ACC 401 Week 4 Quiz – Strayer
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Quiz 3 Chapter 4
Chapter 4
Consolidated
Financial Statements after Acquisition
1. An investor adjusts the investment
account for the amortization of any difference between cost and book value
under the
a. cost method.
b. complete equity method.
c. partial equity method.
d. complete and partial equity methods.
2. Under the partial equity method, the
entry to eliminate subsidiary income and dividends includes a debit to
a. Dividend Income.
b. Dividends Declared - S Company.
c. Equity in Subsidiary Income.
d. Retained Earnings - S Company.
3. On the consolidated statement of cash
flows, the parent’s acquisition of additional shares of the subsidiary’s stock
directly from the subsidiary is reported as
a. an investing activity.
b. a financing activity.
c. an operating activity.
d. none of these.
4. Under the cost method, the workpaper
entry to establish reciprocity
a. debits Retained Earnings - S Company.
b. credits Retained Earnings - S Company.
c. debits Retained Earnings - P Company.
d. credits Retained Earnings - P Company.
5. Under the cost method, the investment
account is reduced when
a. there is a liquidating dividend.
b. the subsidiary declares a cash dividend.
c. the subsidiary incurs a net loss.
d. none of these.
6. The parent company records its share of
a subsidiary’s income by
a. crediting Investment in S Company under the
partial equity method.
b. crediting Equity in Subsidiary Income under
both the cost and partial equity methods.
c. debiting Equity in Subsidiary Income under
the cost method.
d. none of these.
7. In years subsequent to the year of
acquisition, an entry to establish reciprocity is made under the
a. complete equity method.
b. cost method.
c. partial equity method.
d. complete and partial equity methods.
8. A parent company received dividends in
excess of the parent company’s share of the subsidiary’s earnings subsequent to
the date of the investment. How will the parent company’s investment account be
affected by those dividends under each of the following accounting methods?
Cost Method Partial Equity Method
a. No effect No
effect
b. Decrease No
effect
c. No effect Decrease
d. Decrease Decrease
9. P Company purchased 80% of the
outstanding common stock of S Company on May 1, 2011, for a cash payment of
$1,272,000. S Company’s December 31, 2010 balance sheet reported common stock
of $800,000 and retained earnings of $540,000. During the calendar year 2011, S
Company earned $840,000 evenly throughout the year and declared a dividend of
$300,000 on November 1. What is the amount needed to establish reciprocity
under the cost method in the preparation of a consolidated workpaper on
December 31, 2012?
a. $208,000
b. $260,000
c. $248,000
d. $432,000
10. P Company purchased 90% of the
outstanding common stock of S Company on January 1, 1997. S Company’s
stockholders’ equity at various dates was:
1/1/97 1/1/11 12/31/11
Common
stock $400,000 $400,000 $400,000
Retained
earnings 120,000 380,000 460,000
Total $520,000 $780,000 $860,000
The workpaper entry to establish
reciprocity under the cost method in the preparation of a consolidated
statements workpaper on December 31, 2011 should include a credit to P
Company’s retained earnings of
a. $80,000.
b. $234,000.
c. $260,000.
d. $306,000.
11. Consolidated net income for a parent
company and its partially owned subsidiary is best defined as the parent
company’s
a. recorded net income.
b. recorded net income plus the subsidiary’s
recorded net income.
c. recorded net income plus the its share of the
subsidiary’s recorded net income.
d. income from independent operations plus
subsidiary’s income resulting from transactions with outside parties.
12. In the preparation of a consolidated
statements workpaper, dividend income recognized by a parent company for
dividends distributed by its subsidiary is
a. included with parent company income from
other sources to constitute consolidated net income.
b. assigned as a component of the noncontrolling
interest.
c. allocated proportionately to consolidated net
income and the noncontrolling interest.
d. eliminated.
13. In the preparation of a consolidated
statement of cash flows using the indirect method of presenting cash flows from
operating activities, the amount of the noncontrolling interest in consolidated
income is
a. combined with the controlling interest in
consolidated net income.
b. deducted from the controlling interest in
consolidated net income.
c. reported as a significant noncash investing
and financing activity in the notes.
d. reported as a component of cash flows from
financing activities.
14. On October 1, 2011, Parr Company acquired
for cash all of the voting common stock of Stein Company. The purchase price of
Stein’s stock equaled the book value and fair value of Stein’s net assets. The
separate net income for each company, excluding Parr’s share of income from
Stein was as follows:
Parr Stein
Twelve
months ended 12/31/11 $4,500,000 $2,700,000
Three
months ended 12/31/11 495,000 450,000
During September, Stein paid $150,000 in
dividends to its stockholders. For the year ended December 31, 2011, Parr
issued parent company only financial statements. These statements are not
considered those of the primary reporting entity. Under the partial equity
method, what is the amount of net income reported in Parr’s income statement?
a. $7,200,000.
b. $4,650,000.
c. $4,950,000.
d. $1,800,000.
