Ch09 Beams10e TB

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Chapter 9 Test Bank INDIRECT AND MUTUAL HOLDINGS

Multiple Choice Questions

LO1 1.

Pallet Corporation owns 80% of Adelt Corporation and Adelt owns 60% of Bajo Inc. Which of the following is correct? a. Bajo should not be consolidated because minority interests hold 52%. b. Bajo should be consolidated because the 60% of Bajo stock is held in the affiliate structure. c. Pallet has 8% indirect ownership of Bajo. d. Pallet has 80% indirect ownership of Bajo.

LO1 2.

Page Corporation acquired a 60% interest in Ace Corporation at a price $40,000 in excess of book value and fair value on January 1, 2005. On the same date, Ace acquired a 70% interest in Bader Corporation at a price $30,000 in excess of book value and fair value. The excess purchase cost paid by Page and Ace was attributed to goodwill. Separate incomes (excluding investment income) for the three affiliates for 2005 are as follows: Page, $500,000, Ace, $300,000, and Bader, $400,000. Page’s net income for 2005 is a. b. c. d.

$808,000. $848,000. $920,000. $960,000.

Use the following information in answering questions 3, 4, and 5. Paint Corporation owns 82% of Achille corporation and Achille Corporation owns 80% of Badrack Corporation. For the current year, the separate incomes of Paint, Achille, and Badrack are $120,000, $100,000, and $50,000, respectively.

©2009 Pearson Education, Inc. publishing as Prentice Hall 9-1


LO1 3.

Noncontrolling interest expense from Badrack is a. b. c. d.

LO1 4.

Noncontrolling interest from Achille is a. b. c. d.

LO1 5.

$18,000. $25,200. $36,200. $72,000.

Consolidated net income for Paint Corporation and Subsidiaries can be determined by the equation: a. b. c. d.

LO1 6.

$9,000. $10,000. $20,000. $40,000.

$234,000. $244,800. $260,000. $270,000.

Pabari Corporation owns an 80% interest in Alders Corporation and Alders owns a 60% interest in Babao Corporation. Both interests were acquired at book value equal to fair value. During 2005, Alders sells land to Babao at a profit of $12,000. Babao still holds the land at December 31, 2005. Profits and (losses) of the three companies for 2005 are: Pabari Corporation Alders Corporation Babao Corporation

$180,000 72,000 (30,000)

Consolidated net income and noncontrolling interest (loss), respectively, for 2005 are a. $211,200 and ($1,200). b. $211,200 and ($3,600). c. $213,600 and ($1,200). d. $213,600 and ($3,600).



LO1 7.

Pablo Corporation acquired 60% of Abagia Corporation on January 1, 2004, at a cost of $20,000 in excess of book value. Also, on July 1, 2004, Pablo acquired 60% of Babin Corporation at book value. On January 1, 2005, Abagia acquired a 20% interest in Babin at a cost of $10,000 in excess of book value. The excess purchase costs paid by Pablo and Abagia were attributed to goodwill. On July 1, 2005, Pablo sold land with a book value of $20,000 to Abagia for $40,000. The $20,000 unrealized gain is included in Pablo’s separate income. Separate incomes for the affiliated companies (excluding investment income) for 2005 are: Pablo Abagia Babin

$250,000 70,000 100,000

Consolidated net income for the three affiliates is a. b. c. d.

$304,000. $324,000. $344,000. $364,000.

Use the following information for Questions 8, and 9. Paisley Corporation owns 90% of Ackers Company. Akers Company owns 60% of Baglin. Paisley’s separate income for the current year is $540,000. Akers’s separate income is $240,000. Baglin’s separate income is $150,000. LO1 8. The formula for the consolidated noncontrolling interest is calculated as a. 10% X $240,000. b. (10% X $240,000) + (6% X $150,000). c. (10% X $240,000) + (40% X $150,000). d. (10% X $240,000) + (46% X $150,000). LO1 9.

