60 SURGENT MCQ

Question 1

Aden Corp. purchased 100% of Ophir Corp.’s outstanding capital stock for $795,000 cash. Immediately before the purchase, the balance sheets of both corporations reported the following:

Aden Ophir
Assets $3,700,000 $1,800,000
========== ==========
Liabilities $1,100,000 $1,250,000
Common stock 1,900,000 385,000
Retained earnings 700,000 165,000
Liabilities and stockholders’ equity $3,700,000 $1,800,000
========== ==========
At the date of purchase, the fair value of Ophir’s assets was $150,000 more than the aggregate carrying amounts. In the consolidated balance sheet prepared immediately after the purchase, the consolidated stockholders’ equity should amount to:

$3,150,000.

$1,985,000.

$550,000.

$2,600,000.

Question #302106

Answer 1

$2,600,000.

Upon consolidation, Ophir’s equity balances (common stock and retained earnings) would be eliminated; therefore, the remaining consolidated stockholder’s equity would simply be Aden’s balances of $1,900,000 + $700,000, or $2,600,000.

Relevant Terms
Acquisition Method
Business Combination
Capital Stock
Carrying Amount (Book Value)
Common Stock
Consolidation
Fair Value
Goodwill
Liabilities
Parent
Retained Earnings
Stockholders’ Equity

Reference
2116.17
2116.18
2116.19
2116.20
2116.25
2116.26

Question 2

Bard Co. owned several subsidiaries at December 31. The following table shows each subsidiary’s total liabilities, excluding intercompany transactions, and percentage of stock owned by Bard:

Subsidiary Total Liabilities % Owned
Brock Co. $4,000,000 70
Harlson Co. 2,000,000 48
Porter Co. 7,000,000 80
Nortin Co. 5,000,000 100
What amount should Bard include as liabilities in its consolidated balance sheet at December 31?

$12,000,000

$18,000,000

$5,000,000

$16,000,000

Question #301443

Answer 2

$16,000,000

Intercompany balances in total are eliminated in the preparation of consolidated financial statements. Harlson is not included in the consolidated statements since Bard owns less than 50% of Harlson’s stock.

Brock Co. $4,000,000
Porter Co. 7,000,000
Nortin Co. 5,000,000
Total $16,000,000

Relevant Terms
Consolidation
Controlling Interest
Intercompany

Reference
2116.04
2116.05
2116.17

Authorities
FASB ASC 810-10-45-1

Question 3

Birk Co. purchased 30% of Sled Co.’s outstanding common stock on December 31, 20X1, for $200,000. On that date, Sled’s stockholders’ equity was $500,000, and the fair value of its identifiable net assets was $600,000. On December 31, 20X1, what amount of goodwill should Birk attribute to this acquisition?

$30,000

$50,000

$20,000

$0

$20,000

Question #300385

Answer 3

$20,000

When a company is bought, in whole or in part, the purchase price may exceed the fair values of all the company’s net assets. The amount of this excess is goodwill from the purchase.

Purchase cost of stock $200,000
Less 30% of identifiable assets (30% of $600,000) 180,000
Excess of purchase price over fair value
of assets (Goodwill) $ 20,000

Relevant Terms
Fair Value
Goodwill

Reference
2116.29
2116.30
2116.31

Authorities
FASB ASC 323-10-05-5

Question 4

Bolt Corp. owns 75% of Magic Company’s outstanding capital stock. Because Magic’s business is seasonal, Bolt lent $325,000 to Magic on April 17, 20X5, and received a 6-month note receivable from Magic. Bolt’s year-end is June 30. When Bolt prepares its consolidated financial statements at June 30, 20X5, what amount should be reported related to the note receivable from Magic Company?

$320,000

$80,000

$240,000

$0

Question #302291

Answer 4

$0

All intercompany notes receivables and notes payable are eliminated in the consolidation process. The amounts are not included as assets or liabilities on the consolidated balance sheet; therefore, the consolidated financial statements should report $0 in note receivable from Magic.

Relevant Terms
Consolidation
Intercompany Profit

Reference
2116.44

Question 5

Clark Co. had the following transactions with affiliated parties during 20X1:

Sales of $60,000 to Dean, Inc., with $20,000 gross profit. Dean had $15,000 of this inventory on hand at year-end. Clark owns a 15% interest in Dean and does not exert significant influence.
Purchases of raw materials totaling $240,000 from Kent Corp., a wholly owned subsidiary. Kent’s gross profit on the sale was $48,000. Clark had $60,000 of this inventory remaining on December 31, 20X1.
Before eliminating entries, Clark had consolidated current assets of $320,000. What amount should Clark report in its December 31, 20X1, consolidated balance sheet for current assets?

$317,000

$303,000

$320,000

$308,000

Question #300762

Answer 5

$308,000

Relevant Terms
Consolidation
Gross Margin
Intercompany Profit
Significant Influence

Reference
2116.47
2116.48
2116.49
2116.50

Authorities
FASB ASC 323-10-15-6
FASB ASC 810-10-45-1

Question 6

Combined statements may be used to present the results of operations of:

commonly controlled companies.

neither commonly controlled companies nor companies under common management.

companies under common management.

both commonly controlled companies and companies under common management.

Question #300178

Answer 6

both commonly controlled companies and companies under common management.

FASB ASC 810-10-20 notes that in consolidation controlling financial interest resides with one of the companies included in the consolidation. In addition, combined financial statements would be useful where one individual owns a controlling financial interest in several entities that are related in their operations. Another use of combined statements is to present the financial position and the results of operations of entities under common management.

Thus, combined statements (not consolidated) may be used to present operating results of companies under common management, as well as commonly controlled companies.

