Test bank advanced accounting 10e by beams chapter 04

Which one of the following statements is correct if the parent company discovered its mistake at the end of the fourth year, and is now preparing consolidation working papers.. Parrot Co

Chapter 4 Test Bank

CONSOLIDATION TECHNIQUES AND PROCEDURES

Multiple Choice Questions

LO1

1 Which of the following will be debited to the Investment

account when the equity method is used?

b

Investee net losses

Investee net profits

d

Investee declaration of dividends

Depreciation of excess purchase cost attributable to investee equipment

LO1

2 A parent company uses the equity method to account for its

wholly-owned subsidiary The company correctly uses this method and has fully reflected all items of subsidiary gain, loss, income, deductions, and dividends If the parent company is preparing the consolidation working papers, which of the following will be a correct working paper procedure for the

LO1

3 A parent corporation owns 55% of the outstanding voting common

stock of one domestic subsidiary, but does not control the

subsidiary because it is in bankruptcy Which of the following

statements is correct?

a The parent corporation must still prepare consolidated

financial statements for the economic entity

b The parent corporation must stop using the equity method of

accounting for the subsidiary and start using the cost method

c The parent company may continue to use the equity method

but the subsidiary cannot be consolidated

d The parent company would suspend the operation of the

Investment account until notified by the bankruptcy court

that the subsidiary has emerged from bankruptcy

LO1

Use the following information to answer questions 4 through 9

On January 1, 2005, Finch Corporation purchased 75% of the common stock

of Grass Co Separate balance sheet data for the companies at the combination date are given below:

Determine below what the consolidated balance would be for each of the requested accounts

4 What amount of Inventory will be reported?

LO2

10 Bird Corporation has several subsidiaries that are included in

its consolidated financial statements and several other

investments in corporations that are not consolidated In its

year-end trial balance, the following intercompany balances

appear Ostrich Corporation is the unconsolidated company; the

rest are consolidated

Due from Pheasant Corporation $ 25,000

Cash advance to Skylark Company 8,000

Current receivable from Ostrich 10,000

What amount should Bird report as intercompany receivables on

its consolidated balance sheet?

a result because the Investment in Subsidiary account on the

parent’s books and the subsidiary equity accounts on the subsidiary’s books are reciprocal

b have conceptual problems from the minority interest

representation of the equity investment in consolidated net assets by stockholders outside the affiliation structure

c involve the amortization of book/market differences

d appear when the consolidated balance sheet does not

balance

LO3

12 At the beginning of 2005, Starling Inc acquired an 80%

interest in Orchard Corporation when the book values of identifiable net assets equaled their fair values On December

26, 2005, Orchard declared dividends of $50,000, and the dividends were unpaid at year-end Starling had not recorded the dividend receivable at December 31 A consolidated working paper entry is necessary to

d eliminate the dividend payable account from the

consolidated balance sheet

LO3

13 A parent company uses the equity method to account for its

wholly-owned subsidiary, but has applied it incorrectly In each of the past four full years, the company adjusted the

Investment account when it received dividends from the

subsidiary but did not adjust the account for any of the subsidiary’s profits The subsidiary had four years of profits and paid yearly dividends in amounts that were less than reported net incomes Which one of the following statements is correct if the parent company discovered its mistake at the end

of the fourth year, and is now preparing consolidation working papers?

profit, and the Subsidiary Income account will be increased

by the profit for the current year

The parent company's Subsidiary Income account will be

increased by the cumulative total of four years of subsidiary profits

A prior period adjustment must be recorded for the cumulative effect of four years of accounting errors

LO4

14 Pigeon Corporation acquired a 60% interest in Home Company on

January 1, 2005, for $70,000 cash when Home had Capital Stock

of $60,000 and Retained Earnings of $40,000 All excess purchase cost was attributable to equipment with a 10-year (straight-line) life Home suffered a $10,000 net loss in 2005 and paid no dividends At year-end 2005, Home owed Pigeon

$12,000 on account Pigeon’s separate income for 2005 was

$150,000 Consolidated net income for 2005 was

LO5

17 In contrast with single entity organizations, consolidated

financial statements include which of the following in the calculation of cash flows from operating activities under the direct method?

a The change in the balance sheet of the investee account

b Noncontrolling interest dividends

c Noncontrolling interest income expense

d Cash dividends from equity investees

LO5

18 In contrast with single entity organizations, consolidated

financial statements include which of the following in the calculation of cash flows from operating activities under the indirect method?

a The change in the balance sheet of the investee account

b Noncontrolling interest dividends

c Noncontrolling interest income expense

d Cash dividends from equity investees

LO5

19 In contrast with single entity organizations, in preparing

consolidated financial statements which of the following is a subtraction in the calculation of cash flows from operating activities under the indirect method?

