978-1259444951 Test Bank Chapter 3 Part 1

File: Chapter 03 – Consolidations – Subsequent to the Date of Acquisition

Multiple Choice:

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) Goodwill.

B) Equipment.

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. 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.

McGraw-Hill Education.

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AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

[QUESTION]

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. An impairment model is used

A) To assess whether asset write-downs are appropriate for indefinite-lived assets.

B) To calculate the fair value of intangible assets.

C) To calculate the amortization of indefinite-lived assets over their useful lives.

D) To determine whether the fair value of assets should be recognized.

E) To determine the likelihood that the fair value of an assumed liability will increase.

6. Racer Corp. acquired all of the common stock of Tangiers Co. in 2016. 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.

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Learning Objective: 03-03a

Learning Objective: 03-03b

Topic: Investment methods―Identify and differentiate

Difficulty: 3 Hard

Blooms: Understand

AACSB: Reflective Thinking

AICPA BB: Critical Thinking

AICPA FN: Measurement

[QUESTION]

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 balance 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, 2017,

for $257,000. Annual amortization of $19,000 resulted from this acquisition. Jansen reported net

income of $70,000 in 2017 and $50,000 in 2018 and paid $22,000 in dividends each year.

Merriam reported net income of $40,000 in 2017 and $47,000 in 2018 and paid $10,000 in

dividends each year. What is the Investment in Merriam Co. balance on Jansen’s books as of

December 31, 2018, if the equity method has been applied?

A) $286,000.

B) $295,000.

C) $276,000.

D) $344,000.

E) $324,000.

9. Which of the following is not an example of an intangible asset?

A) Customer list

B) Database

C) Lease agreement

D) Broken equipment

E) Trademark

10. Parrett Corp. acquired one hundred percent of Jones Inc. on January 1, 2016, 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, 2018, 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, 2018?

A) $387,000.

B) $497,000.

C) $508.000.

D) $537,000.

E) $570,000.

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Kaltop earned net income for 2017 of $126,000 and paid dividends of $48,000 during the year.

[QUESTION]

REFER TO: 03-01

11. The 2017 total excess amortization of fair-value allocations is calculated to be

A) $4,000.

B) $6,400.

C) ($2,400).

D) ($1,000).

E) $3,800.

12. In Cale’s accounting records, what amount would appear on December 31, 2017 for equity in

subsidiary earnings?

A) $77,000.

B) $79,000.

C) $125,000.

D) $127,000.

E) $81,800.

Fair

Book

Value

Current assets

$ 120,000

Land

72,000

192,000

Building (twenty year life)

240,000

268,000

Equipment (ten year life)

540,000

516,000

Current liabilities

24,000

Long

–

term liabilities

120,000

Common stock

228,000

Additional paid

–

in capital

384,000

Retained earnings

216,000

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Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: $126,000 + $1,000 = $127,000

[QUESTION]

REFER TO: 03-01

13. What is the balance in Cale’s investment in subsidiary account at the end of 2017?

A) $1,099,000.

B) $1,020,000.

C) $1,096,200.

D) $1,098,000.

E) $1,144,400.

14. At the end of 2017, the consolidation entry to eliminate Cale’s accrual of Kaltop’s earnings

would include a credit to Investment in Kaltop Co. for

A) $124,400.

B) $126,000.

C) $127,000.

D) $ 76,400.

E) $ 0.

15. If Cale Corp. had net income of $444,000 in 2017, exclusive of the investment, what is the

amount of consolidated net income?

A) $569,000.

B) $570,000.

C) $571,000.

D) $566,400.

E) $444,000.

16. 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) $190,000.

B) $360,000.

C) $164,000.

D) $354,000.

E) $150,000.

17. 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 partial equity method of internal

recordkeeping?

A) $170,000.

B) $354,000.

C) $164,000.

D) $ 6,000.

E) $174,000.

2017. Janex’s reported earnings for 2017 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

18. On the consolidated financial statements for 2017, what amount should have been shown for

Equity in Subsidiary Earnings?

A) $432,000.

B) $ -0-

C) $408,000.

D) $120,000.

E) $288,000.

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REFER TO: 03-03

19. On the consolidated financial statements for 2017, what amount should have been shown for

consolidated dividends?

A) $ 900,000.

B) $1,020,000.

C) $ 876,000.

D) $ 996,000.

E) $ 948,000.

20. What is the amount of consolidated net income for the year 2017?

A) $3,180,000.

B) $3,612,000.

C) $3,300,000.

D) $3,588,000.

E) $3,420,000.

Jans

Tysk

Revenues

$1,080,000

$840,000

Expenses

480,000

600,000

Investment income

Not given

0

Retained earnings, 1/1/18

840,000

600,000

Dividends paid

132,000

70,000

[QUESTION]

REFER TO: 03-04

21. If the partial equity method had been applied, what was 2018 consolidated net income?

A) $840,000.

B) $768,400.

C) $822,000.

D) $240,000.

E) $600,000.

22. 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 2018?

A) $612,100.

B) $744,000.

C) $774,150.

D) $372,000.

E) $844,150.

McGraw-Hill Education.

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AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Initial Investment $372,000

2016 Entries: $180,000 – $70,000 – $18,000 = $92,000

2017 Entries: $216,000 – $70,000 – $18,000 = $128,000

2018 Entries: $240,000 – $70,000 – $18,000 = $152,000

$372,000 + $92,000 + $128,000 + $152,000 = $744,000

[QUESTION]

23. Red Co. acquired 100% of Green, Inc. on January 1, 2017. On that date, Green had land

with a book value of $42,000 and a fair value of $52,000. 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. In Red’s December

31, 2017 consolidated worksheet, what total amount of excess fair over book value

amortization expense adjustments should Red recognize resulting from its 100%

acquisition of Green?

