411 - test 2 conceptual
what conditions must exist for a negative differential to occur?
a company must acquire a sub at a price equal to the sub's fair value, and that sub must have a total acquisition-date fair value less than its book value
when is the Carrying value of the investment account reduced under equity-method reporting?
a. a dividend is received from the sub b. a differential is amortized c. an impairment of goodwill occurs d. the market value of the investment declines and is less than the carrying value and it is concluded the decline is other than temporary
Lorn corp. purchased inventory for Dresser corp. for 120,000 on september 20, 20x1 and resold 80% of the inventory to unaffiliated companies prior to Dec 31, 20x1 for $140,000. Dresser produced the inventory sold to Lorn for $75,000. Lorn owns 70% of Dresser's voting common stock. The companies had no other transactions during 20x1. What amount of sales will be reported in the 20x1 consolidated income statement? a. 98,000 b. 120,000 c. 140,000 d. 260,000
c - The only sales recorded are sales to non-affiliates.
Banks co (debits) Lamm co. (credits) shipments to banks 150,000 shipments from Lamm 200,000 intercompany inventory profit on toal shipments 50,000 additonal data related to dec. 31, 20x8 inventory: inventory acquired by Banks from outside parties 175,000 inventory acquired by Lamm from outside parties 250,000 intercompany acquired by Banks from Lamm 60,000 At december 31, 20x8, the invenotry reported on the combined balance sheet of the two subsidiaries should be: a. 425,000 b. 435,000 c. 470,000 d. 485,000
Inventory reported by Banks ($175,000 + $60,000) 235,000 Inventory reported by Lamm 250,000 ----------- Total inventory reported 485,000 Unrealized profit at year end [$50,000 x ($60,000 / $200,000)] (15,000) ---------- Amount reported in consolidated statements 470,000
On jan 1 20x5, Post company acquired an 80% investment in Stake comp. The acquisition cost was equal to Post's equity in Stakes's net assets at that date. On jan 1 20x5, Post and Stake had retained earnings of $500,o00 and $100,000 respectively. During 20x5, Post had net income of $200,000, which included its equity in Stake's earnings, and declared dividends of $50,000; Stake had net income of $40,000 and declared dividends of $20,000. There were no other intercompany transactions. On dec. 31, 20x5, what should be the consolidated retained earnings be? a. 650,000 b. 666,000 c. 766,000 d. 770,000
a - $650,000 = $500,000 + $200,000 - $50,000
on Jan 1, 20x1, prim inc. acquired all of Scrap inc.'s outstanding common shares for cash equal to the stocks book value. The carrying amount of scrap'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? a. decrease depreciation expense and recognize goodwill amortization b. increase depreciation expense and recognize good will amortization c. decrease depreciation expense and recognize no goodwill amortization d. increase depreciation expense and recognize no good will amortization
c - Goodwill is not amortized, but instead is tested for impairment at least annually. (a) Incorrect. Goodwill is not amortized. (b) Incorrect. Goodwill is not amortized. (d) Incorrect. Because the subsidiary has recognized more depreciation than it should have, depreciation expense should be decreased, not increased.
What consolidation entry is needed when inventory is sold to an affiliate at a profit and is not resold before the end of the period?
sales xxx COGS xxx Inventory xxx The debit to sales is for the full amount of the transfer price. Inventory is credited for the unrealized profit at the end of the period and cost of goods sold is credited for the amount charged to cost of goods sold by the company making the intercompany sale. Additionally, the basic consolidation entry would need to be adjusted to reflect the deferred gross profit.
how is a differential treated by an investor in computing income from an invested under EQUITY METHOD accounting?
the difference between the amount paid and book value must be assigned to appropriate asset and liability accounts of the acquired company. If any portion of the differential is assigned to an amortizable or depreciable asst, the amount must be charged against income from the invested over the remaining economic life of the asset.
What is the term DIFFERENTIAL used to indicate?
the differential represents the difference between the acquisition-date fair value of the sub and the book value of net identifiable assets
Blue company purchased 60% ownership of Kelly corp. in 20x1. On May 10, 20x2, Kelly purchased inventory from Blue for $60,000. Kelly sold all of the inventory to an unaffiliated company for $68,000 on November 10, 20x2. Blue produced the inventory sold to Kelly for $47,000. The companies had no other transactions in 20x2. What amount of sales will be reported in the 20x2 consolidated income statement? a. 51,600 b. 60,000 c. 86,000 d. 146,000
c - The only sales recorded are sales to non-affiliates.
