Chapter 4 Multiple Choice

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.

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

C. Increase its additional paid-in capital by $16,000. Explanation: Proceeds of $80,000 less $64,000 (1/3 x $192,000) book value = $16,000 Control is maintained so excess proceeds go to APIC.

McKinley, Inc., owns 100 percent of Jackson Company's 45,000 voting shares. On June 30, McKinley's internal accounting records show a $192,000 equity method adjusted balance for its investment in Jackson. McKinley sells 15,000 of its Jackson shares on the open market for $80,000 on June 30. How should McKinley record the excess of the sale proceeds over its carrying amount for the shares? A. Reduce goodwill by $64,000. B. Recognize a revaluation gain on its remaining shares of $48,000. C. Increase its additional paid-in capital by $16,000. D. Recognize a gain on sale for $16,000.

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.

C. $237,000. Explanation: Fair Value of 30% Noncontrolling Interest on April 1 of $165,000 Add 30% of Net Income for Remainder of Year of ($240,000 x 30%) = $72,000 Equals Noncontrolling Interest at December 31 of $237,000

On April 1, Pujols, Inc., exchanges $430,000 fair-value consideration for 70 percent of the outstanding stock of Ramirez Corporation. The remaining 30 percent of the outstanding shares continued to trade at a collective fair value of $165,000. Ramirez's identifiable assets and liabilities each had book values that equaled their fair values on April 1 for a net total of $500,000. During the remainder of the year, Ramirez generates revenues of $600,000 and expenses of $360,000 and declared no dividends. On a December 31 consolidated balance sheet, what amount should be reported as noncontrolling interest? A. $250,500. B. $234,000. C. $237,000. D. $219,000.

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.

C. Adjusted to fair value at the date of the second acquisition with a resulting gain or loss recorded.

A parent buys 32 percent of a subsidiary in one year and then buys an additional 40 percent in the next year. In a step acquisition of this type, the original 32 percent acquisition should be A. Adjusted to its equity method balance at the date of the second acquisition. B. Adjusted to fair value at the date of the second acquisition with a resulting adjustment to additional paid-in capital. C. Adjusted to fair value at the date of the second acquisition with a resulting gain or loss recorded. D. Maintained at its initial value.

A. $105,000. Explanation: Acquisition-date fair value of ($60,000/80%) = $75,000 Less Strand's Book Value of ($50,000) Equals FV in excess of BV of $25,000 Excess Assigned to Inventory (60%) = $15,000 Excess Assigned to Goodwill (40%) = $10,000 Park Current Assets of $70,000 Add Strand Current Assets of $20,000 Add Excess Inventory Fair Value of $15,000 Equals Consolidated Current Assets = $105,000

Note: The same company information is used for five questions. On January 1, Park Corporation and Strand Corporation had condensed balance sheets as follows: Park: Current Assets $70,000 Noncurrent Assets $90,000 Total Assets $160,000 Current Liabilities $30,000 Long-Term Debt $50,000 Stockholders' Equity $80,000 Total Liabilities & SE $160,000 Strand: Current Assets $20,000 Noncurrent Assets $40,000 Total Assets $60,000 Current Liabilities $10,000 Long-Term Debt $- Stockholders' Equity $50,000 Total Liabilities & SE $60,000 On January 2, Park borrowed $60,000 and used the proceeds to obtain 80 percent of the outstanding common shares of Strand. The acquisition price was considered proportionate to Strand's total fair value. The $60,000 debt is payable in 10 equal annual principal payments, plus interest, beginning December 31. The excess fair value of the investment over the underlying book value of the acquired net assets is allocated to inventory (60 percent) and to goodwill (40 percent). On a consolidated balance sheet as of January 2, what should be the amount for current assets? A. $105,000. B. $90,000. C. $102,000. D. $100,000.

C. $46,000. Explanation: Add the two book values and include 10% (the $6,000 current portion) of the loan taken out by Park to acquire Strand.

Note: The same company information is used for five questions. On January 1, Park Corporation and Strand Corporation had condensed balance sheets as follows: Park: Current Assets $70,000 Noncurrent Assets $90,000 Total Assets $160,000 Current Liabilities $30,000 Long-Term Debt $50,000 Stockholders' Equity $80,000 Total Liabilities & SE $160,000 Strand: Current Assets $20,000 Noncurrent Assets $40,000 Total Assets $60,000 Current Liabilities $10,000 Long-Term Debt $- Stockholders' Equity $50,000 Total Liabilities & SE $60,000 On January 2, Park borrowed $60,000 and used the proceeds to obtain 80 percent of the outstanding common shares of Strand. The acquisition price was considered proportionate to Strand's total fair value. The $60,000 debt is payable in 10 equal annual principal payments, plus interest, beginning December 31. The excess fair value of the investment over the underlying book value of the acquired net assets is allocated to inventory (60 percent) and to goodwill (40 percent). On a consolidated balance sheet as of January 2, what should be the amount for current liabilities? A. $40,000. B. $30,000. C. $46,000. D. $50,000.

