Consolidations-Subsequent To The Date of Acquisition: Multiple Choice Questions

Chapter 03
Consolidations-Subsequent to the Date of Acquisition

Multiple Choice Questions

1. Which one of the following accounts would not appear in the consolidated financial
statements at the end of the first fiscal period of the combination?

A. Goodwil
l.
B. Equipmen
t.
C. Investment in
Subsidiary.
D. Common
Stock.
E. Additional Paid-In
Capital.

2. Which of the following internal record-keeping methods can a parent choose to
account for a subsidiary acquired in a business combination?

A. initial value or book

value.
B. initial value, lower-of-cost-or-market-value, or
equity.
C. initial value, equity, or partial
equity.
D. initial value, equity, or book
value.
E. initial value, lower-of-cost-or-market-value, or
partial equity.

3-1
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3. Which one of the following varies between the equity, initial value, and partial equity
methods of accounting for an investment?

A. the amount of consolidated net

income.
B. total assets on the consolidated balance
sheet.
C. total liabilities on the consolidated balance
sheet.
D. the balance in the investment account on the
parent's books.
E. the amount of consolidated cost of
goods sold.

4. Under the partial equity method, the parent recognizes income when

A. dividends are received from the

investee.
B. dividends are declared by the
investee.
C. the related expense has been
incurred.
D. the related contract is signed by the
subsidiary.
E. it is earned by the
subsidiary.

5. Push-down accounting is concerned with the

A. impact of the purchase on the subsidiary's financial

statements.
B. recognition of goodwill by the
parent.
C. correct consolidation of the financial
statements.
D. impact of the purchase on the separate financial statements of
the parent.
E. recognition of dividends received from the
subsidiary.

3-2
6. Racer Corp. acquired all of the common stock of Tangiers Co. in 2011. Tangiers
maintained its incorporation. Which of Racer's account balances would vary between
the equity method and the initial value method?

A. Goodwill, Investment in Tangiers Co., and Retained

Earnings.
B. Expenses, Investment in Tangiers Co., and Equity in Subsidiary
Earnings.
C. Investment in Tangiers Co., Equity in Subsidiary Earnings, and Retained
Earnings.
D. Common Stock, Goodwill, and Investment in
Tangiers Co.
E. Expenses, Goodwill, and Investment in
Tangiers Co.

7. How does the partial equity method differ from the equity method?

A. In the total assets reported on the consolidated

balance sheet.
B. In the treatment of
dividends.
C. In the total liabilities reported on the consolidated
balance sheet.
D. Under the partial equity method, subsidiary income does not increase the balance
in the parent's investment account.
E. Under the partial equity method, the balancsse in the investment account is not
decreased by amortization on allocations made in the acquisition of the subsidiary.

8. Jansen Inc. acquired all of the outstanding common stock of Merriam Co. on January
1, 2012, for $257,000. Annual amortization of $19,000 resulted from this acquisition.
Jansen reported net income of $70,000 in 2012 and $50,000 in 2013 and paid
$22,000 in dividends each year. Merriam reported net income of $40,000 in 2012 and
$47,000 in 2013 and paid $10,000 in dividends each year. What is the Investment in
Merriam Co. balance on Jansen's books as of December 31, 2013, if the equity
method has been applied?

A. $286,00
0.
B. $295,00
0.
C. $276,00
0.
D. $344,00
0.
E. $324,00
0.

3-3
9. Velway Corp. acquired Joker Inc. on January 1, 2012. The parent paid more than the
fair value of the subsidiary's net assets. On that date, Velway had equipment with a
book value of $500,000 and a fair value of $640,000. Joker had equipment with a
book value of $400,000 and a fair value of $470,000. Joker decided to use push-down
accounting. Immediately after the acquisition, what Equipment amount would appear
on Joker's separate balance sheet and on Velway's consolidated balance sheet,
respectively?

A. $400,000 and
$900,000
B. $400,000 and
$970,000
C. $470,000 and
$900,000
D. $470,000 and
$970,000
E. $470,000 and
$1,040,000

10. Parrett Corp. acquired one hundred percent of Jones Inc. on January 1, 2011, at a
price in excess of the subsidiary's fair value. On that date, Parrett's equipment (ten-
year life) had a book value of $360,000 but a fair value of $480,000. Jones had
equipment (ten-year life) with a book value of $240,000 and a fair value of $350,000.
Parrett used the partial equity method to record its investment in Jones. On
December 31, 2013, Parrett had equipment with a book value of $250,000 and a fair
value of $400,000. Jones had equipment with a book value of $170,000 and a fair
value of $320,000. What is the consolidated balance for the Equipment account as of
December 31, 2013?

A. $387,00
0.
B. $497,00
0.
C. $508,00
0.
D. $537,00
0.
E. $570,00
0.

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11. On January 1, 2012, Cale Corp. paid $1,020,000 to acquire Kaltop Co. Kaltop
maintained separate incorporation. Cale used the equity method to account for the
investment. The following information is available for Kaltop's assets, liabilities, and
stockholders' equity accounts on January 1, 2012:

Kaltop earned net income for 2012 of $126,000 and paid dividends of $48,000 during
the year.
The 2012 total amortization of allocations is calculated to be

A. $4,00
0.
B. $6,40
0.
C. $(2,400
).
D. $(1,000
).
E. $3,80
0.

3-5

the year.
In Cale's accounting records, what amount would appear on December 31, 2012 for
equity in subsidiary earnings?

A. $77,00
0.
B. $79,00
0.
C. $125,00
0.
D. $127,00
0.
E. $81,80
0.

3-6

the year.
What is the balance in Cale's investment in subsidiary account at the end of 2012?

A. $1,099,00
0.
B. $1,020,00
0.
C. $1,096,20
0.
D. $1,098,00
0.
E. $1,144,40
0.

3-7

the year.
At the end of 2012, the consolidation entry to eliminate Cale's accrual of Kaltop's
earnings would include a credit to Investment in Kaltop Co. for

A. $124,40
0.
B. $126,00
0.
C. $127,00
0.
D. $76,40
0.
E. $0
.

3-8

the year.
If Cale Corp. had net income of $444,000 in 2012, exclusive of the investment, what
is the amount of consolidated net income?

A. $569,00
0.
B. $570,00
0.
C. $571,00
0.
D. $566,40
0.
E. $444,00
0.

3-9
16. On January 1, 2012, Franel Co. acquired all of the common stock of Hurlem Corp. For
2012, Hurlem earned net income of $360,000 and paid dividends of $190,000.
Amortization of the patent allocation that was included in the acquisition was $6,000.
How much difference would there have been in Franel's income with regard to the
effect of the investment, between using the equity method or using the initial value
method of internal recordkeeping?

A. $190,00
0.
B. $360,00
0.
C. $164,00
0.
D. $354,00
0.
E. $150,00
0.

17. On January 1, 2012, Franel Co. acquired all of the common stock of Hurlem Corp. For
2012, Hurlem earned net income of $360,000 and paid dividends of $190,000.
Amortization of the patent allocation that was included in the acquisition was $6,000.
effect of the investment, between using the equity method or using the partial equity
method of internal recordkeeping?

A. $170,00
0.
B. $354,00
0.
C. $164,00
0.
D. $6,00
0.
E. $174,00
0.

3-10
18. Cashen Co. paid $2,400,000 to acquire all of the common stock of Janex Corp. on
January 1, 2012. Janex's reported earnings for 2012 totaled $432,000, and it paid
$120,000 in dividends during the year. The amortization of allocations related to the
investment was $24,000. Cashen's net income, not including the investment, was
$3,180,000, and it paid dividends of $900,000.
On the consolidated financial statements for 2012, what amount should have been
shown for Equity in Subsidiary Earnings?

A. $432,00
0.
B. $-
0-
C. $408,00
0.
D. $120,00
0.
E. $288,00
0.

shown for consolidated dividends?

A. $900,00
0.
B. $1,020,00
0.
C. $876,00
0.
D. $996,00
0.
E. $948,00
0.

3-11
What is the amount of consolidated net income for the year 2012?

A. $3,180,00
0.
B. $3,612,00
0.
C. $3,300,00
0.
D. $3,588,00
0.
E. $3,420,00
0.

21. Jans Inc. acquired all of the outstanding common stock of Tysk Corp. on January 1,
2011, for $372,000. Equipment with a ten-year life was undervalued on Tysk's
financial records by $46,000. Tysk also owned an unrecorded customer list with an
assessed fair value of $67,000 and an estimated remaining life of five years.
Tysk earned reported net income of $180,000 in 2011 and $216,000 in 2012.
Dividends of $70,000 were paid in each of these two years. Selected account
balances as of December 31, 2013, for the two companies follow.

If the partial equity method had been applied, what was 2013 consolidated net
income?

A. $840,00
0.
B. $768,40
0.
C. $822,00
0.
D. $240,00
0.
E. $600,00
0.

3-12

If the equity method had been applied, what would be the Investment in Tysk Corp.
account balance within the records of Jans at the end of 2013?

A. $612,10
0.
B. $744,00
0.
C. $774,15
0.
D. $372,00
0.
E. $844,15
0.

23. Red Co. acquired 100% of Green, Inc. on January 1, 2012. On that date, Green had
inventory with a book value of $42,000 and a fair value of $52,000. This inventory
had not yet been sold at December 31, 2012. Also, on the date of acquisition, Green
had a building with a book value of $200,000 and a fair value of $390,000. Green had
equipment with a book value of $350,000 and a fair value of $280,000. The building
had a 10-year remaining useful life and the equipment had a 5-year remaining useful
life. How much total expense will be in the consolidated financial statements for the
year ended December 31, 2012 related to the acquisition allocations of Green?

A. $43,00
0.
B. $33,00
0.
C. $5,00
0.
D. $15,00
0.
E. 0
.

3-13
24. All of the following are acceptable methods to account for a majority-owned
investment in subsidiary except

A. The equity
method.
B. The initial value
method.
C. The partial equity
method.
D. The fair-value
method.
E. Book value
method.

25. Under the equity method of accounting for an investment,

A. The investment account remains at initial

value.
B. Dividends received are recorded as
revenue.
C. Goodwill is amortized over 20
years.
D. Income reported by the subsidiary increases the investment
account.
E. Dividends received increase the investment
account.

26. Under the partial equity method of accounting for an investment,


value.
revenue.
C. The allocations for excess fair value allocations over book value of net assets at
date of acquisition are applied over their useful lives to reduce the investment
account.
D. Amortization of the excess of fair value allocations over book value is ignored in
regard to the investment account.
account.

3-14
27. Under the initial value method, when accounting for an investment in a subsidiary,

A. Dividends received by the subsidiary decrease the investment

account.
B. The investment account is adjusted to fair value at
year-end.
C. Income reported by the subsidiary increases the investment
account.
D. The investment account remains at initial
value.
E. Dividends received are
ignored.

28. According to GAAP regarding amortization of goodwill and other intangible assets,
which of the following statements is true?

A. Goodwill recognized in consolidation must be amortized over

20 years.
B. Goodwill recognized in consolidation must be expensed in the period of
acquisition.
C. Goodwill recognized in consolidation will not be amortized but subject to an annual
test for impairment.
D. Goodwill recognized in consolidation can never be
written off.
E. Goodwill recognized in consolidation must be amortized over
40 years.

3-15
29. When a company applies the initial method in accounting for its investment in a
subsidiary and the subsidiary reports income in excess of dividends paid, what entry
would be made for a consolidation worksheet?

A. A
above
B. B
above
C. C
above
D. D
above
E. E
above

30. When a company applies the initial value method in accounting for its investment in
a subsidiary and the subsidiary reports income less than dividends paid, what entry
would be made for a consolidation worksheet?

A. A
above
B. B
above
C. C
above
D. D
above
E. E
above

3-16
31. When a company applies the partial equity method in accounting for its investment
in a subsidiary and the subsidiary's equipment has a fair value greater than its book
value, what consolidation worksheet entry is made in a year subsequent to the initial
acquisition of the subsidiary?

A. A
above
B. B
above
C. C
above
D. D
above
E. E
above

32. When a company applies the partial equity method in accounting for its investment
in a subsidiary and initial value, book values, and fair values of net assets acquired
are all equal, what consolidation worksheet entry would be made?

