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Chapter 6--Cash Flow, EPS, and Taxation Key
1. The cash purchase of a controlling interest in a firm requires disclosure on the consolidated statement of cash
flows as a(n)
2. Ponti Company purchased the net assets of the Sorri Company for $800,000. The book value of the net
assets of Sorri Company were as follows on the acquisition date:
Cash
$ 50,000
Inventory
150,000
Land
150,000
Building (net)
400,000
Liabilities
(200,000)
Net assets
$550,000
The market values were as follows: Inventory, $160,000; Land, $170,000; Building, $450,000. The excess purchase price is allocated to goodwill. On
the consolidated statement of cash flows, what is the amount that will appear as cash applied to investing as a result of this purchase?
3. Company P acquired 80% of the outstanding common stock of the Company S by issuing common stock
with a market value of $550,000. The balance sheet of Company S was as follows on the acquisition date:
Assets
Liabilities and Equity
Cash
$ 50,000
Liabilities
$120,000
Inventory
120,000
Common stock, $10 par
100,000
Land
100,000
Other paid-in capital
150,000
Building (net)
350,000
Retained earnings
250,000
Total
$620,000
Total
$620,000
The market values were as follows: Inventory, $130,000; Land, $120,000; Building, $400,000. What is the amount that will appear as Cash Provided
(Used) by Investing Activities on the consolidated statement of cash flows, as a result of this purchase?
4. In a noncash purchase of a controlling interest in a firm, disclosure is required on the consolidated statement
of cash flows as a(n)
5. Company P acquired 75% of the outstanding common stock of the Company S by issuing common stock
with a market value of $650,000 on January 1, 20X3. The balance sheet of Company S was as follows on the
acquisition date:
Assets
Liabilities and Equity
Cash
$100,000
Liabilities
$100,000
Inventory
90,000
Common stock, $10 par
100,000
Land
150,000
Other paid-in capital
200,000
Building (net)
500,000
Retained earnings
440,000
Total
$840,000
Total
$840,000
The market values were as follows: Inventory, $180,000; Land, $150,000; Building, $600,000. What is the amount that will appear as Cash Provided
(Used) by Financing Activities as a result of this purchase?
6. Amortization of excesses in periods subsequent to the purchase would affect which sections of a consolidated
statement of cash flows?
7. Company P acquired 60% of the outstanding common stock of Company S by issuing common stock with a
market value of $420,000 on January 1, 20X3. The balance sheet of Company S was as follows on the
acquisition date:
Assets
Liabilities and Equity
Cash
$ 50,000
Liabilities
$ 80,000
Inventory
100,000
Common stock, $10 par
100,000
Land
100,000
Other paid-in capital
120,000
Building (net)
250,000
Retained earnings
200,000
Total
$500,000
Total
$500,000
The market values were as follows: Inventory, $130,000; Land, $150,000; Building, $400,000. The inventory was sold during 20X3, the building has
a 10-year life, and any excess purchase price is attributed to goodwill. What adjustment is needed to consolidated net income to arrive at cash flow-
operations for 20X4, under the indirect method, as a result of amortization of excesses from the purchase?
8. Company P purchased an 80% interest in Company S on January 1, 20X3, at a price in excess of book value,
such that a patent arises in the consolidation process. As a result of amortizing the patent on the consolidated
income statement, an adjustment would be required in which section of the consolidated statement of cash
flows?
Operating Investing Financing No Adjustment
9. The purchase of additional shares directly from a subsidiary by the parent results in disclosure in which
section of a consolidated statement of cash flows?
10. The purchase of additional shares from the noncontrolling interest of a subsidiary by the parent results in
disclosure in which section of a cash flow statement?
11. A parent company owns 80% of the common stock of its subsidiary. During the current year, the parent
purchases an additional 10% interest from noncontrolling shareholders. This cash transaction will appear in
which section of the consolidated statement of cash flows?
Operating Investing Financing No Adjustment
12. Dividends paid by a subsidiary have the following affect on the consolidated cash flow
13. Which of the following statements is true about the consolidated statement of cash flows?
14. A parent company purchased all the outstanding bonds of its subsidiary. This cash transaction will appear in
which section of the consolidated statement of cash flows?
