780,000 Cost of shares Sold

$1,560,000 - $780,000 Cost of Shares Sold = $780,000 Balance in the Investment Account

AACSB: Analytic




Blooms: Apply










What is the appropriate journal entry to record the sale of the 15,000 shares?

A. A Above.

B. B Above.

C. C Above.

D. D Above.

E. E Above.

$20,000 Gain is Only shown in Option B



AACSB: Analytic



Blooms: Apply

Difficulty: 3 Hard


60. On January 4, 2013, Mason Co. purchased 40,000 shares (40%) of the common stock of

Hefly Corp., paying $560,000. At that time, the book value and fair value of Hefly's net assets

was $1,400,000. The investment gave Mason the ability to exercise significant influence over

the operations of Hefly. During 2013, Hefly reported income of $150,000 and paid dividends of

$40,000. On January 2, 2014, Mason sold 10,000 shares for $150,000.

What was the balance in the investment account before the shares were sold?

A. $520,000.

B. $544,000.

C. $560,000.

D. $604,000.

E. $620,000.

$560,000 + ($150,000 × 40%) - ($40,000 × 40%) = $604,000

AACSB: Analytic




Blooms: Apply










What is the gain/loss on the sale of the 10,000 shares?

A. $20,000 gain.

B. $10,000 gain.

C. $1,000 gain.

D. $1,000 loss.

E. $10,000 loss.

$604,000 × (10,000/40,000) = $151,000 Cost of Shares Sold

$150,000 Sales Price - $151,000 Cost of Shares Sold = $1,000 Loss on Sale of Shares

AACSB: Analytic




Blooms: Apply

Difficulty: 3 Hard









What is the balance in the investment account after the sale of the 10,000 shares?

A. $390,000.

B. $420,000.

C. $453,000.

D. $454,000.

E. $465,000.

$604,000 - $151,000 = $453,000

AACSB: Analytic




Blooms: Apply

Difficulty: 3 Hard









What is the appropriate journal entry to record the sale of the 10,000 shares?

A. A Above

B. B Above

C. C Above

D. D Above

E. E Above

$1,000 Loss only shown in Option C



AACSB: Analytic



Blooms: Apply

Difficulty: 3 Hard




64. On January 4, 2013, Bailey Corp. purchased 40% of the voting common stock of Emery Co.,

paying $3,000,000. Bailey properly accounts for this investment using the equity method. At

the time of the investment, Emery's total stockholders' equity was $5,000,000. Bailey gathered

the following information about Emery's assets and liabilities whose book values and fair

values differed:

Any excess of cost over fair value was attributed to goodwill, which has not been impaired.

Emery Co. reported net income of $400,000 for 2013, and paid dividends of $200,000 during

that year.

What is the amount of the excess of purchase price over book value?

A. $(2,000,000).

B. $800,000.

C. $1,000,000.

D. $2,000,000.

E. $3,000,000.

$5,000,000 × 40% = $2,000,000 BV for 40% of the Shares

$3,000,000 Price Paid - $2,000,000 BV = $1,000,000 Excess

AACSB: Analytic



Blooms: Apply










values differed:



that year.

How much goodwill is associated with this investment?

A. $(500,000).

B. $0.

C. $100,000.

D. $200,000.

E. $2,000,000.

$800,000 Blgs + $500,000 Equipt + $700,000 Franchises = $2,000,000 FV > BV of Assets

$2,000,000 × 40% = $800,000 FV Identified to Purchaser

$1,000,000 Price Paid - $800,000 FV > BV = $200,000 Excess Unidentified (Goodwill)



AACSB: Analytic



Blooms: Apply










values differed:



that year.

What is the amount of excess amortization expense for Bailey's investment in Emery for the

first year?

A. $0.

B. $84,000.

C. $100,000.

D. $160,000.

E. $400,000.

$800,000/20 = $40,000 per year Blgs × 40% = $16,000

$500,000/5 = $100,000 per year Equipt × 40% = $40,000

$700,000/10 = $70,000 per year Franchises × 40% = $28,000

$16,000 + $40,000 + $28,000 = $84,000 Annual Excess Amortization



AACSB: Analytic



Blooms: Apply

Difficulty: 3 Hard





67. On January 1, 2013, Jackie Corp. purchased 30% of the voting common stock of Rob Co.,

paying $2,000,000. Jackie properly accounts for this investment using the equity method. At

the time of the investment, Rob's total stockholders' equity was $3,000,000. Jackie gathered

the following information about Rob's assets and liabilities whose book values and fair values

differed:


Rob Co. reported net income of $300,000 for 2013, and paid dividends of $100,000 during that

year.

What is the amount of the excess of purchase price over book value?

A. $(1,000,000.)

B. $400,000.

C. $800,000.

D. $1,000,000.

E. $1,100,000.

$2,000,000 - ($3,000,000 × 30%) = $1,100,000 Price Paid > BV

AACSB: Analytic



Blooms: Apply










differed:



year.

How much goodwill is associated with this investment?

A. $(500,000.)

B. $0.

C. $650,000.

D. $1,000,000.

E. $2,000,000.

$500,000 Blgs + $500,000 Equipt + $500,000 Franchises = ($1,500,000 FV > BV) × 30% =

$450,000

($1,100,000 Total > BV) - ($450,000 Identified) = $650,000 Unidentified (Goodwill)



AACSB: Analytic



Blooms: Apply










differed:



year.

What is the amount of excess amortization expense for Jackie Corp's investment in Rob Co.

for year 2013?

A. $0.

B. $30,000.

C. $40,000.

D. $55,000.

E. $60,000.

$500,000/15 = $33,333 per year Blgs × 30% = $10,000

$500,000/5 = $100,000 per year Equipt × 30% = $30,000

$500,000/10 = $50,000 per year Franchises × 30% = $15,000

$10,000 + $30,000 + $15,000 = $55,000 Annual Excess Amortization



AACSB: Analytic



Blooms: Apply

Difficulty: 3 Hard









differed:



year.

What is the balance in Jackie Corp's Investment in Rob Co. account at December 31, 2013?

A. $2,000,000.

B. $2,005,000.

C. $2,060,000.

D. $2,090,000.

E. $2,200,000.

$2,000,000 + ($300,000 × 30%) - ($100,000 × 30%) - $55,000 = $2,005,000

AACSB: Analytic



Blooms: Apply

Difficulty: 3 Hard





71. Acker Inc. bought 40% of Howell Co. on January 1, 2012 for $576,000. The equity method of

accounting was used. The book value and fair value of the net assets of Howell on that date

were $1,440,000. Acker began supplying inventory to Howell as follows:

Howell reported net income of $100,000 in 2012 and $120,000 in 2013 while paying $40,000

in dividends each year.

What is the amount of unrealized intra-entity inventory profit to be deferred on December 31,

2012?

A. $1,600.

B. $4,000.

C. $8,000.

D. $15,000.

E. $20,000.

$75,000 - $55,000 = $20,000 × ($15,000/$75,000) = $4,000 × 40% = $1,600 Deferred Profit

AACSB: Analytic



Blooms: Apply












2013?

A. $1,600.

B. $8,000.

C. $15,000.

D. $20,000.

E. $40,000.

$110,000 - $70,000 = $40,000 × ($55,000/$110,000) = $20,000 × 40% = $8,000 Deferred

Profit

AACSB: Analytic



Blooms: Apply











What is the Equity in Howell Income that should be reported by Acker in 2012?

A. $10,000.

B. $24,000.

C. $36,000.

D. $38,400.

E. $40,000.

$100,000 × 40% = $40,000 - ($1,600 Deferred Inventory Profit) = $38,400

AACSB: Analytic



Blooms: Apply











What is the balance in Acker's Investment in Howell account at December 31, 2012?

A. $576,000.

B. $598,400.

C. $614,400.

D. $606,000.

E. $616,000.

$576,000 + ($100,000 × 40%) - ($40,000 × 40%) - ($1,600 Deferred Profit) = $598,400

AACSB: Analytic



Blooms: Apply











What is the Equity in Howell Income that should be reported by Acker in 2013?

A. $32,000.

B. $41,600.

C. $48,000.

D. $49,600.

E. $50,600.

$120,000 × 40% = $48,000 + ($1,600 in 2012 Recognized Inventory Profit) - ($8,000 in 2013

Deferred Inventory Profit) = $41,600

AACSB: Analytic



Blooms: Apply

Difficulty: 3 Hard










What is the balance in Acker's Investment in Howell account at December 31, 2013?

A. $624,000.

B. $636,000.

C. $646,000.

D. $656,000.

E. $666,000.

($598,400 Balance 2012) + ($41,600 Income from 2013) - ($16,000 Dividend from 2013) =

$624,000

AACSB: Analytic



Blooms: Apply

Difficulty: 3 Hard





77. Cayman Inc. bought 30% of Maya Company on January 1, 2013 for $450,000. The equity

method of accounting was used. The book value and fair value of the net assets of Maya on

that date were $1,500,000. Maya began supplying inventory to Cayman as follows:

Maya reported net income of $100,000 in 2013 and $120,000 in 2014 while paying $40,000 in

dividends each year.


2013?

A. $900.

B. $3,000.

C. $4,500.

D. $6,000.

E. $9,000.

$45,000 - $30,000 = $15,000 × ($9,000/$45,000) = $3,000 × 30% = $900 Deferred Profit

AACSB: Analytic



Blooms: Apply











What is the amount of unrealized inventory profit to be deferred on December 31, 2014?

A. $1,500.

B. $2,400.

C. $3,600.

D. $4,000.

E. $8,000.

$80,000 - $48,000 = $32,000 × ($20,000/$80,000) = $8,000 × 30% = $2,400 Deferred Profit

AACSB: Analytic



Blooms: Apply











What is the Equity in Maya Income that should be reported by Cayman in 2013?

A. $17,100.

B. $18,000.

C. $25,500.

D. $29,100.

E. $30,900.

$100,000 × 30% = $30,000 - $900 Deferred Profit = $29,100

AACSB: Analytic



Blooms: Apply











What is the balance in Cayman's Investment in Maya account at December 31, 2013?

A. $463,500.

B. $467,100.

C. $468,000.

D. $468,900.

E. $480,000.

$450,000 + ($100,000 × 30% = $30,000 - $900 Deferred) - ($40,000 Dividends × 30%) =

$467,100

AACSB: Analytic



Blooms: Apply











What is the Equity in Maya Income that should be reported by Cayman in 2014?

A. $34,200.

B. $34,800.

C. $34,500.

D. $36,000.

E. $37,800.

$120,000 × 30% = $36,000 + ($900 from 2013) - ($2,400 from 2014 Deferral) = $34,500

AACSB: Analytic



Blooms: Apply

Difficulty: 3 Hard










What is the balance in Cayman's Investment in Maya account at December 31, 2014?

A. $488,700.

B. $489,600.

C. $492,000.

D. $494,400.

E. $514,500.

$467,100 + $34,500 - $12,000 = $489,600

AACSB: Analytic



Blooms: Apply

Difficulty: 3 Hard





83. Which of the following results in a decrease in the investment account when applying the

equity method?

A. Dividends paid by the investor.

B. Net income of the investee.

C. Net income of the investor.

D. Unrealized gain on intra-entity inventory transfers for the current year.

E. Purchase of additional common stock by the investor during the current year.

AACSB: Analytic




Blooms: Analyze






84. Which of the following results in an increase in the investment account when applying the

equity method?

A. Unrealized gain on intra-entity inventory transfers for the prior year.

B. Unrealized gain on intra-entity inventory transfers for the current year.

C. Dividends paid by the investor.

D. Dividends paid by the investee.

E. Sale of a portion of the investment during the current year.

AACSB: Analytic




Blooms: Analyze

Difficulty: 1 Easy





85. Which of the following results in a decrease in the Equity in Investee Income account when

applying the equity method?

A. Dividends paid by the investor.

B. Net income of the investee.

C. Unrealized gain on intra-entity inventory transfers for the current year.

D. Unrealized gain on intra-entity inventory transfers for the prior year.

E. Extraordinary gain of the investee.

AACSB: Analytic




Blooms: Analyze

Difficulty: 1 Easy





86. Which of the following results in an increase in the Equity in Investee Income account when

applying the equity method?

A. Amortizations of purchase price over book value on date of purchase.

B. Amortizations, since date of purchase, of purchase price over book value on date of

purchase.

C. Extraordinary gain of the investor.

D. Unrealized gain on intra-entity inventory transfers for the prior year.

E. Sale of a portion of the investment at a loss.

AACSB: Analytic




Blooms: Analyze






87. Renfroe, Inc. acquires 10% of Stanley Corporation on January 1, 2012, for $90,000 when the

book value of Stanley was $1,000,000. During 2012, Stanley reported net income of $215,000

and paid dividends of $50,000. On January 1, 2013, Renfroe purchased an additional 30% of

Stanley for $325,000. Any excess of cost over book value is attributable to goodwill with an

indefinite life. During 2013, Renfroe reported net income of $320,000 and paid dividends of

$50,000.

How much is the adjustment to the Investment in Stanley Corporation for the change from the

fair-value method to the equity method on January 1, 2013?

A. A debit of $16,500.

B. A debit of $21,500.

C. A debit of $90,000.

D. A debit of $165,000.

E. There is no adjustment.

($215,000 × 10%) - ($50,000 × 10%) = $16,500 Debit to the Investment Account

AACSB: Analytic




Blooms: Apply

Difficulty: 1 Easy





88. Renfroe, Inc. acquires 10% of Stanley Corporation on January 1, 2012, for $90,000 when the

book value of Stanley was $1,000,000. During 2012, Stanley reported net income of $215,000

and paid dividends of $50,000. On January 1, 2013, Renfroe purchased an additional 30% of

Stanley for $325,000. Any excess of cost over book value is attributable to goodwill with an

indefinite life. During 2013, Renfroe reported net income of $320,000 and paid dividends of

$50,000.

What is the balance in the Investment in Stanley Corporation on December 31, 2013?

A. $415,000.

B. $512,500.

C. $523,000.

D. $539,500.

E. $544,500.

$90,000 + $325,000 + $16,500 = $431,500 Adjusted Balance on Switch to Equity Method

$431,500 Adjusted Balance + ($320,000 Income × 40%) - ($50,000 Dividends × 40%) =

$539,500

AACSB: Analytic




Blooms: Apply






89. On January 4, 2012, Trycker, Inc. acquired 40% of the outstanding common stock of Inkblot

Co. for $2,400,000. This investment gave Trycker the ability to exercise significant influence

over Inkblot. Inkblot's assets on that date were recorded at $8,000,000 with liabilities of

$2,000,000. There were no other differences between book and fair values.

During 2012, Inkblot reported net income of $500,000 and paid dividends of $300,000. The fair

value of Inkblot at December 31, 2012 is $7,000,000. Trycker elects the fair value option for its

investment in Inkblot.

How are dividends received from Inkblot reflected in Trycker's accounting records for 2012?

A. Reduce investment in Inkblot by $280,000.

B. Increase Investment in Inkblot by $280,000.

C. Reduce Investment in Inkblot by $120,000.

D. Increase Investment in Inkblot by $120,000.

E. Increase Dividend Income by $120,000.

$300,000 × 40% = $120,000 Credit to the Dividend Income Account

AACSB: Analytic




Blooms: Apply


Learning Objective: 01-07 Explain the rationale and reporting implications of fair-value accounting for investments otherwise

accounted for by the equity method.



90. On January 4, 2012, Trycker, Inc. acquired 40% of the outstanding common stock of Inkblot

Co. for $2,400,000. This investment gave Trycker the ability to exercise significant influence

over Inkblot. Inkblot's assets on that date were recorded at $8,000,000 with liabilities of

$2,000,000. There were no other differences between book and fair values.

During 2012, Inkblot reported net income of $500,000 and paid dividends of $300,000. The fair

value of Inkblot at December 31, 2012 is $7,000,000. Trycker elects the fair value option for its

investment in Inkblot.

At what amount will Inkblot be reflected in Trycker's December 31, 2012 balance sheet?

A. $2,400,000.

B. $2,280,000.

C. $2,480,000.

D. $2,800,000.

E. $7,000,000.

$7,000,000 FV × 40% = $2,800,000 at December 31, 2012

AACSB: Analytic




Blooms: Apply


Learning Objective: 01-07 Explain the rationale and reporting implications of fair-value accounting for investments otherwise

accounted for by the equity method.



Chapter 02 Consolidation of Financial Information Answer Key


1. At the date of an acquisition which is not a bargain purchase, the acquisition method

A. consolidates the subsidiary's assets at fair value and the liabilities at book value.

B. consolidates all subsidiary assets and liabilities at book value.

C. consolidates all subsidiary assets and liabilities at fair value.

D. consolidates current assets and liabilities at book value, long-term assets and liabilities at

fair value.

E. consolidates the subsidiary's assets at book value and the liabilities at fair value.





Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 02-04 Describe the valuation principles of the acquisition method.

Learning Objective: 02-05 Determine the total fair value of the consideration transferred for an acquisition and allocate that fair

value to specific subsidiary assets acquired (including goodwill); and liabilities assumed; or a gain on bargain purchase.



