ACC410 - Advanced Accounting - Test 2
When should a consolidated entity recognize a goodwill impairment loss?
If both the fair value of a reporting unit and its associated implied goodwill fall below their respective carrying amounts.
Which of the following statements is false regarding multiple acquisitions of a subsidiary's existing common stock?
The book value of the subsidiary will increase.
Which of the following is not a factor to be considered when determining the useful life of an intangible asset?
The fair value of the asset.
The parent recognizes the noncontrolling interest at its:
acquisition date FV.
When the parent uses the equity method, consolidation entry I
removes the parent's recorded equity income.
The label "S" in consolidation worksheet entry S refers to the sub's stockholders' equity accounts.
yes.
When the parent company pays cash to the former owners of its sub upon achievement of certain performance metrics as part of its negotiated agreement, any excess of amount paid over the previous valuation of the contingency is recorded as a loss from revaluation of the contingent performance obligation.
yes.
When Jolt Co. acquired 75% of the common stock of Yelts Corp., Yelts owned land with a book value of $70,000 and a fair value of $100,000. What amount should have been reported for the land in a consolidated balance sheet at the acquisition date?
$100,000. ($100,000 FV of Land at Acquisition.)
Which of the following statements is true concerning an intra-entity transfer of a depreciable asset?
Net income attributable to the noncontrolling interest is affected only when the transfer is upstream.
Which of the following statements is true regarding the sale of subsidiary shares when using the acquisition method for accounting for business combinations?
If control continues, the difference between selling price and carrying value is recorded as an adjustment to additional paid-in capital.
When a subsidiary is acquired sometime after the first day of the fiscal year, which of the following statements is true?
Income from subsidiary is recognized from date of acquisition to year-end.
How is the fair value allocation of an intangible asset allocated to expense when the asset has no legal, regulatory, contractual, competitive, economic, or other factors that limit its life?
No amortization, but annually reviewed for impairment and adjusted accordingly.
The acquisition method captures the subsidiary's acquisition-date fair values as the relevant attribute for the noncontrolling interest.
The acquisition method captures the subsidiary's acquisition-date fair values as the relevant attribute for the noncontrolling interest.
Which of the following methods is not used to value a noncontrolling interest under circumstances where a control premium is applied to determine the appropriate value for such interest?
The application of a safe harbor discount rate.
Strickland Company sells inventory to its parent, Carter Company, at a profit during 2017. Carter sells one-third of the inventory in 2017. In the consolidation worksheet for 2017, which of the following accounts would be debited to eliminate the intra-entity transfer of inventory?
Sales.
Walsh Company sells inventory to its subsidiary, Fisher Company, at a profit during 2017. With respect to one-third of the inventory sold to Fisher, Walsh accounts for it using the equity method of accounting.. In the consolidation worksheet for 2017, which of the following accounts would be debited to eliminate the intra-entity transfer of inventory?
Sales.
When a parent uses the equity method throughout the year to account for its 80% investment in an acquired subsidiary, which of the following statements is false at the date immediately preceding the date on which adjustments are made on the consolidated worksheet?
Parent company total assets equals consolidated total assets.
Gargiulo Company, a 90% owned subsidiary of Posito Corporation, transfers inventory to Posito at a 25% gross profit rate. The following data are available pertaining specifically to Posito's intra-entity purchases from Gargiulo. Gargiulo was acquired on January 1, 2017. 2017 2018 2019 Purchases by Posito $ 8,000 $ 12,000 $ 15,000 Ending inventory on Posito's books 1,200 4,000 3,000 Assume the equity method is used. The following data are available pertaining to Gargiulo's income and dividends. 2017 2018 2019 Gargiulo's net income $ 70,000 $ 85,000 $ 94,000 Dividends paid by Gargiulo 10,000 10,000 15,000 For consolidation purposes, what amount would be debited to January 1 retained earnings for the 2017 consolidation worksheet entry with regard to the unrecognized intra-entity gross profit remaining in ending inventory with respect to the 2017 intra-entity transfer of merchandise?
