Consolidations Subsequent to Acquisition

File: Chapter 03 - Consolidations - Subsequent to the Date of Acquisition
Multiple Choice:
[QUESTION]
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.
Answer: C
Learning Objective: 03-01
Difficulty: Medium
Bloom’s: Understand
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
[QUESTION]
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.
Answer: C
Difficulty: Easy
Bloom’s: Remember
[QUESTION]
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.
Answer: D
Difficulty: Medium
[QUESTION]
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.
Answer: E
Difficulty: Easy
Bloom’s: Remember
[QUESTION]
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.
Answer: A
Difficulty: Medium
Bloom’s: Remember
[QUESTION]
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.
Answer: C
Learning Objective: 03-04a
Learning Objective: 03-04b
Difficulty: Hard
[QUESTION]
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.
Answer: E
Learning Objective: 03-04c
Difficulty: Medium
Bloom’s: Remember
[QUESTION]
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.
Answer: A
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
Feedback: $257,000 + $40,000 + $47,000 - $10,000 - $19,000 - $10,000 - $19,000 =
$286,000
[QUESTION]
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
Answer: D
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
Feedback: 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
[QUESTION]
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.
Answer: B
Difficulty: Hard
Bloom’s: Apply
AACSB: Analytic
Feedback: Excess of Sub’s FV = $110,000 + Parent’s BV $250,000 + Sub’s BV $170,000
– Excess Amortization ($11,000 X 3yrs) = $497,000
REFERENCE: 03-01
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:
Book Fair
Value Value
Current assets $ 120,000 $ 120,000
Land 72,000 192,000
Building (twenty year life) 240,000 268,000
Equipment (ten year life) 540,000 516,000
Current liabilities 24,000 24,000
Long -term liabilities 120,000 120,000
Common stock 228,000
Additional paid -in capital 384,000
Retained earnings 216,000
Kaltop earned net income for 2012 of $126,000 and paid dividends of $48,000 during the year.
[QUESTION]
REFER TO: 03-01
11. 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.
Answer: D
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
Feedback: 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)
[QUESTION]
REFER TO: 03-01
12. 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.
Answer: D
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
Feedback: $126,000 + $1,000 = $127,000
[QUESTION]
REFER TO: 03-01
13. 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.
Answer: A
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
Feedback: $1,020,000 + ($126,000 + $1,000) - $48,000 = $1,099,000
[QUESTION]
REFER TO: 03-01
14. 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.
Answer: C
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
Feedback: $126,000 + $1,000 = $127,000
[QUESTION]
REFER TO: 03-01
15. 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.
Answer: C
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
Feedback: $444,000 + ($126,000 + $1,000) = $571,000
REFERENCE: 03-02
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.
[QUESTION]
REFER TO: 03-02
16. 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.
Answer: C
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
Feedback: 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
[QUESTION]
REFER TO: 03-02
17. 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.
Answer: D
Difficulty: Easy
Bloom’s: Apply
AACSB: Analytic
Feedback: 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
REFERENCE: 03-03
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.
[QUESTION]
REFER TO: 03-03
18. 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.
Answer: B
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
Feedback: $0; (Income is eliminated from the investment account)
[QUESTION]
REFER TO: 03-03
19. 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.
Answer: A
Difficulty: Easy
Bloom’s: Apply
AACSB: Analytic
Feedback: $900,000 Parent’s Dividends Only
QUESTION]
REFER TO: 03-03
20. 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.
Answer: D
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
Feedback: Parent Income $3,180,000 + Sub Income $432,000 – Amortization Allocations
$24,000 = Consolidated Net Income $3,588,000
REFERENCE: 03-04
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.
Jans Tysk
Revenues $1,080,0 $840,0
00 00
Expenses 480,000 600,00
0
Investment income Not 0
given
Retained earnings, 840,000 600,00
1/1/13 0
Dividends paid 132,000 70,000
[QUESTION]
REFER TO: 03-04
21. 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.
Answer: C
Difficulty: Hard
Bloom’s: Apply
AACSB: Analytic
Feedback: 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
[QUESTION]
REFER TO: 03-04
22. 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.
Answer: B
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
Feedback: 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
[QUESTION]
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.
Answer: D
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
Feedback: Inventory Adjustment $10,000 + Building Adjustment ($190,000 / 10) $19,000
+ Equipment Adjustment ( [$70,000] / 5) [$14,000] = $15,000
[QUESTION]
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.
Answer: D
Difficulty: Easy
Bloom’s: Remember
[QUESTION]
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.
Answer: D
Difficulty: Easy
Bloom’s: Remember
[QUESTION]
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.
Answer: D
Difficulty: Medium
[QUESTION]
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.
Answer: D
Difficulty: Medium
[QUESTION]
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.
Answer: C
Difficulty: Easy
Bloom’s: Remember
[QUESTION]
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) Retained earnings
Investment in subsidiary
B) Investment in subsidiary
Retained earnings
C) Investment in subsidiary
Equity in subsidiary’s income
D) Equity in subsidiary’s income
E) Additional paid-in capital
Retained earnings
A) A above
B) B above
C) C above
D) D above
E) E above
Answer: B
Difficulty: Medium
Bloom’s: Analyze
AACSB: Analytic
[QUESTION]
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?
Retained earnings
D) Investment in subsidiary
Additional paid-in capital
E) Retained earnings
A) A above
B) B above
C) C above
D) D above
E) E above
Answer: A
Difficulty: Medium
Bloom’s: Analyze
AACSB: Analytic
[QUESTION]
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?
Retained earnings
E) Retained earnings
A) A above
B) B above
C) C above
D) D above
E) E above
Answer: A
Difficulty: Medium
Bloom’s: Analyze
AACSB: Analytic
[QUESTION]
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?
Retained earnings
E) No entry is necessary.
A) A above
B) B above
C) C above
D) D above
E) E above
Answer: E
Difficulty: Medium
Bloom’s: Analyze
AACSB: Analytic
[QUESTION]
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.
Answer: D
Difficulty: Easy
Bloom’s: Remember
[QUESTION]
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.
Answer: B
Difficulty: Medium
[QUESTION]
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.
Answer: D
Difficulty: Easy
Bloom’s: Remember
[QUESTION]
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.
Answer: C
Difficulty: Medium
Bloom’s: Remember
[QUESTION]
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 the above choices are used in determining the useful life of an intangible asset.
Answer: E
Difficulty: Medium
Bloom’s: Remember
[QUESTION]
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 the above.
Answer: D
Difficulty: Medium
Bloom’s: Remember
REFERENCE: 03-06
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.
[QUESTION]
REFER TO: 03-06
50. 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.
Answer: C
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
Feedback: 2013 Income $400 – Amortization $20 = $380 Increase
[QUESTION]
REFER TO: 03-06
51. 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.
Answer: A
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
Feedback: 2013 Income = $400 Increase
[QUESTION]
REFER TO: 03-06
52. 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.
Answer: D
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
Feedback: 2013 Dividends = $100 Increase
[QUESTION]
REFER TO: 03-06
53. 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) Retained earnings 20
Investment in Fiore 20
B) Investment in Fiore 20
Retained earnings 20
C) Expenses 20
D) Expenses 20
E) Retained earnings 20
Additional paid-in capital 20
A) Entry A.
B) Entry B.
C) Entry C.
D) Entry D.
E) Entry E.
Answer: A
Difficulty: Medium
Bloom’s: Analyze
AACSB: Analytic
[QUESTION]
REFER TO: 03-06
54. 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) Investment in Fiore 380

