Test bank an introduction to financial statements

Chapter Test Bank AN INTRODUCTION TO CONSOLIDATED FINANCIAL STATEMENTS Multiple Choice Questions LO1 What method must be used if FASB 94 prohibits full consolidation of a 70% owned subsidiary? a The cost method b The Liquidation value c Market value d Equity method LO1 From the standpoint of accounting theory, which of the following statements is the best justification for the preparation of consolidated financial statements? a In substance the companies are separate, but in form the companies are one entity b In substance the companies are one entity, but in form they are separate c In substance and form the companies are one entity d In substance and form the companies are separate entities LO2 Penguin Corporation owns 90% of the outstanding voting stock of Crevice Company and Burrow Corporation owns the remaining 10% of Crevice’s voting stock On the consolidated financial statements of Penguin Corporation and Subsidiary, Burrow is a b c d LO2 an affiliate a minority interest an equity investee a related party A major motivation for FASB’s creation of Statement No 94 was a temporary control was not being disclosed properly b the elimination off-balance sheet financing c situations occurred where subsidiary control did not lie with the parent company d the risk of subsidiary legal reorganization or bankruptcy was not disclosed LO2 Muttonbird Inc has 90% ownership of Beach Company, but should exclude Beach under FASB 94 if a b c d LO2 Subsequent to an acquisition, the parent company and consolidated financial statement amounts would not be the same for a b c d LO3 investments in unconsolidated subsidiaries investments in consolidated subsidiaries capital stock ending retained earnings On June 1, 2005, Gull Company acquired 100% of the stock of Scrap Inc On this date, Gull had Retained Earnings of $200,000 and Scrap had Retained Earnings of $100,000 On December 31, 2005, Gull had Retained Earnings of $240,000 and Scrap had Retained Earnings of $120,000 The amount of Retained Earnings that appeared in the December 31, 2005 consolidated balance sheet was: a b c d LO3 Beach is in a regulated industry Muttonbird uses the equity method for Beach Muttonbird expects to sell Beach within a year Beach is in a foreign country and records its books in a foreign currency $240,000 $260,000 $300,000 $360,000 Scrubwren Corporation acquired a 100% interest in Heath Company for $1,780,000 when Heath had no liabilities The book values and fair values of Heath's assets were Current assets Equipment Land & buildings Book Value $ 400,000 200,000 600,000 Fair Value $ 700,000 400,000 800,000 Total assets $1,200,000 $1,900,000 Immediately following the acquisition, equipment will be included on the consolidated balance sheet at a b c d LO4 $300,000 $340,000 $360,000 $400,000 A newly acquired subsidiary had pre-existing goodwill on its books The parent company's consolidated balance sheet will a not show any value for the subsidiary's pre-existing goodwill b treat the goodwill similarly to other intangible assets of the acquired company c not show any value for the pre-existing goodwill unless all other assets of the subsidiary are stated at their full fair value d always show the pre-existing goodwill of the subsidiary at its book value LO4 10 The unamortized excess account is a a contra-equity account b used in allocating the amounts paid for recorded balance sheet accounts that are above or below their fair values c used in allocating the amounts paid for each asset and liability that are above or below their book values, especially when numerous assets or liabilities are involved d the excess purchase cost that is attributable to goodwill LO5 11 On January 1, 2005, Tern purchased 90% of Costal Corporation’s outstanding shares for $1,400,000 when the fair value of Costal’s assets were equal to the book values The balance sheets of Tern and Costal Corporations at year-end 2004 are summarized as follows: Assets $ Tern 5,900,000 $ Costal 1,450,000 Liabilities Capital stock Retained earnings $ 700,000 $ 3,600,000 1,600,000 250,000 1,000,000 200,000 If a consolidated balance sheet was prepared immediately after the business combination, the minority interest, would be a b c d LO5 12 On July 1, 2005, when Worm Company’s total stockholders’ equity was $180,000, Bird Corporation purchased 7,000 shares of Worm’s common stock at $30 per share Worm Company had 10,000 shares of common stock outstanding both before and after the purchase by Bird, and the book value of Worm’s net assets on July 1, 2005 was equal to the fair value On a consolidated balance sheet prepared at July 1, 2005, goodwill would be a b c d LO5 13 LO5 14 $100,000 $155,556 $140,000 $520,000 $30,000 $40,000 $50,000 $120,000 Bowerbird Inc acquired 60% of the outstanding stock of Mimicry Company in a business combination The book values of Mimicry’s net assets are equal to the fair values except for the building, whose net book value and fair value are $400,000 and 600,000, respectively At what amount is the building reported on the consolidated balance sheet? a $360,000 b $400,000 c $520,000 d $600,000 In the preparation of consolidated financial statements, which of the following intercompany transactions must be eliminated as part of the preparation of the consolidation working papers? a All revenues, expenses, gains, deductions, receivables, and payables b All revenues, expenses, gains, and deductions but not receivables and payables c Receivables and payables but not revenues, expenses, gains, and deductions d only sales revenue and cost of goods sold LO6 15 Pardolate Corporation paid $200,000 for a 60% interest in Arthropod Inc on January 1, 2005, when Arthropod had Capital Stock of $200,000 and Retained Earnings of $100,000 Fair values of identifiable net assets were the same as recorded book values During 2005, Arthropod had income of $30,000, declared dividends of $10,000, and paid $5,000 of dividends On December 31, 2005, Pardolate will have a b c d LO6 16 Spinebill Corporation bought 80% of Nectar Company’s common stock at its book value of $500,000 on January 1, 2005 During 2005, Nectar reported net income of $150,000 and paid dividends of $45,000 At what amount should Spinebill’s Investment in Nectar account be reported on December 31, 2005? a b c d LO6 `` $500,000 $548,000 $584,000 $605,000 Weebill Corporation bought 80% of Tree Company’s common stock at its book value of $800,000 on January 2, 2005 for $700,000 The law firm of Dewey, Cheatam and Howe did $25,000 to facilitate the purchase At what amount should Weebill’s Investment in Tree account be reported on January 2, 2005? a b c d LO7 18 investment in Salem account of $240,000 investment in Salem account of $218,000 goodwill of $33,333 dividends receivable of $3,000 $640,000 $665,000 $700,000 $725,000 Bellbird Corporation acquired an 80% interest in Honey Inc for $130,000 on January 1, 2005, when Honey had Capital Stock of $125,000 and Retained Earnings of $25,000 Bellbird’s separate income statement and a consolidated income statement for Bellbird Corporation and Subsidiary as of December 31, 2005, are shown below ConsoliBellbird dated Sales revenue $ 150,000 $ 234,750 Income from Corporal 11,600 Cost of sales ( 60,000 ) ( 100,000 ) Other expenses Noncontrolling interest income Net income a b c d LO7 19 $ 20,000 ) 81,600 $ ( 50,000 ) ( 3,150 ) 81,600 Honey’s separate income statement must have reported net income of: $13,750 $14,750 $15,750 $15,250 In the consolidated income statement of Wattlebird Corporation and its 85% owned Forest subsidiary, the noncontrolling interest income was reported at $45,000 What amount of net income did the Forest have for the year? a b c d LO8 20 ( $52,941 $38,250 $235,000 $300,000 Push-down accounting a requires a subsidiary to use the same accounting principles as its parent company b is required by the SEC if a subsidiary is wholly owned c is required when the parent company uses