D. $140,000. Explanation: Park noncurrent assets of $90,000 Add Strand noncurrent assets of $40,000 Add Excess FV to Goodwill of $10,000 Equals Consolidated Noncurrent Assets of $140,000

Note: The same company information is used for five questions. On January 1, Park Corporation and Strand Corporation had condensed balance sheets as follows: Park: Current Assets $70,000 Noncurrent Assets $90,000 Total Assets $160,000 Current Liabilities $30,000 Long-Term Debt $50,000 Stockholders' Equity $80,000 Total Liabilities & SE $160,000 Strand: Current Assets $20,000 Noncurrent Assets $40,000 Total Assets $60,000 Current Liabilities $10,000 Long-Term Debt $- Stockholders' Equity $50,000 Total Liabilities & SE $60,000 On January 2, Park borrowed $60,000 and used the proceeds to obtain 80 percent of the outstanding common shares of Strand. The acquisition price was considered proportionate to Strand's total fair value. The $60,000 debt is payable in 10 equal annual principal payments, plus interest, beginning December 31. The excess fair value of the investment over the underlying book value of the acquired net assets is allocated to inventory (60 percent) and to goodwill (40 percent). On a consolidated balance sheet as of January 2, what should be the amount for noncurrent assets? A. $130,000. B. $138,000. C. $134,000. D. $140,000.

B. $104,000. Explanation: Add the two book values and include 90% (the $54,000 noncurrent portion) of the loan taken out by Park to acquire Strand.

Note: The same company information is used for five questions. On January 1, Park Corporation and Strand Corporation had condensed balance sheets as follows: Park: Current Assets $70,000 Noncurrent Assets $90,000 Total Assets $160,000 Current Liabilities $30,000 Long-Term Debt $50,000 Stockholders' Equity $80,000 Total Liabilities & SE $160,000 Strand: Current Assets $20,000 Noncurrent Assets $40,000 Total Assets $60,000 Current Liabilities $10,000 Long-Term Debt $- Stockholders' Equity $50,000 Total Liabilities & SE $60,000 On January 2, Park borrowed $60,000 and used the proceeds to obtain 80 percent of the outstanding common shares of Strand. The acquisition price was considered proportionate to Strand's total fair value. The $60,000 debt is payable in 10 equal annual principal payments, plus interest, beginning December 31. The excess fair value of the investment over the underlying book value of the acquired net assets is allocated to inventory (60 percent) and to goodwill (40 percent). On a consolidated balance sheet as of January 2, what should be the amount for noncurrent liabilities? A. $110,000. B. $104,000. C. $50,000. D. $90,000.

B. $95,000. Park Stockholders Equity of $80,000 Add NCI at Fair Value of (20% x $75,000) = $15,000 Equals Total Stockholders' Equity of $95,000

Note: The same company information is used for five questions. On January 1, Park Corporation and Strand Corporation had condensed balance sheets as follows: Park: Current Assets $70,000 Noncurrent Assets $90,000 Total Assets $160,000 Current Liabilities $30,000 Long-Term Debt $50,000 Stockholders' Equity $80,000 Total Liabilities & SE $160,000 Strand: Current Assets $20,000 Noncurrent Assets $40,000 Total Assets $60,000 Current Liabilities $10,000 Long-Term Debt $- Stockholders' Equity $50,000 Total Liabilities & SE $60,000 On January 2, Park borrowed $60,000 and used the proceeds to obtain 80 percent of the outstanding common shares of Strand. The acquisition price was considered proportionate to Strand's total fair value. The $60,000 debt is payable in 10 equal annual principal payments, plus interest, beginning December 31. The excess fair value of the investment over the underlying book value of the acquired net assets is allocated to inventory (60 percent) and to goodwill (40 percent). On a consolidated balance sheet as of January 2, what should be the amount for stockholders' equity? A. $130,000. B. $95,000. C. $90,000. D. $80,000.

