CH 09

Package Title: Test Bank Questions
Course Title: Advanced Accounting, 6e

Chapter Number: 9
Question Type: Multiple Choice
1) Which of the following methods of allocating the gain or loss on an intercompany bond retirement is the
soundest conceptually?
a) The gain (loss) is allocated to the company that issued the bonds.
b) The gain (loss) is allocated to the company that purchased the bonds.
c) The gain (loss) is allocated to the parent company.
d) The gain (loss) is allocated between the purchasing and issuing companies.
Answer: d
Question Title: Test Bank (Multiple Choice) Question 01

Difficulty: Easy 9.1
Learning Objective: 2 Describe how the gain or loss on constructive retirement of intercompany bond
holdings is allocated between the purchasing and issuing companies.
Section Reference: 9.3
2) The constructive gain or loss on an intercompany bond retirement is recognized in the consolidated
income statement _________ the recognition of the gain or loss on the individual companies' books.
a) after
b) before
c) at the same time as
d) before or after
Answer: b

Difficulty: Easy
3) The constructive gain or loss to the purchasing company is the difference between the:
a) book value of the bonds and their par value.

b) book value of the bonds and their purchase price.
c) cost of the bonds and their par value.
d) cost of the bonds and their purchase price.
Answer: c
Difficulty: Medium
Learning Objective: 1 Describe the term “constructive retirement of debt.”, 2 Describe how the gain or loss
on constructive retirement of intercompany bond holdings is allocated between the purchasing and issuing
companies.
4) The workpaper eliminating entry for a stock dividend declared by the subsidiary includes a:
a) debit to Stock Dividends Declared - S Co.

b) debit to Noncontrolling interest.
c) credit to Stock Dividends Declared - S Co.
d) debit to Dividend Income.
Answer: c

Difficulty: Easy
Learning Objective: 4 Determine the effect on the consolidated financial statements when a subsidiary
issues a stock dividend.
5) The parent company records the receipt of shares from a subsidiary's stock dividend as:
a) dividend income.
b) a reduction of the investment account.
c) an increase in the investment account.
d) none of these.
Answer: d

Difficulty: Easy
Learning Objective: 4 Determine the effect on the consolidated financial statements when a subsidiary
issues a stock dividend., 5 Understand the difference in how stock dividends and cash dividends issued by a
subsidiary company affect the consolidated financial statements., 6 Determine the impact on the investment
account when a subsidiary issues a stock dividend from preacquisition earnings and from postacquisition
earnings.
6) If the book value of preferred stock is greater than its implied value, the difference is accounted for as an
increase in:
a) consolidated retained earnings.

b) consolidated net income.
c) other contributed capital.
d) investment in subsidiary preferred stock.
Answer: c

Difficulty: Medium
Learning Objective: 7 Explain how the purchase price is allocated when the subsidiary has both common
and preferred stock outstanding.
7) If a subsidiary has both common and preferred stock outstanding, a parent must own a controlling interest
in:
a) both the subsidiary's common and preferred stock to justify consolidation.

b) the subsidiary's common stock to justify consolidation.
c) the subsidiary's common stock and at least 20% of the subsidiary's preferred stock to justify
consolidation.
d) the subsidiary's common stock and more than 50% of the subsidiary's preferred stock to justify
consolidation.
Answer: b

Difficulty: Easy
and preferred stock outstanding., 8 Determine the controlling interest in income when the parent company
owns both common and preferred stock of the subsidiary.
8) Pallet Corporation owns 90% of the outstanding common stock of Stealth Company. On January 1, 2014,
Stealth Company issued $500,000, 12%, ten-year bonds.
On January 1, 2016, Pallet Corporation paid $412,000 for Stealth Company bonds with a par value of
$400,000 and a carrying value of $393,600. Both companies use the straight-line method to amortize bond
premiums and discounts. Pallet Corporation accounts for the investment using the cost method of
accounting.
The total gain or loss on the constructive retirement of the debt to be reported in the 2016 consolidated
income statement is
a) $12,000 loss.
b) $12,000 gain.
c) $18,400 loss.
d) $18,400 gain.
Answer: c