The formula for consolidated net income is calculated as a. b. c. d.

$930,000 – ($240,000 X 10%) $930,000 – ($240,000 X 10%) – ($150,000 X 40%) $930,000 – ($240,000 X 10%) – ($150,000 X 46%) $930,000 – ($240,000 X 10%) – ($150,000 X 40%) – ($150,000 X 10% X 50%)



LO1 10.

Paglia Corporation owns 80% of Aburn Corporation and has separate income of $200,000 for 2005. Aburn Corporation has separate income of $100,000 and owns 70% of the outstanding stock of Badley Corporation. Badley Corporation has separate income of $80,000. The correct amount of consolidated net income is a. b. c. d.

$324,800. $328,800. $344,800. $344,800.

Use the following information for Questions 11, 12, and 13. Pace Corporation owns 70% of Abaza Corporation and 60% of Babon Corporation. Abaza Corporation owns 20% of Babon Corporation. Pace’s investment in Abaza was consummated in one transaction at a purchase price $20,000 in excess of the book value. Pace’s purchase of Babon was made in one transaction at a price $30,000 above book value. Abaza’s investment in Babon was completed in one transaction at a purchase price $10,000 in excess of the book value. The purchase price differential for all three investments was attributable to goodwill. Pace’s separate income for the current year is $100,000. Abaza’s separate income is $190,000, which includes a $10,000 unrealized loss on the sale of land to Pace. Babon’s separate income is $150,000. LO1 11. The amount of consolidated net income for Pace Corporation and Abaza for the current year is a. b. c. d. LO1 12.

The amount of noncontrolling interest expense for the current year is a. b. c. d.

LO1 13.

$341,000. $348,400. $351,000. $355,000.

$69,000. $85,000. $95,000. $99,000.

The amount of goodwill in Pace’s consolidated balance sheet is a. b. c. d.

$50,000. $52,000. $58,000. $60,000. ©2009 Pearson Education, Inc. publishing as Prentice Hall 9-4


Use the following information for Questions 14 through 18. Pahm Corporation owns 80% of the outstanding voting common stock of Abussi Corporation, which was purchased for $60,000 over Abussi’s book value. The excess purchase price was attributable to goodwill. Abussi Corporation owns 60% of the outstanding common stock of Badock Corporation, which was purchased at book value. The separate incomes of Pahm, Abussi, and Badock for the year are $200,000, $240,000, and $260,000, respectively. LO1 14. Consolidated net income for the current year is a. b. c. d. LO1 15.

The amount of income for the current year assigned to the minority shareholders of Badock Corporation is a. b. c. d.

LO1 16.

$48,000. $53,200. $74,000. $79,200.

The amount of income assigned to the noncontrolling interest in the current year’s consolidated income statement is a. b. c. d.

LO1 18.

$100,000. $104,000. $120,000. $140,000.

The amount of income for the current year assigned to the minority shareholders of Abussi Corporation is a. b. c. d.

LO1 17.

$504,800. $516,200. $545,200. $557,200.

$142,800. $154,800. $183,200. $195,200.

The net income recorded on the books of Pahm Corporation for the current year is a. b. c. d.

$504,800. $516,800. $545,200. $557,200.



Use the following information for Questions 19 and 20. Paiva Corporation owns 80% of Ackroyd Corporation’s outstanding common stock and Ackroyd owns 80% of the outstanding common stock of Bailey Corporation. Bailey Corporation owns 10% of the outstanding common stock of Ackroyd Corporation. The separate incomes for the three affiliated companies for the year ended December 31, 2005 (excluding investment income) are as follows: Paiva Corporation, $100,000, Ackroyd Corporation, $50,000, and Bailey Corporation, $30,000.

Notations for P = Income of A = Income of B = Income of LO2 19.

The equation, in a set of simultaneous equations, that computes Paiva Corporation is a. b. c. d.

