What is the amount needed to establish reciprocity under the cost method in the preparation of a consolidated workpaper on December 31, 2011?. In the preparation of a consolidated statem
Trang 1Chapter 4 Consolidated Financial Statements after Acquisition
1 An investor adjusts the investment account for the amortization of any difference between cost and
book value under the
a cost method
b complete equity method
c partial equity method
d complete and partial equity methods
2 Under the partial equity method, the entry to eliminate subsidiary income and dividends includes a
debit to
a Dividend Income
b Dividends Declared - S Company
c Equity in Subsidiary Income
d Retained Earnings - S Company
3 On the consolidated statement of cash flows, the parent‟s acquisition of additional shares of the
subsidiary‟s stock directly from the subsidiary is reported as
a an investing activity
b a financing activity
c an operating activity
d none of these
4 Under the cost method, the workpaper entry to establish reciprocity
a debits Retained Earnings - S Company
b credits Retained Earnings - S Company
c debits Retained Earnings - P Company
d credits Retained Earnings - P Company
5 Under the cost method, the investment account is reduced when
a there is a liquidating dividend
b the subsidiary declares a cash dividend
c the subsidiary incurs a net loss
d none of these
6 The parent company records its share of a subsidiary‟s income by
a crediting Investment in S Company under the partial equity method
b crediting Equity in Subsidiary Income under both the cost and partial equity methods
c debiting Equity in Subsidiary Income under the cost method
d none of these
7 In years subsequent to the year of acquisition, an entry to establish reciprocity is made under the
a complete equity method
b cost method
c partial equity method
d complete and partial equity methods
Trang 28 A parent company received dividends in excess of the parent company‟s share of the subsidiary‟s
earnings subsequent to the date of the investment How will the parent company‟s investment account be affected by those dividends under each of the following accounting methods?
Cost Method Partial Equity Method
a No effect No effect
b Decrease No effect
c No effect Decrease
d Decrease Decrease
9 P Company purchased 80% of the outstanding common stock of S Company on May 1, 2011, for a
cash payment of $1,272,000 S Company‟s December 31, 2010 balance sheet reported common stock of $800,000 and retained earnings of $540,000 During the calendar year 2011, S Company earned $840,000 evenly throughout the year and declared a dividend of $300,000 on November 1 What is the amount needed to establish reciprocity under the cost method in the preparation of a consolidated workpaper on December 31, 2011?
a $208,000
b $260,000
c $248,000
d $432,000
10 P Company purchased 90% of the outstanding common stock of S Company on January 1, 1997 S
Company‟s stockholders‟ equity at various dates was:
1/1/97 1/1/11 12/31/11 Common stock $400,000 $400,000 $400,000
Retained earnings 120,000 380,000 460,000
The workpaper entry to establish reciprocity under the cost method in the preparation of a
consolidated statements workpaper on December 31, 2011 should include a credit to P Company‟s retained earnings of
a recorded net income
b recorded net income plus the subsidiary‟s recorded net income
c recorded net income plus the its share of the subsidiary‟s recorded net income
d income from independent operations plus subsidiary‟s income resulting from transactions with outside parties
12 In the preparation of a consolidated statements workpaper, dividend income recognized by a parent
company for dividends distributed by its subsidiary is
a included with parent company income from other sources to constitute consolidated net income
b assigned as a component of the noncontrolling interest
c allocated proportionately to consolidated net income and the noncontrolling interest
d eliminated
Trang 313 In the preparation of a consolidated statement of cash flows using the indirect method of presenting
cash flows from operating activities, the amount of the noncontrolling interest in consolidated income is
a combined with the controlling interest in consolidated net income
b deducted from the controlling interest in consolidated net income
c reported as a significant noncash investing and financing activity in the notes
d reported as a component of cash flows from financing activities
14 On October 1, 2011, Parr Company acquired for cash all of the voting common stock of Stein
Company The purchase price of Stein‟s stock equaled the book value and fair value of Stein‟s net assets The separate net income for each company, excluding Parr‟s share of income from Stein was
as follows:
Twelve months ended 12/31/11 $4,500,000 $2,700,000
Three months ended 12/31/11 495,000 450,000
During September, Stein paid $150,000 in dividends to its stockholders For the year ended
December 31, 2011, Parr issued parent company only financial statements These statements are not considered those of the primary reporting entity Under the partial equity method, what is the amount of net income reported in Parr‟s income statement?
