Test bank with answers for advanced accounting 3e by jeter chapter 04

To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Consolidated Financial Statements after Acquisition 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 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 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 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 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 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 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 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 4-2 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 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? a b c d Cost Method No effect Decrease No effect Decrease Partial Equity Method No effect No effect Decrease Decrease 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 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 Total $520,000 $780,000 $860,000 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 $80,000 b $234,000 c $260,000 d $306,000 11 12 Consolidated net income for a parent company and its partially owned subsidiary is best defined as the parent company‟s 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 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 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Consolidated Financial Statements after Acquisition 4-3 13 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: Parr Stein 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 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 4-4 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition Use 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: a $36,000 b $120,000 c $84,000 d $48,000 18 The balance of Prior‟s Investment in Stevenson account at December 31, 2011 is: a $210,000 b $285,000 c $297,000 d $315,000 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 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 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Consolidated Financial Statements after Acquisition 22 4-5 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 Total $260,000 $390,000 $430,000 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: a $18,000 b $60,000 c $48,000 d $33,600 24 The balance of Prior‟s Investment in Sanderson account at December 31, 2011 is: a $105,000 b $138,600 c $159,000 d $165,000 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 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 4-6 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition Use 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? a $150,000 b $157,500 c $154,500 d $153,000 27 What amount of investment income will be reported by Rotor for the year 2011? a $7,500 b $6,000 c $4,500 d $25,000 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: a $120,000 b $130,000 c $230,000 d $240,000 30 What is the ending balance in Paterson‟s investment account as of December 31, 2011? a $1,800,000 b $1,900,000 c $1,910,000 d $2,030,000 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Consolidated Financial Statements after Acquisition 4-7 Problems 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: 1/01/11 retained earnings Net income Dividends declared 12/31/11 retained earnings STAHL COMPANY $300,000 220,000 (80,000) $440,000 CONSOLIDATED BALANCES $1,400,000 680,000 (140,000) $1,940,000 Stahl‟s stockholders‟ equity includes only common stock and retained earnings Required: 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: Common stock Other contributed capital Retained Earnings, 1/1 Net Income Dividends declared (10/31) PACKER $300,000 120,000 240,000 260,000 40,000 SHIPLEY $90,000 40,000 50,000 160,000 8,000 Any difference between implied and book value relates to Shipley‟s land Packer uses the cost method to record its investment in Shipley Shipley Company‟s income was earned evenly throughout the year Required: A Prepare the workpaper entries that would be made on a consolidated statements workpaper on December 31, 2011 Use the full year reporting alternative B Calculate the controlling interest in consolidated net income for 2011 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 4-8 4-3 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 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: Common stock Other contributed capital Retained earnings $220,000 90,000 320,000 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 Common stock $540,000 $540,000 Other contributed capital 325,000 325,000 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 Other contributed capital Retained earnings $400,000 100,000 450,000 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Consolidated Financial Statements after Acquisition 4-9 During 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: Reported net income Dividends distributed 2010 $45,000 35,000 2011 $60,000 75,000 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 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 4-10 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition Required: 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: Cash Accounts Receivable Inventory Land Buildings & Equipment Less: Acc Depreciation $30,000 120,000 80,000 150,000 300,000 (120,000) Current Liabilities Bonds Payable Common Stock Additional Paid in Capital Retained Earnings Total Assets $560,000 Total Liabilities and Equities $40,000 200,000 200,000 40,000 80,000 $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? http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Consolidated Financial Statements after Acquisition 4-11 Short Answer There are three levels of influence or