A. A
above
B. B
above
C. C
above
D. D
above
E. E
above

3-17
33. When consolidating a subsidiary under the equity method, which of the following
statements is true?

A. Goodwill is never
recognized.
B. Goodwill required is amortized over 20
years.
C. Goodwill may be recorded on the parent company's
books.
D. The value of any goodwill should be tested annually for
impairment in value.
E. Goodwill should be expensed in the year of
acquisition.

statements is true with regard to the subsidiary subsequent to the year of
acquisition?

A. All net assets are revalued to fair value and must be amortized over their
useful lives.
B. Only net assets that had excess fair value over book value when acquired by the
parent must be amortized over their useful lives.
C. All depreciable net assets are revalued to fair value at date of acquisition and must
be amortized over their useful lives.
D. Only depreciable net assets that have excess fair value over book value must be
amortized over their useful lives.
E. Only assets that have excess fair value over book value must be amortized over
their useful lives.

35. Which of the following statements is false regarding push-down accounting?

A. Push-down accounting simplifies the consolidation

process.
B. Fewer worksheet entries are necessary when push-down accounting
is applied.
C. Push-down accounting provides better information for internal
evaluation.
D. Push-down accounting must be applied for all business combinations under a
pooling of interests.
E. Push-down proponents argue that a change in ownership creates a new basis for
subsidiary assets and liabilities.

3-18
36. Which of the following is false regarding contingent consideration in business
combinations?

A. Contingent consideration payable in cash is reported under

liabilities.
B. Contingent consideration payable in stock shares is reported under
stockholders' equity.
C. Contingent consideration is recorded because of its substantial probability of
eventual payment.
D. The contingent consideration fair value is recognized as part of the acquisition
regardless of whether eventual payment is based on future performance of the
target firm or future stock price of the acquirer.
E. Contingent consideration is reflected in the acquirer's balance sheet at the present
value of the potential expected future payment.

37. Factors that should be considered in determining the useful life of an intangible asset
include

A. Legal, regulatory, or contractual

provisions.
B. The residual value of the
asset.
C. The entity's expected use of the intangible
asset.
D. The effects of obsolescence, competition, and technological
change.
E. All of these choices are used in determining the useful life of an
intangible asset.

38. Consolidated net income using the equity method for an acquisition combination is
computed as follows:

A. Parent company's income from its own operations plus the equity from subsidiary's
income recorded by the parent.
B. Parent's reported net
income.
C. Combined revenues less combined expenses less equity in subsidiary's income
less amortization of fair-value allocations in excess of book value.
D. Parent's revenues less expenses for its own operations plus the equity from
subsidiary's income recorded by parent.
E. All of
these.

3-19
39. Perry Company acquires 100% of the stock of Hurley Corporation on January 1, 2012,
for $3,800 cash. As of that date Hurley has the following trial balance;

Any excess of consideration transferred over fair value of net assets acquired is
considered goodwill with an indefinite life. FIFO inventory valuation method is used.
Compute the consideration transferred in excess of book value acquired at January 1,

2012.

A. $15
0.
B. $70
0.
C. $2,20
0.
D. $55
0.
E. $2,90
0.
3-20

Compute goodwill, if any, at January 1, 2012.

A. $15
0.
B. $25
0.
C. $70
0.
D. $1,20
0.
E. $55
0.
3-21

Compute the amount of Hurley's inventory that would be reported in a January 1,

2012, consolidated balance sheet.

A. $80
0.
B. $10
0.
C. $90
0.
D. $15
0.
E. $0
.

3-22

Compute the amount of Hurley's buildings that would be reported in a December 31,

A. $1,56
0.
B. $1,26
0.
C. $1,44
0.
D. $1,16
0.
E. $1,14
0.
3-23

Compute the amount of Hurley's equipment that would be reported in a December

31, 2012, consolidated balance sheet.

A. $1,00
0.
B. $1,25
0.
C. $87
5.
D. $1,12
5.
E. $75
0.
3-24

Compute the amount of total expenses reported in an income statement for the year
ended December 31, 2012, in order to recognize acquisition-date allocations of fair
value and book value differences,

A. $14
0.
B. $19
0.
C. $26
0.
D. $28
5.
E. $31
0.

3-25

Compute the amount of Hurley's long-term liabilities that would be reported in a

December 31, 2012, consolidated balance sheet.

A. $1,80
0.
B. $1,70
0.
C. $1,72
5.
D. $1,67
5.
E. $3,50
0.

3-26

Compute the amount of Hurley's buildings that would be reported in a December 31,

A. $1,62
0.
B. $1,38
0.
C. $1,32
0.
D. $1,08
0.
E. $1,50
0.

3-27



A. $0
.
B. $1,00
0.
C. $1,25
0.
D. $1,12
5.
E. $1,20
0.

3-28

Compute the amount of Hurley's land that would be reported in a December 31,

A. $90
0.
B. $1,30
0.
C. $40
0.
D. $1,45
0.
E. $2,20
0.

3-29



A. $1,70
0.
B. $1,80
0.
C. $1,65
0.
D. $1,75
0.
E. $3,50
0.

3-30
50. Kaye Company acquired 100% of Fiore Company on January 1, 2013. Kaye paid
$1,000 excess consideration over book value which is being amortized at $20 per
year. Fiore reported net income of $400 in 2013 and paid dividends of $100.
Assume the equity method is applied. How much will Kaye's income increase or
decrease as a result of Fiore's operations?

A. $400
increase.
B. $300
increase.
C. $380
increase.
D. $280
increase.
E. $480
increase.

Assume the partial equity method is applied. How much will Kaye's income increase
or decrease as a result of Fiore's operations?

A. $400
increase.
B. $300
increase.
C. $380
increase.
D. $280
increase.
E. $480
increase.

3-31
Assume the initial value method is applied. How much will Kaye's income increase or

A. $400
increase.
B. $300
increase.
C. $380
increase.
D. $100
increase.
E. $210
increase.

Assume the partial equity method is used. In the years following acquisition, what
additional worksheet entry must be made for consolidation purposes that is not
required for the equity method?

A. Entry
A.
B. Entry
B.
C. Entry
C.
D. Entry
D.
E. Entry
E.

3-32
Assume the initial value method is used. In the year subsequent to acquisition, what

A. Entry
A.
B. Entry
B.
C. Entry
C.
D. Entry
D.
E. Entry
E.

55. Hoyt Corporation agreed to the following terms in order to acquire the net assets of
Brown Company on January 1, 2013:
(1.) To issue 400 shares of common stock ($10 par) with a fair value of $45 per
share.
(2.) To assume Brown's liabilities which have a fair value of $1,500.
On the date of acquisition, the consideration transferred for Hoyt's acquisition of

Brown would be

A. $18,00
0.
B. $16,50
0.
C. $20,00
0.
D. $18,50
0.
E. $19,50
0.

3-33
56. Following are selected accounts for Green Corporation and Vega Company as of
December 31, 2015. Several of Green's accounts have been omitted.

Green acquired 100% of Vega on January 1, 2011, by issuing 10,500 shares of its $10
par value common stock with a fair value of $95 per share. On January 1, 2011,
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 book value of Vega at January 1, 2011.

A. $997,50
0.
B. $857,50
0.
C. $1,200,00
0.
D. $1,600,00
0.
E. $827,50
0.

3-34

investment.
Compute the December 31, 2015, consolidated revenues.

A. $1,400,00
0.
B. $800,00
0.
C. $500,00
0.
D. $1,590,37
5.
E. $1,390,37
5.

3-35

investment.
Compute the December 31, 2015, consolidated total expenses.

A. $620,00
0.
B. $280,00
0.
C. $900,00
0.
D. $909,62
5.
E. $299,62
5.

3-36

investment.
Compute the December 31, 2015, consolidated buildings.

A. $1,037,50
0.
B. $1,007,50
0.
C. $1,000,00
0.
D. $1,022,50
0.
E. $1,012,50
0.

3-37

investment.
Compute the December 31, 2015, consolidated equipment.

A. $800,00
0.
B. $808,00
0.
C. $840,00
0.
D. $760,00
0.
E. $848,00
0.

3-38

investment.
Compute the December 31, 2015, consolidated land.

A. $220,00
0.
B. $180,00
0.
C. $670,00
0.
D. $630,00
0.
E. $450,00
0.

3-39

investment.
Compute the December 31, 2015, consolidated trademark.

A. $50,00
0.
B. $46,87
5.
C. $0
.
D. $34,37
5.
E. $37,50
0.

3-40

investment.
Compute the December 31, 2015, consolidated common stock.

A. $450,00
0.
B. $530,00
0.
C. $555,00
0.
D. $635,00
0.
E. $525,00
0.

3-41

investment.
Compute the December 31, 2015, consolidated additional paid-in capital.

A. $210,00
0.
B. $75,00
0.
C. $1,102,50
0.
D. $942,50
0.
E. $525,00
0.

3-42

investment.
Compute the December 31, 2015 consolidated retained earnings.

A. $1,645,37
5.
B. $1,350,00
0.
C. $1,565,37
5.
D. $1,840,37
5.
E. $1,265,37
5.

3-43

investment.
Compute the equity in Vega's income to be included in Green's consolidated income

statement for 2015.

A. $500,00
0.
B. $300,00
0.
C. $190,37
5.
D. $200,00
0.
E. $290,37
5.

3-44
67. One company acquires another company in a combination accounted for as an
acquisition. The acquiring company decides to apply the initial value method in
accounting for the combination. What is one reason the acquiring company might
have made this decision?

A. It is the only method allowed by the

SEC.
B. It is relatively easy to
apply.
C. It is the only internal reporting method allowed by generally accepted
accounting principles.
D. Operating results on the parent's financial records reflect
consolidated totals.
E. When the initial method is used, no worksheet entries are required in the
consolidation process.

acquisition. The acquiring company decides to apply the equity method in accounting
for the combination. What is one reason the acquiring company might have made
this decision?


SEC.
apply.
E. When the equity method is used, no worksheet entries are required in the

69. When is a goodwill impairment loss recognized?

A. Annually on a systematic and rational

basis.
B. Neve
r.
C. If both the fair value of a reporting unit and its associated implied goodwill fall
below their respective carrying values.
D. If the fair value of a reporting unit falls below its original
acquisition price.
E. Whenever the fair value of the entity declines
significantly.

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70. Which of the following will result in the recognition of an impairment loss on
goodwill?

A. Goodwill amortization is to be recognized annually on a systematic and

rational basis.
B. Both the fair value of a reporting unit and its associated implied goodwill fall below
their respective carrying values.
C. The fair value of the entity declines
significantly.
D. The fair value of a reporting unit falls below the original consideration transferred
for the acquisition.
E. The entity is investigated by the SEC and its reputation has been severely
damaged.

71. Goehler, Inc. acquires all of the voting stock of Kenneth, Inc. on January 4, 2012, at
an amount in excess of Kenneth's fair value. On that date, Kenneth has equipment
with a book value of $90,000 and a fair value of $120,000 (10-year remaining life).
Goehler has equipment with a book value of $800,000 and a fair value of $1,200,000
(10-year remaining life). On December 31, 2013, Goehler has equipment with a book
value of $975,000 but a fair value of $1,350,000 and Kenneth has equipment with a
book value of $105,000 but a fair value of $125,000.
If Goehler applies the equity method in accounting for Kenneth, what is the
consolidated balance for the Equipment account as of December 31, 2013?

A. $1,080,00
0.
B. $1,104,00
0.
C. $1,100,00
0.
D. $1,468,00
0.
E. $1,475,00
0.

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If Goehler applies the partial equity method in accounting for Kenneth, what is the

A. $1,080,00
0.
B. $1,104,00
0.
C. $1,100,00
0.
D. $1,468,00
0.
E. $1,475,00
0.

If Goehler applies the initial value method in accounting for Kenneth, what is the

A. $1,080,00
0.
B. $1,104,00
0.
C. $1,100,00
0.
D. $1,468,00
0.
E. $1,475,00
0.

3-47
74. 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?

A. Equally over 20
years.
B. Equally over 40
years.
C. Equally over 20 years with an annual impairment
review.
D. No amortization, but annually reviewed for impairment and adjusted
accordingly.
E. No amortization over an indefinite
period time.