Relevant Terms
Combined Financial Statements
Consolidation

Reference
2116.11

Authorities
FASB ASC 810-10-20
FASB ASC 810-10-45-10

Question 7

Dove Inc. owns 100% of Flom Co. On January 2, 20X3, Dove sold equipment with an original cost of $120,000 and a carrying amount of $84,000 to Flom for $108,000. It is Dove’s policy to use straight-line depreciation with a useful life of 10 years for equipment like that sold to Flom. The equipment had no residual value. Flom is using straight-line depreciation over 6 years with no residual value. In Dove’s December 31, 20X3, consolidating worksheet, by what amount should depreciation expense be decreased?

$18,000

$0

$12,000
$6,000

Question #302070

Answer 7

$6,000

When dealing with unrealized gains or losses in a consolidated financial statement setting, the objective is to defer unrealized gains to establish both historical cost balances and recognize appropriate income within the consolidated financial statement. The unrealized gain of the sale of the equipment to Flom is located in the cost of the equipment on Flom’s books. Depreciation expense on a consolidated basis should be the depreciation that would have been expensed on Dove’s books if the equipment had not been sold.

Depreciation on Flom’s books (unrealized gain)
($108,000 ÷ 6) $18,000
Depreciation on Dove’s books (original cost)
($120,000 ÷ 10) 12,000
Difference $ 6,000

Relevant Terms
Carrying Amount (Book Value)
Consolidation
Depreciation
Intercompany Profit
Salvage Value
Straight-Line Method

Reference
2116.68
2116.70

Question 8

Effective October 1, year 1, Page Co. acquired 80% of subsidiary Sage Co.’s common stock outstanding. At the date of acquisition, Sage had retained earnings of $2,000,000 and current-year net income of $500,000. At the end of year 1, Page has retained earnings of $6,000,000 and current-year net income of $1,000,000, and Sage has retained earnings of $2,800,000 and a current-year net income of $800,000.

What are the consolidated retained earnings and net income for year 1?

Retained earnings, $8,800,000; current-year net income, $1,800,000

Retained earnings, $8,240,000; current-year net income, $1,640,000

Retained earnings, $6,300,000; current-year net income, $1,300,000

Retained earnings, $6,240,000; current-year net income, $1,300,000

6,000,000 1,000,000
2,000,000 500,000
2,800,000 800,000

Question #303006

Answer 8

The correct answer is retained earnings, $6,240,000; current-year net income, $1,300,000. This question can be solved by first determining retained earnings and then calculating current-year net income.

Step 1: Determine consolidated retained earnings at the end of year 1. Page’s retained earnings are not adjusted. Sage’s beginning retained earnings are eliminated using a consolidation entry. The controlling interest portion of net income of Sage earned since acquisition is recorded.

• Page Co.’s retained earnings at the end of year 1: $6,000,000
• Page Co. owns 80% of the subsidiary, so the controlling interest in Sage’s net income earned since acquisition for the year is ($800,000 − $500,000) × 0.80= $240,000.
• $6,000,000 (Page Co. retained earnings) + $240,000 (Page Co. portion of net income earned since acquisition) = $6,240,000 (consolidated retained earnings)

Step 2: Calculate current-year net income.

• The net income should be $1,300,000 (Parent + Subsidiary) as revenues and expenses are fully consolidated. The noncontrolling interest (NCI) portion is broken out separately.
• FASB ASC 810-10-45-19 and 45-20 state the following: “Revenues, expenses, gains, losses, net income or loss, and other comprehensive income shall be reported in the consolidated financial statements at the consolidated amounts, which include the amounts attributable to the owners of the parent and the noncontrolling interest. Net income or loss and comprehensive income or loss…shall be attributed to the parent and the noncontrolling interest.”

Consolidated net income $1,300,000
Net income to NCI (60,000)
Net income to Page Co. $1,240,000

Question 9

For purposes of consolidating financial interests, a majority voting interest is deemed to be:

50% of the directly or indirectly owned outstanding voting shares of another entity.

50% of the directly or indirectly owned outstanding voting shares and at least 50% of the directly or indirectly owned outstanding nonvoting shares of another entity.

greater than 50% of the directly or indirectly owned outstanding voting shares and at least 50% of the directly or indirectly owned outstanding nonvoting shares of another entity.

greater than 50% of the directly or indirectly owned outstanding voting shares of another entity.

Question #301789

Answer 9

greater than 50% of the directly or indirectly owned outstanding voting shares of another entity.

GAAP requires that consolidated financial statements be prepared when one of the entities in the group directly or indirectly has a controlling financial interest in the other entities. FASB ASC 810 specifies that, in general, the usual condition for consolidated financial statements is ownership (direct or indirect) of a majority voting interest (i.e., at least one share in excess of 50%).

Relevant Terms
Consolidation
Financial Statements
Generally Accepted Accounting Principles (GAAP)

Reference
2116.02

Authorities
FASB ASC 810

Question 10

Jane Co. owns 90% of the common stock of Dun Corp. and 100% of the common stock of Beech Corp. On December 30, Dun and Beech each declared a cash dividend of $100,000 for the current year. What is the total amount of dividends that should be reported in the December 31 consolidated financial statements of Jane and its subsidiaries, Dun and Beech?

$190,000

$100,000

$200,000

$10,000

Question #300181

Answer 10

$10,000

Intercompany dividends are eliminated in consolidation. The only dividends that remain after the eliminating entries are dividends paid to noncontrolling shareholders: 10% of Dun’s dividend of $100,000, or $10,000.

Term: Intercompany
An intercompany transaction occurs between members of the same commonly controlled group of entities (e.g., sales or loans made between parent and subsidiary or between two subsidiaries of the same parent). Intercompany transactions and profits must be eliminated from consolidated financial statements.

Relevant Terms
Consolidation
Dividends
Intercompany

Reference
2116.23
2116.61
2116.62
2116.63

Authorities
FASB ASC 805-10-50
FASB ASC 810-10-10-1

Question 11

King, Inc., owns 70% of Simmon Co.’s outstanding common stock. King’s liabilities total $450,000, and Simmon’s liabilities total $200,000. Included in Simmon’s financial statements is a $100,000 note payable to King. What amount of total liabilities should be reported in the consolidated financial statements?