2. In an acquisition where control is achieved, how would the land accounts of the parent and the

land accounts of the subsidiary be combined?

A. Option A

B. Option B

C. Option C

D. Option D

E. Option E




Blooms: Remember







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

A. a worksheet.

B. Lisa's general journal.

C. Victoria's general journal.

D. Victoria's secret consolidation journal.

E. the general journals of both companies.





Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 02-07 Prepare a worksheet to consolidate the accounts of two companies that form a business

combination if dissolution does not take place.



4. Using the acquisition method for a business combination, goodwill is generally defined as:

A. Cost of the investment less the subsidiary's book value at the beginning of the year.

B. Cost of the investment less the subsidiary's book value at the acquisition date.

C. Cost of the investment less the subsidiary's fair value at the beginning of the year.

D. Cost of the investment less the subsidiary's fair value at acquisition date.

E. is no longer allowed under federal law.





Blooms: Remember





5. Direct combination costs and stock issuance costs are often incurred in the process of making

a controlling investment in another company. How should those costs be accounted for in a

pre-2009 purchase transaction?

A. Option A

B. Option B

C. Option C

D. Option D

E. Option E




Blooms: Remember


Learning Objective: 02-09 Appendix: Identify the general characteristics of the legacy purchase and pooling of interest methods

of accounting for past business combinations. Understand the effects that persist today in financial statements from the use of

these legacy methods.



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

business combination?

A. Option A

B. Option B

C. Option C

D. Option D

E. Option E




Blooms: Remember

Difficulty: 1 Easy





7. What is the primary accounting difference between accounting for when the subsidiary is

dissolved and when the subsidiary retains its incorporation?

A. If the subsidiary is dissolved, it will not be operated as a separate division.

B. If the subsidiary is dissolved, assets and liabilities are consolidated at their book values.

C. If the subsidiary retains its incorporation, there will be no goodwill associated with the

acquisition.

D. If the subsidiary retains its incorporation, assets and liabilities are consolidated at their

book values.

E. If the subsidiary retains its incorporation, the consolidation is not formally recorded in the

accounting records of the acquiring company.





Blooms: Understand


Learning Objective: 02-06 Prepare the journal entry to consolidate the accounts of a subsidiary if dissolution takes place.





8. According to GAAP, the pooling of interest method for business combinations

A. Is preferred to the purchase method.

B. Is allowed for all new acquisitions.

C. Is no longer allowed for business combinations after June 30, 2001.

D. Is no longer allowed for business combinations after December 31, 2001.

E. Is only allowed for large corporate mergers like Exxon and Mobil.





Blooms: Remember

Difficulty: 1 Easy






9. An example of a difference in types of business combination is:

A. A statutory merger can only be effected by an asset acquisition while a statutory

consolidation can only be effected by a capital stock acquisition.

B. A statutory merger can only be effected by a capital stock acquisition while a statutory

consolidation can only be effected by an asset acquisition.

C. A statutory merger requires dissolution of the acquired company while a statutory

consolidation does not require dissolution.

D. A statutory consolidation requires dissolution of the acquired company while a statutory

merger does not require dissolution.

E. Both a statutory merger and a statutory consolidation can only be effected by an asset

acquisition but only a statutory consolidation requires dissolution of the acquired company.





Blooms: Remember

Difficulty: 3 Hard

Learning Objective: 02-03 Define the term business combination and differentiate across various forms of business

combinations.



10. Acquired in-process research and development is considered as

A. a definite-lived asset subject to amortization.

B. a definite-lived asset subject to testing for impairment.

C. an indefinite-lived asset subject to amortization.

D. an indefinite-lived asset subject to testing for impairment.

E. a research and development expense at the date of acquisition.





Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 02-08 Describe the two criteria for recognizing intangible assets apart from goodwill in a business

combination.



11. Which one of the following is a characteristic of a business combination accounted for as an

acquisition?

A. The combination must involve the exchange of equity securities only.

B. The transaction establishes an acquisition fair value basis for the company being acquired.

C. The two companies may be about the same size, and it is difficult to determine the

acquired company and the acquiring company.

D. The transaction may be considered to be the uniting of the ownership interests of the

companies involved.

E. The acquired subsidiary must be smaller in size than the acquiring parent.





Blooms: Remember

Difficulty: 1 Easy




12. Which one of the following is a characteristic of a business combination that is accounted for

as an acquisition?

A. Fair value only for items received by the acquirer can enter into the determination of the

acquirer's accounting valuation of the acquired company.

B. Fair value only for the consideration transferred by the acquirer can enter into the

determination of the acquirer's accounting valuation of the acquired company.

C. Fair value for the consideration transferred by the acquirer as well as the fair value of items

received by the acquirer can enter into the determination of the acquirer's accounting

valuation of the acquired company.

D. Fair value for only consideration transferred and identifiable assets received by the

acquirer can enter into the determination of the acquirer's accounting valuation of the

acquired company.

E. Only fair value of identifiable assets received enters into the determination of the acquirer's

accounting valuation of the acquired company.





Blooms: Understand

Difficulty: 3 Hard




13. A statutory merger is a(n)

A. business combination in which only one of the two companies continues to exist as a legal

corporation.

B. business combination in which both companies continue to exist.

C. acquisition of a competitor.

D. acquisition of a supplier or a customer.

E. legal proposal to acquire outstanding shares of the target's stock.





Blooms: Remember



combinations.



14. How are stock issuance costs and direct combination costs treated in a business combination

which is accounted for as an acquisition when the subsidiary will retain its incorporation?

A. Stock issuance costs are a part of the acquisition costs, and the direct combination costs

are expensed.

B. Direct combination costs are a part of the acquisition costs, and the stock issuance costs

are a reduction to additional paid-in capital.

C. Direct combination costs are expensed and stock issuance costs are a reduction to

additional paid-in capital.

D. Both are treated as part of the acquisition consideration transferred.

E. Both are treated as a reduction to additional paid-in capital.





Blooms: Remember







15. Bullen Inc. acquired 100% of the voting common stock of Vicker Inc. on January 1, 2013. The

book value and fair value of Vicker's accounts on that date (prior to creating the combination)

follow, along with the book value of Bullen's accounts:

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?

A. $144,000.

B. $104,000.

C. $64,000.

D. $60,000.

E. $0.

$47 × 12,000 = $564,000 - ($80,000 + $40,000 + $240,000) = $204,000 - $100,000 =

$104,000

FV > BV: Inv +$40,000; Land +$20,000; +Blgs $30,000; +Liab $10,000 = $100,000



AACSB: Analytic



Blooms: Apply














value for all of the outstanding stock of Vicker. What is the consolidated balance for Land as a

result of this acquisition transaction?

A. $460,000.

B. $510,000.

C. $500,000.

D. $520,000.

E. $490,000.

$280,000 + $240,000 = $520,000



AACSB: Analytic



Blooms: Apply













value for all of the outstanding shares of Vicker. What will be the consolidated Additional Paid-

In Capital and Retained Earnings (January 1, 2013 balances) as a result of this acquisition

transaction?

A. $60,000 and $490,000.

B. $60,000 and $250,000.

C. $380,000 and $250,000.

D. $464,000 and $250,000.

E. $464,000 and $420,000.

$20,000 + ($37 × 12,000) = $464,000 Add'l Paid-In Capital

$250,000 Parent's R/E Only



AACSB: Analytic



Blooms: Apply

Difficulty: 3 Hard












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?

A. $440,000, $496,000.

B. $440,000, $520,000.

C. $425,000, $505,000.

D. $400,000, $500,000.

E. $427,000, $510,000.

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

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



AACSB: Analytic



Blooms: Apply












Assume that Bullen paid a total of $480,000 in cash for all of the shares of Vicker. In addition,

Bullen paid $35,000 to a group of attorneys for their work in arranging the combination to be

accounted for as an acquisition. What will be the balance in consolidated goodwill?

A. $0.

B. $20,000.

C. $35,000.

D. $55,000.

E. $65,000.

$480,000 - ($80,000 CS + $40,000 APIC + $240,000 R/E + $100,000 FV) = $20,000 Excess



AACSB: Analytic



Blooms: Apply









20. 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.

Assume that Botkins acquired Volkerson on January 1, 2012. At what amount did Botkins

record the investment in Volkerson?

A. $56,000.

B. $182,000.

C. $209,000.

D. $261,000.

E. $312,000.

$3.25 × 56,000 = $182,000

AACSB: Analytic



Blooms: Apply

Difficulty: 1 Easy









21. 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.

Assume that Botkins acquired Volkerson on January 1, 2012. Immediately afterwards, what is

consolidated Common Stock?

A. $456,000.

B. $402,000.

C. $274,000.

D. $276,000.

E. $330,000.

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

AACSB: Analytic



Blooms: Apply









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,

2013, 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 as an acquisition. Immediately after the combination, what was the total

consolidated net assets?

A. $2,520,000.

B. $1,190,000.

C. $1,680,000.

D. $2,870,000.

E. $2,030,000.

$700,000 + $980,000 + ($35 × 34,000) = $2,870,000

AACSB: Analytic




Blooms: Apply









23. Which of the following is a not a reason for a business combination to take place?

A. Cost savings through elimination of duplicate facilities.

B. Quick entry for new and existing products into domestic and foreign markets.

C. Diversification of business risk.

D. Vertical integration.

E. Increase in stock price of the acquired company.





Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 02-01 Discuss the motives for business combinations.



24. Which of the following statements is true regarding a statutory merger?

A. The original companies dissolve while remaining as separate divisions of a newly created

company.

B. Both companies remain in existence as legal corporations with one corporation now a

subsidiary of the acquiring company.

C. The acquired company dissolves as a separate corporation and becomes a division of the

acquiring company.

D. The acquiring company acquires the stock of the acquired company as an investment.

E. A statutory merger is no longer a legal option.





Blooms: Remember



combinations.



25. Which of the following statements is true regarding a statutory consolidation?

A. The original companies dissolve while remaining as separate divisions of a newly created

company.

B. Both companies remain in existence as legal corporations with one corporation now a

subsidiary of the acquiring company.

C. The acquired company dissolves as a separate corporation and becomes a division of the

acquiring company.

D. The acquiring company acquires the stock of the acquired company as an investment.

E. A statutory consolidation is no longer a legal option.





Blooms: Remember



combinations.



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?

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.

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.

C. Acquired assets are revalued to their fair values. Acquired liabilities are maintained at book

values. Any excess is allocated to goodwill.

D. Acquired long-term assets are revalued to their fair values. Any excess is allocated to

goodwill.





Blooms: Analyze







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?

A. Negative goodwill is recorded.

B. A deferred credit is recorded.

C. A gain on bargain purchase is recorded.

D. Long-term assets of the acquired company are reduced in proportion to their fair values.

Any excess is recorded as a deferred credit.

E. Long-term assets and liabilities of the acquired company are reduced in proportion to their

fair values. Any excess is recorded as an extraordinary gain.





Blooms: Remember

Difficulty: 1 Easy






28. Which of the following statements is true regarding the acquisition method of accounting for a

business combination?

A. Net assets of the acquired company are reported at their fair values.

B. Net assets of the acquired company are reported at their book values.

C. Any goodwill associated with the acquisition is reported as a development cost.

D. The acquisition can only be effected by a mutual exchange of voting common stock.

E. Indirect costs of the combination reduce additional paid-in capital.





Blooms: Remember






29. Which of the following statements is true?

A. The pooling of interests for business combinations is an alternative to the acquisition

method.

B. The purchase method for business combinations is an alternative to the acquisition

method.

C. Neither the purchase method nor the pooling of interests method is allowed for new

business combinations.

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.

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.





Blooms: Remember









30. The financial statements for Goodwin, Inc. and Corr Company for the year ended December

31, 2013, prior to Goodwin's acquisition business combination transaction regarding Corr,

follow (in thousands):

On December 31, 2013, Goodwin issued $600 in debt and 30 shares of its $10 par value

common stock to the owners of Corr to acquire all of the outstanding shares of that company.

Goodwin shares had a fair value of $40 per share.

Goodwin paid $25 to a broker for arranging the transaction. Goodwin paid $35 in stock

issuance costs. Corr's equipment was actually worth $1,400 but its buildings were only valued

at $560.

In this acquisition business combination, at what amount is the investment recorded on

Goodwin's books?

A. $1,540.

B. $1,800.



C. $1,860.

D. $1,825.

E. $1,625.

$600 Cash + ($40 × 30 Shares) = $1,800 Investment

AACSB: Analytic



Blooms: Apply
















at $560.

In this acquisition business combination, what total amount of common stock and additional

paid-in capital is added on Goodwin's books?

A. $265.

B. $1,165.



C. $1,200.

D. $1,235.

E. $1,765.

($10 × 30 shares) Common Stock + ($30 × 30 shares) APIC - $35 APIC = $1,165

AACSB: Analytic



Blooms: Apply




















at $560.

Compute the consolidated revenues for 2013.

A. $2,700.

B. $720.

C. $920.



D. $3,300.

E. $1,540.

$2,700 Parent's Revenue Only

AACSB: Analytic



Blooms: Apply

Difficulty: 1 Easy
















at $560.

Compute the consolidated receivables and inventory for 2013.

A. $1,200.

B. $1,515.

C. $1,540.



D. $1,800.

E. $2,140.

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

AACSB: Analytic



Blooms: Apply

Difficulty: 1 Easy


















at $560.

Compute the consolidated expenses for 2013.

A. $1,980.

B. $2,005.

C. $2,040.



D. $2,380.

E. $2,405.

$1,980 + $25 Fees = $2,005

AACSB: Analytic



Blooms: Apply



















at $560.

Compute the consolidated cash account at December 31, 2013.

A. $460.

B. $425.

C. $400.



D. $435.

E. $240.

$240 + $220 = $460 - ($25 + $35) = $400

AACSB: Analytic



Blooms: Apply



















at $560.

Compute the consolidated buildings (net) account at December 31, 2013.

A. $2,700.

B. $3,370.

C. $3,300.



D. $3,260.

E. $3,340.

$2,700 BV + $560 FV = $3,260

AACSB: Analytic



Blooms: Apply



















at $560.

Compute the consolidated equipment (net) account at December 31, 2013.

A. $2,100.

B. $3,500.

C. $3,300.



D. $3,000.

E. $3,200.

$2,100 BV + $1,400 FV = $3,500

AACSB: Analytic



Blooms: Apply



















at $560.

Compute the consideration transferred for this acquisition at December 31, 2013.

A. $900.

B. $1,165.

C. $1,200.



D. $1,765.

E. $1,800.

$600 Cash + ($40 × 30 Stock) = $1,800

AACSB: Analytic



Blooms: Apply




















at $560.

Compute the goodwill arising from this acquisition at December 31, 2013.

A. $0.

B. $100.

C. $125.



D. $160.

E. $45.

$400 CS + $540 APIC + $600 R/E = $1,540 + $200 Equipt - $40 Blgs = $1,700 Total Equity

$600 Cash + ($40 × 30 Stock) = $1,800 Consideration - $1,700 = $100 Goodwill

AACSB: Analytic



Blooms: Apply




















at $560.

Compute the consolidated common stock account at December 31, 2013.

A. $1,080.

B. $1,480.

C. $1,380.



D. $2,280.

E. $2,680.

$1,080 + ($10 × 30 shares) = $1,380

AACSB: Analytic



Blooms: Apply




















at $560.

Compute the consolidated additional paid-in capital at December 31, 2013.

A. $810.

B. $1,350.

C. $1,675.



D. $1,910.

E. $1,875.

$810 + ($30 × 30 shares) - $35 Issuance Costs = $1,675

AACSB: Analytic



Blooms: Apply

Difficulty: 3 Hard



















at $560.

Compute the consolidated liabilities at December 31, 2013.

A. $1,500.

B. $2,100.

C. $2,320.



D. $2,920.

E. $2,885.

$1,500 Parent's + $820 Sub's + $600 Parent's New = $2,920

AACSB: Analytic



Blooms: Apply
















at $560.

Compute the consolidated retained earnings at December 31, 2013.

A. $2,800.

B. $2,825.

C. $2,850.



D. $3,425.

E. $3,450.

$2,850 - $25 Broker Expense = $2,825

AACSB: Analytic



Blooms: Apply












44. On January 1, 2013, the Moody Company entered into a transaction for 100% of the

outstanding common stock of Osorio Company. To acquire these shares, Moody issued $400

in long-term liabilities and 40 shares of common stock having a par value of $1 per share but a

fair value of $10 per share. Moody paid $20 to lawyers, accountants, and brokers for

assistance in bringing about this acquisition. Another $15 was paid in connection with stock

issuance costs. Prior to these transactions, the balance sheets for the two companies were as

follows:

Note: Parentheses indicate a credit balance.

In Moody's appraisal of Osorio, three assets were deemed to be undervalued on the

subsidiary's books: Inventory by $10, Land by $40, and Buildings by $60.

What amount was recorded as the investment in Osorio?

A. $930.

B. $820.

C. $800.

D. $835.

E. $815.



$400 Cash + ($1.00 × 40 shares) CS + ($9 × 40 shares) APIC = $800

AACSB: Analytic



Blooms: Apply














follows:




What amount was recorded as goodwill arising from this acquisition?