Difficulty: Easy
9) Pallet Corporation owns 90% of the outstanding common stock of Stealth Company. On January 1, 2014,
Stealth Company issued $500,000, 12%, ten-year bonds.
accounting.
Pallet Corporation would report a balance in the Investment in Stealth Company Bonds account on
December 31, 2016, of
a) $412,000.
b) $393,600.
c) $410,500.
d) $400,000.
Answer: c

Difficulty: Hard
10) Pallet Corporation owns 90% of the outstanding common stock of Stealth Company. On January 1,
2014, Stealth Company issued $500,000, 12%, ten-year bonds.
accounting.
Compute the noncontrolling interest in the 2016 consolidated income assuming that Pallet Corporation
reported a net income of $300,000 (includes dividend income from Stealth Company). Stealth Company
reported net income of $180,000 and declared and paid cash dividends of $100,000.
a) $18,000
b) $17,440
c) $17,360
d) $18,560
Answer: b

Difficulty: Hard
11) Soren Corporation is an 80% owned subsidiary of Passia Company. Soren purchased bonds of Passia
Company for $103,000. Passia Company reported the bond liability on the date of purchase at $100,000 less
unamortized discount of $5,000. Assuming that the constructive gain or loss is material, the consolidated
income statement should report an:
a) ordinary loss of $8,000.

b) ordinary gain of $8,000.
c) extraordinary loss of $8,000 adjusted for income tax effects.
d) extraordinary gain of $8,000 adjusted for income tax effects.
Answer: a

Difficulty: Easy
12) From a consolidated entity point of view, the constructive gain or loss on the open market purchase of a
parent company's bonds by a subsidiary company is:
a) considered realized at the date of the open market purchase.

b) realized in future periods through discount and premium amortization on the books of the individual
companies.
c) realized only to the extent of the parent company's interest in the subsidiary.
d) deferred and recognized in the consolidated income statement when the bonds are retired.
Answer: a

Difficulty: Easy
Learning Objective: 1 Describe the term “constructive retirement of debt.”
13) Search Company is a 90% owned subsidiary of Passage Company. On January 1, 2016, Search
Company purchased for $680,000 bonds of Passage Company that had a carrying value of $725,000 (par
value $700,000). The bonds mature on December 31, 2017. Both companies use the straight-line method of
amortization and have a December 31 year-end. The increase in 2016 consolidated income (i.e., income
before subtracting noncontrolling interest) is:
a) $45,000.
b) $44,000.
c) $54,000.
d) $36,000.
Answer: a
Difficulty: Medium
Section Reference: 9.3, 9.4, 9.5
14) Polish Company acquired 90% of Sandwich Company's common stock for $780,000 and 40% of its
preferred stock for $180,000. On January 1, 2016, the date of acquisition, the companies reported the
following account balances:
Polish Sandwich
Company Company
Preferred stock, $100 par value $ 500,000 $ 360,000
Common stock, $10 par value 1,200,000 600,000
Other contributed capital 190,000 140,000
Retained earnings 210,000 110,000
Total stockholders' equity $2,100,000 $1,200,000
The preferred stock is 10%, cumulative, nonparticipating, and has a liquidation value equal to 104% of par
value. Dividends were not paid during 2015. During 2016, Sandwich Company reported net income of
$120,000 and declared and paid cash dividends in the amount of $70,000.
The difference between the implied value of the preferred stock and its book value is:
a) $40,000.
b) $39,600.
c) $34,400.
d) $26,000.
Answer: b

Difficulty: Hard
15) Polish Company acquired 90% of Sandwich Company's common stock for $780,000 and 40% of its
Polish Company Sandwich

Company
Common stock, $10 par value 1,200,000 600,000
value. Dividends were not paid during 2015. During 2016, Sandwich Company reported net income of
Noncontrolling interest in the 2016 reported net income of Sandwich Company is:
a) $29,500.
b) $12,000.
c) $34,000.
d) $30,000.
Answer: d

Difficulty: Hard
16) Constructive gains and losses from intercompany bond transactions are:
a) treated as extraordinary items on the consolidated income statement

b) included as other revenues and expenses on the consolidated income statement.
c) excluded from the consolidated income statement until realized.
d) eliminated from the consolidated income statement.
Answer: b