$520,000

$650,000

$590,000

$550,000

Question #300183

Answer 11

$550,000

All intra-entity liabilities must be eliminated when preparing the consolidated financial statements:

King’s liabilities $450,000
Simmon’s liabilities 200,000
Intra-entity liability (100,000)
Consolidated total $550,000

Relevant Terms
Consolidation
Intracompany

Reference
2116.44
2116.45

Authorities
FASB ASC 810-10-45-1

Question 12

Mr. Cord owns four corporations. Combined financial statements are being prepared for these corpora­tions, which have intercompany loans of $200,000 and intercompany profits of $500,000. What amount of these intercompany loans and profits should be included in the combined financial statements?

Intercompany loans, $200,000; Intercompany profits, $500,000

Intercompany loans, $0; Intercompany profits, $500,000

Intercompany loans, $0; Intercompany profits, $0

Intercompany loans, $200,000; Intercompany profits, $0

Intercompany loans, $0; Intercompany profits, $0

Question #301638

Answer 12

Intercompany loans, $0; Intercompany profits, $0

Intercompany loans and profits must be eliminated in the preparation of combined financial statements. This will result in balances of $0 in these accounts.

Reference: 2116.44
Elimination of Year-End Reciprocal Balance Sheet Accounts

Another type of eliminating entry the candidate should look for is that relating to year-end reciprocal balance sheet accounts. The following are examples of such accounts:

• Accounts receivable or accounts payable
• Notes receivable or notes payable
• Advance to sub (parent) or advance from parent (sub)

Relevant Terms
Combined Financial Statements
Intercompany
Intercompany Profit

Reference
2116.44
2116.45

Authorities
FASB ASC 810-10-45-1

Question 13

On January 1, 20X1, Dallas, Inc., purchased 80% of Style, Inc.’s, outstanding common stock for $120,000. On that date, the carrying amounts of Style’s assets and liabilities approximated their fair values. During 20X1, Style paid $5,000 cash dividends to its stockholders. Summarized balance sheet information for the two companies follows:

                                    Dallas          Style
                                   12/31/X1  12/31/X1  01/01/X1  Investment in Style (equity method)   $132,000  Other assets                           138,000  $115,000  $100,000  Common stock                            50,000    20,000    20,000  Additional paid-in capital              80,250    44,000    44,000  Retained earnings                      139,750    51,000    36,000 The combination is accounted for as an acquisition. What amount should Dallas include from Style as part of consolidated net income in its 20X1 income statement?

$12,000

$16,000

$15,000

$20,000

Question #300742

Answer 13

$20,000

Style, Inc., the subsidiary, reported 20X1 earnings of $20,000 (see below):

Retained Earnings (01/01/X1) $36,000
Plus 20X1 Income ?
Less 20X1 Dividends (5,000)
Retained Earnings (12/31/X1) $51,000
========
Dallas, Inc., the parent, includes 100% of Style’s earnings: $20,000. The noncontrolling interest in the subsidiary net income $4,000 (20% of $20,000) is then subtracted from the combined entity’s consolidated net income to derive the parent’s interest in consolidated net income.

Relevant Terms
Acquisition Method
Carrying Amount (Book Value)
Common Stock
Consolidation
Fair Value
Goodwill
Noncontrolling Interest

Reference
2116.49
2116.50
2116.51
2116.52
2116.53
2116.54
2116.55
2116.56
2116.57

Authorities
FASB ASC 810-10-50-1A

Question 14

On January 1, 20X1, Owen Corp. purchased all of Sharp Corp.’s common stock for $1,200,000. On that date, the fair values of Sharp’s assets and liabilities equaled their carrying amounts of $1,320,000 and $320,000, respectively. During 20X1, Sharp paid cash dividends of $20,000.

Selected information from the separate balance sheets and income statements of Owen and Sharp as of December 31, 20X1, and for the year then ended follows:

Owen Sharp
BALANCE SHEET ACCOUNTS
Investment in subsidiary $1,300,000 —
Retained earnings 1,240,000 560,000
Total stockholders’ equity 2,620,000 1,120,000

INCOME STATEMENT ACCOUNTS
Operating income 420,000 200,000
Equity in earnings of Sharp 120,000 —
Net income 400,000 140,000

In Owen’s December 31, 20X1, consolidated balance sheet, what amount should be reported as total retained earnings?

$1,360,000

$1,800,000

$1,380,000

$1,240,000

Question #300763

Answer 14

$1,240,000

In accounting for business combinations, the stockholders’ equity of the acquired entity is eliminated against the investment account. As a result, consolidated retained earnings include only the retained earnings of the parent company. Thus, the Owen Corp. consolidated balance sheet on December 31, 20X1, would show a retained earnings amount of $1,240,000, an amount equal to Owen’s separate retained earnings.

Relevant Terms
Acquisition Method
Consolidation
Fair Value
Purchase
Retained Earnings

Reference
2116.17
2116.18
2116.19
2116.20
2116.25
2116.26

Authorities
FASB ASC 810-10-45-1

Question 15

On January 1, 20X1, Prim, Inc., acquired all the outstanding common shares of Scarp, Inc., for cash equal to the book value of the stock. The carrying amounts of Scarp’s assets and liabilities approximated their fair values, except that the carrying amount of its building was more than fair value. The combination is accounted for as an acquisition. In preparing Prim’s 20X1 consolidated income statement, which of the following adjustments would be made?

Depreciation expense would be decreased and goodwill impairment would be assessed.

Depreciation expense would be increased and goodwill impairment would not be assessed.

Depreciation expense would be decreased and goodwill impairment would not be assessed.

