Advanced Accounting 12th Edition

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Advanced Accounting, 12e (Beams et al.)
Chapter 10 Subsidiary Preferred Stock, Consolidated Earnings Per Share, and
Consolidated Income Taxation

10.1 Multiple Choice Questions

Use the following information to answer the question(s) below.

On December 31, 2013, Parminter Corporation owns an 80% interest in the common stock of Sanchez
Corporation and an 80% interest in Sanchez's preferred stock. On December 31, 2013, Sanchez's
stockholders' equity was as follows:

10% preferred stock, cumulative, $10 par value $50,000

Common stock 350,000
Retained earnings 100,000
Total stockholders' equity $500,000

On December 31, 2013, preferred dividends are not in arrears. Sanchez had 2014 net income of $30,000
and only preferred dividends are declared and paid in 2014. There are no book value/fair value
differentials associated with Parminter's investments.

1) How much should the Parminter's Investment in Sanchez—Common Stock, change during 2014?
A) $5,000
B) $20,000
C) $25,000
D) $30,000
Answer: B
Explanation: B) ($30,000 - $5,000) × 80%
Objective: LO1
Difficulty: Moderate

2) What should be the noncontrolling interest share, common in the consolidated financial statements of
Parminter for the year ending December 31, 2014?
A) $ 5,000
B) $20,000
C) $25,000
D) $30,000
Answer: A
Explanation: A) ($25,000 × 20%)
Objective: LO1
Difficulty: Moderate

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3) What should be the noncontrolling interest share, preferred in the consolidated financial statements of
Parminter for the year ending December 31, 2014?
A) $1,000
B) $2,000
C) $4,000
D) $5,000
Answer: A
Explanation: A) ($5,000 × 20%)
Objective: LO1
Difficulty: Moderate

4) A subsidiary has dilutive securities outstanding that include convertible bonds payable. The bonds are
convertible into the parent's common stock. When calculating consolidated diluted earnings per share,
the convertible bonds will affect
A) the numerator of consolidated diluted EPS only.
B) the denominator of consolidated diluted EPS only.
C) the numerator and denominator of consolidated diluted EPS.
D) None of the above will be affected.
Answer: C
Objective: LO2
Difficulty: Moderate

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Use the following information to answer the question(s) below.

On January 1, 2014, Pardy Corporation acquired a 70% interest in the common stock of Salter Corporation
for $7,000,000 when Salter's stockholders' equity was as follows:

10% cumulative, nonparticipating preferred stock,

$100 par, with a $105 liquidation preference,
callable at $110 $ 1,000,000
Common stock, $10 par value 6,000,000
Additional paid-in capital 1,500,000
Retained earnings 2,500,000
Total stockholders' equity $11,000,000

There were no preferred dividends in arrears on January 1, 2014. There are no book value/fair value
differentials.

5) What is the implied goodwill for Salter based on Pardy's purchase price for Salter on January 1, 2014?
A) $ 0
B) $ 35,000
C) $ 70,000
D) $100,000
Answer: D
Explanation: D)
Stockholders' equity $11,000,000
Less: Preferred stockholders' equity (10,000 × $110) (1,100,000)
Common stockholders' equity 9,900,000

Cost of 70% interest acquired $7,000,000

Implied fair value of investment ($7,000,000/0.7) 10,000,000
Common stockholders' equity (9,900,000)
Goodwill $100,000
Objective: LO1
Difficulty: Moderate

6) Salter has a 2014 net loss of $200,000. No dividends are declared or paid in 2014. What is the change in
Pardy's Investment in Salter for the year ending December 31, 2014?
A) $ 50,000
B) $ 70,000
C) $140,000
D) $210,000
Answer: D
Explanation: D)
Salter's net loss $(200,000)
Preferred dividend 10% × $1,000,000 (100,000)
Total Loss to common stockholders (300,000)
Pardy's ownership percentage 70%
Pardy's share of the loss on investment $(210,000)
Objective: LO1
Difficulty: Moderate
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7) Assume Salter's net income for 2014 is $220,000. No dividends are declared or paid in 2014. What is the
change in Pardy's Investment in Salter for the year ending December 31, 2014?
A) $ 84,000
B) $119,000
C) $154,000
D) $189,000
Answer: A
Explanation: A) Salter's net income $220,000
Less: Income to the preferred stockholders (100,000)
Income to the common stockholders 120,000
Pardy's ownership percentage 70%
Pardy's share of the income $84,000
Objective: LO1
Difficulty: Moderate

Use the following information to answer the question(s) below.

On January 1, 2013, Pamplin Corporation stockholders' equity consisted of $1,000,000 of $10 par value
Common Stock, $750,000 of Additional Paid-in Capital, and $3,000,000 of Retained Earnings. On January
1, 2014, Pamplin purchased 90% of the outstanding common stock of Sage Corporation for $1,500,000
with all excess purchase cost assigned to goodwill. The stockholders' equity of Sage on this date consisted
of $800,000 of $100 par value, 8% cumulative, preferred stock callable at $105, $900,000 of $10 par value
common stock and $500,000 of Retained Earnings. Sage's net income for 2014 was $100,000.

