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 parents acquisition of

additional shares of the subsidiarys 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 subsidiarys 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 companys share

of the subsidiarys earnings subsequent to the date of the investment. How will
the parent companys 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 Companys 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 Companys 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 Companys 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 companys
a. recorded net income.
b. recorded net income plus the subsidiarys recorded net income.
c. recorded net income plus the its share of the subsidiarys recorded net
income.
d. income from independent operations plus subsidiarys 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 Steins stock equaled
the book value and fair value of Steins net assets. The separate net income for
each company, excluding Parrs 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 Parrs 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 companys share of the subsidiarys earnings
subsequent to the date of the investment. The amount of dividend income that
 should be reported in the parent companys 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
parents share of subsidiarys earnings subsequent to the date of
investment.
d. the portion of the dividends received this year that were NOT in excess of
the parents share of subsidiarys 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 Priors 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 Halls 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 Companys 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 Companys 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 Companys 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 Priors 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 Companys
common stock; no goodwill resulted from the acquisition. Potter Company
appropriately carries the investment using the equity method of accounting and
the balance in Potters 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 Companys

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 Companys operating and
financial policies. Strattons 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 Patersons 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 subsidiarys 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

Stahls 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 Shipleys land.
Packer uses the cost method to record its investment in Shipley. Shipley
Companys 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, Stanleys 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 Companys 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
Companys 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 Companys 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, Saxs 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
Companys 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 Companys
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
Companys 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 Companys 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 Corporations balance sheet at the time of acquisition was as
follows:

Cash $30,000 Current Liabilities $40,000

Accounts 120,000 Bonds Payable 200,000
Receivable
Inventory 80,000 Common Stock 200,000
Land 150,000 Additional Paid in 40,000
Capital
Buildings & 300,000 Retained Earnings 80,000
Equipment
Less: Acc. (120,000)
Depreciation

Total Assets $560,000 Total Liabilities and $560,000

Equities

During 2011, Stuffy Corporation reported net income of $30,000 and paid
dividends of $9,000. The fair values of Stuffys 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

subsidiarys 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
subsidiarys retained earnings had increased to $461,430. What adjustment will be
made on the consolidated work paper at December 31, 2011, to recognize the
parents 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 doesnt collect personal data. Is there an ethical issue for the company?
Comment on and justify your position.