$0. (Zero — No Earnings Adjustment would be necessary in January 2017)
Under acquisition method, parent's get ____% of assets and ____% of liabilities from the subsidiary?
100% of subsidiary.
When the parent applies the initial value method for its investment accounting, consolidation entry I is needed to
remove the balances in the parent's dividend income and the sub's dividends declared.
Consolidation entry P
removes the balances from intra-entity receivables and payables.
Included in the accounts of the parent and subsidiary combined for consolidated financial reporting are:
revenues, expenses, assets, and liabilities.
On January 1, 2016, Pride Corporation 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, 2016, Star's net assets had a total carrying amount of $420,000. Equipment (eight-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 (four-year remaining life), but not recorded on its books. Star recorded net income of $70,000 in 2016 and $80,000 in 2017. Each year since the acquisition, Star has declared a $20,000 dividend. At January 1, 2018, Pride's retained earnings show a $250,000 balance. Selected account balances for the two companies from their separate operations were as follows: Pride Star 2018 Revenues $ 498,000 $ 285,000 2018 Expenses 350,000 195,000 What is consolidated net income for 2018?
$203,000. Consideration transferred by Pride $ 540,000 Noncontrolling interest fair value 60,000 Star acquisition-date fair value $ 600,000 Star book value 420,000 Excess fair over book value $ 180,000 To equipment (8 year remaining life) $ 80,000 $ 10,000 To customer list (4 year remaining life) 100,000 25,000 $ 35,000 Combined revenues $ 783,000 Combined expenses $ 545,000 Excess fair value amortization 35,000 580,000 Consolidated net income $ 203,000
On January 1, 2016, Phoenix Co. acquired 100 percent of the outstanding voting shares of Sedona Inc. for $600,000 cash. At January 1, 2016, Sedona's net assets had a total carrying amount of $420,000. Equipment (eight-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 (four-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 2016 and $80,000 in 2017. Selected account balances from the two companies' individual records were as follows: Phoenix Sedona 2018 Revenues $ 498,000 $ 285,000 2018 Expenses 350,000 195,000 2018 Income from Sedona 55,000 Retained earnings 12/31/18 250,000 175,000. What is Phoenix's consolidated retained earnings balance at December 31, 2018?
$250,000. (Same as Phoenix because of equity method use).
Wilson owned equipment with an estimated life of 10 years when the equipment was acquired for an original cost of $80,000. The equipment had a book value of $50,000 at January 1, 2017. On January 1, 2017, Wilson realized that the useful life of the equipment was longer than originally anticipated, at ten remaining years. On April 1, 2017 Simon Company, a 90% owned subsidiary of Wilson Company, bought the equipment from Wilson for $68,250 and for depreciation purposes used the estimated remaining life as of that date. The following data are available pertaining to Simon's income and dividends declared: 2017 2018 2019 Net income $ 100,000 $ 120,000 $ 130,000 Dividends declared 40,000 50,000 60,000 Assuming there are no excess amortizations associated with the consolidation, and no other intra-entity asset transfers, compute Wilson's share of income from Simon for consolidation for 2017.
$90,000. (Parent's Share of Subsidiary Net Income 2017 ($100,000 X .90) = $90,000)
Walsh Company sells inventory to its subsidiary, Fisher Company, at a profit during 2017. With respect to one-third of the inventory sold to Fisher, Walsh accounts for it using the equity method of accounting.. In the consolidation worksheet for 2017, which of the following accounts would be credited to eliminate the intra-entity transfer of inventory?
Cost of goods sold.
When a parent uses the acquisition method for business combinations and sells shares of its subsidiary, which of the following statements is false?
If majority control is not maintained but significant influence exists, the equity method is still used to account for the investment and consolidated financial statements are still required.
When consolidating a subsidiary that was acquired on a date other than the first day of the fiscal year, which of the following statements is true of the subsidiary with respect to the presentation of consolidated financial statement information?