15. A parent company uses the partial equity
method to account for an investment in common stock of its subsidiary. A
portion of the dividends received this year were in excess of the parent
company’s share of the subsidiary’s earnings subsequent to the date of the
investment. The amount of dividend income that should be reported in the parent
company’s separate income statement should be
a. zero.
b. the total amount of dividends received this
year.
c. the portion of the dividends received this
year that were in excess of the parent’s share of subsidiary’s earnings
subsequent to the date of investment.
d.
the
portion of the dividends received this year that were NOT in excess of the
parent’s share of subsidiary’s earnings subsequent to the date of investment.
16. Masters, Inc. owns 40% of Fields
Corporation. During the year, Fields had net earnings of $200,000 and paid
dividends of $50,000. Masters used the cost method of accounting. What effect
would this have on the investment account, net earnings, and retained earnings,
respectively?
a. understate,
overstate, overstate.
b. overstate,
understate, understate
c. overstate,
overstate, overstate
d. understate,
understate, understate
Use the following information in
answering questions 17 and 18.
17. Prior Industries acquired a 70 percent interest in Stevenson
Company by purchasing 14,000 of its 20,000 outstanding shares of common stock
at book value of $210,000 on January 1, 2010. Stevenson reported net income in
2010 of $90,000 and in 2011 of $120,000 earned evenly throughout the respective
years. Prior received $24,000 dividends from Stevenson in 2010 and
$36,000 in 2011. Prior uses the equity method to record its investment.
Prior
should record investment income from Stevenson during 2011 of:
a.
$36,000
b.
$120,000
c.
$84,000
d.
$48,000
18. The balance of Prior’s Investment in Stevenson account at
December 31, 2011 is:
a.
$210,000
b.
$285,000
c.
$297,000
d.
$315,000
19. Parkview Company acquired a 90% interest in Sutherland Company
on December 31, 2010, for $320,000. During 2011 Sutherland had a net income of
$22,000 and paid a cash dividend of $7,000. Applying the cost method would give
a debit balance in the Investment in Stock of Sutherland Company account at the
end of 2011 of:
a. $335,000
b. $333,500
c. $313,700
d. $320,000
20. Hall, Inc., owns 40% of the outstanding stock of Gloom
Company. During 2011, Hall received a $4,000 cash dividend from Gloom. What
effect did this dividend have on Hall’s 2011 financial statements?
a.
Increased
total assets.
b.
Decreased
total assets.
c.
Increased
income.
d.
Decreased
investment account.
21. P Company purchased 80% of the
outstanding common stock of S Company on May 1, 2011, for a cash payment of
$318,000. S Company’s December 31, 2010 balance sheet reported common stock of
$200,000 and retained earnings of $180,000. During the calendar year 2011, S
Company earned $210,000 evenly throughout the year and declared a dividend of
$75,000 on November 1. What is the amount needed to establish reciprocity under
the cost method in the preparation of a consolidated workpaper on December 31,
2011?
a. $52,000
b. $65,000
c. $62,000
d. $108,000
22. P Company purchased 90% of the
outstanding common stock of S Company on January 1, 1997. S Company’s stockholders’
equity at various dates was:
1/1/97 1/1/11 12/31/11
Common
stock $200,000 $200,000 $200,000
Retained
earnings 60,000 190,000 230,000
Total $260,000 $390,000 $430,000
The workpaper entry to establish
reciprocity under the cost method in the preparation of a consolidated
statements workpaper on December 31, 2011 should include a credit to P
Company’s retained earnings of
a. $40,000.
b. $117,000.
c. $130,000.
d. $153,000.
Use the following information in
answering questions 23 and 24.
23. Prior Industries acquired an 80 percent interest in Sanderson
Company by purchasing 24,000 of its 30,000 outstanding shares of common stock
at book value of $105,000 on January 1, 2010. Sanderson reported net income in
2010 of $45,000 and in 2011 of $60,000 earned evenly throughout the respective
years. Prior received $12,000 dividends from Sanderson in 2010 and
$18,000 in 2011. Prior uses the equity method to record its investment.
Prior
should record investment income from Sanderson during 2011 of:
a. $18,000.
b. $60,000.
c. $48,000.
d. $33,600.
