Consolidating Company

Question 1

will consolidation process be recorded in books of both parent and subsidiary?

Answer 1

no and no

Question 2

where does consolidating take place?

Answer 2

worksheet & schedules and presented in consolidated fs

Question 3

what voting ownership is normally assumed to convey significant influence over investee

Answer 3

20%-50%

Question 4

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

Unconsolidated Subsidiaries

Companies under common management

Answer 4

Unconsolidated Subsidiaries - Yes

Companies under common management - Yes

Question 5

Aceco has significant investments in three separate entities. These investments are:

1. 40% ownership of the voting stock of Kapco.
2. 60% ownership of the voting stock of Placo.
3. 100% ownership of the voting stock of Simco

Which of Aceco’s investments would be consolidated with Aceco in its consolidated financial statements?

Simco only.

Placo and Simco.

Kapco, Placo, and Simco.

Kapco only.

Answer 5

Placo and Simco

While Simco would be consolidated by Aceco, so also would be Placo. Since Aceco owns controlling interest in Placo (60%) and in Simco (100%), each would be consolidated with Aceco. Kapco would not be consolidated, because Aceco does not have controlling interest in Kapco. In Aceco’s consolidated financial statements, Kapco would be shown as an investment.

Question 6

Which one of the following levels of voting ownership is normally assumed to convey significant influence over an investee?

0% ‐ 10%.

20% ‐ 50%.

50% ‐ 100%.

100%.

Answer 6

20% ‐ 50%.

Between 50% and 100% voting ownership of an investee normally gives the investor control over the investee, not significant influence. Ownership of over 50% of the voting stock of an investee may not give the investor control over the investee if additional special circumstances exist, but normally, it does.

Question 7

Which of the following information that exists at the date of an acquisition will be needed to carry out the consolidating process?

I. Book values of a subsidiary’s assets and liabilities.
II. Fair values of a subsidiary’s assets and liabilities.
III. Parent’s cost of its investment in the subsidiary.

I, II, and III.
I, and II, only.
II and III, only.
III only.

Answer 7

I, II, and III.
In order to prepare consolidated financial statements, the parent needs not only the book values and fair values of a subsidiary’s assets and liabilities at the date of the business combination, but also the parent’s cost of investment in the subsidiary.

Question 8

Which one of the following kinds of eliminations, if any, will be required in every consolidating process?

Intercompany Receivables/Payables
Intercompany Investment
Intercompany Revenues/Expenses

Answer 8

Intercompany Receivables/Payables - No
Intercompany Investment - Yes
Intercompany Revenues/Expenses- No

While an intercompany investment elimination will be required in every consolidating process (to eliminate the parent’s investment against the subsidiary’s shareholders’ equity), intercompany receivables/payables and intercompany revenues/expenses eliminations will be required only if the affiliated companies have engaged in intercompany transactions that resulted in such balances.

Question 9

Consolidated financial statements are based on the concept that: Which?

In the preparation of financial statements, legal form takes precedence over economic substance.

In the preparation of financial statements, economic substance takes precedence over legal form.

Financial information should be presented separately for each legal entity.

Separate financial statements are more meaningful than consolidated financial statements.

Answer 9

In the preparation of financial statements, economic substance takes precedence over legal form.

The preparation of consolidated financial statements is not based on the concept that legal form takes precedence over economic substance, but rather that economic substance takes precedence over legal form. In form, the corporations are separate legal entities, but in substance, they are under the common economic control of the parent’s shareholders.

Question 10

Beni Corp. purchased 100% of Carr Corp.’s outstanding capital stock for $430,000 cash. Immediately before the purchase, the balance sheets of both corporations reported the following:

                          Beni   Carr   
Assets   $2,000,000  $750,000  
Liabilities  $750,000 $400,000 
Common stock  1,000,000 310,000 
Retained earnings  \_\_250,000  \_\_40,000  
Liabilities and stockholders' equity  $2,000,000 $750,000 

On the date of purchase, the fair value of Carr’s assets was $50,000 more than the aggregate carrying amounts. In the consolidated balance sheet prepared immediately after the purchase, the consolidated stockholders’ equity should amount to:

$1,680,000

$1,650,000

$1,600,000

$1,250,000

Answer 10

$1,250,000
On the date of a business combination using acquisition accounting, the consolidated stockholders’ equity will exactly equal the parent company stockholders’ equity. This will continue to be the case as long as the parent company uses a complete equity method of accounting for the subsidiary.

Question 11

A subsidiary, acquired for cash in a business combination, owned equipment with a market value in excess of book value as of the date of combination. A consolidated balance sheet prepared immediately after the acquisition would treat this excess as: Which One?

Goodwill

Plant and Equipment

Retained Earnings

Deferred Credits

Answer 11

Plant and Equipment
The excess of (fair) market value over book value of equipment would not be recognized as a deferred credit. The excess would be recognized as plant and equipment by writing up plant and equipment to fair value on the consolidated balance sheet.

