Chapter 3—Consolidated Statements: Subsequent to Acquisition
Key
1. The method of accounting for subsidiaries that better reflects the investment account on parent-only financial
statements is the
2. The method of accounting for subsidiaries that is required for influential investments is the
3. The method of accounting for subsidiaries where investment income is limited to dividends received is the
4. Which of the following statements applying to the use of the equity method versus the cost method is true?
5. On January 1, 20X1, Rabb Corp. purchased 80% of Sunny Corp.’s $10 par common stock for $975,000. On
this date, the carrying amount of Sunny’s net assets was $1,000,000. The fair values of Sunny’s identifiable
assets and liabilities were the same as their carrying amounts except for plant assets (net), which were $100,000
in excess of the carrying amount.
In the January 1, 20X1, consolidated balance sheet, goodwill should be reported at ____.
6. On January 1, 20X1, Promo, Inc. purchased 70% of Set Corporation for $469,000. On that date the book
value of the net assets of Set totaled $500,000. Based on the appraisal done at the time of the purchase, all assets
and liabilities had book values equal to their fair values except as follows:
Book Value
Fair Value
Inventory
$100,000
$120,000
Land
75,000
85,000
Equipment (useful life 4 years)
125,000
165,000
The remaining excess of cost over book value was allocated to a patent with a 10-year useful life.
During 20X1 Promo reported net income of $200,000 and Set had net income of $100,000.
What income from subsidiary did Promo include in its net income if Promo uses the simple equity method?
7. Pete purchased 100% of the common stock of the Sanburn Company on January 1, 20X1, for $500,000. On
that date, the stockholders’ equity of Sanburn Company was $380,000. On the purchase date, inventory of
Sanburn Company, which was sold during 20X1, was understated by $20,000. Any remaining excess of cost
over book value is attributable to patent with a 20-year life. The reported income and dividends paid by Sanburn
Company were as follows:
20X1
20X2
Net income
$80,000
$90,000
Dividends paid
10,000
10,000
Using the simple equity method, which of the following amounts are correct?
Investment Income Investment Account Balance
20X1 December 31, 20X1
8. Pete purchased 100% of the common stock of the Sanburn Company on January 1, 20X1, for $500,000. On
that date, the stockholders’ equity of Sanburn Company was $380,000. On the purchase date, inventory of
Sanburn Company, which was sold during 20X1, was understated by $20,000. Any remaining excess of cost
over book value is attributable to patent with a 20-year life. The reported income and dividends paid by Sanburn
Company were as follows:
20X1
20X2
Net income
$80,000
$90,000
Dividends paid
10,000
10,000
Using the sophisticated (full) equity method, which of the following amounts are correct?
Investment Income Investment Account Balance
20X1 December 31, 20X1
9. Pete purchased 100% of the common stock of the Sanburn Company on January 1, 20X1, for $500,000. On
that date, the stockholders’ equity of Sanburn Company was $380,000. On the purchase date, inventory of
Sanburn Company, which was sold during 20X1, was understated by $20,000. Any remaining excess of cost
over book value is attributable to patent with a 20-year life. The reported income and dividends paid by Sanburn
Company were as follows:
20X1
20X2
Net income
$80,000
$90,000
Dividends paid
10,000
10,000
Using the cost method, which of the following amounts are correct?
Investment Income Investment Account Balance
20X1 December 31, 20X1
10. What is the effect if an unconsolidated subsidiary is accounted for by the equity method but consolidated
statements are being prepared for the parent company and other subsidiaries?
11. In consolidated financial statements, it is expected that:
12. How is the portion of consolidated earnings to be assigned to noncontrolling interest in consolidated
financial statements determined?
13. If in the consolidation process the investment in subsidiary account is increased or decreased by the amount
determined by the following calculation:
the investment account is being converted from
14. Balance sheet information for Pawn Company and its 90%-owned subsidiary, Sox Corporation, at
December 31, 20X1, is summarized as follows:
Pawn
Sox
Current assets-net
$ 200,000
$ 50,000
Property, plant, and equipment-net
1,000,000
600,000
Investment in Sox
558,000
$1,758,000
$650,000
Current liabilities
$ 100,000
$ 30,000
Capital stock
800,000
400,000
Retained earnings
858,000
220,000
$1,758,000
$650,000
Pawn acquired its interest in Sox for cash at book value several years ago when Sox’s assets and liabilities were equal to their fair values.