Blue company purchased 60% ownership of Kelly corp. in 20x1. On May 10, 20x2, Kelly purchased inventory from Blue for $60,000. Kelly sold all of the inventory to an unaffiliated company for $68,000 on November 10, 20x2. Blue produced the inventory sold to Kelly for $47,000. The companies had no other transactions in 20x2. What amount of consolidated net income will be assigned to the controlling shareholders for 20x2? a. 13,000 b. 26,000 c. 28,600 d. 39,000
c - Total income ($86,000 - $47,000) 39,000 Income assigned to noncontrolling interest [0.40($86,000 - $60,000)] (10,400) --------- Consolidated net income assigned 28,600 to controlling interest --------- ---------
How is a differential treated by an investor in computing income from an invested under COST METHOD accounting?
no adjustments are made for amortization the differential on the investor's books
what portion of the BOOK value of a subs net assets normally is included in the consolidated BALANCE SHEET?
current consolidation standards require recognition of the fair value of the subs individual assets and liabilities at the date of acquisition. Generally, this will be all of the book value plus an additional amount (the differential). At least some portion of the book value would not be included if the fair value of a particular asset or liability was less than book value.
how is the amount assigned to the non controlling interest normally determined when a consolidated balance sheet is prepared immediately after a business combination?
The balance assigned to the noncontrolling interest is based on the fair value of the non controlling interest at the date of acquisition
Perez inc. owns 80% of senior inc. During 20x2, Perez sold goods with a 40% gross profit to Senior. Senior sold all of these goods in 20x2. For 20x2 consolidated financial statements, how should the summation of Perez and Senior income statement items be adjusted? a. Sales and COGS should be reduced by the intercompany sales amount b. Sales and COGS should be reduced by 80% of the intercompany sales amount c. Net income should be reduced by 80% of the gross profit in intercompany sales amount d. no adjustment necessary
a - All intercompany sales and cost of goods sold must be eliminated in consolidation to prevent double counting. (b) Incorrect. The entire amount of sales and cost of goods gold must be eliminated. (c) Incorrect. Net income is not directly reduced with a consolidation entry. Instead, sales and cost of goods sold are adjusted. (d) Incorrect. Adjustments to sales and cost of goods sold are required.
The first examination of Rudd Corp.'s financial statements was made for the year ended dec. 31, 20x8. The auditor found that Rudd had acquired another company on jan. 1, 20x8, and had recorded goodwill of $100,000 in connection with this acquisition. Although a friend of the auditor believes the goodwill will last no more than 5 years, Rudds management had found no impairment of good will during 20x8. In its 20x8 financial statements, Rudd should report: amort. exp. goodwill a. $0 $100,000 b. $100,000 $0 c. $20,000 $80,000 D. $0 $0
a - Goodwill is not amortized, thus no amortization expense is recorded. Because goodwill was found to be unimpaired, the entire amount of the existing goodwill would be reported. (b) Incorrect. Goodwill is not amortized. (c) Incorrect. Goodwill is not amortized. (d) Incorrect. Goodwill was unimpaired, and still exists at the end of 20X8. Thus, goodwill should be recorded.
correct? a. foreign sub's do not need to be consolidated if they are reported as a separate operating group under segment reporting b. consolidated retained earnings do not include the non controlling interest's claim on the sub's retained earnings c. the noncontrollign shareholders claim should be adjusted for changes in the fair value of the sub assets but should not include goodwill d. consolidation is expected any time the investor holds significant influence over the sub
b - The only amount included in the consolidated retained earnings balance is the retained earnings balance from the parent's books. (a) Incorrect. Foreign subsidiaries are still required to be consolidated even if they are reported as a separate operating segment. However, if laws of the foreign country prevented the parent from exercising control, the foreign subsidiary would not be consolidated. (c) Incorrect. The noncontrolling shareholders' claim on the net assets does include their proportionate share of goodwill that results in the acquisition. (d) Incorrect. Consolidation is only required when control is held over the subsidiary, not just significant influence.
Nolan owns 100% of the capital stock of both Twill Corporation and Webb corp. Twill purchases merchandise inventory from Webb at 140% of Webb's cost. During 20x0, Webb sold merchandise that had cost it $40,000 to Twill. Twill sold all of this merchandise to unrelated customers for $81,200 during 20x0. In preparing combined financial statements for 20x0, Nolan's bookkeeper disregarded the common ownership of Twill and Webb. By what amount was unadjusted revenue overstated in the combined income statement for 20x0? a. 16,000 b. 40,000 c. 56,000 d. 81,200
c - $56,000. The revenue would be overstated by the amount of cost of goods sold that should have been eliminated.
on Jan 1 20x8, Ritt corp. acquired 80% of Shaw Corp.'s $10 par common stock for $956,000. On this date, the fair value of the noncontrolling interest was $239,000, and the carrying amount of Shaw's net assets was $1,000,000. The fair values of shaws identifiable asset and liabilities were the same as their carrying amounts except for plant assets (net) with a remaining life of 20 years, which were $100,000 in excess of the carrying amount. for the year ended Dec 31, 20x8, Shaw had net income of $190,000 and paid cash dividends totaling 125,000 In the january 1, 20x8 consolidated balance sheet, the amount of goodwill reported should be: a. $0 b. $76,000 c. $95,000 d. $156,000
c - $95,000 = ($956,000 + $239,000) - $1,000,000 - $100,000
Goodwill is... a. seldom reported because it is too difficult to measure b. reported when more than book value is paid in purchasing another company c. reported when the fair value of the acquired is higher than the fair value of the net identifiable assets acquired. d. generally smaller for small companies and increases in amount as the companies acquired increase in size.
c - Goodwill is the difference between the fair value of the acquire (what someone is willing to pay for the company) and the fair value of the net identifiable assets. (a) Incorrect. Goodwill can be measured in business combinations, and is always recorded regardless of difficulty. (b) Incorrect. Goodwill is the excess of the purchase price over the fair value of the net identifiable assets, not the book value. (d) Incorrect. The size of the company acquired has no direct correlation with the amount of goodwill that may or may not be recorded.