Difficulty: Easy
17) Pointe Company purchased bonds issued by Sentient Company on the open market at a premium.
Sentient Company is a 100% owned subsidiary of Pointe Company. Pointe intends to hold the bonds until
maturity. In a consolidated balance sheet, the difference between the bond carrying values in the two
companies would be:
a) included as a decrease to retained earnings.

b) included as an increase to retained earnings.
c) reported as a deferred debit to be amortized over the remaining life of the bonds.
d) reported as a deferred credit to be amortized over the remaining life of the bonds.
Answer: a

Difficulty: Medium
18) On January 1, 2016, Pale Company has $700,000 of 6%, 10-year bonds with an unamortized discount of
$28,000. Slugg Company, an 80% subsidiary, purchased $350,000 of these bonds at 102. The gain or (loss)
on the retirement of Pale’s bonds is:
a) $14,000 loss.
b) $14,000 gain.
c) $21,000 loss.
d) $21,000 gain.
Answer: c

Difficulty: Easy
19) On a consolidated balance sheet, subsidiary preferred stock will be shown:
a) as part of consolidated stockholder’s equity.

b) combined with any preferred stock of the parent.
c) as part of the noncontrolling interest amount to the extent such balance represents preferred stock held by
the parent.
d) as part of the noncontrolling interest amount to the extent such balance represents preferred stock held by
outside interests.
Answer: d

Difficulty: Medium
Learning Objective: 8 Determine the controlling interest in income when the parent company owns both
common and preferred stock of the subsidiary.
20) Pinta Company has total stockholders’ equity of $2,000,000 consisting of $400,000 of $1 par value
common stock, $400,000 of other contributed capital, and $1,200,000 of retained earnings. Pinta owns 80%
of Santa Maria Company purchased at book value. Santa Maria has $800,000 of 5% cumulative preferred
stock outstanding. Pinta acquired 40% of the preferred stock of Santa Maria for $200,000. After this
transaction the balances in Pinta’s retained earnings and other contributed capital accounts are:
a) $1,200,000 and $400,000.

b) $1,200,000 and $520,000.
c) $1,320,000 and $400,000.
d) $1,080,000 and $400,000.
Answer: b

Difficulty: Medium
21) Parker Company owns 90% of the outstanding common stock of Stagger Company. On January 1, 2014,
Stagger Company issued $500,000, 12%, ten-year bonds.
On January 1, 2016, Parker Company paid $315,000 for Stagger Company bonds with a par value of
premiums and discounts. Parker Company accounts for the investment using the cost method of accounting.
The total gain or loss on the constructive retirement of the debt to be reported in the 2016 consolidated
income statement is:
a) $15,000 loss.
b) $15,000 gain.
c) $17,400 loss.
d) $17,400 gain.
e) $ 2,400 loss.
Answer: c

Difficulty: Medium
Parker Company would report a balance in the Investment in Stagger Company Bonds account on December
31, 2016, of:
a) $315,000.
b) $297,600.
c) $313,125.
d) $300,000
Answer: c
Difficulty: Medium
Compute the noncontrolling interest in the 2016 consolidated income assuming that Parker Company
reported a net income of $240,000 (includes dividend income from Stagger Company). Stagger Company
reported net income of $150,000 and declared and paid cash dividends of $90,000.
a) $15,000.
b) $14,790.
c) $14,760.
d) $15,210.
Answer: b

Difficulty: Hard
24) Pentagon Company acquired 90% of Smoker Company's common stock for $1,300,000 and 40% of its
Pentagon Company Smoker Company

Common stock, $10 par value 2,000,000 1,000,000
value. Dividends were not paid during 2015. During 2016, Smoker Company reported net income of
The difference between the implied value of the preferred stock and its book value is:
a) $60,000.
b) $78,000
c) $55,200.
d) $36,000.
Answer: b

Difficulty: Hard
25) Pentagon Company acquired 90% of Smoker Company's common stock for $1,300,000 and 40% of its
Pentagon Company Smoker

