Test bank with answers for advanced accounting 3e by jeter chapter 05

To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Allocation and Depreciation of Differences Between Implied and Book Value Multiple Choice When the implied value exceeds the aggregate fair values of identifiable net assets, the residual difference is accounted for as a excess of implied over fair value b a deferred credit c difference between implied and fair value d goodwill Long-term debt and other obligations of an acquired company should be valued for consolidation purposes at their a book value b carrying value c fair value d face value On January 1, 2010, Lester Company purchased 70% of Stork Corporation's $5 par common stock for $600,000 The book value of Stork net assets was $640,000 at that time The fair value of Stork's identifiable net assets were the same as their book value except for equipment that was $40,000 in excess of the book value In the January 1, 2010, consolidated balance sheet, goodwill would be reported at a $152,000 b $177,143 c $80,000 d $0 When the value implied by the purchase price of a subsidiary is in excess of the fair value of identifiable net assets, the workpaper entry to allocate the difference between implied and book value includes a debit to Difference Between Implied and Book Value credit to Excess of Implied over Fair Value credit to Difference Between Implied and Book Value a b c d Both and If the fair value of the subsidiary's identifiable net assets exceeds both the book value and the value implied by the purchase price, the workpaper entry to eliminate the investment account a debits Excess of Fair Value over Implied Value b debits Difference Between Implied and Fair Value c debits Difference Between Implied and Book Value d credits Difference Between Implied and Book Value 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 5-2 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition The entry to amortize the amount of difference between implied and book value allocated to an unspecified intangible is recorded on the subsidiary's books on the parent's books on the consolidated statements workpaper a b c d Both and The excess of fair value over implied value must be allocated to reduce proportionally the fair values initially assigned to a current assets b noncurrent assets c both current and noncurrent assets d none of the above The SEC requires the use of push down accounting when the ownership change is greater than a 50% b 80% c 90% d 95% Under push down accounting, the workpaper entry to eliminate the investment account includes a a debit to Goodwill b debit to Revaluation Capital c credit to Revaluation Capital d debit to Revaluation Assets 10 In a business combination accounted for as an acquisition, how should the excess of fair value of identifiable net assets acquired over implied value be treated? a Amortized as a credit to income over a period not to exceed forty years b Amortized as a charge to expense over a period not to exceed forty years c Amortized directly to retained earnings over a period not to exceed forty years d Recognized as an ordinary gain in the year of acquisition 11 On November 30, 2010, Pulse Incorporated purchased for cash of $25 per share all 400,000 shares of the outstanding common stock of Surge Company Surge 's balance sheet at November 30, 2010, showed a book value of $8,000,000 Additionally, the fair value of Surge's property, plant, and equipment on November 30, 2010, was $1,200,000 in excess of its book value What amount, if any, will be shown in the balance sheet caption "Goodwill" in the November 30, 2010, consolidated balance sheet of Pulse Incorporated, and its wholly owned subsidiary, Surge Company? a $0 b $800,000 c $1,200,000 d $2,000,000 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 Allocation and Depreciation of Differences Between Implied and Book Value 5-3 12 Goodwill represents the excess of the implied value of an acquired company over the a aggregate fair values of identifiable assets less liabilities assumed b aggregate fair values of tangible assets less liabilities assumed c aggregate fair values of intangible assets less liabilities assumed d book value of an acquired company 13 Scooter Company, a 70%-owned subsidiary of Pusher Corporation, reported net income of $240,000 and paid dividends totaling $90,000 during Year Year amortization of differences between current fair values and carrying amounts of Scooter's identifiable net assets at the date of the business combination was $45,000 The noncontrolling interest in net income of Scooter for Year was a $58,500 b $13,500 c $27,000 d $72,000 14 Porter Company acquired an 80% interest in Strumble Company on January 1, 2010, for $270,000 cash when Strumble Company had common