A. $230.

B. $120.

C. $520.

D. None. There is a gain on bargain purchase of $230.

E. None. There is a gain on bargain purchase of $265.



$800 Consideration Given

$240 CS + $340 APIC + $340 R/E = $920 + $10 Inv FV + $40 Land FV + $60 Blgs FV =

$1,030

($800 Consideration) - ($1,030 BV/FV) = $230 Bargain Purchase Gain

AACSB: Analytic



Blooms: Apply


















follows:




Compute the amount of consolidated inventories at date of acquisition.

A. $1,080.

B. $1,350.

C. $1,360.

D. $1,370.

E. $290.



$1,080 + $280 + $10 = $1,370

AACSB: Analytic



Blooms: Apply

















follows:




Compute the amount of consolidated buildings (net) at date of acquisition.

A. $1,700.

B. $1,760.

C. $1,640.

D. $1,320.

E. $500.



$1,260 + $440 + $60 = $1,760

AACSB: Analytic



Blooms: Apply

















follows:




Compute the amount of consolidated land at date of acquisition.

A. $1,000.

B. $960.

C. $920.

D. $400.

E. $320.



$600 + $360 + $40 = $1,000

AACSB: Analytic



Blooms: Apply

















follows:




Compute the amount of consolidated equipment at date of acquisition.

A. $480.

B. $580.

C. $559.

D. $570.

E. $560.



$480 + $100 = $580

AACSB: Analytic



Blooms: Apply

















follows:




Compute the amount of consolidated common stock at date of acquisition.

A. $370.

B. $570.

C. $610.

D. $330.

E. $530.



$330 + ($1.00 × 40 shares) = $370

AACSB: Analytic



Blooms: Apply


















follows:




Compute the amount of consolidated additional paid-in capital at date of acquisition.

A. $1,080.

B. $1,420.

C. $1,065.

D. $1,425.

E. $1,440.



$1,080 + ($9.00 × 40 shares) - $15 Issuance Costs = $1,425

AACSB: Analytic



Blooms: Apply

Difficulty: 3 Hard

















follows:




Compute the amount of consolidated cash after recording the acquisition transaction.

A. $220.

B. $185.

C. $200.

D. $205.

E. $215.



($180 - $20 - $15 Parent) = $145 + ($40 Sub) = $185

AACSB: Analytic



Blooms: Apply









53. Carnes has the following account balances as of May 1, 2012 before an acquisition

transaction takes place.

The fair value of Carnes' Land and Buildings are $650,000 and $550,000, respectively. On

May 1, 2012, Riley Company issues 30,000 shares of its $10 par value ($25 fair value)

common stock in exchange for all of the shares of Carnes' common stock. Riley paid $10,000

for costs to issue the new shares of stock. Before the acquisition, Riley has $700,000 in its

common stock account and $300,000 in its additional paid-in capital account.

On May 1, 2012, what value is assigned to Riley's investment account?

A. $150,000.

B. $300,000.

C. $750,000.

D. $760,000.

E. $1,350,000.

$25 × 30,000 shares = $750,000



AACSB: Analytic



Blooms: Apply

Difficulty: 1 Easy












At the date of acquisition, by how much does Riley's additional paid-in capital increase or

decrease?

A. $0.

B. $440,000 increase.

C. $450,000 increase.

D. $640,000 increase.

E. $650,000 decrease.

$15 × 30,000 shares = $450,000 - $10,000 = $440,000



AACSB: Analytic



Blooms: Apply

Difficulty: 1 Easy
















What will be Riley's balance in its common stock account as a result of this acquisition?

A. $300,000.

B. $990,000.

C. $1,000,000.

D. $1,590,000.

E. $1,600,000.

$700,000 + ($10 × 30,000 shares) = $1,000,000



AACSB: Analytic



Blooms: Apply

Difficulty: 1 Easy
















What will be the consolidated additional paid-in capital as a result of this acquisition?

A. $440,000.

B. $740,000.

C. $750,000.

D. $940,000.

E. $950,000.

$300,000 APIC + $440,000 Added APIC = $740,000



AACSB: Analytic



Blooms: Apply










57. The financial balances for the Atwood Company and the Franz Company as of December 31,

2013, are presented below. Also included are the fair values for Franz Company's net assets.

Note: Parenthesis indicate a credit balance

Assume an acquisition business combination took place at December 31, 2013. Atwood

issued 50 shares of its common stock with a fair value of $35 per share for all of the

outstanding common shares of Franz. Stock issuance costs of $15 (in thousands) and direct

costs of $10 (in thousands) were paid.

Compute the investment to be recorded at date of acquisition.

A. $1,750.

B. $1,760.

C. $1,775.

D. $1,300.

E. $1,120.

$35 FV × 50 shares = $1,750



AACSB: Analytic



Blooms: Apply













Compute the consolidated common stock at date of acquisition.

A. $1,000.

B. $2,980.

C. $2,400.

D. $3,400.

E. $3,730.

$1,980 + ($20 Par × 50 shares) = $2,980



AACSB: Analytic



Blooms: Apply

















Compute consolidated inventory at the date of the acquisition.

A. $1,650.

B. $1,810.

C. $1,230.

D. $580.

E. $1,830.

$1,230 BV + $580 FV = $1,810



AACSB: Analytic



Blooms: Apply
















Compute consolidated land at the date of the acquisition.

A. $2,060.

B. $1,800.

C. $260.

D. $2,050.

E. $2,070.

$1,800 BV + $250 FV = $2,050



AACSB: Analytic



Blooms: Apply
















Compute consolidated buildings (net) at the date of the acquisition.

A. $2,450.

B. $2,340.

C. $1,800.

D. $650.

E. $1,690.

$1,800 BV + $650 FV = $2,450



AACSB: Analytic



Blooms: Apply
















Compute consolidated long-term liabilities at the date of the acquisition.

A. $2,600.

B. $2,700.

C. $2,800.

D. $3,720.

E. $3,820.

$2,700 BV + $1,120 FV = $3,820



AACSB: Analytic



Blooms: Apply
















Compute consolidated goodwill at the date of the acquisition.

A. $360.

B. $450.

C. $460.

D. $440.

E. $475.

($35 FV × 50 shares = $1,750) - ($1,300 Net Assets at FV) = $450 Goodwill



AACSB: Analytic



Blooms: Apply

















Compute consolidated equipment (net) at the date of the acquisition.

A. $400.

B. $660.

C. $1,060.

D. $1,040.

E. $1,050.

$660 BV + $400 FV = $1,060



AACSB: Analytic



Blooms: Apply
















Compute fair value of the net assets acquired at the date of the acquisition.

A. $1,300.

B. $1,340.

C. $1,500.

D. $1,750.

E. $2,480.

($240 + $600 + $580 + $250 + $650 + $400) - ($240 + $60 + $1,120) = $1300



AACSB: Analytic



Blooms: Apply
















Compute consolidated retained earnings at the date of the acquisition.

A. $1,160.

B. $1,170.

C. $1,280.

D. $1,290.

E. $1,640.

$1,170 + ($2,880 - $2760 - $10) = $1,280



AACSB: Analytic



Blooms: Apply

Difficulty: 3 Hard
















Compute consolidated revenues at the date of the acquisition.

A. $3,540.

B. $2,880.

C. $1,170.

D. $1,650.

E. $4,050.

$2,880 Revenues of the Parent Only



AACSB: Analytic



Blooms: Apply














Compute consolidated cash at the completion of the acquisition.

A. $1,350.

B. $1,085.

C. $1,110.

D. $870.

E. $845.

$870 + $240 - $15 - $10 = $1,085



AACSB: Analytic



Blooms: Apply
















Compute consolidated expenses at the date of the acquisition.

A. $2,760.

B. $2,770.

C. $2,785.

D. $3,380.

E. $3,390.

$2,760 + $10 = $2,770



AACSB: Analytic



Blooms: Apply











70. Presented below are the financial balances for the Atwood Company and the Franz Company

as of December 31, 2012, immediately before Atwood acquired Franz. Also included are the

fair values for Franz Company's net assets at that date.


Assume a business combination took place at December 31, 2012. Atwood issued 50 shares

of its common stock with a fair value of $35 per share for all of the outstanding common

shares of Franz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in

thousands) were paid to effect this acquisition transaction. To settle a difference of opinion

regarding Franz's fair value, Atwood promises to pay an additional $5.2 (in thousands) to the

former owners if Franz's earnings exceed a certain sum during the next year. Given the

probability of the required contingency payment and utilizing a 4% discount rate, the expected

present value of the contingency is $5 (in thousands).

Compute the investment to be recorded at date of acquisition.

A. $1,750.

B. $1,755.

C. $1,725.



D. $1,760.

E. $1,765.

$35 × 50 shares = $1,750 + $5 = $1,755

AACSB: Analytic



Blooms: Apply





















Compute consolidated inventory at date of acquisition.

A. $1,650.

B. $1,810.

C. $1,230.



D. $580.

E. $1,830.

$1,230 BV + $580 FV = $1,810

AACSB: Analytic



Blooms: Apply























Compute consolidated land at date of acquisition.

A. $2,060.

B. $1,800.

C. $260.



D. $2,050.

E. $2,070.

$1,800 BV + $250 FV = $2,050

AACSB: Analytic



Blooms: Apply























Compute consolidated buildings (net) at date of acquisition.

A. $2,450.

B. $2,340.

C. $1,800.



D. $650.

E. $1,690.

$1,800 BV + $650 FV = $2,450

AACSB: Analytic



Blooms: Apply























Compute consolidated goodwill at date of acquisition.

A. $440.

B. $442.

C. $450.



D. $455.

E. $452.

$35 FV × 50 shares = $1,750 - ($1,300 - $5 Contingency) = $455

AACSB: Analytic



Blooms: Apply























Compute consolidated equipment at date of acquisition.

A. $400.

B. $660.

C. $1,060.



D. $1,040.

E. $1,050.

$660 + $400 = $1,060

AACSB: Analytic



Blooms: Apply























Compute consolidated retained earnings as a result of this acquisition.

A. $1,160.

B. $1,170.

C. $1,265.



D. $1,280.

E. $1,650.

$1,170 + ($2,880 - $2760 - $10) = $1,280

AACSB: Analytic



Blooms: Apply

Difficulty: 3 Hard























Compute consolidated revenues at date of acquisition.

A. $3,540.

B. $2,880.

C. $1,170.



D. $1,650.

E. $4,050.

$2,880 Revenues of the Parent Only

AACSB: Analytic



Blooms: Apply























Compute consolidated expenses at date of acquisition.

A. $2,735.

B. $2,760.

C. $2,770.



D. $2,785.

E. $3,380.

$2,760 + $10 = $2,770

AACSB: Analytic



Blooms: Apply























Compute the consolidated cash upon completion of the acquisition.

A. $1,350.

B. $1,110.

C. $1,080.



D. $1,085.

E. $635.

$870 + $240 - $15 - $10 = $1,085

AACSB: Analytic



Blooms: Apply









80. Flynn acquires 100 percent of the outstanding voting shares of Macek Company on January 1,

2013. To obtain these shares, Flynn pays $400 cash (in thousands) and issues 10,000 shares

of $20 par value common stock on this date. Flynn's stock had a fair value of $36 per share on

that date. Flynn also pays $15 (in thousands) to a local investment firm for arranging the

acquisition. An additional $10 (in thousands) was paid by Flynn in stock issuance costs.

The book values for both Flynn and Macek as of January 1, 2013 follow. The fair value of each

of Flynn and Macek accounts is also included. In addition, Macek holds a fully amortized

trademark that still retains a $40 (in thousands) value. The figures below are in thousands.

Any related question also is in thousands.

By how much will Flynn's additional paid-in capital increase as a result of this acquisition?

A. $150,000.

B. $160,000.

C. $230,000.

D. $350,000.

E. $360,000.

$16 × 10,000 = $160,000 - $10,000 = $150,000



AACSB: Analytic



Blooms: Apply



















What amount will be reported for goodwill as a result of this acquisition?

A. $30,000.

B. $55,000.

C. $65,000.

D. $175,000.

E. $200,000.

$400,000 + ($36 × 10,000shares) = $760,000 Consideration

Net Assets at FV = $665,000 + $40,000 Trademark = $705,000

$760,000 - $705,000 = $55,000 Goodwill



AACSB: Analytic



Blooms: Apply



















What amount will be reported for consolidated receivables?

A. $660,000.

B. $640,000.

C. $500,000.

D. $460,000.

E. $480,000.

$480,000 + $160,000 = $640,000



AACSB: Analytic



Blooms: Apply


















What amount will be reported for consolidated inventory?

A. $1,000,000.

B. $960,000.

C. $920,000.

D. $660,000.

E. $620,000.

$660,000 + $300,000 = $960,000



AACSB: Analytic



Blooms: Apply


















What amount will be reported for consolidated buildings (net)?

A. $1,420,000.

B. $1,260,000.

C. $1,140,000.

D. $1,480,000.

E. $1,200,000.

$1,200,000 + $280,000 = $1,480,000



AACSB: Analytic



Blooms: Apply


















What amount will be reported for consolidated equipment (net)?

A. $385,000.

B. $335,000.

C. $435,000.

D. $460,000.

E. $360,000.

$360,000 + $75,000 = $435,000



AACSB: Analytic



Blooms: Apply


















What amount will be reported for consolidated long-term liabilities?

A. $1,520,000.

B. $1,480,000.

C. $1,440,000.

D. $1,180,000.

E. $1,100,000.

$1,140,000 + $300,000 = $1,440,000



AACSB: Analytic



Blooms: Apply


















What amount will be reported for consolidated common stock?

A. $1,000,000.

B. $1,080,000.

C. $1,200,000.

D. $1,280,000.

E. $1,360,000.

$1,000,000 + ($20 × 10,000 shares) = $1,200,000



AACSB: Analytic



Blooms: Apply



















Assuming the combination is accounted for as a purchase, what amount will be reported for

consolidated retained earnings?

A. $1,830,000.

B. $1,350,000.

C. $1,080,000.

D. $1,560,000.

E. $1,535,000.

$1,080,000 R/E of the Parent Only



AACSB: Analytic



Blooms: Apply
















What amount will be reported for consolidated retained earnings?

A. $1,065,000.

B. $1,080,000.

C. $1,525,000.

D. $1,535,000.

E. $1,560,000.

$1,080,000 - $15,000 = $1,065,000



AACSB: Analytic



Blooms: Apply



















What amount will be reported for consolidated additional paid-in capital?

A. $365,000.

B. $350,000.

C. $360,000.

D. $375,000.

E. $345,000.

$200,000 + ($16 × 10,000 shares) - $10,000 = $350,000



AACSB: Analytic



Blooms: Apply

Difficulty: 3 Hard


















What amount will be reported for consolidated cash after the acquisition is completed?

A. $475,000.

B. $500,000.

C. $555,000.

D. $580,000.

E. $875,000.

$900,000 + $80,000 - $400,000 - $15,000 - $10,000 = $555,000



AACSB: Analytic



Blooms: Apply

Difficulty: 3 Hard






Essay Questions

92. What term is used to refer to a business combination in which only one of the original

companies continues to exist?

The appropriate term is statutory merger.




Blooms: Remember



combinations.



93. How are stock issuance costs accounted for in an acquisition business combination?

Stock issuance costs reduce the balance in the acquirer's Additional Paid-In Capital in an

acquisition business combination.




Blooms: Remember









94. What is the primary difference between recording an acquisition when the subsidiary is

dissolved and when separate incorporation is maintained?

When the subsidiary is dissolved, the acquirer records in its books the fair value of individual

assets and liabilities acquired as well as the resulting goodwill from the acquisition. However,

when separate incorporation is maintained, the acquirer only records the total fair value of

assets and liabilities acquired, as well as the resulting goodwill, in one account as an

investment.




Blooms: Remember









95. How are direct combination costs accounted for in an acquisition transaction?

In an acquisition, direct combination costs are expensed in the period of the acquisition.




Blooms: Remember







96. Peterman Co. owns 55% of Samson Co. Under what circumstances would Peterman not be

required to prepare consolidated financial statements?

Peterman would not be required to prepare consolidated financial statements if control of

Samson is temporary or if, despite majority ownership, Peterman does not have control over

Samson. A lack of control might exist if Samson is in a country that imposes restrictions on

Peterman's actions.




Blooms: Understand


Learning Objective: 02-02 Recognize when consolidation of financial information into a single set of statements is necessary.


combinations.



97. How would you account for in-process research and development acquired in a business

combination accounted for as an acquisition?

In-Process Research and Development is capitalized as an asset of the combination and

reported as intangible assets with indefinite lives subject to impairment reviews.




Blooms: Remember



combination.

98. Elon Corp. obtained all of the common stock of Finley Co., paying slightly less than the fair

value of Finley's net assets acquired. How should the difference between the consideration

transferred and the fair value of the net assets be treated if the transaction is accounted for as

an acquisition?

The difference between the consideration transferred and the fair value of the net assets

acquired is recognized as a gain on bargain purchase.




