Deck 11: Consolidation Theories, push-Down Accounting, and Corporate Joint Ventures

Question 1

Under parent company theory,noncontrolling interest is classified on the consolidated balance sheet as ________.Under entity theory,noncontrolling interest is classified on the consolidated balance sheet as ________.

A)stockholders' equity;stockholders' equity
B)stockholders' equity;liability
C)liability;a liability
D)liability;stockholders' equity

Answer 1

D

Question 2

A parent company acquired 100% of the outstanding common stock of another corporation.The parent is going to use push-down accounting.The fair market value of each of the acquired corporation's assets is lower than its respective book value.The fair market value of each of the acquired corporation's liabilities is higher than its respective book value.The acquired corporation has a deficit in the Retained Earnings account.Which one of the following statements is correct?

A)The push-down capital account will have a credit balance after this transaction is posted.
B)The push-down capital account will have a debit balance after this transaction is posted.
C)The push-down capital account will have either a debit or a credit balance depending upon whether the asset adjustments exceed the liability adjustments,or vice versa.
D)Subsidiary Retained Earnings will have a deficit balance after this transaction is posted.

Answer 2

B

Question 3

Assume Paris's land account had a book value of $50,000 and a fair value of $70,000 on January 1,2011.Using the parent company and entity theories,what amounts would be reported on the consolidated balance sheet at January 1,2011 for the land account? Parent Company Theory Entity Theory

A)
B)
C)
D)

Answer 3

A
Explanation: A)Under the parent company theory,the Land account on the consolidated balance sheet would be the sum of the book value of the parent's Land account balance of $50,000 plus the book value of the Land account on the subsidiary's books of $10,000 plus 80% of the $12,000 excess of the fair value in excess of book value of $9,600,for a total of $69,600.Under the entity theory,the land would be valued at the book value of the parent of $50,000 plus the full fair value of the subsidiary's land which is $22,000 for a total of $72,000.

Question 4

Assume Paris's inventory account had a book value of $40,000 and a fair value of $44,000 on January 1,2011.Using the parent company theory,what was the amount reported on the consolidated balance sheet for inventories on January 1,2011?

A)$65,000
B)$66,000
C)$69,000
D)$70,000

Question 5

Anthony and Cleopatra create a joint venture to distribute artifacts.Anthony contributes 70% and Cleopatra 30% of the cash for assets purchased from Tomb Company.How would Anthony report information about Cleopatra on Anthony's financial statements?

A)Not at all
B)In a footnote
C)As a liability
D)As a noncontrolling interest

Question 6

Use the following information to answer the question(s)below.
Pascoe Corporation paid $450,000 for a 90% interest in Sarabet Corporation on January 1,2011,when Sarabet's stockholders' equity consisted of $250,000 Common Stock and $50,000 Retained Earnings.The book values and fair values of Sarabet's assets and liabilities were equal when Pascoe acquired its interest.
The separate net incomes (excluding investment income)of Pascoe and Sarabet for 2011 were $600,000 and $100,000,respectively.Dividends declared and paid during 2011 were $250,000 for Pascoe and $50,000 for Sarabet.Pascoe uses the entity theory in consolidating its financial statements with those of Sarabet.
Pascoe's income from Sarabet under the equity method for 2011 was

A)$72,000.
B)$87,500.
C)$90,000.
D)$100,000.

Question 7

Use the following information to answer the question(s)below.
Paris Corporation purchased 80% of the outstanding voting common stock of Sanders Corporation on January 1,2011,at a cost of $400,000.The stockholders' equity of Sanders Corporation on this date consisted of $200,000 of Capital Stock and $100,000 of Retained Earnings.Book values were equal to fair values except for land and inventory.The book value of Sanders' land was $10,000,and fair value was $22,000.The book value of Sanders' inventory was $30,000,and fair value was $25,000.
Under the parent company theory,what amount of goodwill was reported on the consolidated balance sheet at December 31,2011?