24. The balance of Prior’s Investment in Sanderson account at
December 31, 2011 is:
a. $105,000.
b. $138,600.
c. $159,000.
d. $165,000.
25. Pendleton Company acquired a 70% interest in Sunflower Company
on December 31, 2010, for $380,000. During 2011 Sunflower had a net income of
$30,000 and paid a cash dividend of $10,000. Applying the cost method would
give a debit balance in the Investment in Stock of Sunflower Company account at
the end of 2011 of:
a. $400,000.
b. $394,000.
c. $373,000.
d. $380,000.
Use the following
information to answer questions 26 and 27
On
January 1, 2011, Rotor Corporation acquired 30 percent of Stator Company's
stock for $150,000. On the acquisition date, Stator reported net assets of
$450,000 valued at historical cost and $500,000 stated at fair value. The
difference was due to the increased value of buildings with a remaining life of
10 years. During 2011 Stator reported net income of $25,000 and paid dividends
of $10,000. Rotor uses the equity method.
26. What will be the balance in the Investment
account as of Dec 31, 2011?
a. $150,000
b. $157,500
c. $154,500
d. $153,000
27. What amount of investment income will be
reported by Rotor for the year 2011?
a. $7,500
b. $6,000
c. $4,500
d. $25,000
28. On January 1, 2011,
Potter Company purchased 25 % of Smith Company’s common stock; no goodwill
resulted from the acquisition. Potter Company appropriately carries the
investment using the equity method of accounting and the balance in Potter’s
investment account was $190,000 on December 31, 2011. Smith reported net income of $120,000 for the
year ended December 31, 2011 and paid dividends on its common stock totaling
$48,000 during 2011. How much did Potter pay for its 25% interest in Smith?
a. $172,000
b.
$202,000
c. $208,000
d.
$232,000
Use
the following information to answer questions 29 and 30.
29. On January 1, 2011, Paterson Company purchased 40% of Stratton
Company’s 30,000 shares of voting common stock for a cash payment of $1,800,000
when 40% of the net book value of Stratton Company was $1,740,000. The payment
in excess of the net book value was attributed to depreciable assets with a
remaining useful life of six years. As a result of this transaction Paterson
has the ability to exercise significant influence over Stratton Company’s
operating and financial policies. Stratton’s net income for the ended December
31, 2011 was $600,000. During 2011, Stratton paid $325,000 in dividends to its
shareholders. The income reported by Paterson for its investment in Stratton
should be:
a. $120,000
b. $130,000
c. $230,000
d. $240,000
30. What is the ending balance in Paterson’s
investment account as of December 31, 2011?
a.
$1,800,000
b.
$1,900,000
c.
$1,910,000
d.
$2,030,000
Problems
4-1 On January 1, 2011, Price Company
purchased an 80% interest in the common stock of Stahl Company for $1,040,000,
which was $60,000 greater than the book value of equity acquired. The
difference between implied and book value relates to the subsidiary’s land.
The following information is from the
consolidated retained earnings section of the consolidated statements workpaper
for the year ended December 31, 2011:
STAHL CONSOLIDATED
COMPANY BALANCES
1/01/11 retained
earnings $300,000 $1,400,000
Net income 220,000 680,000
Dividends
declared
(80,000) (140,000)
12/31/11
retained earnings $440,000 $1,940,000
Stahl’s stockholders’ equity includes
only common stock and retained earnings.
Required:
A. Prepare the workpaper eliminating entries for
a consolidated statements workpaper on December 31, 2011. Price uses the cost
method.
B. Compute the total noncontrolling interest to
be reported on the consolidated balance sheet on December 31, 2011.
4-2 On October 1, 2011, Packer Company
purchased 90% of the common stock of Shipley Company for $290,000. Additional
information for both companies for 2011 follows:
PACKER SHIPLEY
Common stock $300,000 $90,000
Other
contributed capital 120,000 40,000
Retained
Earnings, 1/1 240,000 50,000
Net Income 260,000 160,000
Dividends
declared (10/31) 40,000 8,000
Any difference between implied and book
value relates to Shipley’s land. Packer uses the cost method to record its
investment in Shipley. Shipley Company’s income was earned evenly throughout
the year.
Required:
A. Prepare the workpaper entries that would be
made on a consolidated statements workpaper on December 31, 2011. Use the full
year reporting alternative.
B. Calculate the controlling interest in
consolidated net income for 2011.