control by an investor over an investee, which determine the appropriate accounting treatment Identify and briefly describe the three levels and their accounting treatment Two methods are available to account for interim acquisitions of a subsidiary‟s stock at the end of the first year Describe the two methods of accounting for interim acquisitions Short Answer Questions from the Textbook How should nonconsolidated subsidiaries be re-ported in consolidated financial statements? How are liquidating dividends treated on the books of an investor, assuming the investor uses the cost method? Assuming the investor uses the equity method? How are dividends declared and paid by a subsidiary during the year eliminated in the consolidated work papers under each method of ac-counting for investments? How is the income reported by the subsidiary reflected on the books of the investor under each of the methods of accounting for investments? Define: Consolidated net income; consolidated retained earnings At the date of an 80% acquisition, a subsidiary had common stock of $100,000 and retained earnings of $16,250 Seven years later, at December 31, 2010, the subsidiary‟s retained earnings had increased to $461,430 What adjustment will be made on the consolidated work paper at December 31, 2011, to recognize the parent‟s share of the cumulative undistributed profits (losses)of its subsidiary? Under which method(s) is this adjustment needed? Why? On a consolidated work paper for a parent and its partially owned subsidiary, the noncontrolling interest column accumulates the non controlling interests‟ share of several account balances What are these accounts? If a parent company elects to use the partial equity method rather than the cost method to record its investments in subsidiaries, what effect will this choice have on the consolidated financial statements? If the parent company elects the complete equity method? Describe two methods for treating the preacquisition revenue and expense items of a subsidiary purchased during a fiscal period 10 A principal limitation of consolidated financial statements is their lack of separate financial information about the assets, liabilities, revenues, and expenses of the individual companies included in the consolidation Identify some problems that the reader of consolidated financial statements would encounter as a result of this limitation 11 In the preparation of a consolidated statement of cash flows, what adjustments are necessary because of the existence of a noncontrolling interest? (AICPA adapted) http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 4-12 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 12 What potential voting rights refer to, and how they affect the application of the equity method for investments under IFRS? Under U.S.GAAP? What is the term generally used for equity method investments under IFRS? 13B Is the recognition of a deferred tax asset or deferred tax liability when allocating the difference between book value and the value implied by the purchase price affected by whether or not the affiliates file a consolidated income tax re-turn? 14B What assumptions must be made about the realization of undistributed subsidiary income when the affiliates file separate income tax returns? Why? (Appendix) 15B The FASB elected to require that deferred tax effects relating to unrealized intercompany profits be calculated based on the income tax paid by the selling affiliate rather than on the future tax benefit to the purchasing affiliate Describe circumstances where the amounts calculated under these approaches would be different (Appendix) 16B Identify two types of temporary differences that may arise in the consolidated financial statements when the affiliates file separate income tax returns Business Ethics Question from the Textbook On April 5, 2006, the New York State Attorney sued a New York online advertising firm for surreptitiously installing spyware advertising programs on consumers‟ computers The Attorney General claimed that consumers believed they were downloading free games or „browser‟ enhancements The company claimed that the spyware was identified as „advertising-supported‟ and that the software is easy to remove and doesn‟t collect personal data Is there an ethical issue for the company? Comment on and justify your position http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Consolidated Financial Statements after Acquisition ANSWER KEY Multiple Choice b c d d a d b 10 11 12 13 14 d a b d d a c 15 16 17 18 19 20 21 a d c c d d a 22 23 24 25 26 27 28 b c c d d b a 29 30 Problems 4-1 A Dividend Income (80,000 × 80) Dividends Declared – Stahl Common Stock – Stahl Retained Earnings, 1/1 – Stahl Difference Between Implied and Book Value Investment in Stahl Company Noncontrolling Interest in Equity 64,000 64,000 925,000* 300,000 75,000** 1,040,000 260,000 *[(1,040,000 – 60,000)/.8] – 300,000 **60,000/.8 = 75,000 Land Difference Between Implied and Book Value 75,000 75,000 B Noncontrolling Interest: In 1/1/11 retained earnings 300,000 × 20 In 2011 net income 220,000 × 20 In dividends declared 80,000 × 20 In common stock of Stahl 925,000 × 20 In difference between implied and book value 75,000 x 20 Total noncontrolling interest 4-2 A Dividend Income (8,000 × 90) Dividends Declared – Shipley $60,000 44,000 (16,000) 185,000 15,000 $288,000 7,200 Common Stock - Shipley 90,000 Other Contributed Capital – Shipley 40,000 Retained Earnings 1/1 – Shipley 50,000 Difference between Implied# and Book Value (290,000/.9 – 300,000*) 22,222 Subsidiary Income Purchased (160,000 × 9/12) 120,000 Investment in Shipley Company Noncontrolling Interest in Equity (.10 