Chapter 5,6,7 True or False 1. In a business combination that establishes a parent company-subsidiary affiliation, the subsidiary prepares journal entries on the date of the combination to increase the carrying amounts of its net assets to current fair values.
Answer: False 2.Only the balance sheet is consolidated on the date of a business combination of a parent company and subsidiary. Answer: True 3.A controlling financial interest traditionally has been defined as the investor corporation's ownership of more than 50% of the investee corporation's outstanding common stock. Answer: True 4.All out-of-pocket costs of a business combination reduce additional paid-in capital of the combinor. combinor. Answer: False 5.Consolidated financial statements emphasize the legal form of the parent company-subsidiary relationship. Answer: False 6. A paren parentt company company's 's contro controll of a subsidi subsidiary ary may be achieved both directly and indirectly, indirectly, the latter through another subsidiary of the parent. Answer: True 7.A debit to Goodwill Subsidiary Subsidiary in a working paper elimination (in journal entry format) for a parent company and its wholly owned subsidiary indicates that the current fair values of the subsidiary's identifiable net assets exceeded their carrying amounts on the date of the business combination.
8.Goodwill recognized in a business combination of a parent company and a partially owned subsidiary is attributable to the subsidiary. Answer: False 9.In a business combination resulting in a parent company-subsidiary affiliation, the parent company's Investment in Subsidiary Common Stock ledger account is not closed, as it is in other types of business combinations. Answer: True 10.Under the parent company concept of consolidated financial statements, the minority interest in net assets of a subsidiary is displayed as a liability. Answer: True 11.All out-of-pocket costs of a business bu siness combination are recognized as expenses by the combinor. Answer: False 12.Contingent consideration that is determinable on the date of a business combination is part p art of the total cost of the combinor's investment in the combinee. Answer: True 13.In a statutory merger, all except one of the constituent companies are liquidated. Answer: True 14.A part of the cost of a combinee is allocated to identifiable tangible and intangible assets that resulted from research and development activities of the combinee. Answer: True 15.The issuer of common stock in a business combination always is the combinor. Answer: False 16.Goodwill acquired in a business combination is amortized over its economic life.
Answer: False 1
Answer: False 17.Under the equity method of accounting, a parent company credits the Intercompany Investment Income ledger account for dividends declared by the subsidiary. subsidiary. Answer: False 18. Under Under the the equi equity ty met metho hod d of accounting, a parent company's journal entry to record a dividend declared by the subsidiary includes a debit to the Retained Earnings of Subsidiary ledger account and a credit to the Dividends Revenue ledger account. Answer: False 19. Propone Proponents nts of the the equit equity y metho method d of accounting assert that dividends declared by a subsidiary constitute revenue to the parent company. company. Answer: False
20. A whol wholly ly owned owned subsid subsidiar iary y credits credits the the Dividends Payable ledger account when its board of directors declares a dividend. Answer: False 22. Under Under the the equity equity metho method d of accoun accountin ting, g, the the parent company debits the Intercompany Investment Income ledger account for the depreciation and amortization of differences between the current fair values and carrying amounts of a subsidiary's identifiable net assets on the date of the business combination. Answer: True 23. The depr depreci eciati ation on and amortiz amortizati ation on of differences between current fair values and carrying amounts of a subsidiary's identifiable net assets is included in consolidated financial statements by means of a working paper elimination. Answer: True
Multiple Choice Questions
1. In a business business combination combination resultin resulting g in a parent company-sub company-subsidia sidiary ry relationshi relationship, p, differences between current fair values and carrying amounts of the subsidiary's identifiable net assets on the date of the combination are: A) Disr Disreg egar arde ded d B) Entered Entered in the the accounting accounting records records of the subsidi subsidiary ary C) Accounted Accounted for in appropriat appropriately ely titled titled ledger accounts accounts in the parent parent company's company's accounting records D) Provided Provided in a working working paper paper elimination elimination E) Account Accounted ed for for in in some some other other manner manner Answer: D 2. Consolidated Consolidated financi financial al statements statements are are prepared prepared when a parentparent-subsi subsidiary diary relationship exists, in recognition of the accounting principle or concept of: A) Mate Materi rial alit ity y B) Entity C) Reli Reliab abil ilit ity y D) Goin Going g con conce cern rn Answer: B