Depreciation expense would be increased and goodwill impairment would be assessed.

Depreciation expense would be decreased and goodwill impairment would be assessed.

Question #300741

Answer 15

Depreciation expense would be decreased and goodwill impairment would be assessed.

Goodwill is the excess of the fair value of the consideration given over the fair value of the net identifiable assets acquired. The carrying amounts of Scarp’s assets and liabilities approximated their fair values, except that the fair value of the building is less than its book value. Since Prim paid cash equal to the book value of the stock, the amount paid was greater than the fair value of the net identifiable assets of Scarp, resulting in goodwill being recognized. In this particular case, the amount of the goodwill is equal to the excess of the book value of the building over its fair value.

One could argue that Scarp already should have recognized an impairment loss on its own books with regard to the building. However, there is insufficient information to know if the criteria specified in FASB ASC 360-10-05-4 have been met. The mere fact that the fair value of the building is less than its book value is not necessarily sufficient evidence. Thus, presumably the depreciation expense recorded by Scarp is based on the book value amount. In any event, the building should be included in the consolidated assets at its fair value, which is an amount lower than its book value. The consolidated depreciation should be based on this lower amount. Therefore, the consolidated depreciation expense is less than the sum of the depreciation amounts reported by Prim and Scarp as separate entities (i.e., before the consolidated statements are prepared). Thus, for consolidated financial statement purposes, depreciation is decreased from the amounts reported by the two separate entities.

Regardless of the depreciation issue, FASB ASC 350-20-35-28 requires goodwill to be tested for impairment at least annually, as well as in the year of acquisition. Therefore, goodwill impairment must be assessed in this case.

Relevant Terms
Acquisition Method
Amortization
Carrying Amount (Book Value)
Common Stock
Consolidation
Fair Value
Goodwill
Impairment
Outstanding

Reference
2116.42
2116.43

Authorities
FASB ASC 350-20-35-28

Question 16

On January 1, 20X6, James Corp. purchased all of Katie Corp.’s common stock for $1,200,000. On that date, the fair values of Katie’s assets and liabilities equaled their carrying amounts of $880,000 and $210,000, respectively. During 20X6, Katie paid cash dividends of $20,000. James appropriately applies the equity method to Katie Corp.

Selected information from the separate balance sheets and income statements of James and Katie as of December 31, 20X6, and for the year then ended follows:

                            James       Katie     BALANCE SHEET ACCOUNTS  Investment in subsidiary     $  900,000      ---  Retained earnings               920,000   $460,000  Total stockholders' equity    1,620,000    890,000

INCOME STATEMENT ACCOUNTS
Operating income 690,000 310,000
Equity in earnings of Sharp 210,000 —
Net income 480,000 183,000
In James’s December 31, 20X6, consolidated balance sheet, what amount should be reported as total retained earnings?

$1,380,000

$1,103,000

$1,130,000
$920,000

Question #302295

Answer 16

$920,000

In accounting for business combinations, the stockholders’ equity of the acquired entity is eliminated against the investment account. As a result, consolidated retained earnings include only the retained earnings of the parent company. Thus, the James Corp. consolidated balance sheet on December 31, 20X6, would show a retained earnings amount of $920,000, an amount equal to James’s separate retained earnings.

Relevant Terms
Acquisition Method
Consolidation
Fair Value
Purchase
Retained Earnings

Reference
2116.17
2116.18
2116.19
2116.20
2116.25
2116.26

Question 17

On January 1, Year 1, Dallas, Inc., purchased 80% of Style, Inc.’s, outstanding common stock for $120,000. On that date, the carrying amounts of Style’s assets and liabilities approximated their fair values. During Year 1, Style paid $5,000 cash dividends to its stockholders. Summarized balance sheet information for the two companies follows:

Dallas Style
12/31/X1 12/31/X1 01/01/X1
Investment in Style (equity method) $132,000
Other assets $138,000 $115,000 $100,000
Common stock 50,000 20,000 20,000
Additional paid-in capital 80,250 44,000 44,000
Retained earnings 139,750 51,000 36,000
What amount of total stockholders’ equity should be reported in Dallas’ December 31, Year 1, consolidated balance sheet?

$362,000

$270,000

$385,000

$293,000

Question #300760

Answer 17

$293,000

Under the principle of consolidation, the parent and subsidiary are considered a single economic entity. Thus, the consolidated balance sheet reports the combined (parent plus subsidiary) asset and liability accounts.

The single parent-sub entity owns all the net assets of both entities. Total stockholders’ equity accounts on the consolidated balance sheet equals the total stockholders’ equity of the parent plus the noncontrolling interest. Therefore, Dallas, Inc., reports total stockholders’ equity account on December 31, 20X1, of $270,000 ($50,000 + $80,250 + $139,750) plus 20% of the total stockholders’ equity of Style of $23,000 ($20,000 + $44,000 + $51,000), which is $293,000.

Relevant Terms
Acquisition Method
Carrying Amount (Book Value)
Cash Dividend
Common Stock
Consolidation
Fair Value
Noncontrolling Interest

Reference
2116.01
2116.02
2116.03
2116.04
2116.08
2116.09
2116.27

Authorities
FASB ASC 810-10-45-1
FASB ASC 810-10-45-16

Question 18

On January 2 of the current year, Peace Co. paid $310,000 to purchase 75% of the voting shares of Surge Co. Peace reported retained earnings of $80,000, and Surge reported contributed capital of $300,000 and retained earnings of $100,000. The purchase differential was attributed to depreciable assets with a remaining useful life of 10 years. Peace used the equity method in accounting for its investment in Surge. Surge reported net income of $20,000 and paid dividends of $8,000 during the current year. Peace reported income, exclusive of its income from Surge, of $30,000 and paid dividends of $15,000 during the current year. What amount will Peace report as dividends declared and paid in its current year’s consolidated statement of retained earnings?

