Advance Accounting Exam one

On July 1, 2014, when Salaby Company's total stockholders' equity was $360,000, Pogana Corporation purchased 14,000 shares of Salaby's common stock at $30 per share. Salaby had 20,000 shares of common stock outstanding both before and after the purchase by Pogana, and the book value of Salaby's net assets on July 1, 2014 was equal to the fair value. On a consolidated balance sheet prepared at July 1, 2014, goodwill would be

) Salaby's cost = 14,000 × $30 $420,000 Implied fair value of Salaby($420,000/0.70 ) 600,000 Less: Book value (360,000 ) Consolidated Goodwill $240,000 <- answer

On June 1, 2014, Puell Company acquired 100% of the stock of Sorrell Inc On this date, Puell had Retained Earnings of $100,000 and Sorrell had Retained Earnings of $50,000. On December 31, 2014, Puell had Retained Earnings of $120,000 and Sorrell had Retained Earnings of $60,000. The amount of Retained Earnings that appeared in the December 31, 2014 consolidated balance sheet was

120,000 (the parent's retained earnings)

A parent company uses the equity method to account for its wholly-owned subsidiary. Which of the following will be a correct procedure for the Investment account?

A credit for a subsidiary loss and a credit for dividends received

According to FASB Statement 141R, which one of the following items may not be accounted for as an intangible asset apart from goodwill?

A valuable employee workforce

Historically, much of the controversy concerning accounting requirements for business combinations involved the ________ method.

pooling interest

Pinkerton Inc. owns 10% of Sable Company. In the most recent year, Sable had net earnings of $40,000 and paid dividends of $6,000. Pinkerton's accountant mistakenly assumed Pinkerton had considerable influence over Sable and used the equity method instead of the cost method. What is the impact on the investment account and net earnings, respectively?

By using the equity method, the accountant has overstated the investment account and overstated the net earnings.

Which method of accounting will generally be used when one company purchases less than 20% of the outstanding stock of another company?

Either the fair value method or the equity method may be used, depending upon the relationship between the companies.

In reference to the FASB disclosure requirements about a business combination in the period in which the combination occurs, which of the following is correct?

Firms are required to disclose the nature, terms and fair value of consideration transferred in a business combination

Subsequent to an acquisition, the parent company and consolidated financial statement amounts would not be the same for

Investments in consolidated subsidiaries

Which method of accounting will generally be used when one company purchases between 20% to 50% of the outstanding stock of another company?

Only the equity method may be used.

In reference to international accounting for goodwill, U.S. companies have complained that past U.S. accounting rules for goodwill placed them at a disadvantage in competing against foreign companies for merger partners. Why?

Previous rules required amortization of goodwill which resulted in an ongoing expense that was not required under international rules.

Pregler Inc. has 70% ownership of Sach Company, but should exclude Sach from its consolidated financial statements if

Sach is in legal reorganization.

Pental Corporation bought 90% of Sedacor Company's common stock at its book value of $400,000 on January 1, 2014. During 2014, Sedacor reported net income of $130,000 and paid dividends of $40,000. At what amount should Pental's Investment in Sedacor account be reported on December 31, 2014?

Value of investment Cost of investment = 400000 Less: pre acquisition Dividend. = Nil (dividend declared during 2014 not related to pre acquisition) Amount to be disclosed as on 31 st Dec =400000 90% of dividend will be shown in profit and loss a/C as dividend income from subsidiary.

A business merger differs from a business consolidation because

a merger dissolves all but one of the prior entities, but a consolidation dissolves all of the prior entities and forms a new corporation

Picasso Co. issued 5,000 shares of its $1 par common stock, valued at $100,000, to acquire shares of Seurat Company in an all-stock transaction. Picasso paid the investment bankers $35,000 and will treat the investment banker fee as

a reduction to additional paid-in capital.

Panini Corporation owns 85% of the outstanding voting stock of Strathmore Company and Malone Corporation owns the remaining 15% of Strathmore's voting stock. On the consolidated financial statements of Panini Corporation and Strathmore, Malone is

an equity investee.