Company
Common stock, $10 par value 2,000,000 1,000,000
value. Dividends were not paid during 2015. During 2016, Smoker Company reported net income of
Noncontrolling interest in the 2016 reported net income of Smoker Company is:
a) $50,000.
b) $20,000.
c) $80,000.
d) $56,000.
Answer: a

Difficulty: Hard
Learning Objective: 8 Determine the controlling interest in income when the parent company owns both
common and preferred stock of the subsidiary.
26) On January 1, 2016, Pultey Company acquired an 80% interest in Saucey Company for $1,070,000.
Saucey reported common stock of $1,000,000 and retained earnings of $400,000 on this date. Any
difference between implied value and the book value interest acquired is attributable to land.
Other information available for Saucey Company is shown below:

Net Income Cash Dividends
2016 $130,000 $160,000
Pultey Company uses the cost method to account for its investment in Saucey Company.
Required:
A. Prepare the general journal entries for 2016 to record the receipt of the cash dividends.
B. Prepare in general journal form the workpaper entries necessary in the consolidated statements workpaper
for the year end December 31, 2016.
Answer:
A. Cash (160,000 × 0.8) 128,000
Dividend Income (130,000 × 0.8) 104,000
Investment in Saucey Company 24,000
B. Dividend Income 104,000

Dividends Declared 104,000
Investment in Saucey Company 24,000

Common Stock–Saucey 1,000,000

Beginning R/E–Saucey 400,000
Difference Between Implied and Book Value 62,500
Investment in Saucey Company 1,070,000
Noncontrolling Interest in Equity 267,500

Land 62,500
Question Title: Test Bank (Problem) Question 9-1

Difficulty: Medium
27) Stemberger Company issued 10-year, 8% bonds with a par value of $1,000,000 on January 2, 2015, for
$1,040,000. Interest is payable semiannually on June 30 and December 31. On December 31, 2016, Putter
Company purchased $700,000 of Stemberger par value bonds for $670,000. Stemberger is an 80% owned
subsidiary of Putter. Both companies use the straight-line method to amortize bond discounts and premiums.
Stemberger declared cash dividends of $100,000 in 2016 and reported net income of $220,000 for the year.
Putter reported net income of $350,000 for 2016 and paid dividends of $160,000 during 2016.
Required:
A. Compute the total gain or loss on the constructive retirement of the debt.
B. Allocate the total gain or loss between Stemberger Company and Putter Company.
C. Compute the controlling interest in consolidated net income for 2016.
D. Prepare in general journal form the intercompany bond elimination entries for the consolidated
statements workpaper prepared on December 31, 2016.
Answer:
A. Cost of bond investment $670,000
Par value $1,000,000
Unamortized prem. (40,000 × 16/20) 32,000
Carrying value of bonds 1,032,000
Percent of bonds purchased (700/1,000) 0.70 722,400
Total constructive gain $52,400
B. Putter Company Stemberger Company

---------------- ---------------
Cost of bond investment $670,000 Carrying value of
bonds purchased $722,400
Par value 700,000 Par value 700,000
Constructive gain $ 30,000 Constructive gain $ 22,400
C. 2016
Reported net income – Putter $350,000
- Dividend income ($100,000 × 0.8) - 80,000
Net income from independent oper. – Putter 270,000
+ Constructive gain on bond retirement 30,000
Putter's contribution to consolidated income 300,000
Reported net income – Stemberger $220,000
+ Constructive gain on bond retirement 22,400
Stemberger’s contribution to consolidated income 242,400
× 0.8 193,920
Controlling interest in consolidated net income $493,920
D. December 31, 2016

Investment in Stemberger Co. Bonds 30,000
Constructive Gain on Bond Retirement 30,000
Premium on Bonds Payable ($32,000 × 0.70) 22,400

Constructive Gain on Bond Retirement 22,400
Bonds Payable 700,000

Investment in Stemberger Co. Bonds 700,000

Difficulty: Hard
Section Reference: 9.4, 9.5
28) Pratt Company, who owns an 80% interest in Smurfe Company, purchased $2,000,000 of Smurfe’s 8%
bonds at 106 on December 31, 2016. The bonds pay interest on January 1 and July 1 and mature on
December 31, 2026. Pratt Company uses the cost method to account for its investment in Smurfe. Selected
balances from December 31, 2016 accounts of the two companies are as follows:
Pratt _____Smurfe____
Investment in Smurfe 8% bonds $2,120,000 $ ----

