Chapter 4: Consolidated Financial Statements and Outside Ownership

Which of the following statements is true regarding the sale of subsidiary shares when using the acquisition method for accounting for business combinations? A. If control continues, the difference between selling price and acquisition value is recorded as a realized gain or loss. B. If control continues, the difference between selling price and acquisition value is an unrealized gain or loss. C. If control continues, the difference between selling price and carrying value is recorded as an adjustment to additional paid-in capital. D. If control continues, the difference between selling price and carrying value is recorded as a realized gain or loss. E. If control continues, the difference between selling price and carrying value is recorded as an adjustment to retained earnings.

C. If control continues, the difference between selling price and carrying value is recorded as an adjustment to additional paid-in capital.

When a parent uses the acquisition method for business combinations and sells shares of its subsidiary, which of the following statements is false? A. If majority control is still maintained, consolidated financial statements are still required. B. If majority control is not maintained but significant influence exists, the equity method to account for the investment is still used but consolidated financial statements are not required. C. 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. D. If majority control is not maintained and significant influence no longer exists, a prospective change in accounting principle to the fair value method is required. E. A gain or loss calculation must be prepared if control is lost.

C. 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.

In a step acquisition, which of the following statements is false? A. The acquisition method views a step acquisition essentially the same as a single step acquisition. B. Income from subsidiary is computed by applying a partial year for a new purchase acquired during the year. C. Income from subsidiary is computed for the entire year for a new purchase acquired during the year. D. Obtaining control through a step acquisition is a significant remeasurement event. E. Preacquisition earnings are not included in the consolidated income statement.

C. Income from subsidiary is computed for the entire year for a new purchase acquired during the year.

When a parent uses the partial equity method throughout the year to account for its investment in an acquired subsidiary, which of the following statements is false before making adjustments on the consolidated worksheet? A. Parent company net income will equal controlling interest in consolidated net income when initial value, book value, and fair value of the investment are equal. B. Parent company net income will exceed controlling interest in consolidated net income when fair value of depreciable assets acquired exceeds book value of depreciable assets. C. Parent company net income will be less than controlling interest in consolidated net income when fair value of net assets acquired exceeds book value of net assets acquired. D. Goodwill will be recognized if acquisition value exceeds fair value of net assets acquired. E. Subsidiary net assets are valued at their book values before consolidating entries are made.

C. Parent company net income will be less than controlling interest in consolidated net income when fair value of net assets acquired exceeds book value of net assets acquired.

When a parent uses the equity method throughout the year to account for its investment in an acquired subsidiary, which of the following statements is false before making adjustments on the consolidated worksheet? A. Parent company net income equals controlling interest in consolidated net income. B. Parent company retained earnings equals consolidated retained earnings. C. Parent company total assets equals consolidated total assets. D. Parent company dividends equals consolidated dividends. E. Goodwill will not be recorded on the parent's books.

C. Parent company total assets equals consolidated total assets.

Which of the following statements is false regarding multiple acquisitions of a subsidiary's existing common stock? A. The parent recognizes a larger percent of subsidiary income. B. A step acquisition resulting in control may result in a parent recognizing a gain on revaluation. C. The book value of the subsidiary will increase. D. The parent's percent ownership in subsidiary will increase. E. Non-controlling interest in subsidiary's net income will decrease.

C. The book value of the subsidiary will increase.

Jax Company uses the acquisition method for accounting for its investment in Saxton Company. Jax sells some of its shares of Saxton such that neither control nor significant influence exists. Which of the following statements is true? A. The difference between selling price and acquisition value is recorded as a realized gain or loss. B. The difference between selling price and acquisition value is recorded as an unrealized gain or loss. C. The difference between selling price and carrying value is recorded as a realized gain or loss. D. The difference between selling price and carrying value is recorded as an unrealized gain or loss. E. The difference between selling price and carrying value is recorded as an adjustment to retained earnings.

C. The difference between selling price and carrying value is recorded as a realized gain or loss.

Where may a non-controlling interest be presented in a consolidated balance sheet?

A non-controlling interest must be shown in the balance sheet as part of stockholders' equity. It may no longer be shown between liabilities and stockholders' equity or classified as neither.

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 amount of excess land allocation attributed to the controlling interest at the acquisition date? A. $0. B. $30,000. C. $22,500. D. $25,000. E. $17,500.

C. $22,500. FV - BV ($30,000) × .75 = $22,500

One company buys a controlling interest in another company on April 1. How should the preacquisition subsidiary revenues and expenses be handled in the consolidated balances for the year of acquisition?

Only postacquisition revenues and expenses are included in consolidated totals. The non-controlling interest is thereby viewed as beginning as of the acquisition date.

How would you determine the amount of goodwill to be recognized at date of acquisition when there is a non-controlling interest present?