a $7,200,000
b $4,650,000
c $4,950,000
d $1,800,000
15 A parent company uses the partial equity method to account for an investment in common stock of
its subsidiary A portion of the dividends received this year were in excess of the parent company‟s share of the subsidiary‟s earnings subsequent to the date of the investment The amount of dividend income that should be reported in the parent company‟s separate income statement should be
a zero
b the total amount of dividends received this year
c the portion of the dividends received this year that were in excess of the parent‟s share of subsidiary‟s earnings subsequent to the date of investment
d the portion of the dividends received this year that were NOT in excess of the parent‟s share of subsidiary‟s earnings subsequent to the date of investment
16 Masters, Inc owns 40% of Fields Corporation During the year, Fields had net earnings of $200,000
and paid dividends of $50,000 Masters used the cost method of accounting What effect would this have on the investment account, net earnings, and retained earnings, respectively?
a understate, overstate, overstate
b overstate, understate, understate
c overstate, overstate, overstate
d understate, understate, understate
Trang 4Use the following information in answering questions 17 and 18
17 Prior Industries acquired a 70 percent interest in Stevenson Company by purchasing 14,000 of its
20,000 outstanding shares of common stock at book value of $210,000 on January 1, 2010
Stevenson reported net income in 2010 of $90,000 and in 2011 of $120,000 earned evenly
throughout the respective years Prior received $24,000 dividends from Stevenson in 2010 and
$36,000 in 2011 Prior uses the equity method to record its investment
Prior should record investment income from Stevenson during 2011 of:
19 Parkview Company acquired a 90% interest in Sutherland Company on December 31, 2010, for
$320,000 During 2011 Sutherland had a net income of $22,000 and paid a cash dividend of $7,000 Applying the cost method would give a debit balance in the Investment in Stock of Sutherland Company account at the end of 2011 of:
a $335,000
b $333,500
c $313,700
d $320,000
20 Hall, Inc., owns 40% of the outstanding stock of Gloom Company During 2011, Hall received a
$4,000 cash dividend from Gloom What effect did this dividend have on Hall‟s 2011 financial statements?
a Increased total assets
b Decreased total assets
c Increased income
d Decreased investment account
21 P Company purchased 80% of the outstanding common stock of S Company on May 1, 2011, for a
cash payment of $318,000 S Company‟s December 31, 2010 balance sheet reported common stock
of $200,000 and retained earnings of $180,000 During the calendar year 2011, S Company earned
$210,000 evenly throughout the year and declared a dividend of $75,000 on November 1 What is the amount needed to establish reciprocity under the cost method in the preparation of a
consolidated workpaper on December 31, 2011?