Bond discount ---- 300,000
Interest payable ---- 800,000
8% bonds payable ---- 20,000,000
Interest expense ---- 1,700,000
Gain or loss on constructive
retirement of bonds ---- ----
Required:
Prepare in general journal form the workpaper eliminations related to the bonds to consolidated the financial
statements of Pratt and its subsidiary for the year ended December 31, 2016 and 2017.
Answer:
2016 1. Loss on Constructive Retirement of Bonds 120,000
Investment in Smurfe Company Bonds 120,000
2. Loss on Constructive Retirement of Bonds 30,000

Bond Discount 30,000
3. Bonds Payable 2,000,000

Investment in Smurfe Company Bonds 2,000,000
2017 1. Beginning Retained Earnings-Pratt 120,000

Investment in Smurfe Company Bonds 120,000
2. Beginning Retained Earnings-Pratt ($30,000 × 0.80) 24,000

Noncontrolling interest 6,000
Bond Discount 30,000
3. Investment in Smurfe Company Bonds ($120,000/3) 40,000

Interest Revenue 40,000
4. Bond Discount [($300,000/3) × 0.10] 10,000

Interest Expense 10,000
5. Interest Revenue 160,000

Interest Expense 160,000
6. Bonds Payable 2,000,000
Investment in Smurfe Company Bonds 2,000,000
7. Interest Payable 80,000

Interest Receivable 80,000
Difficulty: Hard
29) On January 1, 2016, Power Company purchased 80% of the common stock of Stuckey Company for
$400,000. Stuckey Company reported common stock of $200,000 ($10 par value), other contributed capital
of $60,000, and retained earnings of $120,000 on this date. The difference between implied value and the
book value interest acquired is attributable to the under-valuation of land held by Stuckey Company.
Stuckey Company reported net income for 2016 of $100,000. During 2016 Stuckey Company declared and
paid a 20% stock dividend and a $24,000 cash dividend. Stuckey Company stock had a market value of $30
per share on the date the stock dividend was declared. Power Company uses the cost method to account for
its investment in Stuckey Company.
Required:
A. Prepare the journal entries required in the books of Power Company to account for the investment in
Stuckey Company.
B. Prepare in general journal form the workpaper entries necessary in the consolidated statements workpaper
for the year ended December 31, 2016.
C. Prepare the workpaper entry to establish reciprocity in the 2017 consolidated statements workpaper.
Answer:
A. Investment in Stuckey Company 400,000
Cash 400,000
Memorandum entry – Received stock dividend of 3,200 shares of Stuckey Company stock (16,000
× 0.20)
Cash 19,200
Dividend Income 19,200
B. Common Stock – Stuckey 32,000

Other Contributed Capital – Stuckey 64,000
Stock Dividends Declared – Stuckey 96,000
Dividend Income 19,200

Beginning Retained Earnings – Stuckey 120,000

Common Stock – Stuckey 200,000
Other Contributed Capital – Stuckey 60,000
Investment in Stuckey Company 400,000
Land 120,000
C. Investment in Stuckey Company 28,800
Beginning Retained Earnings – Power Company 28,800

Difficulty: Hard
30) On January 1, 2016, Prosser Company acquired 90% of the common stock of Simone Company for
$720,000 and 20% of the preferred stock for $70,000. On this date, Simone Company reported the following
account balances:
Common stock ($10 par value) $600,000

