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Advanced Accounting, 11e (Beams/Anthony/Bettinghaus/Smith)

Chapter 8 Consolidations - Changes in Ownership Interests

Multiple Choice Questions

1) Which of the following is correct? The direct sale of additional shares of stock at book value per share
to only the parent company from a subsidiary
A) decreases the parent's interest and decreases the noncontrolling shareholders' interest.
B) decreases the parent's interest and increases the noncontrolling shareholders' interest.
C) increases the parent's interest and increases the noncontrolling shareholders' interest.
D) increases the parent's interest and decreases the noncontrolling shareholders' interest.
Answer: D
Objective: LO3
Difficulty: Moderate

Use the following information to answer the question(s) below.

On December 31, 2010, Giant Corporation's Investment in Penguin Corporation account had a balance of
$500,000. The balance consisted of 80% of Penguin's $625,000 stockholders' equity on that date. Giant
owns 80% of Penguin. On January 2, 2011, Penguin increased its outstanding common stock from 15,000
to 18,000 shares.

2) Assume that Penguin sold the additional 3,000 shares directly to Giant for $150,000 on January 2, 2011.
Giant's percentage ownership in Penguin immediately after the purchase of the additional stock is
A) 66-2/3%.
B) 80%.
C) 83-1/3%.
D) 86-2/3%
Answer: C
Explanation: C) (Parent had 80% of 15,000 shares, or 12,000 shares. They now hold 15,000 of 18,000
shares) = 83.33%
Objective: LO3
Difficulty: Moderate

3) Assume that Penguin sold the additional 3,000 shares to outside interests for $150,000 on January 2,
2011. Giant's percentage ownership immediately after the sale of additional stock would be
A) 66-2/3%.
B) 75%.
C) 80%.
D) 83-1/3%.
Answer: A
Explanation: A) (12,000 shares/18,000 shares) = 66.67%
Objective: LO3
Difficulty: Moderate

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Use the following information to answer the question(s) below.

Bird Corporation purchased an 80% interest in Brush Corporation on July 1, 2010 at its book value, and
on January 1, 2011 its Investment in Brush account was $300,000, equal to its book value. Brush's net
income for 2011 was $99,000 (earned uniformly); no dividends were declared. On March 1, 2011, Bird
reduced its interest in Brush by selling a 20% interest, one-fourth of its investment, for $84,000.

4) If Bird uses a "beginning-of-the-year" sale assumption, its gain on sale and income from Brush for 2011
will be
A)
Gain on Sale Income from Brush
$5,700 $59,400

B)
Gain on Sale Income from Brush
$5,700 $62,700

C)
Gain on Sale Income from Brush
$9,000 $59,40

D)
Gain on Sale Income from Brush
$9,000 $62,70

Answer: C
Explanation: C)
Selling price $84,000
Book value of interest sold
$300,000 × (20% / 80%) = 75,000
Gain on sale $9,000

Income from Brush


$99,000 × (80% - 20%) = $59,400
Objective: LO2
Difficulty: Moderate

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5) If Bird uses the "actual-sale-date" sales assumption, its gain on the sale and income from Brush for 2011
will be
A)
Gain on Sale Income from Brush
$5,700 $59,400

B)
Gain on Sale Income from Brush
$5,700 $62,700

C)
Gain on Sale Income from Brush
$21,360 $59,400

D)
Gain on Sale Income from Brush
$21,360 $62,700

Answer: B
Explanation: B)
Selling price $84,000
Book value of interest sold:
Beginning balance $300,000
Income for 2 months
$99,000 x 1/6 × 80% = 13,200
Adjusted book value 313,200
Percentage of interest sold 1/4
Book value applied 78,300 78,300
Gain on sale $5,700

Income from Brush:


Jan 1 - Mar 1 $99,000 × 2/12 × 80% = $13,200
Mar 1 - Dec 31 $99,000 × 10/12 × 60% = 49,500
Income from Brush $62,700
Objective: LO2
Difficulty: Moderate

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6) Jersey Company acquired 90% of York Company on April 1, 2011. Both Jersey Company and York
Company have December 31 fiscal year ends. Under current GAAP, which of the following statements is
false?
A) The consolidated income statement in 2011 should not include York's revenues and expenses prior to
April 1, 2011.
B) When preparing consolidating work papers in 2011, York's revenues prior to April 1, 2011 are
eliminated.
C) York's earnings prior to April 1, 2011 should appear as a deduction on the consolidated income
statement in 2011.
D) The consolidated income statement in 2011 should include York's revenues and expenses after April 1,
2011.
Answer: C
Objective: LO1
Difficulty: Moderate

7) Utah Company holds 80% of the stock of a subsidiary company. The subsidiary issues 100 additional
shares of stock to Utah Company at a price above book value per share. The subsidiary does not issue any
additional shares at the same time. How will Utah Company record the purchase?
A) Utah Company records a gain on sale of stock.
B) Utah Company increases additional paid-in capital.
C) Utah Company decreases additional paid-in capital.
D) Utah Company assigns any excess cost over book value acquired to increase undervalued identifiable
assets or goodwill as appropriate.
Answer: D
Objective: LO3
Difficulty: Moderate

Use the following information to answer the question(s) below.

Goldberg Corporation owned a 70% interest in Savannah Corporation on December 31, 2010, and
Goldberg's Investment in Savannah account had a balance of $3,900,000. Savannah's stockholders' equity
on this date was as follows:

Capital stock, $10 par value $3,000,000


Retained Earnings 2,400,000
Total Stockholders' Equity $5,400,000

On January 1, 2011, Savannah issues 80,000 new shares of common stock to Goldberg for $16 each.

