Advanced Financial Accounting Work sheet

CHOOSE THE BEST ANSWER

1. On any date, the balance of a parent company’s retained earnings of subsidiary account
attributable to wholly owned subsidiary is equal to the:
a. Balance of the subsidiary’s retained earnings account.
b. Net increase in the parent’s Investment in subsidiary common stock account since the date of
the business combination.
c. Total net income of the subsidiary since the date of the business combination.
d. Total dividends declared by the subsidiary since the date of business combination.
2. The end-of-period closing entries for a parent company that uses the equity method accounting
for the operating results of wholly owned subsidiary include a credit to the Retained Earnings of
subsidiary ledger account in the amount of the :
a. Ending retained earnings of the subsidiary.
b. Net income of the subsidiary for the period.
c. Undistributed earnings of subsidiary for the period.
d. Dividends declared by the subsidiary during the period.
3. After completion of the parent company’s equity-method journal entries for its profitable wholly
owned subsidiary’s operating results, the balance of the parent’s Intercompany Investment
Income ledger is equal to the:
a. Subsidiary’s net income.
b. Subsidiary’s net income, less amortization of CFV differences of the subsidiary’s identifiable
net assets.
c. Subsidiary’s net income, less amortization of CFV differences of the subsidiary’s net assets,
including goodwill.
d. Increase in the after-closing balance of the subsidiary’s Retained Earnings ledger account.
4. Under the equity method for the operating results of a subsidiary, dividends declared by the
subsidiary to the parent company are accounted for by the parent company as:
a. Dividend revenue on the declaration date.
b. A reduction of the investment in subsidiary on the payment date.
c. Dividend revenue on the payment date.
d. A reduction of the investment in subsidiary on the declaration date.
5. Under the equity method, dividends declared by the subsidiary to the parent company are credited
to the parent’s:
a. Intercompany Dividends Receivable account.
b. Investment in Subsidiary Common stock account.
c. Retained Earnings of Subsidiary account.
d. Retained Earnings account.
6. On April 1, 2014, Plum Corporation, paid for all issued & outstanding common stock of Long-
Corporation. On that date, the Carrying & CFV of Long’s recorded assets & liabilities were as
follows:

Carrying Amounts CFV

Cash $ 160,000 $ 160,000
Inventory 480,000 460,000
Property, Plant & Equipment(net) 980,000 1,040,000
Liabilities (360,000) (360,000)
Net Assets $ 1,260,000 $ 1,300,000
 In Plum’ March 31, 2015, consolidated balance sheet, what is the amounts of goodwill that should be
reported as a result of this business combination?
a. $

b. 360,000 d. $ 400,000
c. $ 396,000 e. $ 440,000

Item 7 and 8 are based on the following information:

On January 1, 2008, Ritt Corporation Purchased 80% of Shaw Corporation’s $ 10 par common
stock for $ 975,000. On this date, the carrying amount of Shaw’s net assets was $ 1,000,000. The
fair values of Shaw’s identifiable assets & Liabilities were the same as their carrying amounts
except for plant assets (net), which were $ 100,000 in excess of the carrying amount. For the year
ended December 31, 2008, Shaw had net income of $ 190,000 and paid cash dividends totaling $
125,000.
7. In the January 1,2008, consolidated balance sheet, goodwill should be reported at:

a. $ 0 c. $95,000
b. $ 75,000 d. $ 175,000

8. In the December 31, 2008, consolidated balance sheet, non-controlling interest should be reported
at:

a. $ 200,000 c. $ 220,000
b. $ 213,000 d. $ 233,000

9. On January 1, 2005, Post Company purchased an 80% investment in Stake company. The
acquisition cost was equal to Post’s equity in Stake’s net assets at that date. On January 1, 2005,
Post & Stake had retained earnings of $ 500,000 and $ 100,000, respectively. During 2005, Post
had net income of $ 200,000, which included its equity in Stake’s earnings, and declared
dividends of $ 50,000; Stake had net income of $ 40,000 & declared dividends of $ 20,000; and
there were no other intercompany transactions between the parent & subsidiary. On December
31, 2005, the consolidated retained earnings should be:

a. $ 650,000 c. $ 766,000
b. $ 666,000 d. $ 770,000

Items 10 and 11 are based on the following information:

The Nugget Company’s balance sheet on December 31, 2006, is as follows:

Assets Liabilities & SHE

Cash $ 100,000 Current Liabilities $ 300,000
Accounts Receivable 200,000 Long term Debt 500,000
Inventories 500,000 Common Stock($ 1 par) 100,000
Plant Assets(net) 900,000 Additional Paid-In capital 200,000
Retained Earnings 600,000
Total Assets $ 1,700,000 Total Liab & SHE $ 1,700,000
On December 31, 2006, the Gold Company purchased all the outstanding common stock of
Nugget for $ 1,500,000 cash. On that date, the fair(market) value of Nugget’s inventories was $
450,000, and the fair value of Nugget’s plant assets was $1,000,000. The fair values of all other
assets & Liabilities of Nugget were equal to their book values.
 10. As a result of the acquisition of Nugget by Gold, the consolidated balance sheet of Gold &
Nugget should reflect goodwill in the amount of:

a. $ 500,000 c. $ 600,000
b. $ 550,000 d. $ 650,000

11. Assuming that the balance sheet of Gold(unconsolidated) on December 31, 2006, reflected
retained earnings of $ 2,000,000, what amount of retained earnings should be shown in the
December 31,2006, consolidated balance sheet of Gold and its new subsidiary, Nugget?

a. $ 2,000,000 c. $ 2,800,000
b. $ 2,600,000 d. $ 3,150,000

12. The traditional definition of control for a parent company-subsidiary relationship (parent’s
ownership of more than 50% of the subsidiary’s outstanding common stock) emphasizes:

a. Legal form c. Both legal form and economic

b. Economic substance substance.
d. None

13. A parent company’s correctly prepared journal entry to record the out-of-pocket costs of the
acquisition of the subsidiary’s outstanding common stock in business combination was as
follows

Investment in Subsidiary company Common stock 40,000

Cash 40,000
The implementation of the foregoing journal entry is that the consideration issued by the parent company
for the outstanding common stock of the subsidiary was;

a. Cash c. Common stock

b. Bonds d. Cash , bonds, or Common stock

14. If, on the date of the business combination, C= consideration given to the former stockholders of
wholly owned subsidiary Salam Company by Parrot Corporation; DOP= direct out-of-pocket
costs of the combination; CA= carrying amount, and CFV=current fair value of Salam’s
identifiable net assets; and GW= goodwill:

a. C + DOP =CA + GW c. C + DOP = CFV + GW

b. C – DOP = CFV – GW d. C = CA + GW – DOP

15. In a completed working paper elimination for a parent company and its wholly owned
subsidiary on the date of the business combination, the total of the debits generally equals the:
a. Parent company’s total cost of its investment in the subsidiary.
b. Carrying amount of the subsidiary’s identifiable net assets.
c. Current fair value of the subsidiary’s identifiable net assets
d. Total paid- in capital of the subsidiary.
16. In a working paper elimination for consolidated balance sheet of a parent company and its
wholly owned subsidiary on the date of a business combination, the subtotal of the debits to the
subsidiary’s stockholders’ equity accounts equals the:
a. Current fair value of the subsidiary’s total net assets, including goodwill.
b. Current fair value of the subsidiary’s identifiable net assets.
c. Balance of the parent company’s investment ledger account.
 d. Carrying amount of the subsidiary’s identifiable net assets
17. In the working paper for consolidated balance sheet prepared on the date of the business
combination of a parent company & its wholly owned subsidiary, whose liabilities had current
fair values equal to their carrying amounts, the total of the Eliminations column is equal to:
a. The current fair value of the subsidiary’s identifiable net assets.
b. The total stockholder’s equity of the subsidiary.
c. The current fair value of the subsidiary’s total net assets, including goodwill.
d. An amount that is not determinable.
18. On the date of the business combination of Luna Corporation and its wholly owned subsidiary.
Saba Company, Luna paid (i) Birr. 100,000 to the former stockholders of Saba for their
stockholders’ equity of Birr. 65,000 and (ii) Birr. 15,000 for direct out-of-pocket costs of the
combination. Goodwill recognized in the business combination was Birr. 10,000. The current fair
value of Saba’s identifiable net Assets was:

a. Birr. 65,000 d. Birr. 115,000

b. Birr 75,000 e. Birr. 125,000
c. Birr. 105,000

19. Differences between current fair values and carrying amounts of the identifiable net assets of a
subsidiary on the date of a business combination are recognized in a:

a. Working paper elimination. c. Parent company journal entry.

b. Subsidiary journal entry. d. Note to the consolidated financial statements.