How is the amount of consolidated retained earnings assigned to the non controlling interest affected by unrealized inventory profits at the end of the year?
A proportionate share of the realized retained earnings of the subsidiary are assigned to the noncontrolling interest. Any unrealized profits on upstream sales are deducted proportionately from the amount assigned to the noncontrolling interest. Unrealized profits on downstream sales do not affect the noncontrolling interest.
What consolidation entry i needed when inventory is sold to an affiliate at a profit and is resold to an unaffiliated party before the end of the reporting period?
The basic entry: Sales xxx COGS xxx The debit to sales is based on the intercorporate sale price. This means that only the revenue recorded by the company ultimately selling to the nonaffiliate is to be included n the consolidated income statement. Cost of goods sold is credited for the amount paid by the purchaser on the intercorporate transfer, thereby permitting the cost of goods sold recorded by the initial owner to be reported as cost of goods sold in the consolidated statement.
Will the consolidation of unrealized intercompany profits on an upstream sale or on a downstream sale in the current period have a greater effect on income assigned to the non controlling interest?
The elimination of unrealized intercompany profits on an upstream sale will have a greater effect on income assigned to the noncontrolling interest. Income assigned to the noncontrolling interest is affected when unrealized profits are recorded on the subsidiary's books as a result of an upstream sale. A downstream sale would have no effect on the income assigned to noncontrolling interest because the profits are on the books of the parent and are, therefore, eliminated from the consolidated net income assigned to the controlling interest only.
Explain why consolidated financial statements become increasingly important when the differential is very large.
The investment account in the financial statements of the parent company shows its investment in the subsidiary as a singe total and therefore does not provide info on the individual assets and liabilities held by the sub, nor their relative values. The existence of a large differential indicates the parent paid well over book value to acquire ownership of the subsidiary. When the differential is assigned to identifiable assets or liabilities of the sub, both the consolidated balance sheet and consolidated income statement are likely to provide info not available in the financial statements of the individual companies. The consolidated statements are likely to provide a better picture of the assets actually being used and the resulting income statement charges that should be reported.
Amber corp. hold 80% of the stock of Movie Productions inc. During 20x4, Amber purchased an inventory of snack bar items for $40,000 and resold $30,000 to movie productions for $48,000. Movie productions inc. reported sales of $67,000 in 20x4 and had inventory of $16,000 on dec. 31, 20x4. The companies held no beginning inventory and had no other transactions in 20x4 What amount of income will be assigned to the non controlling interest in the 20x4 consolidated income statement? a. 7,000 b. 8,000 c. 9,400 d. 10,200 e. 13,400
a - $7,000 = [($67,000 - $32,000) x 0.20]
Lorn corp. purchased inventory for Dresser corp. for 120,000 on september 20, 20x1 and resold 80% of the inventory to unaffiliated companies prior to Dec 31, 20x1 for $140,000. Dresser produced the inventory sold to Lorn for $75,000. Lorn owns 70% of Dresser's voting common stock. The companies had no other transactions during 20x1. Wha tamoutn of COGS will be reported in the 20x1 consolidated income statement? a. 60,000 b. 75,000 c. 96,000 d. 120,000 e. 171,000
a - Amount paid by Lorn Corporation 120,000 Unrealized profit (45,000) ------------ Actual cost 75,000 Portion sold x 0.80 ------------ Cost of goods sold 60,000
Lorn corp. purchased inventory for Dresser corp. for 120,000 on september 20, 20x1 and resold 80% of the inventory to unaffiliated companies prior to Dec 31, 20x1 for $140,000. Dresser produced the inventory sold to Lorn for $75,000. Lorn owns 70% of Dresser's voting common stock. The companies had no other transactions during 20x1. What inventory balance will be reported by the consolidated entity on Dec. 31, 20x1? a. 15,000 b. 16,800 c. 24,000 d. 39,000
a - Inventory reported by Lorn 24,000 Unrealized profit ($45,000 x .20) (9,000) ------------ Ending inventory reported $15,000
Nolan owns 100% of the capital stock of both Twill Corporation and Webb corp. Twill purchases merchandise inventory from Webb at 140% of Webb's cost. During 20x0, Webb sold merchandise that had cost it $40,000 to Twill. Twill sold all of this merchandise to unrelated customers for $81,200 during 20x0. In preparing combined financial statements for 20x0, Nolan's bookkeeper disregarded the common ownership of Twill and Webb. What amount should be eliminated from COGS in the combined income statement for 20x0? a. 56,000 b. 40,000 c. 24,000 d. 16,000
a - $56,000 = ($40,000 *1.4)
Is an inventory sale from one sub to another treated in the same manner as an upstream sale or a downstream sale?
sales between subs are treated in the same manner as upstream sales. Whenever the profits are on the books of one of the subs, the unrealized profits at the end of the period are eliminated and consolidated net income assigned to the controlling and noncontrolling interests is reduced
give a definition of CONSOLIDATED NET INCOME
Consolidated net income is equal to the parent's income from its own operations, excluding any investment income from consolidated subsidiaries, plus the income of each of the consolidated subsidiaries, adjusted for any differential write-off.