LO2 20.

question 19 are: Paiva on a consolidated basis Ackroyd on a consolidated basis Bailey on a consolidated basis

P P P P

= = = =

$50,000 + .8B. $30,000 + .2A. $100,000 + .2A. $100,000 + .8A.

Ackroyd’s noncontrolling income for 2005 is a. b. c. d.

interest

in

the

total

consolidated

$ 7,609. $ 8,044. $15,652. $23,696.



LO1 Exercise 1 Paice Corporation owns 80% of the voting common stock of Accardi Corporation and 60% of the voting common stock of Badger Corporation. Accardi owns 20% of the voting common stock of Badger. There are no cost-book differentials to consider. The separate incomes of these affiliated companies for 2005 are: Paice Accardi Badger

$300,000 160,000 120,000

Required: Calculate consolidated Subsidiaries for 2005.

net

income

for

Paice

Corporation


and


LO1 Exercise 2 Pacini Corporation owns an 80% interest in Abdoo Corporation, acquired on January 1, 2004 for $700,000 when Abdoo’s stockholders’ equity consisted of $600,000 of Capital Stock and $200,000 of Retained Earnings. Abdoo Corporation acquired a 60% interest in Bach Corporation on July 1, 2004 for $180,000 when Bach had Capital Stock of $200,000 and Retained Earnings of $50,000. On January 1, 2005, Abdoo acquired a 70% interest in Cabo Corporation for $270,000 when Cabo had Capital Stock of $250,000 and Retained Earnings of $100,000. No change in outstanding stock of any of the affiliated companies has occurred since the investments were made. All cost-book differentials are goodwill. The stockholders’ equity section of the separate balance sheets of Abdoo, Bach, and Cabo at December 31, 2005 are as follows:

Capital Stock Retained Earnings Total stockholders’ equity

$ $

Abdoo 600,000 280,000 880,000

$ $

Bach 200,000 140,000 340,000

$ $

Cabo 250,000 130,000 380,000

Required: 1. Compute the amount at which goodwill should be shown in the consolidated balance sheet of Pacini Corporation and Subsidiaries at December 31, 2005. 2. Pacini and Abdoo have applied Determine the balances of the December 31, 2005.

the equity method correctly. three investment accounts at



LO1 Exercise 3 Paik Corporation owns 80% of Acdol Corporation and 60% of Corporation. Acdol Corporation owns 10% of Ben Corporation. subsidiary investments were acquired at book value equal to value. Separate incomes (excluding investment income) of affiliated companies for 2005 are: Paik:

Ben All fair the

$600,000 which includes $60,000 unrealized losses on inventory items sold to Ben

Acdol: $360,000 Ben:

$340,000 which includes $100,000 unrealized profit on land sold to Acdol

Required: Determine consolidated net income and noncontrolling interest expense for Paik Corporation and Subsidiaries for 2005.

LO1 Exercise 4 Packer Corporation owns 100% of Abel Corporation, Abel Corporation owns 95% of Bacon Corporation and Bacon Corporation owns 80% of Cab Corporation. The separate incomes of Packer, Abel, Bacon, and Cab are $300,000, $100,000, $200,000, and $300,000, respectively. All of the investments were made at times when the investee’s book values were equal to their fair values. Required: Determine the consolidated net income and noncontrolling interest expense for Packer Corporation and Subsidiaries for the current year.



LO1 Exercise 5

On January 1, 2005 Paki Inc. bought 75% interest in Adam Corporation. At the time of purchase, Adam owned 80% of Baird Company and 10% of Castle Corporation. In all acquisitions the book value equals the fair value. Separate earnings for the three affiliates for 2005 are as follows:

Paki Company Adam Inc Baird Company Castle Company

$

Separate Earnings $400,000 (50,000 ) 100,000 225,000

Dividends $150,000 90,000 35,000 80,000

Required: Compute consolidated net income and noncontrolling interest expense for Paki for 2005.