Blooms: Remember





99. For acquisition accounting, why are assets and liabilities of the subsidiary consolidated at fair

value?

The acquisition transaction is assumed to occur through an orderly transaction between

market participants at the measurement date of the acquisition. Thus identified assets and

liabilities acquired have been assigned fair value for the transfer to the acquirer and this is a

relevant and faithful representation for consolidation.




Blooms: Remember





100. Goodwill is often acquired as part of a business combination. Why, when separate

incorporation is maintained, does Goodwill not appear on the Parent company's trial balance

as a separate account?

While the Goodwill does not appear on the Parent company's books, it is implied as part of the

account called Investment in Subsidiary. During the consolidation process, the Investment

account is broken down into its component parts. Goodwill, along with other items such as

subsidiary fair value adjustments, is then shown separately as part of the consolidated

financial statement balances.




Blooms: Understand



combination.



101. How are direct combination costs, contingent consideration, and a bargain purchase reflected

in recording an acquisition transaction?

The acquisition method embraces a fair value concept as measured by the fair value of

consideration transferred. (1) Direct combination costs are expensed as incurred; (2)

Contingent consideration obligations are recognized at their present value of the potential

obligation as part of the acquisition consideration transferred; (3) When a bargain purchase

occurs, the acquirer measures and recognizes the fair values of each of the assets acquired

and liabilities assumed at the date of the combination, and as a result a gain on the bargain

purchase is recognized at the acquisition date.




Blooms: Remember










102. How is contingent consideration accounted for in an acquisition business combination

transaction?

The fair value approach of the acquisition method views contingent payments as part of the

consideration transferred. Under this view, contingencies have a value to those who receive

the consideration and represent measurable obligations of the acquirer. The amount of the

contingent consideration is measured as the expected present value of a potential payment

and increases the investment value recorded.




Blooms: Remember



103. How are bargain purchases accounted for in an acquisition business transaction?

A bargain purchase results when the collective fair values of the net identified assets acquired

and liabilities assumed exceed the fair value of consideration transferred. The assets and

liabilities acquired are recorded at their fair values and the bargain purchase is recorded as a

Gain on Bargain Purchase.




Blooms: Remember





104. Describe the accounting for direct costs, indirect costs, and issuance costs under the

acquisition method of accounting for a business combination.

Direct and indirect combination costs are expensed and issuance costs reduce the otherwise

fair value of the consideration issued under the acquisition method of accounting for business

combinations.




Blooms: Remember









105. What is the difference in consolidated results between a business combination whereby the

acquired company is dissolved, and a business combination whereby separate incorporation

is maintained?

There is no difference in consolidated results.




Blooms: Remember

Difficulty: 1 Easy






106. Bale Co. acquired Silo Inc. on December 31, 2013, in an acquisition business combination

transaction. Bale's net income for the year was $1,400,000, while Silo had net income of

$400,000 earned evenly during the year. Bale paid $100,000 in direct combination costs,

$50,000 in indirect costs, and $30,000 in stock issue costs to effect the combination.

Required:

What is consolidated net income for 2013?

Note: Silo's net income does not affect consolidated net income until after the date of

acquisition. The combination costs belong to Bale only.

AACSB: Analytic



Blooms: Apply









107. Fine Co. issued its common stock in exchange for the common stock of Dandy Corp. in an

acquisition. At the date of the combination, Fine had land with a book value of $480,000 and a

fair value of $620,000. Dandy had land with a book value of $170,000 and a fair value of

$190,000.

Required:

What was the consolidated balance for Land in a consolidated balance sheet prepared at the

date of the acquisition combination?

AACSB: Analytic



Blooms: Apply









108. Jernigan Corp. had the following account balances at 12/1/12:

Several of Jernigan's accounts have fair values that differ from book value. The fair values are:

Land — $480,000; Building — $720,000; Inventory — $336,000; and Liabilities — $396,000.

Inglewood Inc. acquired all of the outstanding common shares of Jernigan by issuing 20,000

shares of common stock having a $6 par value, but a $66 fair value. Stock issuance costs

amounted to $12,000.

Required:

Prepare a fair value allocation and goodwill schedule at the date of the acquisition.



AACSB: Analytic



Blooms: Apply










109. Salem Co. had the following account balances as of December 1, 2012:

Bellington Inc. transferred $1.7 million in cash and 12,000 shares of its newly issued $30 par

value common stock (valued at $90 per share) to acquire all of Salem's outstanding common

stock.

Determine the balance for Goodwill that would be included in a December 1, 2012,

consolidation.

AACSB: Analytic



Blooms: Apply










110. Salem Co. had the following account balances as of December 1, 2012:

Bellington Inc. transferred $1.7 million in cash and 12,000 shares of its newly issued $30 par

value common stock (valued at $90 per share) to acquire all of Salem's outstanding common

stock.

Assume that Bellington paid cash of $2.8 million. No stock is issued. An additional $50,000 is

paid in direct combination costs.

Required:

For Goodwill, determine what balance would be included in a December 1, 2012

consolidation.



AACSB: Analytic



Blooms: Apply










111. On January 1, 2013, Chester Inc. acquired 100% of Festus Corp.'s outstanding common stock

by exchanging 37,500 shares of Chester's $2 par value common voting stock. On January 1,

2013, Chester's voting common stock had a fair value of $40 per share. Festus' voting

common shares were selling for $6.50 per share. Festus' balances on the acquisition date, just

prior to acquisition are listed below.

Required:

Compute the value of the Goodwill account on the date of acquisition, 1/1/15.



AACSB: Analytic



Blooms: Apply












112. The financial statements for Jode Inc. and Lakely Corp., just prior to their combination, for the

year ending December 31, 2012, follow. Lakely's buildings were undervalued on its financial

records by $60,000.

On December 31, 2012, Jode issued 54,000 new shares of its $10 par value stock in

exchange for all the outstanding shares of Lakely. Jode's shares had a fair value on that date

of $35 per share. Jode paid $34,000 to an investment bank for assisting in the arrangements.

Jode also paid $24,000 in stock issuance costs to effect the acquisition of Lakely. Lakely will

retain its incorporation.

Prepare the journal entries to record (1) the issuance of stock by Jode and (2) the payment of

the combination costs.

Entry One - To record the issuance of common stock by Jode to execute the purchase.

Entry Two - To record the combination costs.



AACSB: Analytic



Blooms: Apply











records by $60,000.






Required:

Determine consolidated net income for the year ended December 31, 2012.



AACSB: Analytic



Blooms: Apply








records by $60,000.






Determine consolidated Additional paid-in Capital at December 31, 2012.



AACSB: Analytic



Blooms: Apply











115. The following are preliminary financial statements for Black Co. and Blue Co. for the year

ending December 31, 2013.

On December 31, 2013 (subsequent to the preceding statements), Black exchanged 10,000

shares of its $10 par value common stock for all of the outstanding shares of Blue. Black's

stock on that date has a fair value of $50 per share. Black was willing to issue 10,000 shares

of stock because Blue's land was appraised at $204,000. Black also paid $14,000 to several

attorneys and accountants who assisted in creating this combination.

Required:

Assuming that these two companies retained their separate legal identities, prepare a

consolidation worksheet as of December 31, 2013.

Bargain Purchase Acquisition Consolidation Worksheet





AACSB: Analytic



Blooms: Apply

Difficulty: 3 Hard










116. The following are preliminary financial statements for Black Co. and Blue Co. for the year

ending December 31, 2013 prior to Black's acquisition of Blue.

On December 31, 2013 (subsequent to the preceding statements), Black exchanged 10,000

shares of its $10 par value common stock for all of the outstanding shares of Blue. Black's

stock on that date has a fair value of $60 per share. Black was willing to issue 10,000 shares

of stock because Blue's land was appraised at $204,000. Black also paid $14,000 to several

attorneys and accountants who assisted in creating this combination.

Required:

Assuming that these two companies retained their separate legal identities, prepare a

consolidation worksheet as of December 31, 2013 after the acquisition transaction is

completed.

Acquisition Consolidation Worksheet





AACSB: Analytic



Blooms: Apply

Difficulty: 3 Hard








117. For each of the following situations, select the best letter answer to reflect the effect of the

numbered item on the acquirer's accounting entry at the date of combination when separate

incorporation will be maintained. Items (4) and (6) require two selections.

(A) Increase Investment account.

(B) Decrease Investment account.

(C) Increase Liabilities.

(D) Increase Common stock.

(E) Decrease common stock.

(F) Increase Additional paid-in capital.

(G) Decrease Additional paid-in capital.

(H) Increase Retained earnings.

(I) Decrease Retained earnings.

_____1. Direct costs.

_____2. Indirect costs.

_____3. Stock issue costs.

_____4. Contingent consideration.

_____5. Bargain purchase.

_____6. In-process research and development acquired.

(1) I; (2) I; (3) G; (4) A, C; (5) H; (6) A, I






Blooms: Understand






Chapter 03 Consolidations-Subsequent to the Date of Acquisition

Answer Key




1. Which one of the following accounts would not appear in the consolidated financial statements

at the end of the first fiscal period of the combination?

A. Goodwill.

B. Equipment.

C. Investment in Subsidiary.

D. Common Stock.

E. Additional Paid-In Capital.





Blooms: Understand


Learning Objective: 03-01 Recognize the complexities in preparing consolidated financial reports that emerge from the

passage of time.



2. Which of the following internal record-keeping methods can a parent choose to account for a

subsidiary acquired in a business combination?

A. initial value or book value.

B. initial value, lower-of-cost-or-market-value, or equity.

C. initial value, equity, or partial equity.

D. initial value, equity, or book value.

E. initial value, lower-of-cost-or-market-value, or partial equity.





Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 03-02 Identify and describe the various methods available to a parent company in order to maintain its

investment in subsidiary account in its internal records.



3. Which one of the following varies between the equity, initial value, and partial equity methods

of accounting for an investment?

A. the amount of consolidated net income.

B. total assets on the consolidated balance sheet.

C. total liabilities on the consolidated balance sheet.

D. the balance in the investment account on the parent's books.

E. the amount of consolidated cost of goods sold.





Blooms: Understand


Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments has no effect

on the resulting consolidated financial statements.



4. Under the partial equity method, the parent recognizes income when

A. dividends are received from the investee.

B. dividends are declared by the investee.

C. the related expense has been incurred.

D. the related contract is signed by the subsidiary.

E. it is earned by the subsidiary.





Blooms: Remember

Difficulty: 1 Easy



5. Push-down accounting is concerned with the

A. impact of the purchase on the subsidiary's financial statements.

B. recognition of goodwill by the parent.

C. correct consolidation of the financial statements.

D. impact of the purchase on the separate financial statements of the parent.

E. recognition of dividends received from the subsidiary.





Blooms: Remember


Learning Objective: 03-08 Understand in general the requirements of push-down accounting and when its use is appropriate.



6. Racer Corp. acquired all of the common stock of Tangiers Co. in 2011. Tangiers maintained

its incorporation. Which of Racer's account balances would vary between the equity method

and the initial value method?

A. Goodwill, Investment in Tangiers Co., and Retained Earnings.

B. Expenses, Investment in Tangiers Co., and Equity in Subsidiary Earnings.

C. Investment in Tangiers Co., Equity in Subsidiary Earnings, and Retained Earnings.

D. Common Stock, Goodwill, and Investment in Tangiers Co.

E. Expenses, Goodwill, and Investment in Tangiers Co.





Blooms: Understand

Difficulty: 3 Hard

Learning Objective: 03-03a Prepare consolidated financial statements subsequent to acquisition when the parent has aplied in

its internal records: The equity method.

Learning Objective: 03-03b Prepare consolidated financial statements subsequent to acquisition when the parent has aplied in

its internal records: The intial value method.



7. How does the partial equity method differ from the equity method?

A. In the total assets reported on the consolidated balance sheet.

B. In the treatment of dividends.

C. In the total liabilities reported on the consolidated balance sheet.

D. Under the partial equity method, subsidiary income does not increase the balance in the

parent's investment account.

E. Under the partial equity method, the balance in the investment account is not decreased by

amortization on allocations made in the acquisition of the subsidiary.





Blooms: Remember






Learning Objective: 03-03c Prepare consolidated financial statements subsequent to acquisition when the parent has aplied in

its internal records: The partial equity method.



8. Jansen Inc. acquired all of the outstanding common stock of Merriam Co. on January 1, 2012,

for $257,000. Annual amortization of $19,000 resulted from this acquisition. Jansen reported

net income of $70,000 in 2012 and $50,000 in 2013 and paid $22,000 in dividends each year.

Merriam reported net income of $40,000 in 2012 and $47,000 in 2013 and paid $10,000 in

dividends each year. What is the Investment in Merriam Co. balance on Jansen's books as of

December 31, 2013, if the equity method has been applied?

A. $286,000.

B. $295,000.

C. $276,000.

D. $344,000.

E. $324,000.

$257,000 + $40,000 + $47,000 - $10,000 - $19,000 - $10,000 - $19,000 = $286,000

AACSB: Analytic




Blooms: Apply








9. Velway Corp. acquired Joker Inc. on January 1, 2012. The parent paid more than the fair

value of the subsidiary's net assets. On that date, Velway had equipment with a book value of

$500,000 and a fair value of $640,000. Joker had equipment with a book value of $400,000

and a fair value of $470,000. Joker decided to use push-down accounting. Immediately after

the acquisition, what Equipment amount would appear on Joker's separate balance sheet and

on Velway's consolidated balance sheet, respectively?

A. $400,000 and $900,000

B. $400,000 and $970,000

C. $470,000 and $900,000

D. $470,000 and $970,000

E. $470,000 and $1,040,000

FV of EQ = $470,000 for Joker B/S; Consolidated B/S = BV of Parent EQ $500,000 + FV of

Sub EQ $470,000 = $970,000

AACSB: Analytic




Blooms: Apply





10. Parrett Corp. acquired one hundred percent of Jones Inc. on January 1, 2011, at a price in

excess of the subsidiary's fair value. On that date, Parrett's equipment (ten-year life) had a

book value of $360,000 but a fair value of $480,000. Jones had equipment (ten-year life) with

a book value of $240,000 and a fair value of $350,000. Parrett used the partial equity method

to record its investment in Jones. On December 31, 2013, Parrett had equipment with a book

value of $250,000 and a fair value of $400,000. Jones had equipment with a book value of

$170,000 and a fair value of $320,000. What is the consolidated balance for the Equipment

account as of December 31, 2013?

A. $387,000.

B. $497,000.

C. $508,000.

D. $537,000.

E. $570,000.

Excess of Sub's FV = $110,000 + Parent's BV $250,000 + Sub's BV $170,000 - Excess

Amortization ($11,000 × 3yrs) = $497,000

AACSB: Analytic




Blooms: Apply

Difficulty: 3 Hard





11. On January 1, 2012, Cale Corp. paid $1,020,000 to acquire Kaltop Co. Kaltop maintained

separate incorporation. Cale used the equity method to account for the investment. The

following information is available for Kaltop's assets, liabilities, and stockholders' equity

accounts on January 1, 2012:

Kaltop earned net income for 2012 of $126,000 and paid dividends of $48,000 during the year.

The 2012 total amortization of allocations is calculated to be

A. $4,000.

B. $6,400.

C. $(2,400).

D. $(1,000).

E. $3,800.

Building = FV $268,000 - BV $240,000 = $28,000/20 yrs = $1,400 Equipment = FV $516,000 -

BV $540,000 = ($24,000)/10 yrs = ($2,400)

($2,400) + $1,400 = ($1,000)



AACSB: Analytic



Blooms: Apply













In Cale's accounting records, what amount would appear on December 31, 2012 for equity in

subsidiary earnings?

A. $77,000.

B. $79,000.

C. $125,000.

D. $127,000.

E. $81,800.

$126,000 + $1,000 = $127,000



AACSB: Analytic



Blooms: Apply













What is the balance in Cale's investment in subsidiary account at the end of 2012?

A. $1,099,000.

B. $1,020,000.

C. $1,096,200.

D. $1,098,000.

E. $1,144,400.

$1,020,000 + ($126,000 + $1,000) - $48,000 = $1,099,000



AACSB: Analytic



Blooms: Apply













At the end of 2012, the consolidation entry to eliminate Cale's accrual of Kaltop's earnings

would include a credit to Investment in Kaltop Co. for

A. $124,400.

B. $126,000.

C. $127,000.

D. $76,400.

E. $0.

$126,000 + $1,000 = $127,000



AACSB: Analytic



Blooms: Apply











If Cale Corp. had net income of $444,000 in 2012, exclusive of the investment, what is the

amount of consolidated net income?

A. $569,000.

B. $570,000.

C. $571,000.

D. $566,400.

E. $444,000.

$444,000 + ($126,000 + $1,000) = $571,000



AACSB: Analytic



Blooms: Apply






16. On January 1, 2012, Franel Co. acquired all of the common stock of Hurlem Corp. For 2012,

Hurlem earned net income of $360,000 and paid dividends of $190,000. Amortization of the

patent allocation that was included in the acquisition was $6,000.

