Test bank advanced accounting 10e by beams chapter 11

At what amount was consolidated Land account stated under the parent company and entity theories, respectively, if Paris’s land account had a book value of $50,000 and a fair value of...

Chapter 11 Test Bank

CONSOLIDATION THEORIES, PUSH-DOWN ACCOUNTING, AND

CORPORATE JOINT VENTURES

Multiple Choice Questions

Use the following information in answering Questions 1 and 2

Pasfield Corporation acquired a 90% interest in Santini Corporation

for $90,000 cash on January 1, 2005 The following information is

available for Santini at that time

Plant assets 60,000 75,000 15,000 Liabilities ( 50,000 ) ( 50,000 ) 0 Net assets $ 50,000 $ 75,000

LO1

1 Under the entity theory, a consolidated balance sheet prepared

immediately after the business combination will show goodwill

2 Under the entity theory, a consolidated balance sheet prepared

immediately after the business combination will show minority

Corporation for $900,000 when Sandberg’s stockholders’ equity consisted of $600,000 of Capital Stock and $600,000 of Retained Earnings The fair values of Sandberg’s net assets were equal

to their recorded book values At the time of acquisition, Pratt will record

a goodwill for $60,000 under the parent company theory

b goodwill for $85,714 under the entity theory

c investment in Sandberg for $1,285,714 under the entity theory

d investment in Sandberg for $900,000 under the entity and parent company theories

Use the following information for Questions 4, 5, and 6

Pascoe Corporation paid $450,000 for a 90% interest in SarabetCorporation on January 1, 2005, when Sarabet’s stockholders’ equity consisted of $250,000 Common Stock and $50,000 Retained Earnings The book values and fair values of Shelby’s assets and liabilities were equal when Pascoe acquired its interest

The separate incomes of Pascoe and Sarabet for 2005 were $600,000 and

$100,000, respectively Dividends declared and paid during 2005 were

$250,000 for Pascoe and $50,000 for Sarabet Pascoe uses the entity theory in consolidating its financial statements with those of Sarabet

9 At what amount was consolidated Land account stated under the

parent company and entity theories, respectively, if Paris’s land account had a book value of $50,000 and a fair value of

fair value of $44,000, what was the amount stated on the consolidated balance sheet for inventories under the parent theory of consolidation?

11 The SEC requires push-down accounting for SEC filings of

subsidiaries when the subsidiary has no substantial held debt or preferred stock outstanding and

a the parent has substantial ownership (5% or greater)

b the parent has substantial ownership (20% or greater)

c the parent has substantial ownership (50% or greater)

d the parent has substantial ownership (97% or greater)

LO2

12 In practice, push-down accounting

a must use the cost method to report goodwill

b revalues the subsidiary assets on a proportional basis

c requires neither a new basis of accounting nor a new reporting basis

d requires a deferred credit for goodwill

LO2

13 Companies that use push-down accounting

a must use the parent company theory approach

b must use the entity theory approach

c may use either the parent company or entity theory

approach

d shall use neither the parent company nor entity theory approach

LO2

14 A parent company acquired 100% of the outstanding common stock

of another corporation The parent is going to use push-down accounting The fair market value of each of the acquired corporation’s assets is lower than its respective book value The fair market value of each of the acquired corporation’s liabilities is higher than its respective book value The corporation has a deficit in the Retained Earnings account Which one of the following statements is correct?

d Subsidiary retained Earnings will have a deficit balance after this transaction is posted

LO3

15 Earth Company, Fire Incorporated, and Wind Incorporated created

a joint venture to market their products on the internet Earth owns 40% of the stock Fire owns 45% of the stock and Wind owns the remaining 15% Which firms should report their joint venture investments using the equity method?

a Earth

b Fire

c Earth and Fire

d Earth, Fire and Wind

LO3

16 Anthony and Cleopatra create a joint venture to distribute

artifacts Anthony contributes 70% and Cleopatra 30% of the cash for assets purchased from Tomb Company How would Anthony report information about Cleopatra on Anthony’s financial statements?

a the equity method must be used

b either the equity or cost method may be used

c the cost method must be used

d proportionate consolidation must be used

a will have ownership control and financial control

b may have no ownership control but financial control

c does not require ownership control or financial control

d does not have to be an entity

20 If a company pays more for a variable interest entity (VIE)than

the fair value of the net assets

a an extraordinary loss is recorded

b goodwill is recorded if the VIE is defined as a business

c a deferred credit is recorded and amortized over the useful life

d a write-down is taken in all situations

LO1

Exercise 1

On July 1, 2004, Parslow Corporation acquired a 75% interest in Sanderson Corporation for $150,000 Sanderson’s net assets on this date had a book value of $140,000 and a fair value of $160,000 The excess of fair value over book value at acquisition was due to understated plant assets with a remaining useful life of five years from July 1, 2004 Separate incomes of Parslow and Sanderson for 2005were $400,000 and $20,000, respectively