75. Harrison, Inc. acquires 100% of the voting stock of Rhine Company on January 1,
2012 for $400,000 cash. A contingent payment of $16,500 will be paid on April 15,
2013 if Rhine generates cash flows from operations of $27,000 or more in the next
year. Harrison estimates that there is a 20% probability that Rhine will generate at
least $27,000 next year, and uses an interest rate of 5% to incorporate the time
value of money. The fair value of $16,500 at 5%, using a probability weighted
approach, is $3,142.
What will Harrison record as its Investment in Rhine on January 1, 2012?

A. $400,00
0.
B. $403,14
2.
C. $406,00
0.
D. $409,14
2.
E. $416,50
0.

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Assuming Rhine generates cash flow from operations of $27,200 in 2012, how will
Harrison record the $16,500 payment of cash on April 15, 2013 in satisfaction of its
contingent obligation?

A. Debit Contingent performance obligation $16,500, and Credit Cash

$16,500.
B. Debit Contingent performance obligation $3,142, debit Loss from revaluation of
contingent performance obligation $13,358, and Credit Cash $16,500.
C. Debit Investment in Subsidiary and Credit Cash
$16,500.
D. Debit Goodwill and Credit Cash
$16,500.
E. No
entry.

When recording consideration transferred for the acquisition of Rhine on January 1,

2012, Harrison will record a contingent performance obligation in the amount of:

A. $628.4
0
B. $2,671.6
0
C. $3,142.0
0
D. $13,358.
00
E. $16,500.
00

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78. Beatty, Inc. acquires 100% of the voting stock of Gataux Company on January 1,
2013 if Gataux generates cash flows from operations of $26,500 or more in the next
year. Beatty estimates that there is a 30% probability that Gataux will generate at
What will Beatty record as its Investment in Gataux on January 1, 2012?

A. $500,00
0.
B. $503,46
1.
C. $512,00
0.
D. $515,46
1.
E. $526,50
0.

Assuming Gataux generates cash flow from operations of $27,200 in 2012, how will
Beatty record the $12,000 payment of cash on April 1, 2013 in satisfaction of its
contingent obligation?

A. Debit Contingent performance obligation $3,461, debit Goodwill $8,539, and Credit
Cash $12,000.
C. Debit Goodwill and Credit Cash
$12,000.
D. Debit Goodwill $27,200, credit Contingent performance obligation $15,200, and
Credit Cash $12,000.
E. No
entry.

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When recording consideration transferred for the acquisition of Gataux on January 1,

2012, Beatty will record a contingent performance obligation in the amount of:

A. $692.2
0
B. $3,040.0
0
C. $3,461.0
0
D. $12,000.
00
E. $15,200.
00

81. Prince Company acquires Duchess, Inc. on January 1, 2011. The consideration
transferred exceeds the fair value of Duchess' net assets. On that date, Prince has a
building with a book value of $1,200,000 and a fair value of $1,500,000. Duchess has
a building with a book value of $400,000 and fair value of $500,000.
If push-down accounting is used, what amounts in the Building account appear in

Duchess' separate balance sheet and in the consolidated balance sheet immediately
after acquisition?

A. $400,000 and
$1,600,000.
B. $500,000 and
$1,700,000.
C. $400,000 and
$1,700,000.
D. $500,000 and
$2,000,000.
E. $500,000 and
$1,600,000.

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transferred exceeds the fair value of Duchess' net assets. On that date, Prince has a
building with a book value of $1,200,000 and a fair value of $1,500,000. Duchess has
a building with a book value of $400,000 and fair value of $500,000.
If push-down accounting is not used, what amounts in the Building account appear on
Duchess' separate balance sheet and on the consolidated balance sheet immediately
after acquisition?

A. $400,000 and
$1,600,000.
B. $500,000 and
$1,700,000.
C. $400,000 and
$1,700,000.
D. $500,000 and
$2,000,000.
E. $500,000 and
$1,600,000.

83. Watkins, Inc. acquires all of the outstanding stock of Glen Corporation on January 1,
2012. At that date, Glen owns only three assets and has no liabilities:

If Watkins pays $450,000 in cash for Glen, what amount would be represented as the
subsidiary's Building in a consolidation at December 31, 2014, assuming the book
value of the building at that date is still $200,000?

A. $200,00
0.
B. $285,00
0.
C. $290,00
0.
D. $295,00
0.
E. $300,00
0.

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subsidiary's Building in a consolidation at December 31, 2014, assuming the book
value of the building at that date is still $200,000?

A. $200,00
0.
B. $285,00
0.
C. $260,00
0.
D. $268,00
0.
E. $300,00
0.


subsidiary's Equipment in a consolidation at December 31, 2014, assuming the book
value of the equipment at that date is still $80,000?

A. $70,00
0.
B. $73,50
0.
C. $75,00
0.
D. $76,50
0.
E. $80,00
0.

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If Watkins pays $450,000 in cash for Glen, what acquisition-date fair value allocation,
net of amortization, should be attributed to the subsidiary's Equipment in
consolidation at December 31, 2014?

A. $(5,000
.)
B. $80,00
0.
C. $75,00
0.
D. $73,50
0.
E. $(3,500
.)


If Watkins pays $300,000 in cash for Glen, at what amount would the subsidiary's
Building be represented in a January 2, 2012 consolidation?

A. $200,00
0.
B. $225,00
0.
C. $273,00
0.
D. $279,00
0.
E. $300,00
0.

3-54

If Watkins pays $450,000 in cash for Glen, at what amount would Glen's Inventory
acquired be represented in a December 31, 2012 consolidated balance sheet?

A. $40,00
0.
B. $50,00
0.
C. $0
.
D. $10,00
0.
E. $90,00
0.


If Watkins pays $450,000 in cash for Glen, and Glen earns $50,000 in net income and
pays $20,000 in dividends during 2012, what amount would be reflected in
consolidated net income for 2012 as a result of the acquisition?

A. $20,000 under the initial value

method.
B. $30,000 under the partial equity
method.
C. $50,000 under the partial equity
method.
D. $44,500 under the equity
method.
E. $45,500 regardless of the internal accounting
method used.

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90. According to the FASB ASC regarding the testing procedures for Goodwill Impairment,
the proper procedure for conducting impairment testing is:

A. Goodwill recognized in consolidation may be amortized uniformly and only tested if

the amortization method originally chosen is changed.
B. Goodwill recognized in consolidation must only be impairment tested prior to
disposal of the consolidated unit to eliminate the impairment of goodwill from the
gain or loss on the sale of that specific entity.
C. Goodwill recognized in consolidation may be impairment tested in a two-step
approach, first by quantitative assessment of the possible impairment of the fair
value of the unit relative to the book value, and then a qualitative assessment as
to why the impairment, if any, occurred for disclosure.
D. Goodwill recognized in consolidation may be impairment tested in a two-step
approach, first by qualitative assessment of the possibility of impairment of the
unit fair value relative to the book value, and then quantitative assessments as to
how much impairment, if any, occurred for disclosure.
E. Goodwill recognized in consolidation may be impairment tested in a two-step
unit fair value relative to the book value, and then quantitative assessments as to
how much impairment, if any, occurred for asset write-down.


A. Only after both a quantitative and qualitative assessment of the fair value of
goodwill of a reporting unit.
B. After only definitive quantitative assessments of the fair value of goodwill is
completed.
C. After only definitive qualitative assessments of the fair value of goodwill is
completed.
D. If the fair value of a reporting unit falls to zero or below its original
acquisition price.
E. Neve
r.

Essay Questions

92. For an acquisition when the subsidiary retains its incorporation, which method of
internal recordkeeping is the easiest for the parent to use?

3-56
internal recordkeeping gives the most accurate portrayal of the accounting results for
the entire business combination?

94. For an acquisition when the subsidiary maintains its incorporation, under the partial
equity method, what adjustments are made to the balance of the investment
account?

95. From which methods can a parent choose for its internal recordkeeping related to the
operations of a subsidiary?

96. What accounting method requires a subsidiary to record acquisition fair value
allocations and the amortization of allocations in its internal accounting records?

3-57
97. What is the partial equity method? How does it differ from the equity method? What
are its advantages and disadvantages compared to the equity method?

98. What advantages might push-down accounting offer for internal reporting?

99. What is the basic objective of all consolidations?

100 Yules Co. acquired Noel Co. in an acquisition transaction. Yules decided to use the
. partial equity method to account for the investment. The current balance in the
investment account is $416,000. Describe in words how this balance was derived.

3-58
101 Paperless Co. acquired Sheetless Co. and in effecting this business combination,
. there was a cash-flow performance contingency to be paid in cash, and a market-
price performance contingency to be paid in additional shares of stock. In what
accounts and in what section(s) of a consolidated balance sheet are these contingent
consideration items shown?

102 Avery Company acquires Billings Company in a combination accounted for as an
. acquisition and adopts the equity method to account for Investment in Billings. At the
end of four years, the Investment in Billings account on Avery's books is $198,984.
What items constitute this balance?

103 Dutch Co. has loaned $90,000 to its subsidiary, Hans Corp., which retains separate
. incorporation. How would this loan be treated on a consolidated balance sheet?

3-59
104 An acquisition transaction results in $90,000 of goodwill. Several years later a
. worksheet is being produced to consolidate the two companies. Describe in words at
what amount goodwill will be reported at this date.

105 Why is push-down accounting a popular internal reporting technique?
.

Short Answer Questions

106 On January 1, 2012, Jumper Co. acquired all of the common stock of Cable Corp. for
. $540,000. Annual amortization associated with the purchase amounted to $1,800.
During 2012, Cable earned net income of $54,000 and paid dividends of $24,000.
Cable's net income and dividends for 2013 were $86,000 and $24,000, respectively.
Required:
Assuming that Jumper decided to use the partial equity method, prepare a schedule
to show the balance in the investment account at the end of 2013.

3-60
107 Hanson Co. acquired all of the common stock of Roberts Inc. on January 1, 2012,
. transferring consideration in an amount slightly more than the fair value of Roberts'
net assets. At that time, Roberts had buildings with a twenty-year useful life, a book
value of $600,000, and a fair value of $696,000. On December 31, 2013, Roberts had
buildings with a book value of $570,000 and a fair value of $648,000. On that date,
Hanson had buildings with a book value of $1,878,000 and a fair value of
$2,160,000.
Required:
What amount should be shown for buildings on the consolidated balance sheet dated
December 31, 2013?

108 Carnes Co. decided to use the partial equity method to account for its investment in
. Domino Corp. An unamortized trademark associated with the acquisition was
$30,000, and Carnes decided to amortize the trademark over ten years. For 2013,
Carnes' Equity in Subsidiary Earnings was $78,000.
Required:
What balance would have been in the Equity in Subsidiary Earnings account if Carnes
had used the equity method?

3-61
109 Fesler Inc. acquired all of the outstanding common stock of Pickett Company on
. January 1, 2012. Annual amortization of $22,000 resulted from this transaction. On
the date of the acquisition, Fesler reported retained earnings of $520,000 while
Pickett reported a $240,000 balance for retained earnings. Fesler reported net
income of $100,000 in 2012 and $68,000 in 2013, and paid dividends of $25,000 in
dividends each year. Pickett reported net income of $24,000 in 2012 and $36,000 in
2013, and paid dividends of $10,000 in dividends each year.
Assume that Fesler's reported net income includes Equity in Subsidiary Income.
If the parent's net income reflected use of the equity method, what were the
consolidated retained earnings on December 31, 2013?

If the parent's net income reflected use of the partial equity method, what were the

3-62
If the parent's net income reflected use of the initial value method, what were the

3-63
112 Jaynes Inc. acquired all of Aaron Co.'s common stock on January 1, 2012, by issuing
. 11,000 shares of $1 par value common stock. Jaynes' shares had a $17 per share fair
value. On that date, Aaron reported a net book value of $120,000. However, its
equipment (with a five-year remaining life) was undervalued by $6,000 in the
company's accounting records. Any excess of consideration transferred over fair
value of assets and liabilities is assigned to an unrecorded patent to be amortized
over ten years.