stock of $150,000 and retained earnings of $150,000 All excess was attributable to plant assets with a 10-year life Strumble Company made $30,000 in 2010 and paid no dividends Porter Company’s separate income in 2010 was $375,000 Controlling interest in consolidated net income for 2010 is: a $405,000 b $399,000 c $396,000 d $375,000 15 In preparing consolidated working papers, beginning retained earnings of the parent company will be adjusted in years subsequent to acquisition with an elimination entry whenever: a a noncontrolling interest exists b it does not reflect the equity method c the cost method has been used only d the complete equity method is in use 16 Dividends declared by a subsidiary are eliminated against dividend income recorded by the parent under the a partial equity method b equity method c cost method d equity 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 5-4 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition Use the following information to answer questions 17 through 20 On January 1, 2010, Pandora Company purchased 75% of the common stock of Saturn Company Separate balance sheet data for the companies at the combination date are given below: Pandora Co Saturn Co Book Values Saturn Co Fair Values Cash Accounts receivable Inventory Land Plant assets Acc depreciation Investment in Saturn Co Total assets $ 18,000 108,000 99,000 60,000 525,000 (180,000) 330,000 $960,000 $155,000 20,000 26,000 24,000 225,000 (45,000) $155,000 20,000 45,000 45,000 300,000 $405,000 $565,000 Accounts payable Capital stock Retained earnings Total liabilities & equities $156,000 600,000 204,000 $960,000 $105,000 225,000 75,000 $405,000 $105,000 Determine below what the consolidated balance would be for each of the requested accounts on January 2, 2010 17 What amount of inventory will be reported? a $125,000 b $132,750 c $139,250 d $144,000 18 What amount of goodwill will be reported? a ($20,000) b ($25,000) c $25,000 d $0 19 What is the amount of consolidated retained earnings? a $204,000 b $209,250 c $260,250 d $279,000 20 What is the amount of total assets? a $921,000 b $1,185,000 c $1,525,000 d $1,195,000 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 Allocation and Depreciation of Differences Between Implied and Book Value 5-5 21 Sensible Company, a 70%-owned subsidiary of Proper Corporation, reported net income of $600,000 and paid dividends totaling $225,000 during Year Year amortization of differences between current fair values and carrying amounts of Sensible's identifiable net assets at the date of the business combination was $112,500 The noncontrolling interest in consolidated net income of Sensible for Year was a $146,250 b $33,750 c $67,500 d $180,000 22 Primer Company acquired an 80% interest in SealCoat Company on January 1, 2010, for $450,000 cash when SealCoat Company had common stock of $250,000 and retained earnings of $250,000 All excess was attributable to plant assets with a 10-year life SealCoat Company made $50,000 in 2010 and paid no dividends Primer Company’s separate income in 2010 was $625,000 The controlling interest in consolidated net income for 2010 is: a $675,000 b $665,000 c $660,000 d $625,000 Use the following information to answer questions 23 through 25 On January 1, 2010, Poole Company purchased 75% of the common stock of Swimmer Company Separate balance sheet data for the companies at the combination date are given below: Cash Accounts receivable Inventory Land Plant assets Acc depreciation Investment in Swimmer Co Total assets Poole Co $ 24,000 144,000 132,000 78,000 700,000 (240,000) 440,000 $1,278,000 Accounts payable Capital stock Retained earnings Total liabilities & equities Swimmer Co Book Values $206,000 26,000 38,000 32,000 300,000 (60,000) $206,000 800,000 272,000 $1,278,000 Swimmer Co Fair Values $206,000 26,000 60,000 60,000 350,000 $542,000 $702,000 $142,000 300,000 100,000 $542,000 $142,000 Determine below what the consolidated balance would be for each of the requested accounts on January 2, 2010 23 What amount of inventory will be reported? a $170,000 b $177,000 c $186,500 d $192,000 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 5-6 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 24 What amount of goodwill will be reported? a $26,667 b $20,000 c $42,000 d $86,667 25 What is the amount of total assets? a $1,626,667 b $1,566,667 c $1,980,000 d $2,006,667 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 Allocation and Depreciation of Differences Between Implied and Book Value 5-7 Problems 5-1 Phillips Company purchased a 90% interest in Standards Corporation for $2,340,000 on January 1, 2010 Standards Corporation had $1,650,000 of common stock and $1,050,000 of retained earnings on that date The following values were determined