Operating Investing Financing No Adjustment
15. Investor has a 40% ownership interest in the common stock of Investee. Investor paid $10,000 more than
book value for its 40% interest and regards the excess as attributable to goodwill. If Investee reports income of
$200,000 and pays dividends of $50,000, the operating activities of the consolidated statement of cash flows
(indirect method) will reflect an adjustment of
16. Consolidated Basic Earnings Per Share (BEPS) is calculated by dividing
17. Program Corporation owns 70% of Solution Company. Selected financial data for each for the current year
follows:
Program Corporation:
Internally generated net income
$125,000
Common shares outstanding
100,000
Solution Company:
Net income (adjusted for intercompany profits)
$ 50,000
Common shares outstanding
10,000
Consolidated basic earnings per share (BEPS) is (round to the nearest cent):
18. Which of the following is not true regarding diluted earnings per share (DEPS) when the subsidiary has
outstanding dilutive securities which may require the issuance of subsidiary company shares only?
19. When the acquisition of a subsidiary occurs during a reporting period, the computation of both Basic
earnings per share (BEPS) and Diluted earnings per share (DEPS) includes subsidiary income
20. For two or more corporations to file a consolidated tax return, the parent must own what percentage of the
voting power of all classes of stock and what percentage of the fair value of all the outstanding stock of the
corporation?
21. In calculating the voting power and market value for two or more corporations to file a consolidated tax
return, preferred stock is included only if it
22. Consolidated firms that meet the tax law requirements to be an affiliated group
23. When an affiliated group elects to be taxed as a single entity, taxable income is calculated based on
24. Company P purchased an 80% interest in Company S on January 1, 20X3, for $800,000. On the purchase
date, Company S stockholders' equity was $800,000. Any excess of fair value over book value was attributed to
a patent with a 10-year remaining life. In 20X3, Company P reported internally generated net income before
taxes of $150,000. Company S reported a net income before taxes of $70,000. The firms file a consolidated tax
return at a 30% tax rate. The nondeductible portion of excess amortization is
25. Company P purchased an 80% interest in Company S on January 1, 20X3, for $800,000. On the purchase
date, Company S stockholders' equity was $800,000. Any excess of fair value over book value was attributed to
a patent with a 10-year remaining life. In 20X3, Company P reported internally generated net income before
taxes of $150,000. Company S reported a net income before taxes of $70,000. The firms file a consolidated tax
return at a 30% tax rate.The controlling share of consolidated net income is
26. Company P purchased an 80% interest in Company S on January 1, 20X3, for $800,000. On the purchase
date, Company S stockholders' equity was $800,000. Any excess of fair value over book value was attributed to
a patent with a 10-year remaining life. In 20X3, Company P reported internally generated net income before
taxes of $150,000. Company S reported a net income before taxes of $70,000. The firms file a consolidated tax
return at a 30% tax rate. The tax on subsidiary earnings is
27. Company P purchased an 80% interest in Company S on January 1, 20X3, for $800,000. On the purchase
date, Company S stockholders' equity was $800,000. Any excess of fair value over book value was attributed to
a patent with a 10-year remaining life. In 20X3, Company P reported internally generated net income before
taxes of $150,000. Company S reported a net income before taxes of $70,000. The firms file a consolidated tax
return at a 30% tax rate.The consolidated net income is
28. Because good will is amortized over 15 years for tax purposes, but is not amortized for financial reporting:
29. For companies that meet the requirements of an affiliated firm but elect to file separately, the parent may
exclude how much of the dividends received from reported income?
30. For ownership interest of at least 20% but less than 80%, the parent may exclude how much of the dividends
received from its reported income when filing separately?
31. For ownership interest of less than 20%, the parent may exclude how much of the dividends received from
its reported income when filing separately?
32. One complication that arises in consolidation when the parent and subsidiary have filed separate tax returns
is:
33. Company P purchased an 75% interest in Company S on January 1, 20X3, for $675,000. On the purchase
date, Company S stockholders' equity was $800,000. Any excess of cost over book value was attributed to a
patent with a 10-year life. In 20X3, Company P reported internally generated income before taxes of $80,000.
