Test bank with answers for advanced accounting 3e by jeter chapter 09

Compute the noncontrolling interest in the 2010 consolidated income assuming that Pollard Corporation reported a net income of $300,000 includes dividend income from Steele Company.. On

Chapter 9 Intercompany Bond Holdings and Miscellaneous Topics—

Consolidated Financial Statements

Multiple Choice

1 Which of the following methods of allocating the gain or loss on an intercompany bond retirement

is the soundest conceptually?

a The gain (loss) is allocated to the company that issued the bonds

b The gain (loss) is allocated to the company that purchased the bonds

c The gain (loss) is allocated to the parent company

d The gain (loss) is allocated between the purchasing and issuing companies

2 The constructive gain or loss on an intercompany bond retirement is recognized in the consolidated

income statement _ the recognition of the gain or loss on the individual companies' books

a after

b before

c at the same time as

d before or after

3 The constructive gain or loss to the purchasing company is the difference between the

a book value of the bonds and their par value

b book value of the bonds and their purchase price

c cost of the bonds and their par value

d cost of the bonds and their purchase price

4 The workpaper eliminating entry for a stock dividend declared by the subsidiary includes a

a debit to Stock Dividends Declared - S Co

b debit to Noncontrolling interest

c credit to Stock Dividends Declared - S Co

d debit to Dividend Income

5 The parent company records the receipt of shares from a subsidiary's stock dividend as

a dividend income

b a reduction of the investment account

c an increase in the investment account

d none of these

6 If the book value of preferred stock is greater than its implied value, the difference is accounted for

as an increase in

a consolidated retained earnings

b consolidated net income

c other contributed capital

d investment in subsidiary preferred stock

7 If a subsidiary has both common and preferred stock outstanding, a parent must own a controlling

interest in

a both the subsidiary's common and preferred stock to justify consolidation

b the subsidiary's common stock to justify consolidation

c the subsidiary's common stock and at least 20% of the subsidiary's preferred stock to justify consolidation

d the subsidiary's common stock and more than 50% of the subsidiary's preferred stock to justify consolidation

Use the following information to answer Questions 8, 9, and 10

Pollard Corporation owns 90% of the outstanding common stock of Steele Company On January 1, 2008, Steele Company issued $500,000, 12%, ten-year bonds

On January 1, 2010, Pollard Corporation paid $412,000 for Steele Company bonds with a par value of

$400,000 and a carrying value of $393,600 Both companies use the straight-line method to amortize bond premiums and discounts Pollard Corporation accounts for the investment using the cost method of

accounting

8 The total gain or loss on the constructive retirement of the debt to be reported in the 2010

consolidated income statement is

a $12,000 loss

b $12,000 gain

c $18,400 loss

d $18,400 gain

e $6,400 loss

9 Pollard Corporation would report a balance in the Investment in Steele Company Bonds account on

December 31, 2010, of

a $412,000

b $393,600

c $410,500

d $400,000

e none of these

10 Compute the noncontrolling interest in the 2010 consolidated income assuming that Pollard

Corporation reported a net income of $300,000 (includes dividend income from Steele Company) Steele Company reported net income of $180,000 and declared and paid cash dividends of

$100,000

a $18,000

b $17,440

c $17,360

d $18,560

e none of these

11 Sousa Corporation is an 80% owned subsidiary of Phillips Company Sousa purchased bonds of

Phillips Company for $103,000 Phillips Company reported the bond liability on the date of

purchase at $100,000 less unamortized discount of $5,000 Assuming that the constructive gain or loss is material, the consolidated income statement should report an

a ordinary loss of $8,000

b ordinary gain of $8,000

c extraordinary loss of $8,000 adjusted for income tax effects

d extraordinary gain of $8,000 adjusted for income tax effects

12 From a consolidated entity point of view, the constructive gain or loss on the open market purchase

of a parent company's bonds by a subsidiary company is

a considered realized at the date of the open market purchase

b realized in future periods through discount and premium amortization on the books of the individual companies

c realized only to the extent of the parent company's interest in the subsidiary

d deferred and recognized in the consolidated income statement when the bonds are retired