8) What is Goldberg's percentage ownership in Savannah after Savannah issues its stock to Goldberg?
A) 76.32%
B) 80.43%
C) 82.57%
D) 83.43%
Answer: A
Explanation: A) (210,000 + 80,000)/380,000
Objective: LO3
Difficulty: Moderate

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9) On January 1, 2011, assume the fair values of Savannah's identifiable assets and liabilities equal book
values. What is the change in the amount of goodwill associated with the issuance of 80,000 additional
shares to Goldberg? (Use four decimal places.)
A) Increase goodwill $38,176.
B) Decrease goodwill $38,176.
C) Increase goodwill $384,000.
D) Decrease goodwill $384,000.
Answer: B
Explanation: B)
Savannah's equity after the issuance of
the new shares ($5,400,000 + $1,280,000) $6,680,000
Goldberg's ownership percentage 76.32%
Goldberg's share of Savannah's equity now $5,098,176
Goldberg's previous share of Savannah's equity ($5,400,000 × 70%) 3,780,000
Savannah's equity acquired in the purchase $1,318,176
Amount spent to acquire stock 1,280,000
Excess book value acquired over cost $ 38,176
Objective: LO3
Difficulty: Difficult

Use the following information to answer the question(s) below.

Great Corporation acquired a 90% interest in SOS Corporation at its $810,000 book value on December 31,
2010. A summary of the stockholders' equity for SOS at the end of 2010 and 2011 is as follows:

12/31/10 12/31/11
Capital stock, $10 par $600,000 $600,000
Additional paid-in capital 30,000 30,000
Retained Earnings 270,000 420,000
Total stockholders' equity $900,000 $1,050,000

On January 1, 2012, SOS sold 10,000 new shares of its $10 par value common stock for $45 per share.

10) If SOS sold the additional shares to the general public, Great's Investment in SOS account after the sale
would be ________. (Use four decimal places.)
A) $945,000
B) $1,157,100
C) $1,225,000
D) $1,245,000
Answer: B
Explanation: B)
SOS's stockholders' equity prior to the stock issuance $1,050,000
Plus: Capital received from new stock issued 450,000
New stockholders' equity $1,500,000
Great's ownership (54,000/(60,000 + 10,000)) 77.14%
Great's adjusted investment in SOS $1,157,100
Objective: LO3
Difficulty: Moderate

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11) If SOS sold the additional shares directly to Great, Great's Investment in SOS account after the sale
would be
A) $1,350,000.
B) $1,395,000.
C) $1,425,000.
D) $1,500,000.
Answer: B
Explanation: B)
Investment balance at 12/31/2011
($1,050,000 × 90%) $945,000
Additional investment (10,000 shares × $45) 450,000
Investment account balance, 12/31/2011 $1,395,000
Objective: LO3
Difficulty: Moderate

12) Consider a sale of stock by a subsidiary to parties outside the consolidated entity. This transaction
requires an adjustment of the parent's investment and additional paid-in capital accounts except when
A) the shares are sold below book value per share.
B) the shares are sold above book value per share.
C) the shares are sold at book value per share.
D) All of the above are correct.
Answer: C
Objective: LO3
Difficulty: Moderate

13) If a parent company and outside investors purchase shares of a subsidiary in relation to existing stock
ownership (ratably), then
A) there will be an adjustment to additional paid-in capital if the stock is sold above book value.
B) there will be no adjustment to additional paid-in capital regardless whether the stock is sold above or
below book value.
C) there will be an adjustment to additional paid-in capital if the stock is sold below book value.
D) there will be the elimination of a gain.
Answer: B
Objective: LO3
Difficulty: Easy

14) A subsidiary split its stock 2 for 1. Which of the following statements is false?
A) A stock split does not affect the amount of net assets of the subsidiary.
B) A stock split does not affect parent and noncontrolling interest ownership percentages.
C) A stock split does not affect consolidation procedures.
D) A 2 for 1 stock split decreases the number of shares outstanding.
Answer: D
Objective: LO3
Difficulty: Moderate

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Use the following information to answer the question(s) below.

Bower Corporation purchased a 70% interest in Stage Corporation on June 1, 2010 at a purchase price of
$350,000. On June 1, 2010, the book values of Stage's assets and liabilities were equal to fair values. On
June 1, 2010, Stage's stockholders' equity consisted of $290,000 of Common Stock and $210,000 of
Retained Earnings. All cost-book differentials were attributed to goodwill.

During 2010, Stage earned $120,000 of net income, earned uniformly throughout the year and paid $6,000
of dividends on March 1 and another $6,000 on September 1.