the cost method to account for its investment in the subsidiary d results in a push-up residual account on the subsidiaries books Exercises LO4 Exercise Alarm Bird Inc acquired an 85% interest in Clock Corporation on January 2, 2005 for $38,000 cash when Clock had Capital Stock of $15,000 and Retained Earnings of $25,000 Clock’s assets and liabilities had book values equal to their fair values except for inventory that was undervalued by $2,000 Balance sheets for Alarm Bird and Clock on January 2, 2005, immediately after the business combination, are presented in the first two columns of the consolidated balance sheet working papers Alarm Bird Corporation and Subsidiary Consolidated Balance Sheet Working Papers at January 2, 2005 Eliminations Alarm Bird ASSETS Cash Accounts Receivable-net $ Inventories Plant assets-net Investment in Clock Clock 68,000 $ 4,000 75,000 9,000 39,000 10,000 170,000 35,000 38,000 Total Assets $ 390,000 $58,000 EQUITIES Payables $ 120,000 $18,000 100,000 15,000 170,000 25,000 390,000 $58,000 Capital stock Retained Earnings Minority Interest TOTAL EQUITIES $ Debit Credit Balance Sheet Required: Complete the consolidation balance sheet working papers for Alarm Bird and subsidiary at January 1, 2005 LO4 Exercise On January 1, 2005, Myna Corporation issued 10,000 shares of its own $10 par value common stock for 9,000 shares of the outstanding stock of Berry Corporation in an acquisition Myna common stock at January 1, 2005 was selling at $70 per share Just before the business combination, balance sheet information of the two corporations was as follows: Myna Book Value Cash Inventories Other current assets Land Plant and equipment-net $ $ Liabilities Capital stock, $10 par value Additional paid-in capital Retained earnings $ $ 25,000 $ 55,000 110,000 100,000 660,000 950,000 $ Berry Book Value 12,000 $ 32,000 90,000 30,000 250,000 414,000 $ Berry Fair Value 12,000 36,000 110,000 90,000 375,000 623,000 220,000 $ 500,000 170,000 60,000 950,000 $ 50,000 $ 100,000 40,000 224,000 414,000 50,000 Required: Prepare the journal entry on Myna Corporation’s books to account for the business combination Prepare a consolidated balance sheet for Myna Corporation and Subsidiary immediately after the business combination LO5 Exercise The consolidated balance sheet of Treecreeper Corporation and Ants Farm, its 90% owned subsidiary, as of December 31, 2005, contains the following accounts and balances: Treecreeper Corporation and Subsidiary Consolidated Balance Sheet at December 31, 2005 Cash Accounts receivable-net Inventories Other current assets Plant assets-net Goodwill from consolidation $ $ Accounts payable Other liabilities Capital stock Retained earnings Minority interest Balances 19,000 70,000 110,000 85,000 290,000 39,000 613,000 $ 73,000 70,000 350,000 80,000 40,000 613,000 $ Treecreeper Corporation acquired its 90% interest in Ants Farm on January 1, 2005, when Ants Farm had $150,000 of Capital Stock and $70,000 of Retained Earnings Ants Farm’s net assets had fair values equal to their book values when Treecreeper acquired its interest No changes have occurred in the amount of outstanding stock since the date of the business combination Treecreeper uses the equity method of accounting for its investment Required: Determine the following amounts: The balance of Treecreeper's Capital Stock and Retained Earnings accounts at December 31, 2005 Cost of Treecreeper's purchase of Ants Farm on January 1, 2005 Ants Farms’s stockholders' equity on December 31, 2005 Treecreeper’s Investment December 31, 2005 in Ants Farm account balance at LO5 Exercise Monarch Corporation paid $180,000 for a 75% interest in Stem Co.’s outstanding Capital Stock on January 1, 2005, when Stem’s stockholders’ equity consisted of $150,000 of Capital Stock and $50,000 of Retained Earnings Book values of Stem’s net assets were equal to their fair values on this date The adjusted trial balances of Monarch and Stem on December 31, 2005 were as follows: Cash