3. Pangborn Pangborn Corporation Corporation paid paid $840,000 (includ (including ing direct direct out-of-poc out-of-pocket ket costs) costs) for 2
70% of the outstanding common stock of Siddon Company on September 30, 2006, the end of Pangborn's fiscal year. Included in the working paper elimination (in journal entry format) for Pangborn Corporation and subsidiary on that date were the following: Goodwill Pangborn [$840,000 – ($1,100,000 x 0.70)] Mino Minori rity ty Int Inter eres estt in Net Net Asse Assets ts of of Subs Subsid idia iary ry ($1 ($1,1 ,100 00,0 ,000 00 x 0.3 0.30) 0)
$ 70,000 dr 330, 330,00 000 0 cr
If Pangborn had inferred a current fair value for 100% of Siddon's total net n et assets from the $840,000 cost, Goodwill and Minority Interest in Net Assets Assets of Subsidiary in the September 30, 2006, working paper elimination would have been, respectively: A) $100, $100,00 000 0 and $330, $330,00 000 0 B) $70, $70,000 000 and $360 $360,00 ,000 0 C) $49, $49,000 000 and $231 $231,00 ,000 0 D) $100, $100,00 000 0 and $360, $360,00 000 0 E) Some Some oth other er amo amoun unts ts Answer: D Rationale: [($840,000 ÷ 0.70) – $1,100,000 = $100,000]; ($1,200,000 x 0.30 = $360,000) 4. On March March 31, 2006, 2006, Preston Preston Corporati Corporation on acquired acquired for cash at $25 $25 a share share all 300,000 shares of the outstanding common stock of Sexton Company. Out-of pocket costs of the business combination may be disregarded. Sexton's balance sheet on March 31, 2006, had net assets of $6,000,000. Additionally, the current fair value of Preston's plant assets on March 31, 2006, was $800,000 in excess of carrying amount. The amount to be shown for the balance sheet caption "Goodwill" in the March 31, 2006, consolidated balance sheet of Preston Corporation and its wholly owned subsidiary, subsidiary, Sexton Company, is: A ) $0 B) $700,0 0,000 C) $800,0 0,000 D) $1,5 $1,500 00,0 ,000 00 E) Some Some othe otherr amo amoun untt Answer: B Rationale: [(300,000 x $25) – ($6,000,000 + $800,000) = $700,000]
5. Consolidated Consolidated financial financial statem statements ents are are not appropriate appropriate if: A) The subsidiary subsidiary is in in the process process of bankruptcy bankruptcy reorganizat reorganization ion B) There is a minori minority ty interest interest in the the subsidiary subsidiary C) The subsidiary subsidiary has has a substantia substantiall amount of of long-term long-term debt payable payable to outsiders D) The parent company company makes makes substantial substantial purchases purchases of materi material al from the subsidiary Answer: A
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6. On March March 1, 2006, 2006, Pride Corporation Corporation paid paid $400,000 $400,000 for all the the outstanding outstanding common stock of Supra Company in a business combination, for which out-of pocket costs may be disregarded. The carrying amounts of Supra's identifiable assets and liabilities on March 1, 2006, follow: Cash Inventories Plant assets (net) Liabilities
$ 40,000 120,000 240,000 (90,000)
On March 1, 2006, the inventories of Supra had a current fair value of $95,000, and the plant assets (net) had a current fair value of $280,000. The amount recognized as goodwill as a result of the business combination is: A ) $0 B) $25,000 C) $75,000 D) $90,000 000 E) Some Some othe otherr amo amoun untt Answer: C Rationale: [$400,000 – ($310,000 – $25,000 + $40,000) = $75,000] 7. On October October 31, 2006, Portugal Portugal Corpora Corporation tion acquired acquired 80% 80% of the the outstandin outstanding g common stock of Spain Company Compan y in a business combination. Total cost of the investment, including direct out-of-pocket costs, was $480,000. The working paper elimination (in journal entry format, explanation omitted) for Portugal Corporation and Subsidiary on October 31, 2006, was as follows: Common Stock Spain Additional Paid-in Capital Spain Retained Earnings Spain Plant Assets (net) Spain Goodwill Portugal [$480,000 – ($450,000 x 0.80)] Investment in Spain Company Common Stock Portugal Portugal 480,000 Minority Interest in Net Assets of Subsidiary ($450,000 x 0.20)
100,000 120,000 180,000 50,000 120,000
90,000
If minority interest in net assets of subsidiary had been reflected at carrying amount, rather than at current fair value, of the subsidiary's identifiable net assets, the credit to Minority Interest in Net Assets of Subsidiary in the foregoing elimination would have been: A) $90,000 000 B) $120,0 0,000 C) $60,000 D) Some Some oth other er amoun amountt
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Answer: D Rationale: ($400,000 x 0.20 = $80,000)
