Chapter 4 Multiple Choice

C. $60,000. Explanation: Amie, Inc. Fair Value at July 1, 2015 is as follows. 30% Previously Owned Fair Value of (30,000 x $5) = $150,000 Add 60% New Shares Acquired of (60,000 shares x $6) = $360,000 Add 10% NCI Fair Value of (10,000 shares x $5) = $50,000 Equals Acquisition-Date Fair Value of $560,000 Less Net Assets Fair Value of $500,000 Equals Goodwill of $60,000.

Amie, Inc., has 100,000 shares of $2 par value stock outstanding. Prairie Corporation acquired 30,000 of Amie's shares on January 1, 2012, for $120,000 when Amie's net assets had a total fair value of $350,000. On July 1, 2015, Prairie bought an additional 60,000 shares of Amie from a single stockholder for $6 per share. Although Amie's shares were selling in the $5 range around July 1, 2015, Prairie forecasted that obtaining control of Amie would produce significant revenue synergies to justify the premium price paid. If Amie's net identifiable assets had a fair value of $500,000 at July 1, 2015, how much goodwill should Prairie report in its postcombination consolidated balance sheet? A. $0 B. $100,000. C. $60,000. D. $90,000.

D. Exclude 100 percent of the preacquisition revenues and 100 percent of the preacquisition expenses from their respective consolidated totals.

James Company acquired 85 percent of Mark-Right Company on April 1. On its December 31 consolidated income statement, how should James account for Mark-Right's revenues and expenses that occurred before April 1? A. Exclude 15 percent of the preacquisition revenues and 15 percent of the preacquisition expenses from consolidated expenses. B. Deduct 15 percent of the net combined revenues and expenses relating to the preacquisition period from consolidated net income. C. Include 100 percent of Mark-Right's revenues and expenses and deduct the preacquisition portion as noncontrolling interest in net income. D. Exclude 100 percent of the preacquisition revenues and 100 percent of the preacquisition expenses from their respective consolidated totals.

B. $400,000. Explanation: In consolidating the subsidiary's figures, all intra-entity balances must be eliminated in their entirety for external reporting purposes. Even though the subsidiary is less than fully owned, the parent nonetheless controls it.

Jordan, Inc., holds 75 percent of the outstanding stock of Paxson Corporation. Paxson currently owes Jordan $400,000 for inventory acquired over the past few months. In preparing consolidated financial statements, what amount of this debt should be eliminated? A. $100,000. B. $400,000. C. $300,000. D. $0

D. $549,000. Explanation: At the date control is obtained, the parent consolidates subsidiary assets at fair value ($549,000 in this case) regardless of the parent's percentage ownership.

Mittelstaedt Inc., buys 60 percent of the outstanding stock of Sherry, Inc. Sherry owns a piece of land that cost $212,000 but had a fair value of $549,000 at the acquisition date. What value should be attributed to this land in a consolidated balance sheet at the date of takeover? A. $421,800. B. $337,000. C. $127,200. D. $549,000.

B. In the owners' equity section.

The noncontrolling interest represents an outside ownership in a subsidiary that is not attributable to the parent company. Where in the consolidated balance sheet is this outside ownership interest recognized? A. In the liability section. B. In the owners' equity section. C. In a mezzanine section between liabilities and owners' equity. D. The noncontrolling interest is not recognized in the consolidated balance sheet.

A. A subsidiary is an indivisible part of a business combination and should be included in its entirety regardless of the degree of ownership.

What is a basic premise of the acquisition method regarding accounting for a noncontrolling interest? A. A subsidiary is an indivisible part of a business combination and should be included in its entirety regardless of the degree of ownership. B. Consolidated financial statements should be primarily for the benefit of the parent company's stockholders. C. Consolidated financial statements should not report a noncontrolling interest balance because these outside owners do not hold stock in the parent company. D. Consolidated financial statements should be produced only if both the parent and the subsidiary are in the same basic industry.

