Test bank an introduction to financial statements

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

Chapter 3 Test Bank

AN INTRODUCTION TO CONSOLIDATED FINANCIAL STATEMENTS

Multiple Choice Questions

LO1

1 What method must be used if FASB 94 prohibits full

consolidation of a 70% owned subsidiary?

LO1

a The cost method.

b The Liquidation value.

c Market value

d Equity method.

2 From the standpoint of accounting theory, which of the

following statements is the best justification for the preparation of consolidated financial statements?

c In substance and form the companies are one entity.

d In substance and form the companies are separate entities.

3 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

4 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.

5 Muttonbird Inc has 90% ownership of Beach Company, but should

exclude Beach under FASB 94 if

a Beach is in a regulated industry.

b Muttonbird uses the equity method for Beach.

c Muttonbird expects to sell Beach within a year.

d Beach is in a foreign country and records its books in a foreign currency.

LO2

6 Subsequent to an acquisition, the parent company and

consolidated financial statement amounts would not be the same for

a investments in unconsolidated subsidiaries.

b investments in consolidated subsidiaries.

c capital stock.

d ending retained earnings.

LO3

7 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:

8 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

Book Value Fair Value

Land & buildings 600,000 800,000

Total assets $1,200,000 $1,900,000 Immediately following the acquisition, equipment will be

included on the consolidated balance sheet at

9 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.

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:

Tern Costal Assets $ 5,900,000 $ 1,450,000

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

13 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?

14 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.

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 investment in Salem account of $240,000.

b investment in Salem account of $218,000.

c goodwill of $33,333.

d dividends receivable of $3,000.

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?

`` 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?

18 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.

Bellbird Consoli- dated Sales revenue $ 150,000 $ 234,750 Income from Corporal 11,600

Cost of sales ( 60,000 ) ( 100,000 )

Other expenses ( 20,000 ) ( 50,000 ) Noncontrolling

interest income ( 3,150 ) Net income $ 81,600 $ 81,600

Honey’s separate income statement must have reported net income of:

19 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 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.

Alarm Bird Corporation and Subsidiary Consolidated Balance Sheet Working Papers

at January 2, 2005

Alarm Bird Clock

Eliminations

Balance Sheet Debit Credit

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

Berry Book Value

Berry Fair Value Cash $ 25,000 $ 12,000 $ 12,000

Additional paid-in capital 170,000 40,000

Exercise 3

The consolidated balance sheet of Treecreeper Corporation and AntsFarm, its 90% owned subsidiary, as of December 31, 2005, contains thefollowing accounts and balances:

Treecreeper Corporation and Subsidiary

Consolidated Balance Sheet

of accounting for its investment

Required: Determine the following amounts:

1 The balance of Treecreeper's Capital Stock and Retained Earningsaccounts at December 31, 2005

2 Cost of Treecreeper's purchase of Ants Farm on January 1, 2005

3 Ants Farms’s stockholders' equity on December 31, 2005

4 Treecreeper’s Investment in Ants Farm account balance at

December 31, 2005

Exercise 4

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:

Monarch Corporation and SubsidiaryConsolidated balance Sheet Working Papers

at December 31, 2005

Monarch Stem

Eliminations

BalanceSheetDebit Credit

Exercise 5

Zoo Inc paid $268,000 to purchase 80% of the outstanding stock ofBird Corporation, on December 31, 2005 The following year-endinformation was available just before the purchase:

ZooBookValue

BirdBookValue

BirdFairValue

Capital stock, $15 par valuepar value 200,000 225,000

Additional paid-in capital 200,000 80,000

Exercise 6

On July 1, 2005, Magpie Corporation issued 23,000 shares of its own

$2 par value common stock for 35,000 shares of the outstanding stock

of Insect Inc in an acquisition Magpie common stock at July 1, 2005 was selling at $14 per share Just before the business combination, balance sheet information of the two corporations was as follows:

Magpie Book Value

Insect Book Value

Insect Fair Value Cash $ 25,000 $ 17,000 $ 17,000

Additional paid-in capital 170,000 90,000

Exercise 7

Manucode Corporation paid $279,000 for 70% of Trumpet Corporation’s

$10 par common stock on December 31, 2005, when Trumpet Corporation’sstockholders’ equity was made up of $200,000 of Common Stock, $60,000Additional Paid-in Capital and $40,000 of Retained Earnings.Trumpet’s identifiable assets and liabilities reflected their fairvalues on December 31, 2005, except for Trumpet’s inventory which wasundervalued by $50,000 and their land which was undervalued by

$20,000 Balance sheets for Manucode and Trumpet immediately afterthe business combination are presented in the partially completedworking papers