$21,000

$23,000

$8,000

$15,000

Question #300768

Answer 18

$15,000

Only dividends paid to Peace shareholders will be reported as dividends paid. Dividends paid to Peace by Surge will be eliminated in consolidation. Dividends paid to shareholders other than Peace will be reported as an adjustment to the noncontrolling interest account.

Relevant Terms
Cash Dividend
Consolidation
Noncontrolling Interest

Reference
2116.61
2116.62

Authorities
FASB ASC 810-10-55-1

Question 19

On January 2, 20X1, Pare Co. purchased 75% of Kidd Co.’s outstanding common stock. Selected balance sheet data at December 31, 20X1, is as follows:

PARE KIDD
Total assets $420,000 $180,000
======== ========
Liabilities $120,000 $ 60,000
Common stock 100,000 50,000
Retained earnings 200,000 70,000
$420,000 $180,000
======== ========
During 20X1, Pare and Kidd paid cash dividends of $25,000 and $5,000, respectively, to their shareholders. There were no other intercompany transactions.

The combination is accounted for as an acquisition. In its December 31, 20X1, consolidated balance sheet, what amount should Pare report as common stock?

$150,000

$137,500

$50,000

$100,000

Question #300754

Answer 19

$100,000

In a consolidated balance sheet, only the common stock of the parent entity is labeled “common stock.” Pare would report its own common stock ($100,000) on the December 31, 20X1, consolidated balance sheet.

Note: The 25% non-majority-owned common stock of Kidd Co. would be reported as part of “noncontrolling (minority) interest.”

Question 20

On January 2, 20X5, Yimp Co. purchased 90% of Newt Co.’s outstanding common stock. Selected balance sheet data on December 31, 20X5, are as follows:

Yimp Newt
Total assets $630,000 $360,000
======== ========
Liabilities $180,000 $120,000
Common stock 150,000 100,000
Retained earnings 300,000 140,000
$630,000 $360,000
======== ========
During 20X5, Yimp and Newt paid cash dividends of $37,500 and $10,000, respectively, to their shareholders. There were no other intercompany transactions. The combination is accounted for as an acquisition. In its December 31, 20X5, consolidated balance sheet, what amount should Yimp report as common stock?

$100,000

$240,000

$250,000

$150,000

Question #302293

Answer 20

$150,000

In a consolidated balance sheet, only the common stock of the parent entity is labeled “common stock.” Yimp would report its own common stock ($150,000) on the December 31, 20X5, consolidated balance sheet.

Note: The 90% of the common stock of Newt that is owned by Yimp would be eliminated during consolidation. The 10% minority-owned common stock of Newt Co. would be reported as part of “noncontrolling (minority) interest.”

Relevant Terms
Acquisition Method
Consolidation
Intercompany
Noncontrolling Interest

Reference
2116.21
2116.22
2116.23
2116.24

Question 21

On January 2, 20X5, Yimp Co. purchased 90% of Newt Co.’s outstanding common stock. Selected balance sheet data on December 31, 20X5, are as follows:

Yimp Newt
Total assets $630,000 $360,000
======== ========
Liabilities $180,000 $120,000
Common stock 150,000 100,000
Retained earnings 300,000 140,000
$630,000 $360,000
======== ========

During 20X5, Yimp and Newt paid cash dividends of $37,500 and $10,000, respectively, to their shareholders. There were no other intercompany transactions.

In its December 31, 20X5, consolidated statement of retained earnings, what amount should Yimp report as dividends paid?

$10,000

$38,500

$47,500

$37,500

Question #302292

Answer 21

$37,500

The amount reported on the consolidated statement retained earnings as “dividends paid” would include only dividends paid to majority shareholders directly, the $37,500 distributed by Yimp Co.

Of the $10,000 dividends paid by Newt, the parent’s share ($9,000) would be eliminated on the consolidated worksheet and the other $1,000 would be included in the noncontrolling (minority) interest. However, the $1,000 would not be included in “dividends paid” on the consolidated statement of retained earnings.

Relevant Terms
Consolidation
Dividends
Intercompany

Reference
2116.21
2116.22
2116.23
2116.24

Question 22

On January 2, 20X8, Maple Inc. purchases 100% of Elm’s Inc.’s outstanding common stock. During 20X8, Maple’s total cost of goods sold was $485,000 and Elm’s cost of goods sold was $231,000. In 20X8, Maple sold inventory costing $57,000 to Elm for $74,100. By the end of the year, all transferred inventory was sold to third parties. What amount should be reported as cost of goods sold in the consolidated statement of income?

$542,000

$716,000

$659,000

$641,900

Question #302294

Answer 22

$641,900

Under the acquisition method, a number of adjusting and eliminating entries are made during the consolidation process. Eliminations may be categorized as those related to the following:

The investment account
Current-year changes in the investment account
Year-end reciprocal balance sheet accounts
Reciprocal income statement accounts
Intercompany profits and losses
Since Elm sold all of the inventory purchased from Maple, Elm would have recognized $74,100 in cost of goods sold (COGS). As Elm is a 100%-owned subsidiary, 100% of the COGS from Maple is eliminated (i.e., intercompany profits and losses). Total COGS on the consolidated statement of income is $641,900 ($485,000 + $231,000 − $74,100).

Relevant Terms
Acquisition Method
Common Stock
Consolidation
Cost of Goods Sold
Income Statement
Intercompany
Subsidiary

Reference
2116.27
2116.46
2116.47

Question 23

On June 29, 20X4, Riff Inc. purchased all the issued and outstanding common stock of Jinks Co. for $2,640,000. Jinks had assets of $2,680,000 and liabilities of $540,000 on the acquisition date. Jinks’ recorded assets and liabilities had fair values of $2,800,000 and $620,000, respectively. In Riff’s June 30, 20X4, balance sheet, what amount should be reported as goodwill?