D. $250,000. Explanation: Under the equity method, consolidated RE = parent's RE.

Note: The same company information is used for two questions. On January 1, 2013, Pride Co. purchased 90 percent of the outstanding voting shares of Star Inc. for $540,000 cash. The acquisition-date fair value of the noncontrolling interest was $60,000. At January 1, 2013, Star's net assets had a total carrying amount of $420,000. Equipment (8-year remaining life) was undervalued on Star's financial records by $80,000. Any remaining excess fair value over book value was attributed to a customer list developed by Star (4-year remaining life), but not recorded on its books. Star recorded income of $70,000 in 2013 and $80,000 in 2014. Each year since the acquisition, Star has paid a $20,000 dividend. At January 1, 2015, Pride's retained earnings show a $250,000 balance. Selected account balances for the two companies from their separate operations were as follows: Pride: 2015 Revenues $498,000 2015 Expenses $350,000 Star: 2015 Revenues $285,000 2015 Expenses $195,000 Assuming that Pride, in its internal records, accounts for its investment in Star using the equity method, what is Pride's share of consolidated retained earnings at January 1, 2015? A. $315,000. B. $360,000. C. $286,000. D. $250,000.

D. $203,000. Explanation: Step 1 Consideration transferred by Pride of $540,000 Add Noncontrolling interest fair value of $60,000 Equals Star Acquisition-Date FV of $600,000 Less Star Book VAlue of $420,000 Equals Excess FV over BV of $180,000 Step 2 Excess FV over BV Amortized to Equipment of $80,000/8 year remaining life = $10,000 Amortization Excess FV over BV Amortized to Customer List of $100,000/4 year remaining life = $25,000 Amortization $10,000 + $25,000 = $35,000 Amortization Step 3 Combined Revenues of $783,000 Less Combined Expenses of $545,000 Less Excess FV Amortization of $35,000 Equals Consolidated Net Income of $203,000

Note: The same company information is used for two questions. On January 1, 2013, Pride Co. purchased 90 percent of the outstanding voting shares of Star Inc. for $540,000 cash. The acquisition-date fair value of the noncontrolling interest was $60,000. At January 1, 2013, Star's net assets had a total carrying amount of $420,000. Equipment (8-year remaining life) was undervalued on Star's financial records by $80,000. Any remaining excess fair value over book value was attributed to a customer list developed by Star (4-year remaining life), but not recorded on its books. Star recorded income of $70,000 in 2013 and $80,000 in 2014. Each year since the acquisition, Star has paid a $20,000 dividend. At January 1, 2015, Pride's retained earnings show a $250,000 balance. Selected account balances for the two companies from their separate operations were as follows: Pride: 2015 Revenues $498,000 2015 Expenses $350,000 Star: 2015 Revenues $285,000 2015 Expenses $195,000 What is consolidated net income for 2015? A. $197,500. B. $194,000. C. $238,000. D. $203,000.

A. $36,000. Explanation: An asset acquired in a business combination is initially valued at 100% acquisition-date fair value and subsequently amortized its useful life. Patent FV at 1/1/2014 of $45,000 Less Amortization for 2 Years (10 Year Life) of ($9,000) Equals Patent reported amount at 12/31/15 of $36,000

On January 1, 2014, Brendan, Inc., reports net assets of $760,000 although equipment (with a four-year life) having a book value of $440,000 is worth $500,000 and an unrecorded patent is valued at $45,000. Hope Corporation pays $692,000 on that date for an 80 percent ownership in Brendan. If the patent is to be written off over a 10-year period, at what amount should it be reported on consolidated statements at December 31, 2015? A. $36,000. B. $32,400. C. $28,800. D. $40,500.

D. $351,000. Explanation: Combined Revenues of $1,100,000 Less Combines Expenses of ($700,000) Less Excess Acquisition-Date FV Amortization of ($15,000) Equals Consolidated Net Income of $385,000 Less Noncontrolling interest of ($85,000 x 40%) = ($34,000) Equals Consolidated Net Income to Controlling Interest of $351,000

On January 1, 2014, Chamberlain Corporation pays $388,000 for a 60 percent ownership in Neville. Annual excess fair-value amortization of $15,000 results from the acquisition. On December 31, 2015, Neville reports revenues of $400,000 and expenses of $300,000 and Chamberlain reports revenues of $700,000 and expenses of $400,000. The parent figures contain no income from the subsidiary. What is consolidated net income attributable to the Chamberlain Corporation? A. $231,000. B. $366,000. C. $400,000. D. $351,000.