ACC 401 Week 3 Quiz - Strayer

Click on the Link Below to Purchase A+ Graded Course Material

http://budapp.net/ACC-401-Advanced-Accounting-Week-3-Quiz-Strayer271.htm
Chapter 3
Consolidated Financial StatementsDate of Acquisition
Multiple Choice
1.

A majority-owned subsidiary that is in legal reorganization should normally be

accounted for using
a. consolidated financial statements.
b. the equity method.
c. the market value method.
d. the cost method.

2.

Under the acquisition method, indirect costs relating to acquisitions should be

a. included in the investment cost.
b. expensed as incurred.
c. deducted from other contributed capital.
d. none of these.

3.

Eliminating entries are made to cancel the effects of intercompany transactions

and are made on the
a. books of the parent company.
b. books of the subsidiary company.
c. workpaper only.
d. books of both the parent company and the subsidiary.

4.

One reason a parent company may pay an amount less than the book value of
the subsidiary's stock acquired is
a. an undervaluation of the subsidiary's assets.
b. the existence of unrecorded goodwill.
c. an overvaluation of the subsidiary's liabilities.
d. none of these.

5.

In a business combination accounted for as an acquisition, registration costs

related to common stock issued by the parent company are
a. expensed as incurred.
b. deducted from other contributed capital.
c. included in the investment cost.
d. deducted from the investment cost.

6.

On the consolidated balance sheet, consolidated stockholders' equity is

a. equal to the sum of the parent and subsidiary stockholders' equity.
b. greater than the parent's stockholders' equity.

c. less than the parent's stockholders' equity.

d. equal to the parent's stockholders' equity.
7.

Majority-owned subsidiaries should be excluded from the consolidated

statements when
a. control does not rest with the majority owner.
b. the subsidiary operates under governmentally imposed uncertainty.
c. a foreign subsidiary is domiciled in a country with foreign exchange
restrictions or controls.
d. any of these circumstances exist.

8.

Under the economic entity concept, consolidated financial statements are

intended primarily for the benefit of the
a. stockholders of the parent company.
b. creditors of the parent company.
c. minority stockholders.
d. all of the above.

9.

Reasons a parent company may pay more than book value for the subsidiary
company's stock include all of the following except
a. the fair value of one of the subsidiary's assets may exceed its recorded value
because of appreciation.
b. the existence of unrecorded goodwill.
c. liabilities may be overvalued.
d. stockholders' equity may be undervalued.

10.

What is the method of presentation required by SFAS 160 of non-controlling

interest on a consolidated balance sheet?
a. As a deduction from goodwill from consolidation.
b. As a separate item within the long-term liabilities section.
c. As a part of stockholders' equity.
d. As a separate item between liabilities and stockholders' equity.

11.

Which of the following is a limitation of consolidated financial statements?

a. Consolidated statements provide no benefit for the stockholders and
creditors of the parent company.
b. Consolidated statements of highly diversified companies cannot be
compared with industry standards.
c. Consolidated statements are beneficial only when the consolidated
companies operate within the same industry.
d. Consolidated statements are beneficial only when the consolidated
companies operate in different industries.

12.

Pine Corp. owns 60% of Sage Corp.'s outstanding common stock. On May 1,
2011, Pine advanced Sage $90,000 in cash, which was still outstanding at
December 31, 2011. What portion of this advance should be eliminated in the
preparation of the December 31, 2011 consolidated balance sheet?
a. $90,000.
b. $54,000.

c. $36,000.
d. $-0-.

Use the following information for questions 13-15.

On January 1, 2011, Polk Company and Sigler Company had condensed balance
sheets as follows:
Polk
Sigler
Current assets
$ 280,000
$ 80,000
Noncurrent assets
_360,000
__160,000
Total assets
$640,000
$240,000
Current liabilities
$ 120,000
$ 40,000
Long-term debt
200,000
-0Stockholders' equity
__320,000
200,000
Total liabilities & stockholders' equity $640,000
$240,000
On January 2, 2011 Polk borrowed $240,000 and used the proceeds to purchase 90%
of the outstanding common stock of Sigler. This debt is payable in 10 equal annual
principal payments, plus interest, starting December 30, 2011. Any difference between
book value and the value implied by the purchase price relates to land.
On Polk's January 2, 2011 consolidated balance sheet,
13.

Noncurrent assets should be

a. $520,000.
b. $536,000.
c. $544,000.
d. $586,667.

14.

Current liabilities should be

a. $200,000.
b. $184,000.
c. $160,000.
d. $120,000.

15.

Noncurrent liabilities should be

a. $440,000.
b. $416,000.
c. $240,000.
d. $216,000.

16.