B) Retained earnings 380
C) Investment in Fiore 280
D) Retained earnings 280
E) Additional paid-in capital 280
A) Entry A.
B) Entry B.
C) Entry C.
D) Entry D.
E) Entry E.
Answer: C
Difficulty: Hard
Bloom’s: Analyze
AACSB: Analytic
[QUESTION]
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.
Answer: E
Difficulty: Easy
Bloom’s: Apply
AACSB: Analytic
Feedback: Common Stock (400 shares X $45) $18,000 + Liabilities Assumed $1,500 =
$19,500
REFERENCE: 03-07
Following are selected accounts for Green Corporation and Vega Company as of December 31,
2015. Several of Green's accounts have been omitted.
Green Vega
Revenues $900,000 $500,000
Cost of goods sold 360,000 200,000
Depreciation expense 140,000 40,000
Other expenses 100,000 60,000
Equity in Vega’s income ?
Retained earnings, 1/1/15 1,350,000 1,200,000
Dividends 195,000 80,000
Current assets 300,000 1,380,000
Land 450,000 180,000
Building (net) 750,000 280,000
Equipment (net) 300,000 500,000
Liabilities 600,000 620,000
Common stock 450,000 80,000
Additional paid-in capital 75,000 320,000
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.
[QUESTION]
REFER TO: 03-07
56. 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.
Answer: B
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
Feedback: 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
[QUESTION]
REFER TO: 03-07
57. 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.
Answer: A
Difficulty: Easy
Bloom’s: Apply
AACSB: Analytic
Feedback: $900,000 + $500,000 = $1,400,000
[QUESTION]
REFER TO: 03-07
58. Compute the December 31, 2015, consolidated total expenses.
A) $620,000.
B) $280,000.
C) $900,000.
D) $909,625.
E) $299,625.
Answer: D
Difficulty: Hard
Bloom’s: Apply
AACSB: Analytic
58. Feedback: 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
[QUESTION]
REFER TO: 03-07
59. 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.
Answer: B
Difficulty: Hard
Bloom’s: Apply
AACSB: Analytic
Feedback: $750,000 + $280,000 - $30,000 = $1,000,000 + Amortization ($1,500 X 5) =
$1,007,500
[QUESTION]
REFER TO: 03-07
60. Compute the December 31, 2015, consolidated equipment.
A) $800,000.
B) $808,000.
C) $840,000.
D) $760,000.
E) $848,000.
Answer: C
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
Feedback: $300,000 + $580,000 = $880,000 – Amortization ($8,000 X 5) = $840,000
[QUESTION]
REFER TO: 03-07
61. Compute the December 31, 2015, consolidated land.
A) $220,000.
B) $180,000.
C) $670,000.
D) $630,000.
E) $450,000.
Answer: C
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
Feedback: $450,000 + $220,000 = $670,000
[QUESTION]
REFER TO: 03-07
62. Compute the December 31, 2015, consolidated trademark.
A) $50,000.
B) $46,875.
C) $ 0.
D) $34,375.
E) $37,500.
Answer: D
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
Feedback: $50,000 – Amortization ($3,125 X 5) = $34,375
[QUESTION]
REFER TO: 03-07
63. Compute the December 31, 2015, consolidated common stock.
A) $450,000.
B) $530,000.
C) $555,000.
D) $635,000.
E) $525,000.
Answer: A
Difficulty: Easy
Bloom’s: Apply
AACSB: Analytic
Feedback: $450,000 (Parent Only)
[QUESTION]
REFER TO: 03-07
64. 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.
Answer: B
Difficulty: Easy
Bloom’s: Apply
AACSB: Analytic
Feedback: $75,000 (Parent Only)
[QUESTION]
REFER TO: 03-07
65. 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.
Answer: A
Difficulty: Hard
Bloom’s: Apply
AACSB: Analytic
[QUESTION]
REFER TO: 03-07
66. 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.
Answer: C
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
[QUESTION]
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.
Answer: B
Difficulty: Easy
[QUESTION]
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.
Answer: D
Difficulty: Easy
[QUESTION]
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.
Answer: C
Difficulty: Medium
Bloom’s: Remember
[QUESTION]
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.
Answer: B
Difficulty: Medium
Bloom’s: Remember
REFERENCE: 03-08
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.
[QUESTION]
REFER TO: 03-08
71. 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.
Answer: B
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
[QUESTION]
REFER TO: 03-08
72. 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.
Answer: B
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
[QUESTION]
REFER TO: 03-08
73. 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.
Answer: B
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
[QUESTION]
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.
Answer: D
Difficulty: Easy
Bloom’s: Remember
REFERENCE: 03-09
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.
[QUESTION]
REFER TO: 03-09
75. 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.
Answer: B
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
Feedback: Cash Payment $400,000 + Weighted Fair Value of Contingency $3,142 =
$403,142
[QUESTION]
REFER TO: 03-09
76. 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.
Answer: B
Difficulty: Hard
Bloom’s: Analyze
AACSB: Analytic
[QUESTION]
REFER TO: Ref. 03-09
77. 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
Answer: C
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
Feedback: Weighted Fair Value of Contingency = $3,142
REFERENCE: 03-10
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%, using
a probability weighted approach, is $3,461.
[QUESTION]
REFER TO: 03-10
78. 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.
Answer: B
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
Feedback: Cash Payment $500,000 + Weighted Fair Value of Contingency $3,461 =
$503,461
[QUESTION]
REFER TO: 03-10
79. 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.
Answer: B
Difficulty: Hard
Bloom’s: Analyze
AACSB: Analytic
[QUESTION]
REFER TO: 03-10
80. 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
Answer: C
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
Feedback: Weighted Fair Value of Contingency = $3,461
REFERENCE: 03-11
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.
[QUESTION]
REFER TO: 03-11
81. 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.
Answer: B
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
Feedback: Fair Value ($500,000) & Parent BV + Sub FV ($1,700,000)
[QUESTION]
REFER TO: 03-11
82. 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.
Answer: C
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
82. Feedback: Book Value ($400,000) & Parent BV + Sub FV ($1,700,000)
REFERENCE: 03-12
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:
Book Fair
Value Value
Inventory (FIFO method) $ 40,000 $ 50,000
Equipment (10-year life) 80,000 75,000
Building (20-year life) 200,000 300,000
[QUESTION]
REFER TO: 03-12
83. 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.
Answer: B
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
Feedback: Fair Value at Acquisition ($300,000) – Amortization [($100,000 / 20) X 3] =
$285,000
[QUESTION]
REFER TO: 03-12
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.
Answer: B
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
Feedback: Fair Value at Acquisition ($300,000) – Amortization [($100,000 / 20) X 3] =
$285,000
[QUESTION]
REFER TO: 03-12
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.
Answer: D
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
Feedback: Fair Value at Acquisition ($75,000) + Amortization [($5,000 / 10) X 3] =
$76,500
[QUESTION]
REFER TO: 03-12
86. 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.)
Answer: E
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
Feedback: Fair Value Differential at Acquisition [$5,000] + Amortization ([$5000] / 10 X
3) = [$3,500]
[QUESTION]
REFER TO: 03-12
87. 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.
Answer: E
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
Feedback: Fair Value at Acquisition = $300,000
[QUESTION]
REFER TO: 03-12
88. 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.
Answer: C
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
Feedback: Zero (Under FIFO all Inventory would go to COGS)
[QUESTION]
REFER TO: 03-12
89. 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.
Answer: E
Difficulty: Hard
Bloom’s: Apply
AACSB: Analytic
Feedback: Sub Income $50,000 – Amortizations ([$5,000] / 10) – ($100,000 / 20) =