for Standards Corporation on the date of purchase: Inventory Land Equipment Book Value $240,000 2,400,000 1,620,000 Fair Value $300,000 2,700,000 1,800,000 Required: A Prepare a computation and allocation schedule for the difference between the implied and book value in the consolidated statements workpaper B Prepare the January 1, 2010, workpaper entries to eliminate the investment account and allocate the difference between implied and book value 5-2 Pullman Corporation acquired a 90% interest in Sleeper Company for $6,500,000 on January 2010 At that time Sleeper Company had common stock of $4,500,000 and retained earnings of $1,800,000 The balance sheet information available for Sleeper Company on January 1, 2010, showed the following: Inventory (FIFO) Equipment (net) Land Book Value $1,300,000 1,500,000 3,000,000 Fair Value $1,500,000 1,900,000 3,000,000 The equipment had a remaining useful life of ten years Sleeper Company reported $240,000 of net income in 2010 and declared $60,000 of dividends during the year Required: Prepare the workpaper entries assuming the cost method is used, to eliminate dividends, eliminate the investment account, and to allocate and depreciate the difference between implied and book value for 2010 5-3 On January 1, 2010, Preston Corporation acquired an 80% interest in Spiegel Company for $2,400,000 At that time Spiegel Company had common stock of $1,800,000 and retained earnings of $800,000 The book values of Spiegel Company's assets and liabilities were equal to their fair values except for land and bonds payable The land's fair value was $120,000 and its book value was $100,000 The outstanding bonds were issued on January 1, 2005, at 9% and mature on January 1, 2015 The bond principal is $600,000 and the current yield rate on similar bonds is 8% Required: Prepare the workpaper entries necessary on December 31, 2010, to allocate, amortize, and depreciate the difference between implied and book value 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 5-8 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 9%, periods 8%, periods 5-4 Present Value Present value of of Annuity of 64993 3.88965 68058 3.99271 Pennington Corporation purchased 80% of the voting common stock of Stafford Corporation for $3,200,000 cash on January 1, 2010 On this date the book values and fair values of Stafford Corporation's assets and liabilities were as follows: Book Value Fair Value Cash $ 70,000 $ 70,000 Receivables 240,000 240,000 Inventories 600,000 700,000 Other Current Assets 340,000 405,000 Land 600,000 720,000 Buildings – net 1,050,000 1,920,000 Equipment – net 850,000 750,000 $3,750,000 $4,805,000 Accounts Payable Other Liabilities Capital Stock Retained Earnings $ 250,000 740,000 2,400,000 360,000 $3,750,000 $250,000 670,000 Required: Prepare a schedule showing how the difference between Stafford Corporation's implied value and the book value of the net assets acquired should be allocated 5-5 Perez Corporation acquired a 75% interest in Schmidt Company on January 1, 2010, for $2,000,000 The book value and fair value of the assets and liabilities of Schmidt Company on that date were as follows: Book Value Fair Value Current Assets $ 600,000 $ 600,000 Property & Equipment (net) 1,400,000 1,800,000 Land 700,000 900,000 Deferred Charge 300,000 300,000 Total Assets $3,000,000 $3,600,000 Less Liabilities 600,000 600,000 Net Assets $2,400,000 $3,000,000 The property and equipment had a remaining life of years on January 1, 2010, and the deferred charge was being amortized over a period of years from that date Common stock was $1,500,000 and retained earnings was $900,000 on January 1, 2010 Perez Company records its investment in Schmidt Company using the cost method Required: Prepare, in general journal form, the December 31, 2010, workpaper entries necessary to: A Eliminate the investment account B Allocate and amortize the difference between implied and book value 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 Allocation and Depreciation of Differences Between Implied and Book Value 5-6 5-9 On January 1, 2010, Page Company acquired an 80% interest in Schell Company for $3,600,000 On that date, Schell Company had retained earnings of $800,000 and common stock of $2,800,000 The book values of assets and liabilities were equal to fair values except for the following: Inventory Equipment (net) Land Book Value $ 50,000 540,000 300,000 Fair Value $ 85,000 720,000 660,000 The equipment had an estimated remaining useful life of years One-half of the inventory was sold in 2010 and the remaining half was sold in 2011 Schell Company reported net income of $240,000 in 2010 and $300,000 in 2011 No dividends were declared or paid in either year Page Company uses the cost method to record its investment