13 Stage Company is a 90% owned subsidiary of Princeton Company On January 1, 2010, Stage

Company purchased for $680,000 bonds of Princeton Company that had a carrying value of

$725,000 (par value $700,000) The bonds mature on December 31, 2014 Both companies use the straight-line method of amortization and have a December 31 year-end The increase in 2010

consolidated income (i.e., income before subtracting noncontrolling interest) is

a $45,000

b $44,000

c $54,000

d $36,000

e $46,000

Use the following information to answer Questions 14 and 15

Parkes Company acquired 90% of Stanton Company's common stock for $780,000 and 40% of its preferred stock for $180,000 On January 1, 2010, the date of acquisition, the companies reported the following account balances:

Parkes Company Stanton Company Preferred stock, $100 par value $ 500,000 $ 360,000

The preferred stock is 10%, cumulative, nonparticipating, and has a liquidation value equal to 104% of par value Dividends were not paid during 2009 During 2010, Stanton Company reported net income of

$120,000 and declared and paid cash dividends in the amount of $70,000

14 The difference between the implied value of the preferred stock and its book value is

a $40,000

b $39,600

c $34,400

d $26,000

e 15,840

15 Noncontrolling interest in the 2010 reported net income of Stanton Company is

a $29,500

b $12,000

c $34,000

d $21,000

e $30,000

16 Constructive gains and losses from intercompany bond transactions are:

a treated as extraordinary items on the consolidated income statement

b included as other revenues and expenses on the consolidated income statement

c excluded from the consolidated income statement until realized

d eliminated from the consolidated income statement

17 Pittsford Company purchased bonds from Shay Company on the open market at a premium Shay

Company is a 100% owned subsidiary of Pittsford Company Pittsford intends to hold the bonds until maturity In a consolidated balance sheet, the difference between the bond carrying values in the two companies would be:

a included as a decrease to retained earnings

b included as an increase to retained earnings

c reported as a deferred debit to be amortized over the remaining life of the bonds

d reported as a deferred credit to be amortized over the remaining life of the bonds

18 On January 1, 2010, Plueger Company has $700,000 of 6%, 10-year bonds with an unamortized

discount of $28,000 Steiner Company, an 80% subsidiary, purchased $350,000 of these bonds at

102 The gain or (loss) on the retirement of Plueger’s bonds is:

a $14,000 loss

b $14,000 gain

c $21,000 loss

d $21,000 gain

19 On a consolidated balance sheet, subsidiary preferred stock will be shown:

a as part of consolidated stockholder’s equity

b combined with any preferred stock of the parent

c as part of the noncontrolling interest amount to the extent such balance represents preferred

stock held by the parent

d as part of the noncontrolling interest amount to the extent such balance represents preferred

stock held by outside interests

20 Pettijohn Company has total stockholders’ equity of $2,000,000 consisting of $400,000 of $1 par

value common stock, $400,000 of other contributed capital, and $1,200,000 of retained earnings Pettijohn owns 80% of Spencer Company purchased at book value Spencer has $800,000 of 5% cumulative preferred stock outstanding Pettijohn acquired 40% of the preferred stock of Spencer for $200,000 After this transaction the balances in Pettijohn’s retained earnings and other

contributed capital accounts are:

a $1,200,000 and $400,000

b $1,200,000 and $520,000

c $1,320,000 and $400,000

d $1,080,000 and $400,000

Use the following information to answer Questions 21-23

Parkinson Company owns 90% of the outstanding common stock of Staggs Company On January 1, 2008, Staggs Company issued $500,000, 12%, ten-year bonds

On January 1, 2010, Parkinson Company paid $315,000 for Staggs Company bonds with a par value of

