Ch 3 AA Consolidations-Subsequent to the Date of Acquisition: Problems

Q.10 Harrison, Inc. acquires 100% of the voting stock of Rhine Company on January 1, 2012 for $400,000 cash. A contingent payment of $16,500 will be paid on April 15, 2013 if Rhine generates cash flows from operations of $27,000 or more in the next year. Harrison estimates that there is a 20% probability that Rhine will generate at least $27,000 next year, and uses an interest rate of 5% to incorporate the time value of money. The fair value of $16,500 at 5%, using a probability weighted approach, is $3,142. When recording consideration transferred for the acquisition of Rhine on January 1, 2012, Harrison will record a contingent performance obligation in the amount of: 1. $628.40 2. $2,671.60 3. $3,142.00 4. $13,358.00 5. $16,500.00

3 Weighted Fair Value of Contingency = $3,142

5. How would the answer to problem (4) have been affected if the parent had applied the initial value method rather than the equity method? a. No effect: The method the parent uses is for internal reporting purposes only and has no impact on consolidated totals. b. The consolidated Equipment account would have a higher reported balance. c. The consolidated Equipment account would have a lower reported balance. d. The balance in the consolidated Equipment account cannot be determined for the initial value method using the information given.

a

2. 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. It is a relatively easy method to apply. 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. Consolidation is not required when the parent uses the equity method.

b

8. 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. The additional $110,000 payment is a reduction in consolidated retained earnings. b. The fair value of the expected contingent payment increases goodwill at the acquisition date.

b

q.1 Push-down accounting is concerned with the 1. impact of the purchase on the subsidiary's financial statements. 2. recognition of goodwill by the parent. 3. correct consolidation of the financial statements. 4. impact of the purchase on the separate financial statements of the parent. 5. recognition of dividends received from the subsidiary.

1

When a company applies the initial method in accounting for its investment in a subsidiary and the subsidiary reports income in excess of dividends paid, what entry would be made for a consolidation worksheet?

Investment in subsidiary .....Retained earnings

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 (8-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 (4-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 Sedona 2015 Revenues $498,000$285,000 2015 Expenses 350,000 195,000 2015 Income from Sedona 55,000 Retained earnings 12/31/15 250,000 175,000 10. What is Phoenix's consolidated retained earnings balance at December 31, 2015? a. $250,000. b. $290,000. c. $330,000. d. $360,000.

10. A (same as Phoenix because of equity method use).

Q.9 Prince Company acquires Duchess, Inc. on January 1, 2011. The consideration transferred exceeds the fair value of Duchess' net assets. On that date, Prince has a building with a book value of $1,200,000 and a fair value of $1,500,000. Duchess has a building with a book value of $400,000 and fair value of $500,000. If push-down accounting is not used, what amounts in the Building account appear on Duchess' separate balance sheet and on the consolidated balance sheet immediately after acquisition? 1. $400,000 and $1,600,000. 2. $500,000 and $1,700,000. 3. $400,000 and $1,700,000. 4. $500,000 and $2,000,000. 5. $500,000 and $1,600,000.

3 Book Value ($400,000) & Parent BV + Sub FV ($1,700,000)

Q.2 Red Co. acquired 100% of Green, Inc. on January 1, 2012. On that date, Green had inventory with a book value of $42,000 and a fair value of $52,000. This inventory had not yet been sold at December 31, 2012. Also, on the date of acquisition, Green had a building with a book value of $200,000 and a fair value of $390,000. Green had equipment with a book value of $350,000 and a fair value of $280,000. The building had a 10-year remaining useful life and the equipment had a 5-year remaining useful life. How much total expense will be in the consolidated financial statements for the year ended December 31, 2012 related to the acquisition allocations of Green? 1. $43,000. 2. $33,000. 3. $5,000. 4. $15,000. 5. 0.

3 Building Adjustment ($190,000/10) $19,000 + Equipment Adjustment ([$70,000]/5)($14,000) = $5,000

Q.7 Consolidated net income using the equity method for an acquisition combination is computed as follows: 1. Parent company's income from its own operations plus the equity from subsidiary's income recorded by the parent. 2. Parent's reported net income. 3. Combined revenues less combined expenses less equity in subsidiary's income less amortization of fair-value allocations in excess of book value. 4. Parent's revenues less expenses for its own operations plus the equity from subsidiary's income recorded by parent. 5. All of these.