8. On October October 31, 2006, Portugal Portugal Corpora Corporation tion acquired acquired 80% 80% of the the outstandin outstanding g common stock of Spain Company Compan y in a business combination. Total cost of the investment, including direct out-of-pocket costs, was $480,000. The working paper elimination (in journal entry format, explanation omitted) for Portugal Corporation and Subsidiary on October 31, 2006, was as follows: Common Stock Spain Additional Paid-in Capital Spain Retained Earnings Spain Plant Assets (net) Spain Goodwill Portugal [$480,000 – ($450,000 x 0.80)] Investment in Spain Company Common Stock Portugal Portugal 480,000 Minority Interest in Net Assets of Subsidiary ($450,000 x 0.20)
100,000 120,000 180,000 50,000 120,000
90,000
If goodwill had been computed based on the implied current fair value of the subsidiary's total net assets, the debit to Goodwill Portugal Portugal in the foregoing working paper elimination would have been: A) $120,0 0,000 B) $150,0 0,000 C) $180,0 0,000 D) Some Some oth other er amoun amountt Answer: B Rationale: [($480,000 ÷ 0.80) – $450,000 = $150,000] 9. Which of the the following following is the best theoreti theoretical cal justificat justification ion for consolida consolidated ted financial statements? A) In form the constit constituent uent companies companies are one economic economic entity; entity; in substance substance they they are separate B) In form the the constituen constituentt companies companies are separate separate;; in substance substance they are are one economic entity C) In form and and substance substance the constit constituent uent companies companies are are one economic economic entity D) In form and and substance substance the constit constituent uent companies companies are are separate separate Answer: B 10. In a business business combination combination resultin resulting g in a parent company-sub company-subsidia sidiary ry relationshi relationship, p, the parent company's Investment in Subsidiary Common Stock ledger account balance is: A) Allocated Allocated to individual individual asset asset and liabilit liability y ledger accounts accounts in a parent parent company journal entry
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B) Eliminated Eliminated with with a working working paper elimin elimination ation for for the working working paper paper for consolidated balance sheet C) Displayed Displayed among noncurr noncurrent ent assets assets in the the consolidated consolidated balance balance sheet sheet D) Used as a basis basis for adjusting adjusting the subsidia subsidiary's ry's asset asset and liability liability account account balances in the subsidiary's ledger to current fair values Answer: B
11. Working paper eliminations eliminations are entered entered in: A) Both the parent parent company's company's and the subsidiar subsidiary's y's accounting accounting records records B) Neither Neither the parent parent company's company's nor the the subsidiary' subsidiary'ss accounting accounting records records C) The parent parent company's company's accounti accounting ng records records only D) The subsid subsidiary' iary'ss accounting accounting records records only only Answer: B 12. On the date of of a business business combinati combination on resulting resulting in a parentparent-subsi subsidiary diary relationship, the differences between current fair values and carrying amounts of the subsidiary's identifiable net assets are: A) Included Included in a working working paper paper elimination elimination B) Recognized Recognized in the applicab applicable le asset asset and liability liability ledger ledger accounts accounts of the the subsidiary C) Recognized Recognized in the applicable applicable asset asset and liability liability ledger ledger accounts of the the parent company D) Account Accounted ed for for in some some other other manne manner r Answer: A 13. Consolidated Consolidated financi financial al statements statements are are intended intended primarily primarily for for the use use of: A) Stockh Stockholde olders rs of the the parent parent company company B) Taxin axing g author authorit itie iess C) Managem Management ent of of the the parent parent compa company ny D) Credit Creditors ors of of the pare parent nt company company Answer: A 14. On November November 30, 2006, Pegler Pegler Corporat Corporation ion paid $500,000 cash and issued issued 100,000 shares of $1 par common stock with a current fair value of $10 a share for all 50,000 outstanding shares of $5 par common stock (carrying amount $20 a share) of Stadler Company Compan y, which became bec ame a subsidiary of Pegler. Also on November 30, 2006, Pegler paid $50,000 for finder's, accounting, and legal fees related to the business combination and $80,000 for costs associated with the SEC registration statement for the common stock issued in the combination. The net result of Pegler's journal entries to record the combination is to: A) Debit Investm Investment ent in Stadler Stadler Company Company Common Common stock for for $1,000,000 $1,000,000 B) Credit Credit Paid-In Paid-In Capital Capital in Excess of Par for $900,000 $900,000 C) Debit Expenses Expenses of Business Business Combinat Combination ion for for $130,000 $130,000 D) Credit Credit Cash Cash for for $630, $630,000 000
