Chapter 3 Multiple Choice

b (The $105,000 excess acquisition-date fair value allocation to equipment is "pushed-down" to the subsidiary and increases its balance to $441,500. The consolidated balance is $871,500 book value for Crawford ($430,000 plus fair value for Nashville $441,500).

Crawford Corporation acquires Nashville, Inc. The parent pays more for it than the fair value of the subsidiary's net assets. On the acquisition date, Crawford has equipment with a book value of $430,000 and a fair value of $609,000. Nashville has equipment with a book value of $336,500 and a fair value of $441,500. Nashville is going to use push-down accounting. Immediately after the acquisition, what amounts in the Equipment account appear on Nashville's separate balance sheet and on the consolidated balance sheet? A. $441,500 and $1,050,500. B. $441,500 and $871,500. C. $336,500 and $945,500. D. $336,500 and $766,500.

c

Dosmann, Inc., bought all outstanding shares of Lizzi Corporation on January 1, 2013, for $700,000 in cash. This portion of the consideration transferred results in a fair-value allocation of $35,000 to equipment and goodwill of $88,000. At the acquisition date, Dosmann also agrees to pay Lizzi's previous owners an additional $110,000 on January 1, 2015, if Lizzi earns a 10 percent return on the fair value of its assets in 2013 and 2014. Lizzi's profits exceed this threshold in both years. Which of the following is true? A. Consolidated goodwill as of January 1, 2015, increases by $110,000. B. The $110,000 is recorded as an expense in 2015. C. The fair value of the expected contingent payment increases goodwill at the acquisition date. D. The additional $110,000 payment is a reduction in consolidated retained earnings.

d

Goodwill recognized in a business combination must be allocated among a firm's identified reporting units. If the fair value of a particular reporting unit with recognized goodwill falls below its carrying amount, which of the following is true? A. No goodwill impairment loss is recognized unless the implied value for goodwill exceeds its carrying amount. B. The reporting unit reduces the values assigned to its long-term assets (including any unrecognized intangibles) to reflect its fair value. C. A goodwill impairment loss is recognized for the difference between the reporting unit's fair value and carrying amount. D. A goodwill impairment loss is recognized if the carrying amount for goodwill exceeds its implied value.

d

If no legal, regulatory, contractual, competitive, economic, or other factors limit the life of an intangible asset, the asset's assigned value is allocated to expense over which of the following? A. Infinitely. B. 20 years with an annual impairment review. C. 20 years. D. Indefinitely (no amortization) with an annual impairment review until its life becomes finite.

a

Kaplan Corporation acquired Star, Inc., on January 1, 2014, by issuing 13,000 shares of common stock with a $10 per share par value and a $23 market value. This transaction resulted in recognizing $62,000 of goodwill. Kaplan also agreed to compensate Star's former owners for any difference if Kaplan's stock is worth less than $23 on January 1, 2015. On January 1, 2015, Kaplan issues an additional 3,000 shares to Star's former owners to honor the contingent consideration agreement. Which of the following is true? A. The parent's additional paid-in capital from the contingent equity recorded at the acquisition date is reclassified as a regular common stock issue on January 1, 2015. B. The additional shares are assumed to have been issued on January 1, 2014, so that a retrospective adjustment is required. C. The fair value of the number of shares issued for the contingency increases the Goodwill account at January 1, 2015. D. All of the subsidiary's asset and liability accounts must be revalued for consolidation purposes based on their fair values as of January 1, 2015.

a (Consideration transferred at fair value of $600,000 Less Book Value Acquired of $420,000 Equals Excess FV over BV of $180,000 Less Excess FV to Equipment of $80,000 Equals Excess FV to Customer List of $100,000 (Note: Customer List has 4 year life.) Three years since acquisition, 1/4 of acquisition-date value remains ($25,000.)

