Advancing Accounting - 638 Chapter 3 Questions and Answers

On January 1, 2012, Franel Co. acquired all of the common stock of Hurlem Corp. For 2012, Hurlem earned net income of $360,000 and paid dividends of $190,000. Amortization of the patent allocation that was included in the acquisition was $6,000. How much difference would there have been in Franel's income with regard to the effect of the investment, between using the equity method or using the initial value method of internal recordkeeping? A) $190,000. B) $360,000. C) $164,000. D) $354,000. E) $150,000.

C) $164,000. Feedback: Initial Value Method = $0 Recognized from Sub Income (only dividend income) Equity Method = $360,000 - $6,000 - $190,000 = $164,000 Sub Income Added in Consolidation $164,000 - $0 = $164,000

On January 1, 2012, Cale Corp. paid $1,020,000 to acquire Kaltop Co. Kaltop maintained separate incorporation. Cale used the equity method to account for the investment. The following information is available for Kaltop's assets, liabilities, and stockholders' equity accounts on January 1, 2012: Book Fair Value Value Current assets $120,000 $120,000 Land 72,000 192,000 Building (20yr life) 240,000 268,000 Equipment (10yr life) 540,000 516,000 Current Liabilities 24,000 24,000 Long-term Liabilities 120,000 120,000 Common Stock 228,000 Additional Paid-in Capital 384,000 Retained Earnings 216,000 Kaltop earned net income for 2012 of $126,000 and paid dividends of $48,000 during the year. If Cale Corp. had net income of $444,000 in 2012, exclusive of the investment, what is the amount of consolidated net income? A) $569,000. B) $570,000. C) $571,000. D) $566,400. E) $444,000.

C) $571,000 Feedback: $444,000 + ($126,000 + $1,000) = $571,000

Which one of the following accounts would not appear in the consolidated financial statements at the end of the first fiscal period of the combination? A) Goodwill. B) Equipment. C) Investment in Subsidiary. D) Common Stock. E) Additional Paid-In Capital.

C) Investment in Subsidiary.

Racer Corp. acquired all of the common stock of Tangiers Co. in 2011. Tangiers maintained its incorporation. Which of Racer's account balances would vary between the equity method and the initial value method? A) Goodwill, Investment in Tangiers Co., and Retained Earnings. B) Expenses, Investment in Tangiers Co., and Equity in Subsidiary Earnings. C) Investment in Tangiers Co., Equity in Subsidiary Earnings, and Retained Earnings. D) Common Stock, Goodwill, and Investment in Tangiers Co. E) Expenses, Goodwill, and Investment in Tangiers Co.

C) Investment in Tangiers Co., Equity in Subsidiary Earnings, and Retained Earnings.

Which of the following internal record-keeping methods can a parent choose to account for a subsidiary acquired in a business combination? A) initial value or book value. B) initial value, lower-of-cost-or-market-value, or equity. C) initial value, equity, or partial equity. D) initial value, equity, or book value. E) initial value, lower-of-cost-or-market-value, or partial equity.

C) initial value, equity, or partial equity.

On January 1, 2012, Franel Co. acquired all of the common stock of Hurlem Corp. For 2012, Hurlem earned net income of $360,000 and paid dividends of $190,000. Amortization of the patent allocation that was included in the acquisition was $6,000. How much difference would there have been in Franel's income with regard to the effect of the investment, between using the equity method or using the partial equity method of internal recordkeeping? A) $170,000. B) $354,000. C) $164,000. D) $ 6,000. E) $174,000.

D) $ 6,000. Feedback: Equity Method = $360,000 - $6,000 - $190,000 = $164,000 Added in Consolidation - Partial Equity Method = $360,000 - $190,000 = $170,000 Added in Consolidation $170,000 - $164,000 = $6,000

On January 1, 2012, Cale Corp. paid $1,020,000 to acquire Kaltop Co. Kaltop maintained separate incorporation. Cale used the equity method to account for the investment. The following information is available for Kaltop's assets, liabilities, and stockholders' equity accounts on January 1, 2012: Book Fair Value Value Current assets $120,000 $120,000 Land 72,000 192,000 Building (20yr life) 240,000 268,000 Equipment (10yr life) 540,000 516,000 Current Liabilities 24,000 24,000 Long-term Liabilities 120,000 120,000 Common Stock 228,000 Additional Paid-in Capital 384,000 Retained Earnings 216,000 Kaltop earned net income for 2012 of $126,000 and paid dividends of $48,000 during the year. The 2012 total amortization of allocations is calculated to be A) $ 4,000. B) $ 6,400. C) $(2,400). D) $(1,000). E) $ 3,800.