a $52,000
b $65,000
c $62,000
d $108,000
Trang 522 P Company purchased 90% of the outstanding common stock of S Company on January 1, 1997 S
Company‟s stockholders‟ equity at various dates was:
1/1/97 1/1/11 12/31/11 Common stock $200,000 $200,000 $200,000
Retained earnings 60,000 190,000 230,000
The workpaper entry to establish reciprocity under the cost method in the preparation of a
consolidated statements workpaper on December 31, 2011 should include a credit to P Company‟s retained earnings of
a $40,000
b $117,000
c $130,000
d $153,000
Use the following information in answering questions 23 and 24
23 Prior Industries acquired an 80 percent interest in Sanderson Company by purchasing 24,000 of its
30,000 outstanding shares of common stock at book value of $105,000 on January 1, 2010
Sanderson reported net income in 2010 of $45,000 and in 2011 of $60,000 earned evenly
throughout the respective years Prior received $12,000 dividends from Sanderson in 2010 and
$18,000 in 2011 Prior uses the equity method to record its investment
Prior should record investment income from Sanderson during 2011 of:
25 Pendleton Company acquired a 70% interest in Sunflower Company on December 31, 2010, for
$380,000 During 2011 Sunflower had a net income of $30,000 and paid a cash dividend of
$10,000 Applying the cost method would give a debit balance in the Investment in Stock of
Sunflower Company account at the end of 2011 of:
a $400,000
b $394,000
c $373,000
d $380,000
Trang 6Use the following information to answer questions 26 and 27
On January 1, 2011, Rotor Corporation acquired 30 percent of Stator Company's stock for $150,000 On the acquisition date, Stator reported net assets of $450,000 valued at historical cost and $500,000 stated at fair value The difference was due to the increased value of buildings with a remaining life of 10 years During 2011 Stator reported net income of $25,000 and paid dividends of $10,000 Rotor uses the equity method
26 What will be the balance in the Investment account as of Dec 31, 2011?
28 On January 1, 2011, Potter Company purchased 25 % of Smith Company‟s common stock; no
goodwill resulted from the acquisition Potter Company appropriately carries the investment using the equity method of accounting and the balance in Potter‟s investment account was $190,000 on
December 31, 2011 Smith reported net income of $120,000 for the year ended December 31, 2011 and paid dividends on its common stock totaling $48,000 during 2011 How much did Potter pay for its 25% interest in Smith?
a $172,000
b $202,000
c $208,000
d $232,000
Use the following information to answer questions 29 and 30
29 On January 1, 2011, Paterson Company purchased 40% of Stratton Company‟s 30,000 shares of voting common stock for a cash payment of $1,800,000 when 40% of the net book value of Stratton Company was $1,740,000 The payment in excess of the net book value was attributed to depreciable assets with a remaining useful life of six years As a result of this transaction Paterson has the ability
to exercise significant influence over Stratton Company‟s operating and financial policies Stratton‟s net income for the ended December 31, 2011 was $600,000 During 2011, Stratton paid $325,000 in dividends to its shareholders The income reported by Paterson for its investment in Stratton should be:
Trang 7Problems
4-1 On January 1, 2011, Price Company purchased an 80% interest in the common stock of Stahl
Company for $1,040,000, which was $60,000 greater than the book value of equity acquired The difference between implied and book value relates to the subsidiary‟s land
The following information is from the consolidated retained earnings section of the consolidated statements workpaper for the year ended December 31, 2011:
A Prepare the workpaper eliminating entries for a consolidated statements workpaper on
December 31, 2011 Price uses the cost method
B Compute the total noncontrolling interest to be reported on the consolidated balance sheet on December 31, 2011
4-2 On October 1, 2011, Packer Company purchased 90% of the common stock of Shipley Company
for $290,000 Additional information for both companies for 2011 follows:
Trang 84-3 On January 1, 2011, Pierce Company purchased 80% of the common stock of Stanley Company for
$600,000 At that time, Stanley‟s stockholders‟ equity consisted of the following:
Other contributed capital 90,000
During 2011, Stanley distributed a dividend in the amount of $120,000 and at year-end reported a
$320,000 net income Any difference between implied and book value relates to subsidiary
goodwill Pierce Company uses the equity method to record its investment No impairment of goodwill is observed in the first year
Required:
A Prepare on Pierce Company‟s books journal entries to record the investment related activities for 2011
B Prepare the workpaper eliminating entries for a workpaper on December 31, 2011