Pre-acquisition earnings are ignored in the consolidated income statement.
Dosmann, Inc., bought all outstanding shares of Lizzi Corporation on January 1, 2016, 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, 2018, if Lizzi earns a 10 percent return on the fair value of its assets in 2016 and 2017. Lizzi's profits exceed this threshold in both years. Which of the following is true?
The fair value of the expected contingent payment increases goodwill at the acquisition date.
In measuring goodwill impairment loss for a reporting unit, goodwill's implied value is compared to its
carrying value.
When the parent uses the equity method, consolidation entry D
eliminates the intra-entity subsidiary dividends attributable to the parent company.
When acquisition-date FV of subsidiary long-term debt exceeds its carrying amount, in periods subsequent to the acquisition, consolidation worksheet entries are needed to
increase long-term debt.
When the acquisition-date FV of sub long-term debt exceeds its carrying amount, in periods subsequent to the acquisition, consolidation worksheet entries are needed to increase or decrease long-term debt?
increase.
The consolidated balance sheet provides an owners' equity amount for the noncontrolling owners' interest - a recognition that the parent does not:
own 100% of the subsidiary's assets and liabilities.
The consolidation entry *C is needed to
simulate the equity method in adjusting the parent's beginning retained earnings and adjust the parent's ending retained earnings to a full-accrual basis that simulates the equity method. Update the parent's retained earnings for past years' amortizations acquisition-date FV adjustments and to simulate the equity method for the parent's retained earnings in deriving consolidated totals.
A basic premise of the acquisition method is that the
subsidiary's individual accounts cannot be divided along ownership lines.
The total acquired firm fair value in the presence of a partial acquisition is the sum of:
the FV of the controlling interest. the FV of the noncontrolling interest.
Wilson owned equipment with an estimated life of 10 years when the equipment was acquired for an original cost of $80,000. The equipment had a book value of $50,000 at January 1, 2017. On January 1, 2017, Wilson realized that the useful life of the equipment was longer than originally anticipated, at ten remaining years. On April 1, 2017 Simon Company, a 90% owned subsidiary of Wilson Company, bought the equipment from Wilson for $68,250 and for depreciation purposes used the estimated remaining life as of that date. The following data are available pertaining to Simon's income and dividends declared: 2017 2018 2019 Net income $ 100,000 $ 120,000 $ 130,000 Dividends declared 40,000 50,000 60,000 Assuming there are no excess amortizations associated with the consolidation, and no other intra-entity asset transfers, compute Wilson's share of income from Simon for consolidation for 2018.
$108,000. (Parent's Share of Subsidiary Net Income 2018 ($120,000 X .90) = $108,000)
Wilson owned equipment with an estimated life of 10 years when the equipment was acquired for an original cost of $80,000. The equipment had a book value of $50,000 at January 1, 2017. On January 1, 2017, Wilson realized that the useful life of the equipment was longer than originally anticipated, at ten remaining years. On April 1, 2017 Simon Company, a 90% owned subsidiary of Wilson Company, bought the equipment from Wilson for $68,250 and for depreciation purposes used the estimated remaining life as of that date. The following data are available pertaining to Simon's income and dividends declared: 2017 2018 2019 Net income $ 100,000 $ 120,000 $ 130,000 Dividends declared 40,000 50,000 60,000 Assuming there are no excess amortizations associated with the consolidation, and no other intra-entity asset transfers, compute Wilson's share of income from Simon for consolidation for 2019.
$117,000. (Parent's Share of Subsidiary Net Income 2019 ($130,000 X .90) = $117,000)
When the acquisition-date FV of subsidiary long-term debt exceeds its carrying amount, in periods subsequent to the acquisition, worksheet entries are needed to _________ interest expense?
Decrease.
To properly report ownership equity in consolidated fin. stmts., acqusition date goodwill should be apportioned
across the controlling and noncontrolling interests.
Consolidated entry A adjusts the sub's assets to their unamortized acquisition-date FV
as of the beginning of the current reporting period.