Company S reported internally generated income before taxes of $40,000. The firms file separate tax returns at
a 30% tax rate. Assume an 80% exclusion rate on intercompany income. The nondeductible portion of excess
amortization is
34. Company P purchased an 75% interest in Company S on January 1, 20X3, for $675,000. On the purchase
date, Company S stockholders' equity was $800,000. Any excess of cost over book value was attributed to a
patent with a 10-year life. In 20X3, Company P reported internally generated income before taxes of $80,000.
Company S reported internally generated income before taxes of $40,000. The firms file separate tax returns at
a 30% tax rate. Assume an 80% exclusion rate on intercompany income. The tax applicable to Company S’s
income is
35. Company S has been an 80%-owned subsidiary of Company P since January 1, 20X7. The determination
and distribution of excess schedule prepared at the time of purchase was as follows:
Entity
80% Parent
20% NCI
Entity FV
$ 712,500
$ 570,000
$ 142,500
Book value:
Pain-in capital in excess of par
300,000
Retained earnings 1/1/X1
300,000
Book value
600,000
480,000
120,000
Excess
$ 112,500
$ 90,000
$ 22,500
Equipment
$ 50,000
10 yr
5,000
Goodwill
62,500
Total
$ 112,500
On January 2, 20X9, Company P issued $120,000 of 8% bonds at face value to help finance the purchase of 25% of the outstanding common stock of
Alpha Company for $200,000. No excess resulted from this transaction. Alpha earned $100,000 net income during 20X9 and paid $20,000 in
dividends.
The only change in plant assets during 20X9 was that Company S sold a machine for $10,000. The machine had a cost of $60,000 and accumulated
depreciation of $40,000. Depreciation expense recorded during 20X9 was as follows:
Company P
Company S
Alpha Company
Buildings
$15,000
$ 8,000
$12,000
Machinery
35,000
20,000
4,000
The 20X9 consolidated income was $180,000, of which the NCI was $10,000. Company P paid dividends of $12,000, and Company S paid dividends
of $10,000.
Consolidated inventory was $287,000 in 20X8 and $223,000 in 20X9; consolidated current liabilities were $246,000 in 20X8 and $216,700 in 20X9.
Cash increased by $203,700.
Required:
Using the indirect method and the information provided, prepare the 20X9 consolidated statement of cash flows for Company P. and its subsidiary,
Company S.
36. The following comparative consolidated trial balances apply to Perella Company and its subsidiary
Sherwood Company (80% control):
12/31/X4
12/31/X5
Cash
$ 275,000
$ 300,800
Trading securities portfolio (at market)
160,000
120,000
Accounts receivable
350,000
379,600
Inventories
316,000
268,000
Land
95,000
180,000
Property, plant and equipment
500,000
520,000
Accumulated depreciation
(135,000)
(152,000)
Goodwill
60,000
60,000
Current liabilities
(190,000)
(154,500)
Long-term notes payable
(450,000)
(390,000)
NCI
(161,000)
(188,780)
Paid-in Capital
(660,000)
(670,000)
Retained Earnings
(195,000)
(288,120)
Treasury Stock
35,000
15,000
$ ---
$ ---
The following is additional information for 20X5:
a)
No trading securities were sold nor were any investments added to the portfolio.
b)
Land was acquired by issuing a $40,000 note and giving cash for the balance.
c)
Equipment (cost $50,000; accumulated depreciation $40,000) was sold for $3,000
d)
Dividends declared and paid: Perella 50,000; Sherwood $40,000.
e)
Consolidated net income amounted to $178,900.
Required:
Prepare the consolidated statement of cash flows for the year ended December 31, 20X5, for Perella and its subsidiary.