20. In a business combination resulting in a parent company-wholly owned subsidiary relationship,

goodwill developed in the working paper elimination is attributed:
a. In its entirety to the subsidiary.
b. In its entirety to the parent company.
c. To both the parent company & the subsidiary, in the ratio of current fair values of identifiable net
assets.
d. In its entirety to the consolidated entity.
21. On the date of the business combination of a parent company and its partially owned subsidiary,
the amount assigned to minority interest in net assets of subsidiary is based on the:
a. Cost of the parent company’s investment in the subsidiary’s common stock.
b. Carrying amounts of the subsidiary’s identifiable net assets.
c. Current fair value of the subsidiary’s identifiable net assets.
d. Current fair value of the subsidiary’s total net assets, including goodwill.
22. The debits in the working paper elimination for the consolidated balance sheet of parent
Corporation and 90%-owned subsidiary company totaled Birr. 2,080,000, including a debit of
Birr. 80,000 to goodwill-parent. The credit elements of the elimination are:

Investment in Subsidiary company Common Stock- Minority Interest in Net Assets of

Parent Subsidiary
a. Birr. 2,000,000 Birr. 80,000

b. Birr. 1,880,000 Birr. 200,000

c. Birr. 1,872,000 Birr. 208,000

d. Some other amounts

 23. On March 31, 2014, G-Corporation acquired for cash all the outstanding common stock of HIME
Company when HIME’s balance sheet showed net assets of Birr. 400,000. Out-of-pocket costs of
the business combination may be disregarded. HIME’s identifiable net assets fair values different
from carrying amounts as follows:

Carrying Amounts Current Fair Values

Plant Assets (net) Birr. 10,000,000 Birr. 11,500,000
Other assets 1,000,000 700,000
Long-term debt 6,000,000 5,600,000
The amount of goodwill to be displayed in the consolidated balance sheet of HIME Corporation and
Subsidiary on March 31,2014.

a. Birr.400,000 c. Birr. 200,00

b. Birr.1,800,000 d. None

24. At the end of an accounting period, a parent company that uses the equity method of accounting
for its partially owned subsidiary closes its:
a. Dividends Declared ledger account.
b. Intercompany Dividends Receivable ledger account.
c. Dividends Payable ledger account.
d. Intercompany Dividends Payable ledger account.
25. On May 31, 2014, the date of business combination of ICU Corporation and its 80%-owned
subsidiary, 4CU Company, for which ICU uses the equity method of accounting the balance of
4CU’s Retained Earnings account was Birr. 100,000, and on May 31,2015,the after-closing
balance was Birr. 120,000. Prior to ICU’s May 31,2014, closing entries, the balance of its
Retained Earnings of Subsidiary ledger account was:

a. Zero c. Birr. 100,000

b. Birr. 80,000 d. None

26. Under equity method of accounting, apparent company uses the Retained Earnings of Subsidiary
ledger account for a subsidiary:
a. For closing entries only.
b. For dividends declared by the subsidiary only.
c. For both dividends declared by the subsidiary and closing entries.
d. None
27. An inter company Dividends Receivable ledger account is used in:

a. The cost method of accounting only. c. Both

b. The equity method of accounting only. d. None

28. The post-closing balances of the Retained Earnings ledger accounts of P-corporation & its 80%-
owned subsidiary, S-Company, on February 28,2003, were as follows(there was no intercompany
profit or losses):

P-Corporation
Retained Earnings Birr. 1,600,000
Retained Earnings of Subsidiary 80,000
S-Company
Retained Earnings 460,000
Consolidated retained earnings of P-Corporation and Subsidiary on February 28, 2003, is:
a. Birr. 1,600,000
b. Birr. 1,680,000
c. Birr. 1,968,000
d. Birr. 2,060,000
e. None
29. The 80%-owned subsidiary of a parent company reported a net income of Birr. 80,000 for the
year ended May 31, 2003. The parent company’s appropriate journal entry under the equity
method of accounting is;

a Investment in Subsidiary Company Common stock 80,000

Investment Income 80,000
b. Intercompany Investment Income 80,000
Investment in Subsidiary Co. Common stock 80,000
c. Investment in Subsidiary Company Common stock 64,000
Intercompany Investment Income 64,000
d Intercompany Investment Income 64,000
Investment in Subsidiary Co Common stock 64,000
30. During a fiscal year, the balance of parent company’s Investment in Subsidiary common stock
ledger account for a wholly owned subsidiary, for which the parent company uses the equity
method of accounting, increases by the amount of the subsidiary’s:
a. Adjusted net income
b. Dividends
c. Adjusted net income plus dividends
d. Unadjusted earnings.