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Chapter 7 Special Issues in Accounting for an Investment in a Subsidiary

1. A new subsidiary is being formed. The parent company purchased 70% of the shares for $20 per share. The remaining shares were sold to a variety of outside interests for an average of $22 per share. The consolidated statements will show A. a gain. B. a loss. C. only cash and related equity. D. goodwill.

2. A new subsidiary is being formed. The parent company purchased 70% of the shares for $20 per share. The remaining shares were sold to a variety of outside interests for an average of $18 per share. The consolidated statements will show A. a gain. B. a loss. C. only cash and related equity. D. goodwill.

3. Control of a subsidiary was achieved with the initial investment in subsidiary stock. When a subsequent block of subsidiary's stock is purchased A. the parent must change from the cost method to the equity method. B. the parent must change from the equity method to the cost method. C. no change in accounting methods is required. D. none of the above.

4. Which of the following statements is incorrect regarding a parents purchase of additional subsidiary shares? A. There can never be an income statement gain or loss. B. Due to the constraints of conservatism, there can never be an income statement gain but a loss should be recognized if so indicated. C. If the price paid to reacquire the shares exceeds their book value, the debit first is used to reduce existing paid-in capital in excess of par from retirement and the balance is a debit to Retained Earnings. D. If the price paid to reacquire the shares is less than their book value, there is a credit to paid-in capital in excess of par from retirement.

5. Pine Company purchased a 60% interest in the Scent Company on January 1, 20X1 for $360,000. On that date, the stockholders' equity of Scent Company was $450,000. Any excess cost on 1/1/X1 was attributable to goodwill. Pine purchased another 20% interest on January 1, 20X4 for $200,000. On January 1, 20X4, Scent Company's stockholders' equity was $700,000, the entire increase due to retained earnings. As part of the consolidation process, the excess of the price paid over book on the new block of shares is treated as A. additional goodwill B. a loss on acquisition of additional subsidiary shares C. an increase to Pines Investment in Scent account D. a reduction in parents paid-in capital in excess of par

6. Pine Company purchased a 60% interest in the Scent Company on January 1, 20X1 for $360,000. On that date, the stockholders' equity of Scent Company was $450,000. Any excess cost on 1/1/X1 was attributable to goodwill. Pine purchased another 20% interest on January 1, 20X4 for $200,000. On January 1, 20X4, Scent Company's stockholders' equity was $700,000, the entire increase due to retained earnings. The excess of cost over book on the new block of stock is ____. A. $60,000 B. $50,000 C. $48,000 D. $20,000

7. Pine Company purchased a 60% interest in the Scent Company on January 1, 20X1 for $360,000. On that date, the stockholders' equity of Scent Company was $450,000. Any excess cost on 1/1/X1 was attributable to goodwill. Pine purchased another 20% interest on January 1, 20X4 for $200,000. On January 1, 20X4, Scent Company's stockholders' equity was $700,000, the entire increase due to retained earnings. The goodwill balance on the December 31, 20X4, balance sheet is ____. A. $100,000 B. $60,000 C. $0 D. $150,000

8. Parent has purchased additional shares of subsidiary stock. If the original investment blocks are carried at cost, the conversion to simple equity is based upon A. the difference in subsidiary retained earnings at the beginning of the current fiscal year and the retained earnings when the first block was acquired. B. the difference in subsidiary retained earnings at the beginning of the current fiscal year and the retained earnings when the block giving a controlling interest was acquired. C. the difference in subsidiary retained earnings at the beginning of the current fiscal year and the retained earnings of each block at its acquisition. D. the difference in subsidiary retained earnings at the beginning of the current fiscal year and the retained earnings when the last block was acquired.

9. In the year a parent sells its entire subsidiary investment, the results of subsidiary operations prior to the sale date are A. consolidated to the point of sale. B. shown on the balance sheet in the stockholders' equity section as an adjustment to retained earnings. C. not reflected on any of the parent's statements. D. not consolidated.