The non-controlling interest fair value may be implied by the parent's consideration transferred or by a separate value calculation. The total acquisition fair value is then the sum of both parent and non-controlling interest shares.The fair value of the net assets acquired is apportioned to the parent and to the non-controlling interest.Then, the difference between acquisition fair value and relative fair value of net assets acquired is goodwill attributed respectively to the parent and to the non-controlling interest.

Where should a non-controlling interest appear on a consolidated balance sheet?

The non-controlling interest should appear as a part of stockholders' equity where it would be clearly identified, labeled and distinguished from the parent's controlling interest in subsidiaries.

How is a non-controlling interest in the net income of an entity reported in the income statement?

The non-controlling interest would appear as a clearly identifiable portion of consolidated net income such that the controlling portion plus the non-controlling portion equals the consolidated net income presented.

What is preacquisition income?

When a company acquires control of a subsidiary during a fiscal year, preacquisition income is the income attributed to the previous owners of the shares of the common stock for the portion of the year before the acquisition.

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? A. $0. B. $30,000. C. $22,500. D. $25,000. E. $17,500.

B. $30,000. FV $100,000 - BV $70,000 = $30,000

For business combinations involving less than 100 percent ownership, the acquirer recognizes and measures all of the following at the acquisition date except: A. identifiable assets acquired, at fair value. B. liabilities assumed, at book value. C. non-controlling interest, at fair value. D. goodwill or a gain from bargain purchase. E. none of these choices is correct.

B. liabilities assumed, at book value.

In measuring non-controlling interest at the date of acquisition, which of the following would not be indicative of the value attributed to the non-controlling interest? A. Fair value based on stock trades of the acquired company. B. Subsidiary cash flows discounted to present value. C. Book value of subsidiary net assets. D. Projections of residual income. E. Consideration transferred by the parent company that implies a total subsidiary value.

C. Book value of subsidiary net assets.

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? A. $52,500. B. $70,000. C. $75,000. D. $92,500. E. $100,000.

E. $100,000. $100,000 FV of Land at Acquisition

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 in the presentation of consolidated financial statements? A. Preacquisition earnings are deducted from consolidated revenues and expenses. B. Preacquisition earnings are added to consolidated revenues and expenses. C. Preacquisition earnings are deducted from the beginning consolidated stockholders' equity. D. Preacquisition earnings are added to the beginning consolidated stockholders' equity. E. Preacquisition earnings are ignored in the consolidated income statement.

E. Preacquisition earnings are ignored in the consolidated income statement.

How does a parent company account for the sale of a portion of an investment in a subsidiary?

If control is maintained after the sale, then the difference between the sales proceeds and the book value is an adjustment to the parent's owners' equity (APIC). If control is not maintained, then such difference is a gain or loss on sale of investment. In either situation, the book value of the investment should be on the equity method basis in order to calculate the proper entry for the sale. Therefore, if the investment has been kept under the initial value or the partial equity method, the investor adjusts the book value of its investment in order to bring an initial value method or partial equity method investment basis to an equity method basis.

When a subsidiary is acquired sometime after the first day of the fiscal year, which of the following statements is true? A. Income from subsidiary is not recognized until there is an entire year of consolidated operations. B. Income from subsidiary is recognized from date of acquisition to year-end. C. Excess cost over acquisition value is recognized at the beginning of the fiscal year. D. No goodwill can be recognized. E. Income from subsidiary is recognized for the entire year.

B. Income from subsidiary is recognized from date of acquisition to year-end.

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 amount of excess land allocation attributed to the non-controlling interest at the acquisition date? A. $0. B. $30,000. C. $22,500. D. $7,500. E. $17,500.

D. $7,500. FV - BV ($30,000) × .25 = $7,500

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, assuming the investment was obtained prior to the date the purchase method of accounting for new business combinations was discontinued? A. $70,000. B. $75,000. C. $85,000. D. $92,500. E. $100,000.

D. $92,500. BV $70,000 + FV Controlling Differential ($30,000 × .75) = $92,500

When a parent uses the initial value method throughout the year to account for its investment in an acquired subsidiary, which of the following statements is true before making adjustments on the consolidated worksheet? A. Parent company net income equals consolidated net income. B. Parent company retained earnings equals consolidated retained earnings. C. Parent company total assets equals consolidated total assets. D. Parent company dividends equal consolidated dividends. E. Goodwill needs to be recognized on the parent's books.

D. Parent company dividends equal consolidated dividends.

All of the following statements regarding the sale of subsidiary shares are true except which of the following? A. The use of specific identification based on serial number is acceptable. B. The use of the FIFO assumption is acceptable. C. The use of the averaging assumption is acceptable. D. The use of specific LIFO assumption is acceptable. E. The parent company must determine whether consolidation is still appropriate for the remaining shares owned.

D. The use of specific LIFO assumption is acceptable.