x $322,222) http://downloadslide.blogspot.com 7,200 290,000 32,222 c b 4-13 To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 4-14 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition *BV=[90,000 + 40,000 + 50,000 + (160,000 × 9/12)] = $300,000 #Implied Value = Purchase Price/90% = $322,222 Land Difference Between Implied and Book Value B Controlling interest in Consolidated Net Income Packer‟s reported net income – dividend income from Shipley Packer‟s income from independent operations + Packer‟s share of Shipley‟s net income in 2011 since acquisition (.90 × 40,000) Controlling Interest in Consolidated Net Income 4-3 A Investment in Stanley Company Cash Investment in Stanley Company (.80 × 320,000) Equity in Subsidiary Income 22,222 22,222 $260,000 7,200 252,800 36,000 $288,800 600,000 600,000 256,000 256,000 Cash (.80 × 120,000) Investment in Stanley Company 96,000 B Equity in Subsidiary Income Dividends Declared – Stanley Investment in Stanley Company 216,000 Common Stock – Stanley Other Contributed Capital – Stanley Retained Earnings 1/1 – Stanley Difference Between Implied and Book Value Investment in Stanley Company Noncontrolling Interest in Equity 96,000 96,000 120,000 220,000 90,000 320,000 120,000 600,000 150,000 Goodwill 120,000 Difference Between Implied and Book Value 4-4 A Cash Dividend Income (.8 × $60,000) B To Establish Reciprocity Investment in Selby Company 1/1 Retained Earnings - Pratt Company 120,000 48,000 48,000 164,000 164,000 $295,000 – $210,000 + $60,000 = $145,000 Retained Earnings on 1/1/11 $145,000 + $60,000 (deficit on date of acquisition) = $205,000 increase in retained earnings from date of acquisition to 1/1/11 Pratt Company‟s share of increase = (.8 × $205,000) = $164,000 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Consolidated Financial Statements after Acquisition Eliminating Entries Dividend Income Dividends Declared – Selby Company 48,000 48,000 Common Stock – Selby 540,000 Other Contributed Capital – Selby 325,000 1/1 Retained Earnings – Selby 145,000 Difference Between Implied and Book Value45,000* Investment in Selby Company Noncontrolling Interest in Equity 844,000 211,000 Implied Value = $680,000/.80 = $850,000 Diff = $850,000 – $805,000BV Land 45,000 Difference Between Implied and Book Value 4-5 Equity in Subsidiary Income Dividends Declared - S Company Investment in S Company 270,000 Common Stock – S Other Contributed Capital – S 1/1 Retained Earnings – S Difference Between Implied and Book Value Investment in S Company Noncontrolling Interest in Equity 400,000 100,000 450,000 50,000 45,000 90,000 180,000 900,000 100,000 Land 50,000 Difference Between Implied and Book Value 50,000 4-6 A 2010 Investment in Sax Company Cash Cash Dividend Income (.8 × $35,000) 675,000 675,000 28,000 28,000 2011 Cash (.8 × $75,000) 60,000 Investment in Sax Company (.8 × $5,000) Dividend Income B 2010 Investment in Sax Company Cash 4,000 56,000 675,000 675,000 http://downloadslide.blogspot.com 4-15 To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 4-16 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition Cash 28,000 Investment in Sax Company 28,000 Investment in Sax Company 36,000 Equity in Subsidiary Income (.8 × $45,000) Equity in Subsidiary Income ($75,000*/20) Investment in Sax Company 36,000 3,750 3,750 * $675,000/.8 – $750,000 = $93,750 write-up of PPE; Parent‟s share = 80%, or $75,000 2011 Cash Investment in Sax Company 60,000 60,000 Investment in Sax Company 48,000 Equity in Subsidiary Income (.8 × $60,000) Equity in Subsidiary Income Investment in Sax Company 4-7 48,000 3,750 Workpaper entries 12/31/11 Investment in Silk Company Retained Earnings 1/1 - Pell company To establish reciprocity (.90 × ($640,000 – $200,000)) Dividend Income Dividends Declared - Silk Company 3,750 396,000 396,000 36,000 36,000 Common Stock - Silk Company# 1,800,000 Retained Earnings 1/1/11 - Silk Company 640,000 Difference between Implied and Book Values 66,667 Investment in Silk Company ($1,860,000 + $396,000) Noncontrolling Interest in Equity ($206,667 + $44,000##) #$2,000,000– $200,000 ##NCI share of change in R/E = 10($640,000 - $200,000) Goodwill* Difference between Implied and Book Values 2,256,000 250,667 66,667 66,667 *See computation of difference between implied and book values on following page http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Consolidated Financial Statements after Acquisition 4-17 Computation and Allocation of Difference between Implied and Book Value Parent Share Purchase price and implied value Equity at book value Difference between Implied value and bv Allocated to undervalued land Balance * $1,860,000 – $60,000 ** $1,800,000/.9 4-8 A Investment in Small Cash $1,860,000 1,800,000* 60,000 (60,000) -0- NonEntire Controlling Value Share 206,667 2,066,667 200,000 2,000,000** 6,667 66,667 (6,667) (66,667) -0-0- 525,000 525,000 Investment in Small ($222,000)(.85) Equity in Subsidiary Income Cash ($75,000)(.85) Investment in Small B Equity in Subsidiary Income Dividends Declared - Small Investment in Small 188,700 188,700 63,750 63,750 188,700 63,750 124,950 Common Stock - Small Other Contributed Capital - Small Retained Earnings 1/1 - Small Difference between Implied and Book Value Investment in Small Noncontrolling Interest in Equity 150,000 60,000 210,000 197,647 Land Difference between Implied and Book Value 197,647 525,000 92,647 197,647 Computation and Allocation of Difference between Implied and Book Value Parent NonShare controlling share Purchase price and implied value $ 525,000 92,647 Book Value of Equity Acquired 357,000 63,000 Difference between Implied and Book Value 168,000 29,647 Adjust Land Upward (168,000) (29,647) Balance -0-0- http://downloadslide.blogspot.com Entire value 617,647 420,000 197,647 (197,647) -0- To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 4-18 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 4-9 Solution: A Picture Company 2011 equity-method income: Proportionate share of reported income ($30,000 x 40) Amortization of differential assigned to: Buildings and equipment [($35,000 x 40) / years] Goodwill ($8,000: not impaired) Investment Income $ 12,000 (2,800) -0$ 9,200 Assignment of differential Purchase price Proportionate share of book value of net assets ($320,000 x 40) Proportionate share of fair value increase in buildings and equipment ($35,000 x 40) Goodwill $150,000 (128,000) (14,000) $ 8,000 B Dividend income, 2011 ($9,000 x 40) $ 3,600 C Cost-method account balance (unchanged): $150,000 Equity-method account balance: Balance, January 1, 2011 Investment income Dividends received Balance, December 31, 2011 $150,000 9,200 (3,600) $155,600 Short Answers The three levels of influence (control) over an investee are (1) no significant influence, (2) significant influence, and (3) effective control When an investor has no significant influence over an investee, the investment is accounted for at fair value with year-end adjustment for market changes (the cost method) If the investor has significant influence over the investee, the investment is accounted for under the equity method In the equity method, the investor adjusts the investment account for changes in the investee's net assets When an investor has effective control over the investee, consolidated financial statements are prepared The investor's investment account is eliminated in the consolidated process http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Consolidated Financial Statements after Acquisition 4-19 The two methods of accounting for interim acquisitions are the full-year reporting alternative and the partial-year reporting alternative The full-year method includes the subsidiary's revenues and expenses in the consolidated income statement for the entire year and then makes a deduction at the bottom of the income statement for the preacquisition earnings The partial-year method includes in the consolidated income statement only the subsidiary's revenue and expense amounts for the period after acquisition The full-year method is preferred Short Answer Questions in Textbook Solutions Nonconsolidated subsidiaries are expected to be relatively rare In those situations where a subsidiary is not consolidated, the investment in the subsidiary should be reported in the consolidated statement of financial position at cost, along with other long-term investments A liquidating dividend is a return of investment rather than a return on investment Consequently, the amount of a liquidating dividend should be credited to the investment account rather than to dividend income when the cost method is used, whereas regular dividends are recorded as dividend income under the cost method If the equity method is used, all dividends are credited to the investment account When the parent company uses the cost method, the work paper elimination of intercompany dividends is made by a debit to Dividend Income and a credit to Dividends Declared This elimination prevents the double counting of income since the subsidiary's individual revenue and expense items are combined with the parent company's in the determination of consolidated net income When the parent company uses the equity method, the work paper elimination for intercompany dividends is made by a debit to the investment account and a credit to Dividends Declared When the parent company uses the cost method, dividends received are recorded as dividend income When the parent company uses the partial equity method, the parent company recognizes equity income on its books equal to its ownership percentage times the investee company‟s reported net income When the parent company uses the complete equity method, the parent recognizes income similar to the partial equity method, but adjusts the equity income for additional charges or credits when the purchase price differs from the fair value of the investee company‟s net assets, and for intercompany profits (addressed in chapters and 7) Consolidated net income consists of the parent company's net income from independent operations plus (minus) any income (loss) earned (incurred) by its subsidiaries during the period, adjusted for any intercompany transactions during the period and for any excess depreciation or amortization implied by a purchase price in excess of book values Consolidated retained earnings consist of the parent company's retained earnings from its independent operations plus (minus) the parent company's share of the increase (decrease) in its subsidiaries' retained earnings from the date of acquisition http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 4-20 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition Investment in S Company 1/1 Retained Earnings, P Company 80% ($461,430 - $16,250)] 356,144 356,144 This adjustment recognizes that P Company's share of S Company's undistributed profits from the date of acquisition to the beginning of the current year is properly a part of beginning-of-year consolidated retained earnings It also enhances the elimination of the investment account This entry is only needed if the parent company uses the cost method If the equity method is used, the parent‟s retained earnings already reflect the undistributed earnings of the subsidiary The noncontrolling interest column accumulates the noncontrolling stockholders' share of subsidiary income, less their share of