A) $43,000.

B) $33,000.

C) $ 5,000.

D) $15,000.

E) $0.

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.

McGraw-Hill Education.

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AICPA BB: Critical Thinking

AICPA FN: Measurement

[QUESTION]

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,

A) The investment account remains at initial value.

B) Dividends received are recorded as 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.

E) Dividends received increase the investment account.

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 does not change from year to year.

E) Dividends received are ignored.

McGraw-Hill Education.

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AICPA BB: Critical Thinking

AICPA FN: Measurement

[QUESTION]

28. According to GAAP regarding amortization of goodwill, 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.

29. When a company applies the initial value 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 for the second year?

A)

Retained earnings

Investment in subsidiary

B)

Investment in subsidiary

Retained earnings

C)

Investment in subsidiary

Equity in subsidiary’s income

D)

Equity in subsidiary’s income

Investment in subsidiary

E)

Additional paid-in capital

Retained earnings

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 in the second year?

A)

Retained earnings

Investment in subsidiary

B)

Investment in subsidiary

Retained earnings

C)

Investment in subsidiary

Equity in subsidiary’s income

D)

Investment in subsidiary

Additional paid-in capital

E)

Retained earnings

Additional paid-in capital

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)

Retained earnings

Investment in subsidiary

B)

Investment in subsidiary

Retained earnings

C)

Investment in subsidiary

Equity in subsidiary’s income

D)

Investment in subsidiary

Additional paid-in capital

E)

Retained earnings

Additional paid-in capital

32. When consolidating parent and subsidiary financial statements, 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.

33. When consolidating a subsidiary under the equity method, which of the following 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.

34. Which of the following is not a factor to be considered when determining the useful life of an

intangible asset?

A) Legal, regulatory or contractual provisions.

B) The effects of obsolescence.

C) The expected use of the asset by the organization.

D) The fair value of the asset.

E) The level of maintenance expenditures that will be required to obtain expected future benefits.

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AICPA BB: Critical Thinking

AICPA FN: Measurement

[QUESTION]

35. 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.

36. With respect to identifiable intangible assets other than goodwill, which of the following is

true?

A) If the value of the identified asset meets a de minimis exception, the entity may elect to treat it

as goodwill.

B) An identifiable intangible asset with an indefinite useful life must be assessed for impairment

once every three years.

C) If the average fair value of the asset is less than the average carrying amount of the asset with

respect to, and determined for, the preceding three-year period, the asset is considered impaired

and the entity may recognize a loss.

D) A quantitative evaluation of value is required each year regardless of circumstances.

E) If a qualitative assessment of the asset performed by an entity indicates impairment is likely, a

quantitative assessment must be performed to determine whether there has been a loss in fair

value.

37. Consolidated net income using the equity method for an acquisition combination is computed

as follows:

A) Parent company’s revenues from its own operations plus subsidiary retained earnings.

B) Parent’s reported net income plus subsidiary dividends.

C) Combined revenues less combined expenses less equity in subsidiary’s earnings 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

earnings less subsidiary dividends.

E) None of these answer choices are correct.

Debit

Credit

Cash

$ 500

Accounts receivable

600

Inventory

800

Buildings (net) (5 year life)

1,500

Equipment (net) (2 year life)

1,000

Land

900

Accounts payable

$ 400

Long

–

term liabilities (due 12/31/20)

1,800

Common stock

1,000

Additional paid

–

in capital

600

Retained earnings

_____

1,500

Total

$5,300

Net income and dividends reported by Hurley for 2017 and 2018 follow:

2017

2018

Net income

$100

$120

Dividends

30

40

The fair value of Hurley’s net assets that differ from their book values

are listed below:

Fair Value

Buildings

$ 1,200

Equipment

1,250

Land

1,300

Long

–

term liabilities

1,700

38. Compute the consideration transferred in excess of book value acquired at January 1, 2017.

A) $ 150.

B) $ 700.

C) $2,200.

D) $ 550.

E) $2,900.

39. Compute goodwill, if any, at January 1, 2017.

A) $ 150.

B) $ 250.

C) $ 700.

D) $1,200.

E) $ 550.

40. Compute the amount of Hurley’s inventory that would be reported in a January 1, 2017,

consolidated balance sheet.

A) $800.

B) $100.

C) $900.

D) $150.

E) $ 0.

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Learning Objective: 03-03

Topic: Consolidation balances―Calculate

Difficulty: 2 Medium

Blooms: Apply

AACSB: Knowledge Application

AICPA BB: Critical Thinking

AICPA FN: Measurement

Feedback: Fair Value at Acquisition = $800

[QUESTION]

REFER TO: 03-05

41. Compute the amount of Hurley’s buildings that would be reported in a December 31, 2017,

consolidated balance sheet.

A) $1,560.

B) $1,260.

C) $1,440.

D) $1,160.

E) $1,140.

42. Compute the amount of Hurley’s equipment that would be reported in a December 31, 2017,

consolidated balance sheet.

A) $1,000.

B) $1,250.

C) $ 875.

D) $1,125.

E) $ 750.

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REFER TO: 03-05

43. Compute the amount of Hurley’s long-term liabilities that would be reported in a December

31, 2017, consolidated balance sheet.

A) $1,800.

B) $1,700.

C) $1,725.

D) $1,675.

E) $3,500.

44. Compute the amount of Hurley’s buildings that would be reported in a December 31, 2018,

consolidated balance sheet.

A) $1,620.

B) $1,380.

C) $1,320.

D) $1,080.

E) $1,500.

45. Compute the amount of Hurley’s equipment that would be reported in a December 31, 2018,

consolidated balance sheet.

A) $ 0.

B) $1,000.

C) $1,250.

D) $1,125.

E) $1,200.