$160,000

$80,000

$500,000

$460,000

Question #302072

Answer 23

$460,000

When, in the purchase of another company, the purchase price exceeds the fair value of the identifiable net assets (assets – liabilities) of the purchased company, then the excess is recorded as goodwill:

Purchase price $2,640,000
Fair value of assets $2,800,000
Less fair value of liabilities (620,000)
Net fair value of assets 2,180,000
Goodwill $ 460,000
==========

Relevant Terms
Fair Value
Goodwill

Reference
2116.21
2116.27
2116.28
2116.29
2116.30
2116.31
2116.32

Question 24

On September 29, 20X1, Wall Co. paid $860,000 for all the issued and outstanding common stock of Hart Corp. On that date, the carrying amounts of Hart’s recorded assets and liabilities were $800,000 and $180,000, respectively. Hart’s recorded assets and liabilities had fair values of $840,000 and $140,000, respectively. In Wall’s September 30, 20X1, balance sheet, what amount should be reported as goodwill?

$20,000

$160,000

$240,000

$180,000
$160,000

Question #300403

Answer 24

When, in the purchase of another company, the purchase price exceeds the fair value of all the assets the purchased company owns, then the excess is goodwill.

Purchase price $860,000
Fair value of assets $840,000
Less fair value of liabilities 140,000
Net fair value of assets 700,000
Goodwill $160,000
========
Relevant Terms
Fair Value
Goodwill

Reference
2116.27
2116.61

Authorities
FASB ASC 805-30-30-1

Relevant Terms
Fair Value
Goodwill

Reference
2116.27
2116.61

Authorities
FASB ASC 805-30-30-1

Question 25

Parent Co. owns 90% of the 10,000 outstanding shares of Subsidiary Co.’s common stock on December 31, year 1. On that date, the stockholders’ equity of Subsidiary was $150,000, consisting of $100,000 of no-par common stock and $50,000 of retained earnings. On January 2, year 2, Subsidiary issued 2,000 previously unissued shares for $24,000 to various outside investors. As a consequence of this transaction, Parent’s ownership share was reduced to 75%. Which of the following correctly reports this transaction?

The consolidated income statement reports a gain of $4,000.

Parent’s investment in Subsidiary is increased by $3,000.

The consolidated income statement reports a loss of $7,500.

Parent’s investment in Subsidiary is reduced by $4,500.

Question #301901

Answer 25

Parent’s investment in Subsidiary is reduced by $4,500.

If a parent company owns less than 100% of the voting stock of a subsidiary, there is a noncontrolling (minority) interest in the net assets of the subsidiary as well as a controlling interest. The noncontrolling (minority) interest represents a subset of total stockholders’ equity, as demonstrated for a consolidated balance sheet:

Stockholders’ equity:
12.31.Yr 1 1.2.Yr 2
Controlling interest
$135,000 $130,500
Noncontrolling interest
15,000 43,500
Total stockholders’ equity
$150,000 $174,000

On January 2, year 2, total stockholder equity increased to $174,000 ($150,000 + $24,000). Parent Co. now owns 75%, or $130,500 ($174,000 × 75%), so the investment in Subsidiary is decreased by $4,500 ($135,000 – $130,500).

Relevant Terms
Consolidation
Noncontrolling Interest

Reference
2116.07
2116.08

Question 26

Papillon Corp. sold goods to its 90%-owned subsidiary, Trook Corp, during 20X6. At the end of 20X6, 1/4th of these goods were included in Trook’s ending inventory. In its income statement for 20X6, Papillon reported freight-out expenses of $790,000, none of which was paid on sales made to Trook. Trook reported $375,000 of freight-out expenses for the same period. Trook’s freight-out expenses included $103,000 in freight costs paid to ship goods to Papillon. What amount of selling expenses should be reported in Papillon’s 20X6 consolidated income statement?

$1,072,300

$1,165,000

$1,113,500

$1,062,000

Question #302069

Answer 26

$1,062,000

Since freight-out costs between Trook and Papillon are paid by the seller (Trook), they are not included in the value of inventory by the buyer (Papillon). Also, since they were paid on an intercompany sale, these costs should be eliminated from Papillon’s consolidated income statement. Thus, consolidated selling expenses for 20X6 are as follows:

Papillon total + Trook’s total – Trook’s Intercompany
($790,000) + ($375,000 – $103,000)
$790,000* + $272,000 = $1,062,000

Papillon’s full total is included in consolidated selling expenses because none of the freight-out expense is related to sales to Trook.

Relevant Terms
Consolidation
Subsidiary
Transportation Out

Reference
2116.46
2116.47
2116.48
2116.49
2116.50

Question 27

Pardelle, Inc. acquired 80% of Soran Co.’s outstanding common stock on December 31, year 1. Pardelle’s retained earnings total $600,000 and Soran’s retained earnings total $400,000 on the acquisition date. What amount should be reported for consolidated retained earnings in the consolidated statement of financial position on the acquisition date?

$680,000

$920,000

$1,000,000

$600,000

Answer 27

$600,000

When a company obtains control of a subsidiary, typically evidenced by greater than 50% ownership, only the parent (Pardelle) company’s retained earnings are carried through in consolidation. The subsidiary’s (Soran) retained earnings are eliminated in consolidation and the 20% Pardelle does not own would be eliminated and reallocated to the noncontrolling interest. Pardelle has retained earnings of $600,000, which equals consolidated retained earnings at year-end after Soran’s retained earnings are eliminated.

Relevant Terms
Consolidation
Retained Earnings

Reference
2116.17
2116.18

Question 28

Penn Corp. paid $300,000 for the outstanding common stock of Star Co. At that time, Star had the following condensed balance sheet:

Carrying Amounts
Current assets $ 40,000
Plant and equipment (net) 380,000
Liabilities 200,000
Stockholders’ equity 220,000

The fair value of the plant and equipment was $60,000 more than its recorded carrying amount. The fair values and carrying amounts were equal for all other assets and liabilities. The combination is accounted for as an acquisition (initiated in a fiscal year beginning after December 15, 2008). What amount of goodwill, related to Star’s acquisition, should Penn report in its consolidated balance sheet?