Business combinations involving <100% ownership, the acquirer recognizes and measures the following at acquisition date:
All subsidiary identifiable assets and liabilities at their full FV, noncontrolling interest at FV, goodwill or a gain from a bargain purchase.
Where is noncontrolling interest on the consolidated balance sheet reported?
As part of stockholder's equity.
Which of the following is not an example of an intangible asset?
Broken equipment.
Strickland Company sells inventory to its parent, Carter Company, at a profit during 2017. Carter sells one-third of the inventory in 2017. In the consolidation worksheet for 2017, which of the following accounts would be credited to eliminate the intra-entity transfer of inventory?
Cost of goods sold.
In a step acquisition, which of the following statements is false?
Income from subsidiary is computed for the entire year for a new purchase acquired during the year.
Under the partial equity method, the parent recognizes income when:
It is earned by the subsidiary.
For business combinations involving less than 100% ownership, the acquirer recognizes and measures all of the following at the acquisition date except:
Liabilities assumed, at BV.
Origin of each consolidated figure:
Revenues are added together. COGS are added together. Amortization expense are combined with annual amortization. Depreciation expense are added together with the reduction if applicable. Equity in subsidiary is eliminated and replaced with adding revenues and expenses across. Dividends declared includes only the parents.
Jax Company used the acquisition method when it acquired its investment in Saxton Company. Jax now sells some of its shares of Saxton such that neither control nor significant influence exists. Which of the following statements is true?
The difference between selling price and carrying value is recorded as a realized gain or loss.
The acquisition method's solution to consolidation when ownership is less than 100% involves:
The economic unit concept and fair value. Economic unit concept views the parent and subsidiary companies as a single economic unit for financial reporting purposes.
Why does an increase to the FV of acqusition-date subsidiary debt result in a decrease to interest expense on the consolidated worksheet?
The parent has essentially borrowed the FV of the debt, but only will repay the lesser contractual maturity value.
What 2 things contribute to the full-accrual income recognition of subsidiary income on the parent's financial records under the the equity method?
The recognition of excess acquisition-date FV adjustment amortization to subsidiary income and if subsidiary reported income.
When consolidating parent and subsidiary financial statements, which of the following statements is true?
The value of any goodwill should be tested annually for impairment in value.
In comparing U.S. GAAP and International Financial Reporting Standards (IFRS) with regard to a basis for measurement of a noncontrolling interest, which of the following is true?
U.S. GAAP requires acquisition-date fair value measurement, but IFRS allows an option for acquisition-date fair value measurement.
Consolidation Entry I removes the the equity in subsidiary earnings which is then replaced by the inclusion of the sub's individual revenue and expense accounts on the consolidated income statement.
Yes.
Consolidation entry S eliminates the sub's stockholders' equity balances as part of the consolidation process.
Yes.
When the parent applies the equity method for its 100% owned subsidiary, its Equity in Sub Earnings account balance equals the effect of the sub's income on consolidated net income.
Yes.
When an indefinite-lived intangible asset has been assessed to be impaired, the accounting for the impairment includes:
a reduction of the intangible's carrying amount to FV and a recognition of the impairment loss on the income statement.
Under the partial equity method the parent records dividends from its subsidiary as
a reduction of the investment account.
What best describes the income recognition basis reflected by the equity method?
accrual basis.
Amortization is a generic term for both:
amortization of definite-lived intangibles and depreciation of tangibles.
Consolidation entry A adjusts the sub's assets to their unamortized acquisition-date FV as of
beginning of the current reporting period.
In measuring the noncontrolling interest immediately following the date of acquisition, which of the following would not be indicative of the value attributed to the noncontrolling interest?
book value of subsidiaries net assets.
When a sub's tangible asset has an excess acquisition-date BV over FV, consolidation entry E will show a decrease or increase to depreciation expense?
decrease.
Under the initial value method, the parent records income when the subsidiary declares a
dividend.