$45,500
[QUESTION]
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.
Answer: E
Difficulty: Medium
Bloom’s: Remember
[QUESTION]
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.
Answer: B
Difficulty: Medium
Bloom’s: Remember
Essay:
[QUESTION]
92. For an acquisition when the subsidiary retains its incorporation, which method of internal
recordkeeping is the easiest for the parent to use?
Answer: The initial value method is the easiest to use.
Difficulty: Easy
[QUESTION]
93. For an acquisition when the subsidiary retains its incorporation, which method of internal
recordkeeping gives the most accurate portrayal of the accounting results for the entire business
combination?
Answer: The equity method gives the most accurate portrayal of the results for the combined
entity.
Difficulty: Medium
Bloom’s: Remember
[QUESTION]
94. For an acquisition when the subsidiary maintains its incorporation, under the partial equity
method, what adjustments are made to the balance of the investment account?
Answer: The balance of the investment account is increased for the subsidiary's net income. It is
decreased for subsidiary dividends and losses. The amortization of excess fair value allocations
does not affect the account balance.
Difficulty: Medium
Bloom’s: Remember
[QUESTION]
95. From which methods can a parent choose for its internal recordkeeping related to the
operations of a subsidiary?
Answer: The parent can choose from among the initial value method, equity method, and partial
equity method.
Difficulty: Easy
Bloom’s: Remember
[QUESTION]
96. What accounting method requires a subsidiary to record acquisition fair value allocations and
the amortization of allocations in its internal accounting records?
Answer: The appropriate method is termed push-down accounting.
Difficulty: Medium
Bloom’s: Remember
[QUESTION]
97. What is the partial equity method? How does it differ from the equity method? What are its
advantages and disadvantages compared to the equity method?
Answer: The partial equity method is a compromise between the initial value method and the
equity method. It provides some of the advantages of the equity method but is easier to use.
Under the partial equity method, the balance in the investment account is increased by the accrual
of the subsidiary's income and decreased when the subsidiary pays dividends. The method is
simpler than the equity method because amortization of excess fair value allocations is not done.
Difficulty: Medium
Bloom’s: Remember
[QUESTION]
98. What advantages might push-down accounting offer for internal reporting?
Answer: Push-down accounting requires the subsidiary to record acquisition fair value allocations
and amortizations in its accounting records. One advantage that the method offers to internal
reporting is that it simplifies the consolidation process. More important, it provides better
information for internal evaluation.
Difficulty: Medium
[QUESTION]
99. What is the basic objective of all consolidations?
Answer: The basic objective of all consolidations is to combine asset, liability, revenue, expense,
and stockholders' equity accounts in a manner consistent with the concepts of the acquisition
method to reflect substance over form in financial reporting for consolidations. When a parent
has control (substance) over a subsidiary and separate incorporation is maintained (form), the
consolidated financial statements will reflect results as if the multiple entities were one entity.
Difficulty: Medium
[QUESTION]
100. Yules Co. acquired Noel Co. in an acquisition transaction. Yules decided to use the partial
equity method to account for the investment. The current balance in the investment account is
$416,000. Describe in words how this balance was derived.
Answer: The initial balance in the investment account would be the acquisition value implied by
the fair value of consideration transferred. This would not include consideration paid for costs to
effect the combination. After the acquisition, the balance in the account is increased by the
parent's accrual of the subsidiary's income and decreased by the dividends paid by the subsidiary.
Difficulty: Medium
Bloom’s: Analyze
AACSB: Analytic
[QUESTION]
101. Paperless Co. acquired Sheetless Co. and in effecting this business combination, there was
a cash-flow performance contingency to be paid in cash, and a market-price performance
contingency to be paid in additional shares of stock. In what accounts and in what section(s) of a
consolidated balance sheet are these contingent consideration items shown?
Answer: A cash-flow performance contingency is shown as a contingent performance obligation
which is in the liability section of the consolidated balance sheet. A market-price performance
contingency to be paid in stock is shown as additional paid-in capital – contingent equity
outstanding which is in the stockholders’ equity section of the consolidated balance sheet.
Difficulty: Medium
Bloom’s: Analyze
AACSB: Analytic
[QUESTION]
102. Avery Company acquires Billings Company in a combination accounted for as an acquisition
and adopts the equity method to account for Investment in Billings. At the end of four years, the
Investment in Billings account on Avery’s books is $198,984. What items constitute this balance?
Answer: Since the equity method has been applied by Avery, the $198,984 is composed of four
items:
(a.) The acquisition value of consideration transferred by the parent;
(b.) The annual accruals made by Avery to recognize income as it is earned by the subsidiary;
(c.) The reductions that are created by the subsidiary’s payment of dividends;
(d.) The periodic amortization recognized by Avery in connection with the excess fair value
allocations identified with its acquisition.
Difficulty: Medium
[QUESTION]
103. Dutch Co. has loaned $90,000 to its subsidiary, Hans Corp., which retains separate
incorporation. How would this loan be treated on a consolidated balance sheet?
Answer: The loan represents an intra-entity payable for Hans and receivable for Dutch, and each
receivable and payable would be eliminated in preparing a consolidated balance sheet.
Difficulty: Medium
Bloom’s: Remember
[QUESTION]
104. An acquisition transaction results in $90,000 of goodwill. Several years later a worksheet is
being produced to consolidate the two companies. Describe in words at what amount goodwill
will be reported at this date.
Answer: The $90,000 attributed to goodwill is reported at its original amount unless a portion of
goodwill is impaired or a unit of the business where goodwill resides is sold.
Difficulty: Easy
Bloom’s: Remember
[QUESTION]
105. Why is push-down accounting a popular internal reporting technique?
Answer: Push-down accounting has become popular for the parent’s internal reporting purposes
for two reasons. First, this method simplifies the consolidation process each year. If acquisition
value allocations and subsequent amortization are recorded by the subsidiary, they do not need to
be repeated each year on a consolidation worksheet. Second, recording of amortization by the
subsidiary enables that company’s information to provide a good representation of the impact that
the acquisition has on the earnings of the business combination. For example, if the subsidiary
earns $100,000 each year but annual amortization is $80,000, the acquisition is only adding
$20,000 to the income of the combination each year rather than the $100,000 that is reported by
the subsidiary unless push-down accounting is used.
Difficulty: Medium
Problems:
[QUESTION]
106. On January 1, 2012, Jumper Co. acquired all of the common stock of Cable Corp. for
$540,000. Annual amortization associated with the purchase amounted to $1,800. During 2012,
Cable earned net income of $54,000 and paid dividends of $24,000. Cable's net income and
dividends for 2013 were $86,000 and $24,000, respectively.
Required:
Assuming that Jumper decided to use the partial equity method, prepare a schedule to show the
balance in the investment account at the end of 2013.
Answer:
Investment in Cable Corp. – initial cost $540,00
0
Income accrual – 2012 54,000
Dividends collected – 2012 (24,00
0)
Income accrual– 2013 86,000
Dividends collected – 2013 (24,00
0)
Investment in Cable Corp., December 31, $632,00
2013 0

Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
[QUESTION]
107. Hanson Co. acquired all of the common stock of Roberts Inc. on January 1, 2012,
transferring consideration in an amount slightly more than the fair value of Roberts' net assets. At
that time, Roberts had buildings with a twenty-year useful life, a book value of $600,000, and a
fair value of $696,000. On December 31, 2013, Roberts had buildings with a book value of
$570,000 and a fair value of $648,000. On that date, Hanson had buildings with a book value of
$1,878,000 and a fair value of $2,160,000.
Required:
What amount should be shown for buildings on the consolidated balance sheet dated December
31, 2013?
Answer:
Building balance - Hanson Co. $1,878,000
Building balance – Roberts Co. 570,000
Original fair value allocation to Roberts’ buildings ($696,000
– 600,000) 96,000
Amortization of allocation [($96,000/20 years) x 2 years] (9,600)
Buildings, consolidated balance $2,534,400
Difficulty: Hard
Bloom’s: Apply
AACSB: Analytic
[QUESTION]
108. Carnes Co. decided to use the partial equity method to account for its investment in Domino
Corp. An unamortized trademark associated with the acquisition was $30,000, and Carnes
decided to amortize the trademark over ten years. For 2013, Carnes' Equity in Subsidiary
Earnings was $78,000.
Required:
What balance would have been in the Equity in Subsidiary Earnings account if Carnes had used
the equity method?
Answer:
Equity in Subsidiary Earnings for 2013 $ 78,000