Pitch Co. paid $50,000 in fees to its accountants and lawyers in acquiring Slope Company. Pitch will treat the $50,000 as

an expense for the current year.

On January 1, 2014, Packaging International purchased 90% of Shipaway Corporation's outstanding shares for $135,000 when the fair value of Shipaway's net assets were equal to the book values. The balance sheets of Packaging and Shipaway Corporations at year-end 2013 are summarized as follows: Packaging Shipaway Assets $590,000 $180,000 Liabilities $70,000 $30,000 Capital stock 360,000 90,000 Retained earnings 160,000 60,000

$135,000 / 90% = $150,000 × 10% = $15,000

Percy Inc. acquired 80% of the outstanding stock of Sillson Company in a business combination. The book values of Sillson's net assets are equal to the fair values except for the building, whose net book value and fair value are $500,000 and $800,000, respectively. At what amount is the building reported on the consolidated balance sheet?

$800,000

On January 1, 2011, Punch Corporation purchased 80% of the common stock of Soopy Co. Separate balance sheet data for the companies at the acquisition date(after the acquisition) are given below: Punch Soopy Cash $34,000 $206,000 Accounts Receivable 144,000 26,000 Inventory 132,000 38,000 Land 68,000 32,000 Plant assets 700,000 300,000 Accum. Depreciation (240,000) (60,000) Investment in Soopy 392,000 Total assets $ 1,230,000 $ 542,000 Accounts payable $206,000 $142,000 Capital stock 800,000 300,000 Retained earnings 224,000 100,000 Total liabilities & equities $ 1,230,000 $ 542,000 At the date of the acquisition, the book values of Soopy's net assets were equal to the fair value except for Soopy's inventory, which had a fair value of $60,000. Determine below what the consolidated balance would be for each of the requested accounts. What is the amount of consolidated Retained Earnings?

224,000

On January 1, 2011, Punch Corporation purchased 80% of the common stock of Soopy Co. Separate balance sheet data for the companies at the acquisition date(after the acquisition) are given below: Punch Soopy Cash $34,000 $206,000 Accounts Receivable 144,000 26,000 Inventory 132,000 38,000 Land 68,000 32,000 Plant assets 700,000 300,000 Accum. Depreciation (240,000) (60,000) Investment in Soopy 392,000 Total assets $ 1,230,000 $ 542,000 Accounts payable $206,000 $142,000 Capital stock 800,000 300,000 Retained earnings 224,000 100,000 Total liabilities & equities $ 1,230,000 $ 542,000 At the date of the acquisition, the book values of Soopy's net assets were equal to the fair value except for Soopy's inventory, which had a fair value of $60,000. Determine below what the consolidated balance would be for each of the requested accounts. What amount of total liabilities will be reported?

348,000

On January 1, 2011, Punch Corporation purchased 80% of the common stock of Soopy Co. Separate balance sheet data for the companies at the acquisition date(after the acquisition) are given below: Punch Soopy Cash $34,000 $206,000 Accounts Receivable 144,000 26,000 Inventory 132,000 38,000 Land 68,000 32,000 Plant assets 700,000 300,000 Accum. Depreciation (240,000) (60,000) Investment in Soopy 392,000 Total assets $ 1,230,000 $ 542,000 Accounts payable $206,000 $142,000 Capital stock 800,000 300,000 Retained earnings 224,000 100,000 Total liabilities & equities $ 1,230,000 $ 542,000 At the date of the acquisition, the book values of Soopy's net assets were equal to the fair value except for Soopy's inventory, which had a fair value of $60,000. Determine below what the consolidated balance would be for each of the requested accounts.

68,000 Investment in Soopy ($392,000)/ownership percentage (80%) = implied fair value of Soopy ($490,000) - Soopy's underlying book value ($400,000) - the excess cost over book value allocated to inventory ($22,000) = $68,000 allocated to goodwill.

Pepper Company paid $2,500,000 for the net assets of Salt Corporation and Salt was then dissolved. Salt had no liabilities. The fair values of Salt's assets were $3,750,000. Salt's only non-current assets were land and buildings with book values of $100,000 and $520,000, respectively, and fair values of $180,000 and $730,000, respectively. At what value will the buildings be recorded by Pepper?