in Schell Company Required: Prepare, in general journal form, the workpaper eliminating entries necessary in the consolidated statements workpaper for the year ending December 31, 2011 5-7 Paddock Company acquired 90% of the stock of Spector Company for $6,300,000 on January 1, 2010 On this date, the fair value of the assets and liabilities of Spector Company was equal to their book value except for the inventory and equipment accounts The inventory had a fair value of $2,300,000 and a book value of $1,900,000 The equipment had a fair value of $3,300,000 and a book value of $2,800,000 The balances in Spector Company's capital stock and retained earnings accounts on the date of acquisition were $3,700,000 and $1,900,000, respectively Required: In general journal form, prepare the entries on Spector Company's books to record the effect of the pushed down values implied by the acquisition of its stock by Paddock Company assuming that: A values are allocated on the basis of the fair value of Spector Company as a whole imputed from the transaction B values are allocated on the basis of the proportional interest acquired by Paddock Company 5-8 Pruitt Corporation acquired all of the voting stock of Soto Corporation on January 1, 2010, for $210,000 when Soto had common stock of $150,000 and retained earnings of $24,000 The excess of implied over book value was allocated $9,000 to inventories that were sold in 2010, $12,000 to equipment with a 4-year remaining useful life under the straight-line method, and the remainder to goodwill Financial statements for Pruitt and Soto Corporations at the end of the fiscal year ended December 31, 2011 (two years after acquisition), appear in the first two columns of the partially completed consolidated statements workpaper Pruitt Corp has accounted for its investment in Soto using the partial 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 5-10 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition Required: Complete the consolidated statements workpaper for Pruitt Corporation and Soto Corporation for December 31, 2011 Pruitt Corporation and Soto Corporation Consolidated Statements Workpaper at December 31, 2011 Eliminations INCOME STATEMENT Sales Equity from Subsidiary Income Cost of Sales Other Expenses Net Income to Ret Earn Pruitt Corp Soto Corp 618,000 180,000 Debit 36,000 (450,000) (90,000) (114,000) (54,000) 90,000 36,000 Pruitt Retained Earnings 1/1 72,000 Soto Retained Earnings 1/1 Add: Net Income Less: Dividends Retained Earnings 12/31 3,000 90,000 36,000 (60,000) (12,000) 102,000 54,000 42,000 21,000 63,000 45,000 33,000 18,000 192,000 240,000 165,000 570,000 249,000 168,000 45,000 300,000 150,000 102,000 54,000 570,000 249,000 BALANCE SHEET Cash Inventories Land Equipment and Buildings-net Investment in Soto Corp Total Assets LIA & EQUITIES Liabilities Common Stock Retained Earnings Total Equities http://downloadslide.blogspot.com Credit Consolidated Balances To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Allocation and Depreciation of Differences Between Implied and Book Value 5-9 5-11 On January 1, 2010, Prescott Company acquired 80% of the outstanding capital stock of Sherlock Company for $570,000 On that date, the capital stock of Sherlock Company was $150,000 and its retained earnings were $450,000 On the date of acquisition, the assets of Sherlock Company had the following values: Book Value Inventories $ 90,000 Plant and equipment 150,000 Fair Market Value $165,000 180,000 All other assets and liabilities had book values approximately equal to their respective fair market values The plant and equipment had a remaining useful life of 10 years from January 1, 2010, and Sherlock Company uses the FIFO inventory cost flow assumption Sherlock Company earned $180,000 in 2010 and paid dividends in that year of $90,000 Prescott Company uses the complete equity method to account for its investment in S Company Required: A Prepare a computation and allocation schedule B Prepare the balance sheet elimination entries as of December 31, 2010 C Compute the amount of equity in subsidiary income recorded on the books of Prescott Company on December 31, 2010 D Compute the balance in the investment account on December 31, 2010 Short Answer When the value implied by the acquisition price is below the fair value of the identifiable net assets the residual amount will be negative (bargain acquisition) Explain the difference in accounting for bargain acquisition between past accounting and proposed accounting requirements Push down accounting is an accounting method required for the subsidiary in some instances such as the banking industry Briefly explain the concept of push down 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 5-12 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition Questions from the Textbook Distinguish among the following concepts:(a)Difference between book value and the value implied by the purchase price.