Amortization of trademark ($30,000 ÷ 10 years) 3,000
Equity in Subsidiary Earnings balance at December 31, 2013 $ 75,000

Difficulty: Easy
Bloom’s: Apply
AACSB: Analytic
REFERENCE: 03-13
Fesler Inc. acquired all of the outstanding common stock of Pickett Company on January 1, 2012.
Annual amortization of $22,000 resulted from this transaction. On the date of the acquisition,
Fesler reported retained earnings of $520,000 while Pickett reported a $240,000 balance for
retained earnings. Fesler reported net income of $100,000 in 2012 and $68,000 in 2013, and paid
dividends of $25,000 in dividends each year. Pickett reported net income of $24,000 in 2012 and
$36,000 in 2013, and paid dividends of $10,000 in dividends each year.
Assume that Fesler's reported net income includes Equity in Subsidiary Income.
[QUESTION]
REFER TO: 03-13
109. If the parent’s net income reflected use of the equity method, what were the consolidated
retained earnings on December 31, 2013?
Answer:
Equity Method
Fesler (parent) balance — 1/1/12 $ 520,000
Fesler income — 2012 100,000
Fesler dividends — 2012 ( 25,000)
Consolidated retained earnings, December 31, 2013 $ 638,000

Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
[QUESTION]
REFER TO: 03-13
110. If the parent’s net income reflected use of the partial equity method, what were the
consolidated retained earnings on December 31, 2013?
Answer:
Partial Equity Method
Amortization — 2012 ( 22,000)

Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
[QUESTION]
REFER TO: 03-13
111. If the parent’s net income reflected use of the initial value method, what were the
consolidated retained earnings on December 31, 2013?
Answer:
Initial value Method
Pickett income in excess of dividends paid — 2012
($24,000 – $10,000) 14,000
Pickett income in excess of dividends paid — 2013
($36,000 – $10,000) 26,000

Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
REFERENCE: 03-14
Jaynes Inc. acquired all of Aaron Co.'s common stock on January 1, 2012, by issuing 11,000
shares of $1 par value common stock. Jaynes' shares had a $17 per share fair value. On that date,
Aaron reported a net book value of $120,000. However, its equipment (with a five-year
remaining life) was undervalued by $6,000 in the company's accounting records. Any excess of
consideration transferred over fair value of assets and liabilities is assigned to an unrecorded
patent to be amortized over ten years.
The following figures came from the individual accounting records of these two
companies as of December 31, 2012:
Jaynes Inc. Aaron Co.

Revenues $ 720,000 $ 276,000
Expenses 528,000 144,000
Investment income Not given —
The following figures came from the individual accounting records of these two
companies as of December 31, 2013:
Jaynes Inc. Aaron Co.