How much difference would there have been in Franel's income with regard to the effect of the

investment, between using the equity method or using the initial value method of internal

recordkeeping?

A. $190,000.

B. $360,000.

C. $164,000.

D. $354,000.

E. $150,000.

Initial Value Method = $0 Recognized from Sub Income (only dividend income) Equity Method

= $360,000 - $6,000 - $190,000 = $164,000 Sub Income Added in Consolidation $164,000 -

$0 = $164,000

AACSB: Analytic




Blooms: Apply










17. On January 1, 2012, Franel Co. acquired all of the common stock of Hurlem Corp. For 2012,

Hurlem earned net income of $360,000 and paid dividends of $190,000. Amortization of the

patent allocation that was included in the acquisition was $6,000.

How much difference would there have been in Franel's income with regard to the effect of the

investment, between using the equity method or using the partial equity method of internal

recordkeeping?

A. $170,000.

B. $354,000.

C. $164,000.

D. $6,000.

E. $174,000.

Equity Method = $360,000 - $6,000 - $190,000 = $164,000 Added in Consolidation - Partial

Equity Method = $360,000 - $190,000 = $170,000 Added in Consolidation $170,000 -

$164,000 = $6,000

AACSB: Analytic




Blooms: Apply

Difficulty: 1 Easy









18. Cashen Co. paid $2,400,000 to acquire all of the common stock of Janex Corp. on January 1,

2012. Janex's reported earnings for 2012 totaled $432,000, and it paid $120,000 in dividends

during the year. The amortization of allocations related to the investment was $24,000.

Cashen's net income, not including the investment, was $3,180,000, and it paid dividends of

$900,000.

On the consolidated financial statements for 2012, what amount should have been shown for

Equity in Subsidiary Earnings?

A. $432,000.

B. $-0-

C. $408,000.

D. $120,000.

E. $288,000.

$0; (Income is eliminated from the investment account)

AACSB: Analytic




Blooms: Apply



passage of time.









$900,000.

On the consolidated financial statements for 2012, what amount should have been shown for

consolidated dividends?

A. $900,000.

B. $1,020,000.

C. $876,000.

D. $996,000.

E. $948,000.

$900,000 Parent's Dividends Only

AACSB: Analytic




Blooms: Apply

Difficulty: 1 Easy


passage of time.









$900,000.

What is the amount of consolidated net income for the year 2012?

A. $3,180,000.

B. $3,612,000.

C. $3,300,000.

D. $3,588,000.

E. $3,420,000.

Parent Income $3,180,000 + Sub Income $432,000 - Amortization Allocations $24,000 =

Consolidated Net Income $3,588,000

AACSB: Analytic




Blooms: Apply



passage of time.





21. Jans Inc. acquired all of the outstanding common stock of Tysk Corp. on January 1, 2011, for

$372,000. Equipment with a ten-year life was undervalued on Tysk's financial records by

$46,000. Tysk also owned an unrecorded customer list with an assessed fair value of $67,000

and an estimated remaining life of five years.

Tysk earned reported net income of $180,000 in 2011 and $216,000 in 2012. Dividends of

$70,000 were paid in each of these two years. Selected account balances as of December 31,

2013, for the two companies follow.

If the partial equity method had been applied, what was 2013 consolidated net income?

A. $840,000.

B. $768,400.

C. $822,000.

D. $240,000.

E. $600,000.

Parent $1,080,000 - $480,000 = $600,000; Sub $840,000 - $600,000 = $240,000 $600,000 +

$240,000 = $840,000 - ($46,000/10) - ($67,000/5) = $822,000

AACSB: Analytic



Blooms: Apply

Difficulty: 3 Hard





22. Jans Inc. acquired all of the outstanding common stock of Tysk Corp. on January 1, 2011, for

$372,000. Equipment with a ten-year life was undervalued on Tysk's financial records by

$46,000. Tysk also owned an unrecorded customer list with an assessed fair value of $67,000

and an estimated remaining life of five years.

Tysk earned reported net income of $180,000 in 2011 and $216,000 in 2012. Dividends of

$70,000 were paid in each of these two years. Selected account balances as of December 31,

2013, for the two companies follow.

If the equity method had been applied, what would be the Investment in Tysk Corp. account

balance within the records of Jans at the end of 2013?

A. $612,100.

B. $744,000.

C. $774,150.

D. $372,000.

E. $844,150.

Initial Investment $372,000

2011 Entries: $180,000 - $70,000 - $18,000 = $92,000

2012 Entries: $216,000 - $70,000 - $18,000 = $128,000

2013 Entries: $240,000 - $70,000 - $18,000 = $152,000

$372,000 + $92,000 + $128,000 + $152,000 = $744,000



AACSB: Analytic



Blooms: Apply








23. Red Co. acquired 100% of Green, Inc. on January 1, 2012. On that date, Green had inventory

with a book value of $42,000 and a fair value of $52,000. This inventory had not yet been sold

at December 31, 2012. Also, on the date of acquisition, Green had a building with a book

value of $200,000 and a fair value of $390,000. Green had equipment with a book value of

$350,000 and a fair value of $280,000. The building had a 10-year remaining useful life and

the equipment had a 5-year remaining useful life. How much total expense will be in the

consolidated financial statements for the year ended December 31, 2012 related to the

acquisition allocations of Green?

A. $43,000.

B. $33,000.

C. $5,000.

D. $15,000.

E. 0.

Inventory Adjustment $10,000 + Building Adjustment ($190,000/10) $19,000 + Equipment

Adjustment ([$70,000]/5) [$14,000] = $15,000

AACSB: Analytic




Blooms: Apply



passage of time.





24. All of the following are acceptable methods to account for a majority-owned investment in

subsidiary except

A. The equity method.

B. The initial value method.

C. The partial equity method.

D. The fair-value method.

E. Book value method.





Blooms: Remember

Difficulty: 1 Easy





25. Under the equity method of accounting for an investment,

A. The investment account remains at initial value.

B. Dividends received are recorded as revenue.

C. Goodwill is amortized over 20 years.

D. Income reported by the subsidiary increases the investment account.

E. Dividends received increase the investment account.





Blooms: Remember

Difficulty: 1 Easy





26. Under the partial equity method of accounting for an investment,

A. The investment account remains at initial value.

B. Dividends received are recorded as revenue.

C. The allocations for excess fair value allocations over book value of net assets at date of

acquisition are applied over their useful lives to reduce the investment account.

D. Amortization of the excess of fair value allocations over book value is ignored in regard to

the investment account.

E. Dividends received increase the investment account.





Blooms: Understand






27. Under the initial value method, when accounting for an investment in a subsidiary,

A. Dividends received by the subsidiary decrease the investment account.

B. The investment account is adjusted to fair value at year-end.

C. Income reported by the subsidiary increases the investment account.

D. The investment account remains at initial value.

E. Dividends received are ignored.





Blooms: Understand






28. According to GAAP regarding amortization of goodwill and other intangible assets, which of

the following statements is true?

A. Goodwill recognized in consolidation must be amortized over 20 years.

B. Goodwill recognized in consolidation must be expensed in the period of acquisition.

C. Goodwill recognized in consolidation will not be amortized but subject to an annual test for

impairment.

D. Goodwill recognized in consolidation can never be written off.

E. Goodwill recognized in consolidation must be amortized over 40 years.





Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 03-05 Discuss the rationale for the goodwill impairment testing approach.



29. When a company applies the initial method in accounting for its investment in a subsidiary and

the subsidiary reports income in excess of dividends paid, what entry would be made for a

consolidation worksheet?

A. A above

B. B above

C. C above

D. D above

E. E above

AACSB: Analytic



Blooms: Analyze






30. When a company applies the initial value method in accounting for its investment in a

subsidiary and the subsidiary reports income less than dividends paid, what entry would be

made for a consolidation worksheet?

A. A above

B. B above

C. C above

D. D above

E. E above

AACSB: Analytic



Blooms: Analyze






31. When a company applies the partial equity method in accounting for its investment in a

subsidiary and the subsidiary's equipment has a fair value greater than its book value, what

consolidation worksheet entry is made in a year subsequent to the initial acquisition of the

subsidiary?

A. A above

B. B above

C. C above

D. D above

E. E above

AACSB: Analytic



Blooms: Analyze






32. When a company applies the partial equity method in accounting for its investment in a

subsidiary and initial value, book values, and fair values of net assets acquired are all equal,

what consolidation worksheet entry would be made?

A. A above

B. B above

C. C above

D. D above

E. E above

AACSB: Analytic



Blooms: Analyze






33. When consolidating a subsidiary under the equity method, which of the following statements is

true?

A. Goodwill is never recognized.

B. Goodwill required is amortized over 20 years.

C. Goodwill may be recorded on the parent company's books.

D. The value of any goodwill should be tested annually for impairment in value.

E. Goodwill should be expensed in the year of acquisition.





Blooms: Remember

Difficulty: 1 Easy




34. When consolidating a subsidiary under the equity method, which of the following statements is

true with regard to the subsidiary subsequent to the year of acquisition?

A. All net assets are revalued to fair value and must be amortized over their useful lives.

B. Only net assets that had excess fair value over book value when acquired by the parent

must be amortized over their useful lives.

C. All depreciable net assets are revalued to fair value at date of acquisition and must be

amortized over their useful lives.

D. Only depreciable net assets that have excess fair value over book value must be amortized

over their useful lives.

E. Only assets that have excess fair value over book value must be amortized over their

useful lives.





Blooms: Understand








35. Which of the following statements is false regarding push-down accounting?

A. Push-down accounting simplifies the consolidation process.

B. Fewer worksheet entries are necessary when push-down accounting is applied.

C. Push-down accounting provides better information for internal evaluation.

D. Push-down accounting must be applied for all business combinations under a pooling of

interests.

E. Push-down proponents argue that a change in ownership creates a new basis for

subsidiary assets and liabilities.





Blooms: Remember

Difficulty: 1 Easy




36. Which of the following is false regarding contingent consideration in business combinations?

A. Contingent consideration payable in cash is reported under liabilities.

B. Contingent consideration payable in stock shares is reported under stockholders' equity.

C. Contingent consideration is recorded because of its substantial probability of eventual

payment.

D. The contingent consideration fair value is recognized as part of the acquisition regardless

of whether eventual payment is based on future performance of the target firm or future

stock price of the acquirer.

E. Contingent consideration is reflected in the acquirer's balance sheet at the present value of

the potential expected future payment.





Blooms: Remember


Learning Objective: 03-07 Understand the accounting and reporting for contingent consideration subsequent to a business

acquisition.



37. Factors that should be considered in determining the useful life of an intangible asset include

A. Legal, regulatory, or contractual provisions.

B. The residual value of the asset.

C. The entity's expected use of the intangible asset.

D. The effects of obsolescence, competition, and technological change.

E. All of these choices are used in determining the useful life of an intangible asset.





Blooms: Remember


Learning Objective: 03-06 Describe the procedures for conducting a goodwill impairment test.



38. Consolidated net income using the equity method for an acquisition combination is computed

as follows:

A. Parent company's income from its own operations plus the equity from subsidiary's income

recorded by the parent.

B. Parent's reported net income.

C. Combined revenues less combined expenses less equity in subsidiary's income less

amortization of fair-value allocations in excess of book value.

D. Parent's revenues less expenses for its own operations plus the equity from subsidiary's

income recorded by parent.

E. All of these.





Blooms: Remember








39. Perry Company acquires 100% of the stock of Hurley Corporation on January 1, 2012, for

$3,800 cash. As of that date Hurley has the following trial balance;

Any excess of consideration transferred over fair value of net assets acquired is considered

goodwill with an indefinite life. FIFO inventory valuation method is used.

Compute the consideration transferred in excess of book value acquired at January 1, 2012.

A. $150.

B. $700.

C. $2,200.



D. $550.

E. $2,900.

Acquisition Price $3,800 - Total Equity at Acquisition $3,100 = $700

AACSB: Analytic



Blooms: Apply

Difficulty: 1 Easy











Compute goodwill, if any, at January 1, 2012.

A. $150.

B. $250.

C. $700.



D. $1,200.

E. $550.

Identified BVs $2,950 - Identified FVs $3,100 = $150 Excess Unidentified (Goodwill)

AACSB: Analytic



Blooms: Apply












Compute the amount of Hurley's inventory that would be reported in a January 1, 2012,

consolidated balance sheet.

A. $800.

B. $100.



C. $900.

D. $150.

E. $0.

Fair Value at Acquisition = $900

AACSB: Analytic



Blooms: Apply



passage of time.











Compute the amount of Hurley's buildings that would be reported in a December 31, 2012,


A. $1,560.

B. $1,260.



C. $1,440.

D. $1,160.

E. $1,140.

FV $1,200 + Excess Amortization ($300/5) $60 = $1,260

AACSB: Analytic



Blooms: Apply



passage of time.











Compute the amount of Hurley's equipment that would be reported in a December 31, 2012,


A. $1,000.

B. $1,250.



C. $875.

D. $1,125.

E. $750.

FV $1,250 - Excess Amortization ($250/2) $125 = $1,125

AACSB: Analytic



Blooms: Apply



passage of time.











Compute the amount of total expenses reported in an income statement for the year ended

December 31, 2012, in order to recognize acquisition-date allocations of fair value and book

value differences,

A. $140.



B. $190.

C. $260.

D. $285.

E. $310.

AACSB: Analytic



Blooms: Apply



passage of time.











Compute the amount of Hurley's long-term liabilities that would be reported in a December 31,

2012, consolidated balance sheet.

A. $1,800.

B. $1,700.



C. $1,725.

D. $1,675.

E. $3,500.

FV $1,700 + Excess Amortization ($100/4) $25 = $1,725

AACSB: Analytic



Blooms: Apply

Difficulty: 3 Hard


passage of time.











Compute the amount of Hurley's buildings that would be reported in a December 31, 2013,


A. $1,620.

B. $1,380.



C. $1,320.

D. $1,080.

E. $1,500.

FV $1,200 + Excess Amortization ($300/5) $60 × 2 = $1,320

AACSB: Analytic



Blooms: Apply



passage of time.











Compute the amount of Hurley's equipment that would be reported in a December 31, 2013,


A. $0.

B. $1,000.



C. $1,250.

D. $1,125.

E. $1,200.

FV $1,250 - Excess Amortization ($250/2) $125 × 2 = $1,000

AACSB: Analytic



Blooms: Apply



passage of time.











Compute the amount of Hurley's land that would be reported in a December 31, 2013,


A. $900.

B. $1,300.



C. $400.

D. $1,450.

E. $2,200.

FV $1,300

AACSB: Analytic



Blooms: Apply



passage of time.











Compute the amount of Hurley's long-term liabilities that would be reported in a December 31,

2013, consolidated balance sheet.

A. $1,700.

B. $1,800.



C. $1,650.

D. $1,750.

E. $3,500.

FV $1,700 + Excess Amortization ($100/4) $25 × 2 = $1,750

AACSB: Analytic



Blooms: Apply



passage of time.





50. Kaye Company acquired 100% of Fiore Company on January 1, 2013. Kaye paid $1,000

excess consideration over book value which is being amortized at $20 per year. Fiore reported

net income of $400 in 2013 and paid dividends of $100.

Assume the equity method is applied. How much will Kaye's income increase or decrease as a

result of Fiore's operations?

A. $400 increase.

B. $300 increase.

C. $380 increase.

D. $280 increase.

E. $480 increase.

2013 Income $400 - Amortization $20 = $380 Increase

AACSB: Analytic




Blooms: Apply









Assume the partial equity method is applied. How much will Kaye's income increase or

decrease as a result of Fiore's operations?

A. $400 increase.

B. $300 increase.

C. $380 increase.

D. $280 increase.

E. $480 increase.

2013 Income = $400 Increase

AACSB: Analytic




Blooms: Apply









Assume the initial value method is applied. How much will Kaye's income increase or

decrease as a result of Fiore's operations?

A. $400 increase.

B. $300 increase.

C. $380 increase.

D. $100 increase.

E. $210 increase.

2013 Dividends = $100 Increase

AACSB: Analytic




Blooms: Apply









Assume the partial equity method is used. In the years following acquisition, what additional

worksheet entry must be made for consolidation purposes that is not required for the equity

method?

A. Entry A.

B. Entry B.

C. Entry C.

D. Entry D.

E. Entry E.

AACSB: Analytic



Blooms: Analyze









Assume the initial value method is used. In the year subsequent to acquisition, what additional

worksheet entry must be made for consolidation purposes that is not required for the equity

method?

A. Entry A.

B. Entry B.

C. Entry C.

D. Entry D.

E. Entry E.

AACSB: Analytic



Blooms: Analyze

Difficulty: 3 Hard





55. Hoyt Corporation agreed to the following terms in order to acquire the net assets of Brown

Company on January 1, 2013:

(1.) To issue 400 shares of common stock ($10 par) with a fair value of $45 per share.

(2.) To assume Brown's liabilities which have a fair value of $1,500.