730,000

Which of the following is not a reason for a company to expand through a combination, rather than by building new facilities?

A combination might provide an opportunity to invest in a company without having to take responsibility for its financial results.

Which one of the following items, originally recorded in the Investment in Falcon Co. account under The equity method, would not be systematically used to reduce investment income on a periodic basis?

Amortization expense of goodwill

Pond Corporation uses the fair value method of accounting for its investment in Swan Company. Which one of the following events would affect the Investment in Swan Co. account?

An increase in the investee's share price from last period

Jabiru Corporation purchased a 20% interest in Fish Company common stock on January 1, 2013 for $300,000. This investment was accounted for using the complete equity method and the correct balance in the Investment in Fish account on December 31, 2015 was $440,000. The original excess purchase transaction included $60,000 for a patent amortized at a rate of $6,000 per year. In 2016, Fish Corporation had net income of $4,000 per month earned uniformly throughout the year and paid $20,000 of dividends in May. If Jabiru sold one-half of its investment in Fish on August 1, 2016 for $500,000, how much gain was recognized on this transaction?

C) $280,950 Dec 31, 2010 investment balance $440,000 Jabiru's interest in Fish's income from Jan 1-July 31: ($4,000 × 7 months × 20%) = 5,600 Less: Dividends ($20,000 × 20%) = (4,000) Less: Seven months of patent amortization: $500 × 7 = (3,500) Investment account balance at July 31, 2011 $438,100 Amount received from sale: $500,000 Book value of one-Half interest (219,050) Gain on sale $280,950

2 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall Use the following information to answer question(s) below. On January 1, 2011, Punch Corporation purchased 80% of the common stock of Soopy Co. Separate balance sheet data for the companies at the acquisition date(after the acquisition) are given below: Punch Soopy Cash $34,000 $206,000 Accounts Receivable 144,000 26,000 Inventory 132,000 38,000 Land 68,000 32,000 Plant assets 700,000 300,000 Accum. Depreciation (240,000) (60,000) Investment in Soopy 392,000 Total assets $ 1,230,000 $ 542,000 Accounts payable $206,000 $142,000 Capital stock 800,000 300,000 Retained earnings 224,000 100,000 Total liabilities & equities $ 1,230,000 $ 542,000 At the date of the acquisition, the book values of Soopy's net assets were equal to the fair value except for Soopy's inventory, which had a fair value of $60,000. Determine below what the consolidated balance would be for each of the requested accounts. 4) What amount of Inventory will be reported?

Combined inventory of $132,000 plus $38,000 plus the excess of the fair value over the book value of $22,000 (192000)

On January 1, 2011, Punch Corporation purchased 80% of the common stock of Soopy Co. Separate balance sheet data for the companies at the acquisition date(after the acquisition) are given below: Punch Soopy Cash $34,000 $206,000 Accounts Receivable 144,000 26,000 Inventory 132,000 38,000 Land 68,000 32,000 Plant assets 700,000 300,000 Accum. Depreciation (240,000) (60,000) Investment in Soopy 392,000 Total assets $ 1,230,000 $ 542,000 Accounts payable $206,000 $142,000 Capital stock 800,000 300,000 Retained earnings 224,000 100,000 Total liabilities & equities $ 1,230,000 $ 542,000 At the date of the acquisition, the book values of Soopy's net assets were equal to the fair value except for Soopy's inventory, which had a fair value of $60,000. Determine below what the consolidated balance would be for each of the requested accounts. What is the reported amount for the noncontrolling interest?