C. $34,400 and $240,800. Explanation: Subsidiary Net Income of ($100,000 - $14,000 excess Amortizations) = $86,000 x Noncontrolling Interest percentage of 40% Equals Noncontrolling Interest Percentage of $34,400 Fair Value of noncontrolling interest at acquisition date of $200,000 Add 40% Change in previous year Solar book value of ($430,000 - $400,000) x 40% = $12,000 Less 40% of excess fair value amortization for year one of ($5,600) Add NCI share of current year consolidated net income (above) of $34,400 Equals Noncontrolling interest at end of year of $240,800

Note: The same company information is used for three questions. West Company acquired 60 percent of Solar Company for $300,000 when Solar's book value was $400,000. The newly comprised 40 percent noncontrolling interest had an assessed fair value of $200,000. Also at the acquisition date, Solar had a trademark (with a 10-year life) that was undervalued in the financial records by $60,000. Also, patented technology (with a 5-year life) was undervalued by $40,000. Two years later, the following figures are reported by these two companies (stockholders' equity accounts have been omitted): West Company Book Value Information Current Assets $620,000 Trademarks $260,000 Patented Technology $410,000 Liabilities ($390,000) Revenues ($900,000) Expenses $500,000 Investment Income: Not Given West Company Book Value Information Current Assets $300,000 Trademarks $200,000 Patented Technology $150,000 Liabilities ($120,000) Revenues ($400,000) Expenses $300,000 Investment Income $- West Company Book Value Information Current Assets $320,000 Trademarks $280,000 Patented Technology $150,000 Liabilities ($120,000) Revenues $- Expenses $- Investment Income $- Assuming Solar Company has declared no dividends, what are the noncontrolling interest's share of the subsidiary's income and the ending balance of the noncontrolling interest in the subsidiary? A. $28,800 and $252,000. B. $40,000 and $252,000. C. $34,400 and $240,800. D. $26,000 and $230,000.

D. $486,000. Explanation: Combined revenues $1,300,000 Less Combined Expenses ($800,000) Less Trademark Amortization ($6,000) Less Patented Technology Amortization ($8,000) Equals Consolidated Net Income of $486,000

Note: The same company information is used for three questions. West Company acquired 60 percent of Solar Company for $300,000 when Solar's book value was $400,000. The newly comprised 40 percent noncontrolling interest had an assessed fair value of $200,000. Also at the acquisition date, Solar had a trademark (with a 10-year life) that was undervalued in the financial records by $60,000. Also, patented technology (with a 5-year life) was undervalued by $40,000. Two years later, the following figures are reported by these two companies (stockholders' equity accounts have been omitted): West Company Book Value Information Current Assets $620,000 Trademarks $260,000 Patented Technology $410,000 Liabilities ($390,000) Revenues ($900,000) Expenses $500,000 Investment Income: Not Given West Company Book Value Information Current Assets $300,000 Trademarks $200,000 Patented Technology $150,000 Liabilities ($120,000) Revenues ($400,000) Expenses $300,000 Investment Income $- West Company Book Value Information Current Assets $320,000 Trademarks $280,000 Patented Technology $150,000 Liabilities ($120,000) Revenues $- Expenses $- Investment Income $- What is the consolidated net income before allocation to the controlling and noncontrolling interests? A. $400,000. B. $491,600. C. $500,000. D. $486,000.

B. $508,000. Explanation: West Trademark Balance of $260,000 Add Solar Trademark Balance of $200,000 Add Acquisition-Date Fair Value Allocation of $60,000 Less Excess Fair Value amortization for two years of ($12,000) Equals Consolidated Trademarks of $508,000

Note: The same company information is used for three questions. West Company acquired 60 percent of Solar Company for $300,000 when Solar's book value was $400,000. The newly comprised 40 percent noncontrolling interest had an assessed fair value of $200,000. Also at the acquisition date, Solar had a trademark (with a 10-year life) that was undervalued in the financial records by $60,000. Also, patented technology (with a 5-year life) was undervalued by $40,000. Two years later, the following figures are reported by these two companies (stockholders' equity accounts have been omitted): West Company Book Value Information Current Assets $620,000 Trademarks $260,000 Patented Technology $410,000 Liabilities ($390,000) Revenues ($900,000) Expenses $500,000 Investment Income: Not Given West Company Book Value Information Current Assets $300,000 Trademarks $200,000 Patented Technology $150,000 Liabilities ($120,000) Revenues ($400,000) Expenses $300,000 Investment Income $- West Company Book Value Information Current Assets $320,000 Trademarks $280,000 Patented Technology $150,000 Liabilities ($120,000) Revenues $- Expenses $- Investment Income $- What is the consolidated trademarks balance? A. $540,000. B. $508,000. C. $514,000. D. $520,000.

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.