(b)Excess of implied value over fair value.(c)Excess of fair value over implied value.(d)Excess of book value over fair value In what account is the difference between book value and the value implied by the purchase price recorded on the books of the investor? In what account is the “excess of implied over fair value” recorded? How you determine the amount of “the difference between book value and the value implied by the purchase price” to be allocated to a specific asset of a less than wholly owned subsidiary? The parent company’s share of the fair value of the net assets of a subsidiary may exceed acquisition cost How must this excess be treated in the preparation of consolidated financial statements? What are the arguments for and against the alternatives for the handling of bargain acquisitions? Why are such acquisitions unlikely to occur with great frequency? P Company acquired a 100% interest in S Company On the date of acquisition the fair value of the assets and liabilities of S Company was equal to their book value except for land that had a fair value of $1,500,000 and a book value of $300,000 At what amount should the land of S Company be included in the consolidated balance sheet? At what amount should the land of S Company be included in the consolidated balance sheet if P Company acquired an80% interest in S Company rather than a 100%interest? Business Ethics Question from the Textbook Consider the following: Many years ago, a student in a consolidated financial statements class came to me and said that Grand Central (a multi-store grocery and variety chain in Salt Lake City and surrounding towns and cities) was going to be acquired and that I should try to buy the stock and make lots of money I asked him how he knew and he told me that he worked part-time for Grand Central and heard that Fred Meyer was going to acquire it I did not know whether the student worked in the accounting department at Grand Central or was a custodian at one of the stores I thanked him for the information but did not buy the stock Within a few weeks, the announcement was made that Fred Meyer was acquiring Grand Central and the stock price shot up, almost doubling It was clear that I had missed an opportunity to make a lot of money I don’t know to this day whether or not that would have been insider trading How-ever, I have never gone home at night and asked my wife if the SEC called From “Don’t go to jail and other good advice for accountants,” by Ron Mano, Accounting Today, October 25, 1999 Question: Do you think this individual would have been guilty of insider trading if he had purchased the stock in Grand Central based on this advice? Why or why not? Are there ever instances where you think it would be wise to miss out on an opportunity to reap benefits simply because the behavior necessitated would have been in a gray ethical area, though not strictly illegal? Defend 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 Allocation and Depreciation of Differences Between Implied and Book Value 5-13 ANSWER KEY Multiple Choice d c b c c 10 c d d b d 11 12 13 14 15 b a a c b 16 17 18 19 20 c d d a d 21 22 23 24 25 a c d a b Problems 5-1 A Allocation of Difference Between Implied and Book Value Purchase price and implied value Less: Book value of equity acquired Difference between implied and book value Inventory Land Equipment Balance (excess of FV over implied value) Gain Increase Noncontrolling interest to fair value of assets Total allocated bargain Balance NonParent Controlling Entire Share Share Value $2,340,000 260,000 2,600,000 2,430,000 270,000 2,700,000 (90,000) (10,000) (100,000) (54,000) (6,000) (60,000) (270,000) (30,000) (300,000) (162,000) (18,000) (180,000) (576,000) (64,000) (640,000) 576,000 64,000 640,000 -0- B Common Stock – Standard 1,650,000 Beginning R/E – Standard 1,050,000 Investment in Standard Corp Difference Between Implied and Book Value Noncontrolling Interest in Equity Difference Between Implied and Book Value Inventory Land Equipment Gain on Acquisition Noncontrolling Interest -0- -0- 2,340,000 100,000 260,000 100,000 60,000 300,000 180,000 http://downloadslide.blogspot.com 576,000 64,000 To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 5-14 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 5-2 Dividend Income (.90 × 60,000) Dividends Declared 54,000 54,000 Beginning R/E – Sleeper Common Stock – Sleeper Difference Between Implied and Book Value Investment in Sleeper Company Noncontrolling Interest *$6,500,000/.9 - $1,800,000 - $4,500,000 = $922,222 Allocated to: Inventory Equipment Goodwill Cost of Goods