15) Noncontrolling interest share for 2010 is


A) $21,000.
B) $32,400.
C) $36,000.
D) $50,000.
Answer: A
Explanation: A) ($120,000 × 7/12 × 30%)
Objective: LO2
Difficulty: Moderate

16) Preacquisition income for 2010 is


A) $50,000.
B) $35,000.
C) $44,000.
D) $36,000.
Answer: A
Explanation: A) ($120,000 × 5/12)
Objective: LO2
Difficulty: Moderate

17) Anthony Company declared and paid $20,000 of dividends during 2011. The schedule of dividends
follows:

Date Dividend Declared & Paid Amount Paid


March 31, 2011 $5,000
June 30, 2011 $5,000
September 30, 2011 $5,000
December 31, 2011 $5,000

Anthony Company was acquired on June 1, 2011 by Google Company. Google acquired 100 percent of
Anthony Company. Both companies have a December 31 fiscal year end. What is the amount of
preacquisition dividends in 2011?
A) 0
B) $5,000
C) $10,000
D) $15,000
Answer: B
Objective: LO1
Difficulty: Moderate

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18) On April 1, 2011, Paramount Company acquires 100% of the outstanding stock of Yester Company on
the open market. Paramount and Yester have December 31 fiscal year ends. Under GAAP, a consolidated
income statement for the year ending December 31, 2011, will include
A) 100 percent of the revenues and expenses in 2011 of Yester Company after January 1, 2011.
B) no revenues and expenses in 2011 of Yester Company.
C) 80 percent of the revenues and expenses in 2011 of Yester Company.
D) 100 percent of the revenues and expenses in 2011 of Yester Company after April 1, 2011.
Answer: D
Objective: LO1
Difficulty: Moderate

19) The acquisition of treasury stock by a subsidiary from noncontrolling shareholders at a price above
book value
A) decreases the parent's share of subsidiary book value and decreases the parent's ownership
percentage.
B) decreases the parent's share of subsidiary book value and increases the parent's ownership percentage.
C) increases the parent's share of subsidiary book value and decreases the parent's ownership
percentage.
D) increases the parent's share of subsidiary book value and increases the parent's ownership percentage.
Answer: B
Objective: LO3
Difficulty: Moderate

20) A 15% stock dividend by a subsidiary causes


A) the parent company investment account to decrease.
B) the parent company investment account to remain the same.
C) the parent company investment account to increase.
D) the noncontrolling interest equity to increase.
Answer: B
Objective: LO3
Difficulty: Moderate

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Exercises

1) At December 31, 2010, the stockholders' equity of Gost Corporation and its 80%-owned subsidiary,
Tree Corporation, are as follows:

Gost Tree
Common stock, $10 par value $20,000 $12,000
Retained earnings 8,000 6,000
Totals $28,000 $18,000

Gost's Investment in Tree is equal to 80 percent of Tree's book value. Tree Corporation issued 225
additional shares of common stock directly to Gost on January 1, 2011 at $18 per share.

Required:
1. Compute the balance in Gost's Investment in Tree account on January 1, 2011 after the new investment is
recorded.

2. Determine the increase or decrease in goodwill from Gost's new investment in the 225 Tree shares. Use
four decimal places for the ownership percentage. Assume the fair values of Tree's assets and liabilities
are equal to book values.
Answer:
Requirement 1
Cost of investment ($18,000 × 80%) $14,400
Plus: Purchase of 225 Tree shares at $18 on January 1, 2011 4,050
Investment account balance $18,450

Requirement 2
Tree's stockholders' equity at January 1, 2011 $18,000
Plus: Additional capital from the shares issued 4,050
Total stockholders' equity after issuance of the new shares $22,050
Gost's percentage
(960 + 225)/1425 = 0.8316
Gost's share of Tree's equity after issuance $18,337
Gost's share of Tree's equity before stock issuance 14,400
Equity acquired in the purchase 3,937
Cost of interest acquired 4,050
Increase goodwill $ 113
Objective: LO3
Difficulty: Moderate

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2) At December 31, 2010, the stockholders' equity of Godwin Corporation and its 80%-owned subsidiary,
Goldberg Corporation, are as follows:

Godwin Goldberg
Common stock, $10 par value $20,000 $12,000
Retained earnings 8,000 6,000
Totals $28,000 $18,000

Godwin's Investment in Goldberg is equal to 80 percent of Goldberg's book value. Goldberg Corporation
issued 225 additional shares of common stock directly to Godwin on January 1, 2011 at $28 per share.

Required:
1. Compute the balance in Godwin's Investment in Goldberg account on January 1, 2011 after the new
investment is recorded.

2. Determine the increase or decrease in goodwill from Godwin's new investment in the 225 Goldberg
shares. Use four decimal places for the ownership percentage. Assume the fair value and book value of
Goldberg's assets and liabilities are equal.
Answer:
Requirement 1
Cost of investment ($18,000 × 80%) $14,400
Plus: Purchase of 225 Goldberg shares at $28 on January 1, 2011 6,300
Investment account balance $20,700

Requirement 2
Goldberg's stockholders' equity at January 1, 2011 $18,000
Plus: Additional capital from the shares issued 6,300
Total stockholders' equity after issuance of the new shares $24,300
Godwin's percentage
(960 + 225)/1425 = 0.8316
Godwin's share of Goldberg's equity after issuance $20,208
Godwin's share of Goldberg's equity before stock issuance 14,400
Equity acquired in the purchase 5,808
Cost of interest acquired 6,300
Increase in goodwill $ 492
Objective: LO3
Difficulty: Moderate

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3) At December 31, 2010, the stockholders' equity of Pearson Corporation and its 80%-owned subsidiary,
Trompeter Corporation, are as follows:

Pearson Trompeter
Common stock, $10 par value $20,000 $12,000
Retained earnings 8,000 6,000
Totals $28,000 $18,000

Pearson's Investment in Trompeter is equal to 80 percent of Trompeter's book value. Trompeter


Corporation issued 400 additional shares of common stock directly to Pearson on January 1, 2011 at $10
per share.

Required:
1. Compute the balance in Pearson's Investment in Trompeter account on January 1, 2011 after the new
investment is recorded.