Preferred stock ($100 par value, 8%,
cumulative, nonparticipating, liquidation
value equal to par value) 300,000
Other contributed capital - premium on
common stock 120,000
Retained earnings 80,000
Simone Company did not declare a cash dividend during 2015. Prosser Company uses the cost method.
Required:
A. During 2016 Simone Company reported net income of $360,000 and declared cash dividends of
$160,000. Calculate the 2016 noncontrolling interest in net income and the amount of the cash dividends
Prosser Company should have received during the year from each of the stock investments.
B. Prepare, in general journal form, the workpaper entries that would be made in the preparation of the
December 31, 2016, consolidated statements workpaper. The difference between the implied value of the
common stock and the book value interest acquired is attributable to an undervaluation in the land of
Simone Company. Any difference between the implied value of the preferred stock and its book value is
allocated to other contributed capital.
Answer:
A. Noncontrolling interest in net income
Net income reported by Simone $360,000
Allocated to preferred stock ($300,000 × 0.08) 24,000 × 0.80 = 19,200
Residual to common stock 336,000 × 0.10 = 33,600
Noncontrolling interest in income $52,800
Cash dividends to Prosser Company

Preferred stock dividend ($24,000 × 2) $ 48,000 × 0.20 = $ 9,600
Residual to common stock 112,000 × 0.90 = 100,800
Total dividends received by Prosser Company $110,400
B. Dividend Income 110,400
Dividends Declared – Preferred Stock 9,600
Dividends Declared – Common Stock 100,800
Beginning Retained Earnings - Simone Company 24,000
Preferred Stock - Simone Company 300,000
Investment in Simone Company Preferred Stock 70,000
Other Contributed Capital—Prosser Company 5,200

Beginning Retained Earnings – Simone Company 56,000

Common Stock – Simone Company 600,000
Other Contributed Capital – Simone Company 120,000
Investment in Simone Company Common Stock 720,000
Land 24,000

Difficulty: Hard
31) On January 1, 2016, Pippert Company acquired 80% of Skyler Company's common stock for $210,000
and 70% of Skyler's preferred stock for $80,000. Skyler Company reported the following stockholders'
equity on this date:
Preferred stock, 8%, Par value $20 $ 100,000

Common stock, Par value $50 200,000
Premium on common stock 30,000
Retained earnings 80,000
Total $410,000
The preferred stock is cumulative, nonparticipating, and callable at 104% of par value plus dividends in
arrears. On January 1, 2016, dividends were in arrears for one year. Any difference between the implied
value of the preferred stock and its book value interest is to be allocated to other contributed capital.
Changes in Skyler Company's retained earnings during 2016 and 2017 were as follows:
January 1, 2016 Balance $ 80,000

2016 net income 20,000
2017 net income 16,000
2017 cash dividends (30,000)
December 31, 2017 Balance $ 86,000
Required:
A. Compute the difference between the implied value and book value interest acquired for the investment in
preferred stock.
B. Compute the balance in the Investment in Preferred Stock account on December 31, 2017.
C. Compute the amount of Skyler Company's net income that will be included in the controlling interest in
consolidated net income for 2017.
Answer:
A. Preferred stock $100,000
Call premium ($100,000 × 4%) 4,000
Dividends in arrears ($100,000 × 0.08) 8,000
Book value interest of preferred stock 112,000
Implied value ($80,000/.7) 114,286
Difference between implied and book value $ 2,286
B. Cost of investment $80,000

Less: Liquidating dividend ($8,000 × 0.70) 5,600
Balance – 12/31/10 $74,400
C. Percentage Controlling interest in

Net Income Interest
Consolidated Income
Preferred stock $ 8,000 70 $ 5,600
Common stock
($16,000 - $8,000) 8,000 80 6,400
Total $16,000 $12,000