Implied value of Soopy = $392,000/80%=$490,000 × 20% = $98,000

On January 1, 2011, Punch Corporation purchased 80% of the common stock of Soopy Co. Separate balance sheet data for the companies at the acquisition date(after the acquisition) are given below: Punch Soopy Cash $34,000 $206,000 Accounts Receivable 144,000 26,000 Inventory 132,000 38,000 Land 68,000 32,000 Plant assets 700,000 300,000 Accum. Depreciation (240,000) (60,000) Investment in Soopy 392,000 Total assets $ 1,230,000 $ 542,000 Accounts payable $206,000 $142,000 Capital stock 800,000 300,000 Retained earnings 224,000 100,000 Total liabilities & equities $ 1,230,000 $ 542,000 At the date of the acquisition, the book values of Soopy's net assets were equal to the fair value except for Soopy's inventory, which had a fair value of $60,000. Determine below what the consolidated balance would be for each of the requested accounts. What amount of Goodwill will be reported?

Investment in Soopy ($392,000)/ownership percentage (80%) = implied fair value of Soopy ($490,000) - Soopy's underlying book value ($400,000) - the excess cost over book value allocated to inventory ($22,000) = $68,000 allocated to goodwill.

Pelican Corporation acquired a 25% interest in Seafare Incorporated at book value several years ago. Seafare declared $100,000 dividends in 2013 and reported its income for the year as follows: Income from continuing operations $600,000 Loss on discontinued division (100,000) Net income $500,000

Pelican's share of income ($500,000 × 25%) = $125,000 Pelican's share of dividends = $100,000 × 25% (25,000) Increase in investment account $100,000

Pigeon Corporation acquired an 80% interest in Statue Company on January 1, 2014, for $90,000 cash when Statue had Capital Stock of $60,000 and Retained Earnings of $40,000. The fair value/book value differential was attributable to equipment with a 10-year (straight-line) life. Statue suffered a $10,000 net loss in 2014 and paid no dividends. At year-end 2014, Statue owed Pigeon $18,000 on account. Pigeon's separate income for 2011 was $150,000. Controlling interest share of consolidated net income for 2014 was

Pigeon's separate income $150,000 Less:80% of Statue's $10,000 loss (8,000) Less: Equipment depreciation ($12,500 × 80%)/ 10 years = (1,000) Controlling Interest Share of Consolidated net income $141,000

Perth Corporation acquired a 100% interest in Sansone Company for $1,600,000 when Sansone had no liabilities. The book values and fair values of Sansone's assets were: Current assets Equipment Land & buildings Total assets Book Value $350,000 150,000 570,000 $1,070,000 Fair Value $400,000 210,000 590,000 $1,200,000 Immediately following the acquisition, equipment will be included on the consolidated balance sheet at

The assets will be recorded at fair value. When investment cost ($1,600,000) exceeds the fair value of net assets ($1,200,000), the difference is goodwill. $210,000.

Griffon Incorporated holds a 30% ownership in Duck Corporation. Griffon should use the equity method under which of the following circumstances?

The ownership of Duck Corporation is diverse.

A parent company uses the equity method to account for its wholly-owned subsidiary, but has applied it incorrectly. In each of the past four full years, the company adjusted the Investment account when it received dividends from the subsidiary but did not adjust the account for any of the subsidiary's profits. The subsidiary had four years of profits and paid yearly dividends in amounts that were less than reported net incomes. Which one of the following statements is correct if the parent company discovered its mistake at the end of the fourth year, and is now preparing consolidation working papers?

The parent company's Retained Earnings will be increased by the cumulative total of the first three years of subsidiary profit, and the Subsidiary Income account will be increased by the profit for the current year.

Sadie Corporation's stockholders' equity at December 31, 2010 included the following: 6% Preferred stock, $10 par value $1,000,000 Common stock, $1 par value 10,000,000 Other paid-In capital-Common 4,000,000 Retained earnings 4,000,000 $19,000,000 Pilga Corporation purchased a 30% interest in Sadie's common stock from other shareholders on January 1, 2011 for $5,800,000. What was the book value of Pilga's investment in Sadie on January 1, 2011?

Total stockholders' equity$19,000,000 Less: preferred equity (1,000,000) Equals: common equity 18,000,000 x Pilga's percentage × 30% Book value of Pilga investment $5,400,000

Firms must conduct impairment tests more frequently than annually when

a "more likely than not" expectation exists that a reporting unit will be sold or disposed of.