10. If the sale of an investment in a subsidiary is deemed to be a disposal of a component of the entity, the appropriate accounting treatments for the results its operations for the period and the gain or loss on the sale are: Results of Operations for the Period Gain or Loss on the Sale A. Normal recurring operations Extraordinary item B. Discontinued operations Discontinued operations C. Normal recurring operations Normal recurring operations D. Normal recurring operations Discontinued operations

11. Partridge purchased a 60% interest in Sparrow on January 1, 20X1, for $240,000. At the time of the purchase, Sparrow had the following stockholders' equity:
Common stock ($10 par) Retained earnings Total stockholders' equity $ 80,000 120,000 $200,000

Any excess is attributable to equipment with a 10-year life. On January 1, 20X6, the retained earnings of Sparrow was $175,000. The entire investment was sold for $300,000 on January 1, 20X6. The gain was ____. A. $87,000 B. $90,000 C. $27,000 D. $78,000 12. When selling an investment in a subsidiary, in order to record the appropriate gain or loss: A. the investment must be adjusted to show the balance under the sophisticated equity method. B. the investment must be adjusted to show the balance under the equity method. C. a final consolidation must be prepared. D. the unamortized balances of the excess of the purchase price over the book value of the investment must be written off. 13. Partridge purchased a 60% interest in Sparrow on January 1, 20X1, for $240,000. At the time of the purchase, Sparrow had the following stockholders' equity: Common stock ($10 par) Retained earnings Total stockholders' equity $ 80,000 120,000 $200,000

Any excess is attributable to equipment with a 10-year life. On January 1, 20X6, the retained earnings of Sparrow was $175,000. During the first 6 months of 20X6, $25,000 was earned by Sparrow. The entire investment was sold for $300,000 on July 1, 20X6. The gain (loss) was ____. A. $87,000 B. $78,000 C. $12,000 D. $60,000 14. Partridge purchased a 60% interest in Sparrow on January 1, 20X1, for $240,000. At the time of the purchase, Sparrow had the following stockholders' equity: Common stock ($10 par) Retained earnings Total stockholders' equity $ 80,000 120,000 $200,000

Any excess is attributable to goodwill. On January 1, 20X6, the retained earnings of Sparrow was $175,000. The entire investment was sold for $300,000 on January 1, 20X6. At that date, Partridge had on hand inventory it had purchased from Sparrow for $50,000. Sparrow has a gross profit percentage of 40%. The gain (loss) was ____. A. $105,000 B. $81,000 C. $27,000 D. $39,000

15. Patten Company purchased an 80% interest in Salty Inc. on January 1, 20X1, for $500,000 when the stockholders' equity of Salty was $500,000. Any excess of cost was attributed to a building with a 20-year life. On July 1, 20X4, Patten sold part of its investment and reduced its ownership interest to 60%. Salty earned $62,000, evenly, during 20X4.The NCI share of 20X4 consolidated income is A. $10,000 B. $12,400 C. $16,725 D. $43,400

16. A parent company owns a 90% interest in a subsidiary at the start of the year and during the year sells a 10% interest to reduce its ownership percentage to 80%. The most popular view of the transaction under current consolidations theory is that A. it is a sale of an investment at a gain or a loss. B. it is likened to a treasury stock transaction that may not result in a gain or a loss. C. it is a transaction between the controlling and noncontrolling ownership interests and has no effect on consolidated income. The transaction would impact only paid-in capital. D. the increase or decrease in equity as a result of the sale is an adjustment to donated capital.

17. When a parent sells its subsidiary interest, a gain (loss) is recognized if the parent sells its sells part but sells part and entire investment retains control loses control A. Yes Yes No B. Yes No Yes C. No No No D. No No Yes

18. Page Company purchased an 80% interest in the common stock of the Seed Company for $600,000 on January 1, 20X4, when Seed Company had the following stockholders' equity:

Common stock, $10 par Cumulative preferred stock, 10%, $10 par Paid-in capital in excess of par, common Retained earnings

$300,000 100,000 50,000 200,000

Any excess of cost over book value on the common stock purchase was attributed to goodwill. Page does not hold any of Seeds preferred stock. Seed had net income of $40,000 during 20X4 and paid no dividends. The preferred stock is one year in arrears on January 1, 20X4. The goodwill that will appear on the consolidated balance sheet prepared on January 1, 20X4, is ____. A. $80,000 B. $88,000 C. $210,000 D. $168,000

19. Page Company purchased an 80% interest in the common stock of the Seed Company for $600,000 on January 1, 20X4, when Seed Company had the following stockholders' equity:

Common stock, $10 par Cumulative preferred stock, 10%, $10 par Paid-in excess of par, common Retained earnings

$300,000 100,000 50,000 200,000

Any excess of cost over book value on the common stock purchase was attributed to goodwill. Page does not hold any of Seeds preferred stock. Seed had net income of $40,000 during 20X4 and paid no dividends. The preferred stock is two years in arrears on January 1, 20X4. The noncontrolling interest share of 20X4 net income was ____. A. $3,200 B. $6,000 C. $8,000 D. $16,000 20. Page Company purchased an 80% interest in the common stock of the Seed Company for $600,000 on January 1, 20X4, when Seed Company had the following stockholders' equity:

Common stock, $10 par Cumulative preferred stock, 10%, $10 par Paid-in excess of par, common Retained earnings

$300,000 100,000 50,000 200,000

Any excess of cost over book value on the common stock purchase was attributed to goodwill. Page does not hold any of Seeds preferred stock. Seed had net income of $40,000 during 20X4 and paid no dividends. The preferred stock is two years in arrears on January 1, 20X4. The controlling interest's share of Seed's 20X4 net income is ____. A. $24,000 B. $23,360 C. $25,600 D. $32,000 21. Pepin Company owns 75% of Savin Corp. Savin;s net income in the current year was $60,000. Savin also has 10,000 shares of 4% cumulative preferred $10 par value stock outstanding. When Pepin purchased Savin, the excess purchase price of $50,000 was attributable to a patent having a life of 10 years. How much income is attributable to the controlling interest? A. $45,000 B. $41,250 C. $37,250 D. $38,250

22. Which of the following is not true of an investors investment in the preferred stock of an investee? A. Because preferred stock normally does not carry voting rights, an investor many not have controlling interest if owning 100% of the preferred stock. B. The investors purchase of investees outstanding preferred stock viewed of a retirement of the stock. C. Preferred stock is included in the Determination and Distribution of Excess Schedule to calculate goodwill. D. Preferred stock dividends reduce the income available to the NCI.

23. Plant company owns 80% of the common stock of Surf Company. Surf Company also has outstanding preferred stock. Plant Company owned none of the preferred stock prior to January 1, 20X5. Plant Company purchased 100% of the outstanding preferred stock on January 1, 20X5, at a price in excess of book value. The result of this transaction with regard to the consolidated statements is that A. there will be added goodwill. B. there will be a loss recorded in the year of the purchase. C. the preferred stock will not appear on the balance sheet and there may be a decrease in retained earnings as a result of the purchase. D. the investment in preferred stock will appear on the balance sheet.

24. When preparing a consolidated balance sheet worksheet when the investment account is maintained under the simple equity method: A. the parents share of subsidiary income should be eliminated against retained earnings. B. the parents share of the subsidiarys equity accounts may be eliminated directly against the investment account. C. any intercompany sales must be eliminated against cost of goods sold. D. the investment account should be converted to the cost method as of the end of the year.

25. Company P has consistently sold merchandise for resale to its subsidiary at a gross profit of 20%. There were intercompany goods in both the subsidiary's beginning and ending inventory. As a result of these sales, which of the following amounts must be adjusted for when preparing only a consolidated balance sheet? Sales Profit by Co. P during the Year A. Yes B. Yes C. No D. No Beginning Inventory Profit Yes No No No Ending Inventory Profit Yes Yes Yes No

26. Company P owns an 90% interest in Company S. Company S has outstanding $100,000 of 10% bonds that were sold at face value and have 6 years to maturity as of the balance sheet date. Company P owns $70,000 of the bonds and has a remaining unamortized book value of $66,000. Company S bonds will be presented on the consolidated balance sheet as A. bonds payable, $30,000. B. bonds payable, $34,000. C. bonds payable, $100,000. D. bonds payable will not appear.

27. Saddle Corporation is an 80%-owned subsidiary of Paso Company. On January 1, 20X1, Saddle sold Paso a machine for $50,000. Saddle's cost was $60,000 and the book value was $40,000. The machine had a 5-year remaining life at the time of the sale. A consolidated balance sheet only is being prepared on December 31, 20X3. The retained earnings of the controlling interest requires which of the following adjustments? A. Debit $4,000 B. Debit $6,000 C. Debit $3,200 D. Debit $4,800