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Answer: D 15. Minority Minority interest interest in net assets assets of subsidi subsidiary ary is displayed displayed in the the consolidated consolidated balance sheet as: A) A part part of consolidated consolidated stockholder stockholders' s' equity under under the parent company concept concept of consolidated financial statements B) A liabili liability ty under the parent parent company company concept of consolidat consolidated ed financial financial statements C) An offset offset to investme investment nt in subsidiary subsidiary common stock stock under the parent parent company concept of consolidated financial statements D) An item between between liabiliti liabilities es and stockholder stockholders' s' equity under under the economic economic unit concept of consolidated financial statements Answer: B 16. Before Before the computation computation of goodwil goodwill, l, the debits debits in the the date-of-busi date-of-businessnesscombination working paper elimination for the consolidated balance sheet of Promo Corporation and its 80%-owned subsidiary subtotaled $640,000, compared with a $540,000 credit to Investment in Sindow Company Common Stock Promo. The working paper elimination should be completed with: A) An allocation allocation of the $100,000 $100,000 bargain-p bargain-purchas urchasee excess to reduce reduce the amounts amounts initially assigned to specified assets of Sindow. B) A $100,000 $100,000 credit credit to Minority Minority Interest Interest in Net Assets Assets of Subsidiary Subsidiary C) A $28 $28,000 ,000 debit debit to Goodwi Goodwill ll Promo and a $128,000 credit to Minority Promo Interest in Net Assets of Subsidiary D) A $35 $35,000 ,000 debit debit to Goodw Goodwill ill Promo and a $135,000 credit to Minority Promo Interest in Net Assets of Subsidiary Answer: C 17.Two methods for arranging business combinations that begin with similar transactions by the combinor are: A) Statutory Statutory merger merger and statutor statutory y consolidat consolidation ion B) Statutory Statutory merger merger and acquisit acquisition ion of common stock C) Acquisition Acquisition of of common common stock stock and acquisiti acquisition on of net assets assets D) Statutory Statutory consolidat consolidation ion and acquisit acquisition ion of common common stock stock Answer: B 18. Direct out-of-pocket out-of-pocket costs of of a business business combinatio combination n that are part part of the the cost of the combinee do not include: A) Legal fees fees for registrati registration on of securities securities issued issued by the combinor combinor B) Find Finder er's 's fee fee C) Legal fees for the contrac contractt of combination combination D) CPA CPA firm firm fees for pre-combina pre-combination tion investigat investigation ion of the combinee Answer: A 20. On October 1, 2006, Poon Corporation acquired for cash all the outstanding common stock of Soong Company, which was not liquidated. Consolidated net income for the fiscal year ended December 31, 2006, includes net income of: A) Poon for for three three months months and Soong for for three three months months 7
B) Poon for for twelve twelve months months and Soong Soong for three months months C) Poon for for twelve twelve months months and Soong Soong for twelve months months D) Poon for twelve twelve months, months, but no no income from from Soong Soong until it declares declares a cash dividend Answer: B 22. The Retained Retained Earnings Earnings of Subsidiary Subsidiary ledger account is: A) An account of the parent parent company company that at all all times times in any business business combination shows the amount of the subsidiary's retained earnings B) An accou account nt of of the the subs subsidi idiary ary C) An account that appears appears only in in the working working paper for for consolidat consolidated ed financial financial statements D) None None of the the fore forego goin ing g Answer: D 23. Under the the equity method method of accounti accounting, ng, depreciati depreciation on and amortizat amortization ion of the datedateof-business-combination differences between current fair values and carrying amounts of a subsidiary's identifiable net assets is debited in a journal entry to the: A) Subsidiary's Subsidiary's expense expense ledger accounts accounts B) Parent Parent company company's 's expens expensee ledger ledger accounts accounts C) Subsidiary's Subsidiary's Retained