Revenues $ 840,000 $ 336,000
Expenses 552,000 180,000
Investment income Not given —
Equipment 600,000 360,000
Retained earnings, 12/31/13 balance 960,000 216,000
[QUESTION]
REFER TO: 03-14
112. What balance would Jaynes' Investment in Aaron Co. account have shown on December 31,
2012, when the equity method was applied for this acquisition?
Answer:
An allocation of the acquisition value (based on the fair value of the shares issued) must first be
made.
Annual
Life Amortization
Acquisition value (11,000 shares x 17) $187,000
Book value equivalency (120,000)
Excess of fair value over book value $ 67,000
Excess of fair value assigned to specific
accounts based on fair value
Equipment 6,000 5 years $ 1,200
Patent $ 61,000 10 years 6,100
Total $ 7,300
Original acquisition value $187,000

2012 income accrual ($276,000 - $144,000) 132,000
2012 dividends paid by Aaron (60,000)
2012 amortization (from above) (7,300)
2013 income accrual ($336,000 - $180,000) 156,000
2013 dividends paid by Aaron (50,000)
2013 amortization (7,300)
Investment in Aaron Co. – December 31, 2013 $350,400

Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
[QUESTION]
REFER TO: 03-14
113. What was consolidated net income for the year ended December 31, 2013?
Answer:
Net income of Jaynes Inc. ($840,000 - $288,00
$552,000) 0
Net income of Aaron Co. ($336,000 - 156,00
$180,000) 0
Amortization expense (from above) (7,30
0)
Consolidated net income – 2013 $436,70
0

Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
[QUESTION]
REFER TO: 03-14
114. What was consolidated equipment as of December 31, 2013?
Answer:
Equipment balance – Jaynes Inc. $600,00
0
Equipment balance – Aaron Co. 360,00
0
Allocation based on fair value (from 6,00
above) 0
Amortization for 2012-2013 ($1,200 x 2) (2,40
0)
Consolidated equipment – December 31, $963,60
2013 0

Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
[QUESTION]
REFER TO: 03-14
115. What was the total for consolidated patents as of December 31, 2013?
Answer:
Allocation to patent based on acquisition price $61,00
(from above) 0
Amortization for 2012-2013 ($6,100 x 2) (12,20
0)
Consolidated patent – December 31, 2013 $48,80
0

Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
REFERENCE: 03-15
Utah Inc. acquired all of the outstanding common stock of Trimmer Corp. on January 1, 2011. At
that date, Trimmer owned only three assets and had no liabilities:
Book Fair
Value Value
Inventory $ 36,000 $ 48,000
Equipment (5 -year life) 84,000 60,000
Building (10 -year life) 120,000 180,000
[QUESTION]
REFER TO: 03-15
116. If Utah paid $300,000 in cash for Trimmer, what allocation should have been assigned to the
subsidiary's Building account and its Equipment account in a December 31, 2013 consolidation?
Answer:
Since Utah paid more than the $288,000 fair value of Trimmer's net assets, all allocations are
based on fair value with the excess $12,000 assigned to goodwill.
Accounts Fair Value Allocation Life Annual Amortization
Building $60,000 10 years $6,000
Equipment (24,000) 5 years (4,800)
Building:
Allocation – January 1, 2011 $60,000
Amortization during past years ($6,000 x (12,000)
2 years)
Amortization for current year (6,000)
Allocation – December 31, 2013 $42,000
Equipment:
Allocation – January 1, 2011 (valuation $(24,000)
reduction)
Amortization during past years ($4,800 x 9,600
2 years)
Amortization for current year 4,800
Allocation – December 31, 2013 $(9,600)

Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
[QUESTION]
117. Matthews Co. acquired all of the common stock of Jackson Co. on January 1, 2012. As of
that date, Jackson had the following trial balance:
Debit Credit
Accounts payable $ 60,000
Accounts receivable $ 50,000
Additional paid -in capital 60,000
Buildings — net (20 -year life) 140,000
Cash and short -term investments 70,000
Common stock 300,000
Equipment — net (8-year life) 240,000
Inventory 110,000
Land 90,000
Long -term liabilities (mature 12/31/14) 180,000
Retained earnings, 1/1/12 120,000
Supplies 20,000
Totals $ 720,000 $ 720,000
During 2012, Jackson reported net income of $96,000 while paying dividends of $12,000.
During 2013, Jackson reported net income of $132,000 while paying dividends of $36,000.
Assume that Matthews Co. acquired the common stock of Jackson Co. for $588,000 in cash. As
of January 1, 2012, Jackson's land had a fair value of $102,000, its buildings were valued at
$188,000, and its equipment was appraised at $216,000. Any excess of consideration transferred
over fair value of assets and liabilities acquired is due to an unamortized patent to be amortized
over 10 years.
Matthews decided to use the equity method for this investment.
Required:
(A.) Prepare consolidation worksheet entries for December 31, 2012.
(B.) Prepare consolidation worksheet entries for December 31, 2013.
Answer:
Annual
Life Amortization
Consideration transferred for Jackson Co. $588,000
Book value (480,000)
Excess of consideration transferred over book $108,000
value
Excess consideration transferred, assigned to
specific accounts based on fair values
Land 12,000 - -
Buildings 48,000 20 years $ 2,400
Equipment (24,000) 8 years (3,000)
Patent (remaining excess) 72,00 10 years 7,200
0
Total 6,600
A.
Consolidated Worksheet Entries-2012:
Entry S
Common Stock-Jackson Co. 300,000

