ACC 308 Midterm
A 70 percent owned subsidiary company declares and pays a cash dividend. What effect does the dividend have on the retained earnings and noncontrolling interest balances in the parent company's consolidated balance sheet?
No effect on retained earnings and a decrease in noncontrolling interest. Subsidiary dividends declared have no effect on consolidated retained earnings (because the parent's retained earnings appear as the consolidated retained earnings, but they do decrease the noncontrolling interest just as they decrease the controlling interest.
On January 1, 20X8, Ritt Corporation acquired 80 percent of Shaw Corporation's $10 par common stock for $956,000. On this date, the fair value of the noncontrolling interest was $239,000, and the carrying amount of Shaw's net assets was $1,000,000. The fair values of Shaw's identifiable assets and liabilities were the same as their carrying amounts except for plant assets (net) with a remaining life of 20 years, which were $100,000 in excess of the carrying amount. For the year ended December 31, 20X8, Shaw had net income of $190,000 and paid cash dividends totaling $125,000. In the December 31, 20X8, consolidated balance sheet, the amount of noncontrolling interest reported should be
$251,000 $251,000 = 0.20[($956,000 + $239,000) + ($190,000 − $5,000 − $125,000)]
On January 2, 20X3, Kean Company purchased a 30 percent interest in Pod Company for $250,000. Pod reported net income of $100,000 for 20X3 and declared and paid a dividend of $10,000. Kean accounts for this investment using the equity method. In its December 31, 20X3, balance sheet, what amount should Kean report as its investment in Pod?
$277,000 $250,000 + ($100,000 × 0.30) - ($10,000 × 0.30) = $277,000.
Pickle Corporation issued nonvoting preferred stock with a fair market value of $4,000,000 in exchange for all the outstanding common stock of Sickle Corporation. On the date of the exchange, Sickle had tangible net assets with a book value of $2,000,000 and a fair value of $2,500,000. In addition, Pickle issued preferred stock valued at $400,000 to an individual as a finder's fee in arranging the transaction. As a result of this transaction, Pickle should record an increase in net assets of
$4,000,000 $4,000,000. The increase in net assets is solely attributable to the FV of the consideration given, the nonvoting preferred stock.
On January 1, 20X5, Post Company acquired an 80 percent investment in Stake Company. The acquisition cost was equal to Post's equity in Stake's net assets at that date. On January 1, 20X5, Post and Stake had retained earnings of $500,000 and $100,000, respectively. During 20X5, Post had net income of $200,000, which included its equity in Stake's earnings, and declared dividends of $50,000; Stake had net income of $40,000 and declared dividends of $20,000. There were no other intercompany transactions between the parent and subsidiary. On December 31, 20X5, what should the consolidated retained earnings be?
$650,000 $650,000 = $500,000 + $200,000 − $50,000
A and B Companies have been operating separately for five years. Each company has a minimal amount of liabilities and a simple capital structure consisting solely of voting common stock. In exchange for 40 percent of its voting stock, A Company acquires 80 percent of the common stock of B Company. This is a "tax-free" stock-for-stock exchange for tax purposes. B Company's identifiable assets have a total net fair market value of $800,000 and a total net book value of $580,000. The fair market value of the A stock used in the exchange is $700,000, and the fair value of the noncontrolling interest is $175,000. The goodwill reported following the acquisition would be
$75,000 $875,000 - $800,000 = $75,000. Total consideration given - FV of net assets = Goodwill
On January 1, 20X8, Ritt Corporation acquired 80 percent of Shaw Corporation's $10 par common stock for $956,000. On this date, the fair value of the noncontrolling interest was $239,000, and the carrying amount of Shaw's net assets was $1,000,000. The fair values of Shaw's identifiable assets and liabilities were the same as their carrying amounts except for plant assets (net) with a remaining life of 20 years, which were $100,000 in excess of the carrying amount. For the year ended December 31, 20X8, Shaw had net income of $190,000 and paid cash dividends totaling $125,000. In the January 1, 20X8, consolidated balance sheet, the amount of goodwill reported should be
$95,000 $95,000 = ($956,000 + $239,000) − $1,000,000 − $100,000
Consolidated financial statements are typically prepared when one company has a controlling interest in another unless
Circumstances prevent the exercise of control. Under certain circumstances, a company can lose the ability to exercise control of a subsidiary even when a controlling interest is held. For example, if the subsidiary were under a legal reorganization or bankruptcy. As long as control cannot be exercised, consolidated financial statements would not be prepared.