2. Determine the increase or decrease in goodwill from Pearson's new investment in the 400 Trompeter
shares. Use four decimal places for the ownership percentage. Assume the fair value and book value of
Trompeter's assets and liabilities are equal.
Answer:
Requirement 1
Cost of investment ($18,000 × 80%) $14,400
Plus: Purchase of 400 Trompeter shares at $10 on January 1, 2011 4,000
Investment account balance $18,400

Requirement 2
Trompeter's stockholders' equity at January 1, 2011 $18,000
Plus: Additional capital from the shares issued 4,000
Total stockholders' equity after issuance of the new shares $22,000
Pearson's percentage
(960 + 400)/1600 = 0.85
Pearson's share of Trompeter's equity after issuance $18,700
Pearson's share of Trompeter's equity before stock issuance 14,400
Equity acquired in the purchase 4,300
Cost of interest acquired 4,000
Reduce goodwill or identifiable assets (Since no goodwill is
associated with the investment, should reduce overvalued
identifiable assets.) $ 300
Objective: LO3
Difficulty: Moderate

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4) On January 1, 2010, Starling Corporation held an 80% interest in Twig Corporation and the investment
account balance was $900,000. On January 1, 2010, Twig's total stockholders' equity was $1,125,000.

During 2010, Twig uniformly earned $234,000 and paid dividends of $37,500 on April 1 and again on
October 1. On August 1, 2010, Starling sold 30% of its investment in Twig for $262,500, thereby reducing
its interest in Twig to 56%.

Required: Compute the following using the actual sales date assumption:
1. Gain or loss on sale.

2. Income from Twig for 2010.

3. Noncontrolling interest share for 2010.


Answer:
Preliminary computations
Investment balance, January 1 $900,000
Income from Twig ($234,000 x 7/12 × 80%) 109,200
Less: April 1 dividends ($37,500 × 80%) (30,000)
Book value at July 31, 2010 $979,200

Requirement 1
Proceeds from sale $262,500
Book value of interest sold
($979,200 × 30%) 293,760
Loss on sale $ (31,260)

Requirement 2
Income from Twig from Jan 1 through July 31
(from above) $109,200
Income from August 1 - December 31
($234,000 × 5/12 × 56%) 54,600
Income from Twig for 2010 $ 163,800

Requirement 3
Noncontrolling interest share:
Jan 1 to Jul 31 ($234,000 × 7/12 × 20%) $27,300
Aug 1 to Dec 31 ($234,000 × 5/12 × 44%) 42,900
Noncontrolling interest share $ 70,200
Objective: LO2
Difficulty: Moderate

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5) On January 1, 2011, Fly Corporation held a 60% interest in Liptin Corporation. The investment account
balance was $2,100,000, consisting of 60% of Liptin's $3,500,000 of net assets.

During 2011, Liptin earned $300,000 uniformly and paid dividends of $110,000 on November 1. On
October 1, 2011, Fly sold 10% of its investment in Liptin for $364,000, thereby reducing its interest in
Liptin to 54%.

Required: Compute the following using the actual sales date assumption:

1. Gain or loss on sale.

2. Income from Liptin for 2011.

3. Noncontrolling interest share for 2011.


Answer:
Preliminary computations
Investment balance, January 1 $2,100,000
Income from Liptin ($300,000 × 9/12 × 60%) 135,000
Book value at September 30, 2011 $2,235,000

Requirement 1
Proceeds from sale $364,000
Book value of interest sold
($2,235,000 × 10%) 223,500
Gain on sale $140,500

Requirement 2
Income from Liptin from Jan 1
through September 30 (from above) $135,000
Income from October 1-December 31
($300,000 × 3/12 × 54%) 40,500
Income from Liptin for 2011 $175,500

Requirement 3
Noncontrolling interest share:
Jan 1 to Sep 30 ($300,000 × 9/12 × 40%) $90,000
Oct 1 to Dec 31 ($300,000 × 3/12 × 46%) 34,500
Noncontrolling interest share $124,500
Objective: LO2
Difficulty: Moderate

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6) At December 31, 2012 year-end, Lapwing Corporation's investment in Ground Inc. was $200,000
consisting of 80% of Ground's $250,000 stockholders' equity on that date. On April 1, 2013, Lapwing sold
20% interest (one-fourth of its holdings) in Ground for $65,000. During 2013, Ground had net income of
$75,000(earned uniformly) and on July 1, 2013, Ground paid dividends of $40,000. Lapwing uses the
equity method to account for the investment.

Required:
1. What is the gain or loss on sale of the 20% interest?
2. Record the journal entries for Lapwing for the year ending December 31, 2013. Use the actual-sale-date
assumption.
Answer:
Requirement 1
Selling price $65,000
Book value of interest sold:
Beginning balance $200,000
Income for 3 months
$75,000 × 1/4 × 80% = 15,000
Adjusted book value 215,000
Percentage of interest sold 25%
Book value applied 53,750 53,750
Gain on sale $11,250

Requirement 2 Debit Credit


April 1
Investment in Ground 15,000
Income from Ground 15,000

Cash 65,000
Investment in Ground 53,750
Gain from sale of investment in Ground 11,250
July 1
Cash ($40,000 × 60%) 24,000
Investment in Ground 24,000

December 31
Investment in Ground 33,750
Income from Ground 33,750
($75,000 × 60% × 9/12)
Objective: LO2
Difficulty: Moderate

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7) At December 31, 2012 year-end, Arnold Corporation's investment in Oakes Inc. was $200,000 consisting
of 80% of Oakes's $250,000 stockholders' equity on that date. On April 1, 2013, Arnold sold 20% interest
(one-fourth of its holdings) in Oakes for $65,000. During 2013, Oakes had net income of $75,000 (earned
uniformly) and on July 1, 2013, Oakes paid dividends of $40,000. Arnold uses the equity method to
account for the investment.