What portion of consolidated retained earnings is assigned to the non controlling interest in the consolidated balance sheet?
Consolidated retained earnings includes only amounts attributable to the shareholders of the parent company. Thus, none of the retained earnings is assigned to the noncontrolling interest.
How is the amount to be reported as COGS by the consolidated entity determined when there have been inter corporate sales during the period?
Cost of goods sold is reported by the consolidated entity when inventory is sold to an external party. The amount reported as cost of goods sold is based on the amount paid for the inventory when it was produced or purchased from an external party. If inventory has been purchased by one company and sold to a related company, the cost of goods sold recorded on the intercorporate sale must be eliminated.
How are dividends paid by a sub to non controlling shareholders treated in the consolidation worksheet?
Dividends paid to noncontrolling shareholders are eliminated in preparing the consolidated statement of retained earnings as are those paid by the subsidiary to the parent. Only dividends paid by the parent company are reported as dividends in the consolidated financial statements.
What type of adjustment must be made in the consolidation worksheet if a differential is assigned to land and the subsidiary disposes of the land in the current period?
In the period in which the land is sold, the gain or loss recorded by the subsidiary must be adjusted by the amount of the differential assigned to the land. When the differential is assigned in the worksheet consolidation entries at the end of the period, a debit will be made to the gain or loss on sale of land that came to the worksheet from the subsidiary's books.
How is income assigned to the non controlling interest shown in the consolidation worksheet?
Income assigned to noncontrolling shareholders is reported as a deduction from consolidated net income in arriving at income assigned to the parent company shareholders.
on Jan 1 20x8, Ritt corp. acquired 80% of Shaw Corp.'s $10 par common stock for $956,000. On this date, the fair value of the noncontrolling interest was $239,000, and the carrying amount of Shaw's net assets was $1,000,000. The fair values of shaws identifiable asset and liabilities were the same as their carrying amounts except for plant assets (net) with a remaining life of 20 years, which were $100,000 in excess of the carrying amount. for the year ended Dec 31, 20x8, Shaw had net income of $190,000 and paid cash dividends totaling 125,000 In the december 31, 20x8, consolidated balance sheet, the amount go non controlling interest reported should be: a. $200,000 b. $239,000 c. $251,000 d. $252,000
. c - $251,000 = .20[($956,000 + $239,000) + ($190,000 - $5,000 - $125,000)]
What portion of the FAIR value of a subs net assets normally is included in the consolidated balance sheet FOLLOWING a business combination?
100% of the fair value of the subs assets and liabilities at the date of acquisition should be included. The type of asset or liability will determine whether a change in its value will be recognized following the date of acquisition.
When majority ownership is acquired, what portion of the fair value of assets held by the sub at acquisition is reported in the consolidated balance sheet?
100% of the fair value of the subs assets is included
Why must inventory transfers to related companies be eliminated in preparing consolidated financial statements?
All inventory transfers between related companies must be eliminated to avoid an overstatement of revenue and cost of goods sold in the consolidated income statement. In addition, when unrealized profits exist at the end of the period, the eliminations are needed to avoid overstating inventory and consolidated net income.
distinguish between an upstream sale of inventory and a downstream sale. Why is it important to know whether a sale up upstream or downstream.
An upstream sale occurs when the parent purchases items from one or more subsidiaries. A downstream sale occurs when the sale is made by the parent to one or more subsidiaries. Knowledge of the direction of sale is important when there are unrealized profits so that the person preparing the consolidation worksheet will know whether to reduce consolidated net income assigned to the controlling interest by the full amount of the unrealized profit (downstream) or reduce consolidated income assigned to the controlling and noncontrolling interests on a proportionate basis (upstream).
how does the introduction of noncontrolling shareholders change the consolidation worksheet?
The income statement portion of the consolidation worksheet is expanded to include a line for income assigned to the noncontrolling interest. This amount is deducted from consolidated net income in computing income to the controlling interest. The balance sheet portion of the worksheet also is expanded to include the claim of the noncontrolling shareholders on the net assets of the subsidiary.
where is the balance assigned to the non controlling interest reported in the consolidated balance sheet?
The non controlling interest is reported as a separate item in the stockholders' equity section of the balance sheet
What effect does a negative retained earningsbblnace on the subs books have on consolidation procedures?