a The change in the balance sheet of the investee account

b Noncontrolling interest dividends

c Noncontrolling interest income expense

d Undistributed income of equity investees

a Post-closing trial balances

b Adjusted trial balances

c Unadjusted trial balances

d All of the above are used equally

LO1

Exercise 1

Parrot Corporation acquired 80% of Hollow Co on January 1, 2005 for

$24,000 cash when Hollow’s stockholders’ equity consisted of $10,000

of Common Stock and $3,000 of Retained Earnings The difference between the price paid by Parrot and the underlying equity acquired

in Hollow was allocated solely to a patent amortized over 10 years The separate company statements for Parrot and Hollow appear in the first two columns of the partially completed consolidation working papers

Required:

Complete the consolidation working papers for Parrot and Hollow for the year 2005

Parrot Corporation and Subsidiary Consolidated Balance Sheet Working Papers

at December 31, 2005 Parrot Hollow

Eliminations

Non-Cntl

Consol- idated Debit Credit

LO2

Exercise 2

Cuckoo Company acquired all the voting stock of Perch Corporation on January 1, 2004 for $70,000 when Perch had Capital Stock of $50,000 and Retained Earnings of $8,000 The excess of cost over book value was allocated $3,000 to inventories that were sold in 2004, $4,000 to equipment with a 4-year remaining useful life under the straight-line method, and the remainder to goodwill

Financial statements for Cuckoo and Perch at the end of the fiscal year ended December 31, 2005 (two years after acquisition), appear in the first two columns of the partially completed consolidation working papers Cuckoo has accounted for its investment in Slim using

an incomplete equity method of accounting

Required:

Complete the consolidation working papers for Cuckoo Company and Subsidiary

Cuckoo Company and Subsidiary Consolidated Balance Sheet Working Papers

at December 31, 2005 Cuckoo Perch

Eliminations

Non-Cntl

Consol- idated Debit Credit

LO2

Exercise 3

Owl Corporation acquired 90% of the voting stock of Hunt Corporation

on January 1, 2004 for $7,000 when Hunt had Capital Stock of $5,000 and Retained Earnings of $1,500 The excess of cost over book value was allocated $150 to inventories that were sold in 2004, $200 to undervalued land, $400 to undervalued equipment with a remaining useful life of 5 years under the straight-line method, and the remainder to goodwill

Financial statements for Owl and Hunt Corporations at the end of the fiscal year ended December 31, 2005 appear in the first two columns

of the partially completed consolidation working papers Owl has accounted for its investment in Hunt using the equity method of accounting Owl Corporation owed Hunt Corporation $100 on open account at the end of the year Dividends receivable in the amount

of $450 payable from Hunt to Owl is included in Owl’s net receivables

Required:

Complete the consolidation working papers for Owl Corporation and Subsidiary

Owl Corporation and Subsidiary Consolidated Balance Sheet Working Papers

at December 31, 2005 Owl Hunt

Eliminations

Non-Cntl

Consol- idated Debit Credit

LO3

Exercise 4

Koel Corporation acquired all the voting stock of Rain Company for

$500,000 on January 1, 2005 when Rain had Capital Stock of $300,000 and Retained Earnings of $150,000 Rain’s assets and liabilities were fairly valued except for the plant assets The entire cost-book differential is allocated to plant assets and is fully depreciated on

a straight-line basis over a 10-year period

During 2005, Koel borrowed $25,000 on a short-term bearing note from Rain, and on December 31, 2005, Koel mailed a check

non-interest-to Rain non-interest-to settle the note Rain deposited the check on January 5,

2006, but receipt of payment of the note was not reflected in Rain’s December 31, 2005 balance sheet

Required:

Complete the consolidation working papers

Koel Corporation and Subsidiary Consolidated Balance Sheet Working Papers

at December 31, 2005 Koel Rain

Eliminations

Non-Cntl

Balance Sheet Debit Credit

Required:

Complete the consolidation working papers for Owl and Barn for the year 2005

Owl Corporation and Subsidiary Consolidated Balance Sheet Working Papers

at December 31, 2005 Owl Barn

Eliminations Min

Int

Consol- idated Debit Credit

LO4

Exercise 6

Lorikeet Company has the following information collected in order to

do make a cash flow statement and uses the direct format for Cash Flow from Operations The annual report year end is December 31,