Penn Inc., a manufacturing company, owns 75 percent of the common stock of Sell Inc., an investment company. Sell owns 60 percent of the common stock of Vane Inc., an insurance company. In Penn's consolidated financial statements, should Sell and Vane be consolidated or reported as equity method investments (assuming there are no side agreements)?
Consolidation used for both Sell and Vane. The consolidation method is typically used when ownership is greater than 50% of the common stock of the subsidiary. Penn directly controls Sell and indirectly controls Vane, thus, Sell and Vane should both be consolidated.
When a parent-subsidiary relationship exists, consolidated financial statements are prepared in recognition of the accounting concept of
Economic entity. Consolidated financial statements are intended to provide a meaningful representation of the overall position and activities of a single economic entity comprising a number of separate legal entities (subsidiaries).
Peel Company received a cash dividend from a common stock investment. Should Peel report an increase in the investment account if it carries the investment at fair value or if it uses the equity method of accounting?
Fair Value - No Equity - No Cash dividends received will never cause an increase in the investment account under either method.
Which of the following is the appropriate basis for valuing fixed assets acquired in a business combination carried out by exchanging cash for common stock?
Fair value. "Costs of issuing equity securities used to acquire the acquire are treated in the same manner as stock issue costs are normally treated, as a reduction in the paid-in capital associated with the securities" A reduction to the paid-in capital account results in a reduction in the fair value of the securities issued.
Which of the following is the best theoretical justification for consolidated financial statements?
In form, the companies are separate; in substance, they are one entity. The companies are each separate legal entities, but in substance they are one economic entity
In a business combination, costs of registering equity securities to be issued by the acquiring company are a(n)
Reduction of the recorded value of the securities. Goodwill equals the excess sum of the consideration given over the sum of the fair value of identifiable assets less liabilities.
Goodwill is
Reported when the fair value of the acquiree is higher than the fair value of the net identifiable assets acquired. Goodwill is the difference between the fair value of the acquire (what someone is willing to pay for the company) and the fair value of the net identifiable assets.
Goodwill represents the excess of the sum of the fair value of the (1) consideration given, (2) shares already owned, and (3) the noncontrolling interest over the
Sum of the fair values assigned to identifiable assets acquired less liabilities assumed.
How is the portion of consolidated earnings to be assigned to the noncontrolling interest in consolidated financial statements determined?
The amount of the subsidiary's earnings recognized for consolidation purposes is multiplied by the noncontrolling interest's percentage of ownership. The noncontrolling interest's proportionate share of the subsidiary's income is allocated based on the percentage of ownership in the subsidiary held by the noncontrolling shareholders.
An investor uses the equity method to account for an investment in common stock. Assume that (1) the investor owns less than 50 percent of the outstanding common stock of the investee, (2) the investee company reports net income and declares dividends during the year, (3) the fair value of the investee's stock is unchanged during the year, and (4) the investee's net income is more than the dividends it declares. How would the investor's investment in the common stock of the investee company under the equity method differ at year-end from what it would have been if the investor had carried the investment at fair value?
The balance under the equity method is higher than it would have been if the investment was carried at fair value. Under the equity method, net income increases the investment account while dividends decrease it. Because net income was greater than the dividends declared, this results in a net increase in the investment account. The problem information indicated that fair value of the stock was unchanged during the year. Thus in this problem, the balance at year-end would be lower if the investment was carried at fair value than it would be under the equity method.
In a business combination in which an acquiring company purchases 100% of the outstanding common stock of another company, if the fair value of the net identifiable assets acquired exceeds the fair value of the consideration given. The excess should be reported as a
This combination would result in a bargain purchase. When a new company is acquired, the assets and liabilities are recorded at fair value.
Investor Inc. owns 40 percent of Alimand Corporation. During the calendar year 20X5, Alimand had net earnings of $100,000 and paid dividends of $10,000. During 20X5, the market value of Alimand's stock remained unchanged. Investor mistakenly recorded these transactions by carrying the investment at fair value rather than using the equity method of accounting. What effect would this have on the investment account, net earnings, and retained earnings, respectively?
Understate, understate, understate. If the investment had been accounted for using the equity method, Investor would have recorded its share of Alimand's income by increasing the investment account and increasing earnings by $40,000 ($100,000 × 40%). Investor would also have decreased the investment account by $4,000 for its share of the dividends ($10,000 × 40%). However, since Investor incorrectly accounted for the investment as if were carried at fair value, the only entry Investor recorded was to increase income by $4,000 for the dividends. As a result, the investment account will be understated, earnings will be understated, and retained earnings will be understated.
