ACC 410 Ch 1, 2, 3, 4
Cite the conditions under which you would expect the balance of an equity investment account on a balance sheet date subsequent to acquisition to be equal to the underlying book value represented by that investment.
1) equity method is correctly applied 2) investment acquired at BV which was equal to FV, the pooling of interest method was used, or cost-book value differentials have all been amortized 3) no intercompany transactions between affilliated companies have created investment account-book value differences
When does a corporation become a subsidiary of another corporation?
A corp becomes a sub when another corp either directly or indirectly acquires a controlling financial interest (generally over 50% ) of its outstanding voting stock
Who are the primary users for which consolidated financial statements are intended?
Cons financial statements are intended primarily for stockholders and creditors of the parent, according to GAAP
Describe the equity method of accounting.
The equity method of accounting for investments increases the investment account for the investor's share of the investee's income and decreases it for the investor's share of the investee's losses and for dividends received from the investee.
What are the legal distinctions between a business combination, a merger, and a consolidation?
The investment account balance of the investor will equal underlying book value of the investee if (a) the equity method is correctly applied, (b) the investment was acquired at book value which was equal to fair value, the pooling method was used, or the cost-book value differentials have all been amortized, and (c) there have been no intercompany transactions between the affiliated companies that have created investment account-book value differences.
Are workpaper adjustments and eliminations entered on the parent's books? The subsidiary's books? Explain.
WP adj are not normally entered in the general ledger of the parent or any other entity. They are used in prep of cons f/s for a conceptual entity for which there no formal accounting records
5. On January 2, 2016, Pam Corporation bought 15 percent of Sun Corporation's capital stock for $30,000. Pam accounts for this investment using the cost method. Sun's net income for the years ended December 31, 2016, and December 31, 2017, were $10,000 and $50,000, respectively. During 2017 Sun declared a dividend of $70,000. No dividends were declared in 2016. How much should Pam report on its 2017 income statement as income from this investment? a $1,575 b $7,500 c $9,000 d $10,500
a $210,000
Pop Corporation paid $100,000 cash for the net assets of Son Company, which consisted of the following: Current assets Plant and equipment Liabilities assumed Book Value $ 40,000 160,000 (40,000) = $160,000 Fair Value $ 56,000 220,000 (36,000) = $240,000 Assume Son Company is dissolved. The plant and equipment acquired in this business combination should be recorded at: a $220,000 b $200,000 c $183,332 d $180,000
a $220,000 Plant and equipment should be recorded at the $220,000 FV
. On January 3, 2016, Pop Company purchases a 15 percent interest in Son Corporation's common stock for $50,000 cash. Pop accounts for the investment using the cost method. Son's net income for 2016 is $20,000, but it declares no dividends. In 2017, Son's net income is $80,000, and it declares dividends of $120,000. What is the correct balance of Pop's Investment in Son account at December 31, 2017? a $47,000 b $50,000 c $62,000 d $65,000
a $47,000 Divs received from Son (120,000 *15%) --> $18,000 Share of income since acquisition of interest 2016 :---->(3,000) 2017: ---->(12,000) Excess divs received over share of income ====>3,000 investment in Son Jan 3, 2016 --->$50,000 less: excess in divs received over share of income ----> (3,000) investment in Son Dec 31, 2017 ===> 47,000
On January 1, Pop purchased 10 percent of Son Company's common stock. Pop purchased additional shares, bring- ing its ownership up to 40 percent of Son's common stock outstanding, on August 1. During October, Son declared and paid a cash dividend on all of its outstanding common stock. How much income from the Son investment should Pop report for the year ended December 31? a 10 percent of Son's income for January 1 to July 31, plus 40 percent of Son's income for August 1 to December 31 b 40 percent of Son's income for August 1 to December 31 only c 40 percent of Son's income d Amount equal to dividends received from Son
a 10 percent of Son's income for January 1 to July 31, plus 40 percent of Son's income for August 1 to December 31
On consolidation workpapers, consolidated ending retained earnings is determined by: a Adding beginning consolidated retained earnings and the controlling share of consolidated net income and subtracting parent dividends b Adding end-of-the-period retained earnings of the affiliates c Adjusting beginning parent-retained earnings for subsidiary profits and dividends d Adjusting the parent's retained earnings account balance
a Adding beginning consolidated retained earnings and the controlling share of consolidated net income and subtracting parent dividends
In computing cash flows from operating activities under the direct method, the following item is an addition: a Cash dividends from equity investees b Collection of principal on a loan made to a subsidiary c Noncontrolling interest dividends d Noncontrolling interest share
a Cash dividends from equity investees
. A business combination in which a new corporation is formed to take over the assets and operations of two or more separate business entities, with the previously separate entities being dissolved, is a/an: a Consolidation b Merger c Pooling of interests d Acquisiti
a Consolidation
On January 1, Pop Company purchased 75 percent of the outstanding shares of Son Company at a cost exceeding the book value and fair value of Son's net assets. Using the following notations, describe the amount at which the plant assets will appear in a consolidated balance sheet of Pop Company and Subsidiary prepared immediately after acquisition: Pby = book value of Pop's plant assets Pfv = fair value of Pop's plant assets Sbv = book value of Son's plant assets Sfv = fair value of Son's plant assets a Pbv +Sbv t(Sfv −Sbv) b Pbv + 0.75(Sbv) t 0.75(Sfv − Sbv) c Pbv + 0.75(Sfv) d Pbv + Sbv t 0.75(Sfv − Sbv)
a Pbv +Sbv t(Sfv −Sbv)
An excess of the fair value of net assets acquired in a business combination over the price paid is a Reported as a gain from a bargain purchase b Applied to a reduction of noncash assets before negative goodwill may be reported c Applied to reduce noncurrent assets other than marketable securities to zero before negative goodwill may be reported d Applied to reduce goodwill to zero before negative goodwill may be reported
a Reported as a gain from a bargain purchase
. Pam Corporation acquired an 80 percent interest in Sun Corporation on January 1, 2016, and issued consolidated financial statements at and for the year ended December 31, 2016. Pam and Sun had issued separate-company financial statements in 2015. a The change in reporting entity is reported by restating the financial statements of all prior periods presented as consolidated statements. b The cumulative effect of the change in reporting entity is shown in a separate category of the income statement net of tax. c The income effect of the error is charged or credited directly to beginning retained earnings. d The income effect of the accounting change is spread over the current and future periods.
a The change in reporting entity is reported by restating the financial statements of all prior periods
Most errors made in consolidating financial statements will appear when: a The consolidated balance sheet does not balance b Consolidated net income does not equal parent net income c The retained earnings amount on the balance sheet does not equal the amount on the retained earnings statement d Adjustment and elimination column totals do not equal
a The consolidated balance sheet does not balance
What is a noncontrolling interest?
a noncontrolling interest is equity interest in a subsidiary that is owned by stockholders outside of the affiliation structure. In other words, it is the equity interest in a sub (recorded at FV) that is not held by the parent or sub of the parent
If a parent in accounting for its subsidiary amortizes patents on its separate books, why do we include an adjustment for patents amortization in the consolidation workpaper?
a parent amortizes patents from sub investments by adjusting its sub investment and income accounts. Since patents and patent amortization accounts are not recorded on parent's books, they are created for cons statement purposes thru workpaper entries
When does goodwill result from a business combination? How does goodwill affect reported net income after a business combination?
arises in a business combination accounted for under the acquisition method when the cost of an investment (FV of consideration is transferred) exceeds fair value of identifiable net assets acquired. Under GAAP, goodwill s not amortized for financial reporting purposes and will have no effect on net income, unless the goodwill is deemed to be impaired. If goodwill is impaired, a loss will recognized.
Son Corporation's stockholders' equity at December 31, 2016, follows (in thousands): Capital stock, $100 par $3,000 Additional paid-in capital 500 Retained earnings 500 Total stockholders' equity $4,000 On January 3, 2017, Son sells 10,000 shares of previously unissued $100 par common stock to Pop Corporation for $1,400,000. On this date the recorded book values of Son's assets and liabilities equal fair values. Goodwill from Pop's investment in Son at the date of purchase is: a $0 b $50,000 c $300,000 d $400,000
b $50,000 Cost of $10,000 of 40,000 shares outstanding ----> $1,400,000 BV of 25% interest acquired (4,000,000 SE at 12/31/16 +1,400,000 from add stock issuance) * 25% ----> 1,350,000 ======> 50,000
On January 1, Pop Company paid $600,000 for 20,000 shares of Son Company's common stock, which represents a 15 percent investment in Son. Pop does not have the ability to exercise significant influence over Son. Son declared and paid a dividend of $2 per share to its stockholders during the year. Son reported net income of $520,000 for the year ended December 31. The balance in Pop's balance sheet account "Investment in Son Company" at Decem- ber 31 should be: a $560,000 b $600,000 c $638,000 d $678,000
b $600,000 bec of the equity method is not appropriate and bec Pop's share of Son's income > dividends received since acquisition [(520,000*15%)> 40,000
. Under the trial balance approach to consolidation workpapers, which of the following is used? a Unadjusted trial balances b Adjusted trial balances c Postclosing trial balances d Either a or b, depending on the circumstances
b Adjusted trial balances
On consolidation workpapers, the investment in subsidiary account balances are: a Allocated between controlling and noncontrolling interests b Always eliminated c Carried forward to the consolidated balance sheet d Eliminated when the financial statement approach is used
b Always eliminated
In a business combination, the direct costs of registering and issuing equity securities are a Added to the parent/investor company's investment account b Charged against other paid-in capital of the combined entity c Deducted from income in the period of combination d None of the above
b Charged against other paid-in capital of the combined entity
A 75 percent-owned subsidiary should not be consolidated when: a Its operations are dissimilar from those of the parent company b Control of the subsidiary does not lie with the parent company c There is a dominant noncontrolling interest in the subsidiary d Consolidation would not provide the most meaningful financial statements
b Control of the subsidiary does not lie with the parent company
Son Corporation is a 25 percent-owned equity investee of Pop Corporation. During the current year, Pop receives $12,000 in dividends from Son. How does the $12,000 dividend affect Pop's financial position and results of operations? a Increases assets b Decreases investment c Increases income d Decreases income
b Decreases investment
. On consolidation workpapers, the controlling share of consolidated net income is determined by: a Adding net income of the parent and subsidiary b Deducting consolidated expenses and noncontrolling interest share from consolidated revenues c Making adjustments to the parent's income d Subtracting noncontrolling interest share from parent net income
b Deducting consolidated expenses and noncontrolling interest share from consolidated revenues
In computing cash flows from operating activities under the indirect method, the following item is an addition to the controlling share of consolidated net income: a Noncontrolling interest dividends b Noncontrolling interest share c Income from equity investees in excess of dividends received d Write-off of negative goodwill
b Noncontrolling interest share
The FASB's primary motivation for requiring consolidation of all majority-owned subsidiaries was to: a Ensure disclosure of all loss contingencies b Prevent the use of off-balance sheet financing c Improve comparability of the statements of cash flows d Establish criteria for exclusion of finance and insurance subsidiaries from consolidation
b Prevent the use of off-balance sheet financing
A corporation exercises control over an affiliate in which it holds a 25 percent common stock interest. If its affiliate completed a fiscal year profitably but paid no dividends, how would this affect the investor? a Result in an increased current ratio b Result in increased earnings per share c Increase several turnover ratios d Decrease book value per share
b Result in increased earnings per share
. The noncontrolling interest share that appears in the consolidated income statement is computed as follows: a Consolidated net income is multiplied by the noncontrolling interest percentage. b The subsidiary's income less amortization of fair/book value differentials is multiplied by the noncontrol- ling interest percentage. c Subsidiary net income is subtracted from consolidated net income. d Subsidiary income determined for consolidated statement purposes is multiplied by the noncontrolling interest percentage.
b The subsidiary's income less amortization of fair/book value differentials is multiplied by the noncontrol- ling interest percentage.
Cobb Company's current receivables from affiliated companies at December 31, 2016, are (1) a $75,000 cash advance to Hill Corporation (Cobb owns 30 percent of the voting stock of Hill and accounts for the investment by the equity method), (2) a receivable of $260,000 from Vick Corporation for administrative and selling services (Vick is 100 percent owned by Cobb and is included in Cobb's consolidated financial statements), and (3) a receivable of $200,000 from Ward Corporation for merchandise sales on credit (Ward is a 90 percent-owned, unconsolidated subsidiary of Cobb accounted for by the equity method). In the current assets section of its December 31, 2016, consolidated balance sheet, Cobb should report accounts receivable from investees in the amount of: a $180,000 b $255,000 c $275,000 d $535,000
c $275,000
On April 1, Pam Company paid $1,600,000 for all the issued and outstanding common stock of Sun Corporation in a transaction properly accounted for as an acquisition. Sun Corporation is dissolved. The recorded assets and liabili- ties of Sun Corporation on April 1 follow: Cash $160,000 Inventory 480,000 Property and equipment (net of accumulated depreciation of $640,000) 960,000 Liabilities(360,000) On April 1, it was determined that the inventory of Sun had a fair value of $380,000, and the property and equipment (net) had a fair value of $1,120,000. What is the amount of goodwill resulting from the acquisition? a0 b $100,000 c $300,000 d $360,000
c $300,000 Investment Cost Less: FV of net assets Cash $160,000 Inventory $380,000 Property and equipment --net $1,120,000 Liabilities ($360,000) ---> 1,300,000 Goodwill --> 300,000
Pam purchased 10 percent of Sun Company's 100,000 shares of common stock on January 2 for $100,000. On December 31, Pam purchased an additional 20,000 shares of Sun for $300,000. There was no goodwill as a result of either acquisition, and Sun had not issued any additional stock during the year. Sun reported earnings of $600,000 for the year. What amount should Pam report in its December 31 balance sheet as investment in Sun? a $340,000 b $400,000 c $460,000 d $580,000
c $460,000
. . Pam purchased 10 percent of Sun Company's 100,000 shares of common stock on January 2 for $100,000. On December 31, Pam purchased an additional 20,000 shares of Sun for $300,000. There was no goodwill as a result of either acquisition, and Sun had not issued any additional stock during the year. Sun reported earnings of $600,000 for the year. What amount should Pam report in its December 31 balance sheet as investment in Sun? a $340,000 b $400,000 c $460,000 d $580,000
c $460,000 [(100,000 + 300,000) +(600,000 *10 %)]
Pop Corporation owns a 40 percent interest in Son Products acquired several years ago at book value. Son's income statement contains the following information (in thousands): Income from continuing operations $200 Discontinued operations loss (50) Net income $150 Pop should report income from Son in its income from continuing operations at: a $20,000 b $60,000 c $80,000 d $100,000
c $80,000 income from cont. operations ---> 200,000 percent owned ---> 40% income from Son products ===> 80,000
On January 2, 2016, Pam Corporation bought 15 percent of Sun Corporation's capital stock for $30,000. Pam accounts for this investment using the cost method. Sun's net income for the years ended December 31, 2016, and December 31, 2017, were $10,000 and $50,000, respectively. During 2017 Sun declared a dividend of $70,000. No dividends were declared in 2016. How much should Pam report on its 2017 income statement as income from this investment? a $1,575 b $7,500 c $9,000 d $10,500
c $9,000 Dividends received from Sun for the two years were $10,500 (70,000 * 15% - all in 2017), but only $9,000 (15% of Sun's income of $60,000 for the income from the Sun investment. The remaining $1,500 reduces the investment account balance
In preparing a statement of cash flows, the cost of acquiring a subsidiary is reported: a As an operating activity under the direct method b As an operating activity under the indirect method c As an investing activity d As a financing activity
c As an investing activity
The cost of a 25 percent interest in the voting stock of an investee that is recorded in the investment account includes: a Cash disbursed and the book value of other assets given or securities issued, other than the cost of registering and issuing equity securities b Cash disbursed and the book value of other assets given or securities issued c Cash disbursed and the fair value of other assets given or securities issued, other than the cost of reg- istering and issuing equity securities d Cash disbursed and the fair value of other assets given or securities issued
c Cash disbursed and the fair value of other assets given or securities issued, other than the cost of reg- istering and issuing equity securities
In computing cash flows from operating activities under the direct method, the following item is an addition: a Sales b Noncontrolling interest share c Cash received from customers d Depreciation expense
c Cash received from customers
A 20 percent common stock interest in an investee: a Must be accounted for under the equity method b Is accounted for by the cost method because over 20 percent is required for the application of the equity method c Is presumptive evidence of an ability to exercise significant influence over the investee d Enables the investor to apply either the cost or the equity method
c Is presumptive evidence of an ability to exercise significant influence over the investee
Consolidation workpaper techniques assume that nominal accounts are: a Open when the financial statement approach is used b Open when the trial balance approach is used c Open in all cases d Closed
c Open in all cases
. The retained earnings that appear on the consolidated balance sheet of a parent company and its 60 percent-owned subsidiary are: a Parent company's retained earnings plus 100 percent of the subsidiary's retained earnings b Parent company's retained earnings plus 60 percent of the subsidiary's retained earnings c Parent company's retained earnings d Pooled retained earnings
c Parent company's retained earnings
An 80 percent-owned subsidiary that cannot be consolidated must be accounted for: a Under the equity method b Under the cost method c Under the equity method if the parent exercises significant influence d At market value if the subsidiary is in bankruptcy
c Under the equity method if the parent exercises significant influence
8. On January 2, Pam Company purchased a 30 percent interest in Sun Company for $250,000. On this date, the book value of Sun's stockholders' equity was $500,000. The carrying amounts of Sun's identifiable net assets approxi- mated fair values, except for land, whose fair value exceeded its carrying amount by $200,000. Sun reported net income of $100,000 and paid no dividends. Pam accounts for this investment using the equity method. In its December 31 balance sheet, what amount should Pam report for this investment? a $210,000 b $220,000 c $270,000 d $280,000
d $280,000 Investment balance Jan 2 $250,000 Add: income from Sun (100,000 *30%) $30,000 Investment in Sun December 31 ----= 280,000
On January 1, Pop Company paid $300,000 for a 20 percent interest in Son Corporation's voting common stock, at which time Son's stockholders' equity consisted of $600,000 capital stock and $400,000 retained earnings. Pop was not able to exercise any influence over the operations of Son and accounted for its investment using the cost method. During the year, Son had net income of $200,000 and paid dividends of $150,000. The balance of Pop's Investment in Son account at December 31 is: a $330,000 b $310,000 c $307,500 d $300,000
d $300,000 The investment in Son balance remains at the original cost
Pop Industries owns 7,000 shares of Son Corporation's outstanding common stock (a 70 percent interest). The remaining 3,000 outstanding common shares of Son are held by Ott Insurance Company. On Pop Industries' con- solidated financial statements, Ott Insurance Company is considered: a An investee b An associated company c An affiliated company d A noncontrolling interest
d A noncontrolling interest
On consolidation workpapers, investment income from a subsidiary is: a Eliminated b Added to the investment account c Added to the parent's beginning retained earnings d Allocated between controlling and noncontrolling stockholders
d Allocated between controlling and noncontrolling stockholders
Consolidation workpaper entries normally: a Are posted to the general ledger accounts of one or more of the affiliates b Are posted to the general ledger accounts only when the financial statement approach is used c Are posted to the general ledger accounts only when the trial balance approach is used d Do not affect the general ledger accounts of any of the affiliates
d Do not affect the general ledger accounts of any of the affiliates
. Noncontrolling interest, as it appears in a consolidated balance sheet, refers to: a Owners of less than 50 percent of the parent company's stock b Parent's interest in subsidiary companies c Interest expense on subsidiary's bonds payable d Equity in the subsidiary's net assets held by stockholders other than the parent
d Equity in the subsidiary's net assets held by stockholders other than the parent
GAAP provides indicators of an investor's inability to exercise significant influence over an investee. Which of the following is not included among those indicators? a Surrender of significant stockholder rights by agreement b Concentration of majority ownership in another group rather than the investor c Failure to obtain representation on the investee's board of directors d Inability to control the investee's operating policies
d Inability to control the investee's operating policies
Parent-company and consolidated financial statement amounts would not be the same for: a Capital stock b Retained earnings c Investments in unconsolidated subsidiaries d Investments in consolidated subsidiaries
d Investments in consolidated subsidiaries
The underlying equity of an investment at acquisition: a Is recorded in the investment account under the equity method b Minus the cost of the investment is assigned to goodwill c Is equal to the fair value of the investee's net assets times the percentage acquired d Is equal to the book value of the investee's net assets times the percentage acquired
d Is equal to the book value of the investee's net assets times the percentage acquired
Cork Corporation acquires Dart Corporation in a business combination. Which of the following would be excluded from the process of assigning fair values to assets and liabilities for purposes of recording the acquisition? (Assume Dart Corporation is dissolved.) a Patents developed by Dart because the costs were expensed under GAAP b Dart's mortgage payable because it is fully secured by land that has a market value far in excess of the mortgage c An asset or liability amount for over- or underfunding of Dart's defined-benefit pension plan d None of the above
d None of the above
Net income on consolidation workpapers is: a Adjusted when the parent uses the cost method b Adjusted when the parent uses the equity method c Adjusted in all cases d Not an account balance and not subject to adjustment
d Not an account balance and not subject to adjustment
Dividends paid as presented in a consolidated cash flow statement are: a Parent dividends b Subsidiary dividends c Parent and subsidiary dividends d Parent and noncontrolling interest dividends
d Parent and noncontrolling interest dividends
Consolidated statements for Pop Corporation and its 60 percent-owned investee, Son Company, will not be prepared under current GAAP if: a The fiscal periods of Pop and Son are more than three months apart b Pop is a major manufacturing company and Son is an insurance company c Son is a foreign company d Pop Corporation and Son Company form a joint venture
d Pop Corporation and Son Company form a joint venture
Under GAAP, a parent company should exclude a subsidiary from consolidation if: a It measures income from the subsidiary under the equity method b The subsidiary is in a regulated industry c The subsidiary is a foreign entity whose books are recorded in a foreign currency d The parent does not have control of the subsidiary
d The parent does not have control of the subsidiary
An investor uses the cost method to account for an investment in common stock. A portion of the dividends received this year were in excess of the investor's share of investee's earnings after the date of the investment. The amount of dividends revenue that should be reported in the investor's income statement for this year would be: a Zero b The total amount of dividends received this year c The portion of the dividends received this year that were in excess of the investor's share of investee's earnings after the date of investment d The portion of the dividends received this year that were not in excess of the investor's share of invest- ee's earnings after the date of investment
d The portion of the dividends received this year that were not in excess of the investor's share of invest- ee's earnings after the date of investment
Pam Company owns 25 percent of Sun Corporation. During the year, Sun had net earnings of $450,000 and paid dividends of $28,000. Pam mistakenly recorded these transactions using the cost method rather than the equity method. What effect would this have on the investment account, net earnings, and retained earnings, respectively? a Understate, overstate, overstate b Overstate, understate, understate c Overstate, overstate, overstate d Understate, understate, understate
d Understate, understate, understate
What is the accounting concept of a business combination?
is a union of business entities in which 2 or more previously seperate companies are brough under the control of a single management team. 3 situations establish the control neccesary for a business combo, namely, when one or more corpoations become subsidiaries, when one company transfers net assets to another, and when each combining company transfes its net assets to a newly formed corporation.
Ordinarily, the income from an investment accounted for by the equity method is reported on one line of the investor's income statement. When would more than one line of the income statement of the investor be required to report such income?
when the investee's income includes gains or losses from discontinued operations . If so, investee's ordinary income is reported as investment income under one line consolidation , but the investor's share of gains and losses from discontinued operations is combined with similar items of the investor