D) $(1,000). Feedback: Building = FV $268,000 - BV $240,000 = $28,000 / 20 yrs = $1,400 Equipment = FV $516,000 - BV $540,000 = ($24,000) / 10 yrs = ($2,400) ($2,400) + $1,400 = ($1,000)

On January 1, 2012, Cale Corp. paid $1,020,000 to acquire Kaltop Co. Kaltop maintained separate incorporation. Cale used the equity method to account for the investment. The following information is available for Kaltop's assets, liabilities, and stockholders' equity accounts on January 1, 2012: Book Fair Value Value Current assets $120,000 $120,000 Land 72,000 192,000 Building (20yr life) 240,000 268,000 Equipment (10yr life) 540,000 516,000 Current Liabilities 24,000 24,000 Long-term Liabilities 120,000 120,000 Common Stock 228,000 Additional Paid-in Capital 384,000 Retained Earnings 216,000 Kaltop earned net income for 2012 of $126,000 and paid dividends of $48,000 during the year. In Cale's accounting records, what amount would appear on December 31, 2012 for equity in subsidiary earnings? A) $ 77,000. B) $ 79,000. C) $125,000. D) $127,000. E) $ 81,800.

D) $127,000. Feedback: $126,000 + $1,000 = $127,000

Cashen Co. paid $2,400,000 to acquire all of the common stock of Janex Corp. on January 1, 2012. Janex's reported earnings for 2012 totaled $432,000, and it paid $120,000 in dividends during the year. The amortization of allocations related to the investment was $24,000. Cashen's net income, not including the investment, was $3,180,000, and it paid dividends of $900,000 What is the amount of consolidated net income for the year 2012? A) $3,180,000. B) $3,612,000. C) $3,300,000. D) $3,588,000. E) $3,420,000.

D) $3,588,000. Feedback: Parent Income $3,180,000 + Sub Income $432,000 - Amortization Allocations $24,000 = Consolidated Net Income $3,588,000

Velway Corp. acquired Joker Inc. on January 1, 2012. The parent paid more than the fair value of the subsidiary's net assets. On that date, Velway had equipment with a book value of $500,000 and a fair value of $640,000. Joker had equipment with a book value of $400,000 and a fair value of $470,000. Joker decided to use push-down accounting. Immediately after the acquisition, what Equipment amount would appear on Joker's separate balance sheet and on Velway's consolidated balance sheet, respectively? A) $400,000 and $900,000 B) $400,000 and $970,000 C) $470,000 and $900,000 D) $470,000 and $970,000 E) $470,000 and $1,040,000

D) $470,000 and $970,000 Feedback: FV of EQ = $470,000 for Joker B/S; Consolidated B/S = BV of Parent EQ $500,000 + FV of Sub EQ $470,000 = $970,000

. Which one of the following varies between the equity, initial value, and partial equity methods of accounting for an investment? A) the amount of consolidated net income. B) total assets on the consolidated balance sheet. C) total liabilities on the consolidated balance sheet. D) the balance in the investment account on the parent's books. E) the amount of consolidated cost of goods sold.

D) the balance in the investment account on the parent's books.

How does the partial equity method differ from the equity method? A) In the total assets reported on the consolidated balance sheet. B) In the treatment of dividends. C) In the total liabilities reported on the consolidated balance sheet. D) Under the partial equity method, subsidiary income does not increase the balance in the parent's investment account. E) Under the partial equity method, the balance in the investment account is not decreased by amortization on allocations made in the acquisition of the subsidiary.

E) Under the partial equity method, the balance in the investment account is not decreased by amortization on allocations made in the acquisition of the subsidiary

Under the partial equity method, the parent recognizes income when A) dividends are received from the investee. B) dividends are declared by the investee. C) the related expense has been incurred. D) the related contract is signed by the subsidiary. E) it is earned by the subsidiary.

E) it is earned by the subsidiary.

Cashen Co. paid $2,400,000 to acquire all of the common stock of Janex Corp. on January 1, 2012. Janex's reported earnings for 2012 totaled $432,000, and it paid $120,000 in dividends during the year. The amortization of allocations related to the investment was $24,000. Cashen's net income, not including the investment, was $3,180,000, and it paid dividends of $900,000. On the consolidated financial statements for 2012, what amount should have been shown for Equity in Subsidiary Earnings? A) $432,000. B) $ -0- C) $408,000. D) $120,000. E) $288,000.