$80,000

$40,000

$60,000
$20,000

Question #300740

Answer 28

$20,000

Under FASB ASC 805-30-30-1, the excess of acquisition price over the net value of the identifiable assets acquired is accounted for as goodwill: “Measurement of Goodwill: “The acquirer shall recognize goodwill as of the acquisition date, measured as the excess of (a) over (b):

“The aggregate of the following:
“The consideration transferred measured in accordance with this Section, which generally requires acquisition-date fair value (see paragraph 805-30-30-7)
“The fair value of any noncontrolling interest in the acquiree
“In a business combination achieved in stages, the acquisition-date fair value of the acquirer’s previously held equity interest in the acquiree.
“The net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed measured in accordance with this Topic.”

Acquisition price $300,000
Less fair value of net assets:
Current assets $ 40,000
Plant and equipment ($380,000 + $60,000) 440,000
Subtotal 480,000
Less liabilities 200,000 280,000
Excess of acquisition price over
fair value of net assets = Goodwill $ 20,000
========

Relevant Terms
Acquisition
Acquisition Method
Carrying Amount (Book Value)
Consolidation
Fair Value
Goodwill

Reference
2116.29
2116.30
2116.31
2116.32
2116.33
2116.34

Authorities
FASB ASC 805-30-30-1

Question 29

Perez, Inc., owns 80% of Senior, Inc. During 20X1, Perez sold goods with a 40% gross profit to Senior. Senior sold all of these goods in 20X1. For 20X1 consolidated financial statements, how should the summation of Perez and Senior income statement items be adjusted?

Sales and cost of goods sold should be reduced by 80% of the intercompany sales.

No adjustment is necessary.

Sales and cost of goods sold should be reduced by the intercompany sales.

Net income should be reduced by 80% of the gross profit on intercompany sales.

Sales and cost of goods sold should be reduced by the intercompany sales.

Question #300744

Answer 29

Sales and cost of goods sold should be reduced by the intercompany sales.

FASB ASC 810-10-45-1 states: “In the preparation of consolidated financial statements, intra-entity balances and transactions should be eliminated. This includes…sales and purchases….Any intra-entity profit…shall be eliminated.”

The income statement adjustment process is greatly simplified because the goods sold to Senior were all subsequently sold to “outside” customers. This means that inventory will not require adjustment. The only adjustment needed is reduction of sales and cost of goods by the total dollar amount of the intercompany sales. Failure to do this would overstate those two items on the consolidated income statement.

Relevant Terms
Consolidation
Customer
Intercompany
Intercompany Profit

Reference
2116.46

Authorities
FASB ASC 810-10-45-1

Question 30

Qual Inc. purchased 55% of Saucer Co.’s outstanding common stock on December 31, 20X2, for $960,000. On that date, Saucer’s stockholders’ equity was $775,000, and the fair value of its identifiable net assets was $880,000. On December 31, 20X2, what amount of goodwill should Qual attribute to this acquisition?

$80000

$304000

$185000
$476000

Answer 30

$476000
When a company is bought, in whole or in part, the purchase price may exceed the fair values of all the company’s net assets. The amount of this excess is goodwill from the purchase.

Purchase cost of stock of $960,000 − 55% of identifiable assets (55% of $880,000) of $484000 = Excess of purchase price over fair value of assets (Goodwill) of $476000

Question 31

Rowe, Inc., owns 80% of Cowan Co.’s outstanding capital stock. On November 1, Rowe advanced $100,000 in cash to Cowan. What amount should be reported related to the advance in Rowe’s consolidated balance sheet as of December 31?

$80,000

$100,000

$20,000

$0

Question #300180

Answer 31

$0

All intercompany liabilities are eliminated in the consolidation process. The amounts are not included as assets or liabilities on the consolidated balance sheet.

Relevant Terms
Consolidation
Intercompany
Liabilities

Reference
2116.44

Authorities
FASB ASC 805-10-50
FASB ASC 810-10-10-1

Question 32

Selected information from the separate and consolidated balance sheets and income statements of Para, Inc., and its subsidiary, Shel Co., as of December 31, 20X1, and for the year then ended is as follows:

SEE PHOTO

Additional information: During 20X1, Pare sold goods to Shel at the same markup on cost that Pare uses for all sales.

On December 31, 20X1, what was the amount of Shel’s payable to Pare for intercompany sales?

$6,000

$58,000

$64,000

$12,000

Question #300765

Answer 32

$12,000

Total separate accounts receivable = $52,000 + $38,000 = $90,000
Less consolidated accounts receivable 78,000
Accounts receivable eliminated in consolidation $12,000

Intercompany receivables and payables are always eliminated in the consolidation process. Therefore, the $12,000 eliminated must represent the amount Shel owed to Pare for intercompany sales.

Relevant Terms
Consolidation
Intercompany Profit

Reference
2116.47
2116.48
2116.49
2116.50

Authorities
FASB ASC 810-10-45-1

Question 33

Thyme, Inc. owns 16,000 of Sage Co.’s 20,000 outstanding common shares. The carrying value of Sage’s equity is $500,000. Sage subsequently issues an additional 5,000 previously unissued shares for $200,000 to an outside party that is unrelated to either Thyme or Sage. What is the total noncontrolling interest after the additional shares are issued?

$140,000

$172,000

$300,000

$252,000

Question #301811

Answer 33

$252,000

After Sage issued the additional $200,000 in equity, its total equity was $700,000 ($500,000 + $200,000). Thyme now owns 16,000 shares out of the total 25,000 (20,000 + 5,000) shares outstanding, or 64% (16,000 ÷ 25,000). The remaining 36% (100% − 64%) accounts for a noncontrolling interest of $252,000 ($700,000 × 36%).