excess depreciation or amortization implied by fair value adjustments (addressed in detail in chapter 5), dividends (as a reduction), and the beginning noncontrolling interest in equity carried forward from the previous period The method used to record the investment on the books of the parent company (cost method, partial equity method, or complete equity method) has no effect on the consolidated financial statements Only the workpaper elimination procedures are affected The two methods for treating the preacquisition revenue and expense items of a subsidiary purchased during a fiscal year are (1) including the revenue and expense items of the subsidiary for the entire period with a deduction at the bottom of the consolidated income statement for the net income earned prior to acquisition (this is the preferred method), and (2) including in the consolidated income statement only the subsidiary's revenue earned and expenses incurred subsequent to the date of purchase 10 (a) Readers of consolidated financial statements will be unable to evaluate the financial position and results of operations (neither of which is shown separately from the parent's) of the subsidiaries (b) Because consolidated assets are not generally available to meet the claims of the creditors of a subsidiary, creditors will have to look to the financial statements of the debtor (subsidiary) corporation Similarly, the creditors of the parent company are most interested in only the assets of the parent company, although large creditors are likely to gain control over or have indirect access to the assets of subsidiaries in the case of parent company default (c) Because consolidated financial statements are a composite, it is impossible to distinguish a financially weak subsidiary from financially strong ones (d) Ratio analyses based on consolidated data are not reliable guides, especially when the related group produces a conglomerate of unrelated product lines and services (e) Consolidated financial statements often not disclose data about subsidiaries that are not consolidated (f) A reader of consolidated financial statements cannot assume that a certain amount of unrestricted consolidated retained earnings will be available for dividends Data on the ability of the individual subsidiaries to pay dividends are frequently unavailable http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Consolidated Financial Statements after Acquisition 4-21 11 A consolidated statement of cash flows contains two adjustments that result from the existence of a noncontrolling interest: (1) an adjustment for the noncontrolling interest in net income or loss of the subsidiary in the determination of net cash flow from operating activities, and (2) subsidiary dividend payments to the noncontrolling stockholders must be included with parent company dividends paid in determining cash paid as dividends because the entire amount of the noncontrolling interest in net income (loss) is added back (deducted) in determining net cash flows from operating activities 12 Potential voting rights refer to the rights associated with potentially dilutive securities such as convertible bonds or stocks, or stock options, rights, or warrants that are currently exercisable These are considered under international standards in determining the applicability of the equity method for investments where the investor may be considered to have significant influence They are generally not considered under U.S GAAP International standards (IFRS) refer to investments that are accounted for under the equity method as “investments in associates.” 13B No The recognition and display of a deferred tax asset or deferred tax liability relating to the assignment of the difference between implied value and book value is necessary without regard to whether the affiliates file consolidated income tax returns or separate income tax returns 14B An assumption must be made as to whether the undistributed income will be realized in a future dividend distribution or as a result of the sale of the subsidiary This is necessary because the calculation of the tax consequences differs depending on the assumption made Dividend distributions are subject to a dividends received exclusion, whereas gains or losses on disposal are not In addition, gains or losses on disposal may be taxed at different tax rates than dividend distributions Although capital gains are currently taxed at the same rates as ordinary income, the rates have been different in the past and may be again in the future 15B The amounts calculated under these two approaches would be different (1) if the affiliates had different marginal tax rates, (2) if the affiliates were in different tax jurisdictions, or (3) when expected future tax rates differ from the tax rate used in determining the tax paid or accrued by the selling affiliate 16B When the affiliates file separate returns, two types of temporary differences may arise: Deferred income tax consequences that arise in the consolidated financial statements because of undistributed subsidiary income, and Deferred income tax consequences that arise in the consolidated financial statements because of the elimination of unrealized intercompany profit ANSWERS TO BUSINESS ETHICS CASE Surreptitiously installing spyware on computers can be an unethical practice (the word surreptitious implies that the customer is unaware of the activity) The programs run in the background and can significantly slow down the computer’s operating performance Sometimes these programs are used to pass on the consumer browsing history and may leak personal information to the 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