On the date of acquisition, the consideration transferred for Hoyt's acquisition of Brown would

be

A. $18,000.

B. $16,500.

C. $20,000.

D. $18,500.

E. $19,500.

Common Stock (400 shares × $45) $18,000 + Liabilities Assumed $1,500 = $19,500

AACSB: Analytic




Blooms: Apply

Difficulty: 1 Easy





56. Following are selected accounts for Green Corporation and Vega Company as of December

31, 2015. Several of Green's accounts have been omitted.

Green acquired 100% of Vega on January 1, 2011, by issuing 10,500 shares of its $10 par

value common stock with a fair value of $95 per share. On January 1, 2011, Vega's land was

undervalued by $40,000, its buildings were overvalued by $30,000, and equipment was

undervalued by $80,000. The buildings have a 20-year life and the equipment has a 10-year

life. $50,000 was attributed to an unrecorded trademark with a 16-year remaining life. There

was no goodwill associated with this investment.

Compute the book value of Vega at January 1, 2011.

A. $997,500.

B. $857,500.

C. $1,200,000.

D. $1,600,000.

E. $827,500.

Common Stock Fair Value $997,500 - Fair Value Asset Adjustment (Land $40,000 - Building

$30,000 + Equipment $80,000 + Unrecorded Trademark $50,000) $140,000 = $857,500



AACSB: Analytic



Blooms: Apply














Compute the December 31, 2015, consolidated revenues.

A. $1,400,000.

B. $800,000.

C. $500,000.

D. $1,590,375.

E. $1,390,375.

$900,000 + $500,000 = $1,400,000



AACSB: Analytic



Blooms: Apply

Difficulty: 1 Easy


passage of time.















Compute the December 31, 2015, consolidated total expenses.

A. $620,000.

B. $280,000.

C. $900,000.

D. $909,625.

E. $299,625.



COGS ($360,000 + $200,000) + Depreciation ($140,000 + $40,000) + Other Exp ($100,000 +

$60,000) + Excess FV Amortization (Blg [$1,500] + Equip $8,000 + Trademark $3,125) =

$909,625

AACSB: Analytic



Blooms: Apply

Difficulty: 3 Hard


passage of time.













Compute the December 31, 2015, consolidated buildings.

A. $1,037,500.

B. $1,007,500.

C. $1,000,000.

D. $1,022,500.

E. $1,012,500.

$750,000 + $280,000 - $30,000 = $1,000,000 + Amortization ($1,500 × 5) = $1,007,500



AACSB: Analytic



Blooms: Apply

Difficulty: 3 Hard


passage of time.













Compute the December 31, 2015, consolidated equipment.

A. $800,000.

B. $808,000.

C. $840,000.

D. $760,000.

E. $848,000.

$300,000 + $580,000 = $880,000 - Amortization ($8,000 × 5) = $840,000



AACSB: Analytic



Blooms: Apply



passage of time.













Compute the December 31, 2015, consolidated land.

A. $220,000.

B. $180,000.

C. $670,000.

D. $630,000.

E. $450,000.

$450,000 + $220,000 = $670,000



AACSB: Analytic



Blooms: Apply



passage of time.













Compute the December 31, 2015, consolidated trademark.

A. $50,000.

B. $46,875.

C. $0.

D. $34,375.

E. $37,500.

$50,000 - Amortization ($3,125 × 5) = $34,375



AACSB: Analytic



Blooms: Apply



passage of time.













Compute the December 31, 2015, consolidated common stock.

A. $450,000.

B. $530,000.

C. $555,000.

D. $635,000.

E. $525,000.

$450,000 (Parent Only)



AACSB: Analytic



Blooms: Apply

Difficulty: 1 Easy


passage of time.













Compute the December 31, 2015, consolidated additional paid-in capital.

A. $210,000.

B. $75,000.

C. $1,102,500.

D. $942,500.

E. $525,000.

$75,000 (Parent Only)



AACSB: Analytic



Blooms: Apply

Difficulty: 1 Easy


passage of time.













Compute the December 31, 2015 consolidated retained earnings.

A. $1,645,375.

B. $1,350,000.

C. $1,565,375.

D. $1,840,375.

E. $1,265,375.



AACSB: Analytic



Blooms: Apply

Difficulty: 3 Hard


passage of time.













Compute the equity in Vega's income to be included in Green's consolidated income

statement for 2015.

A. $500,000.

B. $300,000.

C. $190,375.

D. $200,000.

E. $290,375.



AACSB: Analytic



Blooms: Apply



passage of time.



67. One company acquires another company in a combination accounted for as an acquisition.

The acquiring company decides to apply the initial value method in accounting for the

combination. What is one reason the acquiring company might have made this decision?

A. It is the only method allowed by the SEC.

B. It is relatively easy to apply.

C. It is the only internal reporting method allowed by generally accepted accounting principles.

D. Operating results on the parent's financial records reflect consolidated totals.

E. When the initial method is used, no worksheet entries are required in the consolidation

process.





Blooms: Understand

Difficulty: 1 Easy





68. One company acquires another company in a combination accounted for as an acquisition.

The acquiring company decides to apply the equity method in accounting for the combination.

What is one reason the acquiring company might have made this decision?

A. It is the only method allowed by the SEC.

B. It is relatively easy to apply.

C. It is the only internal reporting method allowed by generally accepted accounting principles.

D. Operating results on the parent's financial records reflect consolidated totals.

E. When the equity method is used, no worksheet entries are required in the consolidation

process.





Blooms: Understand

Difficulty: 1 Easy





69. When is a goodwill impairment loss recognized?

A. Annually on a systematic and rational basis.

B. Never.

C. If both the fair value of a reporting unit and its associated implied goodwill fall below their

respective carrying values.

D. If the fair value of a reporting unit falls below its original acquisition price.

E. Whenever the fair value of the entity declines significantly.





Blooms: Remember





70. Which of the following will result in the recognition of an impairment loss on goodwill?

A. Goodwill amortization is to be recognized annually on a systematic and rational basis.

B. Both the fair value of a reporting unit and its associated implied goodwill fall below their

respective carrying values.

C. The fair value of the entity declines significantly.

D. The fair value of a reporting unit falls below the original consideration transferred for the

acquisition.

E. The entity is investigated by the SEC and its reputation has been severely damaged.





Blooms: Remember





71. Goehler, Inc. acquires all of the voting stock of Kenneth, Inc. on January 4, 2012, at an

amount in excess of Kenneth's fair value. On that date, Kenneth has equipment with a book

value of $90,000 and a fair value of $120,000 (10-year remaining life). Goehler has equipment

with a book value of $800,000 and a fair value of $1,200,000 (10-year remaining life). On

December 31, 2013, Goehler has equipment with a book value of $975,000 but a fair value of

$1,350,000 and Kenneth has equipment with a book value of $105,000 but a fair value of

$125,000.

If Goehler applies the equity method in accounting for Kenneth, what is the consolidated

balance for the Equipment account as of December 31, 2013?

A. $1,080,000.

B. $1,104,000.

C. $1,100,000.

D. $1,468,000.

E. $1,475,000.

AACSB: Analytic




Blooms: Apply














$125,000.

If Goehler applies the partial equity method in accounting for Kenneth, what is the

consolidated balance for the Equipment account as of December 31, 2013?

A. $1,080,000.

B. $1,104,000.

C. $1,100,000.

D. $1,468,000.

E. $1,475,000.

AACSB: Analytic




Blooms: Apply














$125,000.

If Goehler applies the initial value method in accounting for Kenneth, what is the consolidated

balance for the Equipment account as of December 31, 2013?

A. $1,080,000.

B. $1,104,000.

C. $1,100,000.

D. $1,468,000.

E. $1,475,000.

AACSB: Analytic




Blooms: Apply








74. How is the fair value allocation of an intangible asset allocated to expense when the asset has

no legal, regulatory, contractual, competitive, economic, or other factors that limit its life?

A. Equally over 20 years.

B. Equally over 40 years.

C. Equally over 20 years with an annual impairment review.

D. No amortization, but annually reviewed for impairment and adjusted accordingly.

E. No amortization over an indefinite period time.





Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 03-06 Describe the procedures for conducting a goodwill impairment test.



75. Harrison, Inc. acquires 100% of the voting stock of Rhine Company on January 1, 2012 for

$400,000 cash. A contingent payment of $16,500 will be paid on April 15, 2013 if Rhine

generates cash flows from operations of $27,000 or more in the next year. Harrison estimates

that there is a 20% probability that Rhine will generate at least $27,000 next year, and uses an

interest rate of 5% to incorporate the time value of money. The fair value of $16,500 at 5%,

using a probability weighted approach, is $3,142.

What will Harrison record as its Investment in Rhine on January 1, 2012?

A. $400,000.

B. $403,142.

C. $406,000.

D. $409,142.

E. $416,500.

Cash Payment $400,000 + Weighted Fair Value of Contingency $3,142 = $403,142

AACSB: Analytic




Blooms: Apply



acquisition.









Assuming Rhine generates cash flow from operations of $27,200 in 2012, how will Harrison

record the $16,500 payment of cash on April 15, 2013 in satisfaction of its contingent

obligation?

A. Debit Contingent performance obligation $16,500, and Credit Cash $16,500.

B. Debit Contingent performance obligation $3,142, debit Loss from revaluation of contingent

performance obligation $13,358, and Credit Cash $16,500.

C. Debit Investment in Subsidiary and Credit Cash $16,500.

D. Debit Goodwill and Credit Cash $16,500.

E. No entry.

AACSB: Analytic




Blooms: Analyze

Difficulty: 3 Hard


acquisition.









When recording consideration transferred for the acquisition of Rhine on January 1, 2012,

Harrison will record a contingent performance obligation in the amount of:

A. $628.40

B. $2,671.60

C. $3,142.00

D. $13,358.00

E. $16,500.00

Weighted Fair Value of Contingency = $3,142

AACSB: Analytic




Blooms: Apply



acquisition.



78. Beatty, Inc. acquires 100% of the voting stock of Gataux Company on January 1, 2012 for

$500,000 cash. A contingent payment of $12,000 will be paid on April 1, 2013 if Gataux

generates cash flows from operations of $26,500 or more in the next year. Beatty estimates

that there is a 30% probability that Gataux will generate at least $26,500 next year, and uses

an interest rate of 4% to incorporate the time value of money. The fair value of $12,000 at 4%,


What will Beatty record as its Investment in Gataux on January 1, 2012?

A. $500,000.

B. $503,461.

C. $512,000.

D. $515,461.

E. $526,500.

Cash Payment $500,000 + Weighted Fair Value of Contingency $3,461 = $503,461

AACSB: Analytic




Blooms: Apply



acquisition.









Assuming Gataux generates cash flow from operations of $27,200 in 2012, how will Beatty

record the $12,000 payment of cash on April 1, 2013 in satisfaction of its contingent

obligation?

A. Debit Contingent performance obligation $3,461, debit Goodwill $8,539, and Credit Cash

$12,000.

B. Debit Contingent performance obligation $3,461, debit Loss from revaluation of contingent

performance obligation $8,539, and Credit Cash $12,000.

C. Debit Goodwill and Credit Cash $12,000.

D. Debit Goodwill $27,200, credit Contingent performance obligation $15,200, and Credit

Cash $12,000.

E. No entry.

AACSB: Analytic




Blooms: Analyze

Difficulty: 3 Hard


acquisition.









When recording consideration transferred for the acquisition of Gataux on January 1, 2012,

Beatty will record a contingent performance obligation in the amount of:

A. $692.20

B. $3,040.00

C. $3,461.00

D. $12,000.00

E. $15,200.00

Weighted Fair Value of Contingency = $3,461

AACSB: Analytic




Blooms: Apply



acquisition.



81. Prince Company acquires Duchess, Inc. on January 1, 2011. The consideration transferred

exceeds the fair value of Duchess' net assets. On that date, Prince has a building with a book

value of $1,200,000 and a fair value of $1,500,000. Duchess has a building with a book value

of $400,000 and fair value of $500,000.

If push-down accounting is used, what amounts in the Building account appear in Duchess'

separate balance sheet and in the consolidated balance sheet immediately after acquisition?

A. $400,000 and $1,600,000.

B. $500,000 and $1,700,000.

C. $400,000 and $1,700,000.

D. $500,000 and $2,000,000.

E. $500,000 and $1,600,000.

Fair Value ($500,000) & Parent BV + Sub FV ($1,700,000)

AACSB: Analytic




Blooms: Apply





82. Prince Company acquires Duchess, Inc. on January 1, 2011. The consideration transferred

exceeds the fair value of Duchess' net assets. On that date, Prince has a building with a book

value of $1,200,000 and a fair value of $1,500,000. Duchess has a building with a book value

of $400,000 and fair value of $500,000.

If push-down accounting is not used, what amounts in the Building account appear on

Duchess' separate balance sheet and on the consolidated balance sheet immediately after

acquisition?

A. $400,000 and $1,600,000.

B. $500,000 and $1,700,000.

C. $400,000 and $1,700,000.

D. $500,000 and $2,000,000.

E. $500,000 and $1,600,000.

Book Value ($400,000) & Parent BV + Sub FV ($1,700,000)

AACSB: Analytic




Blooms: Apply





83. Watkins, Inc. acquires all of the outstanding stock of Glen Corporation on January 1, 2012. At

that date, Glen owns only three assets and has no liabilities:

If Watkins pays $450,000 in cash for Glen, what amount would be represented as the

subsidiary's Building in a consolidation at December 31, 2014, assuming the book value of the

building at that date is still $200,000?

A. $200,000.

B. $285,000.

C. $290,000.

D. $295,000.

E. $300,000.

Fair Value at Acquisition ($300,000) - Amortization [($100,000/20) × 3] = $285,000

AACSB: Analytic



Blooms: Apply



passage of time.








subsidiary's Building in a consolidation at December 31, 2014, assuming the book value of the

building at that date is still $200,000?

A. $200,000.

B. $285,000.

C. $260,000.

D. $268,000.

E. $300,000.

Fair Value at Acquisition ($300,000) - Amortization [($100,000/20) × 3] = $285,000

AACSB: Analytic



Blooms: Apply



passage of time.








subsidiary's Equipment in a consolidation at December 31, 2014, assuming the book value of

the equipment at that date is still $80,000?

A. $70,000.

B. $73,500.

C. $75,000.

D. $76,500.

E. $80,000.

Fair Value at Acquisition ($75,000) + Amortization [($5,000/10) × 3] = $76,500

AACSB: Analytic



Blooms: Apply








If Watkins pays $450,000 in cash for Glen, what acquisition-date fair value allocation, net of

amortization, should be attributed to the subsidiary's Equipment in consolidation at December

31, 2014?

A. $(5,000.)

B. $80,000.

C. $75,000.

D. $73,500.

E. $(3,500.)

Fair Value Differential at Acquisition [$5,000] + Amortization ([$5000]/10 × 3) = [$3,500]

AACSB: Analytic



Blooms: Apply



passage of time.







If Watkins pays $300,000 in cash for Glen, at what amount would the subsidiary's Building be

represented in a January 2, 2012 consolidation?

A. $200,000.

B. $225,000.

C. $273,000.

D. $279,000.

E. $300,000.

Fair Value at Acquisition = $300,000

AACSB: Analytic



Blooms: Apply








If Watkins pays $450,000 in cash for Glen, at what amount would Glen's Inventory acquired be

represented in a December 31, 2012 consolidated balance sheet?

A. $40,000.

B. $50,000.

C. $0.

D. $10,000.

E. $90,000.

Zero (Under FIFO all Inventory would go to COGS)

AACSB: Analytic



Blooms: Apply








If Watkins pays $450,000 in cash for Glen, and Glen earns $50,000 in net income and pays

$20,000 in dividends during 2012, what amount would be reflected in consolidated net income

for 2012 as a result of the acquisition?

A. $20,000 under the initial value method.

B. $30,000 under the partial equity method.

C. $50,000 under the partial equity method.

D. $44,500 under the equity method.

E. $45,500 regardless of the internal accounting method used.

Sub Income $50,000 - Amortizations ([$5,000]/10) - ($100,000/20) = $45,500

AACSB: Analytic



Blooms: Apply

Difficulty: 3 Hard





90. According to the FASB ASC regarding the testing procedures for Goodwill Impairment, the

proper procedure for conducting impairment testing is:

A. Goodwill recognized in consolidation may be amortized uniformly and only tested if the

amortization method originally chosen is changed.

B. Goodwill recognized in consolidation must only be impairment tested prior to disposal of

the consolidated unit to eliminate the impairment of goodwill from the gain or loss on the

sale of that specific entity.

C. Goodwill recognized in consolidation may be impairment tested in a two-step approach,

first by quantitative assessment of the possible impairment of the fair value of the unit

relative to the book value, and then a qualitative assessment as to why the impairment, if

any, occurred for disclosure.

D. Goodwill recognized in consolidation may be impairment tested in a two-step approach,

first by qualitative assessment of the possibility of impairment of the unit fair value relative

to the book value, and then quantitative assessments as to how much impairment, if any,

occurred for disclosure.

E. Goodwill recognized in consolidation may be impairment tested in a two-step approach,

first by qualitative assessment of the possibility of impairment of the unit fair value relative

to the book value, and then quantitative assessments as to how much impairment, if any,

occurred for asset write-down.