4-3 On January 1, 2011, Pierce Company
purchased 80% of the common stock of Stanley Company for $600,000. At that
time, Stanley’s stockholders’ equity consisted of the following:
Common stock $220,000
Other
contributed capital
90,000
Retained
earnings 320,000
During 2011, Stanley distributed a
dividend in the amount of $120,000 and at year-end reported a $320,000 net
income. Any difference between implied and book value relates to subsidiary
goodwill. Pierce Company uses the equity method to record its investment. No
impairment of goodwill is observed in the first year.
Required:
A. Prepare on Pierce Company’s books journal
entries to record the investment related activities for 2011.
B. Prepare the workpaper eliminating entries for
a workpaper on December 31, 2011.
4-4 Pratt Company purchased 80% of the
outstanding common stock of Selby Company on January 2, 2004, for $680,000. The
composition of Selby Company’s stockholders’ equity on January 2, 2004, and
December 31, 2011, was:
1/2/04 12/31/11
Common stock $540,000 $540,000
Other
contributed capital 325,000 325,000
Retained
earnings (deficit) (60,000) 295,000
Total stockholders’ equity $805,000 $1,160,000
During 2011, Selby Company earned
$210,000 net income and declared a $60,000 dividend. Any difference between
implied and book value relates to land. Pratt Company uses the cost method to
record its investment in Selby Company.
Required:
A. Prepare any journal entries that Pratt Company
would make on its books during 2011 to record the effects of its investment in
Selby Company.
B. Prepare, in general journal form, all
workpaper entries needed for the preparation of a consolidated statements
workpaper on December 31, 2011.
4-5 P Company purchased 90% of the common
stock of S Company on January 2, 2011 for $900,000. On that date, S Company’s
stockholders’ equity was as follows:
Common stock,
$20 par value $400,000
Other
contributed capital 100,000
Retained
earnings 450,000
During 2011, S Company earned $200,000
and declared a $100,000 dividend. P Company uses the partial equity method to
record its investment in S Company. The difference between implied and book
value relates to land.
Required:
Prepared, in general journal form, all
eliminating entries for the preparation of a consolidated statements workpaper
on December 31, 2011.
4-6 Pair Company acquired 80% of the
outstanding common stock of Sax Company on January 2, 2010 for $675,000. At
that time, Sax’s total stockholders’ equity amounted to $1,000,000. Sax Company
reported net income and dividends for the last two years as follows:
2010
2011
Reported net
income $45,000 $60,000
Dividends
distributed
35,000 75,000
Required:
Prepare journal entries for Pair Company
for 2010 and 2011 assuming Pair uses:
A. The cost method to record its investment
B. The complete equity method to record its
investment. The difference between implied value and the book value of equity
acquired was attributed solely to a building, with a 20-year expected life.
4-7 Pell
Company purchased 90% of the stock of Silk Company on January 1, 2007, for
$1,860,000, an amount equal to $60,000 in excess of the book value of equity
acquired. All book values were equal to fair values at the time of purchase
(i.e., any excess payment relates to subsidiary goodwill). On the date of
purchase, Silk Company’s retained earnings balance was $200,000. The remainder
of the stockholders’ equity consists of no-par common stock. During 2011, Silk
Company declared dividends in the amount of $40,000, and reported net income of
$160,000. The retained earnings balance of Silk Company on December 31, 2010
was $640,000. Pell Company uses the cost method to record its investment. No impairment of goodwill was recognized
between the date of acquisition and December 31, 2011.
Required:
Prepare in
general journal form the workpaper entries that would be made in the
preparation of a consolidated statements workpaper on December 31, 2011.
4-8 On January 1, 2011, Pitt Company
purchased 85% of the outstanding common stock of Small Company for $525,000. On
that date, Small Company’s stockholders’ equity consisted of common stock,
$150,000; other contributed capital, $60,000; and retained earnings, $210,000.
Pitt Company paid more than the book value of net assets acquired because the
recorded cost of Small Company’s land was significantly less than its fair
value.
During 2011 Small Company earned
$222,000 and declared and paid a $75,000 dividend. Pitt Company used the
partial equity method to record its investment in Small Company.
Required:
A. Prepare the investment related entries on Pitt
Company’s books for 2011.
B. Prepare the workpaper eliminating entries for
a workpaper on December 31, 2011.