The only effect of a negative balance in retained earnings is the need for a credit to subsidiary retained earnings, rather than a debit to retained earnings, when the stockholders' equity accounts of the subsidiary and the investment account of the parent are eliminated.
How will the elimination of unrealized intercompany inventory profits recorded on the PARENT'S books affect consolidated retained earnings?
Under the fully adjusted equity method, consolidated retained earnings is not affected directly by unrealized profits. Unrealized profits are deferred in the investment in sub and income from sub accounts on the parent's books. Income from sub is closed out to retained earnings, so the deferral of unrealized profits indirectly affects retained earnings. As a result, the amount reported for consolidated retained earnings is always equal to the parent's retained earnings. Under the modified equity or cost methods, these adjustments to income and retained earnings would be made during consolidation and the consolidated retained earnings will be the same under any of the methods.
Par company regularly purchases from Eagle company. recently, Par comp. purchased a majority of the voting shares of Eagle comp. How should Par company treat inventory profits recorded by Eagle Comp. before the day of acquisition? Following the day of acquisition?
When company is acquired in a business combination the transactions occurring before the combination generally are regarded as transactions with unrelated parties and no adjustments or eliminations are needed. All transactions between the companies following the combination must be fully eliminated.
How do unrealized intercompany inventory profits from a prior period affect the computation of consolidated net income when the inventory is resold in the current period? It is important to know whether the sale was upstream or downstream?
When inventory profits from a prior period intercompany transfer are realized in the current period, the profit is added to consolidated net income and to the income assigned to the shareholders of the company that made the intercompany sale. If the unrealized profits arise from a downstream sale, income assigned to the controlling interest will increase by the full amount of profit realized. When the profits arise from an upstream sale, income assigned to the controlling and noncontrolling interests will be increased proportionately in the period the profit is realized. Thus, knowledge of whether the profits resulted from an upstream or a downstream sale is imperative in assigning consolidated net income to the appropriate shareholder group. However, consolidated net income is not affected by a change in the direction of sale.
What is a differential?
a differential occurs when an investor pays more than or less than underlying book value in acquiring ownership of a sub
Assuming Gold uses the equity method to account for investments and that Gold's (unconsolidated) balance sheet on dec. 31, 20x6 reflected retained earnings of $2,000,000, what amount of retained earnings should be shown on the dec. 31, 20x6, consol. balance sheet of Gold and its new sub? a. 2,000,000 b. 2,600,000 c. 2,800,000 d. 3,150,000
a. (2,000,000) A - the consolidated balance sheet should only show the retained earnings balance of the parent company
Why is there a need for a consolidation entry when an intracompany inventory transfer is made at cost?
an inventory transfer at cost results in an overstatement of sales and cost of goods sold. While net incomes not affected, gross profit ratios and other financial statement analysis may be substantially in error if appropriate eliminations are not made.
How do unrealized intercompany profits on a downstream sale of inventory made during the current period affect the computation of consolidated net income and income to the controlling interest?
as in all cases, the total amount of unrealized profit must be eliminated in preparing the consolidated statements. When the profits are on the parent company's books (downstream sale), consolidated net income and income assigned to the controlling interest are reduced by the full amount of the unrealized profit.
Blue company purchased 60% ownership of Kelly corp. in 20x1. On May 10, 20x2, Kelly purchased inventory from Blue for $60,000. Kelly sold all of the inventory to an unaffiliated company for $68,000 on November 10, 20x2. Blue produced the inventory sold to Kelly for $47,000. The companies had no other transactions in 20x2. What amount of COGS will be reported in the 20x2 consolidated income statement? a. 36,000 b. 47,000 c. 60,000 d. 107,000
b - The amount of cost of goods sold is the cost at which Blue had produced the inventory.
A 70% owned subsidiary company declares and pays a cash dividend. What effect does the dividend have on the retained earnings and non controlling interest balances in the parent company's consolidated balance sheet? a. no effect on either ret. earns. or non controlling interest b. no effect on ret. earns. and a decrease in non controlling interest c. decreases in both retained earnings and on controlling interest d. a decrease in retained earnings and no effect on non controlling interst
b - Subsidiary dividends declared have no effect on consolidated retained earnings (because the parent's retained earnings appear as the consolidated retained earnings, but they do decrease the noncontrolling interest just as they decrease the controlling interest. (a) Incorrect. The noncontrolling interest is decreased by dividends declared by the subsidiary. (c) Incorrect. The retained earnings balance is not decreased by subsidiary dividends declared. (d) Incorrect. Retained earnings is unaffected, while the noncontrolling interest is decreased.
What determines whether the bane assigned to the differential remains constant or decreases each period?