$300,000 and a carrying value of $297,600 Both companies use the straight-line method to amortize bond premiums and discounts Parkinson Company accounts for the investment using the cost method of

accounting

21 The total gain or loss on the constructive retirement of the debt to be reported in the 2010

consolidated income statement is

a $15,000 loss

b $15,000 gain

c $17,400 loss

d $17,400 gain

e $ 2,400 loss

22 Parkinson Company would report a balance in the Investment in Staggs Company Bonds account on

December 31, 2010, of

a $315,000

b $297,600

c $313,125

d $300,000

e None of these

23 Compute the noncontrolling interest in the 2010 consolidated income assuming that Parkinson

Company reported a net income of $240,000 (includes dividend income from Staggs Company) Staggs Company reported net income of $150,000 and declared and paid cash dividends of $90,000

a $15,000

b $14,790

c $14,760

d $15,210

e None of these

Use the following information to answer Questions 24 and 25

Penner Company acquired 90% of Skulley Company's common stock for $1,300,000 and 40% of its

preferred stock for $300,000 On January 1, 2010, the date of acquisition, the companies reported the

following account balances:

Penner Company Skulley Company Preferred stock, $100 par value $ 800,000 $ 600,000

The preferred stock is 10%, cumulative, nonparticipating, and has a liquidation value equal to 102% of par value Dividends were not paid during 2009 During 2010, Skulley Company reported net income of

$200,000 and declared and paid cash dividends in the amount of $120,000

24 The difference between the implied value of the preferred stock and its book value is

a $60,000

b $78,000

c $55,200

d $36,000

e none of these

25 Noncontrolling interest in the 2010 reported net income of Skulley Company is

a $50,000

b $20,000

c $80,000

d $56,000

e none of these

Problems

9-1 On January 1, 2010, Page Company acquired an 80% interest in Sterling Company for $1,070,000

Sterling reported common stock of $1,000,000 and retained earnings of $400,000 on this date Any difference between implied value and the book value interest acquired is attributable to land

Other information available for Sterling Company is shown below:

Net Income Cash Dividends

Page Company uses the cost method to account for its investment in Sterling Company

Required:

A Prepare the general journal entries for 2010 to record the receipt of the cash dividends

B Prepare in general journal form the workpaper entries necessary in the consolidated statements workpaper for the year end December 31, 2010

9-2 Steinberger Company issued 10-year, 8% bonds with a par value of $1,000,000 on January 2, 2009,

for $1,040,000 Interest is payable semiannually on June 30 and December 31 On December 31,

2010, Potts Company purchased $700,000 of Steinberger par value bonds for $670,000 Steinberger

is an 80% owned subsidiary of Potts Both companies use the straight-line method to amortize bond discounts and premiums Steinberger declared cash dividends of $100,000 in 2010 and reported net income of $220,000 for the year

Potts reported net income of $350,000 for 2010 and paid dividends of $160,000 during 2010

Required:

A Compute the total gain or loss on the constructive retirement of the debt

B Allocate the total gain or loss between Steinberger Company and Potts Company

C Compute the controlling interest in consolidated net income for 2010

D Prepare in general journal form the intercompany bond elimination entries for the consolidated statements workpaper prepared on December 31, 2010

9-3 Prentice Company, who owns an 80% interest in Steffey Company, purchased $2,000,000 of

Steffey’s 8% bonds at 106 on December 31, 2010 The bonds pay interest on January 1 and July 1 and mature on December 31, 2013 Prentice Company uses the cost method to account for its investment in Steffey Selected balances from December 31, 2010 accounts of the two companies are as follows:

Prentice _Steffey

Investment in Steffey 8% bonds $2,120,000 $

Gain or loss on constructive

retirement of bonds

Required:

Prepare in general journal form the workpaper eliminations related to the bonds to consolidated the financial statements of Prentice and its subsidiary for the year ended December 31, 2010 and 2011

9-4 On January 1, 2010, Powell Company purchased 80% of the common stock of Southern Company

for $400,000 Southern Company reported common stock of $200,000 ($10 par value), other contributed capital of $60,000, and retained earnings of $120,000 on this date The difference between implied value and the book value interest acquired is attributable to the under-valuation of land held by Southern Company Southern Company reported net income for 2010 of $100,000 During 2010 Southern Company declared and paid a 20% stock dividend and a $24,000 cash dividend Southern Company stock had a market value of $30 per share on the date the stock dividend was declared Powell Company uses the cost method to account for its investment in Southern Company