Question 12

Which of the following financial statements, if any, prepared by a parent immediately after a business combination is likely to be different from financial statements it prepares immediately before the business combination?

Balance Sheet
Income Statement

Answer 12

Balance Sheet - Yes
Income Statement - No

While a parent’s balance sheet prepared immediately after a business combination will be different from its balance sheet prepared immediately before the business combination, the parent’s income statement is not likely to be different than the consolidated income statement prepared immediately after the combination. As a result of the combination, the parent will have on its balance sheet an investment account (and probably other accounts/amounts) that it did not have before the combination, but the consolidated income statement prepared immediately after a business combination will likely be the same as the parent’s pre‐combination income statement.

Question 13

Which one of the following is not a characteristic of consolidated financial statements prepared following an operating period that occurred after the date of a business combination?

A full set of consolidated financial statements will be required.

The method used by the parent to carry on its books its investment in the subsidiary will affect the consolidating process.

Intercompany transactions may have occurred since the business combination.

The method used by the parent to carry on its books its investment in the subsidiary will affect the final consolidated financial statements.

Answer 13

Answer:
The method used by the parent to carry on its books its investment in the subsidiary will affect the final consolidated financial statements.

The method used by the parent to carry on its books its investment in the subsidiary will not affect the final consolidated financial statements. The method used by the parent (cost, equity, or other) will affect how the investment account has changed since the date of the investment and, therefore, the investment elimination process but not the final consolidated financial statements.

Question 14

Under which of the following methods of carrying a subsidiary on its books, if any, will the carrying value of the investment normally change following a combination?

Cost Method
Equity Method

Answer 14

Cost Method - No
Equity Method - Yes

If the parent uses the equity method to carry on its books the investment in a subsidiary, the carrying value of the investment will change as the equity of the subsidiary changes. However, if the parent uses the cost method, the carrying value on its books normally will not change.

Question 15

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. What amount of goodwill, related to Star’s acquisition, should Penn report in its consolidated balance sheet?

$20,000

$40,000

$60,000

$80,000

Answer 15

$20,000

In an acquisition business combination, all assets and liabilities are revalued to fair value. Any excess of investment value over fair value of the revalued identifiable net assets is assigned to goodwill.

Book value of net assets was $220,000. Plant and Equipment needed to be written up by $60,000, making fair value of net assets $280,000. Since Penn paid $300,000 for Star, that leaves $20,000 in goodwill ($300,000‐$280,000). Thus, this is the correct response.

Question 16

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 amount of Scarp’s assets and liabilities approximated their fair values, except that the carrying amount of its building was more than fair value. In preparing Prim’s 20X1 consolidated income statement, which of the following adjustments would be made?

Depreciation expense would be decreased, and goodwill would be recognized.

Depreciation expense would be increased, and goodwill would be recognized.

Depreciation expense would be decreased, and no goodwill would be recognized.

Depreciation expense would be increased, and no goodwill would be recognized.

Answer 16

Depreciation expense would be decreased, and goodwill would be recognized.

Although the cost of the investment was equal to book values, the cost of the investment was greater than the fair values, because the carrying amount of Scarp’s building was more than its fair value. For consolidated statement purposes, the building would be written down to its lower fair value, and the excess of cost over fair values would be assigned to recognize goodwill. Since for consolidated purposes the building has a lower fair value than its carrying value, the depreciation expense taken on the carrying value would be greater than the depreciation expense for consolidated purposes. Thus, depreciation expense would be decreased in the consolidating process, and goodwill would be recognized.

Question 17

When a parent company uses the cost method on its books to carry its investment in a subsidiary, which one of the following will be recorded by the parent on its books?

Parent’s share of subsidiary’s net income/net loss.

Parent’s amortization of goodwill resulting from excess investment cost over fair value of subsidiary’s net assets.

Parent’s share of subsidiary’s cash dividends declared.

Parent’s depreciation of excess investment cost over book values of subsidiary’s net assets.

Answer 17

Parent’s share of subsidiary’s cash dividends declared.

Under the cost method of carrying an investment in a subsidiary, the parent does recognize its share of the subsidiary’s dividends declared and, ultimately, the cash received in payment of the dividend. The dividend income (CR.) so recognized by the parent would be eliminated in the consolidating process against the retained earnings decrease (DR.) recognized by the subsidiary.

Question 18

In the preparation of consolidated financial statement, which of the following sources of transactions should be eliminated?

Transactions with Affiliates

Transactions with Non‐affiliates

Answer 18

Transactions with Affiliates - Yes

Transactions with Non‐affiliates - No

Transactions with affiliates (that are to be consolidated) will be eliminated in the preparation of consolidated financial statements. Transactions with non‐affiliates are not eliminated, because those entities are not consolidated with the parent company.