Retained Earning Earningss ledger ledger account D) Parent company' company'ss Intercompany Intercompany Investm Investment ent Income Income ledger account Answer: D 24. To recognize recognize the impairment impairment of goodwill goodwill arisin arising g from a business business combination combination involving a partially owned subsidiary: A) The subsidiary subsidiary debits debits the Impairm Impairment ent Loss ledger ledger account account and credits credits the Goodwill account in its accounting records. B) The parent parent company debits the the Impairment Impairment Loss Loss ledger ledger account and credits credits the Goodwill account in its accounting records. C) The parent parent company debits the the Intercompany Intercompany Investm Investment ent Income Income ledger ledger account and credits the Investment in Subsidiary Common Stock account in its accounting records. D) The parent parent company prepares prepares some other other journal journal entry. entry. Answer: D Rationale: (Debit Impairment Loss, credit the Investment account) 25. Skeene Company Company,, the 70%-owned 70%-owned subsidia subsidiary ry of Probert Probert Corporati Corporation, on, had a net income of $80,000 and declared dividends of $30,000 during the fiscal year ended February 28, 2006. Fiscal Year 2006 depreciation and amortization of differences between current fair values and carrying amounts of Skeene's identifiable net assets on the date of the business b usiness combination was $15,000; and Fiscal Year Year 2006 impairment of goodwill recognized in the Probert-Skeene business combination was $500. The minority interest in net income inco me of Skeene for Fiscal Year Year 2006 was: A) $24,000 000 8
B) C) D) E)
$19,500 $19,350 $9,000 Some Some othe otherr amo amoun untt
Answer: B Rationale: [($80,000 – $15,000) x .30 = $19,500] 26. Which of the the following following does not affect affect the computati computation on of the minority minority interest interest in the net assets of a partially owned subsidiary? A) Impairment Impairment of goodwill goodwill recogniz recognized ed in the business business combination combination B) Divide Dividends nds decla declared red by the the subsi subsidia diary ry C) Depreciatio Depreciation n and amortization amortization of differ differences ences between between current current fair values values and carrying amounts of the subsidiary's identifiable net assets on the da te of the business combination D) None None of the the fore forego goin ing g Answer: A 27. Plover Corporat Corporation ion accounts accounts for its 80%-owne 80%-owned d purchased subsid subsidiary iary,, Swallow Company, Company, under the equity equ ity method of accounting. For the fiscal year ended March 31, 2006, Swallow had a net income of $100,000, but declared no dividends. Depreciation and amortization of differences differences between current fair fair values and carrying amounts of Swallow's identifiable net assets for the year ended March 31, 2006, totaled totaled $40,000. Plover's closing entry for the year year ended March 31, 2006, includes a: A) Credit Credit of $48,000 $48,000 to Interco Intercompany mpany Investm Investment ent Income Income B) Credit Credit of $60,000 $60,000 to Retained Retained Earnin Earnings gs of Subsidiary Subsidiary C) Debit of $60,000 $60,000 to to Intercompa Intercompany ny Investmen Investmentt Income Income D) Credit Credit of $48,000 $48,000 to Retaine Retained d Earnings Earnings of Subsid Subsidiary iary Answer: D Rationale: [($100,000 – $40,000) x 0.80 = $48,000] 29. The minority minority interes interestt in net assets assets of a partia partially lly owned owned subsidiary subsidiary is: is: A) Decreased Decreased by the minority's minority's share share of subsidiary subsidiary dividends dividends and and increased increased by the minority's share of subsidiary adjusted net income B) Increased Increased by the minority minority's 's share of subsidi subsidiary ary dividends dividends and decreased decreased by the minority's share of subsidiary adjusted net income C) Decreased Decreased by the minority's minority's share share of both subsidi subsidiary ary dividends dividends and subsidiary subsidiary adjusted net income D) Increased Increased by the minority's minority's share share of both subsidiary subsidiary dividends dividends and subsidiary subsidiary adjusted net income Answer: A 30. If a wholly wholly owned subsidi subsidiary's ary's net income income was $150,000, $150,000, the subsidi subsidiary ary declared declared dividends of $80,000, and the depreciation and amortization of current fair value excess was $20,000, the parent company's intercompany investment income under the equity method of accounting is: 9
A) B) C) D) E)
$60,000 000 $70,000 $100,0 0,000 $130,0 0,000 Some Some othe otherr amo amoun untt
Answer: D Rationale: ($150,000 – $20,000 = $130,000)
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