Required:
1. What is the gain or loss on sale of the 20% interest?
2. Record the journal entries for Arnold for the year ending December 31, 2013. Use the beginning-of-the-
year-sale-date assumption.
Answer:
Requirement 1
Selling price $65,000
Book value of interest sold:
Beginning balance $200,000
Percentage of interest sold 25%
Book value applied 50,000 50,000
Gain on sale $15,000

Requirement 2 Debit Credit


April 1
Cash 65,000
Investment in Oakes 50,000
Gain from sale of investment in Oakes 15,000

July 1
Cash ($40,000 × 60%) 24,000
Investment in Oakes 24,000

December 31
Investment in Oakes 45,000
Income from Oakes 45,000
($75,000 × 60%)
Objective: LO2
Difficulty: Moderate

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8) Candy Corporation paid $240,000 on April 1, 2011 for all of the common stock of Bun Corporation in a
business acquisition. On January 1, 2011, Bun's stockholders' equity was equal to $195,000. Bun's first
quarter 2011 net income was $10,000 and first quarter 2011 dividends were $5,000. In 2011, preacquisition
sales were $32,500 and preacquisition cost of sales was $22,500. (There were no other preacquisition
expenses in 2011.) Dividends are paid quarterly on March 31, June 30, September 30 and December 31.
Any excess cost over book value acquired is allocated to goodwill.

Additional information:

1. Candy sold equipment with a 5-year remaining useful life to Bun on July 1, 2011 for a gain of $10,000.
Salvage value of the equipment is zero and both companies use the straight-line depreciation method.

2. Bun's accounts payable balance at December 31 includes $5,000 due to Candy from the sale of
equipment.

3. Candy accounts for its investment in Bun using the equity method.

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Required:
Complete the working papers to consolidate the financial statements of Candy and Bun Corporations for
the year ending December 31, 2011.

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Answer:

Objective: LO1, 2
Difficulty: Difficult

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9) Olson Corporation paid $62,000 to acquire 100% of Towing Corporation's outstanding voting common
stock at book value on May 1, 2011. The stockholders' equity of Towing on January 1, 2011 consisted of
$40,000 Capital Stock and $20,000 Retained Earnings. Towing's total dividends for 2011 were $6,000, paid
equally on April 1 and October 1. Towing's net income was earned uniformly throughout 2011. In 2011,
preacquisition sales were $10,000 and preacquisition expenses were cost of sales for $5,000. (There were
no other preacquisition expenses in 2011.)

During 2011, Olson made sales of $10,000 to Towing at a gross profit of $3,000. One-half of this
merchandise was inventoried by Towing at year-end, and one-half of the 2011 intercompany sales were
unpaid at year-end 2011.

Olson sold equipment with a ten-year remaining useful life to Towing at a $2,000 gain on December 31,
2011. The straight-line depreciation method is used by both companies. The equipment has no salvage
value.

Financial statements of Olson and Towing Corporations for 2011 appear in the first two columns of the
partially completed consolidation working papers.

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Required:
Complete the consolidating working papers for Olson Corporation and Subsidiary for the year ending
December 31, 2011.

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Answer:

Objective: LO1, 2
Difficulty: Difficult

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10) Justice Corporation paid $40,000 cash for an 80% interest in the voting common stock of Grace
Corporation on July 1, 2012, when Grace's stockholders' equity consisted of $30,000 of $10 par common
stock and $15,000 retained earnings. The excess cost over the book value of the investment was assigned
$2,000 to undervalued inventory items that were sold in 2012, with the remaining excess being assigned
to goodwill. During the last half of 2012, Grace reported $4,000 net income and declared dividends of
$2,000, and Justice reported income from Grace of $1,200.

There were no intercompany sales during the last half of 2012, but during 2013 Justice sold inventory
items that cost $8,000 to Grace for $12,000. Half of these inventory items were included in Grace
Corporation's Inventory at December 31, 2013, with $1,000 unpaid by Grace at December 31, 2013.

On January 5, 2013, Justice sold a plant asset with a book value of $2,500 and a remaining useful life of 5
years to Grace for $4,000. Grace Corporation owned the plant asset at year-end. The plant asset has no
salvage value and both companies use the straight-line depreciation method.

Justice Corporation uses the equity method to account for its investment in Grace, and the changes in
Justice's Investment in Grace account from acquisition until year-end 2013 are as follows:

Investment in Grace, July 1, 2012 $40,000


Income from Grace July 1 - December 31, 2012 1,200
Less: Share of dividends received (1,600)
Investment in Grace at December 31, 2012 39,600
Add: Income from Grace for 2013 4,800
Less: Dividends received (3,200)
Investment in Grace at December 31, 2013 $41,200

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Required:
Complete the working papers for the year ending December 31, 2013 that are given below.

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Answer: Preliminary Calculations:
Implied fair value of Grace, July 1, 2012 $40,000/0.8 = $50,000
Total stockholders' equity of Grace, July 1, 2012 45,000
Excess fair value over book value $5,000

Excess fair value over book value allocated:


Inventory $2,000
Goodwill 3,000
Excess fair value over book value $5,000

Objective: LO1, 2
Difficulty: Difficult

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11) On September 1, 2011, Beck Corporation acquired an 80% interest in Johnsen Corporation for
$700,000. Johnsen's stockholders' equity at January 1, 2011 consisted of $200,000 of Common Stock and
$600,000 of Retained Earnings. The book values of its assets and liabilities were equal to their respective
fair values on this date. All excess purchase cost was attributed to goodwill.
During 2011, Johnsen uniformly earned $78,000 and paid dividends of $9,000 on each of four dates:
February 1, June 1, August 1, and December 1.