2005

Noncontrolling Interest Dividends $20,000

Dividends Received from Equity Investees 17,000

Cash Paid for Other Operating Activities 34,000

Cash Paid for Interest Expense 22,300

Cash Proceeds from the Sale of Equipment 70,000

Cash Received from Customers 412,600

Bronzewing Company has the following information collected in order

to do make a cash flow statement and uses the indirect format for Cash Flow from Operations The annual report year end is December

31, 2005

Noncontrolling Interest Dividends $17,000

Undistributed Income of Equity Investees 7,500

Increase in Accounts Payable 15,000

Decrease in Accounts Receivable 48,000

Noncontrolling Interest Expense 17,000

Required:

1 Prepare the Cash Flow for Operations part of the cash flow statement for Bronzewing

LO6

Exercise 8

Swift Corporation paid $88,500 for a 70% interest in Cave Corporation

on January 1, 2005, when Cave’s Capital Stock was $70,000 and its

Retained Earnings $30,000 The fair values of Cave's identifiable

assets and liabilities were the same as the recorded book values on

the acquisition date Trial balances at the end of the year on

December 31, 2005 are given below:

Capital stock, $10 par value 100,000 70,000

Additional Paid-in Capital 10,000

investment in Cave On January 1, 2005, it debited the Investment in

Cave account for $88,500 and on November 1, 2005, it credited

Dividend Income for $7,000

Required:

1 Prepare a consolidated income statement and a statement of

retained earnings for Swift and Subsidiary for the year ended

LO6

Exercise 9

Emu Corporation paid $77,000 for a 60% interest in Chick Inc on

January 1, 2005, when Chick’s Capital Stock was $80,000 and its

Retained Earnings $20,000 The fair values of Chick's identifiable

assets and liabilities were the same as the recorded book values on

the acquisition date Trial balances at the end of the year on

December 31, 2005 are given below:

Capital stock, $10 par value 100,000 80,000

Additional Paid-in Capital 11,000

investment in Chick On January 1, 2005, it debited the Investment in

Chick account for $77,000 and on November 1, 2005, it credited

Dividend Income for $6,000

Required:

1 Prepare a consolidated income statement and a statement of

retained earnings for Emu and Subsidiary for the year ended

December 31, 2005

2 Prepare a consolidated balance sheet for Emu and Subsidiary as

of December 31, 2005

4 c Parent’s inventory of $132,000 plus subsidiary’s

book value of inventory of $38,000 plus 75% of the excess of the fair value over the book value

= $132,000+$38,000+(75%)x($22,000) = $186,500

5 d Purchase price minus 75% of Grass’s underlying

book value - $16,500 of excess cost over book value allocated to inventory (see 9) =

8 a The parent’s Retained Earnings is the amount of

consolidated Retained Earnings

9 c Cash $230,000 Accounts Receivable 170,000 Inventory

10 b Intercompany receivables and

payables from unconsolidated subsidiaries would not be eliminated

11 d

13 b

14 c Pigeon’s separate income $ 150,000

Less: 60% of Home’s $10,000 loss

Less: Equipment depreciation $10,000/ 10 years = ( 1,000 ) Consolidated net income $ 143,000

Exercise 1

Parrot Corporation and Subsidiary Consolidated Balance Sheet Working Papers

at December 31, 2005 Parrot Hollow

Eliminations Non-

Cntl

Consoli- dated Debit Credit

Less:

Dividends ( 3,000) ( 2,000) a $ 1,600 ( 400) 3,000Retained

2,080 24,000 TOTAL ASSETS $ 141,080 $100,400

$227,640LIB & EQUITY

$ 1,000 11,000

a

4,000

20,000Perch Retained

5,000 7,000 68,000

5,000

Exercise 3

Owl Corporation and Subsidiary Consolidated Balance Sheet Working Papers

at December 31, 2005 Owl Hunt

Sheet Debit Credit

INCOME STATEMENT

Sales $ 10,000 $6,500

$16,500Income from Hunt 1,270 a $1,270

Cost of Sales ( 4,000) ( 3,300)

( 7,300)Depreciation

expense ( 1,000) ( 1,000) c 80

( 2,080)Other expenses ( 1,800) ( 700)

( 2,500)Minority income

$(150)( 150)Net income 4,470 1,500

4,470Retained Earnings 2,510 2,000 b 2,000

2,510Add:

Net income 4,470 2,500

4,470Less:

$3,340Receivables-net 1,550 600

de

100

450 1,600Inventories 1,500 1,200

Buildings-net 7,500 5,700 b 320 c 80 13,440

Investment in

Hunt Corporation 8,490

ab

1,270 7,220

Capital Stock 11,600 5,000 b 5,000

11,600Retained earnings 5,880 3,500

4,980Noncntl interest