Pardo Corporation paid $140,000 for a 70% interest in Spedeal Inc. on January 1, 2014, when Spedeal had Capital Stock of $50,000 and Retained Earnings of $100,000. Fair values of identifiable net assets were the same as recorded book values. During 2014, Spedeal had income of $40,000, declared dividends of $15,000, and paid $10,000 of dividends. On December 31, 2014, the consolidated financial statements will show

consolidated goodwill of $50,000. Implied fair value of Spedeal($140,000/0.70) $200,000 Less: Book value (150,000) Consolidated Goodwill $50,000

Push-down accounting:

is required when the parent company uses the cost method to account for its investment in a subsidiary.

A newly acquired subsidiary had pre-existing goodwill on its books. The parent company's consolidated balance sheet will

not show any value for the pre-existing goodwill unless all other assets of the subsidiary are stated at their full fair value.

The income from an equity method investee is reported on one line of the investor company's income statement except when

the investee has extraordinary items.

Polka Corporation exchanges 100,000 shares of newly issued $1 par value common stock with a fair market value of $20 per share for all of the outstanding $5 par value common stock of Spot Inc. and Spot is then dissolved. Polka paid the following costs and expenses related to the business combination: In the business combination of Polka and Spot

the salaries of Polka's employees assigned to the merger are treated as expenses.

The unamortized excess account is

used in allocating the amounts paid for each asset and liability that are above or below their book values, especially when numerous assets or liabilities are involved

Jacana Corporation paid $200,000 for a 25% interest in Lilypad Corporation's common stock on January 1, 2013, but was not able to exercise significant influence over Lilypad. During 2014, Jacana reported income of $120,000, excluding its income from Lilypad, and paid dividends of $50,000. Lilypad reported net income of $40,000 during 2014 and paid dividends of $20,000. Jacana should report net income for 2014 in the amount of

$125,000

In the consolidated income statement of Wattlebird Corporation and its 85% owned Forest subsidiary, the noncontrolling interest share was reported at $45,000. Assume the book value and fair value of Forest's net assets were equal at the acquisition date. What amount of net income did Forest have for the year?

$45,000 / 15% = $300,000

Pomograte Corporation bought 75% of Sycamore Company's common stock, with a book value of $900,000, on January 2, 2014 for $750,000. The law firm of Dewey, Cheatam and Howe was paid $55,000 to facilitate the purchase. At what amount should Pomograte's Investment in Sycamore account be reported on January 2, 2014?

$750,000

Under the provisions of FASB Statement No. 141R, in a business combination, when the fair value of identifiable net assets acquired exceeds the investment cost, which of the following statements is correct?

A gain from a bargain purchase is recognized for the amount that the fair value of the identifiable net assets acquired exceeds the acquisition price.

A subsidiary can be excluded from consolidation if control does not rest with the majority owner. the subsidiary is in legal reorganization. the subsidiary is operating under severe foreign-exchange restrictions. All of these are correct.

All of the Above

In the preparation of consolidated financial statements, which of the following intercompany transactions must be eliminated as part of the preparation of the consolidation working papers?

All revenues, expenses, gains, losses, receivables, and payables

Which method must be used if FASB Statement No. 94 prohibits full consolidation of a 70% owned subsidiary?

Equity method

From the standpoint of accounting theory, which of the following statements is the best justification for the preparation of consolidated financial statements?

In substance the companies are one entity, but in form they are separate.

Which of the following methods does the FASB consider the best indicator of fair values in the evaluation of goodwill impairment?

Market value

A parent corporation owns 55% of the outstanding voting common stock of one domestic subsidiary. The parent has control over the subsidiary. Which of the following statements is correct?

The parent corporation must prepare consolidated financial statements for the economic entity.

At the beginning of 2014, Parling Food Services acquired a 90% interest in Simmons' Orchards when Simmons' book values of identifiable net assets equaled their fair values. On December 26, 2014, Simmons declared dividends of $50,000, and the dividends were unpaid at year-end. Parling had not recorded the dividend receivable at December 31. A consolidated working paper entry is necessary to

reduce the dividends payable account by $45,000 in the consolidated balance sheet.