Required:

A Prepare the journal entries required in the books of Powell Company to account for the

investment in Southern Company

B Prepare in general journal form the workpaper entries necessary in the consolidated statements workpaper for the year ended December 31, 2010

C Prepare the workpaper entry to establish reciprocity in the 2011 consolidated statements workpaper

9-5 On January 1, 2010, Proctor Company acquired 90% of the common stock of Styles Company for

$720,000 and 20% of the preferred stock for $70,000 On this date, Styles Company reported the following account balances:

Common stock ($10 par value) $600,000

Preferred stock ($100 par value, 8%,

cumulative, nonparticipating, liquidation

Other contributed capital - premium on

Styles Company did not declare a cash dividend during 2009 Proctor Company uses the cost

method

Required:

A During 2010 Styles Company reported net income of $360,000 and declared cash dividends of

$160,000 Calculate the 2010 noncontrolling interest in net income and the amount of the cash dividends Proctor Company should have received during the year from each of the stock

investments

B Prepare, in general journal form, the workpaper entries that would be made in the preparation of the December 31, 2010, consolidated statements workpaper The difference between the implied value of the common stock and the book value interest acquired is attributable to an

undervaluation in the land of Styles Company Any difference between the implied value of the preferred stock and its book value is allocated to other contributed capital

9-6 On January 1, 2010, Pippin Company acquired 80% of Skylark Company's common stock for

$210,000 and 70% of Skylark's preferred stock for $80,000 Skylark Company reported the

following stockholders' equity on this date:

Preferred stock, 8%, Par value $20 $ 100,000

The preferred stock is cumulative, nonparticipating, and callable at 104% of par value plus

dividends in arrears On January 1, 2010, dividends were in arrears for one year Any difference between the implied value of the preferred stock and its book value interest is to be allocated to other contributed capital

Changes in Skylark Company's retained earnings during 2010 and 2011 were as follows:

Required:

A Compute the difference between the implied value and book value interest acquired for the investment in preferred stock

B Compute the balance in the Investment in Preferred Stock account on December 31, 2011

C Compute the amount of Skylark Company's net income that will be included in the controlling interest in consolidated net income for 2011

9-7 On January 2, 2010, Preston, Inc acquired an 80% interest in Simpson Corporation for $2,250,000

Simpson reported total stockholders’ equity of $2,500,000 on this date An examination of

Simpson’s books revealed that book value was equal to fair value for all assets and liabilities except for inventory, which was undervalued by $150,000 All of the undervalued inventory was sold during 2010

Preston also purchased 30% of the $1,250,000 par value outstanding bonds of Simpson Corporation for $350,000 on January 2, 2010 The bonds mature in 10 years, carry an 11% annual interest rate payable on June 30 and December 31, and had a carrying value of $1,270,000 on the date of

purchase Both companies use the straight-line method to amortize bond discounts and premiums Preston reported net income of $750,000 for 2010 and paid dividends of $325,000 during 2010 Simpson Corporation reported net income of $800,000 for 2010 and paid dividends of $225,000 during the year

Required:

Compute the following items at December 31, 2010

1 Carrying value of the debt

2 Interest revenue reported by Preston, Inc

3 Interest expense reported by Simpson Corporation

4 Balance in the Investment in Simpson Bonds account

5 Controlling interest in consolidated net income for 2010 using the t-account approach

6 Noncontrolling interest in consolidated income for 2010

9-8 On January 2, 2010, Palmer Corporation purchased 80% of the outstanding common stock and 30%

of the outstanding cumulative, nonparticipating, preferred stock of Sears Company for $800,000 and

$140,000, respectively At this date, Sears Company reported account balances of $800,000 in common stock, $400,000 in preferred stock and $200,000 in retained earnings No other contributed capital accounts exist The difference between implied and book value of the common stock is attributable to under- or overvalued land Dividends on the 12% cumulative preferred stock (par

$10) were not paid during 2009

Corporation Company