12 If the differential arises because the fair value of land, or some other non-depreciable asset, held by the subsidiary is greater than book value, the amount assigned to the differential will remain constant so long as the subsidiary continues to hold the land. When the differential arises because the fair value of depreciable or amortizable assets is greater than book value, the amount debited to the related assets each period will decrease as the parent amortizes an appropriate portion of the differential against investment income
Amber corp. hold 80% of the stock of Movie Productions inc. During 20x4, Amber purchased an inventory of snack bar items for $40,000 and resold $30,000 to movie productions for $48,000. Movie productions inc. reported sales of $67,000 in 20x4 and had inventory of $16,000 on dec. 31, 20x4. The companies held no beginning inventory and had no other transactions in 20x4. What amount of COGS will be reported in the 20x4 consolidated income statement? a. 20,000 b. 30,000 c. 32,000 d. 52,000 e. 62,000
a - $20,000 = $30,000 x [($48,000 - $16,000) / $48,000]
How do unrealized intracompany profits on UPSTREAM sale of inventory made during the current period affect the computation of consolidated net income and income to the controlling interest?
consolidated net income is reduced by the full amount of the unrealized profits. In the upstream sale, the unrealized profits are apportioned between the parent company shareholders and noncontroling shareholders. Thus, consolidated net income assigned to the controlling and non controlling interests is reduced by a pro rata portion (based on ownership percentage) of the unrealized profits.
Beni corporation acquired 100% of carr corp's outstanding capital stock for $430,000 cash. Immediately before the purchase, the balance sheets of both corporations reported: 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 & Stockholders Eq. 2,000,000 750,000 At 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 a. 1,680,000 b. 1,650,000 c. 1,600,000 d. 1,250,000
d (1,250,000) - The consolidated stockholder's equity balance is always equal to the balance of total equity from the parent's books.
why must a non controlling interest be reported in the consolidated balance sheet?
The consolidated balance sheet always includes 100 percent of the subsidiary's assets and liabilities. When the parent holds less than 100 percent ownership of the subsidiary, the noncontrolling interest's claim on those net assets must be reported. The balance sheet will not balance without this additional amount.
How will the elimination of unrealized intercompany inventory profits recorded on the SUB's books affect consolidated retained earnings?
Consolidated retained earnings are always equal to the parent's retained earnings under the fully adjusted equity method. Since the parent company defers unrealized profits in the income from sub and investment in sub accounts and since income from sub is closed out to the parent's retained earnings, the ending balance in consolidated retained earnings will reflect the reduction associated with the deferral of unrealized profits. Under the modified equity or cost methods, these adjustments to income and retained earnings would be made during consolidation and the consolidated retained earnings will be the same under any of the methods.
When majority ownership is acquired, what portion of the goodwill is reported in the consolidated balance sheet is assigned t the non controlling interest?
The amount of goodwill at the date of acquisition is determined by deducting the fair value of the net assets of the acquired company from the sum of the fair value of the consideration given by the acquiring company and the fair value of the noncontrolling interest. The resulting goodwill must be apportioned between the controlling and noncontrolling interest. Under normal circumstances, goodwill apportioned to the noncontrolling interest will equal the excess of the fair value of the noncontrolling interest over its proportionate share of the fair value of the net assets of the acquired company.
How is income assigned to the non controlling interest shown in the consolidation worksheet?
income assigned to the noncontrollin interest normally is a proportionate share od the net income of the sub
Comp. A owns 100% of the common shares of comp. B. If comp. B reports net income of $100,000 for 20x5, what factors may cause comp. A to report less than $100,000 of income from the sub?
-Amort. of a differential is most common: If comp. A has paid more than book value for the shares of comp. B, the differential must be assigned to identifiable assets and liabilities of the sub, or to goodwill. Those amounts assigned to depreciable and identifiable intangible assets must be amortized and will reduce equity-method income over the remaining economic lives of the underlying assets -Amounts attributable to other items such as land or inventories must be treated as a reduction of income in the period in which comp. B disposes of the item. -Income also will be lower if the sub has been involved in sales to related companies during the period and there are unrealized profits from those intercompany sales; the income of the selling affiliate must be reduced by the unrealized profits before equity-method income is computed. -if comp. B has preferred stock outstanding, preferred dividends must be deducted before assigning earnings to common shareholders.
On April, 20x8, Plum inc. paid $1,700,000 for all of Long corp.s issued and outstanding common stock. On that date, the costs and fair values of Long's recorded assets and liabilities were: cost fair value Cash 160,000 160,000 inventory 480,000 460,000 PP&E, net 980,000 1,040,000 liabilities (360,000) (360,000) ----------- ------------ net assets 1,260,000 1,300,000 in plums march 31, 20x9 consolidated balance sheet, what amount of goodwill should be reported as a result of business combination? a. 360,000 b. 396,000 c. 400,000 d. 440,000
. c - $400,000 = $1,700,000 - $1,300,000
under what circumstances would a parent company cease consolidation of a sub?
A parent will discontinue consolidating a subsidiary when it can no longer exercise control over it. Control might be lost for a number of reasons, such as: (1) the parent sells some or all of its interest in the subsidiary, (2) the subsidiary issues additional common stock, (3) the parent enters into an agreement to relinquish control, or (4) the subsidiary comes under the control of the government or other regulator.
When Ajax was preparing its consolidation worksheet, the differential was properly assigned to buildings and equipment. What additional entry must be made in the worksheet?