Additional Paid-In Capital 60,000
Retained Earnings, 1/1/12 120,000
Investment in Jackson Co. 480,000
Entry A
Land 12,000
Buildings 48,000
Patent 72,000
Equipment 24,000
Entry 1
Investment Income 89,400

Entry D
Dividends Paid 12,000
Entry E
Expense 6,600
Equipment 3,000
Buildings 2,400
Patent 7,200
B. Consolidated Worksheet Entries -2013:
Entry S
Common Stock-Jackson Co. 300,000

Additional Paid-In Capital 60,000
Retained Earnings, 1/1/13 204,000
Entry A
Land 12,000
Buildings 45,600
Patent 64,800
Equipment 21,000
Entry 1
Investment Income 125,400

Entry D

Dividends Paid 36,000
Entry E
Expense 6,600
Equipment 3,000
Buildings 2,400
Patent 7,200

Difficulty: Hard
Bloom’s: Apply
AACSB: Analytic
[QUESTION]
118. On January 1, 2011, Rand Corp. issued shares of its common stock to acquire all of the
outstanding common stock of Spaulding Inc. Spaulding's book value was only $140,000 at the
time, but Rand issued 12,000 shares having a par value of $1 per share and a fair value of $20 per
share. Rand was willing to convey these shares because it felt that buildings (ten-year life) were
undervalued on Spaulding's records by $60,000 while equipment (five-year life) was undervalued
by $25,000. Any consideration transferred over fair value of identified net assets acquired is
assigned to goodwill.
Following are the individual financial records for these two companies for the year ended
December 31, 2014.
Rand Spaulding
Corp. Inc.
Revenues $ 372,000 $108,000
Expenses (264,00 (72,000)
0)
Equity in subsidiary earnings 25,000 0
Net income $ 133,000 $ 36,000
Retained earnings, January 1, 2014 $ 765,000 $102,000

Net income (above) 133,000 36,000
Dividends paid (84,000 (24,000)
)
Retained earnings, December 31, $ 814,000 $114,000
2014
Current assets $ 150,000 $ 22,000

Investment in Spaulding Inc. 242,000 0
Buildings (net) 525,000 85,000
Equipment (net) 389,25 129,000
0
Total assets $1,306,25 $236,000
0
Liabilities $ 82,250 $ 50,000

Common stock 360,000 72,000
Additional paid-in capital 50,000 0
Retained earnings, December 31, 814,000 114,000
2014 (above)
Total liabilities and stockholders’ $1,306,25 $236,000
equity 0
Required:
Prepare a consolidation worksheet for this business combination.
Answer:
Consolidation Worksheet for Rand and Spaulding:
CONSOLIDATION WORKSHEET-Acquisition
For the Year Ended 12/31/2014
Rand Spaulding Consolidation Entries Consolidated

Account Corp. Inc. DR CR Balance
Revenues 372,000 108,000 480,000
Expenses (264,000) (72,000) (E) 11,000 (347,000)
Equity in Sub Income 25,000 _____ (I) 25,000 ______
Net Income 133,00 36,000 133,000
0
R/E, 1/1/14 765,000 102,000 (S) 102,000 765,000

Net Income 133,000 36,000 133,000
Dividends (84,000) (24,000) (D) 24,000 (84,000)
R/E, 12/31/14 814,00 114,000 814,000
0
Current assets 150,000 22,000 172,000

Investment in Spaulding 242,000 (D) 24,000 (S) 174,000
(A) 67,000
(I) 25,000
Building (net) 525,000 85,000 (A) 42,000 (E) 6,000 646,000
Equipment (net) 389,250 129,000 (A) 10,000 (E) 5,000 523,250
Goodwill _______ ______ (A) 15,000 15,000
Total Assets 1,306,25 236,000 1,356,250
0
Liabilities 82,250 50,000 132,250

Common Stock 360,000 72,000 (S) 72,000 360,000
Additional Paid-in Capital 50,000 50,000
R/E, 12/31/14 814,000 114,000 814,000
Total liabilities& ________ _______ _______ _______ ________
Stockholders’ Equity 1,306,25 236,000 301,000 301,000 1,356,250
0

Difficulty: Hard
Bloom’s: Apply
AACSB: Analytic
REFERENCE: 03-16
Pritchett Company recently acquired three businesses, recognizing goodwill in each acquisition.
Destin has allocated its acquired goodwill to its three reporting units: Apple, Banana, and Carrot.
Pritchett provides the following information in performing the 2013 annual review for
impairment:
[QUESTION]
REFER TO: 03-16
119. Which of Pritchett’s reporting units require both steps to test for goodwill impairment?
Answer:
Goodwill Impairment Test—Step 1
Total fair Carrying Potential goodwill