What balance would Jaynes' Investment in Aaron Co. account have shown on
December 31, 2012, when the equity method was applied for this acquisition?

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over ten years.

What was consolidated net income for the year ended December 31, 2013?

3-65
over ten years.

What was consolidated equipment as of December 31, 2013?

3-66
over ten years.

What was the total for consolidated patents as of December 31, 2013?

3-67
116 Utah Inc. acquired all of the outstanding common stock of Trimmer Corp. on January
. 1, 2011. At that date, Trimmer owned only three assets and had no liabilities:

If Utah paid $300,000 in cash for Trimmer, what allocation should have been
assigned to the subsidiary's Building account and its Equipment account in a
December 31, 2013 consolidation?

3-68
117 Matthews Co. acquired all of the common stock of Jackson Co. on January 1, 2012. As
. of that date, Jackson had the following trial balance:

During 2012, Jackson reported net income of $96,000 while paying dividends of
$12,000. During 2013, Jackson reported net income of $132,000 while paying
dividends of $36,000.
Assume that Matthews Co. acquired the common stock of Jackson Co. for $588,000 in
cash. As of January 1, 2012, Jackson's land had a fair value of $102,000, its buildings
were valued at $188,000, and its equipment was appraised at $216,000. Any excess
of consideration transferred over fair value of assets and liabilities acquired is due to
an unamortized patent to be amortized over 10 years.
Matthews decided to use the equity method for this investment.
Required:
(A.) Prepare consolidation worksheet entries for December 31, 2012.

(B.) Prepare consolidation worksheet entries for December 31, 2013.

3-69
118 On January 1, 2011, Rand Corp. issued shares of its common stock to acquire all of
. the outstanding common stock of Spaulding Inc. Spaulding's book value was only
$140,000 at the time, but Rand issued 12,000 shares having a par value of $1 per
share and a fair value of $20 per share. Rand was willing to convey these shares
because it felt that buildings (ten-year life) were undervalued on Spaulding's records
by $60,000 while equipment (five-year life) was undervalued by $25,000. Any
consideration transferred over fair value of identified net assets acquired is assigned
to goodwill.
Following are the individual financial records for these two companies for the year
ended December 31, 2014.

Required:
Prepare a consolidation worksheet for this business combination.

3-70
119 Pritchett Company recently acquired three businesses, recognizing goodwill in each
. acquisition. Destin has allocated its acquired goodwill to its three reporting units:
Apple, Banana, and Carrot. Pritchett provides the following information in performing
the 2013 annual review for impairment:

Which of Pritchett's reporting units require both steps to test for goodwill
impairment?

3-71
120 Pritchett Company recently acquired three businesses, recognizing goodwill in each
. acquisition. Destin has allocated its acquired goodwill to its three reporting units:
Apple, Banana, and Carrot. Pritchett provides the following information in performing
the 2013 annual review for impairment:

How much goodwill impairment should Pritchett report for 2013?

121 On 4/1/11, Sey Mold Corporation acquired 100% of DotDot.Com for $2,000,000 cash.
. On the date of acquisition, DotDot's net book value was $900,000. DotDot's assets
included land that was undervalued by $300,000, a building that was undervalued by
$400,000, and equipment that was overvalued by $50,000. The building had a
remaining useful life of 8 years and the equipment had a remaining useful life of 4
years. Any excess fair value over consideration transferred is allocated to an
undervalued patent and is amortized over 5 years.
Determine the amortization expense related to the combination at the year-end date
of 12/31/11.

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Determine the amortization expense related to the combination at the year-end date
of 12/31/15.

Determine the amortization expense related to the consolidation at the year-end

date of 12/31/19.

3-73
124 For each of the following situations, select the best answer that applies to
. consolidating financial information subsequent to the acquisition date:
(A) Initial value method.

(B) Partial equity method.
(C) Equity method.
(D) Initial value method and partial equity method but not equity method.
(E) Partial equity method and equity method but not initial value method.
(F) Initial value method, partial equity method, and equity method.
_____1. Method(s) available to the parent for internal record-keeping.

_____2. Easiest internal record-keeping method to apply.
_____3. Income of the subsidiary is recorded by the parent when earned.
_____4. Designed to create a parallel between the parent's investment accounts and
changes in the underlying equity of the acquired company.
_____5. For years subsequent to acquisition, requires the *C entry.
_____6. Uses the cash basis for income recognition.
_____7. Investment account remains at initially recorded amount.
_____8. Dividends received by the parent from the subsidiary reduce the parent's
investment account.
_____9. Often referred to in accounting as a single-line consolidation.
_____10. Increases the investment account for subsidiary earnings, but does not
decrease the subsidiary account for equity adjustments such as amortizations.

3-74
Chapter 03 Consolidations-Subsequent to the Date of
Acquisition Answer Key

Multiple Choice Questions

1. Which one of the following accounts would not appear in the consolidated financial
statements at the end of the first fiscal period of the combination?

A. Goodwil
l.
B. Equipmen
t.
C. Investment in
Subsidiary.
D. Common
Stock.
E. Additional Paid-In
Capital.

AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 03-01 Recognize the complexities in preparing consolidated financial reports that emerge
from the passage of time.
Topic: Consolidations-Subsequent to the Date of Acquisition

2. Which of the following internal record-keeping methods can a parent choose to
account for a subsidiary acquired in a business combination?

A. initial value or book

value.
B. initial value, lower-of-cost-or-market-value, or
equity.
C. initial value, equity, or partial
equity.
D. initial value, equity, or book
value.
E. initial value, lower-of-cost-or-market-value, or
partial equity.

Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 03-02 Identify and describe the various methods available to a parent company in order to
maintain its investment in subsidiary account in its internal records.
3-75
Topic: Investment Accounting by the Acquiring Company

3. Which one of the following varies between the equity, initial value, and partial
equity methods of accounting for an investment?

A. the amount of consolidated net

income.
B. total assets on the consolidated balance
sheet.
C. total liabilities on the consolidated balance
sheet.
D. the balance in the investment account on the
parent's books.
E. the amount of consolidated cost of
goods sold.

Blooms: Understand
Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments
has no effect on the resulting consolidated financial statements.
Topic: Consolidation Subsequent to Year of Acquisition-Initial Value and Partial Equity Methods

4. Under the partial equity method, the parent recognizes income when

A. dividends are received from the

investee.
B. dividends are declared by the
investee.
C. the related expense has been
incurred.
D. the related contract is signed by the
subsidiary.
E. it is earned by the
subsidiary.

Blooms: Remember
Difficulty: 1 Easy

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5. Push-down accounting is concerned with the

A. impact of the purchase on the subsidiary's financial

statements.
B. recognition of goodwill by the
parent.
C. correct consolidation of the financial
statements.
D. impact of the purchase on the separate financial statements of
the parent.
E. recognition of dividends received from the
subsidiary.

Blooms: Remember
Learning Objective: 03-08 Understand in general the requirements of push-down accounting and when its use
is appropriate.
Topic: Push-Down Accounting

6. Racer Corp. acquired all of the common stock of Tangiers Co. in 2011. Tangiers
maintained its incorporation. Which of Racer's account balances would vary
between the equity method and the initial value method?

A. Goodwill, Investment in Tangiers Co., and Retained

Earnings.
B. Expenses, Investment in Tangiers Co., and Equity in Subsidiary
Earnings.
C. Investment in Tangiers Co., Equity in Subsidiary Earnings, and Retained
Earnings.
D. Common Stock, Goodwill, and Investment in
Tangiers Co.
E. Expenses, Goodwill, and Investment in
Tangiers Co.

Blooms: Understand
Difficulty: 3 Hard
Learning Objective: 03-03a Prepare consolidated financial statements subsequent to acquisition when the
parent has applied in its internal records: The equity method.
Learning Objective: 03-03b Prepare consolidated financial statements subsequent to acquisition when the
parent has applied in its internal records: The intial value method.
Topic: Subsequent Consolidation-Investment Recorded by the Equity Method
Topic: Subsequent Consolidations-Investment Recorded Using Initial Value or Partial Equity Method

3-77
7. How does the partial equity method differ from the equity method?

A. In the total assets reported on the consolidated

balance sheet.
B. In the treatment of
dividends.
C. In the total liabilities reported on the consolidated
balance sheet.
D. Under the partial equity method, subsidiary income does not increase the
balance in the parent's investment account.
E. Under the partial equity method, the balancsse in the investment account is not
decreased by amortization on allocations made in the acquisition of the
subsidiary.

Blooms: Remember
Learning Objective: 03-03c Prepare consolidated financial statements subsequent to acquisition when the
parent has applied in its internal records: The partial equity method.
Topic: Acquisition Made during the Current Year

8. Jansen Inc. acquired all of the outstanding common stock of Merriam Co. on
January 1, 2012, for $257,000. Annual amortization of $19,000 resulted from this
acquisition. Jansen reported net income of $70,000 in 2012 and $50,000 in 2013
and paid $22,000 in dividends each year. Merriam reported net income of $40,000
in 2012 and $47,000 in 2013 and paid $10,000 in dividends each year. What is the
Investment in Merriam Co. balance on Jansen's books as of December 31, 2013, if
the equity method has been applied?

A. $286,00
0.
B. $295,00
0.
C. $276,00
0.
D. $344,00
0.
E. $324,00
0.
$257,000 + $40,000 + $47,000 - $10,000 - $19,000 - $10,000 - $19,000 =

$286,000

AACSB: Analytic
Blooms: Apply
3-78

9. Velway Corp. acquired Joker Inc. on January 1, 2012. The parent paid more than
the fair value of the subsidiary's net assets. On that date, Velway had equipment
with a book value of $500,000 and a fair value of $640,000. Joker had equipment
with a book value of $400,000 and a fair value of $470,000. Joker decided to use
push-down accounting. Immediately after the acquisition, what Equipment amount
would appear on Joker's separate balance sheet and on Velway's consolidated
balance sheet, respectively?

A. $400,000 and

$900,000
B. $400,000 and
$970,000
C. $470,000 and
$900,000
D. $470,000 and
$970,000
E. $470,000 and
$1,040,000
FV of EQ = $470,000 for Joker B/S; Consolidated B/S = BV of Parent EQ $500,000 +

FV of Sub EQ $470,000 = $970,000

AACSB: Analytic
Blooms: Apply
is appropriate.

3-79
10. Parrett Corp. acquired one hundred percent of Jones Inc. on January 1, 2011, at a
price in excess of the subsidiary's fair value. On that date, Parrett's equipment
(ten-year life) had a book value of $360,000 but a fair value of $480,000. Jones
had equipment (ten-year life) with a book value of $240,000 and a fair value of
$350,000. Parrett used the partial equity method to record its investment in Jones.
On December 31, 2013, Parrett had equipment with a book value of $250,000 and
a fair value of $400,000. Jones had equipment with a book value of $170,000 and
a fair value of $320,000. What is the consolidated balance for the Equipment
account as of December 31, 2013?

A. $387,00
0.
B. $497,00
0.
C. $508,00
0.
D. $537,00
0.
E. $570,00
0.
Excess of Sub's FV = $110,000 + Parent's BV $250,000 + Sub's BV $170,000 -

Excess Amortization ($11,000 × 3yrs) = $497,000

AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard

3-80
investment. The following information is available for Kaltop's assets, liabilities,
and stockholders' equity accounts on January 1, 2012:

Kaltop earned net income for 2012 of $126,000 and paid dividends of $48,000
during the year.
The 2012 total amortization of allocations is calculated to be

A. $4,00
0.
B. $6,40
0.
C. $(2,400
).
D. $(1,000
).
E. $3,80
0.
Building = FV $268,000 - BV $240,000 = $28,000/20 yrs = $1,400 Equipment = FV

$516,000 - BV $540,000 = ($24,000)/10 yrs = ($2,400)
($2,400) + $1,400 = ($1,000)

AACSB: Analytic
Blooms: Apply

3-81

during the year.
In Cale's accounting records, what amount would appear on December 31, 2012
for equity in subsidiary earnings?

A. $77,00
0.
B. $79,00
0.
C. $125,00
0.
D. $127,00
0.
E. $81,80
0.
$126,000 + $1,000 = $127,000

AACSB: Analytic
Blooms: Apply

3-82

during the year.
What is the balance in Cale's investment in subsidiary account at the end of

2012?