Difficulty: Hard
32) On January 2, 2016, Porous, Inc. acquired an 80% interest in Simtex Corporation for $2,250,000. Simtex
reported total stockholders’ equity of $2,500,000 on this date. An examination of Simtex’s books revealed
that book value was equal to fair value for all assets and liabilities except for inventory, which was
undervalued by $150,000. All of the undervalued inventory was sold during 2016.
Porous also purchased 30% of the $1,250,000 par value outstanding bonds of Simtex Corporation for
$350,000 on January 2, 2016. The bonds mature in 10 years, carry an 11% annual interest rate payable on
June 30 and December 31, and had a carrying value of $1,270,000 on the date of purchase. Both companies
use the straight-line method to amortize bond discounts and premiums.
Porous reported net income of $750,000 for 2016 and paid dividends of $325,000 during 2016. Simtex
Corporation reported net income of $800,000 for 2016 and paid dividends of $225,000 during the year.
Required:
Compute the following items at December 31, 2016.
1. Carrying value of the debt.
2. Interest revenue reported by Porous, Inc.
3. Interest expense reported by Simtex Corporation.
4. Balance in the Investment in Simtex Bonds account.
5. Controlling interest in consolidated net income for 2016 using the t-account approach.
6. Noncontrolling interest in consolidated income for 2016.
Answer:
1. Carrying value of debt – 1/2/2016 $1,270,000
Less: Premium amortization – [($20,000/20) × 2 periods) 2,000
Carrying value of debt – 12/31/2016 $1,268,000
2. Stated interest (30% of $1,250,000 × 0.11) $41,250

Add: Discount amortization [($25,000/20) × 2 periods)] 2,500
Interest revenue $43,750
3. Stated interest ($1,250,000 × 0.11) $137,500

Less: Premium amortization [($20,000/20) × 2] 2,000
Interest expense $135,500
4. Cost of bond investment (1/2/2016) $350,000

Add: Discount amortization* 2,500
Investment account balance – 12/31/2016 $352,500
*$1,250,000 par × 30% less $350,000 paid divided by 10 years = $2,500.
5. Reported net income – Porous $750,000

Less: Dividend income ($225,000 × 0.80) 180,000
Independent net income 570,000
Add: Constructive gain on bond retirement 25,000
Less: Constructive gain recorded during year (2,500)
Contribution of Porous to consolidated income 592,500
Reported net income – Simtex $800,000
Less: Amortization of difference between
implied and book value:
Cost of goods sold (150,000)
Add: Constructive gain on bond retirement 650,000
[($1,270,000 - $1,250,000) × 0.30] = 6,000
Less: Constructive gain recorded during year (600)
Income after adjustment in constructive gain 655,400
× 0.80
Porous’s share of adjusted income 524,320
Controlling interest in consolidated net income $1,116,820
Implied value of investment ($2,250,000/0.80) $2,812,500

Book value of equity acquired 2,500,000
Difference between implied and book value 312,500
Allocated to inventory 150,000
Goodwill (Excess implied value over fair value) $ 162,500
6. Noncontrolling interest in consolidated income ($2,250,000/0.80) – $2,250,000 = $562,500

Difficulty: Hard
33) On January 2, 2016, Palomine Corporation purchased 80% of the outstanding common stock and 30%
of the outstanding cumulative, nonparticipating, preferred stock of Sour Company for $800,000 and
$140,000, respectively. At this date, Sour Company reported account balances of $800,000 in common
stock, $400,000 in preferred stock and $200,000 in retained earnings. No other contributed capital accounts
exist. The difference between implied and book value of the common stock is attributable to under- or
overvalued land. Dividends on the 12% cumulative preferred stock (par $10) were not paid during 2015.
Palomine Sour
Corporation Company
1/2/2016 Retained Earnings $ 90,000 $200,000
2016 Reported Net Income 169,200 180,000
2016 Dividends Declared 50,000 100,000
Required:
A. Prepare the journal entries made by Palomine Corporation in 2016 to account for the investments
assuming the partial equity method is used.
B. Compute the noncontrolling interest in Sour Company’s net income.
C. Prepare the 2016 workpaper entries related to the foregoing investments assuming the partial equity
method is used to account for the investment.
Answer:
A. Investment in Sour Company Preferred Stock 140,000
Investment in Sour Company Common Stock 800,000
Cash 940,000
Cash (preferred stock) 28,800

Equity in Subsidiary Income – Preferred Stock 14,400
Cash 3,200

Equity in Subsidiary Income {[($180,000 –
($400,000 × 0.12)] × (.80)} 105,600
Preferred Common
Stock Stock
Arrears $48,000
Current year 48,000 $4,000
Total 96,000 4,000
Percentage interest 0.30 0.80
$28,800 $3,200
B. Reported net income – 2016 $180,000