4-4 Pratt Company purchased 80% of the outstanding common stock of Selby Company on January 2,
2004, for $680,000 The composition of Selby Company‟s stockholders‟ equity on January 2, 2004, and December 31, 2011, was:
1/2/04 12/31/11
Retained earnings (deficit) (60,000) 295,000
Total stockholders‟ equity $805,000 $1,160,000
During 2011, Selby Company earned $210,000 net income and declared a $60,000 dividend Any difference between implied and book value relates to land Pratt Company uses the cost method to record its investment in Selby Company
Required:
A Prepare any journal entries that Pratt Company would make on its books during 2011 to record the effects of its investment in Selby Company
B Prepare, in general journal form, all workpaper entries needed for the preparation of a
consolidated statements workpaper on December 31, 2011
4-5 P Company purchased 90% of the common stock of S Company on January 2, 2011 for $900,000
On that date, S Company‟s stockholders‟ equity was as follows:
Common stock, $20 par value $400,000
Other contributed capital 100,000
Trang 9During 2011, S Company earned $200,000 and declared a $100,000 dividend P Company uses the partial equity method to record its investment in S Company The difference between implied and book value relates to land
Required:
Prepared, in general journal form, all eliminating entries for the preparation of a consolidated statements workpaper on December 31, 2011
4-6 Pair Company acquired 80% of the outstanding common stock of Sax Company on January 2, 2010
for $675,000 At that time, Sax‟s total stockholders‟ equity amounted to $1,000,000 Sax Company reported net income and dividends for the last two years as follows:
Required:
Prepare journal entries for Pair Company for 2010 and 2011 assuming Pair uses:
A The cost method to record its investment
B The complete equity method to record its investment The difference between implied value and the book value of equity acquired was attributed solely to a building, with a 20-year expected life
4-7 Pell Company purchased 90% of the stock of Silk Company on January 1, 2007, for $1,860,000, an
amount equal to $60,000 in excess of the book value of equity acquired All book values were equal
to fair values at the time of purchase (i.e., any excess payment relates to subsidiary goodwill) On the date of purchase, Silk Company‟s retained earnings balance was $200,000 The remainder of the stockholders‟ equity consists of no-par common stock During 2011, Silk Company declared
dividends in the amount of $40,000, and reported net income of $160,000 The retained earnings balance of Silk Company on December 31, 2010 was $640,000 Pell Company uses the cost method
to record its investment No impairment of goodwill was recognized between the date of
acquisition and December 31, 2011
Required:
Prepare in general journal form the workpaper entries that would be made in the preparation of a consolidated statements workpaper on December 31, 2011
4-8 On January 1, 2011, Pitt Company purchased 85% of the outstanding common stock of Small
Company for $525,000 On that date, Small Company‟s stockholders‟ equity consisted of common stock, $150,000; other contributed capital, $60,000; and retained earnings, $210,000 Pitt Company paid more than the book value of net assets acquired because the recorded cost of Small Company‟s land was significantly less than its fair value
During 2011 Small Company earned $222,000 and declared and paid a $75,000 dividend Pitt Company used the partial equity method to record its investment in Small Company
Trang 10Required:
A Prepare the investment related entries on Pitt Company‟s books for 2011
B Prepare the workpaper eliminating entries for a workpaper on December 31, 2011
4-9
Picture Company purchased 40% of Stuffy Corporation on January 1, 2011 for $150,000 Stuffy Corporation‟s balance sheet at the time of acquisition was as follows:
Buildings & Equipment 300,000 Retained Earnings 80,000
Less: Acc Depreciation (120,000)
Total Assets $560,000 Total Liabilities and Equities $560,000
During 2011, Stuffy Corporation reported net income of $30,000 and paid dividends of $9,000 The fair values of Stuffy‟s assets and liabilities were equal to their book values at the date of acquisition, with the exception of Building and Equipment, which had a fair value of $35,000 above book value All buildings and equipment had a remaining useful life of five years at the time of the acquisition The amount attributed to goodwill as a result of the acquisition in not impaired
Required:
A What amount of investment income will Picture record during 2011 under the equity method of accounting?
B What amount of income will Picture record during 2011 under the cost method of accounting?
C What will be the balance in the investment account on December 31, 2011 under the cost and equity method of accounting?