Sold Depreciation Expense 400,000/10 Equipment 400,000– 40,000 Goodwill Difference Between Implied and Book Value 1,800,000 4,500,000 922,222* 6,500,000 722,222 $922,222 (200,000) (400,000) $ 322,222 200,000 40,000 360,000 322,222 922,222 5-3 Parent Share Purchase price and implied value Less: Book value of equity acquired Difference between implied and book value Land ($120,000 – $100,000) Premium on Bonds Payable (623,954*– 600,000) Balance Goodwill Balance NonControlling Share Entire Value $2,400,000 600,000 2,080,000 520,000 320,000 80,000 (16,000) (4,000) 19,163 4,791 323,163 80,791 (323,163) (80,791) -0-0- 3,000,000 2,600,000 400,000 (20,000) 23,954 403,954 (403,954) -0- Present Value of 9% Bonds Payable discounted at 8% for periods: $600,000 × 68058 = $408,348 54,000 × 3.99271 = 215,606 $623,954* Land Goodwill Difference Between Implied and Book Value Interest Expense Unamortized Premium on Bonds Payable (23,954 – 4,084) 20,000 403,954 **[54,000 – (623,954 × 08)] http://downloadslide.blogspot.com 400,000 4,084** 19,870 To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Allocation and Depreciation of Differences Between Implied and Book Value Alternative Entries Land 20,000 Goodwill 403,954 Premium on Bonds Payable Difference Between Implied and Book Value Premium on Bonds Payable Interest Expense 23,954 400,000 4,084 4,084 5-4 Parent Share Purchase price and implied value Less: Book value of equity acquired Difference between implied and book value Inventories Other Current assets Land Buildings (net) Other liabilities Equipment (net) Balance Goodwill Balance NonControlling Share $3,200,000 2,208,000 992,000 (80,000) (52,000) (96,000) (696,000) (56,000) 80,000 92,000 (92,000) -0- Entire Value 800,000 552,000 248,000 (20,000) (13,000) (24,000) (174,000) (14,000) 20,000 23,000 (23,000) -0- 4,000,000 2,760,000 1,240,000 (100,000) (65,000) (120,000) (870,000) (70,000) * 100,000 115,000 (115,000) -0- *A debit to Other Liabilities is a reduction of their carrying value 5-5 A Beginning Retained Earnings (Schmidt) Capital Stock (Schmidt) Difference Between Implied and Book Value Investment in Schmidt Noncontrolling Interest in Equity 5-15 900,000 1,500,000 266,667 2,000,000 666,667 B Depreciation Expense ($400,000/6) 66,667 Equipment (net) ($400,000 – $66,667) 333,333 Land ($900,000 - $700,000) 200,000 Gain on Acquisition ($200,000+$400,000-$266,667) × 0.75 Difference Between Implied and Book Value Noncontrolling Interest ($200,000+$400,000-$266,667) × 0.25 http://downloadslide.blogspot.com 250,000 266,667 83,333 To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 5-16 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 5-6 Calculations Cost of Investment and Implied Value ($3,600,000/0.8) Book Value of Equity Acquired Difference between Implied and Book Value $4,500,000 3,600,000 $ 900,000 Annual Adjustment in Determining Consolidated Net Income Difference Between Implied and Book Value 2010 $360,000 180,000 $22,500 35,000 17,500 325,000 $900,000 $40,000 Land Equipment (net) Inventory Goodwill (1) Investment in Schell Beginning Retained Earnings (Page) 192,000 (2) Beginning Retained Earnings (Schell) Difference between Implied and Book Value Common Stock (Schell) Investment in Schell ($3,600,000 + $192,000) Noncontrolling Interest in Equity 1,040,000 900,000 2,800,000 192,000 3,792,000 948,000 (3) Beginning Retained Earnings – Page 32,000 Noncontrolling Interest 8,000 Depreciation Expense 22,500 Cost of Goods Sold (Beginning Inventory) 17,500 Goodwill 325,000 Land 360,000 Equipment (net) ($180,000 – $22,500 – $22,500) 135,000 Difference between Implied and Book Value 5-7 A Imputed Value ($6,300,000/.9) Recorded Value ($1,900,000 + $3,700,000) Unrecorded Values Allocate to identifiable assets Inventory ($2,300,000 – $1,900,000) Equipment ($3,300,000 – $2,800,000) Goodwill Inventory Equipment Goodwill Revaluation Capital 2011 $22,500 17,500 $40,000 900,000 Net Assets $7,000,000 5,600,000 $1,400,000 $400,000 500,000 900,000 $ 500,000 400,000 500,000 500,000 http://downloadslide.blogspot.com 1,400,000 To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Allocation and Depreciation of Differences Between Implied and Book Value B Unrecorded Value Imputed by Paddock Company's Proportionate Interest (.9 × $1,400,000) Allocate to Inventory ($2,300,000 – $1,900,000) × $360,000 Equipment ($3,300,000 – $2,800,000) × 450,000 Goodwill 810,000 $ 450,000 Inventory Equipment Goodwill Revaluation Capital 1,260,000 $1,260,000 360,000 450,000 450,000 http://downloadslide.blogspot.com 5-17 To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 5-18 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 5-8 Pruitt Corporation and Soto Corporation Consolidated Statements Workpaper at December 31, 2011 Eliminations Pruitt Corp