A)$148,000
B)$153,000
C)$154,400
D)$160,000

Question 8

Under parent company theory,the amount of consolidated net income is equal to the amount of ________ under entity theory.

A)noncontrolling interest share
B)noncontrolling interest income
C)income attributable to controlling stockholders
D)income attributable to noncontrolling stockholders

Question 9

Under the entity theory,a consolidated balance sheet prepared immediately after the business combination will show goodwill of

A)$15,000.
B)$22,500.
C)$25,000.
D)$32,500.

Question 10

Use the following information to answer the question(s)below.
Paris Corporation purchased 80% of the outstanding voting common stock of Sanders Corporation on January 1,2011,at a cost of $400,000.The stockholders' equity of Sanders Corporation on this date consisted of $200,000 of Capital Stock and $100,000 of Retained Earnings.Book values were equal to fair values except for land and inventory.The book value of Sanders' land was $10,000,and fair value was $22,000.The book value of Sanders' inventory was $30,000,and fair value was $25,000.
Under the entity theory,what amount of goodwill was reported on the consolidated balance sheet at December 31,2011?

A)$185,000
B)$191,250
C)$193,000
D)$200,000

Question 11

Earth Company,Fire Incorporated,and Wind Incorporated created a joint venture to market their products on the internet.Earth owns 40% of the stock,Fire owns 45% of the stock and Wind owns the remaining 15%.Which firms should report their joint venture investments using the equity method?

A)Earth
B)Fire
C)Earth and Fire
D)Earth,Fire and Wind

Question 12

Use the following information to answer the question(s)below.
Pascoe Corporation paid $450,000 for a 90% interest in Sarabet Corporation on January 1,2011,when Sarabet's stockholders' equity consisted of $250,000 Common Stock and $50,000 Retained Earnings.The book values and fair values of Sarabet's assets and liabilities were equal when Pascoe acquired its interest.
The separate net incomes (excluding investment income)of Pascoe and Sarabet for 2011 were $600,000 and $100,000,respectively.Dividends declared and paid during 2011 were $250,000 for Pascoe and $50,000 for Sarabet.Pascoe uses the entity theory in consolidating its financial statements with those of Sarabet.
Noncontrolling interest share was reported in the 2011 consolidated income statement at

A)$5,000.
B)$6,000.
C)$8,000.
D)$10,000.

Question 13

Under parent company theory,noncontrolling interest is valued at ________ on the consolidated balance sheet.Under entity theory,noncontrolling interest is valued at ________ on the consolidated balance sheet.

A)fair value;present value
B)present value;fair value
C)book value;fair value
D)fair value;book value

Question 14

Use the following information to answer the question(s)below.
Pascoe Corporation paid $450,000 for a 90% interest in Sarabet Corporation on January 1,2011,when Sarabet's stockholders' equity consisted of $250,000 Common Stock and $50,000 Retained Earnings.The book values and fair values of Sarabet's assets and liabilities were equal when Pascoe acquired its interest.
The separate net incomes (excluding investment income)of Pascoe and Sarabet for 2011 were $600,000 and $100,000,respectively.Dividends declared and paid during 2011 were $250,000 for Pascoe and $50,000 for Sarabet.Pascoe uses the entity theory in consolidating its financial statements with those of Sarabet.
Goodwill was reported in the December 31,2011 consolidated balance sheet at

A)$170,000.
B)$180,000.
C)$200,000.
D)$210,000.

Question 15

Entities other than the primary beneficiary account for their investment in a variable interest entity using the

A)cost method.
B)equity method.
C)cost or equity methods.
D)consolidated method.

Question 16

Paroz Corporation acquired a 70% interest in Sandberg Corporation for $900,000 when Sandberg's stockholders' equity consisted of $600,000 of Capital Stock and $600,000 of Retained Earnings.The fair values of Sandberg's net assets were equal to their recorded book values.At the time of acquisition,on Paroz's books,Paroz will record

A)goodwill for $60,000 under the parent company theory.
B)goodwill for $85,714 under the entity theory.
C)investment in Sandberg for $1,285,714 under the entity theory.
D)investment in Sandberg for $900,000 under the entity and parent company theories.