Required: Compute the following:


1. Implied goodwill associated with Johnsen Corporation based on Beck's purchase price on September 1,
2011.

2. Beck's income from Johnsen for 2011.

3. Preacquisition income for Beck Corporation and Subsidiary for 2011.

4. Noncontrolling interest share for 2011.

5. What is the balance in Beck's Investment in Johnsen account at December 31, 2011?
Answer:
Requirement 1
Cost of investment $700,000
Total stockholders' equity, Jan. 1 $800,000
Add: Net income($78,000 × 8/12) 52,000
Less: Dividends($9,000 × 3) (27,000)
Total stockholders' equity, Sep. 1 $825,000

Implied fair value of investment:


$700,000/0.8 $875,000
Total stockholders' equity, Sep. 1 825,000
Implied goodwill $50,000

Requirement 2
Income from Johnsen
($78,000 x 1/3 × 80%) $20,800

Requirement 3
Preacquisition income
($78,000 × 8/12) $52,000

Requirement 4
Noncontrolling interest share
($78,000 × 20% × 4/12) $5,200

Requirement 5
Investment at December 31, 2011:
$700,000 + $20,800 - $9,000 (80%) $713,600
Objective: LO1, 2
Difficulty: Moderate

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12) On September 1, 2011, Nelson Corporation acquired a 90% interest in Corbin Corporation for
$900,000. Corbin's stockholders' equity at January 1, 2011 consisted of $200,000 of Common Stock and
$600,000 of Retained Earnings. The book values of its assets and liabilities were equal to their respective
fair values on this date. All excess purchase cost was attributed to goodwill.

During 2011, Corbin uniformly earned $98,000 and paid dividends of $19,000 on each of four dates:
February 1, June 1, August 1, and December 1.

Required: Compute the following:


1. Implied goodwill associated with Corbin Corporation based on Nelson's purchase price on September
1, 2011.
2. Nelson's income from Corbin for 2011.
3. Preacquisition income for Nelson Corporation and Subsidiary for 2011.
4. Noncontrolling interest share for 2011.
5. What is the balance in Nelson's Investment in Corbin account at December 31, 2011?
Answer:
Requirement 1
Cost of investment $900,000
Total stockholders' equity, Jan. 1 $800,000
Add: Net income($98,000 × 8/12) 65,333
Less: Dividends($19,000 × 3) (57,000)
Total stockholders' equity, Sep. 1 808,333

Implied fair value of investment:


$900,000/0.9 1,000,000
Total stockholders' equity, Sep. 1 808,333
Implied goodwill 191,667

Requirement 2
Income from Corbin
($98,000 × 4/12 × 90%) $29,400

Requirement 3
Preacquisition income
($98,000 × 8/12) $65,333

Requirement 4
Noncontrolling interest share
($98,000 × 10% × 4/12) $3,267

Requirement 5
Investment at December 31, 2011:
$900,000 + $29,400 - ($19,000 × 90%) $912,300
Objective: LO1, 2
Difficulty: Moderate

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13) At January 1, 2010, the stockholders' equity of Raven Corporation and its 60%-owned subsidiary,
Trunk Corporation, are as follows:

Raven Trunk
Common stock, $10 par value $700,000 $400,000
Retained earnings 800,000 50,000
Totals $1,500,000 $450,000

Trunk's net income for 2010 was $40,000. No dividends were declared or paid in 2010. Raven's Investment
in Trunk account balance on December 31, 2010 was equal to its underlying equity on December 31, 2010.
Trunk Corporation issued 10,000 additional shares of common stock directly to Raven on January 1, 2011
at $22 per share.

Required:
1. Compute the balance in Raven's Investment in Trunk account on January 1, 2011 after its purchase of the
additional Trunk shares.

2. Determine the increase or decrease in goodwill stemming from Raven's investment in the 10,000 Trunk
shares. Assume the fair value and book value of Trunk's assets and liabilities are equal.
Answer:
Requirement 1
Cost of investment ($450,000 × 60%) $270,000
Share of Trunk's income for 2010
($40,000 × 60%) 24,000
Investment in Trunk balance at December 31, 2010 294,000
Plus: Purchase of 10,000 Trunk shares at $22 on January 1, 2011 220,000
Investment account balance $514,000

Requirement 2
Trunk's stockholders' equity at January 1, 2011
($450,000 + $40,000 of 2010 net income) $490,000
Plus: Additional capital from the shares issued 220,000
Total stockholders' equity after issuance of the new shares $710,000
Raven's percentage
(24,000 + 10,000)/50,000 = 68%
Raven's share of Trunk's equity after issuance $482,800
Raven's share of Trunk's equity before stock issuance 294,000
Equity acquired in the purchase 188,800
Cost of interest acquired 220,000
Increase in Goodwill $31,200
Objective: LO3
Difficulty: Moderate

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14) On December 31, 2011, Pat Corporation has the following information available:

Common stock, $10 par $100,000


Additional paid-in capital 60,000
Retained earnings 40,000
Total stockholders' equity $200,000

On December 31, 2011, Anne Corporation buys an 80% interest in Pat Corporation for $160,000. On
December 31, 2011, the fair value of Pat's assets and liabilities are equal to the respective book values. Use
four decimal places for the ownership percentage.