Dividends receivable Other current assets Land Plant assets-net Investment in Stem Cost of sales Other expenses Dividends Accounts payable Dividends payable Capital stock Retained earnings Sales revenue Income from Stem $ Packer 8,250 7,500 40,000 50,000 100,000 195,000 225,000 45,000 25,000 695,750 $ 40,750 $ $ 150,000 75,000 400,000 30,000 695,750 35,000 10,000 150,000 50,000 190,000 $ 435,000 $ $ Stem 35,000 50,000 30,000 150,000 $ 125,000 25,000 20,000 435,000 Required: Complete the partially prepared consolidated balance sheet working papers that appear below SOLUTIONS Multiple Choice Questions d b b b c b a c The parent’s retained earnings Purchase cost Current asset fair value Excess to non-current assets Fair value of non-current assets Allocation shortfall Equipment share of shortfall: $400,000/$1,200,000 X $120,000 = Allocation to equipment: $400,000 - $40,000 = c 10 c 11 b $1,400,000 / 90% = $1,555,556 10% of $1,555,556 = $155,556 12 d Bird’s cost = 7,000 x $30 Implied fair value of Worm ($210,000 / 70%) Less: Book value Goodwill acquired 13 $ $ $ $ $ ( $ 1,780,000 700,000 1,080,000 1,200,000 120,000 40,000 360,000 210,000 300,000 180,000 ) 120,000 d 14 a 15 c Pardolate’s cost Implied fair value of Arthropod ($200,000 / 60%) Less: Book value Goodwill acquired $ 600,000 $ 200,000 333,333 ( $ 300,000 ) 33,333 16 c Investment cost + 80% (subsidiary income) – (80%)(subsidiary dividends = $500,000 + $120,000 - $36,000 = 17 d 18 c $3,150/0.20 = $15,750 19 d $45,000/15% = $300,000 20 d 584,000 $ Exercise Preliminary computations $ $38,000 Fair value (purchase price) of 90% interest Eliminations acquired Alarm Clock Debit Credit January 2, 2005 Bird ASSETS Implied fair value of Cash $ Book value of Clock’s Accounts Excess cost over book Receivable-net Clock ($38,000 / 90% 68,000 $ 4,000 net assets value acquired 75,000 9,000= ( $ Balance Sheet $44,706 $72,000 40,000) 4,706 84,000 Inventories 39,000 10,000 $2,000 51,000 Allocation of excess of cost over book avalue: Plant assetsInventory $ 2,000 Net 35,000 205,000 Remainder to goodwill170,000 2,706 Investment in Excess of fair value over book value $ 4,706 Charlie 38,000 a $38,000 Total Assets Alarm Bird Corporation and a 2,706 Subsidiary Consolidated Balance Sheet Working Papers at January 1, 2005 390,000 $58,000 $ $414,706 EQUITIES Payables $ $138,000 Goodwill Capital stock Retained Earnings Minority Interest Total equities 120,000 2,706 $18,000 100,000 15,000 a $15,000 100,000 170,000 25,000 a 25,000 170,000 a $ 390,000 6,706 $58,000 6,706 $414,706 44,706 44,706 Exercise Requirement 1: Investment in 0Berry Co Common stock Paid-in capital 70 ,000 100,000 600,000 Requirement 2: Preliminary computations Fair value (purchase price) of 90% interest acquired January $ 2, 2005 $700,000 Implied fair value of Berry ($700,000 / 90% Book value of Clock’s net assets Excess fair value over book value acquired = $777,778 364,000) 413,778 Allocation of excess of cost over book value: Inventory Other current assets Land Plant assets Remainder to goodwill Excess of fair value over book value ( $ $ 4,000 20,000 60,000 125,000 204,778 $ 413,778 Myna Corporation and Subsidiary Consolidated Balance Sheet Working Papers at January 1, 2005 Myna ASSETS Cash $ 25,000 Berry Eliminations Debit Credit $ 12,000 Balance Sheet $ 37,000 Inventories Other current Assets 55,000 32,000 b $ 4,000 91,000 110,000 90,000 b 20,000 220,000 Land 100,000 30,000 b 60,000 190,000 Plant assets Goodwill Investment in Berry Total Assets 660,000 250,000 b b 125,000 204,778 1,035,000 204,778 $ 1,650,000 $414,000 $1,777,778 EQUITIES Liabilities $ $ 50,000 270,000 Capital stock Additional paidin capital Retained earnings Minority Interest Total equities b a 700,000 220,000 $413,778 286,222 600,000 100,000 a 100,000 600,000 770,000 40,000 a 40,000 770,000 60,000 224,000 a 224,000 60,000 a77,778 $ 1,650,000 $414,000 77,778 $1,777,778 Exercise Preliminary computations Requirement 1: On the consolidated balance sheet, the balance in the