A newly acquired subsidiary has pre-existing goodwill on its books. The

parent companys consolidated balance sheet will:
a. treat the goodwill the same as other intangible assets of the acquired
company.
b. will always show the pre-existing goodwill of the subsidiary at its book
value.
c. not show any value for the subsidiarys pre-existing goodwill.
d. do an impairment test to see if any of it has been impaired.

17.

The Difference between Implied and Book Value account is:

a. an account necessary for the preparation of consolidated working papers.
b. used in allocating the amounts paid for recorded balance sheet accounts
that are different than
their fair values.
c. the excess implied value assigned to goodwill.
d. the unamortized excess that cannot be assigned to any related balance
sheet accounts

18.

The main evidence of control for purposes of consolidated financial statements

involves
a. possessing majority ownership
b. having decision-making ability that is not shared with others.
c. being the sole shareholder
d. having the parent company and the subsidiary participating in the same
industry.

19.

In which of the following cases would consolidation be inappropriate?

a. The subsidiary is in bankruptcy.
b. Subsidiary's operations are dissimilar from those of the parent.
c. The parent owns 90 percent of the subsidiary's common stock, but all of
the subsidiary's nonvoting preferred stock is held by a single investor.
d. Subsidiary is foreign.

20.

Princeton Company acquired 75 percent of the common stock of Sheffield

Corporation on December 31, 2011. On the date of acquisition, Princeton held
land with a book value of $150,000 and a fair value of $300,000; Sheffield
held land with a book value of $100,000 and fair value of $500,000. What
amount would land be reported in the consolidated balance sheet prepared
immediately after the combination?
a. $650,000
b. $500,000
c. $550,000
d. $375,000

Use the following information to answer questions 21 - 23.

On January 1, 2011, Pena Company and Shelby Company had condensed balanced
sheets as follows:
Pena
Shelby
Current assets

$ 210,000

Noncurrent assets

$
60,000

270,000
120,000

Total assets

$480,000
$180,000

Current liabilities

90,000

Long-term debt

$
30,000

150,000
-0-

Stock holders' equity

150,000
Total liabilities & stockholders' equity

240,000
$ 480,000

$
180,000

On January 2, 2011 Pena borrowed $180,000 and used the proceeds to purchase 90%
of the outstanding common stock of Shelby. This debt is payable in 10 equal annual
principal payments, plus interest, starting December 30, 2011. Any difference between
book value and the value implied by the purchase price relates to land.
On Pena's January 2, 2011 consolidated balance sheet,
21.

Noncurrent assets should be

a. $390,000.
b. $402,000.
c. $408,000.
d. $440,000.

22.

Current liabilities should be

a. $150,000.
b. $138,000.
c. $120,000.

d. $90,000.
23.

Noncurrent liabilities should be

a. $330,000.
b. $312,000.
c. $180,000.
d. $162,000.

24.
On January 1, 2011, Primer Corporation acquired 80 percent of Sutter Corporation's
voting common stock.
Sutters's buildings and equipment had a book value of $300,000 and a fair value of
$350,000 at the time of
acquisition. At what amount will Sutters buildings and equipment will be reported in
the consolidated
statements ?
a. $350,000
b. $340,000
c. $280,000
d. $300,000
Problems
3-1

On December 31, 2011, Page Company purchased 80% of the outstanding

common stock of Snead Company for cash. At the time of acquisition, Snead
Company's balance sheet was as follows:
Current assets
Plant and equipment
Land
Total assets

$ 1,680,000
1,580,000
280,000
$3,540,000

Liabilities
$ 1,320,000
Common stock, $10 par value
1,440,000
Other contributed capital
700,000
Retained earnings
240,000
Total
$3,700,000
Treasury stock at cost, 5,000 shares
160,000
Total equities
$3,540,000
Required:
Prepare the elimination entry(s) required for the preparation of a consolidated
balance sheet workpaper on December 31, 2011, assuming the purchase price
of the stock was $1,670,000. Any difference between the value implied by the
purchase price of the investment and the book value of net assets acquired
relates to subsidiary land.
3-2

P Company purchased 80% of the outstanding common stock of S Company

on January 2, 2011, for $380,000. Balance sheets for P Company and S
Company immediately after the stock acquisition were as follows:

Current assets
Investment in S Company
Plant and equipment (net)
Land
Current liabilities
Long-term notes payable
Common stock
Other contributed capital
Retained earnings

P Company
$ 166,000
380,000
560,000
40,000
$1,146,000

S Company
$ 96,000
-0224,000
120,000
$440,000

$ 120,000
-0480,000
244,000
302,000
$1,146,000

$ 44,000
36,000
160,000
64,000
136,000
$440,000

S Company owed P Company $16,000 on open account on the date of

acquisition.
Required:
Prepare a consolidated balance sheet for P and S Companies on the date of
acquisition. Any difference between the value implied by the purchase price of
the investment and the book value of net assets acquired relates to subsidiary
land. The book values of S Company's other assets and liabilities are equal to
their fair values.
3-3