A. $1,099,00
0.
B. $1,020,00
0.
C. $1,096,20
0.
D. $1,098,00
0.
E. $1,144,40
0.
$1,020,000 + ($126,000 + $1,000) - $48,000 = $1,099,000

AACSB: Analytic
Blooms: Apply

3-83

during the year.
At the end of 2012, the consolidation entry to eliminate Cale's accrual of Kaltop's
earnings would include a credit to Investment in Kaltop Co. for

A. $124,40
0.
B. $126,00
0.
C. $127,00
0.
D. $76,40
0.
E. $0
.
$126,000 + $1,000 = $127,000

AACSB: Analytic
Blooms: Apply

3-84

during the year.
If Cale Corp. had net income of $444,000 in 2012, exclusive of the investment,
what is the amount of consolidated net income?

A. $569,00
0.
B. $570,00
0.
C. $571,00
0.
D. $566,40
0.
E. $444,00
0.
$444,000 + ($126,000 + $1,000) = $571,000

AACSB: Analytic
Blooms: Apply

3-85
16. On January 1, 2012, Franel Co. acquired all of the common stock of Hurlem Corp.
For 2012, Hurlem earned net income of $360,000 and paid dividends of $190,000.
Amortization of the patent allocation that was included in the acquisition was
$6,000.
effect of the investment, between using the equity method or using the initial
value method of internal recordkeeping?

A. $190,00
0.
B. $360,00
0.
C. $164,00
0.
D. $354,00
0.
E. $150,00
0.
Initial Value Method = $0 Recognized from Sub Income (only dividend income)
Equity Method = $360,000 - $6,000 - $190,000 = $164,000 Sub Income Added in
Consolidation $164,000 - $0 = $164,000

AACSB: Analytic
Blooms: Apply

3-86
17. On January 1, 2012, Franel Co. acquired all of the common stock of Hurlem Corp.
For 2012, Hurlem earned net income of $360,000 and paid dividends of $190,000.
Amortization of the patent allocation that was included in the acquisition was
$6,000.
effect of the investment, between using the equity method or using the partial
equity method of internal recordkeeping?

A. $170,00
0.
B. $354,00
0.
C. $164,00
0.
D. $6,00
0.
E. $174,00
0.
Equity Method = $360,000 - $6,000 - $190,000 = $164,000 Added in Consolidation

- Partial Equity Method = $360,000 - $190,000 = $170,000 Added in Consolidation
$170,000 - $164,000 = $6,000

AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy

3-87
$120,000 in dividends during the year. The amortization of allocations related to
the investment was $24,000. Cashen's net income, not including the investment,
was $3,180,000, and it paid dividends of $900,000.
shown for Equity in Subsidiary Earnings?

A. $432,00
0.
B. $-
0-
C. $408,00
0.
D. $120,00
0.
E. $288,00
0.
$0; (Income is eliminated from the investment account)

AACSB: Analytic
Blooms: Apply

3-88
shown for consolidated dividends?

A. $900,00
0.
B. $1,020,00
0.
C. $876,00
0.
D. $996,00
0.
E. $948,00
0.
$900,000 Parent's Dividends Only

AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy

3-89
What is the amount of consolidated net income for the year 2012?

A. $3,180,00
0.
B. $3,612,00
0.
C. $3,300,00
0.
D. $3,588,00
0.
E. $3,420,00
0.
Parent Income $3,180,000 + Sub Income $432,000 - Amortization Allocations

$24,000 = Consolidated Net Income $3,588,000

AACSB: Analytic
Blooms: Apply

3-90

If the partial equity method had been applied, what was 2013 consolidated net
income?

A. $840,00
0.
B. $768,40
0.
C. $822,00
0.
D. $240,00
0.
E. $600,00
0.
Parent $1,080,000 - $480,000 = $600,000; Sub $840,000 - $600,000 = $240,000

$600,000 + $240,000 = $840,000 - ($46,000/10) - ($67,000/5) = $822,000

AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard

3-91

If the equity method had been applied, what would be the Investment in Tysk
Corp. account balance within the records of Jans at the end of 2013?

A. $612,10
0.
B. $744,00
0.
C. $774,15
0.
D. $372,00
0.
E. $844,15
0.
Initial Investment $372,000

2011 Entries: $180,000 - $70,000 - $18,000 = $92,000
2012 Entries: $216,000 - $70,000 - $18,000 = $128,000
2013 Entries: $240,000 - $70,000 - $18,000 = $152,000
$372,000 + $92,000 + $128,000 + $152,000 = $744,000

AACSB: Analytic
Blooms: Apply

3-92
23. Red Co. acquired 100% of Green, Inc. on January 1, 2012. On that date, Green had
inventory with a book value of $42,000 and a fair value of $52,000. This inventory
had not yet been sold at December 31, 2012. Also, on the date of acquisition,
Green had a building with a book value of $200,000 and a fair value of $390,000.
Green had equipment with a book value of $350,000 and a fair value of $280,000.
The building had a 10-year remaining useful life and the equipment had a 5-year
remaining useful life. How much total expense will be in the consolidated financial
statements for the year ended December 31, 2012 related to the acquisition
allocations of Green?

A. $43,00
0.
B. $33,00
0.
C. $5,00
0.
D. $15,00
0.
E. 0
.
Inventory Adjustment $10,000 + Building Adjustment ($190,000/10) $19,000 +

Equipment Adjustment ([$70,000]/5) [$14,000] = $15,000

AACSB: Analytic
Blooms: Apply

24. All of the following are acceptable methods to account for a majority-owned
investment in subsidiary except

A. The equity

method.
B. The initial value
method.
C. The partial equity
method.
D. The fair-value
method.
E. Book value
method.

Blooms: Remember
Difficulty: 1 Easy
3-93

25. Under the equity method of accounting for an investment,


value.
revenue.
C. Goodwill is amortized over 20
years.
D. Income reported by the subsidiary increases the investment
account.
account.

Blooms: Remember
Difficulty: 1 Easy

26. Under the partial equity method of accounting for an investment,


value.
revenue.
C. The allocations for excess fair value allocations over book value of net assets at
date of acquisition are applied over their useful lives to reduce the investment
account.
D. Amortization of the excess of fair value allocations over book value is ignored in
regard to the investment account.
account.

Blooms: Understand

3-94
27. Under the initial value method, when accounting for an investment in a
subsidiary,

A. Dividends received by the subsidiary decrease the investment

account.
B. The investment account is adjusted to fair value at
year-end.
C. Income reported by the subsidiary increases the investment
account.
D. The investment account remains at initial
value.
E. Dividends received are
ignored.

Blooms: Understand

28. According to GAAP regarding amortization of goodwill and other intangible assets,
which of the following statements is true?

A. Goodwill recognized in consolidation must be amortized over

20 years.
B. Goodwill recognized in consolidation must be expensed in the period of
acquisition.
C. Goodwill recognized in consolidation will not be amortized but subject to an
annual test for impairment.
D. Goodwill recognized in consolidation can never be
written off.
E. Goodwill recognized in consolidation must be amortized over
40 years.

Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 03-05 Discuss the rationale for the goodwill impairment testing approach.
Topic: Goodwill Impairment

3-95
29. When a company applies the initial method in accounting for its investment in a
subsidiary and the subsidiary reports income in excess of dividends paid, what
entry would be made for a consolidation worksheet?

A. A
above
B. B
above
C. C
above
D. D
above
E. E
above

AACSB: Analytic
Blooms: Analyze

3-96
30. When a company applies the initial value method in accounting for its investment
in a subsidiary and the subsidiary reports income less than dividends paid, what
entry would be made for a consolidation worksheet?

A. A
above
B. B
above
C. C
above
D. D
above
E. E
above

AACSB: Analytic
Blooms: Analyze

3-97
31. When a company applies the partial equity method in accounting for its
investment in a subsidiary and the subsidiary's equipment has a fair value greater
than its book value, what consolidation worksheet entry is made in a year
subsequent to the initial acquisition of the subsidiary?

A. A
above
B. B
above
C. C
above
D. D
above
E. E
above

AACSB: Analytic
Blooms: Analyze

3-98
32. When a company applies the partial equity method in accounting for its
investment in a subsidiary and initial value, book values, and fair values of net
assets acquired are all equal, what consolidation worksheet entry would be made?

A. A
above
B. B
above
C. C
above
D. D
above
E. E
above

AACSB: Analytic
Blooms: Analyze

statements is true?

A. Goodwill is never

recognized.
B. Goodwill required is amortized over 20
years.
C. Goodwill may be recorded on the parent company's
books.
D. The value of any goodwill should be tested annually for
impairment in value.
E. Goodwill should be expensed in the year of
acquisition.

Blooms: Remember
Difficulty: 1 Easy

3-99
statements is true with regard to the subsidiary subsequent to the year of
acquisition?

A. All net assets are revalued to fair value and must be amortized over their
useful lives.
B. Only net assets that had excess fair value over book value when acquired by
the parent must be amortized over their useful lives.
C. All depreciable net assets are revalued to fair value at date of acquisition and
must be amortized over their useful lives.
D. Only depreciable net assets that have excess fair value over book value must
be amortized over their useful lives.
E. Only assets that have excess fair value over book value must be amortized
over their useful lives.

Blooms: Understand

35. Which of the following statements is false regarding push-down accounting?

A. Push-down accounting simplifies the consolidation

process.
B. Fewer worksheet entries are necessary when push-down accounting
is applied.
C. Push-down accounting provides better information for internal
evaluation.
D. Push-down accounting must be applied for all business combinations under a
pooling of interests.
E. Push-down proponents argue that a change in ownership creates a new basis
for subsidiary assets and liabilities.

Blooms: Remember
Difficulty: 1 Easy
is appropriate.

3-100
36. Which of the following is false regarding contingent consideration in business
combinations?

A. Contingent consideration payable in cash is reported under

liabilities.
B. Contingent consideration payable in stock shares is reported under
stockholders' equity.
C. Contingent consideration is recorded because of its substantial probability of
eventual payment.
D. The contingent consideration fair value is recognized as part of the acquisition
regardless of whether eventual payment is based on future performance of the
target firm or future stock price of the acquirer.
E. Contingent consideration is reflected in the acquirer's balance sheet at the
present value of the potential expected future payment.

Blooms: Remember
Learning Objective: 03-07 Understand the accounting and reporting for contingent consideration subsequent to
a business acquisition.
Topic: Contingent Consideration

37. Factors that should be considered in determining the useful life of an intangible
asset include

A. Legal, regulatory, or contractual

provisions.
B. The residual value of the
asset.
C. The entity's expected use of the intangible
asset.
D. The effects of obsolescence, competition, and technological
change.
E. All of these choices are used in determining the useful life of an
intangible asset.

Blooms: Remember
Learning Objective: 03-06 Describe the procedures for conducting a goodwill impairment test.
Topic: Qualitative Assessment Option

3-101
38. Consolidated net income using the equity method for an acquisition combination is
computed as follows:

A. Parent company's income from its own operations plus the equity from
subsidiary's income recorded by the parent.
B. Parent's reported net
income.
C. Combined revenues less combined expenses less equity in subsidiary's income
less amortization of fair-value allocations in excess of book value.
D. Parent's revenues less expenses for its own operations plus the equity from
subsidiary's income recorded by parent.
E. All of
these.

Blooms: Remember

3-102
3-103
39. Perry Company acquires 100% of the stock of Hurley Corporation on January 1,
2012, for $3,800 cash. As of that date Hurley has the following trial balance;

considered goodwill with an indefinite life. FIFO inventory valuation method is
used.
Compute the consideration transferred in excess of book value acquired at January

1, 2012.

A. $15
0.
B. $70
0.
C. $2,20
0.
D. $55
0.
E. $2,90
0.
3-104
Acquisition Price $3,800 - Total Equity at Acquisition $3,100 = $700

AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy

3-105
3-106

used.
Compute goodwill, if any, at January 1, 2012.