Value (w/o GW) Value (w/GW) impairment?
Apple $400,000 < $515,000 yes
Banana 468,000 > 433,000 no
Carrot 215,000 < 230,000 yes
Therefore, the Apple and the Carrot reporting units require both steps to test for goodwill
impairment.
LO 6
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
[QUESTION]
REFER TO: 03-16
120. How much goodwill impairment should Pritchett report for 2013?
Answer:
Goodwill Impairment Test—Step 2 (Apple and Carrot only)
Apple—total fair value $525,000
Fair values of identifiable net assets
Tangible assets $320,000
Trademark 10,000
Licenses 90,000
Liabilities ( 20,000) 400,000
Implied value of goodwill 125,000
Carrying value of goodwill 130,000
Impairment loss $ 5,000 $ 5,000
Carrot—total fair value $215,000

Fair values of identifiable net assets
Tangible assets $120,000
Unpatented technology 50,000
Customer list 45,000 215,000
Implied value of goodwill 0
Carrying value of goodwill 75,000
Impairment loss 75,000 75,000
Total impairment loss $ 80,000
Total impairment loss $5,000 + $75,000 = $80,000

Difficulty: Hard
Bloom’s: Apply
AACSB: Analytic
REFERENCE: 03-17
On 4/1/11, Sey Mold Corporation acquired 100% of DotDot.Com for $2,000,000 cash. On the
date of acquisition, DotDot's net book value was $900,000. DotDot's assets included land that
was undervalued by $300,000, a building that was undervalued by $400,000, and equipment that
was overvalued by $50,000. The building had a remaining useful life of 8 years and the
equipment had a remaining useful life of 4 years. Any excess fair value over consideration
transferred is allocated to an undervalued patent and is amortized over 5 years.
[QUESTION]
REFER TO: 03-17
121. Determine the amortization expense related to the combination at the year-end date of
12/31/11.
Answer:
Amortization for
Amount Life 3/4 of the year
Fair value consideration transferred $2,000,000
in Sey Mold’s acquisition
BV of DotDot.com at 4/1/11 (900,000)
Fair value in excess of BV, to be $1,100,000
allocated:
Land (300,000)
Building (400,000) 8 $37,500
Equipment 50,000 4 (9,375)
Patent $ 450,000 5 67,500
Total Amortization $95,625

Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
[QUESTION]
REFER TO: 03-17
122. Determine the amortization expense related to the combination at the year-end date of
12/31/15.
Answer:
Amortization for December 31, 2015:
Building $ 50,000
Equipment (1/4 year remaining) (3,125)
Patent 90,000
Total $136,87
5

Difficult: Medium
Bloom’s: Apply
AACSB: Analytic
[QUESTION]
REFER TO: 03-17
123. Determine the amortization expense related to the consolidation at the year-end date of
12/31/19.
Answer:
By 2019, all of the fair value adjustments and the patent will have been fully amortized. The
amortization expense for 2019 related to the combination will be $0.
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
[QUESTION]
124. For each of the following situations, select the best answer that applies to consolidating
financial information subsequent to the acquisition date:
(A) Initial value method.
(B) Partial equity method.
(C) Equity method.
(D) Initial value method and partial equity method but not equity method.
(E) Partial equity method and equity method but not initial value method.
(F) Initial value method, partial equity method, and equity method.
_____1. Method(s) available to the parent for internal record-keeping.

_____2. Easiest internal record-keeping method to apply.
_____3. Income of the subsidiary is recorded by the parent when earned.
_____4. Designed to create a parallel between the parent’s investment accounts and changes in
the underlying equity of the acquired company.
_____5. For years subsequent to acquisition, requires the *C entry.
_____6. Uses the cash basis for income recognition.
_____7. Investment account remains at initially recorded amount.
_____8. Dividends received by the parent from the subsidiary reduce the parent’s investment
account.
_____9. Often referred to in accounting as a single-line consolidation.
_____10. Increases the investment account for subsidiary earnings, but does not decrease the
subsidiary account for equity adjustments such as amortizations.
Answer: (1) F; (2) A; (3) E; (4) C; (5) D; (6) A; (7) A; (8) E; (9) C; (10) B
Difficulty: Hard

Consolidations Subsequent to Acquisition

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File: Chapter 03 - Consolidations - Subsequent to the Date of Acquisition

A) Investment in Fiore 380

Learning Objective: 03-02

Equity in Subsidiary Earnings for 2013 $ 78,000

Learning Objective: 03-02

Learning Objective: 03-04a

Learning Objective: 03-03

Learning Objective: 03-03

Jaynes Inc. Aaron Co.

Jaynes Inc. Aaron Co.

Original acquisition value $187,000

Learning Objective: 03-02

Learning Objective: 03-01

Learning Objective: 03-01

Learning Objective: 03-01

Learning Objective: 03-01

Common Stock-Jackson Co. 300,000

Investment Income 89,400

B. Consolidated Worksheet Entries -2013:

Common Stock-Jackson Co. 300,000

Investment Income 125,400

Investment in Jackson Co. 36,000

Learning Objective: 03-04a

Retained earnings, January 1, 2014 $ 765,000 $102,000

Current assets $ 150,000 $ 22,000

Liabilities $ 82,250 $ 50,000

Rand Spaulding Consolidation Entries Consolidated

R/E, 1/1/14 765,000 102,000 (S) 102,000 765,000

Current assets 150,000 22,000 172,000

Liabilities 82,250 50,000 132,250

Learning Objective: 03-04a

Total fair Carrying Potential goodwill

Carrot—total fair value $215,000

Learning Objective: 03-06

Learning Objective: 03-01

Learning Objective: 03-01

_____1. Method(s) available to the parent for internal record-keeping.

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