Blooms: Remember





91. When is a goodwill impairment loss recognized?

A. Only after both a quantitative and qualitative assessment of the fair value of goodwill of a

reporting unit.

B. After only definitive quantitative assessments of the fair value of goodwill is completed.

C. After only definitive qualitative assessments of the fair value of goodwill is completed.

D. If the fair value of a reporting unit falls to zero or below its original acquisition price.

E. Never.





Blooms: Remember





Chapter 04 Consolidated Financial Statements and Outside Ownership

Answer Key


1. For business combinations involving less than 100 percent ownership, the acquirer recognizes

and measures all of the following at the acquisition date except:

A. identifiable assets acquired, at fair value.

B. liabilities assumed, at book value.

C. non-controlling interest, at fair value.

D. goodwill or a gain from bargain purchase.

E. none of these choices is correct.





Blooms: Remember


Learning Objective: 04-02 Describe the valuation principles underlying the acquisition method of accounting for the

noncontrolling interest.



2. 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.

What amount should have been reported for the land in a consolidated balance sheet at the

acquisition date?

A. $52,500.

B. $70,000.

C. $75,000.

D. $92,500.

E. $100,000.

$100,000 FV of Land at Acquisition

AACSB: Analytic




Blooms: Apply

Difficulty: 1 Easy

Learning Objective: 04-01 Understand that complete ownership is not a prerequisite for the formation of a business

combination.





What is the total amount of excess land allocation at the acquisition date?

A. $0.

B. $30,000.

C. $22,500.

D. $25,000.

E. $17,500.

FV $100,000 - BV $70,000 = $30,000

AACSB: Analytic




Blooms: Apply

Difficulty: 1 Easy


combination.

Learning Objective: 04-05 Identify and calculate the four noncontrolling interest figures that must be included within the

consolidation process and prepare a consolidation worksheet in the presence of a noncontrolling interest.





What is the amount of excess land allocation attributed to the controlling interest at the

acquisition date?

A. $0.

B. $30,000.

C. $22,500.

D. $25,000.

E. $17,500.

FV - BV ($30,000) × .75 = $22,500

AACSB: Analytic




Blooms: Apply



combination.







What is the amount of excess land allocation attributed to the non-controlling interest at the

acquisition date?

A. $0.

B. $30,000.

C. $22,500.

D. $7,500.

E. $17,500.

FV - BV ($30,000) × .25 = $7,500

AACSB: Analytic




Blooms: Apply



combination.







What amount should have been reported for the land in a consolidated balance sheet,

assuming the investment was obtained prior to the date the purchase method of accounting

for new business combinations was discontinued?

A. $70,000.

B. $75,000.

C. $85,000.

D. $92,500.

E. $100,000.

BV $70,000 + FV Controlling Differential ($30,000 × .75) = $92,500

AACSB: Analytic




Blooms: Apply



combination.



7. 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 non-controlling

interest shares of Float Corp. are not actively traded.

What is the total amount of goodwill recognized at the date of acquisition?

A. $150,000.

B. $250,000.

C. $0.

D. $120,000.

E. $170,000.

FV $1,850,000 - FV of Stock at Purchase Price for 100% ($1,600,000/.80) $2,000,000 =

($150,000) Goodwill

AACSB: Analytic




Blooms: Apply


Learning Objective: 04-03 Allocate goodwill acquired in a business combination across the controlling and noncontrolling

interests.






What amount of goodwill should be attributed to Perch at the date of acquisition?

A. $150,000.

B. $250,000.

C. $0.

D. $120,000.

E. $170,000.

(Purchase Price for 80%) $1,600,000 - (FV $1,850,000 × .80 = $1,480,000) = $120,000

AACSB: Analytic




Blooms: Apply



interests.






What amount of goodwill should be attributed to the non-controlling interest at the date of

acquisition?

A. $0.

B. $20,000.

C. $30,000.

D. $100,000.

E. $120,000.

$150,000 Goodwill × .20 = $30,000 to Non-Controlling Interest

AACSB: Analytic




Blooms: Apply



interests.






What is the dollar amount of non-controlling interest that should appear in a consolidated

balance sheet prepared at the date of acquisition?

A. $350,000.

B. $300,000.

C. $400,000.

D. $370,000.

E. $0.

FV of Stock at Purchase Price for 100% ($1,600,000/.80) $2,000,000 × .20 = $400,000

AACSB: Analytic




Blooms: Apply









What is the dollar amount of Float Corp.'s net assets that would be represented in a

consolidated balance sheet prepared at the date of acquisition?

A. $1,600,000.

B. $1,480,000.

C. $1,200,000.

D. $1,780,000.

E. $1,850,000.

FV of Assets Acquired = $1,850,000

AACSB: Analytic




Blooms: Apply



combination.






What is the dollar amount of fair value over book value differences attributed to Perch at the

date of acquisition?

A. $120,000.

B. $150,000.

C. $280,000.

D. $350,000.

E. $370,000.

FV $1,850,000 - BV $1,500,000 = $350,000 × .80 = $280,000

AACSB: Analytic




Blooms: Apply



combination.





13. Femur Co. acquired 70% of the voting common stock of Harbor Corp. on January 1, 2014.

During 2014, Harbor had revenues of $2,500,000 and expenses of $2,000,000. The

amortization of excess cost allocations totaled $60,000 in 2014.

The non-controlling interest's share of the earnings of Harbor Corp. is calculated to be

A. $132,000.

B. $150,000.

C. $168,000.

D. $160,000.

E. $0.

Revenue $2,500,000 - Expenses $2,000,000 = $500,000 - $60,000 = $440,000 × .30 =

$132,000

AACSB: Analytic




Blooms: Apply


Learning Objective: 04-04 Demonstrate the computation and allocation of consolidated net income in the presence of a




14. Femur Co. acquired 70% of the voting common stock of Harbor Corp. on January 1, 2014.

During 2014, Harbor had revenues of $2,500,000 and expenses of $2,000,000. The

amortization of excess cost allocations totaled $60,000 in 2014.

What is the effect of including Harbor in consolidated net income for 2014?

A. $350,000.

B. $308,000.

C. $500,000.

D. $440,000.

E. $290,000.

Revenue $2,500,000 - Expenses $2,000,000 = $500,000 - $60,000 = $440,000

AACSB: Analytic




Blooms: Apply






15. Denber Co. acquired 60% of the common stock of Kailey Corp. on September 1, 2014. For

2014, Kailey reported revenues of $810,000 and expenses of $630,000, all reflected evenly

throughout the year. The annual amount of amortization related to this acquisition was

$15,000.

In consolidation, the total amount of expenses related to Kailey, and to Denber's acquisition of

Kailey, for 2014 is determined to be

A. $153,750.

B. $161,250.

C. $205,000.

D. $210,000.

E. $215,000.

AACSB: Analytic




Blooms: Apply


Learning Objective: 04-08 Understand the impact on consolidated financial statements of a midyear acquisition.






$15,000.

What is the effect of including Kailey in consolidated net income for 2014?

A. $31,000.

B. $33,000.

C. $55,000.

D. $60,000.

E. $39,000.

Revenue $810,000 - Expenses $630,000 = Income $180,000 × 4/12 = $60,000 - Annual

Amortization ($15,000 × 4/12) = $55,000

AACSB: Analytic




Blooms: Apply








$15,000.

What is the amount of net income to the controlling interest for 2014?

A. $31,000.

B. $33,000.

C. $55,000.

D. $60,000.

E. $39,000.

Revenue $810,000 - Expenses $630,000 = Income $180,000 × 4/12 = $60,000 - Annual

Amortization ($15,000 × 4/12) = $55,000 × .60 = $33,000

AACSB: Analytic




Blooms: Apply








$15,000.

What is the amount of the non-controlling interest's share of Kailey's income for 2014?

A. $22,000.

B. $24,000.

C. $48,000.

D. $66,000.

E. $72,000.

Total Income for September-December = $55,000 - Controlling Interest Portion $33,000 =

$22,000

AACSB: Analytic




Blooms: Apply





19. MacHeath Inc. bought 60% of the outstanding common stock of Nomes Inc. in an acquisition

business combination 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 sheet at the date of acquisition?

A. $250,000.

B. $150,000.

C. $600,000.

D. $360,000.

E. $460,000.

FV of the Land $600,000

AACSB: Analytic




Blooms: Apply



combination.



20. 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 this debt should be eliminated?

A. $375,000

B. $125,000

C. $300,000

D. $500,000

E. $0

BV & FV of the Existing Receivable $500,000





Blooms: Understand

Difficulty: 1 Easy





21. Royce Co. acquired 60% of Park Co. for $420,000 on December 31, 2014 when 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 following selected figures were reported by the two companies.

Additionally, no dividends have been paid.

What is consolidated net income for 2015 attributable to Royce's controlling interest?

A. $686,000.

B. $560,000.

C. $644,000.

D. $635,600.

E. $691,600.

[Parent's Income ($1,260,000 - $700,000 = $560,000)] + [Sub's Income ($560,000 - $420,000)

× .60 = $84,000] - [Excess Equipment Amortization for 2015 ($140,000/10) × .60 = $8,400] =

$635,600



AACSB: Analytic



Blooms: Apply











What is the non-controlling interest's share of the subsidiary's net income for the year ended

December 31, 2015 and what is the ending balance of the non-controlling interest in the

subsidiary at December 31, 2015?

A. $56,000 and $280,000.

B. $50,400 and $218,400.

C. $56,000 and $224,000.

D. $56,000 and $336,000.

E. $50,400 and $330,400.

[Sub's Income ($560,000 - $420,000) × .40 = $56,000] - [Excess Equipment Amortization for

2015 ($140,000/10) × .40 = $5,600] = $50,400

[Non-Controlling Interest at Acquisition (FV $700,000 × .40) = $280,000] + [Non-Controlling

Interest 2015 Income $56,000] - [Excess Equipment Amortization ($140,000/10) × .40] =

$330,400



AACSB: Analytic



Blooms: Apply













What is the consolidated balance of the Equipment account at December 31, 2015?

A. $644,400.

B. $784,000.

C. $719,600.

D. $770,000.

E. $775,600.

[Parent's Equipment $364,000] + [Sub's Equipment $280,000] + [Excess Amortization

Remaining $140,000 - $14,000] = $770,000



AACSB: Analytic



Blooms: Apply






24. On January 1, 2014, Palk Corp. and Spraz Corp. had condensed balance sheets as follows:

On January 2, 2014, Palk borrowed the entire $84,000 it needed to acquire 80% of the

outstanding common shares of Spraz. The loan was to be paid in ten equal annual principal

payments, plus interest, beginning December 31, 2014. The excess consideration transferred

over the underlying book value of the acquired net assets was allocated 60% to inventory and

40% to goodwill.

What is consolidated current assets at January 2, 2014?

A. $127,000.

B. $129,800.

C. $143,800.

D. $148,000.

E. $135,400.

[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



AACSB: Analytic



Blooms: Apply



combination.








40% to goodwill.

What is consolidated noncurrent assets at January 2, 2014?

A. $195,000.

B. $192,200.

C. $186,600.

D. $181,000.

E. $169,800.

[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



AACSB: Analytic



Blooms: Apply



combination.








40% to goodwill.

What are the total consolidated current liabilities at January 2, 2014?

A. $53,200.

B. $56,000.

C. $64,400.

D. $42,000.

E. $70,000.

[Parent's Current Liabilities $42,000] + [Sub's Current Liabilities $14,000] + [Current Portion of

Acquisition Loan ($84,000/10) = $8,400] = $64,400



AACSB: Analytic



Blooms: Apply



combination.








40% to goodwill.

What is consolidated stockholders' equity at January 2, 2014?

A. $112,000.

B. $133,000.

C. $168,000.

D. $182,000.

E. $203,000.

Parent's Equity $112,000 + Non-Controlling Interest $21,000 = $133,000



AACSB: Analytic



Blooms: Apply


Learning Objective: 04-06 Identify appropriate placements for the components of the noncontrolling interest in consolidated

financial statements.

28. In measuring non-controlling interest at the date of acquisition, which of the following would

not be indicative of the value attributed to the non-controlling interest?

A. Fair value based on stock trades of the acquired company.

B. Subsidiary cash flows discounted to present value.

C. Book value of subsidiary net assets.

D. Projections of residual income.

E. Consideration transferred by the parent company that implies a total subsidiary value.





Blooms: Remember






29. When a parent uses the equity method throughout the year to account for its investment in an

acquired subsidiary, which of the following statements is false before making adjustments on

the consolidated worksheet?

A. Parent company net income equals controlling interest in consolidated net income.

B. Parent company retained earnings equals consolidated retained earnings.

C. Parent company total assets equals consolidated total assets.

D. Parent company dividends equals consolidated dividends.

E. Goodwill will not be recorded on the parent's books.





Blooms: Understand






30. When a parent uses the initial value method throughout the year to account for its investment

in an acquired subsidiary, which of the following statements is true before making adjustments

on the consolidated worksheet?

A. Parent company net income equals consolidated net income.

B. Parent company retained earnings equals consolidated retained earnings.

C. Parent company total assets equals consolidated total assets.

D. Parent company dividends equal consolidated dividends.

E. Goodwill needs to be recognized on the parent's books.





Blooms: Understand






31. When a parent uses the partial equity method throughout the year to account for its

investment in an acquired subsidiary, which of the following statements is false before making

adjustments on the consolidated worksheet?

A. Parent company net income will equal controlling interest in consolidated net income when

initial value, book value, and fair value of the investment are equal.

B. Parent company net income will exceed controlling interest in consolidated net income

when fair value of depreciable assets acquired exceeds book value of depreciable assets.

C. Parent company net income will be less than controlling interest in consolidated net income

when fair value of net assets acquired exceeds book value of net assets acquired.

D. Goodwill will be recognized if acquisition value exceeds fair value of net assets acquired.

E. Subsidiary net assets are valued at their book values before consolidating entries are

made.





Blooms: Understand






32. In a step acquisition, which of the following statements is false?

A. The acquisition method views a step acquisition essentially the same as a single step

acquisition.

B. Income from subsidiary is computed by applying a partial year for a new purchase acquired

during the year.

C. Income from subsidiary is computed for the entire year for a new purchase acquired during

the year.

D. Obtaining control through a step acquisition is a significant remeasurement event.

E. Preacquisition earnings are not included in the consolidated income statement.





Blooms: Remember


Learning Objective: 04-09 Understand the impact on consolidated financial statements when a step acquisition has taken

place.



33. Which of the following statements is false regarding multiple acquisitions of a subsidiary's

existing common stock?

A. The parent recognizes a larger percent of subsidiary income.

B. A step acquisition resulting in control may result in a parent recognizing a gain on

revaluation.

C. The book value of the subsidiary will increase.

D. The parent's percent ownership in subsidiary will increase.

E. Non-controlling interest in subsidiary's net income will decrease.





Blooms: Understand


Learning Objective: 04-09 Understand the impact on consolidated financial statements when a step acquisition has taken

place.



34. When a subsidiary is acquired sometime after the first day of the fiscal year, which of the

following statements is true?

A. Income from subsidiary is not recognized until there is an entire year of consolidated

operations.

B. Income from subsidiary is recognized from date of acquisition to year-end.

C. Excess cost over acquisition value is recognized at the beginning of the fiscal year.

D. No goodwill can be recognized.

E. Income from subsidiary is recognized for the entire year.





Blooms: Remember

Difficulty: 1 Easy




35. 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 true in the presentation of consolidated

financial statements?

A. Preacquisition earnings are deducted from consolidated revenues and expenses.

B. Preacquisition earnings are added to consolidated revenues and expenses.

C. Preacquisition earnings are deducted from the beginning consolidated stockholders' equity.

D. Preacquisition earnings are added to the beginning consolidated stockholders' equity.

E. Preacquisition earnings are ignored in the consolidated income statement.





Blooms: Remember





36. When a parent uses the acquisition method for business combinations and sells shares of its

subsidiary, which of the following statements is false?

A. If majority control is still maintained, consolidated financial statements are still required.

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.

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.

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.

E. A gain or loss calculation must be prepared if control is lost.





Blooms: Remember


Learning Objective: 04-10 Record the sale of a subsidiary (or a portion of its shares).



37. All of the following statements regarding the sale of subsidiary shares are true except which of

the following?

A. The use of specific identification based on serial number is acceptable.

B. The use of the FIFO assumption is acceptable.

C. The use of the averaging assumption is acceptable.

D. The use of specific LIFO assumption is acceptable.

E. The parent company must determine whether consolidation is still appropriate for the

remaining shares owned.





Blooms: Remember





38. Which of the following statements is true regarding the sale of subsidiary shares when using

the acquisition method for accounting for business combinations?

A. If control continues, the difference between selling price and acquisition value is recorded

as a realized gain or loss.

B. If control continues, the difference between selling price and acquisition value is an

unrealized gain or loss.

C. If control continues, the difference between selling price and carrying value is recorded as

an adjustment to additional paid-in capital.

D. If control continues, the difference between selling price and carrying value is recorded as

a realized gain or loss.