Partel Corporation purchased 75% of Sandford Corporation on January

1, 2005, for $230,000 Balance sheets for the two companies on this date, prepared just prior to the purchase, are provided below

Book Values

Sandford

Book Values

Sandford

Fair Values

Common stock $ 300,000 95,000

Retained earnings 800,000 105,000

Total equities $ 1,100,000 $ 200,000

Required:

Prepare one consolidated balance sheet using the proprietary rata) theory of consolidation, and, prepare a second consolidatedbalance sheet using the parent company theory of consolidation

(pro-Pashley Corporation purchased 75% of Sargent Corporation on January

1, 2005, for $115,000 Balance sheets for the two companies on this

date, prepared just prior to the purchase, are provided below

Book Values

Sargent

Book Values

Sargent

Fair Values

Common stock $ 150,000 $ 47,500

Retained earnings 400,000 52,500

Total equities $ 550,000 $ 100,000

Required:

Prepare a consolidated balance sheet using the entity theory of

consolidation

LO1

Exercise 4

Patane Corporation acquired 80% of the outstanding voting common stock

of Sanlon Corporation on January 1, 2005, for $500,000 Sanlon

Corporation’s stockholders’ equity at this date consisted of $250,000

in Capital Stock and $100,000 in Retained Earnings The fair value of

Sanlon’s assets was equal to the book value of the assets except for

land with a fair value $40,000 greater than its book value, and

marketable securities with a fair value $50,000 greater than its book

value Sanlon also had a valuable patent with a fair value of $25,000

and a book value of zero because its development costs were expensed

as incurred The fair value of Sanlon’s liabilities is $10,000 higher

than the $40,000 book value

Required:

Calculate the amount of goodwill under the parent company and entity

theories of consolidation

Partridge Corporation purchased an 80% interest in Sandy Corporation

for $840,000 on January 1, 2005 Sandy's balance sheet book values

and accompanying fair values on this date are shown below

Book Value

Fair Value

Entity Theory Push- Down Balance Sheet

Parent Company Theory Push- Down Balance Sheet

Complete the push-down columns of Sandy Corporation’s restructured

balance sheet using entity theory and parent company theory

LO2

Exercise 7

Party Corporation acquired an 80% interest in Sang Corporation on

January 1, 2005 for $20,000 Balance sheet and fair value information

on this date is summarized as follows:

Book Value

Sang Book Value

Sang Fair Value Current assets $ 15,000 $ 9,000 $ 9,000

Land and Building-net 35,000 7,000 7,000

1 Prepare an entry on the books of Sang Corporation to record the

push-down adjustment under parent company theory

2 Prepare an entry on the books of Sang Corporation to record a

push-down adjustment under entity theory

Pascal Corporation paid $225,000 for a 70% interest in Sank

Corporation on January 1, 2005 On that date, Sank’s balance sheet

accounts, at book value and fair value, were as follows:

Book Value Fair Value Assets

Prepare a balance sheet for Sank Corporation immediately after the

acquisition transaction by using push-down accounting under the

parent company theory

LO3

Exercise 9

Patch Corporation has a 50% undivided interest in Saric Corporation, a

joint venture Patch accounts for its interest in Saric by the equity

method and also prepares consolidated financial statements for external reporting purposes Patch follows specialized industry practices and uses proportionate consolidation for its interest in

Saric Separate financial statements for Patch and Saric are as follows:

Prepare the consolidated balance sheet for Patch Corporation and its

undivided interest in Saric Corporation

On January 1, 2005, Alford Corporation and Bancroft Inc decided to

set up a syndicate called Showtime to conduct The partners agreed

to a 50%-50% split of Showtime’s profits, but Alford will absorb all

losses After the partners contributed $15,000 each on January 1,

2005, no journal entries were made for Alford or Bancroft during the

year to report Showtime activities During the year, Showtime sold

$110,000 of tickets for five shows at $25 per ticket and performers

were paid $60,000 in advance with one show remaining to be performed

next year Market value was assumed to be cash present value On

December 31, 2005 year-end, worksheet financial statements for Alford

and Bancroft were as follows:

Alford Corporation, Bancroft Inc and Showtime Affiliate

Financial Statement Working Papers

LIAB & EQUITY

Liabilities 90,900 83,100 10,000Capital

Stock/Partnership 30,000 10,000 30,000Retained

1.Prepare a balance sheet for Alford as of December 31, 2005

2.Prepare a balance sheet for Bancroft as of December 31, 2005

Multiple Choice Questions

1 c

Imputed value of Santini ($90,000/90%) $ 100,000

Less: Fair value of net assets acquired 75,000

2 d

Imputed value of Santini ($90,000/90%) $ 100,000

Minority interest percentage 10%

3 d The investment is recorded at cost

4 c

Imputed value of Sarabet ($450,000/90%) $ 500,000

Less: Total underlying book value 300,000

Total amount of implied goodwill $ 200,000

Majority percentage acquired 90%

Goodwill under contemporary theory $ 180,000

Under contemporary theory the amount of goodwill recorded would be

$180,000; however, under pure entity theory, the amount of goodwill

7 c

Purchase price of 80% interest $ 400,000

Less: Book value acquired ($300,000 x 80%) 240,000

Excess of cost over book value $ 160,000

Less: Excess allocated to land ($12,000 x 80%) ( 9,600 )

Plus: Excess allocated to inventory ($5,000 x 80%) 4,000

Remainder allocated to goodwill $ 154,400

8 c $154,400/80% = $193,000

9 a

Under the parent company theory, the Land account on the consolidated

balance sheet would be the sum of the book value of the parent’s Land

account balance of $50,000 plus the book value of the Land account on

the subsidiary’s books of $10,000 plus 80% of the $12,000 excess of

the fair value in excess of book value of $9,600, for a total of

$69,600 Under the entity theory, the land would be valued at the

book value of the parent of $50,000 plus the full fair value of the

subsidiary’s land which is $22,000 for a total of $72,000

10 b

Under the parent company theory, the Inventory account on the consolidated balance sheet would be the sum of the book value of the parent’s Inventory account balance of $40,000 plus the book value of the Inventory account on the subsidiary’s books of $30,000 less 80% of the $5,000 excess of the book value in excess of fair value, or ($4,000), for a total of $66,000

Requirement 1:

Parent company theory:

Cost of 75% interest on July 1, 2004 $ 150,000

Book value acquired ($140,000 x 75%) 105,000

Excess cost over book value acquired $ 45,000

Excess:

Allocated to plant assets ($160,000 - $140,000) x 75%

( 15,000 )

Requirement 2:

Parent Theory

Entity Theory Combined separate incomes $ 420,000 $ 420,000

Less: Depreciation on excess allocated to

plant assets: $15,000/5 years ( 3,000 )

$20,000/5 years ( 4,000 )

Less: Minority interest income ( 5,000 )

Consolidated net income $ 412,000

Total consolidated income $ 416,000

Income allocated to majority shareholders $ 412,000

Income allocated to minority shareholders $ 4,000

Cash ($330,000 - $230,000) + (75% x 10,000) $ 107,500Inventories $270,000 + (75% x 90,000) 337,500Buildings & equipment-net $500,000 + (75% x 190,000) 642,500Goodwill ($230,000 paid – ($290,000 x 75%) 12,500

Cash ($330,000 - $230,000) + $10,000) $ 110,000Inventories ($270,000 + $70,000) + (75% x 20,000) 355,000Buildings &

Equip.-net ($500,000 + $120,000) + (75% x $70,000) 672,500Goodwill ($230,000 paid – ($290,000 x 75%) 12,500

Pashley Corporation and Subsidiary Consolidated Balance Sheet

January 1, 2005 (Entity Theory of Consolidation) Assets

Cash ($165,000 - $115,000) + $5,000) $ 55,000Inventories ($135,000 + $45,000) 180,000Buildings & equipment-net ($250,000 + $95,000) 345,000Goodwill ($115,000/75%) - $145,000 fair value 8,333

Equity

Minority Interest ($45,000 excess of fair value over

book value x 25%) + (25% x $100,000 net book values) +

Sanlon net assets at January 1, 2005:

($250,000 capital stock + $100,000 Retained

Plus: Book value of liabilities 40,000Equals: Book value of assets $ 390,000

Plus: Excess of land fair value over book value 40,000Plus: Excess of securities fair value over book

value

50,000Plus: Fair value of patent in excess of book value 25,000Equals: Total fair value of assets $ 505,000Less: Fair value of liabilities 50,000Equals: Fair value of net assets $ 455,000

Equals: Fair value of net assets acquired $ 364,000

Required:

Goodwill under the parent company theory:

Less: Fair value of net assets acquired 364,000

Goodwill using the parent company theory $ 136,000

Goodwill under the parent company theory $ 136,000

Divided by: Percentage acquired 80%

Goodwill under the entity theory $ 170,000

Exercise 5

Requirement 1:

Parent company theory:

Cost of 80% interest on January 1, 2005 $ 184,000

Book value acquired ($160,000 x 80%) 128,000

Excess cost over book value acquired $ 56,000

Excess allocation:

Plant assets ($20,000 x 80%) = $16,000

Patent ($30,000 x 80%) = 24,000

( 40,000 )