Required:
1. On January 1, 2012, Pat Corporation sells 2,000 additional shares of common stock to noncontrolling
stockholders at $20 per share. Prepare the journal entry for Anne Corporation on January 1, 2012.

2. On January 1, 2012, Pat Corporation sells 2,000 additional shares of common stock to noncontrolling
stockholders at $35 per share. Prepare the journal entry for Anne Corporation on January 1, 2012.

3. On January 1, 2012, Pat Corporation sells 2,000 additional shares of common stock to noncontrolling
stockholders at $15 per share. Prepare the journal entry for Anne Corporation on January 1, 2012.
Answer:
Requirement 1
No entry is needed.

Requirement 2
Total stockholders' equity at January 1, 2012:
$200,000 + $35(2,000) = $270,000
Anne's percent ownership:
8,000/12,000 = 0.6667
Anne's share of stockholders' equity at January 1, 2012:
0.6667 × $270,000 = $180,009
Anne's prior share of stockholders' equity at January 1, 2012 (Before additional sale):
$200,000 × 80% = $160,000
Increase in ownership: $180,009 - $160,000 = $20,009
---------------------------------------
Investment 20,009
Additional paid-in capital 20,009
---------------------------------------

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Requirement 3
Total stockholders' equity at January 1, 2012:
$200,000 + $15(2,000) = $230,000
Anne's percent ownership:
8,000/12,000 = 0.6667
Anne's share of stockholders' equity at January 1, 2012:
0.6667 × $230,000 = $153,341
Anne's prior share of stockholders' equity at January 1, 2012 (Before additional sale):
$200,000 × 80% = $160,000
Decrease in ownership: $160,000-$153,341 = $6,659
----------------------------------------
Additional paid-in capital 6,659
Investment 6,659
----------------------------------------
Objective: LO3
Difficulty: Moderate

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15) On December 31, 2011, Dixie Corporation has the following information available:

Common stock, $10 par $200,000


Additional paid-in capital 60,000
Retained earnings 40,000
Total stockholders' equity $300,000

On December 31, 2011, Grimsled Corporation buys an 80% interest in Dixie Corporation for $240,000. On
December 31, 2011, the fair value of Dixie's assets and liabilities are equal to the respective book values.

Required:
1. On January 1, 2012, Dixie Corporation sells 5,000 additional shares of common stock to noncontrolling
stockholders at $20 per share. Prepare the journal entry for Grimsled Corporation on January 1, 2012.

2. On January 1, 2012, Dixie Corporation sells 5,000 additional shares of common stock to noncontrolling
stockholders at $35 per share. Prepare the journal entry for Grimsled Corporation on January 1, 2012.

3. On January 1, 2012, Dixie Corporation sells 5,000 additional shares of common stock to noncontrolling
stockholders at $10 per share. Prepare the journal entry for Grimsled Corporation on January 1, 2012.
Answer:
Requirement 1
Total stockholders' equity at January 1, 2012:
$300,000 + $20(5,000) = $400,000
Anne's percent ownership:
= 0.64
Anne's share of stockholders' equity at January 1, 2012:
0.64 × $400,000 = $256,000
Anne's prior share of stockholders' equity at January 1, 2012 (Before additional sale):
$300,000 × 80% = $240,000
Increase in ownership: $256,000 - $240,000 = $16,000
---------------------------------------
Investment 16,000
Additional paid-in capital 16,000
----------------------------------------

Requirement 2
Total stockholders' equity at January 1, 2012:
$300,000 + $35(5,000) = $475,000
Anne's percent ownership:
0.64
Anne's share of stockholders' equity at January 1, 2012:
0.64 × $475,000 = $304,000
Anne's prior share of stockholders' equity at January 1, 2012 (Before additional sale):
$300,000 × 80% = $240,000
Increase in ownership: $304,000 - $240,000 = $64,000
---------------------------------------
Investment 64,000
Additional paid-in capital 64,000
---------------------------------------
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Requirement 3
Total stockholders' equity at January 1, 2012:
$300,000 + $10(5,000) = $350,000
Anne's percent ownership:
0.64
Anne's share of stockholders' equity at January 1, 2012:
0.64 × $350,000 = $224,000
Anne's prior share of stockholders' equity at January 1, 2012 (Before additional sale):
$300,000 × 80% = $240,000
Decrease in ownership: $240,000 - $224,000 = $16,000
----------------------------------------
Additional paid-in capital 16,000
Investment 16,000
----------------------------------------
Objective: LO3
Difficulty: Moderate

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16) On December 31, 2011, Lorna Corporation has the following information available:

Common stock, $10 par $200,000


Additional paid-in capital 60,000
Retained earnings 40,000
Total stockholders' equity $300,000

On December 31, 2011, Gerald Corporation buys an 80% interest in Lorna Corporation for $240,000. On
December 31, 2011, the fair value of Lorna's assets and liabilities are equal to the respective book values.

Required:
1. On January 1, 2012, Lorna Corporation buys 500 shares of common stock from noncontrolling
stockholders at $20 per share. Prepare the journal entry for Gerald Corporation on January 1, 2012. Use
four decimal places for the ownership percentage.

2. On January 1, 2012, Lorna Corporation buys 500 shares of common stock from noncontrolling
stockholders at $30 per share. Prepare the journal entry for Gerald Corporation on January 1, 2012. Use
four decimal places for the ownership percentage.