A. $15
0.
B. $25
0.
C. $70
0.
D. $1,20
0.
E. $55
0.
3-107
Identified BVs $2,950 - Identified FVs $3,100 = $150 Excess Unidentified
(Goodwill)

AACSB: Analytic
Blooms: Apply

3-108
3-109

used.
Compute the amount of Hurley's inventory that would be reported in a January 1,


A. $80
0.
B. $10
0.
C. $90
0.
D. $15
0.
E. $0
.
3-110
Fair Value at Acquisition = $900

AACSB: Analytic
Blooms: Apply

3-111
3-112

used.
Compute the amount of Hurley's buildings that would be reported in a December


A. $1,56
0.
B. $1,26
0.
C. $1,44
0.
D. $1,16
0.
E. $1,14
0.
3-113
FV $1,200 + Excess Amortization ($300/5) $60 = $1,260

AACSB: Analytic
Blooms: Apply

3-114
3-115

used.


A. $1,00
0.
B. $1,25
0.
C. $87
5.
D. $1,12
5.
E. $75
0.
3-116
FV $1,250 - Excess Amortization ($250/2) $125 = $1,125

AACSB: Analytic
Blooms: Apply

3-117

used.
Compute the amount of total expenses reported in an income statement for the
year ended December 31, 2012, in order to recognize acquisition-date allocations
of fair value and book value differences,

A. $14
0.
B. $19
0.
C. $26
0.
D. $28
5.
E. $31
0.
3-118

AACSB: Analytic
Blooms: Apply

3-119
3-120

used.


A. $1,80
0.
B. $1,70
0.
C. $1,72
5.
D. $1,67
5.
E. $3,50
0.
3-121
FV $1,700 + Excess Amortization ($100/4) $25 = $1,725

AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard

3-122
3-123

used.
Compute the amount of Hurley's buildings that would be reported in a December


A. $1,62
0.
B. $1,38
0.
C. $1,32
0.
D. $1,08
0.
E. $1,50
0.
3-124
FV $1,200 + Excess Amortization ($300/5) $60 × 2 = $1,320

AACSB: Analytic
Blooms: Apply

3-125
3-126

used.


A. $0
.
B. $1,00
0.
C. $1,25
0.
D. $1,12
5.
E. $1,20
0.
3-127
FV $1,250 - Excess Amortization ($250/2) $125 × 2 = $1,000

AACSB: Analytic
Blooms: Apply

3-128
3-129

used.
Compute the amount of Hurley's land that would be reported in a December 31,

A. $90
0.
B. $1,30
0.
C. $40
0.
D. $1,45
0.
E. $2,20
0.
3-130
FV $1,300

AACSB: Analytic
Blooms: Apply

3-131
3-132

used.


A. $1,70
0.
B. $1,80
0.
C. $1,65
0.
D. $1,75
0.
E. $3,50
0.
3-133
FV $1,700 + Excess Amortization ($100/4) $25 × 2 = $1,750

AACSB: Analytic
Blooms: Apply

Assume the equity method is applied. How much will Kaye's income increase or

A. $400
increase.
B. $300
increase.
C. $380
increase.
D. $280
increase.
E. $480
increase.
2013 Income $400 - Amortization $20 = $380 Increase

AACSB: Analytic
Blooms: Apply

3-134
Assume the partial equity method is applied. How much will Kaye's income
increase or decrease as a result of Fiore's operations?

A. $400
increase.
B. $300
increase.
C. $380
increase.
D. $280
increase.
E. $480
increase.
2013 Income = $400 Increase

AACSB: Analytic
Blooms: Apply

Assume the initial value method is applied. How much will Kaye's income increase
or decrease as a result of Fiore's operations?

A. $400
increase.
B. $300
increase.
C. $380
increase.
D. $100
increase.
E. $210
increase.
2013 Dividends = $100 Increase

AACSB: Analytic
Blooms: Apply
3-135

Assume the partial equity method is used. In the years following acquisition, what

A. Entry
A.
B. Entry
B.
C. Entry
C.
D. Entry
D.
E. Entry
E.

AACSB: Analytic
Blooms: Analyze

3-136
Assume the initial value method is used. In the year subsequent to acquisition,
what additional worksheet entry must be made for consolidation purposes that is
not required for the equity method?

A. Entry
A.
B. Entry
B.
C. Entry
C.
D. Entry
D.
E. Entry
E.

AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard

3-137
55. Hoyt Corporation agreed to the following terms in order to acquire the net assets
of Brown Company on January 1, 2013:
(1.) To issue 400 shares of common stock ($10 par) with a fair value of $45 per
share.
(2.) To assume Brown's liabilities which have a fair value of $1,500.
On the date of acquisition, the consideration transferred for Hoyt's acquisition of

Brown would be

A. $18,00
0.
B. $16,50
0.
C. $20,00
0.
D. $18,50
0.
E. $19,50
0.
Common Stock (400 shares × $45) $18,000 + Liabilities Assumed $1,500 =

$19,500

AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy

3-138

Green acquired 100% of Vega on January 1, 2011, by issuing 10,500 shares of its
$10 par value common stock with a fair value of $95 per share. On January 1,
2011, 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 book value of Vega at January 1, 2011.

A. $997,50
0.
B. $857,50
0.
C. $1,200,00
0.
D. $1,600,00
0.
E. $827,50
0.
Common Stock Fair Value $997,500 - Fair Value Asset Adjustment (Land $40,000 -
Building $30,000 + Equipment $80,000 + Unrecorded Trademark $50,000)
$140,000 = $857,500

AACSB: Analytic
Blooms: Apply

3-139

Compute the December 31, 2015, consolidated revenues.

A. $1,400,00
0.
B. $800,00
0.
C. $500,00
0.
D. $1,590,37
5.
E. $1,390,37
5.
$900,000 + $500,000 = $1,400,000

AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy

3-140

Compute the December 31, 2015, consolidated total expenses.

A. $620,00
0.
B. $280,00
0.
C. $900,00
0.
D. $909,62
5.
E. $299,62
5.
COGS ($360,000 + $200,000) + Depreciation ($140,000 + $40,000) + Other Exp

($100,000 + $60,000) + Excess FV Amortization (Blg [$1,500] + Equip $8,000 +
Trademark $3,125) = $909,625

AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard

3-141

Compute the December 31, 2015, consolidated buildings.

A. $1,037,50
0.
B. $1,007,50
0.
C. $1,000,00
0.
D. $1,022,50
0.
E. $1,012,50
0.
$750,000 + $280,000 - $30,000 = $1,000,000 + Amortization ($1,500 × 5) =

$1,007,500

AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard

3-142

Compute the December 31, 2015, consolidated equipment.

A. $800,00
0.
B. $808,00
0.
C. $840,00
0.
D. $760,00
0.
E. $848,00
0.
$300,000 + $580,000 = $880,000 - Amortization ($8,000 × 5) = $840,000

AACSB: Analytic
Blooms: Apply

3-143

Compute the December 31, 2015, consolidated land.

A. $220,00
0.
B. $180,00
0.
C. $670,00
0.
D. $630,00
0.
E. $450,00
0.
$450,000 + $220,000 = $670,000

AACSB: Analytic
Blooms: Apply

3-144

Compute the December 31, 2015, consolidated trademark.

A. $50,00
0.
B. $46,87
5.
C. $0
.
D. $34,37
5.
E. $37,50
0.
$50,000 - Amortization ($3,125 × 5) = $34,375

AACSB: Analytic
Blooms: Apply

3-145

Compute the December 31, 2015, consolidated common stock.

A. $450,00
0.
B. $530,00
0.
C. $555,00
0.
D. $635,00
0.
E. $525,00
0.
$450,000 (Parent Only)

AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy

3-146

Compute the December 31, 2015, consolidated additional paid-in capital.

A. $210,00
0.
B. $75,00
0.
C. $1,102,50
0.
D. $942,50
0.
E. $525,00
0.
$75,000 (Parent Only)

AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy

3-147

Compute the December 31, 2015 consolidated retained earnings.

A. $1,645,37
5.
B. $1,350,00
0.
C. $1,565,37
5.
D. $1,840,37
5.
E. $1,265,37
5.

AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard

3-148

Compute the equity in Vega's income to be included in Green's consolidated

income statement for 2015.

A. $500,00
0.
B. $300,00
0.
C. $190,37
5.
D. $200,00
0.
E. $290,37
5.

AACSB: Analytic
Blooms: Apply

3-149
acquisition. The acquiring company decides to apply the initial value method in


SEC.
apply.
E. When the initial method is used, no worksheet entries are required in the

Blooms: Understand
Difficulty: 1 Easy

acquisition. The acquiring company decides to apply the equity method in


SEC.
apply.
E. When the equity method is used, no worksheet entries are required in the

Blooms: Understand
Difficulty: 1 Easy

3-150

A. Annually on a systematic and rational

basis.
B. Neve
r.
C. If both the fair value of a reporting unit and its associated implied goodwill fall
D. If the fair value of a reporting unit falls below its original
acquisition price.
E. Whenever the fair value of the entity declines
significantly.

Blooms: Remember

70. Which of the following will result in the recognition of an impairment loss on
goodwill?

A. Goodwill amortization is to be recognized annually on a systematic and

rational basis.
B. Both the fair value of a reporting unit and its associated implied goodwill fall
C. The fair value of the entity declines
significantly.
D. The fair value of a reporting unit falls below the original consideration
transferred for the acquisition.
E. The entity is investigated by the SEC and its reputation has been severely
damaged.

Blooms: Remember

3-151
Goehler has equipment with a book value of $800,000 and a fair value of
$1,200,000 (10-year remaining life). On December 31, 2013, Goehler has
equipment with a book value of $975,000 but a fair value of $1,350,000 and
Kenneth has equipment with a book value of $105,000 but a fair value of
$125,000.
If Goehler applies the equity method in accounting for Kenneth, what is the

A. $1,080,00
0.
B. $1,104,00
0.
C. $1,100,00
0.
D. $1,468,00
0.
E. $1,475,00
0.

AACSB: Analytic
Blooms: Apply

3-152
$125,000.
If Goehler applies the partial equity method in accounting for Kenneth, what is the

A. $1,080,00
0.
B. $1,104,00
0.
C. $1,100,00
0.
D. $1,468,00
0.
E. $1,475,00
0.

AACSB: Analytic
Blooms: Apply

3-153
$125,000.
If Goehler applies the initial value method in accounting for Kenneth, what is the

A. $1,080,00
0.
B. $1,104,00
0.
C. $1,100,00
0.
D. $1,468,00
0.
E. $1,475,00
0.

AACSB: Analytic
Blooms: Apply

74. 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?

A. Equally over 20

years.
B. Equally over 40
years.
C. Equally over 20 years with an annual impairment
review.
D. No amortization, but annually reviewed for impairment and adjusted
accordingly.
E. No amortization over an indefinite
period time.

Blooms: Remember
Difficulty: 1 Easy
3-154

What will Harrison record as its Investment in Rhine on January 1, 2012?

A. $400,00
0.
B. $403,14
2.
C. $406,00
0.
D. $409,14
2.
E. $416,50
0.
Cash Payment $400,000 + Weighted Fair Value of Contingency $3,142 = $403,142

AACSB: Analytic
Blooms: Apply

3-155
Assuming Rhine generates cash flow from operations of $27,200 in 2012, how will
Harrison record the $16,500 payment of cash on April 15, 2013 in satisfaction of
its contingent obligation?

A. Debit Contingent performance obligation $16,500, and Credit Cash

$16,500.
C. Debit Investment in Subsidiary and Credit Cash
$16,500.
D. Debit Goodwill and Credit Cash
$16,500.
E. No
entry.

AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard

3-156
When recording consideration transferred for the acquisition of Rhine on January 1,

2012, Harrison will record a contingent performance obligation in the amount of:

A. $628.4
0
B. $2,671.6
0
C. $3,142.0
0
D. $13,358.
00
E. $16,500.
00
Weighted Fair Value of Contingency = $3,142

AACSB: Analytic
Blooms: Apply

3-157
2013 if Gataux generates cash flows from operations of $26,500 or more in the
next year. Beatty estimates that there is a 30% probability that Gataux will
generate at least $26,500 next year, and uses an interest rate of 4% to
incorporate the time value of money. The fair value of $12,000 at 4%, using a
probability weighted approach, is $3,461.
What will Beatty record as its Investment in Gataux on January 1, 2012?