Soto Corp 618,000 180,000 INCOME STATEMENT Sales Equity from Subsidiary Income Cost of Sales (450,000) (90,000) Other Expenses (114,000) (54,000) 90,000 36,000 Net Income to Ret Earn Pruitt Retained Earnings 1/1 Soto Retained Earnings 36,000 Credit Consolidated Balances 798,000 (a) 36,000 (540,000) (c) 3,000 (171,000) 39,000 (b) (c) 72,000 1/1 Debit 87,000 9,000 3,000 60,000 30,000 (b) 30,000 90,000 36,000 39,000 Less: Dividends (60,000) (12,000) Retained Earnings 12/31 102,000 54,000 Cash 42,000 21,000 63,000 Inventories 63,000 45,000 108,000 Land 33,000 18,000 51,000 192,000 165,000 Add: Net Income 81,000 87,000 (a) 12,000 (60,000) 12,000 87,000 BALANCE SHEET Equipment and Buildings-net (b) 12,000 (c) 6,000 (a) 24,000 (b) 216,000 363,000 Investment in Soto Corp Goodwill 240,000 Total Assets 570,000 249,000 600,000 Liabilities 168,000 45,000 213,000 Common Stock 300,000 150,000 (b) 150,000 Retained Earnings 102,000 54,000 81,000 12,000 87,000 Total Equities 570,000 249,000 258,000 258,000 600,000 (b) 15,000 15,000 LIA & EQUITIES http://downloadslide.blogspot.com 300,000 To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Allocation and Depreciation of Differences Between Implied and Book Value 5-19 5-9 A Prescott Share Purchase price and implied value Less: Book value of equity acquired Difference between implied and book value Inventories Equipment (net) Balance Goodwill Balance $570,000 480,000 90,000 (60,000) (24,000) 6,000 (6,000) -0- B Common Stock – Sherlock Retained Earnings – Sherlock Difference Between Implied and Book Value Investment in Sherlock Company Noncontrolling Interest in Equity Cost of Goods Sold Depreciation Expense ($30,000/10 years) Plant and Equipment ($30,000 – $3,000) Goodwill Difference Between Implied and Book Value C Sherlock Company net income $180,000 × 80% = Less: Inventory sold Plant & equipment depreciation Equity in subsidiary income D Investment balance 1/1/10 + Equity in subsidiary income – Dividends ($90,000 × 80%) Investment balance 12/31/10 NonControlling Share 142,500 120,000 22,500 (15,000) (6,000) 1,500 (1,500) -0- Entire Value 712,500 600,000 112,500 (75,000) (30,000) 7,500 (7,500) -0- 150,000 450,000 112,500 570,000 142,500 75,000 3,000 27,000 7,500 112,500 $144,000 (60,000) ( 2,400) $81,600 $570,000 81,600 (72,000) $579,600 Short Answer In the past, when a bargain acquisition occurred some of the acquired assets were reduced below their fair values Long-lived assets were recorded at fair market value less an adjustment for the bargain In addition, an extraordinary gain was recorded in certain instances Under proposed accounting requirements, no assets are reduced below fair value Instead the credit (negative) balance will be shown as an ordinary gain in the year of acquisition Push down accounting is the establishment of a new accounting and reporting basis for a subsidiary company in its separate financial statements based on the purchase price paid by the Parent 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 5-20 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition Company to acquire a controlling interest in the outstanding voting stock of the subsidiary company The valuation implied by the price of the stock to the Parent Company is “pushed down” to the subsidiary and used to restate its assets and liabilities in its separate financial statements Under push down accounting, the Parent Company’s cost of acquiring a subsidiary is used to establish a new accounting basis for the assets and liabilities of the subsidiary in the subsidiary’s separate financial statements Solutions to Questions from the Textbook a The “difference between implied and book value” is the total difference between the value of the subsidiary in total, as implied by the acquisition cost of an investment in that subsidiary, and the book value of the subsidiary’s equity on the date of the acquisition (note that equity is the same as net assets) b The excess of implied value over fair value, or “Goodwill,” is the excess of the value of the subsidiary, as implied by the amount paid by the parent, over the fair value of the identifiable net assets of that subsidiary on the date of acquisition c The “excess of fair value over implied value” is the excess of the fair value of the identifiable net assets of a subsidiary (all assets other than goodwill minus liabilities) on the acquisition date over the value of the subsidiary as implied by the amount paid by the parent This may be referred to as a bargain acquisition d An excess of book value over fair value describes a situation where some (or all) of the subsidiary’s assets need to be written down rather than up (or liabilities need to be increased, or both) It does not, however, tell us whether the acquisition results in the