Consolidated total assets of Pawn and Sox, at December 31, 20X1, will be ____.
15. Balance sheet information for Pawn Company and its 90%-owned subsidiary, Sox Corporation, at
December 31, 20X1, is summarized as follows:
Pawn
Sox
Current assets-net
$ 200,000
$ 50,000
Property, plant, and equipment-net
1,000,000
600,000
Investment in Sox
558,000
$1,758,000
$650,000
Current liabilities
$ 100,000
$ 30,000
Capital stock
800,000
400,000
Retained earnings
858,000
220,000
$1,758,000
$650,000
Pawn acquired its interest in Sox for cash at book value several years ago when Sox’s assets and liabilities were equal to their fair values.
The consolidated balance sheet of Pawn and Sox at December 31, 20X1 will show
16. On January 1, 20X1, Promo, Inc. purchased 70% of Set Corporation for $469,000. On that date the book
value of the net assets of Set totaled $500,000. Based on the appraisal done at the time of the purchase, all assets
and liabilities had book values equal to their fair values except as follows:
Book Value
Fair Value
Inventory
$100,000
$120,000
Land
75,000
85,000
Equipment (useful life 4 years)
125,000
165,000
The remaining excess of cost over book value was allocated to a patent with a 10-year useful life.
During 20X1 Promo reported net income of $200,000 and Set had net income of $100,000.
What is consolidated net income if Promo recognizes income from Set using the sophisticated equity method?
17. On January 1, 20X1, Promo, Inc. purchased 70% of Set Corporation for $469,000. On that date the book
value of the net assets of Set totaled $500,000. Based on the appraisal done at the time of the purchase, all assets
and liabilities had book values equal to their fair values except as follows:
Book Value
Fair Value
Inventory
$100,000
$120,000
Land
75,000
85,000
Equipment (useful life 4 years)
125,000
165,000
The remaining excess of cost over book value was allocated to a patent with a 10-year useful life.
During 20X1 Promo reported net income of $200,000 and Set had net income of $100,000.
What income from subsidiary did Promo include in its net income if Promo uses the sophisticated equity method?
18. On January 1, 20X1, Payne Corp. purchased 70% of Shayne Corp.’s $10 par common stock for $900,000.
On this date, the carrying amount of Shayne’s net assets was $1,000,000. The fair values of Shayne’s identifiable
assets and liabilities were the same as their carrying amounts except for plant assets (net), which were $200,000
in excess of the carrying amount. For the year ended December 31, 20X1, Shayne had net income of $150,000
and paid cash dividends totaling $90,000. Excess attributable to plant assets is amortized over 10 years.
In the December 31, 20X1, consolidated balance sheet, noncontrolling interest should be reported at ____.
19. In a mid-year purchase when the subsidiary’s books are not closed until the end of the year, the consolidated
net income contains the parent’s share of the
20. Alpha purchased an 80% interest in Beta on June 30, 20X1. Both Alpha’s and Beta’s reporting periods end
December 31. Which of the following represents the controlling interest in consolidated net income for 20X1?
21. Under IASB for small and medium entities, goodwill:
22. Prossart Company owned 70% of the outstanding stock of Say Company. During the annual goodwill
impairment test, the following information pertaining to Say was noted:
Book value of net assets
$2,000,000
Fair value of Say Company
1,800,000
Estimated fair value of net identifiable assets
1,700,000
Recorded goodwill
200,000
The amount of goodwill impairment loss that would be recorded on Prossart’s books would be:
23. On January 1, 20X1, Piston, Inc. acquired Spur Corp. While recording the acquisition, Piston established a
deferred tax liability. It is most likely that this account was created because
24. Which of the following is not true regarding a subsidiary’s tax loss carryovers in an acquisition?
25. On January 1, 20X1, Parent Company purchased 80% of the common stock of Subsidiary Company for
$316,000. On this date, Subsidiary had common stock, other paid-in capital, and retained earnings of $40,000,
$120,000, and $190,000, respectively. Net income and dividends for 2 years for Subsidiary Company were as
follows:
20X1
20X2
Net income
$50,000
$90,000
Dividends
10,000
20,000
On January 1, 20X1, the only tangible assets of Subsidiary that were undervalued were inventory and building. Inventory, for which FIFO is used,
was worth $5,000 more than cost. The inventory was sold in 20X1. Building, which was worth $15,000 more than book value, has a remaining life of
8 years, and straight-line depreciation is used. Any remaining excess is goodwill.