Allocation to preferred stock interest ($400,000 × 0.12) 48,000 × 0.70 = $33,600
Residual to common stock interest $132,000 × 0.20 = 26,400
Noncontrolling interest in 2016 net income $60,000
C. Investment in Sour Company Preferred Stock 14,400

Dividends Declared – Preferred Stock 28,800
Equity in Subsidiary Income 105,600

Dividends Declared – Common Stock 3,200
Beginning Retained Earnings – Sour Company 48,000

Preferred Stock 400,000
Other Contributed Capital (or Retained Earnings) 5,600
Investment in Sour Company Preferred Stock 140,000
Noncontrolling Interest in Equity* 313,600
*($400,000 + $48,000)] × 0.7 = $313,600
Beginning Retained Earnings – Sour Company 152,000

Common Stock 800,000
Difference between Implied and Book Value 48,000
Investment in Sung Company Common Stock 800,000

Difficulty: Hard

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Package Title: Test Bank Questions

Course Title: Advanced Accounting, 6e

Question Type: Multiple Choice

Question Title: Test Bank (Multiple Choice) Question 01

Question Title: Test Bank (Multiple Choice) Question 02

a) book value of the bonds and their par value.

a) debit to Stock Dividends Declared - S Co.

Question Title: Test Bank (Multiple Choice) Question 04

Question Title: Test Bank (Multiple Choice) Question 05

a) consolidated retained earnings.

Question Title: Test Bank (Multiple Choice) Question 06

a) both the subsidiary's common and preferred stock to justify consolidation.

Question Title: Test Bank (Multiple Choice) Question 07

Question Title: Test Bank (Multiple Choice) Question 8

Question Title: Test Bank (Multiple Choice) Question 9

Question Title: Test Bank (Multiple Choice) Question 10

a) ordinary loss of $8,000.

Question Title: Test Bank (Multiple Choice) Question 11

a) considered realized at the date of the open market purchase.

Question Title: Test Bank (Multiple Choice) Question 12

Question Title: Test Bank (Multiple Choice) Question 14

Polish Company Sandwich

Question Title: Test Bank (Multiple Choice) Question 15

a) treated as extraordinary items on the consolidated income statement

Question Title: Test Bank (Multiple Choice) Question 16

a) included as a decrease to retained earnings.

Question Title: Test Bank (Multiple Choice) Question 17

Question Title: Test Bank (Multiple Choice) Question 18

19) On a consolidated balance sheet, subsidiary preferred stock will be shown:

a) as part of consolidated stockholder’s equity.

Question Title: Test Bank (Multiple Choice) Question 19

a) $1,200,000 and $400,000.

Question Title: Test Bank (Multiple Choice) Question 20

Question Title: Test Bank (Multiple Choice) Question 21

Question Title: Test Bank (Multiple Choice) Question 23

Pentagon Company Smoker Company

Question Title: Test Bank (Multiple Choice) Question 24

Pentagon Company Smoker

Question Title: Test Bank (Multiple Choice) Question 25

Other information available for Saucey Company is shown below:

B. Dividend Income 104,000

Investment in Saucey Company 24,000

Common Stock–Saucey 1,000,000

Difference Between Implied and Book Value 62,500

Question Title: Test Bank (Problem) Question 9-1

C. Compute the controlling interest in consolidated net income for 2016.

B. Putter Company Stemberger Company

D. December 31, 2016

Premium on Bonds Payable ($32,000 × 0.70) 22,400

Bonds Payable 700,000

Question Title: Test Bank (Problem) Question 9-2

Investment in Smurfe 8% bonds $2,120,000 $ ----

2. Loss on Constructive Retirement of Bonds 30,000

3. Bonds Payable 2,000,000

2017 1. Beginning Retained Earnings-Pratt 120,000

2. Beginning Retained Earnings-Pratt ($30,000 × 0.80) 24,000

3. Investment in Smurfe Company Bonds ($120,000/3) 40,000

4. Bond Discount [($300,000/3) × 0.10] 10,000

5. Interest Revenue 160,000

7. Interest Payable 80,000

B. Common Stock – Stuckey 32,000

Dividend Income 19,200

Beginning Retained Earnings – Stuckey 120,000