Under FASBs proposed simplification of accounting for goodwill impairment is measured as the excess of the carrying amount of a reporting unit (with residing goodwill) over its
fair value.
In step 2 of the measurement of goodwill impairement the implied FV of goodwill is computed in a manner similar to the determination of
goodwill in a business combination.
Among the most prominent internal record-keeping methods for accounting for an investment in a subsidiary are
partial equity method, equity method, and the initial value method.
Consolidation entry E
provides current period amortization expense for the acquisition-date FV adjustments and increases expenses when excess FV over BV acquisition-date allocations are made to the depreciable subsidiary assets.
At acquisition date, the parent measures at FV both the:
subsidiary as a whole and its identifiable assets and liabilities.
Consolidation entry A adjusts the sub's assets to their unamortized acquisition-date FV as of:
the beginning of the current reporting period.
All of the following statements regarding the sale of subsidiary shares are true except which of the following?
the use of specific LIFO assumption is acceptable.
Valuation of the noncontrolling interest is best evidenced NOT always by the purchase price, but sometimes by the
traded fair value.
The parent company accrues income as reported by the subsidiary
when using the partial equity method of accounting for a parent company's investment in a sub company.
Consolidation entry P removes intra-entity payable and receivable balances because of the parent and subsidiary companies are viewed as a single entity for financial reporting purposes.
yes.
If a parent uses either the initial value of partial equity method, then a worksheet adjustment must be made to bring the parent's retained earnings balance to equal that of the equity method.
yes.
In the quantitative test for goodwill impairment, if an individual reporting unit's FV exceeds its carrying amount, goodwill is not considered impaired and no further procedures is needed.
yes.
Although maintained on the books of the parent, the investment in sub account is always brought to a
zero balance in consolidation.
Following are selected accounts for Green Corporation and Vega Company as of December 31, 2020. Several of Green's accounts have been omitted. Green Vega Revenues $ 900,000 $ 500,000 Cost of goods sold 360,000 200,000 Depreciation expense 140,000 40,000 Other expenses 100,000 60,000 Equity in Vega's income ? Retained earnings, 1/1/2020 1,350,000 1,200,000 Dividends 195,000 80,000 Current assets 300,000 1,380,000 Land 450,000 180,000 Building (net) 750,000 280,000 Equipment (net) 300,000 500,000 Liabilities 600,000 620,000 Common stock 450,000 80,000 Additional paid-in capital 75,000 320,000 Green acquired 100% of Vega on January 1,2016, by issuing 10,500 shares of its $10 par value common stock with a fair value of $95 per share. On January 1, 2016, 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, 2020, consolidated revenues.
$1,400,000. ($900,000 + $500,000 = $1,400,000)
Hoyt Corporation agreed to the following terms in order to acquire the net assets of Brown Company on January 1, 2018: To issue 400 shares of common stock ($10 par) with a fair value of $45 per share. To assume Brown's liabilities which have a book value of $1,600 and a fair value of $1,500. On the date of acquisition, the consideration transferred for Hoyt's acquisition of Brown would be:
$19,500. (Common Stock (400 shares × $45) $18,000 + Liabilities Assumed $1,500 = $19,500)
On January 1, 2016, Phoenix Co. acquired 100 percent of the outstanding voting shares of Sedona Inc. for $600,000 cash. At January 1, 2016, Sedona's net assets had a total carrying amount of $420,000. Equipment (eight-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 (four-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 2016 and $80,000 in 2017. Selected account balances from the two companies' individual records were as follows: Phoenix Sedona 2018 Revenues $ 498,000 $ 285,000 2018 Expenses 350,000 195,000 2018 Income from Sedona 55,000 Retained earnings 12/31/18 250,000 175,000 What is consolidated net income for Phoenix and Sedona for 2018?
$203,000. 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
When Jolt Co. acquired 75% of the common stock of Yelts Corp., Yelts owned land with a book value of $70,000 and a fair value of $100,000. What is the total amount of excess land allocation at the acquisition date?