Question 17

Under GAAP,the ________ will include the variable interest entity in consolidated financial statements.

A)special purpose entity
B)limited liability company
C)trust
D)primary beneficiary

Question 18

The SEC requires push-down accounting for SEC filings of subsidiaries when the subsidiary has no substantial publicly-held debt or preferred stock outstanding and

A)the parent has substantial ownership (5% or greater).
B)the parent has substantial ownership (20% or greater).
C)the parent has substantial ownership (50% or greater).
D)the parent has substantial ownership (90% or greater).

Question 19

Under the entity theory,a consolidated balance sheet prepared immediately after the business combination will show noncontrolling interest of

A)$5,000.
B)$7,500.
C)$9,000.
D)$10,000.

Question 20

Noncontrolling interest share is viewed as an expense under ________ theory.

A)parent company
B)entity
C)contemporary
D)joint venture

Question 21

Pascal Corporation paid $225,000 for a 70% interest in Sank Corporation on January 1,2011.On that date,Sank's balance sheet accounts,at book value and fair value,were as follows:
Both companies use the parent company theory.Push-down accounting is used for the acquisition.
Required:
1.Prepare the journal entry on January 1,2011 on Sank Corporation's books.
2.Prepare a balance sheet for Sank Corporation immediately after the acquisition on January 1,2011.

Question 22

Use the following information to answer the question(s)below.
On January 1,2011,Penelope Company acquired a 90% interest in Leah Company for $180,000 cash.On January 1,2011,Leah Company had the following assets and liabilities:
Push-down accounting is used for the acquisition.
Assume the parent company theory is used.On January 2,2011,Leah Company will report Goodwill of ________ and Accounts Receivable of ________ on Leah's balance sheet.

A)$27,000;$30,000
B)$27,000;$35,000
C)$30,000;$30,000
D)$45,000;$34,500

Question 23

On January 1,2011,Jennifer Company acquired a 90% interest in Jayda Company for $270,000 cash.On January 1,2011,Jayda Company had the following assets and liabilities:
Push-down accounting is used for the acquisition.Both companies use the entity theory.
Required:
1.What is the goodwill associated with Jayda Company on January 1,2011?
2.Prepare the journal entry(ies)on Jayda's books on January 1,2011.
3.Prepare the journal entry(ies)on Jennifer's books on January 1,2011.
4.Prepare the elimination entry(ies)on the consolidating working papers on January 1,2011.

Question 24

On January 1,2011,Gregory Company acquired a 90% interest in Subway Company for $200,000 cash.On January 1,2011,Subway Company had the following assets and liabilities:
The plant assets have 20 years of useful life remaining.Straight-line depreciation is used.The excess fair value over book value associated with Accounts Receivable and Inventory is realized in 2011.
In 2011,Subway reported net income of $35,000 and declared and paid common dividends of $10,000.Gregory reported Income from Subway in 2011 of $17,100.
Required:
Assume both companies use the entity theory.Prepare the elimination entry(ies)on consolidating work papers for the year ending December 31,2011.

Question 25

Johnsen Corporation paid $225,000 for a 70% interest in Jonas Corporation on January 1,2011.On that date,Jonas's balance sheet accounts,at book value and fair value,were as follows:
Required:
1.Prepare the journal entry necessary on January 1,2011 on Jonas Corporation's books.Both companies use push-down accounting and the entity theory.
2.Prepare the balance sheet for Jonas Corporation immediately after the acquisition on January 1,2011.

Question 26

Party Corporation acquired an 80% interest in Sang Corporation on January 1,2011 for $20,000.Balance sheet and fair value information on this date is summarized as follows:
Required:
1.Prepare an entry on the books of Sang Corporation to record the push-down adjustment under parent company theory.
2.Prepare an entry on the books of Sang Corporation to record a push-down adjustment under entity theory.