LO2 Exercise 6 Paco Corporation owns 90% of Aber Corporation, Aber Corporation owns 85% of Back Corporation, and Back Corporation owns 5% of Aber Corporation. The separate incomes (excluding investment income), of Paco, Aber, and Back are $100,000, $40,000, and $55,000, respectively. Required: Calculate revised net incomes for Paco, Aber, and Back by including the correct amount of investment income for each company. Use the conventional method for your solution.



LO2 Exercise 7 Paine Corporation owns 90% of Achan Corporation, Achan Corporation owns 85% of Badge Corporation, and Badge Corporation owns 5% of Achan Corporation. The separate incomes (excluding investment income), of Paine, Achan, and Badge are $400,000, $160,000, and $220,000, respectively. Required: Calculate the consolidated net income for Paine Corporation and its subsidiaries, Achan, and Badge. Use the treasury stock method for your solution. LO2 Exercise 8 Separate earnings and investment percentages for the three affiliates for 2005 are as follows: Separate Earnings Palace Company Acres Inc Bain Corporation

$

450,000 200,000 160,000

Percentage Interest in Acres 80%

Percentage Interest in Bain 70%

10%

Required: Compute consolidated net income for Palace for 2005.



LO2 Exercise 9 Padhy Corporation owns 80% of Abrams Corporation, Abrams Corporation owns 60% of Bacud Corporation, and Bacud Corporation owns 10% of Padhy Corporation. The separate incomes (excluding investment income), of Padhy, Abrams, and Bacud are $300,000, $100,000, and $80,000, respectively. Required: Calculate the consolidated net income for Padhy Corporation and its subsidiaries, Abrams and Bacud. Use the conventional method for your solution.

LO2 Exercise 10 Padua Corporation owns 80% of Able Corporation, Able Corporation owns 60% of Baden Corporation, and Baden Corporation owns 10% of Padua Corporation. The separate incomes (excluding investment income), of Padua, Able, and Baden are $300,000, $100,000, and $80,000, respectively. Required: Calculate the consolidated net income for Padua Corporation and its subsidiaries, Able and Baden. Use the treasury stock method for your solution.



SOLUTIONS Multiple Choice Questions 1

b

2

b

Separate incomes $ Allocate 70% of Bader to Ace Allocate 60% of Ace to Page Page’s net income

$

Page 500,000

348,000 848,000

Noncontrolling interest expense

3

$

Ace 300,000

280,000 ( 348,000 )

280,000 )

( $

232,000

120,000

$

$

Bader 400,000

b

From Badrack: .20 x $50,000 =

$

10,000

$

25,200

Noncontrolling interest expense: From Badrack: .20 x $50,000 =

$

10,000

From Achille: (.18)x[$100,000 + (.80)x($50,000)]

$

25,200

Total minority income

$

36,200

Combined separate incomes Less: Noncontrolling interest expense Consolidated net income

$

4

b

From Achille: (.18)x[$100,000 + (.80)x($50,000)]

5

a

( $

270,000 36,200 ) 234,800



6

d

Noncontrolling interest net loss: $8,400 + ($12,000) = ($3,600)

Separate incomes $ Less: Unrealized profit on land Subtotal $ Allocate Babao’s net loss to Alders ($30,000) x 60% Allocate 80% of Alders income to Pabari Consolidated net income $

Pabari 180,000

$

180,000

( $

12,000 ) 60,000

(

18,000 )

(

33,600 )

33,600 213,600


7

Alders 72,000

$(

Babao 30,000 )

$(

30,000 ) 18,000

$

8,400

$(

(12,000 )

$

Abagia 70,000

$

Babin 100,000

20,000 ) 230,000 $

70,000

$

100,000

20,000

( (

60,000 ) 20,000 )

$

20,000

c

Separate incomes $ Less: Unrealized profit on land ( Separate realized incomes $ Allocate Babin’s income: 60% to Pablo 20% to Abagia Allocate Abagia’s net income $90,000 x 60%