$30,000. (FV $100,000 - BV $70,000 = $30,000.)
On January 1, 2017, 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, 2018, 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 Chamberlain Corporation?
$351,000. Combined revenues $ 1,100,000 Combined expenses (700,000 ) Excess acquisition-date fair value amortization (15,000 ) Consolidated net income $ 385,000 Less: noncontrolling interest share($85,000 × 40%) (34,000 ) Consolidated net income to Chamberlain Corporation $ 351,000
The parent's consolidated financial statements should:
- Recognize the subsidiary's assets and liabilities. - Assign values to the subsidiary's assets and liabilities. - Value and disclose the presence of the other owners.
Kordel Inc. acquired 75% of the outstanding common stock of Raxston Corp. Raxston currently owes Kordel $500,000 for inventory acquired over the past few months. In preparing consolidated financial statements, what amount of Raxston's liability should be eliminated?
$500,000. (BV & FV of the Existing Receivable $500,000)
MacHeath Inc. bought 60% of the outstanding common stock of Nomes Inc. in an acquisition that resulted in the recognition of goodwill. Nomes owned a piece of land that cost $250,000 but was worth $600,000 at the date of acquisition. What value would be attributed to this land in a consolidated balance sheet at the date of acquisition?
$600,000. (FV of the Land $600,000)
In the preparation of consolidated financial reports, the sub's revenue, expense, asset, and liability accounts are added to the parent company balances. Several important guidelines must be followed:
- Sub's assets and liabs are adjusted to reflect the allocations originating from their acquisition-date FVs. - Because of the passage of time, the income effects (amortizations) of these allocations must also be recognized within the consolidation process. - Any reciprocal or intra-entity accounts must be offset. If one of the company owes money to the other, the receivable and payable balances aren't connected to an outside party. Thus the balances must be eliminated since they will be represented together as a consolidated entity.
When a parent uses the initial value method throughout the year to account for its 80% investment in an acquired subsidiary, which of the following statements is true at the date immediately preceding the date on which adjustments are made on the consolidated worksheet?
Parent company dividends equal consolidated dividends.
Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2019. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows: 2019 2020 2021 Net income $ 100,000 $ 120,000 $ 130,000 Dividends 40,000 50,000 60,000 Assume the partial equity method is applied. How much does Pell record as Income from Demers for the year ended December 31, 2019?
$80,000. (Controlling Interest Share of Net Income for 2019 ($100,000 × .80) = $80,000)
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 remaining life) that was undervalued in the financial records by $60,000. Also, patented technology (with a 5-year remaining 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 Solar Company Book Value Solar Company Fair Value Current assets $ 620,000 $ 300,000 $ 320,000 Trademarks 260,000 200,000 280,000 Patented technology 410,000 150,000 150,000 Liabilities (390,000 ) (120,000 ) (120,000 ) Revenues (900,000 ) (400,000 ) Expenses 500,000 300,000 Investment income Not given Note: Parentheses indicate a credit balance. What is the consolidated trademarks balance?
$508,000. West trademark balance $ 260,000 Solar trademark balance 200,000 Acquisition-date fair value allocation 60,000 Excess fair value amortization for two years (12,000 ) Consolidated trademarks $ 508,000
On January 1, 2016, Pride Corporation 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, 2016, Star's net assets had a total carrying amount of $420,000. Equipment (eight-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 (four-year remaining life), but not recorded on its books. Star recorded net income of $70,000 in 2016 and $80,000 in 2017. Each year since the acquisition, Star has declared a $20,000 dividend. At January 1, 2018, Pride's retained earnings show a $250,000 balance. Selected account balances for the two companies from their separate operations were as follows: Pride Star 2018 Revenues $ 498,000 $ 285,000 2018 Expenses 350,000 195,000 Assuming that Pride, in its internal records, accounts for its investment in Star using the equity method, what amount of retained earnings would Pride report on its January 1, 2018 consolidated balance sheet?