3. On January 1, 2012, Lorna Corporation buys 500 shares of common stock from noncontrolling
stockholders at $10 per share. Prepare the journal entry for Gerald Corporation on January 1, 2012. Use
four decimal places for the ownership percentage.
Answer:
Requirement 1
Total stockholders' equity at January 1, 2012 $300,000
Less: Treasury stock ($20 × 500) (10,000)
Total stockholders' equity at January 1, 2012 $290,000

Gerald's percent ownership:


16,000/19,500 = 0.8205
Gerald's share of stockholders' equity at January 1, 2012:
0.8205 × $290,000 = $237,945
Gerald's prior share of stockholders' equity at January 1, 2012(Before treasury stock):
$300,000 × 80% = $240,000
Decrease in ownership: $240,000 - $237,945 = $2,055
-------------------------------------------
Additional paid-in capital 2,055
Investment in Lorna Corp. 2,055

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Requirement 2
Total stockholders' equity at January 1, 2012 $300,000
Less: Treasury stock ($30 × 500) (15,000)
Total stockholders' equity at January 1, 2012 $285,000

Gerald's percent ownership:


16,000/19,500 = 0.8205
Gerald's share of stockholders' equity at January 1, 2012:
0.8205 × $285,000 = $233,842.50
Gerald's prior share of stockholders' equity at January 1, 2012 (Before treasury stock):
$300,000 × 80% = $240,000
Decrease in ownership: $240,000 - $233,842.50 = $6,157.50
----------------------------------------------
Additional paid-in capital 6,157.50
Investment in Lorna Corp. 6,157.50
----------------------------------------------

Requirement 3
Total stockholders' equity at January 1, 2012 $300,000
Less: Treasury stock ($10 × 500) (5,000)
Total stockholders' equity at January 1, 2012 $295,000

Gerald's percent ownership:


16,000/19,500 = 0.8205
Gerald's share of stockholders' equity at January 1, 2012:
0.8205 × $295,000 = $242,047.50
Gerald's prior share of stockholders' equity at January 1, 2012 (Before treasury stock):
$300,000 × 80% = $240,000
Increase in ownership: $242,047.50 - $240,000 = $2,047.50
-----------------------------------------------
Investment in Lorna Corp. 2,047.50
Additional paid-in capital 2,047.50
-----------------------------------------------
Objective: LO3
Difficulty: Moderate

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17) On December 31, 2011, Maria Corporation has the following stockholders' equity:

Common stock, $10 par $100,000


Additional paid-in capital 20,000
Retained earnings 80,000
Total stockholders' equity $200,000

On January 1, 2012, Maria Corporation declared and issued a 10% stock dividend when the market price
per share was $50.

On January 2, 2012, James Corporation purchased an 80% interest in Maria Corporation for $160,000 from
the open market. On January 2, 2012, the fair value of Maria's individual assets and liabilities was equal
to book value.

Required:
1. Prepare the journal entry(ies) for Maria Corporation on January 1, 2012.

2. Prepare the journal entry(ies) for James Corporation on January 2, 2012.

3. Prepare the elimination entry(ies) for consolidating work papers on January 2, 2012.

4. Prepare the elimination entry(ies) for consolidating work papers on January 2, 2012 if the 10% stock
dividend is not declared and issued on January 1, 2012.
Answer:
Requirement 1
Retained earnings(10,000 × $50 × 10%) 50,000
Common stock(10,000 × $10 × 10% 10,000
Additional paid-in capital 40,000

Requirement 2
Investment 160,000
Cash 160,000

Requirement 3
Common stock 110,000
Additional paid-in capital 60,000
Retained earnings 30,000
Investment 160,000
Noncontrolling interest 40,000

Requirement 4
Common stock 100,000
Additional paid-in capital 20,000
Retained earnings 80,000
Investment 160,000
Noncontrolling interest 40,000
Objective: LO3
Difficulty: Moderate

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18) On December 31, 2011, Potter Corporation has the following stockholders' equity:

Common stock, $10 par $200,000


Retained earnings 100,000
Total stockholders' equity $300,000

On January 1, 2012, Potter Corporation declared and issued a 10% stock dividend when the market price
per share was $50.

On January 2, 2012, Corrao Corporation purchased an 80% interest in Potter Corporation for $250,000 on
the open market. On January 2, 2012, the fair value of Potter's individual assets and liabilities was equal
to book value. Any excess cost over book value is attributed to goodwill.

Required:
1. Prepare the journal entry(ies) for Potter Corporation on January 1, 2012.

2. Prepare the journal entry(ies) for Corrao Corporation on January 2, 2012.

3. Prepare the elimination entry(ies) for consolidating work papers on January 2, 2012.

4. Prepare the elimination entry(ies) for consolidating work papers on January 2, 2012 if the 10% stock
dividend is not declared and issued on January 1, 2012.
Answer:
Requirement 1
Retained earnings (20,000 × $50 × 10%) 100,000
Common stock (20,000 × $10 × 10%) 20,000
Additional paid-in capital 80,000

Requirement 2
Investment 250,000
Cash 250,000

Requirement 3
Common stock 220,000
Additional paid-in capital 80,000
Goodwill 12,500
Investment 250,000
Noncontrolling interest 62,500

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Requirement 4
Common stock 200,000
Retained earnings 100,000
Goodwill 12,500
Investment 250,000
Noncontrolling interest 62,500

$250 ,000
Goodwill: - $300,000 = $12,500
0.80

Objective: LO3
Difficulty: Moderate

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