B) $ -0- Feedback: $0; (Income is eliminated from the investment account)

Parrett Corp. acquired one hundred percent of Jones Inc. on January 1, 2011, at a price in excess of the subsidiary's fair value. On that date, Parrett's equipment (ten-year life) had a book value of $360,000 but a fair value of $480,000. Jones had equipment (ten-year life) with a book value of $240,000 and a fair value of $350,000. Parrett used the partial equity method to record its investment in Jones. On December 31, 2013, Parrett had equipment with a book value of $250,000 and a fair value of $400,000. Jones had equipment with a book value of $170,000 and a fair value of $320,000. What is the consolidated balance for the Equipment account as of December 31, 2013? A) $387,000. B) $497,000. C) $508.000. D) $537,000. E) $570,000.

B) $497,000. Feedback: Excess of Sub's FV = $110,000 + Parent's BV $250,000 + Sub's BV $170,000 - Excess Amortization ($11,000 X 3yrs) = $497,000

Cashen Co. paid $2,400,000 to acquire all of the common stock of Janex Corp. on January 1, 2012. Janex's reported earnings for 2012 totaled $432,000, and it paid $120,000 in dividends during the year. The amortization of allocations related to the investment was $24,000. Cashen's net income, not including the investment, was $3,180,000, and it paid dividends of $900,000 On the consolidated financial statements for 2012, what amount should have been shown for consolidated dividends? A) $ 900,000. B) $1,020,000. C) $ 876,000. D) $ 996,000. E) $ 948,000.

A) $ 900,000. Feedback: $900,000 Parent's Dividends Only

On January 1, 2012, Cale Corp. paid $1,020,000 to acquire Kaltop Co. Kaltop maintained separate incorporation. Cale used the equity method to account for the investment. The following information is available for Kaltop's assets, liabilities, and stockholders' equity accounts on January 1, 2012: Book Fair Value Value Current assets $120,000 $120,000 Land 72,000 192,000 Building (20yr life) 240,000 268,000 Equipment (10yr life) 540,000 516,000 Current Liabilities 24,000 24,000 Long-term Liabilities 120,000 120,000 Common Stock 228,000 Additional Paid-in Capital 384,000 Retained Earnings 216,000 Kaltop earned net income for 2012 of $126,000 and paid dividends of $48,000 during the year. What is the balance in Cale's investment in subsidiary account at the end of 2012? A) $1,099,000. B) $1,020,000. C) $1,096,200. D) $1,098,000. E) $1,144,400.

A) $1,099,000. Feedback: $1,020,000 + ($126,000 + $1,000) - $48,000 = $1,099,000

Jansen Inc. acquired all of the outstanding common stock of Merriam Co. on January 1, 2012, for $257,000. Annual amortization of $19,000 resulted from this acquisition. Jansen reported net income of $70,000 in 2012 and $50,000 in 2013 and paid $22,000 in dividends each year. Merriam reported net income of $40,000 in 2012 and $47,000 in 2013 and paid $10,000 in dividends each year. What is the Investment in Merriam Co. balance on Jansen's books as of December 31, 2013, if the equity method has been applied? A) $286,000. B) $295,000. C) $276,000. D) $344,000. E) $324,000.

A) $286,000. Feedback: $257,000 + $40,000 + $47,000 - $10,000 - $19,000 - $10,000 - $19,000 = $286,000

Push-down accounting is concerned with the A) impact of the purchase on the subsidiary's financial statements. B) recognition of goodwill by the parent. C) correct consolidation of the financial statements. D) impact of the purchase on the separate financial statements of the parent. E) recognition of dividends received from the subsidiary.

A) impact of the purchase on the subsidiary's financial statements.

On January 1, 2012, Cale Corp. paid $1,020,000 to acquire Kaltop Co. Kaltop maintained separate incorporation. Cale used the equity method to account for the investment. The following information is available for Kaltop's assets, liabilities, and stockholders' equity accounts on January 1, 2012: Book Fair Value Value Current assets $120,000 $120,000 Land 72,000 192,000 Building (20yr life) 240,000 268,000 Equipment (10yr life) 540,000 516,000 Current Liabilities 24,000 24,000 Long-term Liabilities 120,000 120,000 Common Stock 228,000 Additional Paid-in Capital 384,000 Retained Earnings 216,000 Kaltop earned net income for 2012 of $126,000 and paid dividends of $48,000 during the year. At the end of 2012, the consolidation entry to eliminate Cale's accrual of Kaltop's earnings would include a credit to Investment in Kaltop Co. for A) $124,400. B) $126,000. C) $127,000. D) $ 76,400. E) $ 0.

C) $127,000 Feedback: $126,000 + $1,000 = $127,000