An additional consolidation entry normally must be entered in the worksheet to expense (depreciate) an appropriate portion o the amount assigned to buildings and equipment. Normally, depreciation expense is debited and income from sub is credited.
If A comp. acquires 80% f the stock of B comp. on jan 1, 20x2, immediately after the acquisition, which of the following is correct? a. consolidated retained earnings will be equal to the combined retained earnings the two companies b. goodwill will always be reported in the consolidated balance sheet c. Comp.'s additional paid in capital may be reduced to permit the carry forward of B comp. retained earnings d. consolidated retained earnings and A comp. retained earnings will be the same
d - Under the equity method, consolidated retained earnings will always equal the retained earning balance of the acquiring company (A company) at the date of acquisition regardless of the percentage owned. The retained earnings balance of the acquired company (B Company) is eliminated in consolidation. This will continue to be true if the parent uses the fully-adjusted equity method to account for its investment. (a) Incorrect. The retained earnings of B Company is eliminated during consolidation. (b) Incorrect. Goodwill does not arise in every consolidation. If goodwill were to arise in this acquisition, it would appear on the consolidated balance sheet. However, there is insufficient data to determine the existence of goodwill. (c) Incorrect. B Company's retained earnings are never carried forward, rather they are eliminated during consolidation.
How is the amount to be reported as consolidated retained earnings determined when there have been inter corporate sales during the period?
No adjustment to retained earnings is needed if the intercorporate sales have been made at cost or if all intercorporate sales have been resold to an external party in the same accounting period. If all of the intercorporate sales have not been resold by the end of the period, under the fully adjusted equity method, the parent defers unrealized profits in the investment in sub and income from sub accounts so no Retained Earnings adjustment would be needed under the modified equity or cost methods. This adjustment would need to be made to retained earnings during consolidation. However, regardless of the parent's method for accounting for the investment, the amount of the noncontrolling interest is reduced by the NCI's proportionate share of the unrealized profit associated with upstream sales.
Clark co. had these transactions w/ affiliated parties in 20x2: -Sales of $60,000 to Dean inc. with $20,000 gross profit. Dean had $15,000 of this inventory on had at year end. Clark owns 15% interest in Dean and does not exert significant influence -Purchases of raw materials totaling $240,000 from Kent Corp., a wholly owned sub. Kent's gross profit on the sales were $48,000. Clark had $60,000 of the inventory remaining on dec. 31, 20x2. Before consolidation entries, Clark had consolidated current assets of $320,000. What amount should Clark report in its Dec. 31, 20x2, consolidated balance sheet for current assets? a. 320,000 b. 317,000 c. 308,000 d. 303,000
c - Net assets reported 320,000 Profit on intercompany sale 48,000 Proportion of inventory unsold @yr end ($60,000 / $240,000) x 0.25 ---------- Unrealized profit at year end (12,000) ---------- Amount reported in consolidated statements $308,000 -------------
which is correct? a. the noncontrolling shareholders claim on the sub's net assets is based on the book value of the sub's net assets b. only the parents portion of the difference between book value and fair value of the sub's assets is assigned to those assets c. goodwill represents the difference between the book value of the sub's net assets and the amount paid by the parent to buy ownership d. totol assets reported by the parent generally will be less then total assets reported on the consolidated balance sheet.
d - Because the consolidated balance sheet contains the assets of the parent company as well as the assets of the subsidiary, total assets of the parent company will always be less than total assets reported on the consolidated balance sheet. (a) Incorrect. The noncontrolling shareholders' claim on the subsidiary's net assets is based on the fair value of the net assets, not the book value. (b) Incorrect. The entire differential is assigned and proportionately allocated to both the parent and the noncontrolling interest's respective share. (c) Incorrect. Goodwill represents the difference between the fair value of the subsidiary's net assets and the amount paid by the parent to buy ownership.
wright corp. includes several subsidiaries in its consolidated financial statements. current receivable due from main comp. 32,000 concurrent receivable from main comp. 114,000 cash advance to corn corp. 6,000 cash advance from king comp. 15,000 intercompany payable to king comp. 101,000 in its december 31,20x2 consolidated balance sheet, what amount should wright report as intercompany receivables?