A. $500,00
0.
B. $503,46
1.
C. $512,00
0.
D. $515,46
1.
E. $526,50
0.
Cash Payment $500,000 + Weighted Fair Value of Contingency $3,461 = $503,461

AACSB: Analytic
Blooms: Apply

3-158
Assuming Gataux generates cash flow from operations of $27,200 in 2012, how
will Beatty record the $12,000 payment of cash on April 1, 2013 in satisfaction of
its contingent obligation?

A. Debit Contingent performance obligation $3,461, debit Goodwill $8,539, and
C. Debit Goodwill and Credit Cash
$12,000.
D. Debit Goodwill $27,200, credit Contingent performance obligation $15,200, and
E. No
entry.

AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard

3-159
When recording consideration transferred for the acquisition of Gataux on January

1, 2012, Beatty will record a contingent performance obligation in the amount of:

A. $692.2
0
B. $3,040.0
0
C. $3,461.0
0
D. $12,000.
00
E. $15,200.
00
Weighted Fair Value of Contingency = $3,461

AACSB: Analytic
Blooms: Apply

3-160
transferred exceeds the fair value of Duchess' net assets. On that date, Prince has
a building with a book value of $1,200,000 and a fair value of $1,500,000. Duchess
has a building with a book value of $400,000 and fair value of $500,000.
If push-down accounting is used, what amounts in the Building account appear in

Duchess' separate balance sheet and in the consolidated balance sheet
immediately after acquisition?

A. $400,000 and

$1,600,000.
B. $500,000 and
$1,700,000.
C. $400,000 and
$1,700,000.
D. $500,000 and
$2,000,000.
E. $500,000 and
$1,600,000.
Fair Value ($500,000) & Parent BV + Sub FV ($1,700,000)

AACSB: Analytic
Blooms: Apply
is appropriate.

3-161
transferred exceeds the fair value of Duchess' net assets. On that date, Prince has
a building with a book value of $1,200,000 and a fair value of $1,500,000. Duchess
has a building with a book value of $400,000 and fair value of $500,000.
If push-down accounting is not used, what amounts in the Building account appear
on Duchess' separate balance sheet and on the consolidated balance sheet
immediately after acquisition?

A. $400,000 and

$1,600,000.
B. $500,000 and
$1,700,000.
C. $400,000 and
$1,700,000.
D. $500,000 and
$2,000,000.
E. $500,000 and
$1,600,000.
Book Value ($400,000) & Parent BV + Sub FV ($1,700,000)

AACSB: Analytic
Blooms: Apply
is appropriate.

3-162
83. Watkins, Inc. acquires all of the outstanding stock of Glen Corporation on January
1, 2012. At that date, Glen owns only three assets and has no liabilities:

If Watkins pays $450,000 in cash for Glen, what amount would be represented as
the subsidiary's Building in a consolidation at December 31, 2014, assuming the
book value of the building at that date is still $200,000?

A. $200,00
0.
B. $285,00
0.
C. $290,00
0.
D. $295,00
0.
E. $300,00
0.
Fair Value at Acquisition ($300,000) - Amortization [($100,000/20) × 3] =

$285,000

AACSB: Analytic
Blooms: Apply

3-163

the subsidiary's Building in a consolidation at December 31, 2014, assuming the
book value of the building at that date is still $200,000?

A. $200,00
0.
B. $285,00
0.
C. $260,00
0.
D. $268,00
0.
E. $300,00
0.
Fair Value at Acquisition ($300,000) - Amortization [($100,000/20) × 3] =

$285,000

AACSB: Analytic
Blooms: Apply

3-164

the subsidiary's Equipment in a consolidation at December 31, 2014, assuming the
book value of the equipment at that date is still $80,000?

A. $70,00
0.
B. $73,50
0.
C. $75,00
0.
D. $76,50
0.
E. $80,00
0.
Fair Value at Acquisition ($75,000) + Amortization [($5,000/10) × 3] = $76,500

AACSB: Analytic
Blooms: Apply

3-165

If Watkins pays $450,000 in cash for Glen, what acquisition-date fair value
allocation, net of amortization, should be attributed to the subsidiary's Equipment
in consolidation at December 31, 2014?

A. $(5,000
.)
B. $80,00
0.
C. $75,00
0.
D. $73,50
0.
E. $(3,500
.)
Fair Value Differential at Acquisition [$5,000] + Amortization ([$5000]/10 × 3) =

[$3,500]

AACSB: Analytic
Blooms: Apply

3-166

If Watkins pays $300,000 in cash for Glen, at what amount would the subsidiary's
Building be represented in a January 2, 2012 consolidation?

A. $200,00
0.
B. $225,00
0.
C. $273,00
0.
D. $279,00
0.
E. $300,00
0.
Fair Value at Acquisition = $300,000

AACSB: Analytic
Blooms: Apply

3-167

If Watkins pays $450,000 in cash for Glen, at what amount would Glen's Inventory
acquired be represented in a December 31, 2012 consolidated balance sheet?

A. $40,00
0.
B. $50,00
0.
C. $0
.
D. $10,00
0.
E. $90,00
0.
Zero (Under FIFO all Inventory would go to COGS)

AACSB: Analytic
Blooms: Apply

3-168

If Watkins pays $450,000 in cash for Glen, and Glen earns $50,000 in net income
and pays $20,000 in dividends during 2012, what amount would be reflected in
consolidated net income for 2012 as a result of the acquisition?

A. $20,000 under the initial value

method.
B. $30,000 under the partial equity
method.
C. $50,000 under the partial equity
method.
D. $44,500 under the equity
method.
E. $45,500 regardless of the internal accounting
method used.
Sub Income $50,000 - Amortizations ([$5,000]/10) - ($100,000/20) = $45,500

AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard

3-169
90. According to the FASB ASC regarding the testing procedures for Goodwill
Impairment, the proper procedure for conducting impairment testing is:

A. Goodwill recognized in consolidation may be amortized uniformly and only

tested if the amortization method originally chosen is changed.
B. Goodwill recognized in consolidation must only be impairment tested prior to
disposal of the consolidated unit to eliminate the impairment of goodwill from
the gain or loss on the sale of that specific entity.
C. Goodwill recognized in consolidation may be impairment tested in a two-step
approach, first by quantitative assessment of the possible impairment of the
fair value of the unit relative to the book value, and then a qualitative
assessment as to why the impairment, if any, occurred for disclosure.
D. Goodwill recognized in consolidation may be impairment tested in a two-step
unit fair value relative to the book value, and then quantitative assessments as
to how much impairment, if any, occurred for disclosure.
E. Goodwill recognized in consolidation may be impairment tested in a two-step
unit fair value relative to the book value, and then quantitative assessments as
to how much impairment, if any, occurred for asset write-down.

Blooms: Remember


A. Only after both a quantitative and qualitative assessment of the fair value of
goodwill of a reporting unit.
B. After only definitive quantitative assessments of the fair value of goodwill is
completed.
C. After only definitive qualitative assessments of the fair value of goodwill is
completed.
D. If the fair value of a reporting unit falls to zero or below its original
acquisition price.
E. Neve
r.

Blooms: Remember

Essay Questions

3-170
internal recordkeeping is the easiest for the parent to use?

The initial value method is the easiest to use.

Blooms: Understand
Difficulty: 1 Easy

internal recordkeeping gives the most accurate portrayal of the accounting results
for the entire business combination?

The equity method gives the most accurate portrayal of the results for the
combined entity.

Blooms: Remember

94. For an acquisition when the subsidiary maintains its incorporation, under the
partial equity method, what adjustments are made to the balance of the
investment account?

The balance of the investment account is increased for the subsidiary's net
income. It is decreased for subsidiary dividends and losses. The amortization of
excess fair value allocations does not affect the account balance.

Blooms: Remember

3-171
95. From which methods can a parent choose for its internal recordkeeping related to
the operations of a subsidiary?

The parent can choose from among the initial value method, equity method, and
partial equity method.

Blooms: Remember
Difficulty: 1 Easy

96. What accounting method requires a subsidiary to record acquisition fair value
allocations and the amortization of allocations in its internal accounting records?

The appropriate method is termed push-down accounting.

Blooms: Remember
is appropriate.

97. What is the partial equity method? How does it differ from the equity method?
What are its advantages and disadvantages compared to the equity method?

The partial equity method is a compromise between the initial value method and
the equity method. It provides some of the advantages of the equity method but is
easier to use. Under the partial equity method, the balance in the investment
account is increased by the accrual of the subsidiary's income and decreased
when the subsidiary pays dividends. The method is simpler than the equity
method because amortization of excess fair value allocations is not done.

Blooms: Remember

3-172
98. What advantages might push-down accounting offer for internal reporting?

Push-down accounting requires the subsidiary to record acquisition fair value

allocations and amortizations in its accounting records. One advantage that the
method offers to internal reporting is that it simplifies the consolidation process.
More important, it provides better information for internal evaluation.

Blooms: Understand
is appropriate.

99. What is the basic objective of all consolidations?

The basic objective of all consolidations is to combine asset, liability, revenue,

expense, and stockholders' equity accounts in a manner consistent with the
concepts of the acquisition method to reflect substance over form in financial
reporting for consolidations. When a parent has control (substance) over a
subsidiary and separate incorporation is maintained (form), the consolidated
financial statements will reflect results as if the multiple entities were one entity.

Blooms: Understand

100. Yules Co. acquired Noel Co. in an acquisition transaction. Yules decided to use the
partial equity method to account for the investment. The current balance in the
investment account is $416,000. Describe in words how this balance was derived.

The initial balance in the investment account would be the acquisition value
implied by the fair value of consideration transferred. This would not include
consideration paid for costs to effect the combination. After the acquisition, the
balance in the account is increased by the parent's accrual of the subsidiary's
income and decreased by the dividends paid by the subsidiary.

AACSB: Analytic
Blooms: Analyze

3-173
101. Paperless Co. acquired Sheetless Co. and in effecting this business combination,
there was a cash-flow performance contingency to be paid in cash, and a market-
price performance contingency to be paid in additional shares of stock. In what
accounts and in what section(s) of a consolidated balance sheet are these
contingent consideration items shown?

A cash-flow performance contingency is shown as a contingent performance

obligation which is in the liability section of the consolidated balance sheet. A
market-price performance contingency to be paid in stock is shown as additional
paid-in capital - contingent equity outstanding which is in the stockholders' equity
section of the consolidated balance sheet.

AACSB: Analytic
Blooms: Analyze

102. Avery Company acquires Billings Company in a combination accounted for as an
acquisition and adopts the equity method to account for Investment in Billings. At
the end of four years, the Investment in Billings account on Avery's books is
$198,984. What items constitute this balance?

Since the equity method has been applied by Avery, the $198,984 is composed of
four items:
(a.) The acquisition value of consideration transferred by the parent;

(b.) The annual accruals made by Avery to recognize income as it is earned by the
subsidiary;
(c.) The reductions that are created by the subsidiary's payment of dividends;
(d.) The periodic amortization recognized by Avery in connection with the excess
fair value allocations identified with its acquisition.

Blooms: Understand

3-174
103. Dutch Co. has loaned $90,000 to its subsidiary, Hans Corp., which retains separate
incorporation. How would this loan be treated on a consolidated balance sheet?

The loan represents an intra-entity payable for Hans and receivable for Dutch, and
each receivable and payable would be eliminated in preparing a consolidated
balance sheet.

Blooms: Remember

104. An acquisition transaction results in $90,000 of goodwill. Several years later a
worksheet is being produced to consolidate the two companies. Describe in words
at what amount goodwill will be reported at this date.

The $90,000 attributed to goodwill is reported at its original amount unless a

portion of goodwill is impaired or a unit of the business where goodwill resides is
sold.

Blooms: Remember
Difficulty: 1 Easy

105. Why is push-down accounting a popular internal reporting technique?

Push-down accounting has become popular for the parent's internal reporting
purposes for two reasons. First, this method simplifies the consolidation process
each year. If acquisition value allocations and subsequent amortization are
recorded by the subsidiary, they do not need to be repeated each year on a
consolidation worksheet. Second, recording of amortization by the subsidiary
enables that company's information to provide a good representation of the
impact that the acquisition has on the earnings of the business combination. For
example, if the subsidiary earns $100,000 each year but annual amortization is
$80,000, the acquisition is only adding $20,000 to the income of the combination
each year rather than the $100,000 that is reported by the subsidiary unless push-
down accounting is used.