$250,000. (Under the equity method, consolidated RE = parent's RE.)
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 remaining life) that was undervalued in the financial records by $60,000. Also, patented technology (with a 5-year remaining 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 Solar Company Book Value Solar Company Fair Value Current assets $ 620,000 $ 300,000 $ 320,000 Trademarks 260,000 200,000 280,000 Patented technology 410,000 150,000 150,000 Liabilities (390,000 ) (120,000 ) (120,000 ) Revenues (900,000 ) (400,000 ) Expenses 500,000 300,000 Investment income Not given Note: Parentheses indicate a credit balance. 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?
$34,400 and $240,800. Subsidiary net income ($100,000 − $14,000 excess amortizations) $ 86,000 Noncontrolling interest percentage 40 % Noncontrolling interest in consolidated net income $ 34,400 Fair value of noncontrolling interest at acquisition date $ 200,000 40% change in previous year Solar book value ($430,000 − $400,000) × 40% 12,000 40% of excess fair value amortization—year one (5,600 ) NCI share of current year consolidated net income (above) 34,400 Noncontrolling interest at end of year $ 240,800 Alternative noncontrolling interest year 2 solution: Solar and NCI valuations: Current assets $ 300,000 Trademarks 200,000 Patented technology 150,000 Liabilities (120,000 ) Solar book value at end of year 2 $ 530,000 Solar book value at acquisition date (400,000 ) Increase in book value (2 years) $ 130,000 NCI percentage 40 % NCI share of book value increase 52,000 NCI share of excess fair value amortization (2 years) (11,200 ) Increase in NCI since acquisition 40,800 Fair value of noncontrolling interest at acquisition date 200,000 Noncontrolling interest at end of year 2 $ 240,800
On January 1, 2018, Race Corp. acquired 80% of the voting common stock of Gallow Inc. During the year, Race sold to Gallow for $450,000 goods that cost $330,000. At year-end, Gallow owned 15% of the goods transferred. Gallow reported net income of $204,000, and Race's net income was $806,000. Race decided to use the equity method to account for this investment. Assuming there are no excess amortizations associated with the consolidation, and no other intra-entity asset transfers, what was the net income attributable to the noncontrolling interest?
$40,800. (Subsidiary's Net Income $204,000 × .20 (Noncontrolling Interest) = $40,800)
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 remaining life) that was undervalued in the financial records by $60,000. Also, patented technology (with a 5-year remaining 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 Solar Company Book Value Solar Company Fair Value Current assets $ 620,000 $ 300,000 $ 320,000 Trademarks 260,000 200,000 280,000 Patented technology 410,000 150,000 150,000 Liabilities (390,000 ) (120,000 ) (120,000 ) Revenues (900,000 ) (400,000 ) Expenses 500,000 300,000 Investment income Not given Note: Parentheses indicate a credit balance. What is the consolidated net income before allocation to the controlling and noncontrolling interests?
$486,000. Combined revenues $ 1,300,000 Combined expenses (800,000 ) Trademark amortization (6,000 ) Patented technology amortization (8,000 ) Consolidated net income $ 486,000
Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2019. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows: 2019 2020 2021 Net income $ 100,000 $ 120,000 $ 130,000 Dividends 40,000 50,000 60,000 Assume the initial value method is applied. Compute Pell's investment in Demers at December 31, 2019.
$500,000. (Initial Investment = $500,000)
Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2019. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows: 2019 2020 2021 Net income $ 100,000 $ 120,000 $ 130,000 Dividends 40,000 50,000 60,000 Assume the initial value method is applied. Compute Pell's investment in Demers at December 31, 2021.
$500,000. (Initial Investment = $500,000)
Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2019. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows: 2019 2020 2021 Net income $ 100,000 $ 120,000 $ 130,000 Dividends 40,000 50,000 60,000 Assume the initial value method is applied. Compute Pell's investment in Demers at December 31, 2020.
$500,000. (Initial Investment = $500,000)