37. The following comparative consolidated trial balances apply to Pembina Company and its subsidiary
Scranton Company (80% interest) for the fiscal year ended 12/31/X5:
12/31/X4
12/31/X5
Cash
$ 145,000
$ 419,000
Trading Securities Portfolio (at market)
160,000
175,000
Accounts Receivable
440,000
384,000
Inventories
525,000
542,000
Land
130,000
105,000
Plant, Property, and Equipment
660,000
680,000
Accumulated Depreciation
(145,000)
(188,000)
Goodwill
60,000
60,000
Current Liabilities
(474,000)
(502,000)
Long-Term Notes Payable
(450,000)
(450,000)
Deferred Taxes
(35,000)
(33,000)
NCI
(161,000)
(199,800)
Paid-In Capital
(660,000)
(660,000)
Retained Earnings
(195,000)
(332,200)
$ ---
$ ---
The following events occurred during the year:
a)
No trading securities were sold nor were any investments added to the portfolio.
b)
Sold land, book value $25,000, for $80,000.
c)
Purchased equipment with a cost of $50,000 to replace equipment, book value $13,000, that was sold for $10,000.
d)
Dividends declared and paid: Pembina $50,000; Scranton $40,000.
e)
Consolidated net income: $234,000.
Required:
Prepare the consolidated statement of cash flows for the year ended December 31, 20X5, for Pembina and its subsidiary.
38. Plaza Company acquires an 80% interest in Scenic Company for $200,000 cash on January 1, 20X1. On that
date, Scenic’s equipment (remaining economic life of 5 years) is undervalued by $25,000; any excess of cost
over book value is attributed to goodwill. Scenic’s balance sheet on the date of the purchase is as follows:
Assets
Liabilities and Equity
Cash
$ 30,000
Current liabilities
$ 30,000
Inventory
30,000
Long-term liabilities
40,000
Property, (net)
210,000
Common Stock (no par)
150,000
Retained Earnings
50,000
Total assets
$270,000
Total Liabilities & Equity
$270,000
The controlling interest in consolidated net income for 20X1 is $97,900; the noncontrolling interest is $6,000. On December 31, 20X1, Plaza
acquired a 15% interest in Adams, Inc. and, in an unrelated transaction, issued additional common stock. Dividends declared and paid during the
year by Plaza and Scenic were $30,000 and $15,000, respectively. There are no purchases or sales of property, plant, or equipment during the year.
Based on the following information, prepare a statement of cash flows using the indirect method for Plaza Company and its subsidiary for the year
ended December 31, 20X1.
Plaza
1/1/X1
Consolidated
12/31/X1
Cash
100,000
87,100
Inventory
50,000
84,300
Property (net)
600,000
772,000
Investment in Adams
57,500
Goodwill
25,000
Current Liabilities
(80,000)
(115,000)
Long-term Liabilities
(100,000)
(130,000)
NCI
(53,000)
Paid-in Capital
(400,000)
(490,000)
Retained Earnings
(170,000)
(237,900)
---
---
Required:
Prepare the consolidated statement of cash flows for the year ended December 31, 20X1, for Plaza and its subsidiary.
39. Plateau Company acquires an 80% interest in Seagull Company for $200,000 cash on January 1, 20X1. On
that date, Seagull’s equipment is undervalued by $25,000; any excess of cost over book value is attributed to
goodwill. Seagull’s balance sheet on the date of the purchase is as follows:
Assets
Liabilities and
Equity
Cash
$ 30,000
Current liabilities
$ 30,000
Inventory
30,000
Long-term liabilities
40,000
Property, (net)
210,000
Common Stock (no par)
150,000
Retained Earnings
50,000
Total assets
$270,000
Total liabilities & equity
$270,000
The controlling interest in consolidated net income for 20X1 is $97,900; the noncontrolling interest is $6,000. During the year Plateau retired long-
term debt by issuing common stock. Dividends declared and paid during the year by Plateau and Seagull were $30,000 and $15,000, respectively.
During the year Seagull sold equipment with a book value of $30,000 for a gain of $3,000; there were no purchases of property, plant, or equipment
during the year.
Plateau
1/1/X1
Consolidated
12/31/X1
Cash
100,000
87,100
Inventory
50,000
73,000
Property (net)
600,000
772,000
Goodwill
25,000
Current Liabilities
(80,000)
(126,200)
Long-term Liabilities
(100,000)
(130,000)
NCI
(53,000
Paid-in Capital
(400,000)
(410,000)
Retained Earnings
(170,000)
(237,900)
---
---
Required:
Prepare a statement of cash flows using the indirect method for Plateau Company and its subsidiary for the year ended December 31, 20X1.