4-9
Picture Company
purchased 40% of Stuffy Corporation on January 1, 2011 for $150,000. Stuffy
Corporation’s balance sheet at the time of acquisition was as follows:
|
|
|
|
|
|
Cash
|
$30,000
|
Current Liabilities
|
$40,000
|
|
Accounts Receivable
|
120,000
|
Bonds Payable
|
200,000
|
|
Inventory
|
80,000
|
Common Stock
|
200,000
|
|
Land
|
150,000
|
Additional Paid in Capital
|
40,000
|
|
Buildings & Equipment
|
300,000
|
Retained Earnings
|
80,000
|
|
Less: Acc. Depreciation
|
(120,000)
|
|
|
|
|
|
|
|
|
Total Assets
|
$560,000
|
Total Liabilities and Equities
|
$560,000
|
During 2011,
Stuffy Corporation reported net income of $30,000 and paid dividends of $9,000.
The fair values of Stuffy’s assets and liabilities were equal to their book
values at the date of acquisition, with the exception of Building and
Equipment, which had a fair value of $35,000 above book value. All buildings
and equipment had a remaining useful life of five years at the time of the
acquisition. The amount attributed to goodwill as a result of the acquisition
in not impaired.
Required:
A. What amount
of investment income will Picture record during 2011 under the equity method of
accounting?
B. What amount
of income will Picture record during 2011 under the cost method of accounting?
C. What will be
the balance in the investment account on December 31, 2011 under the cost and
equity method of accounting?
Short Answer
1. There are three levels of influence or control by an
investor over an investee, which determine the appropriate accounting
treatment. Identify and briefly describe the three levels and their accounting
treatment.
2. Two methods are available to account for interim
acquisitions of a subsidiary’s stock at the end of the first year. Describe the
two methods of accounting for interim acquisitions.
Short Answer Questions from the
Textbook
1.
How should nonconsolidated subsidiaries be re-ported
in consolidated financial statements?
2.
How are liquidating dividends treated on the books
of an investor, assuming the investor uses the cost method? Assuming the
investor uses the equity method?
3.
How are dividends declared and paid by a subsidiary
during the year eliminated in the consolidated work papers under each method of
ac-counting for investments?
4.
How is the income reported by the subsidiary
reflected on the books of the investor under each of the methods of accounting
for investments?
5.
Define: Consolidated net income; consolidated
retained earnings.
6.
At the date of an 80% acquisition, a subsidiary had
common stock of $100,000 and retained earnings of $16,250. Seven years later,
at December 31, 2010, the subsidiary’s retained earnings had increased to
$461,430. What adjustment will be made on the consolidated work paper at
December 31, 2011, to recognize the parent’s share of the cumulative
undistributed profits (losses)of its subsidiary? Under which method(s) is this
adjustment needed? Why?
7.
On a consolidated work paper for a parent and its
partially owned subsidiary, the noncontrolling interest column accumulates the
non controlling interests’ share of several account balances. What are these
accounts?
8.
If a parent company elects to use the partial equity
method rather than the cost method to record its investments in subsidiaries,
what effect will this choice have on the consolidated financial statements? If
the parent company elects the complete equity method?
9.
Describe two methods for treating the preacquisition
revenue and expense items of a subsidiary purchased during a fiscal period.
10. A
principal limitation of consolidated financial statements is their lack of
separate financial in-formation about the assets, liabilities, revenues, and
expenses of the individual companies included in the consolidation. Identify
some problems that the reader of consolidated financial statements would
encounter as a result of this limitation.
11. In the
preparation of a consolidated statement of cash flows, what adjustments are
necessary because of the existence of a noncontrolling interest? (AICPA
adapted)
12. What do
potential voting rights refer to, and how do they affect the application of the
equity method for investments under IFRS? Under U.S.GAAP? What is the term
generally used for equity method investments under IFRS?
13B. Is the recognition of a deferred tax asset
or deferred tax liability when allocating the difference between book value and
the value implied by the purchase price affected by whether or not the
affiliates file a consolidated income tax re-turn?
14B. What assumptions must be made about the
realization of undistributed subsidiary income when the affiliates file
separate income tax returns? Why? (Appendix)
15B. The FASB elected to require that deferred
tax effects relating to unrealized intercompany profits be calculated based on
the income tax paid by the selling affiliate rather than on the future tax
benefit to the purchasing affiliate. Describe circumstances where the amounts
calculated under these approaches would be different. (Appendix)
16B. Identify two types of temporary differences
that may arise in the consolidated financial statements when the affiliates
file separate income tax returns.
Business
Ethics Question from the Textbook
On
April 5, 2006, the New York State Attorney sued a New York online advertising
firm for surreptitiously installing spyware advertising programs on consumers’
computers. The Attorney General claimed that con-sumers believed they were
downloading free games or ‘browser’ enhancements. The company claimed that the
spyware was identified as ‘advertising-supported’ and that the software is easy
to remove and doesn’t collect personal data. Is there an ethical issue for the
company? Comment on and justify your position.
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