4

Q.8 Watkins, Inc. acquires all of the outstanding stock of Glen Corporation on January 1, 2012. At that date, Glen owns only three assets and has no liabilities: Book Value.....Fair Value -Inventory (FIFO method) $40000.....$50,000 -Equipment (10-year life) $80,000.....$75,000 -Building (20-year life) $200,000.....$300,000 If Watkins pays $450,000 in cash for Glen, what amount would be represented as the subsidiary's Equipment in a consolidation at December 31, 2014, assuming the book value of the equipment at that date is still $80,000? 1. $70,000. 2. $73,500. 3. $75,000. 4. $76,500. 5. $80,000.

4 Fair Value at Acquisition ($75,000) + Amortization [($5,000/10) × 3] = $76,500

4. Paar Corporation bought 100 percent of Kimmel, Inc., on January 1, 2012. On that date, Paar's equipment (10-year remaining life) has a book value of $420,000 but a fair value of $520,000. Kimmel has equipment (10-year remaining 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. $574,000. b. $802,200. c. $612,600. d. $484,400.

4. A Paar's equipment book value—12/31/14...$294,000 Kimmel's equipment book value—12/31/14...190,400 Original acquisition-date allocation to Kimmel's equipment ($400,000 - $272,000)...128,000 Amortization of allocation ($128,000 ÷ 10 years for 3 years)...(38,400) = Consolidated equipment...$574,000 $294,000+190,400+128,000+(38,400)=$574,000

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 (8-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 (4-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 Sedona 2015 Revenues $498,000$285,000 2015 Expenses 350,000 195,000 2015 Income from Sedona 55,000 Retained earnings 12/31/15 250,000 175,000 9. What is consolidated net income for Phoenix and Sedona for 2015? a. $148,000. b. $203,000. c. $228,000. d. $238,000.

B Phoenix revenues $498,000 Phoenix expenses 350,000 Net income before Sedona effect 148,000 Equity income from Sedona 55,000 = Consolidated net income $203,000 -or- Consolidated revenues $783,000 Consolidated expenses (includes $35K amortization) 580,000 = Consolidated net income $203,000

Beatty, Inc. acquires 100% of the voting stock of Gataux Company on January 1, 2012 for $500,000 cash. A contingent payment of $12,000 will be paid on April 1, 2013 if Gataux generates cash flows from operations of $26,500 or more in the next year. Beatty estimates that there is a 30% probability that Gataux will generate at least $26,500 next year, and uses an interest rate of 4% to incorporate the time value of money. The fair value of $12,000 at 4%, using a probability weighted approach, is $3,461. What will Beatty record as its Investment in Gataux on January 1, 2012? $500,000. $503,461. $512,000. $515,461. $526,500.

Cash Payment $500,000 + Weighted Fair Value of Contingency $3,461 = $503,461

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? $190,000. $360,000. $164,000. $354,000. $150,000

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

When a company applies the initial method in accounting for its investment in a subsidiary and the subsidiary reports income in excess of dividends paid, what entry would be made for a consolidation worksheet?

Investment in subsidiary.....Dr .....Retained earnings.....Cr

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

a

On January 1, two years ago, Parkway Corporation purchased all of the outstanding common stock of Shaw Company for $220,000 cash. On that date, Shaw's net assets had a book value of $148,000. Equipment with an 8-year life was undervalued by $20,000 in Shaw's financial records. Shaw has a database that is valued at $52,000 and will be amortized over ten years. Shaw reported net income of $25,000 in the year of acquisition and $32,500 in the following year. Dividends of $2,500 were declared and paid in each of those two years. The third year of operations is now complete. For each of the two companies, selected account balances as of December 31 for this third year are as follows: Parkway.....Shaw Revenues 250,000.....142,500 Expenses 175,000.....100,000 Equipment (net) 125,000.....60,000 Retained Earnings, beginning of the year 150,000.....75,500 Dividends paid 25,000.....5,000 What is consolidated net income for the third year of operations if the parent company uses the partial equity method? A) $109,800 B) $112,000 C) $115,000 D) $117,500 E) $113,500

a Consolidted net income: Revenues(add book values).....392,500 Expenses(add book values and include amortization).....(287,700) = Consolidated net income.....$109,800

6. 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. A goodwill impairment loss is recognized if the carrying amount for goodwill exceeds its implied value. c. A goodwill impairment loss is recognized for the difference between the reporting unit's fair value and carrying amount. d. The reporting unit reduces the values assigned to its long-term assets (including any unrecognized intangibles) to reflect its fair value.

b

Q.5 Under the initial value method, when accounting for an investment in a subsidiary, 1. Dividends received by the subsidiary decrease the investment account. 2. The investment account is adjusted to fair value at year-end. 3. Income reported by the subsidiary increases the investment account. 4. The investment account remains at initial value. 5. Dividends received are ignored.