Note: The same company information is used for three questions. On January 1, 2013, Phoenix Co. acquired 100 percent of the outstanding voting shares of Sedona Inc. for $600,000 cash. At January 1, 2013, Sedona's net assets had a total carrying amount of $420,000. Equipment (eight-year remaining life) was undervalued on Sedona's financial records by $80,000. Any remaining excess fair over book value was attributed to a customer list developed by Sedona (four-year remaining life), but not recorded on its books. Phoenix applies the equity method to account for its investment in Sedona. Each year since the acquisition, Sedona has declared a $20,000 dividend. Sedona recorded net income of $70,000 in 2013 and $80,000 in 2014. Selected account balances from the two companies' individual records were as follows: Phoenix: 2015 Revenues $498,000 2015 Expenses $350,000 2015 Income from Sedona $55,000 Retained earnings 12/31/15 $250,000 Sedona: 2015 Revenues $285,000 2015 Expenses $195,000 2015 Income from Sedona $- Retained earnings 12/31/15 $175,000 Note: there are three questions linked to the folllowing information. On January 1, 2013, Phoenix Co. acquired 100 percent of the outstanding voting shares of Sedona Inc. for $600,000 cash. At January 1, 2013, Sedona's net assets had a total carrying amount of $420,000. Equipment (eight-year remaining life) was undervalued on Sedona's financial records by $80,000. Any remaining excess fair over book value was attributed to a customer list developed by Sedona (four-year remaining life), but not recorded on its books. Phoenix applies the equity method to account for its investment in Sedona. Each year since the acquisition, Sedona has declared a $20,000 dividend. Sedona recorded net income of $70,000 in 2013 and $80,000 in 2014. Selected account balances from the two companies' individual records were as follows: Phoenix: 2015 Revenues $498,000 2015 Expenses $350,000 2015 Income from Sedona $55,000 Retained earnings 12/31/15 $250,000 Sedona: 2015 Revenues $285,000 2015 Expenses $195,000 2015 Income from Sedona $- Retained earnings 12/31/15 $175,000 On its December 31, 2015, consolidated balance sheet, what amount should Phoenix report for Sedona's customer list? A. $25,000. B. $50,000. C. $20,000. D. $10,000.

c (Same as Phoenix's regular Retained Earnings because of use of Equity Method.)

Note: The same company information is used for three questions. On January 1, 2013, Phoenix Co. acquired 100 percent of the outstanding voting shares of Sedona Inc. for $600,000 cash. At January 1, 2013, Sedona's net assets had a total carrying amount of $420,000. Equipment (eight-year remaining life) was undervalued on Sedona's financial records by $80,000. Any remaining excess fair over book value was attributed to a customer list developed by Sedona (four-year remaining life), but not recorded on its books. Phoenix applies the equity method to account for its investment in Sedona. Each year since the acquisition, Sedona has declared a $20,000 dividend. Sedona recorded net income of $70,000 in 2013 and $80,000 in 2014. Selected account balances from the two companies' individual records were as follows: Phoenix: 2015 Revenues $498,000 2015 Expenses $350,000 2015 Income from Sedona $55,000 Retained earnings 12/31/15 $250,000 Sedona: 2015 Revenues $285,000 2015 Expenses $195,000 2015 Income from Sedona $- Retained earnings 12/31/15 $175,000 What is Phoenix's consolidated retained earnings balance at December 31, 2015? A. $290,000. B. $360,000. C. $250,000. D. $330,000.

a (Phoenix revenues of $498,000 Less Phoenix Expenses of $350,000 Equals Net Income before Sedona effect of $148,000 Add "Sedona effect" Equity income from Sedona of $55,000 Equals Consolidated Net Income of $203,000)

Note: The same company information is used for three questions. On January 1, 2013, Phoenix Co. acquired 100 percent of the outstanding voting shares of Sedona Inc. for $600,000 cash. At January 1, 2013, Sedona's net assets had a total carrying amount of $420,000. Equipment (eight-year remaining life) was undervalued on Sedona's financial records by $80,000. Any remaining excess fair over book value was attributed to a customer list developed by Sedona (four-year remaining life), but not recorded on its books. Phoenix applies the equity method to account for its investment in Sedona. Each year since the acquisition, Sedona has declared a $20,000 dividend. Sedona recorded net income of $70,000 in 2013 and $80,000 in 2014. Selected account balances from the two companies' individual records were as follows: Phoenix: 2015 Revenues $498,000 2015 Expenses $350,000 2015 Income from Sedona $55,000 Retained earnings 12/31/15 $250,000 Sedona: 2015 Revenues $285,000 2015 Expenses $195,000 2015 Income from Sedona $- Retained earnings 12/31/15 $175,000 What is consolidated net income for Phoenix and Sedona for 2015? A. $203,000. B. $238,000. C. $148,000. D. $228,000.

b

A company acquires a subsidiary and will prepare consolidated financial statements for external reporting purposes. For internal reporting purposes, the company has decided to apply the equity method. Why might the company have made this decision? A. Consolidation is not required when the parent uses the equity method. B. Operating results appearing on the parent's financial records reflect consolidated totals. C. GAAP now requires the use of this particular method for internal reporting purposes. D. It is a relatively easy method to apply.

b

A company acquires a subsidiary and will prepare consolidated financial statements for external reporting purposes. For internal reporting purposes, the company has decided to apply the initial value method. Why might the company have made this decision? A. GAAP now requires the use of this particular method for internal reporting purposes. B. It is a relatively easy method to apply. C. Operating results appearing on the parent's financial records reflect consolidated totals. D. Consolidation is not required when the parent uses the initial value method.

b

Paar Corporation bought 100 percent of Kimmel, Inc., on January 1, 2012. On that date, Paar's equipment (10-year life) has a book value of $420,000 but a fair value of $520,000. Kimmel has equipment (10-year life) with a book value of $272,000 but a fair value of $400,000. Paar uses the equity method to record its investment in Kimmel. On December 31, 2014, Paar has equipment with a book value of $294,000 but a fair value of $445,200. Kimmel has equipment with a book value of $190,400 but a fair value of $357,000. The consolidated balance for the Equipment account as of December 31, 2014 is $574,000. What would be the impact on consolidated balance for the Equipment account as of December 31, 2014 if the parent had applied the initial value method rather than the equity method? A. The consolidated Equipment account would have a lower reported balance. B. No effect: The method the parent uses is for internal reporting purposes only and has no impact on consolidated totals. C. The consolidated Equipment account would have a higher reported balance. D. The balance in the consolidated Equipment account cannot be determined for the initial value method using the information given.

b (Paar's equipment book value—12/31/14 of $294,000 Add Kimmel's equipment book value—12/31/14 of $190,400 Add Original acquisition-date allocation to Kimmel's equipment of ($400,000 − $272,000) = $128,000 Less Amortization of Allocation ($128,000 ÷ 10 years for 3 years) = ($38,400) Eqcuals Consolidated Equipment of $574,000)

Paar Corporation bought 100 percent of Kimmel, Inc., on January 1, 2012. On that date, Paar's equipment (10-year life) has a book value of $420,000 but a fair value of $520,000. Kimmel has equipment (10-year life) with a book value of $272,000 but a fair value of $400,000. Paar uses the equity method to record its investment in Kimmel. On December 31, 2014, Paar has equipment with a book value of $294,000 but a fair value of $445,200. Kimmel has equipment with a book value of $190,400 but a fair value of $357,000. What is the consolidated balance for the Equipment account as of December 31, 2014? A. $612,600. B. $574,000. C. $802,200. D. $484,400.

d

What is push-down accounting? A. The adjustments required for consolidation when a parent has applied the equity method of accounting for internal reporting purposes. B. A requirement that a subsidiary must use the same accounting principles as a parent company. C. Inventory transfers made from a parent company to a subsidiary. D. A subsidiary's recording of the fair-value allocations as well as subsequent amortization.

c

When should a consolidated entity recognize a goodwill impairment loss? A. Annually on a systematic and rational basis. B. If a reporting unit's fair value falls below its original acquisition price. C. If both the fair value of a reporting unit and its associated implied goodwill fall below their respective carrying amounts. D. Whenever the entity's fair value declines significantly.