Blooms: Understand
is appropriate.
3-175

Short Answer Questions

106. On January 1, 2012, Jumper Co. acquired all of the common stock of Cable Corp.
for $540,000. Annual amortization associated with the purchase amounted to
$1,800. During 2012, Cable earned net income of $54,000 and paid dividends of
$24,000. Cable's net income and dividends for 2013 were $86,000 and $24,000,
respectively.
Required:
Assuming that Jumper decided to use the partial equity method, prepare a
schedule to show the balance in the investment account at the end of 2013.

AACSB: Analytic
Blooms: Apply

3-176
107. Hanson Co. acquired all of the common stock of Roberts Inc. on January 1, 2012,
transferring consideration in an amount slightly more than the fair value of
Roberts' net assets. At that time, Roberts had buildings with a twenty-year useful
life, a book value of $600,000, and a fair value of $696,000. On December 31,
2013, Roberts had buildings with a book value of $570,000 and a fair value of
$648,000. On that date, Hanson had buildings with a book value of $1,878,000
and a fair value of $2,160,000.
Required:
What amount should be shown for buildings on the consolidated balance sheet
dated December 31, 2013?

AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard

108. Carnes Co. decided to use the partial equity method to account for its investment
in Domino Corp. An unamortized trademark associated with the acquisition was
$30,000, and Carnes decided to amortize the trademark over ten years. For 2013,
Carnes' Equity in Subsidiary Earnings was $78,000.
Required:
What balance would have been in the Equity in Subsidiary Earnings account if
Carnes had used the equity method?

AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
3-177

109. Fesler Inc. acquired all of the outstanding common stock of Pickett Company on
January 1, 2012. Annual amortization of $22,000 resulted from this transaction. On
income of $100,000 in 2012 and $68,000 in 2013, and paid dividends of $25,000
in dividends each year. Pickett reported net income of $24,000 in 2012 and
$36,000 in 2013, and paid dividends of $10,000 in dividends each year.
If the parent's net income reflected use of the equity method, what were the

AACSB: Analytic
Blooms: Apply

3-178
If the parent's net income reflected use of the partial equity method, what were
the consolidated retained earnings on December 31, 2013?

AACSB: Analytic
Blooms: Apply

3-179
If the parent's net income reflected use of the initial value method, what were the

AACSB: Analytic
Blooms: Apply

3-180
3-181
112. Jaynes Inc. acquired all of Aaron Co.'s common stock on January 1, 2012, by
issuing 11,000 shares of $1 par value common stock. Jaynes' shares had a $17 per
share fair value. On that date, Aaron reported a net book value of $120,000.
However, its equipment (with a five-year remaining life) was undervalued by
$6,000 in the company's accounting records. Any excess of consideration
transferred over fair value of assets and liabilities is assigned to an unrecorded
patent to be amortized over ten years.

What balance would Jaynes' Investment in Aaron Co. account have shown on
December 31, 2012, when the equity method was applied for this acquisition?

An allocation of the acquisition value (based on the fair value of the shares issued)
must first be made.
3-182

AACSB: Analytic
Blooms: Apply

3-183

What was consolidated net income for the year ended December 31, 2013?

AACSB: Analytic
Blooms: Apply

3-184

What was consolidated equipment as of December 31, 2013?

AACSB: Analytic
Blooms: Apply

3-185

What was the total for consolidated patents as of December 31, 2013?

AACSB: Analytic
Blooms: Apply

3-186
116. Utah Inc. acquired all of the outstanding common stock of Trimmer Corp. on
January 1, 2011. At that date, Trimmer owned only three assets and had no
liabilities:

If Utah paid $300,000 in cash for Trimmer, what allocation should have been
assigned to the subsidiary's Building account and its Equipment account in a
December 31, 2013 consolidation?

Since Utah paid more than the $288,000 fair value of Trimmer's net assets, all
allocations are based on fair value with the excess $12,000 assigned to goodwill.

AACSB: Analytic
Blooms: Apply

3-187
3-188
117. Matthews Co. acquired all of the common stock of Jackson Co. on January 1, 2012.
As of that date, Jackson had the following trial balance:

During 2012, Jackson reported net income of $96,000 while paying dividends of
$12,000. During 2013, Jackson reported net income of $132,000 while paying
dividends of $36,000.
Assume that Matthews Co. acquired the common stock of Jackson Co. for $588,000
in cash. As of January 1, 2012, Jackson's land had a fair value of $102,000, its
buildings were valued at $188,000, and its equipment was appraised at $216,000.
Any excess of consideration transferred over fair value of assets and liabilities
acquired is due to an unamortized patent to be amortized over 10 years.
Matthews decided to use the equity method for this investment.
Required:
(A.) Prepare consolidation worksheet entries for December 31, 2012.

(B.) Prepare consolidation worksheet entries for December 31, 2013.

3-189

3-190

AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard

3-191
3-192
118. On January 1, 2011, Rand Corp. issued shares of its common stock to acquire all of
the outstanding common stock of Spaulding Inc. Spaulding's book value was only
$140,000 at the time, but Rand issued 12,000 shares having a par value of $1 per
share and a fair value of $20 per share. Rand was willing to convey these shares
because it felt that buildings (ten-year life) were undervalued on Spaulding's
records by $60,000 while equipment (five-year life) was undervalued by $25,000.
Any consideration transferred over fair value of identified net assets acquired is
assigned to goodwill.
Following are the individual financial records for these two companies for the year
ended December 31, 2014.

Required:
Prepare a consolidation worksheet for this business combination.

Consolidation Worksheet for Rand and Spaulding:
3-193

AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard

3-194
119. Pritchett Company recently acquired three businesses, recognizing goodwill in
each acquisition. Destin has allocated its acquired goodwill to its three reporting
units: Apple, Banana, and Carrot. Pritchett provides the following information in
performing the 2013 annual review for impairment:

Which of Pritchett's reporting units require both steps to test for goodwill
impairment?

Goodwill Impairment Test—Step 1

Therefore, the Apple and the Carrot reporting units require both steps to
test for goodwill impairment.

AACSB: Analytic
Blooms: Apply

3-195
120. Pritchett Company recently acquired three businesses, recognizing goodwill in
each acquisition. Destin has allocated its acquired goodwill to its three reporting
units: Apple, Banana, and Carrot. Pritchett provides the following information in
performing the 2013 annual review for impairment:

How much goodwill impairment should Pritchett report for 2013?

Goodwill Impairment Test—Step 2 (Apple and Carrot only)

Total impairment loss $5,000 + $75,000 = $80,000

AACSB: Analytic
3-196
Blooms: Apply
Difficulty: 3 Hard

121. On 4/1/11, Sey Mold Corporation acquired 100% of DotDot.Com for $2,000,000
cash. On the date of acquisition, DotDot's net book value was $900,000. DotDot's
assets included land that was undervalued by $300,000, a building that was
undervalued by $400,000, and equipment that was overvalued by $50,000. The
building had a remaining useful life of 8 years and the equipment had a remaining
useful life of 4 years. Any excess fair value over consideration transferred is
allocated to an undervalued patent and is amortized over 5 years.
Determine the amortization expense related to the combination at the year-end

date of 12/31/11.

AACSB: Analytic
Blooms: Apply

3-197
Determine the amortization expense related to the combination at the year-end

date of 12/31/15.

AACSB: Analytic
Blooms: Apply

Determine the amortization expense related to the consolidation at the year-end

date of 12/31/19.

By 2019, all of the fair value adjustments and the patent will have been fully
amortized. The amortization expense for 2019 related to the combination will be
$0.

AACSB: Analytic
Blooms: Apply
3-198

124. For each of the following situations, select the best answer that applies to
consolidating financial information subsequent to the acquisition date:
(A) Initial value method.

(B) Partial equity method.
(C) Equity method.
(D) Initial value method and partial equity method but not equity method.
(E) Partial equity method and equity method but not initial value method.
(F) Initial value method, partial equity method, and equity method.
_____1. Method(s) available to the parent for internal record-keeping.

_____2. Easiest internal record-keeping method to apply.
_____3. Income of the subsidiary is recorded by the parent when earned.
_____4. Designed to create a parallel between the parent's investment accounts
and changes in the underlying equity of the acquired company.
_____5. For years subsequent to acquisition, requires the *C entry.
_____6. Uses the cash basis for income recognition.
_____7. Investment account remains at initially recorded amount.
_____8. Dividends received by the parent from the subsidiary reduce the parent's
investment account.
_____9. Often referred to in accounting as a single-line consolidation.
_____10. Increases the investment account for subsidiary earnings, but does not
decrease the subsidiary account for equity adjustments such as amortizations.

(1) F; (2) A; (3) E; (4) C; (5) D; (6) A; (7) A; (8) E; (9) C; (10) B

Blooms: Understand
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3-199

Consolidations-Subsequent To The Date of Acquisition: Multiple Choice Questions

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Consolidations-Subsequent To The Date of Acquisition: Multiple Choice Questions

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Chapter 03

Consolidations-Subsequent to the Date of Acquisition

Multiple Choice Questions

A. initial value or book

A. the amount of consolidated net

A. dividends are received from the

A. impact of the purchase on the subsidiary's financial

A. Goodwill, Investment in Tangiers Co., and Retained

A. In the total assets reported on the consolidated

The 2012 total amortization of allocations is calculated to be

A. The investment account remains at initial

A. The investment account remains at initial

A. Dividends received by the subsidiary decrease the investment

A. Goodwill recognized in consolidation must be amortized over

A. Push-down accounting simplifies the consolidation

A. Contingent consideration payable in cash is reported under

A. Legal, regulatory, or contractual

Compute the consideration transferred in excess of book value acquired at January 1,

Compute goodwill, if any, at January 1, 2012.

Compute the amount of Hurley's inventory that would be reported in a January 1,

Compute the amount of Hurley's equipment that would be reported in a December

Compute the amount of Hurley's long-term liabilities that would be reported in a

Compute the amount of Hurley's equipment that would be reported in a December

Compute the amount of Hurley's long-term liabilities that would be reported in a

On the date of acquisition, the consideration transferred for Hoyt's acquisition of

Compute the book value of Vega at January 1, 2011.

Compute the December 31, 2015, consolidated revenues.

Compute the December 31, 2015, consolidated total expenses.

Compute the December 31, 2015, consolidated buildings.

Compute the December 31, 2015, consolidated equipment.

Compute the December 31, 2015, consolidated land.

Compute the December 31, 2015, consolidated trademark.

Compute the December 31, 2015, consolidated common stock.

Compute the December 31, 2015, consolidated additional paid-in capital.

Compute the December 31, 2015 consolidated retained earnings.

Compute the equity in Vega's income to be included in Green's consolidated income

A. It is the only method allowed by the

A. It is the only method allowed by the

A. Annually on a systematic and rational

A. Goodwill amortization is to be recognized annually on a systematic and

What will Harrison record as its Investment in Rhine on January 1, 2012?

A. Debit Contingent performance obligation $16,500, and Credit Cash

When recording consideration transferred for the acquisition of Rhine on January 1,

What will Beatty record as its Investment in Gataux on January 1, 2012?

When recording consideration transferred for the acquisition of Gataux on January 1,

If push-down accounting is used, what amounts in the Building account appear in

A. $20,000 under the initial value

A. Goodwill recognized in consolidation may be amortized uniformly and only tested if

Short Answer Questions

What was consolidated equipment as of December 31, 2013?

(A.) Prepare consolidation worksheet entries for December 31, 2012.

Prepare a consolidation worksheet for this business combination.

How much goodwill impairment should Pritchett report for 2013?

Determine the amortization expense related to the consolidation at the year-end

(A) Initial value method.

_____1. Method(s) available to the parent for internal record-keeping.

Multiple Choice Questions

A. initial value or book

A. the amount of consolidated net

A. dividends are received from the

A. impact of the purchase on the subsidiary's financial

A. Goodwill, Investment in Tangiers Co., and Retained

A. In the total assets reported on the consolidated