P Company acquired 54,000 shares of the common stock of S Company on

January 1, 2011, for $950,000 cash. The stockholders' equity section of S
Company's balance sheet on that date was as follows:
Common stock, $10 par value
Other contributed capital
Retained earnings
Total

$600,000
80,000
320,000
$1,000,000

On the date of acquisition, S Company owed P Company $10,000 on open

account.
Required:
Present, in general journal form, the elimination entries for the preparation of a
consolidated balance sheet workpaper on January 1, 2011. The difference
between the value implied by the purchase price of the investment and the
book value of the net assets acquired relates to subsidiary land.

3-4

On January 2, 2011, Potter Company acquired 90% of the outstanding

common stock of Smiley Company for $480,000 cash. Just before the
acquisition, the balance sheets of the two companies were as follows:

Cash
Accounts Receivable (net)
Inventory
Plant and Equipment (net)
Land
Total Assets

Potter
$ 650,000
360,000
290,000
970,000
150,000
$2,420,000

Smiley
$ 160,000
60,000
140,000
240,000
80,000
$680,000

Accounts Payable
Mortgage Payable
Common Stock, $2 par value
Other Contributed Capital
Retained Earnings
Total Equities

$ 260,000
180,000
1,000,000
520,000
460,000
$2,420,000

$ 120,000
100,000
170,000
50,000
240,000
$680,000

The fair values of Smiley's assets and liabilities are equal to their book
values with the exception of land.

Required:
A. Prepare the journal entry necessary to record the purchase of Smiley's
common stock.
B. Prepare a consolidated balance sheet at the date of acquisition.
3-5

P Corporation paid $420,000 for 70% of S Corporations $10 par common

stock on December 31, 2011, when S Corporations stockholders equity was
made up of $300,000 of Common Stock, $90,000 of Other Contributed Capital
and $60,000 of Retained Earnings. Ss identifiable assets and liabilities
reflected their fair values on December 31, 2011, except for Ss inventory
which was undervalued by $60,000 and their land which was undervalued by
$25,000. Balance sheets for P and S immediately after the business
combination are presented in the partially completed work-paper below.
P
ASSETS
Cash
Accounts
receivable-net
Inventories
Land
Plant assetsnet
Investment in
S Corp.
Difference

$40,000

$30,000

30,000
185,000
45,000

45,000
165,000
120,000

480,000

240,000

420,000

Eliminations
Debit
Credit

Noncontrolli
ng Interest

Consolidate
d Balances

between
implied and
book value
Goodwill
Total Assets
EQUITIES
Current
liabilities
Capital stock
Additional
paid-in capital
Retained
earnings
Noncontrolling
interest
Total Equities

$1,200,00
0

$600,00
0

$170,000
600,000

$150,00
0
300,000

150,000

90,000

280,000

60,000

$1,200,00
0

$600,00
0

Required:
Complete the consolidated balance sheet workpaper for P Corporation and
Subsidiary.
3-6

Prepare in general journal form the workpaper entries to eliminate Porter

Company's investment in Sewell Company in the preparation of a
consolidated balance sheet at the date of acquisition for each of the following
independent cases:

Sewell Company Equity Balances

Percent of
Stock
Owned

Investment
Cost

Common
Stock

Other
Contributed
Capital

Retained
Earnings

a.

90

$675,000

$450,000

$180,000

$75,000

b.

80

318,000

620,000

140,000

20,000

Cash

Any difference between book value of net assets acquired and the value
implied by the purchase price relates to subsidiary property, plant, and
equipment except for case (b). In case (b) assume that all book values and fair
values are the same.
3-7

On December 31, 2011, Pryor Company purchased a controlling interest in

Shelby Company for $1,060,000. The consolidated balance sheet on
December 31, 2011 reported noncontrolling interest in Shelby Company of
$265,000.
On the date of acquisition, the stockholders' equity section of Shelby
Company's balance sheet was as follows:
Common stock
Other contributed capital
Retained earnings
Total

$520,000
380,000
280,000
1,180,000

Required:
A. Compute the noncontrolling interest percentage on December 31, 2011.
B. Prepare the investment elimination entry made to prepare a consolidated
balance sheet workpaper. Any difference between book value and the value
implied by the purchase price relates to subsidiary land.
3-8

On January 1, 2011, Primer Company issued 1,500 of its $20 par value
common shares with a fair value of $50 per share in exchange for 2,000
outstanding common shares of Swartz Company in a purchase transaction.
Registration costs amounted to $1,700 paid in cash. Just prior to the
acquisition, the balance sheets of the two companies were as follows:

Cash
Accounts Receivable (net)
Inventory
Plant and Equipment (net)
Land
Total Assets

Primer

Swartz

$ 73,000
95,000
58,000
95,000
26,000
$ 347,000

$13,000
19,000
25,000
43,000
20,000
$ 120,000

Accounts Payable
Notes Payable
Common Stock, $20 par value
Other Contributed Capital
Retained Earnings
Total Liabilities and Equities

$ 66,000
82,000
100,000
60,000
39,000
$ 347,000

16,000
21,000
40,000
24,000
19,000
$ 120,000

Any differences between the book value of equity and the value implied by the
purchase price relates to Land.
Required:
A. Prepare the journal entry on Primers books to record the exchange of stock.
B. Prepare a Computation and Allocation Schedule for the Difference between
book value and value implied by the purchase price.
C. Calculate the consolidated balance for each of the following accounts as of
December 31, 2011:
1.
Cash
2.
Land
3.
Common Stock
4.
Other Contributed Capital

Short Answer
1. There are several reasons why a company would acquire a subsidiarys
voting common stock rather than its net assets. Identify at least two
advantages to acquiring a controlling interest in the voting stock of another
company rather than its assets.
2. A useful first step in the consolidating process is to prepare a Computation
and Allocation of Difference (CAD) Schedule. Identify the steps involved
in preparing the CAD schedule.

Short Answer Questions from the Textbook

1. What are the advantages of acquiring the majority of the voting stock of another
company rather than acquiring all its voting stock?
2. What is the justification for preparing consolidated financial statements when, in
fact, it is ap-parent that the consolidated group is not a legal entity?
3. Why is it often necessary to prepare separate financial statements for each legal
entity in a consolidated group even though consolidated statements provide a
better economic picture of the combined activities?

4. What aspects of control must exist before a subsidiary is consolidated?

5. Why are consolidated work papers used in pre-paring consolidated financial
statements?
6. Define noncontrolling (minority) interest. List three methods that might be used
for reporting the noncontrolling interest in a consolidated balance sheet, and state
which is preferred under the SFAS No. 160[topic 810].
7. Give several reasons why a parent company would be willing to pay more than
book value for subsidiary stock acquired.
8. What effect do subsidiary treasury stock holdings have at the time the subsidiary
is acquired? How should the treasury stock be treated on consolidated work
papers?
9. What effect does a noncontrolling interest have on the amount of intercompany
receivables and payables eliminated on a consolidated balance sheet?
10 A.SFAS No. 109and SFAS No. 141R[ASC 740 and805] require that a deferred
tax asset or liability be recognized for likely differences between the reported
values and tax bases of assets and liabilities recognized in business combinations
(for example, in exchanges that are nontaxable to the selling shareholders). Does
this decision change the amount of consolidated net income reported in years
subsequent to the business combination? Explain.
Business Ethics Question from the Textbook
Part I. You are working on the valuation of accounts receivable, and bad debt
reserves for the current years annual report. The CFO stops by and asks you
to reduce the reserve by enough to increase the current years EPS by 2 cents a
share. The companys policy has always been to use the previous years actual
bad debt percentage adjusted for a specific economic index. The CFOs
suggested change would still be within acceptable GAAP. However, later, you
learn that with the increased EPS, the CFO would qualify for a significant
bonus. What do you do and why?
Part II. Consider the following: Accounting firm KPMG created tax shelters
called BLIPS, FLIP, OPIS, and SOS that were based largely in the Cayman
Islands and allowed wealthy clients (there were 186) to create $5 billion in
losses, which were then deducted from their income for IRS tax purposes.
BLIPS (Bond Linked Issue Premium Structures) had clients borrow from an
offshore bank for purposes of purchasing currency. The client would then sell
the currency back to the lender for a loss. However, the IRS contends the
losses were phony and that there was never any risk to the client in the deals.
The IRS has indicted eight former KPMG partners and an outside lawyer
alleging that the transactions were shams, illegal methods for avoiding taxes.
KPMG has agreed to pay a$456 million fine, no longer to do tax shelters, and
to cooperate with the government in its prosecution of the nine individuals

involved in the tax shelter scheme. Many argue that the courts have not always
held that such tax avoidance schemes show criminal intent because the tax
laws permit individuals to minimize taxes. However, the IRS argues that these
shelters evidence intent because of the lack of risk.
Question
In this case, the IRS contends that the losses generated by the tax shelters were
phony and that the clients never incurred any risk. Do tax avoidance schemes
indicate criminal intent if the tax laws permit individuals to minimize taxes?
Justify your answer.