Prepare Parent’s 20X1 and 20X2 journal entries (after the purchase has been recorded) to record the transactions related to its investment in
Subsidiary under the
a.
cost method
b.
simple equity method
20X1
20X2
Debit
Credit
Debit
Credit
Cash
8,000 (1)
16,000 (2)
Dividend Income
8,000
16,000
80% of $10,000 dividends
80% of $20,000 dividends
20X1
20X2
Debit
Credit
Debit
Credit
Investment in Subsidiary
40,000 (1)
72,000 (2)
Subsidiary Income
40,000
72,000
Cash
8,000 (3)
16,000 (4)
Investment in Subsidiary
8,000
16,000
80% of $50,000 net income
80% of $90,000 net income
80% of $10,000 dividends
80% of $20,000 dividends
26. On January 1, 20X1, Parent Company purchased 80% of the common stock of Subsidiary Company for
$316,000. On this date, Subsidiary had common stock, other paid-in capital, and retained earnings of $40,000,
$120,000, and $190,000, respectively. Net income and dividends for 2 years for Subsidiary Company were as
follows:
20X1
20X2
Net income
$50,000
$90,000
Dividends
10,000
20,000
On January 1, 20X1, the only tangible assets of Subsidiary that were undervalued were inventory and building. Inventory, for which FIFO is used,
was worth $5,000 more than cost. The inventory was sold in 20X1. Building, which was worth $15,000 more than book value, has a remaining life of
8 years, and straight-line depreciation is used. Any remaining excess is goodwill.
Prepare Parent’s 20X1 and 20X2 journal entries (after the purchase has been recorded) to record the transactions related to its investment in
Subsidiary under the sophisticated equity method.
20X1
20X2
Debit
Credit
Debit
Credit
Investment in Subsidiary
34,500 (1)
70,500 (2)
Subsidiary Income
34,500
70,500
Cash
8,000 (3)
16,000 (4)
Investment in Subsidiary
8,000
16,000
80% of $10,000 dividends
80% of $20,000 dividends
Amortization:
20X1
20X2
Inventory: $5,000 ´ 80%
4,000
Building: $15,000 ´ 80% 8 years
$5,500
$1,500
27. On January 1, 20X1, Parent Company purchased 80% of the common stock of Subsidiary Company for
$316,000. On this date, Subsidiary had common stock, other paid-in capital, and retained earnings of $40,000,
$120,000, and $190,000, respectively. Net income and dividends for 2 years for Subsidiary Company were as
follows:
20X1
20X2
Net income
$50,000
$90,000
Dividends
10,000
20,000
On January 1, 20X1, the only tangible assets of Subsidiary that were undervalued were inventory and building. Inventory, for which FIFO is used,
was worth $5,000 more than cost. The inventory was sold in 20X1. Building, which was worth $15,000 more than book value, has a remaining life of
8 years, and straight-line depreciation is used. Any remaining excess is goodwill.
Required:
a. Prepare a value analysis schedule
b. Prepare a determination and distribution of excess schedule
Implied entity fair value
$395,000
$316,000
$79,000
Fair value of entity net identifiable assets
370,000
296,000
74,000
Goodwill
$ 25,000
$ 20,000
$ 5,000
Fair value of subsidiary
$395,000
$316,000
$79,000
Less book value:
Common stock
40,000
Paid in capital in excess of par
120,000
Retained earnings
190,000
Total equity
350,000
350,000
350,000
Interest Acquired
80%
20%
Book value
280,000
70,000
Excess of fair over book
$ 45,000
$ 36,000
$ 9,000
Adjust identifiable accounts:
Life
Amort/Year
Inventory
$ 5,000
[ FIFO; sold in Yr 1]
Building
15,000
8
1,875
Goodwill
25,000
Total
$45,000