4

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

C

12. 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 fair value of the number of shares issued for the contingency increases the Goodwill account at January 1, 2015. b. 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. c. 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. d. The additional shares are assumed to have been issued on January 1, 2014, so that a retrospective adjustment is required.

B

1. 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. It is a relatively easy method to apply. 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. Consolidation is not required when the parent uses the initial value method.

a

On January 1, two years ago, Parkway Corporation purchased all of the outstanding common stock of Shaw Company for $220,000 cash. On that date, Shaw's net assets had a book value of $148,000. Equipment with an 8-year life was undervalued by $20,000 in Shaw's financial records. Shaw has a database that is valued at $52,000 and will be amortized over ten years. Shaw reported net income of $25,000 in the year of acquisition and $32,500 in the following year. Dividends of $2,500 were declared and paid in each of those two years. The third year of operations is now complete. For each of the two companies, selected account balances as of December 31 for this third year are as follows: Parkway.....Shaw Revenues 250,000.....142,500 Expenses 175,000.....100,000 Equipment (net) 125,000.....60,000 Retained Earnings, beginning of the year 150,000.....75,500 Dividends paid 25,000.....5,000 What is consolidated net income for the third year of operations if the parent company uses the initial value method? A) $80,000 B) $109,800 C) $112,500 D) $115,000 E) $117,500

b Same amount; all three methods result in same consolidated net income

On January 1, two years ago, Parkway Corporation purchased all of the outstanding common stock of Shaw Company for $220,000 cash. On that date, Shaw's net assets had a book value of $148,000. Equipment with an 8-year life was undervalued by $20,000 in Shaw's financial records. Shaw has a database that is valued at $52,000 and will be amortized over ten years. Shaw reported net income of $25,000 in the year of acquisition and $32,500 in the following year. Dividends of $2,500 were declared and paid in each of those two years. The third year of operations is now complete. For each of the two companies, selected account balances as of December 31 for this third year are as follows: Parkway.....Shaw Revenues 250,000.....142,500 Expenses 175,000.....100,000 Equipment (net) 125,000.....60,000 Retained Earnings, beginning of the year 150,000.....75,500 Dividends paid 25,000.....5,000 What is consolidated retained earnings at January 1 of the third year if the parent company uses the equity method? A) $191,100 B) $192,500 C) $150,000 D) $134,600 E) $187,100

c If Parkway Corporation uses the equity method, its retained earnings balance at January 1 of the third year will reflect the consolidated total. Thus, Parkway's balance of $150,000 also represents consolidated retained earnings.

7. 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. 20 years. b. 20 years with an annual impairment review. c. Infinitely. d. Indefinitely (no amortization) with an annual impairment review until its life becomes finite.

d

On January 1, two years ago, Parkway Corporation purchased all of the outstanding common stock of Shaw Company for $220,000 cash. On that date, Shaw's net assets had a book value of $148,000. Equipment with an 8-year life was undervalued by $20,000 in Shaw's financial records. Shaw has a database that is valued at $52,000 and will be amortized over ten years. Shaw reported net income of $25,000 in the year of acquisition and $32,500 in the following year. Dividends of $2,500 were declared and paid in each of those two years. The third year of operations is now complete. For each of the two companies, selected account balances as of December 31 for this third year are as follows: Parkway.....Shaw Revenues 250,000.....142,500 Expenses 175,000.....100,000 Equipment (net) 125,000.....60,000 Retained Earnings, beginning of the year 150,000.....75,500 Dividends paid 25,000.....5,000 What is consolidated retained earnings at January 1 of the third year if the parent company uses the partial equity method? A) $191,100 B) $192,500 C) $150,000 D) $134,600 E) $187,100

d 150,000-15,400=134,600 If Parkway Corporation uses the partial equity method, its retained earnings balance at January 1 of third year will be correct except for the omission of amortization.

ashen 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? $432,000. $-0- $408,000. $120,000. $288,000.

$0; (Income is eliminated from the investment account)

Following are selected accounts for Green Corporation and Vega Company as of December 31, 2015. Several of Green's accounts have been omitted. Picture Green acquired 100% of Vega on January 1, 2011, by issuing 10,500 shares of its $10 par value common stock with a fair value of $95 per share. On January 1, 2011, Vega's land was undervalued by $40,000, its buildings were overvalued by $30,000, and equipment was undervalued by $80,000. The buildings have a 20-year life and the equipment has a 10-year life. $50,000 was attributed to an unrecorded trademark with a 16-year remaining life. There was no goodwill associated with this investment. Compute the December 31, 2015, consolidated equipment. $800,000. $808,000. $840,000. $760,000. $848,000.