On January 1, 2014, no preferred dividends are in arrears. No dividends are declared or paid in 2014. In a
separate transaction on January 1, 2014, Pamplin purchased 70% of Sage's preferred stock for $600,000.

8) For the year ending December 31, 2014, the amount of Pamplin's income from Sage (associated with
the common stock investment in Sage) is
A) $32,400.
B) $36,000.
C) $60,000.
D) $90,000.
Answer: A
Explanation: A)
Preliminary computations:
Total stockholders' equity (Sage) $2,200,000
Less: Preferred stockholders' equity
($800,000 × 1.05) (840,000)
Equals: Common stockholders' equity $1,360,000

Net income as given $100,000

Less: Preferred dividends ($800,000 × 8%) (64,000)
Income available to the common stockholders $36,000
Ownership percentage 90%
Income from Sage $32,400
Objective: LO1
Difficulty: Moderate

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9) What is the goodwill on the consolidated balance sheet for Pamplin and Subsidiaries on December 31,
2014 based on Pamplin's purchase of Sage's common stock?
A) $140,000
B) $240,000
C) $290,000
D) $306,667
Answer: D
Explanation: D) Implied fair value ($1,500,000/0.90)$1,666,667
Less: Common stockholders' equity (1,360,000)
Goodwill $306,667
Objective: LO1
Difficulty: Moderate

10) Pan Corporation has total stockholders' equity of $5,000,000 consisting of $1,000,000 of $10 par value
Common Stock, $1,000,000 of Additional Paid-in Capital, and $3,000,000 of Retained Earnings. Pan owns
80% of Sailor Corporation's common stock purchased at book value, which equals fair value. Sailor has
$900,000 of 10% cumulative preferred stock outstanding, with no preferred dividends in arrears. The
preferred stock has no call price, redemption price or liquidation price. Pan acquired 60% of the preferred
stock of Sailor for $500,000. After this transaction the balances in Pan's Retained Earnings and Additional
Paid-in Capital accounts, respectively, are
A) $2,960,000 and $1,000,000.
B) $3,000,000 and $960,000.
C) $3,000,000 and $1,040,000.
D) $3,040,000 and $1,000,000.
Answer: C
Explanation: C) If the book value ($900,000 × 60%) of preferred stock is greater than the price paid
($500,000) for the preferred stock, then the difference is added to the parent's additional paid-in capital.
Objective: LO1
Difficulty: Moderate

11) Assume a company's preferred stock is cumulative with a call provision and has dividends in arrears.
The amount of stockholders' equity allocated to preferred stockholders is equal to the number of shares
outstanding times the
A) sum of the par value per share plus any liquidation premium per share, plus the sum of any preferred
dividends in arrears, plus the current year's dividend requirement, but only if dividends have been
declared.
B) sum of the par value per share, plus any liquidation premium per share, plus the sum of any preferred
dividends in arrears, plus the current year's dividend requirement, regardless of whether dividends have
been declared.
C) call price plus the sum of any preferred dividends in arrears, plus the current year's dividend
requirement, but only if dividends have been declared.
D) call price plus the sum of any preferred dividends in arrears, plus the current year's dividend
requirement, regardless of whether dividends have been declared.
Answer: D
Objective: LO1
Difficulty: Moderate

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12) When a parent acquires the preferred stock of a subsidiary, there will be a constructive retirement and
A) any difference paid above the book value of the preferred stock reduces the parent's additional paid-in
capital.
B) any difference paid above the book value of the preferred stock reduces the subsidiary's retained
earnings.
C) any difference paid above the book value of the preferred stock increases the parent's additional paid-
in capital.
D) any difference paid above the book value of the preferred stock increases the parent's retained
earnings.
Answer: A
Objective: LO1
Difficulty: Moderate

13) If a parent company has controlling interest in a subsidiary which has no potentially dilutive
securities outstanding, then in the calculation of consolidated diluted EPS, it will be necessary to
A) only make an adjustment of subsidiary's basic earnings.
B) replace the parent's equity in subsidiary earnings with the parent's equity in subsidiary's diluted EPS.
C) make a replacement calculation in the parent's basic earnings for the EPS.
D) only use the parent's common shares and shares represented by the parent's potentially dilutive
securities.
Answer: D
Objective: LO2
Difficulty: Moderate

14) Parnaby has 25,000 common stock shares outstanding and its 100%-owned subsidiary Sandal has
5,000 common stock shares outstanding. Parnaby and Sandal do not have any potentially dilutive
securities outstanding. The separate net incomes for Parnaby and Sandal is $150,000 and $75,000
respectively. Diluted EPS for the consolidated company is
A) $5.00.
B) $6.00.
C) $7.50.
D) $9.00.
Answer: D
Explanation: D) ($150,000 + $75,000)/25,000
Objective: LO2
Difficulty: Moderate

15) In computing consolidated diluted EPS, the replacement calculation replaces the parent's equity in
subsidiary earnings with the
A) parent's share of basic EPS of the subsidiary.
B) subsidiary's share of basic EPS of the parent.
C) parent's share of diluted EPS of the subsidiary.
D) subsidiary's share of diluted EPS of the parent.
Answer: C
Objective: LO2
Difficulty: Moderate

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