Capital Stock and Retained Earnings accounts will be those of the parent, so the Capital Stock balance is $350,000, and the Retained Earnings balance is $80,000 Requirement (Ant Farm’s equity on January 1, 2005)x(90%) = ($220,000)x(90%) Original goodwill = Original acquisition cost = $ $ 198,000 39,000 237,000 Ant Farm’s stockholders’ equity = (minority interest) divided by (minority interest percentage) =($40,000/10%) $ 400,000 Requirement Treecreeper’s book value in 90% of Ants Farm at December 31, 2005 = ($400,000 (from above)) x 90% $ Plus: goodwill (from balance sheet) 360,000 39,000 Balance in Investment account at December 31, 2005 399,000 Requirement $ Exercise Preliminary computations Fair value (purchase price) of 75% interest acquired $ on January 1, 2005 Implied fair value of Stem (($180,000 / 75%) $ Book value of Stem’s net assets $ Excess cost over book value acquired $ 240,000 200,000 40,000 Initial investment cost Income from Stem: (75%)($40,000)= Dividends ($20,000)(75%) = $ 180,000 30,000 -15,000 Balance in Investment in Stem at December 31,2005 $ 195,000 180,000 Monarch Corporation and Subsidiary Consolidated Balance Sheet Working Papers at December 31, 2005 Monarch ASSETS Cash Dividends Receivable Other current Assets $ 8,250 $ 35,000 Plant assets Investment in Stem b $ 7,500 40,000 50,000 90,000 50,000 30,000 80,000 100,000 150,000 250,000 195,000 a Goodwill a $ Balance Sheet $ 43,250 7,500 Land Total Assets Eliminations Debit Credit Stem 400,750 $265,000 $ 40,000 195,000 40,000 $503,250 EQUITIES Accounts payable $ Dividends Payable Capital stock Retained Earnings Minority Interest Total equities 40,750 $ 35,000 $75,750 10,000 b 7,500 2,500 150,000 150,000 a 150,000 150,000 210,000 70,000 a 70,000 210,000 a $ 400,750 65,000 65,000 $265,000 $503,250 267,500 267,500 Exercise Requirement 1: Preliminary computations Fair value (purchase price) of 80% interest acquired $ on December 31, 2005 Implied fair value of Bird (($268,000 / 80%) $ Book value of Bird’s net assets $ Excess cost over book value acquired $ 268,000 335,000 335,000 Zoo Corporation and Subsidiary Consolidated Balance Sheet Working Papers at December 31, 2005 Zoo ASSETS Cash $ Bird 110,000 40,000 130,000 76,000 240,000 50,000 b Land 220,000 80,000 PP&E Investment in Bird Total Assets 660,000 Accounts Receivable Inventory Eliminations Debit Credit Balance Sheet $ 150,000 206,000 $ 5,000 295,000 b EQUITIES Accounts Payable $ Bonds Payable Capital stock Additional paidin capital Retained earnings Minority Interest Total equities 200,000 b 25,000 15,000 268,000 $ 1,628,000 275,000 875,000 a 268,000 $446,000 $1,801,000 440,000 468,000 $11,000 100,000 b $ 5,000 451,000 563,000 200,000 225,000 a 225,000 200,000 200,000 80,000 a 80,000 200,000 320,000 30,000 a 30,000 320,000 a $ 1,628,000 67,000 $446,000 67,000 $1,801,000 360,000 360,000 Exercise Requirement 1: Investment in Insect Inc Common stock Paid-in capital 322,000 46,000 276,000 Requirement 2: Preliminary computations Fair value (purchase price) of 70% interest acquired July 1, $ 2005 $322,000 Implied fair value of Insect ($322,000 / 70% Book value of Insect’s net assets Excess cost over book value acquired = $460,000 294,000) 166,000 Allocation of excess of cost over book value: Inventory Other current assets Land Plant and Equipment Liabilities Remainder to goodwill Excess of fair value over book value ( $ $ ( ( ( $ 5,000 10,000) 10,000) 60,000 5,000) 126,000 166,000 Magpie Corporation and Subsidiary Consolidated Balance Sheet Working Papers July 1, 2005 Magpie ASSETS Cash $ 25,000 Eliminations Debit Credit Insect $ 17,000 $ 110,000 40,000 b $ 10,000 140,000 Land 100,000 45,000 b 10,000 135,000 Plant assets Goodwill Investment in Insect Total Assets 660,000 $ 1,272,000 EQUITIES Liabilities $ Total equities 42,000 b 220,000 b b $ 5,000 42,000 Inventories Other current Assets Capital stock Additional paidin capital Retained Earnings Minority Interest 55,000 Balance Sheet 102,000 60,000 126,000 940,000 