d - Consolidated financial statements will never report intercompany receivables. The intercompany receivables would show up on the individual books of the companies involved, but the amounts would be eliminated prior to consolidation. [AICPA Adapted]
Parker corp. owns 8-% of Smiths inc.'s common stock. During 20x1, Parker sold inventory to Smith for $250,000 on the same terms as sales made to third parties. Smith sold all of the inventory purchased from Parker in 20x1. Parker Smith Sales 1,000,000 700,000 Cost of Sales (400,000) (350,000) ------------ ----------- Gross Profit 600,000 350,000 What amount should PArker report as cost of sales in its 20x1 consolidated income statement? a. 750,000 b. 680,000 c. 500,000 d. 430,000
c - $500,000 = ($400,000 +$350,000 - $250,000)
At dec. 31, 20x9, Gey inc. owned 90% of Winn Corporation, a consolidated sub and 20% of Carr Corp, an invested in which Grey cannot exercise significant influence. On the same date, Grey had receivables of $300,000 from Winn and $200,000 from Carr. In its dec. 31, 20x9, consolidated balance sheet, Grey should report accounts receivable from its affiliates of: a. 500,000 b. 340,000 c. 230,000 d. 200,000
d - The only accounts receivable from affiliates that will be eliminated from the consolidated balance sheet are receivables from consolidated entities (Winn Corporation). Thus, the receivable from any unconsolidated investees (Carr Corporation) would be reported on the consolidated balance sheet. [AICPA Adapted] (a) Incorrect. Receivables from consolidated entities (Winn Corporation) would be eliminated in consolidated, while any receivables from an unconsolidated investee would still be reported. (b) Incorrect. Receivables from the consolidated entity (Winn Corporation) would be eliminated in their entirety, while receivables from investees under significant influence (Carr Corporation) would be reported in their entirety, not proportionately eliminated. (c) Incorrect. The only amounts that should be recorded on the consolidated balance sheet are the receivables from the investee under significant influence (Carr Corporation), while receivable from the consolidated entity (Winn Corporation) would be eliminated in consolidation.
what happens to the differential in the consolidation worksheet prepared as of the date of combination? How is it reestablished so that the proper balances can be reported the following year?
during consolidation, the differential is eliminated from the investment account and distributed to the appropriate asset and liability accounts. This same process is followed each time consolidated statements are prepared. The consolidation entries do not actually remove the balance in the investment account from the parents book; thus there is no need to reestablish the balance in the parent company's records. The differential continues to be a part of the investment account balance until fully amortized, if appropriate.
Lorn corp. purchased inventory for Dresser corp. for 120,000 on september 20, 20x1 and resold 80% of the inventory to unaffiliated companies prior to Dec 31, 20x1 for $140,000. Dresser produced the inventory sold to Lorn for $75,000. Lorn owns 70% of Dresser's voting common stock. The companies had no other transactions during 20x1. What amount of consolodatied net income will be assigned to the controlling interst for 20x1? a. 20,000 b. 30,800 c. 44,000 d. 45,000
e - Consolidated sales 140,000 Cost of goods sold (60,000) ----------- Consolidated net income 80,000 Income to Dresser's noncontrolling interest: Sales 120,000 Reported cost of sales (75,000) ----------- Report income 45,000 Portion realized x 0.80 ----------- Realized net income 36,000 Portion to Noncontrolling Interest x 0.30 ---------- Income to noncontrolling Interest (10,800) --------- Income to controlling interest $69,200
How is the portion of consolidated earnings to be assigned to the noncontrolling interest in consolidated financial statements determined? a. the parents net income is subtracted from the sub's net income to determine the noncontrolling interst b. the sub's net income is extended to the noncontrolling interest c. the amount of the sub's earnings recognized for consolidation purposes is multiplied by the noncontrolling interest's percentage on the balance sheet date d. the amount of consolidated earnings on the consolidated worksheets is multiplied by the noncontrolling interest percentage on the balance sheet date
c - The noncontrolling interest's proportionate share of the subsidiary's income is allocated based on the percentage of ownership in the subsidiary held by the noncontrolling shareholders. (a) Incorrect. The parent's net income would never be subtracted from the subsidiary's net income. (b) Incorrect. The entire portion of the subsidiary's income is not extended to the noncontrolling interest, but rather is proportionately allocated between the controlling and noncontrolling interest based on ownership percentage. (d) Incorrect. The noncontrolling interest's ownership percentage is not multiplied by the consolidated earnings because it would then be allocating a portion of the parent's own earnings as well. The noncontrolling interest is not entitled to any of the parent's income, only their share of the subsidiary's income.
Amber corp. hold 80% of the stock of Movie Productions inc. During 20x4, Amber purchased an inventory of snack bar items for $40,000 and resold $30,000 to movie productions for $48,000. Movie productions inc. reported sales of $67,000 in 20x4 and had inventory of $16,000 on dec. 31, 20x4. The companies held no beginning inventory and had no other transactions in 20x4 What amount of net income will be reported in the 20x4 consolidated income statement? a. 12,000 b. 18,000 c. 40,000 d. 47,000 e. 53,000
d - Sales reported by Movie Productions Inc. 67,000 Cost of goods sold ($30,000 x 2/3) (20,000) --------- Consolidated net income $47,000
Consolidated financial statements are being prepared for a parent and its four wholly owned sub.s that have intercompany loans of $100,00 and intercompany profits of $300,000. How much of these loans and profits should be eliminated?
d - All intercompany loans and profits must be eliminated in a consolidation, thus the entire balances should be eliminated. (a) Incorrect. All intercompany loans and profits must be eliminated with a wholly owned subsidiary. (b) Incorrect. All intercompany loans and profits must be eliminated with a wholly owned subsidiary. (c) Incorrect. All intercompany loans and profits must be eliminated with a wholly owned subsidiary.