recording of goodwill or an ordinary gain (in a bargain acquisition) That determination depends on the comparison of fair value of identifiable net assets and the implied value (purchase price divided by percentage acquired), referred to in parts (b) and (c) above The “difference between implied and book value” and the “Goodwill” are a part of the cost of an investment and are included in the amount recorded in the investment account Although not recorded separately in the records of the parent company, these amounts must be known in order to prepare the consolidated financial statements In allocating the difference between implied and book value to specific assets of a less than wholly owned subsidiary, the difference between the fair value and book value of each asset on the date of acquisition is reflected by adjusting each asset upward or downward to fair value (marked to market) in its entirety, regardless of the percentage acquired by the parent company If the parent’s share of the fair value exceeds the cost, then the entire fair value similarly exceeds the implied value of the subsidiary This constitutes a bargain acquisition, and under proposed GAAP (ED No 1204-001), the excess is recorded as an ordinary gain in the period of the acquisition Past GAAP (APB Opinion No 16) differed in that it provided that the excess of fair value over cost should be allocated to reduce proportionally the values assigned to noncurrent assets with certain exceptions If such noncurrent assets were reduced to zero (or to the noncontrolling percentage, if there was one) by this allocation, any remaining excess was recorded as an extraordinary gain The recording of an ordinary (or extraordinary gain) on an acquisition flies in the face of the rules of revenue recognition because no earnings process has been completed On the other hand, a decision to 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 Allocation and Depreciation of Differences Between Implied and Book Value 5-21 record certain assets below their fair values is arbitrary, and also rather confusing (how far should they be reduced?) The reason that bargain acquisitions are unlikely to occur very often is because they suggest that the usual assumptions of an arm’s length transaction have been violated In most accounting scenarios, we assume that both parties are negotiating for a reasonable exchange price and that price, once established, represents fair value both for the item given up and the item received In the case of a business combination, there is not a single item being exchanged but rather a number of assets and liabilities Nonetheless, the assumption is still that both parties are negotiating for a fair valuation If one party is able to obtain a bargain, it most likely indicates that the other party was being influenced by non-quantitative considerations, such as a wish to retire quickly, health concerns, etc If P Company acquires a 100 percent interest in S Company the land will be included in the consolidated financial statements at its fair value on the date of acquisition of $1,500,000 If P Company acquires an 80 percent interest in S Company, the land will still be included in the consolidated financial statements at $1,500,000, and the noncontrolling interest would be charged with its share of the fair value adjustment Business Ethics Solution This case brings an interesting question to the table for discussion As the article by Mano points out, each individual must decide for himself or herself how to respond to the gray issues that are bound to arise in life Ultimately life is more about being at peace with ourselves and leaving a legacy of a life well-lived and values taught through our example to the generations that we leave behind us than it is about accumulating wealth (that we cannot take to the grave) The individual, had he acted on the advice, may have been guilty of insider trading as the information available to him was, apparently, not available publicly Although there is no clear-cut definition of what constitutes insider trading, the gray area implies uncertainty; and this uncertainty can in many cases result in decisions that have severe implications both professionally and personally http://downloadslide.blogspot.com ... ebook,solutions solutionsand andtest testbank, bank, visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 5-2 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition... ebook,solutions solutionsand andtest testbank, bank, visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 5-4 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition... ebook,solutions solutionsand andtest testbank, bank, visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 5-6 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition