Chapter 4

What amount of consolidated net income for 2019 should be allocated to Femur's controlling interest in Harbor?

What amount of consolidated net income for 2019 should be allocated to Femur's controlling interest in Harbor? A) $ 582,000 B) $1,050,000 C) $1,358,000 D) $1,808,000 E) $2,140,000 Answer: D

When Jolt Co. acquired 75% of the common stock of Yelts Corp., Yelts owned land with a book value of $70,000 and a fair value of $100,000.

. What amount should have been reported for the land in a consolidated balance sheet at the acquisition date? A) $ 52,500. B) $ 70,000. C) $ 75,000. D) $ 92,500. E) $100,000. Answer: E

What amount of goodwill should be attributed to the noncontrolling interest at the date of acquisition?

A) $ 0. B) $ 20,000. C) $ 30,000. D) $100,000. E) $120,000. Answer: C

3. What is the total amount of excess land allocation at the acquisition date?

A) $ 0. B) $30,000. C) $22,500. D) $25,000. E) $17,500. Answer: B

What is the dollar amount of Float Corp.'s net assets that would be represented in a consolidated balance sheet prepared at the date of acquisition?

A) $1,600,000. B) $1,480,000. C) $1,200,000. D) $1,780,000. E) $1,850,000. Answer: E

Compute the noncontrolling interest in Demers at December 31, 2021.

A) $107,800. B) $140,000. C) $ 80,000. D) $ 50,000. E) $160,800. Answer: E

What is the dollar amount of fair value over book value differences attributed to Perch at the date of acquisition?

A) $120,000. B) $150,000. C) $280,000. D) $350,000. E) $370,000. Answer: C

Femur Co. acquired 70% of the voting common stock of Harbor Corp. on January 1, 2019. During 2019, Harbor had revenues of $2,500,000 and expenses of $2,000,000. The amortization of fair value allocations totaled $60,000 in 2019. Not including its investment in Harbor, Femur Co. had its own revenues of $4,500,000 and expenses of $3,000,000 for the year 2019. The noncontrolling interest's share of the earnings of Harbor Corp. for 2019 is calculated to be

A) $132,000. B) $150,000. C) $168,000. D) $160,000. E) $0. Answer: A

Perch Co. acquired 80% of the common stock of Float Corp. for $1,600,000. The fair value of Float's net assets was $1,850,000, and the book value was $1,500,000. The noncontrolling interest shares of Float Corp. are not actively traded. What is the total amount of goodwill recognized at the date of acquisition?

A) $150,000. B) $250,000. C) $ 0. D) $120,000. E) $170,000. Answer: A

What amount of goodwill should be attributed to Perch at the date of acquisition?

A) $150,000. B) $250,000. C) $ 0. D) $120,000. E) $170,000. Answer: D

Compute the noncontrolling interest in the net income of Demers at December 31, 2020.

A) $18,400. B) $14,000. C) $22,600. D) $24,000. E) $12,600

Compute the noncontrolling interest in the net income of Demers at December 31, 2019.

A) $20,000. B) $12,000. C) $18,600. D) $10,600. E) $14,400. Answer: C

What is the amount of the noncontrolling interest's share of Kailey's income for 2019?

A) $22,000. B) $24,000. C) $48,000. D) $66,000. E) $72,000. Answer: A

MacHeath Inc. bought 60% of the outstanding common stock of Nomes Inc. in an acquisition that resulted in the recognition of goodwill. Nomes owned a piece of land that cost $250,000 but was worth $600,000 at the date of acquisition. What value would be attributed to this land in a consolidated balance sheet at the date of acquisition?

A) $250,000. B) $150,000. C) $600,000. D) $360,000. E) $460,000. Answer: C

What is the dollar amount of noncontrolling interest that should appear in a consolidated balance sheet prepared at the date of acquisition?

A) $350,000. B) $300,000. C) $400,000. D) $370,000. E) $0. Answer: C

What is the dollar amount of noncontrolling interest that should appear in a consolidated balance sheet prepared at the date of acquisition?

A) $350,000. B) $300,000. C) $400,000. D) $370,000. E) $0. Answer: C

What amount would Femur Co. report as consolidated net income for 2019?

A) $440,000. B) $500,000. C) $1,500,000. D) $1,940,000. E) $2,000,000. Answer: D

What is the noncontrolling interest's share of the subsidiary's net income for the year ended December 31, 2020 and what is the ending balance of the noncontrolling interest in the subsidiary at December 31, 2020?

A) $56,000 and $280,000. B) $50,400 and $218,400. C) $56,000 and $224,000. D) $56,000 and $336,000. E) $50,400 and $330,400. Answer: E

What is the consolidated balance of the Equipment account at December 31, 2020?

A) $644,400. B) $784,000. C) $719,600. D) $770,000. E) $775,600. Answer: D

1. For business combinations involving less than 100 percent ownership, the acquirer recognizes and measures all of the following at the acquisition date except:

A) Identifiable assets acquired, at fair value. B) Liabilities assumed, at book value. C) Non-controlling interest, at fair value. D) Goodwill, or a gain from bargain purchase. E) None of these choices is correct. Answer: B

Which of the following statements is true regarding the sale of subsidiary shares when using the acquisition method for accounting for business combinations?

A) If control continues, the difference between selling price and acquisition value is recorded as a realized gain or loss. B) If control continues, the difference between selling price and acquisition value is an unrealized gain or loss. C) If control continues, the difference between selling price and carrying value is recorded as an adjustment to additional paid-in capital. D) If control continues, the difference between selling price and carrying value is recorded as a realized gain or loss. E) If control continues, the difference between selling price and carrying value is recorded as an adjustment to retained earnings. Answer: C

When a parent uses the acquisition method for business combinations and sells shares of its subsidiary, which of the following statements is false?

A) If majority control is still maintained, consolidated financial statements are still required. B) If majority control is not maintained but significant influence exists, the equity method to account for the investment is still used but consolidated financial statements are not required. C) If majority control is not maintained but significant influence exists, the equity method is still used to account for the investment and consolidated financial statements are still required. D) If majority control is not maintained and significant influence no longer exists, a prospective change in accounting principle to the fair value method is required. E) A gain or loss calculation must be prepared if control is lost. Answer: C

When a subsidiary is acquired sometime after the first day of the fiscal year, which of the following statements is true?

A) Income from subsidiary is not recognized until there is an entire year of consolidated operations. B) Income from subsidiary is recognized from date of acquisition to year-end. C) Excess cost over acquisition value is recognized at the beginning of the fiscal year. D) No goodwill can be recognized. E) Income from subsidiary is recognized for the entire year. Answer: B

When a parent uses the initial value method throughout the year to account for its 80% investment in an acquired subsidiary, which of the following statements is true at the date immediately preceding the date on which adjustments are made on the consolidated worksheet?

A) Parent company net income equals consolidated net income. B) Parent company retained earnings equals consolidated retained earnings. C) Parent company total assets equals consolidated total assets. D) Parent company dividends equal consolidated dividends. E) Goodwill is recorded on the parent's books. Answer: D

When a parent uses the partial equity method throughout the year to account for its 80% investment in an acquired subsidiary, which of the following statements is true at the date immediately preceding the date on which adjustments are made on the consolidated worksheet?

A) Parent company net income equals consolidated net income. B) Parent company retained earnings equals consolidated retained earnings. C) Parent company total assets equals consolidated total assets. D) Parent company dividends equal consolidated dividends. E) Goodwill is recorded on the parent's books. Answer: D

When consolidating a subsidiary that was acquired on a date other than the first day of the fiscal year, which of the following statements is true of the subsidiary with respect to the presentation of consolidated financial statement information?

A) Pre-acquisition earnings are deducted from consolidated revenues and expenses. B) Pre-acquisition earnings are added to consolidated revenues and expenses. C) Pre-acquisition earnings are deducted from the beginning consolidated stockholders' equity. D) Pre-acquisition earnings are added to the beginning consolidated stockholders' equity. E) Pre-acquisition earnings are ignored in the consolidated income statement. Answer: E

In a step acquisition, which of the following statements is false?

A) The acquisition method views a step acquisition essentially the same as a single step acquisition. B) Income from subsidiary is computed by applying a partial year for a new purchase acquired during the year. C) Income from subsidiary is computed for the entire year for a new purchase acquired during the year. D) Obtaining control through a step acquisition is a significant measurement event. E) Pre-acquisition earnings are not included in the consolidated income statement. Answer: C

Jax Company used the acquisition method when it acquired its investment in Saxton Company. Jax now sells some of its shares of Saxton such that neither control nor significant influence exists. Which of the following statements is true?

A) The difference between selling price and acquisition value is recorded as a realized gain or loss. B) The difference between selling price and acquisition value is recorded as an unrealized gain or loss. C) The difference between selling price and carrying value is recorded as a realized gain or loss. D) The difference between selling price and carrying value is recorded as an unrealized gain or loss. E) The difference between selling price and carrying value is recorded as an adjustment to retained earnings. Answer: C

Which of the following statements is false regarding multiple acquisitions of a subsidiary's existing common stock?

A) The parent recognizes a larger percent of subsidiary income. B) A step acquisition resulting in control may result in a parent recognizing a gain on revaluation. C) The book value of the subsidiary will increase. D) The parent's percent ownership in subsidiary will increase. E) Noncontrolling interest in subsidiary's net income will decrease. Answer: C

All of the following statements regarding the sale of subsidiary shares are true except which of the following?

A) The use of specific identification based on serial number is acceptable. B) The use of the FIFO assumption is acceptable. C) The use of the averaging assumption is acceptable. D) The use of specific LIFO assumption is acceptable. E) The parent company must determine whether consolidation is still appropriate for the remaining shares owned. Answer: D

Which of the following methods is not used to value a noncontrolling interest under circumstances where a control premium is applied to determine the appropriate value for such interest?

A) Valuation models based on subsidiary discounted cash flows. B) Valuation models based on subsidiary residual income projections. C) Comparison with comparable investments. D) The application of a safe harbor discount rate. E) Fair value based on market trades. Answer: D

Alonzo Co. acquired 60% of Beazley Corp. by paying $240,000 cash. There is no active trading market for Beazley Corp. At the time of the acquisition, the book value of Beazley's net assets was $300,000. Required: What amount should have been assigned to the noncontrolling interest immediately after the combination?

Answer: Implied value of Beazley Corp. ($240,000 ÷ 60%) $ 400,000 Noncontrolling percentage x 40% Noncontrolling interest in Beazley Corp. $ 160,000

Prepare a proper presentation of consolidated net income and its allocation for 2020

Answer: Jannison's income - 2020 $364,000 Techron's income - 2020 126,000 Amortization expense (given) (11,000) Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Page 4-47 Consolidated net income $479,000 To noncontrolling interest (10%) ($126,000-11,000) (11,500) To controlling interest $467,500

Beta Corp. owns less than one hundred percent of the voting common stock of Shedds Co. Under what conditions will Beta be required to prepare consolidated financial statements?

Answer: Beta will be required to prepare consolidated financial statements if it has control of Shedds. If Beta has more than 50% of the voting common stock of Shedds, it has control and must prepare consolidated financial statements. Occasionally, ownership of less than 50% of the voting common stock can confer control. In this situation, an argument can be made that the company with control should prepare consolidated financial statements, although such reporting is not currently required.

How does a parent company account for the sale of a portion of an investment in a subsidiary?

Answer: If control is maintained after the sale, then the difference between the sales proceeds and the book value is an adjustment to the parent's owners' equity (APIC). If control is not maintained, then such difference is a gain or loss on sale of investment. In either situation, the book value of the investment should be on the equity method basis in order to calculate the proper entry for the sale. Therefore, if the investment has been kept under the initial value or the partial equity method, the investor adjusts the book value of its investment in order to bring an initial value method or partial equity method investment basis to an equity method basis

Prevatt, Inc. owns 80% of Franklin Company. During the current year, a portion of the investment in Franklin is sold. Prior to recording the sale, Prevatt adjusts the carrying value of its investment. What is the purpose of the adjustment?

Answer: If control is maintained after the sale, then the difference between the sales proceeds and the book value is an adjustment to the parent's owners' equity. If control is not maintained, then such difference is a gain or loss on sale of investment. In either situation, the carrying value of the investment should be on the equity method basis in order to calculate the proper entry for the sale. Therefore, if Prevatt adjusts the carrying value of its investment, it is in order to bring an initial value method or partial equity method investment basis to an equity method basis.

Why is it important to know if the parent paid a premium to acquire control of a subsidiary?

Answer: It is necessary to ascertain the subsidiary's total fair value at the acquisition date so that the value can be appropriately attributed to the parent and to the noncontrolling interest. If there is a control premium, then the total fair value of the subsidiary cannot be implied by the parent's consideration transferred unless the premium amount is first removed from the consideration value. If separate share fair values are specifically known for the shares acquired by the parent and the shares held by the noncontrolling interest, then the total fair value can be directly calculated. In either calculation, the control premium affects primarily the parents' shares acquired, and thus goodwill is disproportionately (relative to the ownership percentages) allocated to the controlling and noncontrolling interests. This disproportionate allocation of goodwill is essential to know because the resulting allocation of goodwill affects Entry A for the worksheet and thus affects the resulting balance of the noncontrolling interest reported on the consolidated balance sheet.

One company buys a controlling interest in another company on April 1 during a company's calendar year of operations. How should the pre-acquisition subsidiary revenues and expenses be handled in the consolidated balances for the year of acquisition?

Answer: Only post-acquisition revenues and expenses are included in consolidated totals. The noncontrolling interest is thereby viewed as beginning as of the acquisition date.

How would you determine the amount of goodwill to be recognized at date of acquisition when there is a noncontrolling interest present?

Answer: The noncontrolling interest fair value may be implied by the parent's consideration transferred Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Page 4-41 or by a separate value calculation. The total acquisition fair value is then the sum of both parent and noncontrolling interest shares. The fair value of the net assets acquired is apportioned to the parent and to the noncontrolling interest. Then, the difference between acquisition fair value and relative fair value of net assets acquired is goodwill attributed respectively to the parent and to the noncontrolling interest.

What is pre-acquisition income?

Answer: When a company acquires control of a subsidiary during a fiscal year, pre-acquisition income is the income attributed to the previous owners of the shares of the common stock for the portion of the year before the acquisition.