One reason a parent company may pay an amount less than the book value of the subsidiary's stock acquired is a.. At the time of acquisition, Snead Company's balance sheet was as follows:
Trang 1Chapter 3 Consolidated Financial Statements—Date of Acquisition
Multiple Choice
1 A majority-owned subsidiary that is in legal reorganization should normally be accounted for using
a consolidated financial statements
b the equity method
c the market value method
d the cost method
2 Under the acquisition method, indirect costs relating to acquisitions should be
a included in the investment cost
b expensed as incurred
c deducted from other contributed capital
d none of these
3 Eliminating entries are made to cancel the effects of intercompany transactions and are made on the
a books of the parent company
b books of the subsidiary company
c workpaper only
d books of both the parent company and the subsidiary
4 One reason a parent company may pay an amount less than the book value of the subsidiary's stock
acquired is
a an undervaluation of the subsidiary's assets
b the existence of unrecorded goodwill
c an overvaluation of the subsidiary's liabilities
d none of these
5 In a business combination accounted for as an acquisition, registration costs related to common
stock issued by the parent company are
a expensed as incurred
b deducted from other contributed capital
c included in the investment cost
d deducted from the investment cost
6 On the consolidated balance sheet, consolidated stockholders' equity is
a equal to the sum of the parent and subsidiary stockholders' equity
b greater than the parent's stockholders' equity
c less than the parent's stockholders' equity
d equal to the parent's stockholders' equity
7 Majority-owned subsidiaries should be excluded from the consolidated statements when
a control does not rest with the majority owner
b the subsidiary operates under governmentally imposed uncertainty
c a foreign subsidiary is domiciled in a country with foreign exchange restrictions or controls
d any of these circumstances exist
Trang 28 Under the economic entity concept, consolidated financial statements are intended primarily for the
benefit of the
a stockholders of the parent company
b creditors of the parent company
c minority stockholders
d all of the above
9 Reasons a parent company may pay more than book value for the subsidiary company's stock
include all of the following except
a the fair value of one of the subsidiary's assets may exceed its recorded value because of
appreciation
b the existence of unrecorded goodwill
c liabilities may be overvalued
d stockholders' equity may be undervalued
10 What is the method of presentation required by SFAS 160 of “non-controlling interest” on a
consolidated balance sheet?
a As a deduction from goodwill from consolidation
b As a separate item within the long-term liabilities section
c As a part of stockholders' equity
d As a separate item between liabilities and stockholders' equity
11 Which of the following is a limitation of consolidated financial statements?
a Consolidated statements provide no benefit for the stockholders and creditors of the parent company
b Consolidated statements of highly diversified companies cannot be compared with industry standards
c Consolidated statements are beneficial only when the consolidated companies operate within the same industry
d Consolidated statements are beneficial only when the consolidated companies operate in
different industries
12 Pine Corp owns 60% of Sage Corp.'s outstanding common stock On May 1, 2011, Pine advanced
Sage $90,000 in cash, which was still outstanding at December 31, 2011 What portion of this advance should be eliminated in the preparation of the December 31, 2011 consolidated balance sheet?
a $90,000
b $54,000
c $36,000
d $-0-
Trang 3Use the following information for questions 13-15
On January 1, 2011, Polk Company and Sigler Company had condensed balance sheets as follows:
Total liabilities & stockholders' equity $ 640,000 $240,000
On January 2, 2011 Polk borrowed $240,000 and used the proceeds to purchase 90% of the outstanding common stock of Sigler This debt is payable in 10 equal annual principal payments, plus interest, starting December 30, 2011 Any difference between book value and the value implied by the purchase price relates
to land
On Polk's January 2, 2011 consolidated balance sheet,
13 Noncurrent assets should be
a $520,000
b $536,000
c $544,000
d $586,667
14 Current liabilities should be
a $200,000
b $184,000
c $160,000
d $120,000
15 Noncurrent liabilities should be
a $440,000
b $416,000
c $240,000
d $216,000
16 A newly acquired subsidiary has pre-existing goodwill on its books The parent company’s
consolidated balance sheet will:
a treat the goodwill the same as other intangible assets of the acquired company
b will always show the pre-existing goodwill of the subsidiary at its book value
c not show any value for the subsidiary’s pre-existing goodwill
d do an impairment test to see if any of it has been impaired
17 The Difference between Implied and Book Value account is:
a an account necessary for the preparation of consolidated working papers
b used in allocating the amounts paid for recorded balance sheet accounts that are different than their fair values
c the excess implied value assigned to goodwill
d the unamortized excess that cannot be assigned to any related balance sheet accounts
Trang 418 The main evidence of control for purposes of consolidated financial statements involves
a possessing majority ownership
b having decision-making ability that is not shared with others
c being the sole shareholder
d having the parent company and the subsidiary participating in the same industry