Consolidated net income Noncontrolling interest expense

8

d

9

c

$

Pablo 250,000

60,000

54,000

(

54,000 )

$

36,000

344,000



10

a

Separate incomes Allocate Badley’s income: 70% to Aburn Subtotal Allocate Aburn’s income: 80% to Paglia Consolidated net income

$

Paglia 200,000

$

Aburn 100,000

$

$

$

200,000

$

56,000 156,000

( $

56,000 ) 24,000

124,800 324,800

(

124,800 ) $

24,000


11

$

32,200

Badley 80,000

c

Separate incomes Plus: Unrealized loss on land sale to Pace Separate realized incomes Allocate Babon’s income: 60% to Pace 20% to Abaza Subtotal Allocate Abaza’s net income to Pace $230,000 x 70% Consolidated net income

$

Pace 100,000

$

100,000

$

Abaza 190,000

$

Babon 150,000

$

10,000 200,000

$

150,000

90,000 30,000 230,000

190,000 161,000 $

(

( (

90,000 ) 30,000 ) 30,000

$

30,000

161,000 )

351,000


$

69,000

12

d

From Question 11: $69,000 + 30,000 = $99,000

13

d

14

b

$200,000 + (80%)x[$240,000 + (60%)x(260,000)] = $516,200

15

b

40% x $260,000 = $104,000

16

d

(20% x $240,000) + (20% x $156,000) = $79,200

17

c

$79,200 + $104,000 = $183,200 ©2009 Pearson Education, Inc. publishing as Prentice Hall 9-15


Separate incomes Allocate Badock’s income: 60% to Abussi Subtotal Allocate Abussi’s net income to Pahm $396,000 x 80%

Consolidated net income

$

Pahm 200,000

$

Abussi 240,000

$

Badock 260,000

$

200,000

$

156,000 396,000

( $

156,000 ) 104,000

316,800

(

316,800 )

$

79 ,200

$

104,000

$

516,800


18

b

19

d

20

b

Pahm’s separate net income consolidated net income.

is

the

same

as

the

$

8,044

P = $100,000 + .8A A = $50,000 + .8B B = $30,000 + .1P Computations: A = $50,000 + .8 x ($30,000 + .1A) A = $50,000 + $24,000 + .08S A = $80,435 (rounded) Noncontrolling interest expense Ackroyd: $80,435 x 10% outside interest



LO1 Exercise 1 Paice Corporation and Subsidiaries Income Allocation Schedule For the year 2005

Separate earnings Allocate Badger’s income: 60% to Paice 20% to Accardi Subtotal Allocate Accardi’s income: 80% to Paice Consolidated net income

$

Paice 300,000

$

Accardi 160,000

$ ( ( $

72,000 ) 24,000 ) 24,000

$

24,000

72,000 $

372,000

$

24,000 184,000

(

147,200 )

$

147,200 519,200


$

36,800

Badger 120,000

LO1 Exercise 2 Requirement 1: Pacini’s investment in Abdoo: Goodwill at acquisition $700,000 cost – ($800,000 x 80%) book value $

60,000

Abdoo’s investment in Bach: Goodwill at acquisition: $180,000 cost – ($250,000 x 60%) book value acquired

30,000

Abdoo’s investment in Cabo: Goodwill at acquisition: $270,000 cost – ($350,000 x 70%) book value acquired Total goodwill on December 31, 2005

25,000 115,000

$

Requirement 2:

Investment cost Investors’ share of equity since acquisition: Abdoo: ($80,000 x 80%) Bach: ($90,000 x 60%) Cabo: ($30,000 x 70%) Investment account balance