Manucode Corporation and SubsidiaryConsolidated Balance Sheet Working Papers

at December 31, 2005

Manucode Trumpet

Eliminations

BalanceSheetDebit Credit

Exercise 8

Bower Corporation paid $5,000 for a 60% interest in Fig Inc onJanuary 1, 2005 when Fig’s stockholders’ equity consisted of $5,000Capital Stock and $2,500 Retained Earnings Fig’s assets andliabilities were fairly valued on this date Two years later, onDecember 31, 2006, the balance sheets of Bower and Fig are summarized

Exercise 9

Currawong Corporation paid $500,000 for 80% of the outstanding votingcommon stock of Lizard Corporation on January 2, 2005 when the bookvalue of Lizard’s net assets was $460,000 The fair values ofLizard’s identifiable net assets were equal to their book valuesexcept as indicated below

Lizard reported net income of $75,000 during 2005; dividends of

$35,000 were declared and paid during the year

BookValue ValueFairInventories (sold in 2005) $ 80,000 $ 112,000

Buildings-net (15-year life) 200,000 170,000

Note Payable (paid in 2005) 20,000 21,250

Required:

1 Prepare a schedule to allocate the cost/book differential to thespecific identifiable assets and liabilities

2 Determine Currawong’s income from Lizard for 2005

3 Determine the correct balance in the Investment in Lizard

account as of December 31, 2005

$400,000/$1,200,000 X $120,000 = $ 40,000Allocation to equipment:

Less: Book value ( 300,000 ) Goodwill acquired $ 33,333

16 c Investment cost + 80% (subsidiary

income) – (80%)(subsidiary dividends = $500,000 + $120,000

Allocation of excess of cost over book value:

Inventory $ 2,000

Excess of fair value over book value $ 4,706

Alarm Bird Corporation andSubsidiary Consolidated BalanceSheet Working Papers at January

1, 2005

AlarmBird Clock

Eliminations Balance

SheetDebit Credit

Allocation of excess of cost over book value:

Inventory $ 4,000Other current assets 20,000Land 60,000Plant assets 125,000

Investment in Berry Co 70 ,000

Myna Corporation and Subsidiary Consolidated Balance Sheet

Working Papers at January 1, 2005

Myna Berry DebitEliminationsCredit BalanceSheetASSETS

Ant Farm’s stockholders’ equity = (minority

interest) divided by (minority interest percentage)

=($40,000/10%)

Requirement 4

$ 400,000

Treecreeper’s book value in 90% of Ants Farm

December 31, 2005 = ($400,000 (from above)) x 90% at$ 360,000

Balance in Investment account at December 31, 2005 $ 399,000

Balance in Investment in Stem at December 31,2005 $ 195,000

Monarch Corporation and SubsidiaryConsolidated Balance Sheet Working Papers

Implied fair value of Bird (($268,000 / 80%) $ 335,000

Book value of Bird’s net assets $ 335,000

Excess cost over book value acquired $ 0

Zoo Corporation and Subsidiary Consolidated Balance Sheet

Working Papers at December 31, 2005

Zoo Bird DebitEliminationsCredit BalanceSheetASSETS

Allocation of excess of cost over book value:

Inventory $ 5,000Other current assets ( 10,000)Land ( 10,000)Plant and Equipment 60,000Liabilities ( 5,000)Remainder to goodwill 126,000Excess of fair value over book value $ 166,000

Magpie Corporation and SubsidiaryConsolidated Balance Sheet Working Papers

Allocation of excess of cost over book value:

Inventory $ 50,000Land 20,000

Excess of fair value over book value $ 98,571

Manucode Corporation and Subsidiary Consolidated Balance Sheet Working Papers

Allocation of excess of cost over book value:

Excess of fair value over book value $ 833

Bower Corporation and SubsidiaryConsolidated Balance Sheet Working Papers

Implied fair value of Lizard ($500,000 / 80% $625,000Book value of Lizard’s net assets ( 460,000)Excess cost over book value acquired = $ 165,000

Requirement 1

Allocation of excess of cost over book value:

Inventory $ 32,000Buildings-net ( 30,000)Note payable ( 1,250)Remainder to goodwill 164,250Excess of fair value over book value $ 165,000

Requirement 2

Currawong’s share of Lizard income =(80%)x(75,000) = $ 60,000

Less: Excess allocated in inventory which was sold

in the current year (25,600)

Add: Depreciation adjustment on building =

+($24,000/15 years) 1,600

Add: Excess allocated to Note payable 1,000

Net adjustment to investment account due to

Currowong’s share of Lizard’s income $ 37,000

Requirement 3

Original cost of investment in Brazil $ 500,000

Plus: Currawong’s share of Lizard’s income (from

Requirement 2 37,000

Less: Dividends received (80%)x(35,000) = (28,000)

Investment in Lizard account at December 31, 2005 $ 509,000