Relevant Terms
Equity
Noncontrolling Interest

Reference
2116.08

Question 34

Tulip Co. owns 100% of Daisy Co.’s outstanding common stock. Tulip’s cost of goods sold for the year totals $600,000 and Daisy’s cost of goods sold totals $400,000. During the year, Tulip sold inventory costing $60,000 to Daisy for $100,000. By the end of the year, all transferred inventory was sold to third parties. What amount should be reported as cost of goods sold in the consolidated statement of income?

$940,000

$960,000

$1,000,000

$900,000

Question #301750

Answer 34

$900,000
Under the acquisition method, a number of adjusting and eliminating entries are made during the consolidation process. Eliminations may be categorized as those related to the following:

The investment account
Current-year changes in the investment account
Year-end reciprocal balance sheet accounts
Reciprocal income statement accounts
Intercompany profits and losses
Since Daisy sold all of the inventory purchased from Tulip, Daisy would have recognized $100,000 in cost of goods sold (COGS). As Daisy is a 100%-owned subsidiary, 100% of the COGS from Tulip is eliminated (i.e., intercompany profits and losses). Total COGS on the consolidated statement of income is $900,000 ($600,000 + $400,000 − $100,000).

Relevant Terms
Acquisition Method
Common Stock
Consolidation
Cost of Goods Sold
Income Statement
Outstanding
Subsidiary

Reference
2116.27
2116.46
2116.47

Authorities
FASB ASC 810-10-45

Question 35

Wagner, a holder of a $1,000,000 Palmer, Inc., bond, collected the interest due on March 31, 20X1, and then sold the bond to Seal, Inc., for $975,000. On that date, Palmer, a 75% owner of Seal, had a $1,075,000 carrying amount for this bond. What was the effect of Seal’s purchase of Palmer’s bond on the retained earnings and noncontrolling (minority) interest amounts reported in Palmer’s March 31, 20X1, consolidated balance sheet?

Retained earnings: $0; Noncontrolling interest: $100,000 increase

Retained earnings: $75,000 increase; Noncontrolling interest: $25,000 increase

Retained earnings: $0; Noncontrolling interest: $25,000 increase

Retained earnings: $100,000 increase; Noncontrolling interest: $0

Question #300759

Answer 35

Retained earnings: $100,000 increase; Noncontrolling interest: $0

Carrying value of Palmer bonds payable $1,075,000
Less acquisition cost to Seal, Inc. 975,000
Gain to Palmer (Consolidated entity) $ 100,000
==========
This gain would, of course, increase consolidated retained earnings. The gain is identified with the issuer of the bonds, which is Palmer in this case. Therefore, the gain has no effect on noncontrolling (minority) interest.

Relevant Terms
Bond
Intercompany Profit
Interest
Noncontrolling Interest
Retained Earnings

Reference
2116.83
2116.84
2116.85

Authorities
FASB ASC 810-10-45-1

Question 36

Wright Corp. has several subsidiaries that are included in its consolidated financial statements. In its December 31, 20X1, trial balance, Wright had the following intercompany balances before eliminations:

Debit Credit
Current receivable due from Main Co. 32,000
Noncurrent receivable from Main Co. 114,000
Cash advance to Corn Corp. 6,000
Cash advance from King Co. 15,000
Intercompany payable to King 101,000

In its December 31, 20X1, consolidated balance sheet, what amount should Wright report as intercompany receivables?

$36,000

$146,000

$152,000
$0

Question #300755

Answer 36

$0

Do not fall for this trick question. On a consolidated balance sheet no intercompany receivables (or payables) would appear. They would be eliminated in the consolidation process.

This rule is stated clearly in FASB ASC 810-10-45-1 as follows: “In the preparation of consolidated financial statements, intra-entity balances and transactions shall be eliminated.”

Relevant Terms
Consolidation
Intercompany
Intercompany Profit
Subsidiary

Reference
2116.47
2116.48
2116.49
2116.50

Authorities
FASB ASC 810-10-45-1

Question 37

Zest Co. owns 100% of Cinn, Inc. On January 2, 20X1, Zest sold equipment with an original cost of $80,000 and a carrying amount of $48,000 to Cinn for $72,000. Zest had been depreciating the equipment over a 5-year period using straight-line depreciation with no residual value. Cinn is using straight-line depreciation over three years with no residual value. In Zest’s December 31, 20X1, consolidating worksheet, by what amount should depreciation expense be decreased?

$24,000

$16,000

$0

$8,000

Question #300748

Answer 37

$8,000

When dealing with unrealized gains or losses in a consolidated financial statement setting, the objective is to defer unrealized gains to establish both historical cost balances and recognize appropriate income within the consolidated financial statement. The unrealized gain of the sale of the equipment to Cinn is located in the cost of the equipment on Cinn’s books. Depreciation expense on a consolidated basis should be the depreciation that would have been expensed on Zest’s books if the equipment had not been sold.

Depreciation on Cinn’s books (unrealized gain) (72,000 / 3) $24,000
Depreciation on Zest’s books (original cost) (80,000 / 5) 16,000
Difference $ 8,000

Relevant Terms
Carrying Amount (Book Value)
Consolidation
Depreciation
Intercompany Profit
Salvage Value
Straight-Line Method

Reference
2116.76
2116.77
2116.78

Authorities
FASB ASC 810-10-45-1

Question 38

What is the extra money paid for a company that is above the fair value of its assets called?

Answer 38

goodwill

Question 39

In a consolidated balance sheet, which entity is the only one to list common stock?

Answer 39

the parent entity

Question 40

All intercompany notes receivables and notes payable are eliminated in what process?

Answer 40

The consolidation process