$

Pacini Equity in Abdoo 700,000

Abdoo’s books Equity Equity in Bach in Cabo $

180,000

$

270,000

$

21,000 291,000

64,000 54,000 $

764,000

$

234,000



LO1 Exercise 3

Separate incomes Plus: Unrealized loss on inventory sales to Ben Less: Unrealized profits on land sold to Acdol Separate realized incomes Allocate Ben: 60% to Paik 10% to Acdol Subtotal Allocate Acdol to Paik Consolidated net income

$

Paik 600,000

$

Acdol 360,000

$

Ben 340,000

60,000 ( 660,000

360,000

100,000 ) 240,000

144,000

( 24,000 ( 384,000 $ 307,200 )

144,000 ) 24,000 ) 72,000

$

804,000 307,200 $ 1,111,200


$ ( $

76,800

$

72,000

LO1 Exercise 4

Separate incomes

Allocate Cab’s income: 80% to Bacon Subtotal Allocate Bacon’s income: 95% to Abel Subtotal Allocate Abel’s income: 100 to Packer Consolidated net income

Noncontrolling interest

Packer $300,000

Abel $100,000

Bacon $200,000

240,000

418,000

518,000

Cab $300,000

(240,000)

$440,000 (418,000)

518,000 (518,000)

$818,000

$0

$22,000


$60,000


LO1 Exercise 5

Castle is not consolidated because the ownership percentage is less than 20% and no evidence of control is given

Separate incomes Allocate Baird 80% Subtotal Allocate Adam Consolidated net income

Paki 400,000

$

$

400,000 22,500

$ (

Adam (50,000 ) 80,000 30,000 22,500 )

$

422,500 $

7,500

$

Minority income

Noncontrolling interest in Baird Noncontrolling interest in Adam Noncontrolling interest expense

$ $

$

Baird 100,000 (80,000 ) 20,000

20,000

$ $

20,000 7,500 27,500



LO2 Exercise 6 Equations: P = Income of Paco on a consolidated basis A = Income of Aber on a consolidated basis B = Income of Back on a consolidated basis P = $100,000 + .90A A = $ 40,000 + .85B B = $ 55,000 + .05A Computations: A = $40,000 + (.85)x($55,000 + .05A) A = $40,000 + $46,750 + .0425A A = $90,601 B = $55,000 + (.05)x($90,601) B = $59,530 P = $100,000 + (.9)x($90,601) P = $100,000 + $81,541 P = $181,541

LO2 Exercise 7 Equations: P = Income of Paine on a consolidated basis A = Income of Achan on a consolidated basis A = $160,000 + (.85) x ($220,000) A = $160,000 + $187,000 A = $347,000 P = $400,000 + (90/95) x ($347,000) P = $400,000 + $328,737 P = $728,737



LO2 Exercise 8 Equations: P = Income of Palace on a consolidated basis A = Income of Acres on a consolidated basis B = Income of Bain on a consolidated basis P = $450,000 + .8A A = $200,000 + .7B B = $160,000 + .1A Computations: A A A P P P

= = = = = =

$200,000 $200,000 $335,484 $450,000 $450,000 $718,387

+ (.7)x($160,000 + .1A) + $112,000 + .07A + (.8)x($335,484) + $268,387

LO2 Exercise 9 Equations: P = Income of Padhy on a consolidated basis A = Income of Abrams on a consolidated basis B = Income of Bacud on a consolidated basis P = $300,000 + .8A A = $100,000 + .6B B = $ 80,000 + .1P Computations: P P P P P

= = = = =

$300,000 $300,000 $300,000 $380,000 $439,496

+ + + +

(.8)x($100,000 + .6B) $80,000 + .48B $80,000 + (.48)x($80,000 + .1P) $38,400 + .048P



LO2 Exercise 10 Equations: P = Income of Padua on a consolidated basis A = Income of Able on a consolidated basis A = $100,000 + (.6) x ($80,000) A = $100,000 + $48,000 A = $148,000 P = $300,000 + (.8) x ($148,000)] P = $300,000 + $118,400 P = $418,400


Ch09 Beams10e TB

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