19 In which of the following cases would consolidation be inappropriate?
a The subsidiary is in bankruptcy
b Subsidiary's operations are dissimilar from those of the parent
c The parent owns 90 percent of the subsidiary's common stock, but all of the subsidiary's nonvoting preferred stock is held by a single investor
d Subsidiary is foreign
20 Princeton Company acquired 75 percent of the common stock of Sheffield Corporation on
December 31, 2011 On the date of acquisition, Princeton held land with a book value of $150,000 and a fair value of $300,000; Sheffield held land with a book value of $100,000 and fair value of
$500,000 What amount would land be reported in the consolidated balance sheet prepared
immediately after the combination?
a $650,000
b $500,000
c $550,000
d $375,000
Trang 5Use the following information to answer questions 21 - 23
On January 1, 2011, Pena Company and Shelby Company had condensed balanced sheets as follows:
Pena Shelby
Long-term debt 150,000 -0-
Stock holders' equity 240,000 150,000
Total liabilities & stockholders' equity $ 480,000 $ 180,000
On January 2, 2011 Pena borrowed $180,000 and used the proceeds to purchase 90% of the outstanding common stock of Shelby This debt is payable in 10 equal annual principal payments, plus interest, starting December 30, 2011 Any difference between book value and the value implied by the purchase price relates
to land
On Pena's January 2, 2011 consolidated balance sheet,
21 Noncurrent assets should be
a $390,000
b $402,000
c $408,000
d $440,000
22 Current liabilities should be
a $150,000
b $138,000
c $120,000
d $90,000
23 Noncurrent liabilities should be
a $330,000
b $312,000
c $180,000
d $162,000
24 On January 1, 2011, Primer Corporation acquired 80 percent of Sutter Corporation's voting common stock
Sutters's buildings and equipment had a book value of $300,000 and a fair value of $350,000 at the time of acquisition At what amount will Sutter’s buildings and equipment will be reported in the consolidated statements ?
a $350,000
b $340,000
c $280,000
d $300,000
Trang 6Problems
3-1 On December 31, 2011, Page Company purchased 80% of the outstanding common stock of Snead
Company for cash At the time of acquisition, Snead Company's balance sheet was as follows:
Common stock, $10 par value 1,440,000
Other contributed capital 700,000
Treasury stock at cost, 5,000 shares 160,000
Required:
Prepare the elimination entry(s) required for the preparation of a consolidated balance sheet
workpaper on December 31, 2011, assuming the purchase price of the stock was $1,670,000 Any difference between the value implied by the purchase price of the investment and the book value of net assets acquired relates to subsidiary land
3-2 P Company purchased 80% of the outstanding common stock of S Company on January 2, 2011, for
$380,000 Balance sheets for P Company and S Company immediately after the stock acquisition were as follows:
P Company S Company
$1,146,000 $440,000
$1,146,000 $440,000
S Company owed P Company $16,000 on open account on the date of acquisition
Trang 7
Required:
Prepare a consolidated balance sheet for P and S Companies on the date of acquisition Any
difference between the value implied by the purchase price of the investment and the book value of net assets acquired relates to subsidiary land The book values of S Company's other assets and liabilities are equal to their fair values
3-3 P Company acquired 54,000 shares of the common stock of S Company on January 1, 2011, for
$950,000 cash The stockholders' equity section of S Company's balance sheet on that date was as follows:
Common stock, $10 par value $600,000
Other contributed capital 80,000
On the date of acquisition, S Company owed P Company $10,000 on open account
Required:
Present, in general journal form, the elimination entries for the preparation of a consolidated balance sheet workpaper on January 1, 2011 The difference between the value implied by the purchase price of the investment and the book value of the net assets acquired relates to subsidiary land
3-4 On January 2, 2011, Potter Company acquired 90% of the outstanding common stock of Smiley
Company for $480,000 cash Just before the acquisition, the balance sheets of the two companies were as follows:
Potter Smiley
Common Stock, $2 par value 1,000,000 170,000
The fair values of Smiley's assets and liabilities are equal to their book values with the exception
of land
Trang 8Required:
A Prepare the journal entry necessary to record the purchase of Smiley's common stock
B Prepare a consolidated balance sheet at the date of acquisition
3-5 P Corporation paid $420,000 for 70% of S Corporation’s $10 par common stock on December 31,
2011, when S Corporation’s stockholders’ equity was made up of $300,000 of Common Stock,
$90,000 of Other Contributed Capital and $60,000 of Retained Earnings S’s identifiable assets and liabilities reflected their fair values on December 31, 2011, except for S’s inventory which was undervalued by $60,000 and their land which was undervalued by $25,000 Balance sheets for P and S immediately after the business combination are presented in the partially completed work-paper below
Eliminations
P S Debit Credit Noncontrolling
Interest
Consolidated Balances
ASSETS
Accounts
receivable-net 30,000 45,000
Inventories 185,000 165,000
Plant assets-
Investment in
Difference
between implied
and book value
Goodwill
Total Assets $1,200,000 $600,000
EQUITIES
Current
liabilities $170,000 $150,000
Capital stock 600,000 300,000
Additional
Retained
Noncontrolling
interest
Total Equities $1,200,000 $600,000
Required:
Complete the consolidated balance sheet workpaper for P Corporation and Subsidiary
3-6 Prepare in general journal form the workpaper entries to eliminate Porter Company's investment in
Sewell Company in the preparation of a consolidated balance sheet at the date of acquisition for each of the following independent cases:
Trang 9Sewell Company Equity Balances Cash Percent of
Stock Owned
Investment Cost
Common Stock
Other Contributed Capital
Retained Earnings
Any difference between book value of net assets acquired and the value implied by the purchase price relates to subsidiary property, plant, and equipment except for case (b) In case (b) assume that all book values and fair values are the same
3-7 On December 31, 2011, Pryor Company purchased a controlling interest in Shelby Company for
$1,060,000 The consolidated balance sheet on December 31, 2011 reported noncontrolling interest
in Shelby Company of $265,000
On the date of acquisition, the stockholders' equity section of Shelby Company's balance sheet was
as follows:
Required:
A Compute the noncontrolling interest percentage on December 31, 2011
B Prepare the investment elimination entry made to prepare a consolidated balance sheet
workpaper Any difference between book value and the value implied by the purchase price relates to subsidiary land
3-8 On January 1, 2011, Primer Company issued 1,500 of its $20 par value common shares with a fair
value of $50 per share in exchange for 2,000 outstanding common shares of Swartz Company in a purchase transaction Registration costs amounted to $1,700 paid in cash Just prior to the
acquisition, the balance sheets of the two companies were as follows:
Total Assets $ 347,000 $ 120,000
Trang 10Common Stock, $20 par value 100,000 40,000
Total Liabilities and Equities $ 347,000 $ 120,000
Any differences between the book value of equity and the value implied by the purchase price relates to Land
Required:
A Prepare the journal entry on Primer’s books to record the exchange of stock
B Prepare a Computation and Allocation Schedule for the Difference between book value and value
implied by the purchase price
C Calculate the consolidated balance for each of the following accounts as of December 31, 2011:
1 Cash
2 Land
3 Common Stock
4 Other Contributed Capital
Short Answer
1 There are several reasons why a company would acquire a subsidiary’s voting common stock rather than its net assets Identify at least two advantages to acquiring a controlling interest in the voting stock of another company rather than its assets
2 A useful first step in the consolidating process is to prepare a Computation and Allocation of Difference (CAD) Schedule Identify the steps involved in preparing the CAD schedule
Short Answer Questions from the Textbook
1 What are the advantages of acquiring the majority of the voting stock of another company rather than acquiring all its voting stock?
2 What is the justification for preparing consolidated financial statements when, in fact, it is ap-parent that the consolidated group is not a legal entity?
3 Why is it often necessary to prepare separate financial statements for each legal entity in a consolidated group even though consolidated statements provide a better economic picture of the combined
activities?
4 What aspects of control must exist before a subsidiary is consolidated?
5 Why are consolidated work papers used in pre-paring consolidated financial statements?
6 Define noncontrolling (minority) interest List three methods that might be used for reporting the noncontrolling interest in a consolidated balance sheet, and state which is preferred under the SFAS No 160[topic 810]