$300,000 + $580,000 = $880,000 - Amortization ($8,000 × 5) = $840,000

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: Picture 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? $569,000. $570,000. $571,000. $566,400. $444,000.

$444,000 + ($126,000 + $1,000) = $571,000

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 (8-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 (4-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 Sedona 2015 Revenues $498,000$285,000 2015 Expenses 350,000 195,000 2015 Income from Sedona 55,000 Retained earnings 12/31/15 250,000 175,000 11. On its December 31, 2015, consolidated balance sheet, what amount should Phoenix report for Sedona's customer list? a. $10,000. b. $20,000. c. $25,000. d. $50,000.

11. C Consideration transferred at fair value $600,000 Book value acquired 420,000 Excess fair over book value 180,000 to equipment 80,000 = to customer list (4-year remaining life) $100,000 Three years since acquisition, ¼ of acquisition-date value remains.

14. 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. $336,500 and $945,500. b. $336,500 and $766,500. c. $441,500 and $1,050,500. d. $441,500 and $871,500.

14. D 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 ($430,000 book value for Crawford plus fair value for Nashville $441,500).

When consolidating a subsidiary under the equity method, which of the following statements is true with regard to the subsidiary subsequent to the year of acquisition? 1. All net assets are revalued to fair value and must be amortized over their useful lives. 2. Only net assets that had excess fair value over book value when acquired by the parent must be amortized over their useful lives. 3. All depreciable net assets are revalued to fair value at date of acquisition and must be amortized over their useful lives. 4. Only depreciable net assets that have excess fair value over book value must be amortized over their useful lives. 5. Only assets that have excess fair value over book value must be amortized over their useful lives.

2

Which of the following will result in the recognition of an impairment loss on goodwill? Goodwill amortization is to be recognized annually on a systematic and rational basis. Both the fair value of a reporting unit and its associated implied goodwill fall below their respective carrying values. The fair value of the entity declines significantly. The fair value of a reporting unit falls below the original consideration transferred for the acquisition. The entity is investigated by the SEC and its reputation has been severely damaged.

2

Q.6 Harrison, Inc. acquires 100% of the voting stock of Rhine Company on January 1, 2012 for $400,000 cash. A contingent payment of $16,500 will be paid on April 15, 2013 if Rhine generates cash flows from operations of $27,000 or more in the next year. Harrison estimates that there is a 20% probability that Rhine will generate at least $27,000 next year, and uses an interest rate of 5% to incorporate the time value of money. The fair value of $16,500 at 5%, using a probability weighted approach, is $3,142. What will Harrison record as its Investment in Rhine on January 1, 2012? 1. $400,000. 2. $403,142. 3. $406,000. 4. $409,142. 5. $416,500.

2 Cash Payment $400,000 + Weighted Fair Value of Contingency $3,142 = $403,142

Kaye Company acquired 100% of Fiore Company on January 1, 2013. Kaye paid $1,000 excess consideration over book value which is being amortized at $20 per year. Fiore reported net income of $400 in 2013 and paid dividends of $100. Assume the initial value method is applied. How much will Kaye's income increase or decrease as a result of Fiore's operations? $400 increase. $300 increase. $380 increase. $100 increase. $210 increase.

2013 Dividends = $100 Increase

Which of the following is false regarding contingent consideration in business combinations? 1. Contingent consideration payable in cash is reported under liabilities. 2. Contingent consideration payable in stock shares is reported under stockholders' equity. 3. Contingent consideration is recorded because of its substantial probability of eventual payment. 4. The contingent consideration fair value is recognized as part of the acquisition regardless of whether eventual payment is based on future performance of the target firm or future stock price of the acquirer. 5. Contingent consideration is reflected in the acquirer's balance sheet at the present value of the potential expected future payment.

3

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? 1. Goodwill. 2. Equipment. 3. Investment in Subsidiary. 4. Common Stock. 5. Additional Paid-In Capital.

3

Q.4 Kaye Company acquired 100% of Fiore Company on January 1, 2013. Kaye paid $1,000 excess consideration over book value which is being amortized at $20 per year. Fiore reported net income of $400 in 2013 and paid dividends of $100. Assume the equity method is applied. How much will Kaye's income increase or decrease as a result of Fiore's operations? 1. $400 increase. 2. $300 increase. 3. $380 increase. 4. $280 increase. 5. $480 increase.

3 2013 Income $400 - Amortization $20 = $380 Increase