126,000 b a 322,000 166,000 156,000 $364,000 220,000 $ $1,485,000 70,000 b 5,000 $ 295,000 546,000 100,000 a 100,000 546,000 446,000 90,000 a 90,000 446,000 60,000 104,000 a 104,000 60,000 a $ 1,272,000 138,000 $364,000 138,000 $1,485,000 $ 485,000 $ 485,000 Exercise Preliminary computations Fair value (purchase price) of 70% interest acquired December 31, 2005 Implied fair value of Trumpet ($279,000 / 70%) Book value of Trumpet’s net assets Excess cost over book value acquired = Allocation of excess of cost over book value: Inventory Land Remainder to goodwill Excess of fair value over book value $ ( $ $ $ $279,000 $398,571 300,000) 98,571 50,000 20,000 28,571 98,571 Manucode Corporation and Subsidiary Consolidated Balance Sheet Working Papers at December 31, 2005 Manucode ASSETS Cash $ Receivables-net Inventories Land Plant assets – net Investment in Trumpet Goodwill Total Assets Trumpet $ 20,000 $ 46,000 20,000 30,000 50,000 125,000 110,000 b 30,000 80,000 b $50,000 130,000 160,000 480,000 a b b $ 285,000 20,000 279,000 $ Balance Sheet 26,000 320,000 EQUITIES Current $ liabilities Capital Stock Additional paidIn capital Retained earnings Minority Interest Total equities Eliminations Debit Credit 180,429 98,571 28,571 28,571 800,000 $400,000 $1,019,571 110,000 $100,000 $210,000 400,000 200,000 a 200,000 400,000 100,000 60,000 a 60,000 100,000 190,000 40,000 a 40,000 190,000 a 800,000 119,571 $400,000 119,571 $1,019,571 398,571 398,571 Exercise Preliminary computations Fair value (purchase price) of 60% interest acquired January $ 1, 2005 $5,000 Implied fair value of Fig ($5,000 / 60% Book value of Fig’s net assets Excess cost over book value acquired = $8,333 7,500) 833 ( $ Allocation of excess of cost over book value: Remainder to goodwill Excess of fair value over book value 833 833 $ Bower Corporation and Subsidiary Consolidated Balance Sheet Working Papers at December 31, 2006 Bower ASSETS Current assets $ Fixed assets Investment in Fig Eliminations Debit Credit Fig Balance Sheet 12,550 $ 4,000 $16,550 21,550 6,500 28,050 5,900 a Goodwill a $ 5,900 $ 833 833 Total assets $ 40,000 $10,500 $45,433 EQUITIES Liabilities $ 10,000 $ 1,500 $11,500 Capital stock Retained earnings Minority Interest Total equities 20,000 5,000 a 5,000 20,000 10,000 4,000 a 4,000 10,000 a $ 40,000 3,933 $10,500 3,933 $45,433 9,833 9,833 Exercise Preliminary computations Fair value (purchase price) of 80% interest acquired January $ 2, 2005 $500,000 Implied fair value of Lizard ($500,000 / 80% Book value of Lizard’s net assets Excess cost over book value acquired = ( $ $625,000 460,000) 165,000 Requirement Allocation of excess of cost over book value: Inventory Buildings-net Note payable Remainder to goodwill Excess of fair value over book value $ ( ( $ Requirement Currawong’s share of Lizard income =(80%)x(75,000) = $ Less: Excess allocated in inventory which was sold in the current year Add: Depreciation adjustment on building = +($24,000/15 years) Add: Excess allocated to Note payable Net adjustment to investment account Currowong’s share of Lizard’s income due to 60,000 (25,600) 1,600 1,000 $ 37,000 $ 500,000 $ 37,000 (28,000) 509,000 Requirement Original cost of investment in Brazil Plus: Currawong’s share of Lizard’s income (from Requirement Less: Dividends received (80%)x(35,000) = Investment in Lizard account at December 31, 2005 32,000 30,000) 1,250) 164,250 165,000 ...LO2 Muttonbird Inc has 90% ownership of Beach Company, but should exclude Beach under FASB 94 if a b c d LO2 Subsequent to an acquisition, the parent company and consolidated financial statement... consolidated balance sheet, the balance in the Capital Stock and Retained Earnings accounts will be those of the parent, so the Capital Stock balance is $350,000, and the Retained Earnings balance is... amounts: The balance of Treecreeper's Capital Stock and Retained Earnings accounts at December 31, 2005 Cost of Treecreeper's purchase of Ants Farm on January 1, 2005 Ants Farms’s stockholders'