E. If control continues, the difference between selling price and carrying value is recorded as

an adjustment to retained earnings.





Blooms: Remember





39. Jax Company uses the acquisition method for accounting for its investment in Saxton

Company. Jax sells some of its shares of Saxton such that neither control nor significant

influence exists. Which of the following statements is true?

A. The difference between selling price and acquisition value is recorded as a realized gain or

loss.

B. The difference between selling price and acquisition value is recorded as an unrealized

gain or loss.

C. The difference between selling price and carrying value is recorded as a realized gain or

loss.

D. The difference between selling price and carrying value is recorded as an unrealized gain

or loss.

E. The difference between selling price and carrying value is recorded as an adjustment to

retained earnings.





Blooms: Understand





40. Keefe Inc, a calendar-year corporation, acquires 70% of George Company on September 1,

2014, and an additional 10% on January 1, 2015. Total annual amortization of $6,000 relates

to the first acquisition. George reports the following figures for 2015:

Without regard for this investment, Keefe independently earns $300,000 in net income during

2015.

All net income is earned evenly throughout the year.

What is the controlling interest in consolidated net income for 2015?

A. $380,000.

B. $375,200.

C. $375,800.

D. $376,000.

E. $400,000.

AACSB: Analytic



Blooms: Apply





41. McGuire Company acquired 90 percent of Hogan Company on January 1, 2014, for $234,000

cash. This amount is reflective of Hogan's total 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:

Any excess consideration transferred over fair value is attributable to an unamortized patent

with a useful life of 5 years.

The acquisition value attributable to the non-controlling interest at January 1, 2014 is:

A. $23,400.

B. $24,000.

C. $24,900.

D. $26,000.

E. $20,000.

$234,000/.90 = $260,000 × .10 = $26,000

AACSB: Analytic



Blooms: Apply












In consolidation at January 1, 2014, what adjustment is necessary for Hogan's Buildings

account?

A. $2,000 increase.

B. $2,000 decrease.

C. $1,800 increase.

D. $1,800 decrease.

E. No change.

FV $8,000 - BV $10,000 = <$2,000> Reduction

AACSB: Analytic



Blooms: Apply

Difficulty: 1 Easy


combination.









In consolidation at December 31, 2014, what adjustment is necessary for Hogan's Buildings

account?

A. $1,620 increase.

B. $1,620 decrease.

C. $1,800 increase.

D. $1,800 decrease.

E. No adjustment is necessary.

<$2,000> Reduction - 2014 Excess Amortization of <$200> = <$1,800> Reduction

AACSB: Analytic



Blooms: Apply












In consolidation at December 31, 2015, what adjustment is necessary for Hogan's Buildings

account?

A. $1,440 increase.

B. $1,440 decrease.

C. $1,600 increase.

D. $1,600 decrease.


<$1,800> 2014 BV - 2015 Excess Amortization of <$200> = <$1,600> Reduction

AACSB: Analytic



Blooms: Apply












In consolidation at January 1, 2014, what adjustment is necessary for Hogan's Equipment

account?

A. $4,000 increase.

B. $4,000 decrease.

C. $3,600 increase.

D. $3,600 decrease.


FV $18,000 - BV $14,000 = Increase $4,000

AACSB: Analytic



Blooms: Apply

Difficulty: 1 Easy


combination.









In consolidation at December 31, 2014, what adjustment is necessary for Hogan's Equipment

account?

A. $3,000 increase.

B. $3,000 decrease.

C. $2,700 increase.

D. $2,700 decrease.


Fair Value Differential $4,000 - Amortization for 2014 $1,000 = $3,000 Increase

AACSB: Analytic



Blooms: Apply












In consolidation at December 31, 2015, what adjustment is necessary for Hogan's Equipment

account?

A. $2,000 increase.

B. $2,000 decrease.

C. $1,800 increase.

D. $1,800 decrease.


Fair Value Differential $4,000 - Amortization for 2014 & 2015 $2,000 = $2,000 Increase

AACSB: Analytic



Blooms: Apply












In consolidation at January 1, 2014, what adjustment is necessary for Hogan's Land account?

A. $7,000 increase.

B. $7,000 decrease.

C. $6,300 increase.

D. $6,300 decrease.


Fair Value Differential at Acquisition $7,000 - No Amortization = $7,000 Increase

AACSB: Analytic



Blooms: Apply

Difficulty: 1 Easy


combination.









In consolidation at December 31, 2014, what adjustment is necessary for Hogan's Land

account?

A. $8,000 decrease.

B. $7,000 increase.

C. $6,300 increase.

D. $6,300 decrease.



AACSB: Analytic



Blooms: Apply

Difficulty: 1 Easy











In consolidation at December 31, 2015, what adjustment is necessary for Hogan's Land

account?

A. $7,000 decrease.

B. $7,000 increase.

C. $6,300 increase.

D. $6,300 decrease.



AACSB: Analytic



Blooms: Apply

Difficulty: 1 Easy











In consolidation at January 1, 2014, what adjustment is necessary for Hogan's Patent

account?

A. $7,000.

B. $6,300.

C. $11,000.

D. $9,900.


BV Equity $240,000 - Fair Value Equity at Acquisition $260,000 = $20,000 - Identified Net FV

Increase $9,000 (Blgs + Equipt + Land) = $11,000 Excess Attributed to Patent

AACSB: Analytic



Blooms: Apply

Difficulty: 1 Easy


combination.









In consolidation at December 31, 2014, what net adjustment is necessary for Hogan's Patent

account?

A. $5,600.

B. $8,800.

C. $7,000.

D. $7,700.


Attributed Fair Value Patent $11,000 - Amortization for 2014 $2,200 = $8,800

AACSB: Analytic



Blooms: Apply












In consolidation at December 31, 2015, what net adjustment is necessary for Hogan's Patent

account?

A. $4,200.

B. $5,500.

C. $8,000.

D. $6,600.


Attributed Fair Value Patent $11,000 - Amortization for 2014 & 2015 $4,400 = $6,600

AACSB: Analytic



Blooms: Apply






54. Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2014. Demers

reported common stock of $300,000 and retained earnings of $210,000 on that date.

Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each

having a 10-year remaining life. Any excess consideration transferred over fair value was

attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been

impaired.

Demers earns income and pays dividends as follows:

Assume the EQUITY METHOD is applied.

Compute Pell's investment account balance in Demers at December 31, 2014.

A. $580,000.

B. $574,400.

C. $548,000.

D. $542,400.

E. $541,000.

Initial Investment $500,000 + Controlling Interest Income for 2014 ($100,000 × .80) -

Dividends for 2014 ($40,000 × .80) - Excess FV Annual Amortization ($7,000 × .80) =

$542,400

AACSB: Analytic



Blooms: Apply











impaired.




A. $577,200.

B. $604,000.

C. $592,800.

D. $632,800.

E. $572,000.

December 2014 Investment Balance $542,400 + Controlling Interest Income for 2015

($120,000 × .80) - Dividends for 2015 ($50,000 × .80) - Excess FV Annual Amortization

($7,000 × .80) = $592,800

AACSB: Analytic



Blooms: Apply











impaired.




A. $639,000.

B. $643,200.

C. $763,200.

D. $676,000.

E. $620,000.


($130,000 × .80) - Dividends for 2015 ($60,000 × .80) - Excess FV Annual Amortization

($7,000 × .80) = $643,200

AACSB: Analytic



Blooms: Apply











impaired.



Compute Pell's income from Demers for the year ended December 31, 2014.

A. $74,400.

B. $73,000.

C. $42,400.

D. $41,000.

E. $80,000.

Controlling Interest Income for 2014 ($100,000 × .80) - Excess FV Annual Amortization

($7,000 × .80) = $74,400

AACSB: Analytic



Blooms: Apply











impaired.




A. $90,400.

B. $89,000.

C. $50,400.

D. $56,000.

E. $96,000.


($7,000 × .80) = $90,400

AACSB: Analytic



Blooms: Apply











impaired.




A. $50,400.

B. $56,000.

C. $98,400.

D. $97,000.

E. $104,000.


($7,000 × .80) = $98,400

AACSB: Analytic



Blooms: Apply











impaired.



Compute the non-controlling interest in the net income of Demers at December 31, 2014.

A. $20,000.

B. $12,000.

C. $18,600.

D. $10,600.

E. $14,400.

Non-Controlling Interest Income for 2014 ($100,000 × .20) - Excess FV Annual Amortization

($7,000 × .20) = $18,600

AACSB: Analytic



Blooms: Apply











impaired.




A. $18,400.

B. $14,400.

C. $22,600.

D. $24,000.

E. $12,600.


($7,000 × .20) = $22,600

AACSB: Analytic



Blooms: Apply











impaired.




A. $20,400.

B. $24,600.

C. $26,000.

D. $14,000.

E. $12,600.


($7,000 × .20) = $24,600

AACSB: Analytic



Blooms: Apply











impaired.



Compute the non-controlling interest in Demers at December 31, 2014.

A. $135,600.

B. $137,000.

C. $112,000.

D. $100,000.

E. $118,600.

Non-Controlling Interest at Acquisition $125,000 + Non-Controlling Interest Income for 2014

($100,000 × .20) - Non-Controlling Dividends for 2014 ($40,000 × .20) - Excess FV Annual

Amortization ($7,000 × .20) = $135,600

AACSB: Analytic



Blooms: Apply











impaired.




A. $107,000.

B. $126,000.

C. $109,200.

D. $149,600.

E. $148,200.

December 2014 Investment Balance $135,600 + Non-Controlling Interest Income for 2015


Amortization ($7,000 × .20) = $148,200

AACSB: Analytic



Blooms: Apply











impaired.




A. $107,800.

B. $140,000.

C. $165,200.

D. $160,800.

E. $146,800.



Amortization ($7,000 × .20) = $160,800

AACSB: Analytic



Blooms: Apply











impaired.


Assume the INITIAL VALUE is applied.

Compute Pell's investment in Demers at December 31, 2014.

A. $500,000.

B. $574,400.

C. $625,000.

D. $542,400.

E. $532,000.

Initial Investment = $500,000

AACSB: Analytic



Blooms: Apply

Difficulty: 1 Easy


combination.










impaired.




A. $625,000.

B. $664,800.

C. $592,400.

D. $500,000.

E. $572,000.


AACSB: Analytic



Blooms: Apply

Difficulty: 1 Easy


combination.










impaired.




A. $592,400.

B. $500,000.

C. $625,000.

D. $676,000.

E. $620,000.


AACSB: Analytic



Blooms: Apply

Difficulty: 1 Easy


combination.










impaired.



How much does Pell record as Income from Demers for the year ended December 31, 2014?

A. $32,000.

B. $74,400.

C. $73,000.

D. $42,400.

E. $41,000.

2014 Dividends $40,000 × .80 = $32,000

AACSB: Analytic



Blooms: Apply



combination.










impaired.




A. $90,400.

B. $40,000.

C. $89,000.

D. $50,400.

E. $56,000.

2015 Dividends $50,000 × .80 = $40,000

AACSB: Analytic



Blooms: Apply



combination.










impaired.




A. $48,000.

B. $56,000.

C. $98,400.

D. $97,000.

E. $50,400.

2016 Dividends $60,000 × .80 = $48,000

AACSB: Analytic



Blooms: Apply



combination.










impaired.




A. $12,000.

B. $10,600.

C. $18,600.

D. $20,000.

E. $14,400.


($7,000 × .20) = $18,600

AACSB: Analytic



Blooms: Apply











impaired.




A. $18,400.

B. $14,000.

C. $22,600.

D. $24,000.

E. $12,600.


($7,000 × .20) = $22,600

AACSB: Analytic



Blooms: Apply











impaired.




A. $24,600.

B. $14,000.

C. $26,000.

D. $20,400.

E. $12,600.


($7,000 × .20) = $24,600

AACSB: Analytic



Blooms: Apply











impaired.




A. $135,600.

B. $80,000.

C. $117,000.

D. $100,000.

E. $110,600.



Amortization ($7,000 × .20) = $135,600

AACSB: Analytic



Blooms: Apply











impaired.




A. $126,000.

B. $106,000.

C. $109,200.

D. $149,600.

E. $148,200.



Amortization ($7,000 × .20) = $148,200

AACSB: Analytic



Blooms: Apply











impaired.




A. $107,800.

B. $140,000.

C. $80,000.

D. $50,000.

E. $160,800.



Amortization ($7,000 × .20) = $160,800

AACSB: Analytic



Blooms: Apply











impaired.


Assume the PARTIAL EQUITY method is applied.


A. $625,000.

B. $574,400.

C. $548,000.

D. $542,400.

E. $532,000.

Initial Investment $500,000 + Controlling Interest Income for 2014 ($100,000 × .80) -

Dividends for 2014 ($40,000 × .80) = $548,000



AACSB: Analytic



Blooms: Apply



combination.










impaired.




A. $676,000.

B. $629,000.

C. $580,000.

D. $604,000.

E. $572,000.


($120,000 × .80) - Dividends for 2015 ($50,000 × .80) = $604,000



AACSB: Analytic



Blooms: Apply



combination.










impaired.




A. $780,000.

B. $660,000.

C. $785,000.

D. $676,000.

E. $620,000.


($130,000 × .80) - Dividends for 2015 ($60,000 × .80) = $660,000



AACSB: Analytic



Blooms: Apply



combination.










impaired.




A. $80,000.

B. $74,400.

C. $73,000.

D. $42,400.

E. $41,000.

Controlling Interest Income for 2014 ($100,000 × .80) = $80,000

AACSB: Analytic



Blooms: Apply

Difficulty: 1 Easy


combination.










impaired.



How much does Pell record as income from Demers for the year ended December 31, 2015?

A. $90,400.

B. $89,000.

C. $50,400.

D. $96,000.

E. $56,000.


AACSB: Analytic



Blooms: Apply

Difficulty: 1 Easy


combination.










impaired.



How much does Pell record as income from Demers for the year ended December 31, 2016?

A. $98,400.

B. $56,000.

C. $104,000.

D. $97,000.

E. $50,400.


AACSB: Analytic



Blooms: Apply

Difficulty: 1 Easy


combination.










impaired.




A. $20,000.

B. $12,000.

C. $18,600.

D. $10,600.

E. $14,400.


($7,000 × .20) = $18,600

AACSB: Analytic



Blooms: Apply

Difficulty: 1 Easy










impaired.




A. $18,400.

B. $14,000.

C. $22,600.

D. $24,000.

E. $12,600.


($7,000 × .20) = $22,600

AACSB: Analytic



Blooms: Apply











impaired.




A. $20,400.

B. $26,000.

C. $24,600.

D. $14,000.

E. $12,600.


($7,000 × .20) = $24,600

AACSB: Analytic



Blooms: Apply











impaired.




A. $135,600.

B. $114,000.

C. $112,000.

D. $100,000.

E. $110,600.



Amortization ($7,000 × .20) = $135,600

AACSB: Analytic



Blooms: Apply











impaired.




A. $124,000.

B. $126,000.

C. $109,200.

D. $149,600.

E. $148,200.



Amortization ($7,000 × .20) = $148,200

AACSB: Analytic



Blooms: Apply











impaired.




A. $107,800.

B. $140,000.

C. $80,000.

D. $160,800.

E. $146,800.



Amortization ($7,000 × .20) = $160,800

AACSB: Analytic



Blooms: Apply






90. Parsons Company acquired 90% of Roxy Company several years ago and recorded goodwill

of $200,000 at that date. During 2015 an analysis of the fair value of Roxy's assets determined

an impairment of goodwill in the amount of $50,000.

At what amount would consolidated goodwill be reported for 2015?

A. $150,000.

B. $200,000.

C. $50,000.

D. $0.

E. $135,000.

(Recorded Goodwill $200,000) - (2015 Goodwill Impairment $50,000) = $150,000 Reported

Goodwill for 2015

AACSB: Analytic




Blooms: Apply

Difficulty: 1 Easy





91. Parsons Company acquired 90% of Roxy Company several years ago and recorded goodwill

of $200,000 at that date. During 2015 an analysis of the fair value of Roxy's assets determined

an impairment of goodwill in the amount of $50,000.

What journal entry would be made by Parsons regarding the impairment of goodwill?

A. Journal entry A.

B. Journal entry B.

C. Journal entry C.

D. Journal entry D.

E. Journal entry E.

AACSB: Analytic



Blooms: Analyze

Difficulty: 1 Easy





92. In comparing U.S. GAAP and international financial reporting standards (IFRS) with regard to

a basis for measurement of a non-controlling interest, which of the following is true?

A. U.S. GAAP requires acquisition-date fair value measurement and IFRS requires the

acquiree's identifiable net asset fair value measurement.

B. U.S. GAAP and IFRS both require acquisition-date fair value measurement.

C. U.S. GAAP and IFRS both require the acquiree's identifiable net asset fair value

measurement.

D. U.S. GAAP requires acquisition-date fair value measurement, but IFRS allows an option for

acquisition-date fair value measurement.

E. U.S. GAAP and IFRS both apportion goodwill to the parent only.





Blooms: Remember



Documents

Chapter 01 The Equity Method of Accounting for Investments