Question 27

Partel Corporation purchased 75% of Sandford Corporation on January 1,2011,for $230,000.Balance sheets for the two companies on this date,prepared just prior to the purchase,are provided below.
Required:
1.Prepare a consolidated balance sheet using the entity theory of consolidation.
2.Prepare a consolidated balance sheet using the parent company theory of consolidation.

Question 28

On January 1,2011,Parton Corporation acquired an 80% interest in Sandra Corporation for $184,000.Sandra's net assets on this date had a book value of $160,000 and a fair value of $210,000.The excess of fair value over book value at acquisition was attributable to $20,000 of understated plant assets with a remaining useful life of five years from January 1,2011,and $30,000 to an understated patent with a remaining economic life of six years from January 1,2011.Separate net incomes (excluding investment income)of Parton and Sandra for 2011 were $300,000 and $50,000,respectively.
Required:
1.Compute goodwill at January 1,2011 under the parent company theory and the entity theory.
2.Determine consolidated net income and noncontrolling interest share for 2011 under the parent company theory and the entity theory.

Question 29

Use the following information to answer the question(s)below.
On January 1,2011,Penelope Company acquired a 90% interest in Leah Company for $180,000 cash.On January 1,2011,Leah Company had the following assets and liabilities:
Push-down accounting is used for the acquisition.
Assume the entity theory is used.On January 2,2011,Leah Company will report Goodwill of ________ and Accounts Receivable of ________ on Leah's balance sheet.

A)$27,000;$30,000
B)$27,000;$34,500
C)$30,000;$30,000
D)$50,000;$35,000

Question 30

Patch Corporation has a 50% undivided interest in Saric Corporation,a joint venture.Patch accounts for its interest in Saric by the equity method and also prepares consolidated financial statements for external reporting purposes.Patch follows specialized industry practices and uses proportionate consolidation for its interest in Saric.Separate financial statements for Patch and Saric are as follows:
Required:
Prepare the consolidated balance sheet for Patch Corporation and its undivided interest in Saric Corporation.

Question 31

Which of the following statements about variable interest entities (VIE)is false?

A)Under GAAP,a VIE may be a corporation,partnership,limited liability company or trust.
B)Under GAAP,pension plans are excluded from VIE accounting.
C)A potential VIE must be a separate entity,not a subset,branch or division of another entity.
D)VIEs do not require the identification of a primary beneficiary.

Question 32

With regard to a variable interest entity (VIE),Ann Company may meet the following two conditions: Condition I
Ann Company has the power to direct VIE activities that significantly impact VIE's economic performance.
Condition II
Ann Company has an obligation to absorb losses and/or a right to receive significant benefits from the VIE.
Ann Company must consolidate a VIE if

A)Condition I is met only.
B)Condition II is met only.
C)either Condition I or Condition II is met.
D)both Condition I and Condition II are met.

Question 33

Under push-down accounting,the ________ of the acquired subsidiary's assets and liabilities are reported on the financial statements of the ________.

A)book value;subsidiary
B)book value;parent
C)fair value;subsidiary
D)present value;parent

Question 34

Partridge Corporation purchased an 80% interest in Sandy Corporation for $840,000 on January 1,2011.Sandy's balance sheet book values and accompanying fair values on this date are shown below.
Required:
Complete the push-down columns of Sandy Corporation's restructured balance sheet using entity theory and parent company theory.

Question 35

On January 1,2011,Jeff Company acquired a 90% interest in Margaret Company for $198,000 cash.On January 1,2011,Margaret Company had the following assets and liabilities:
Push-down accounting is used for the acquisition.
Required:
1.Assume both companies use the entity theory.
a.Record the journal entry on Margaret's separate books on January 1,2011.
b.Record the journal entry on Jeff's separate books on January 1,2011.
2.Assume both companies use the parent company theory.
a.Record the journal entry on Margaret's separate books on January 1,2011.
b.Record the journal entry on Jeff's separate books on January 1,2011.

Question 36

On January 1,2011,Penny Company acquired a 90% interest in Lampire Company for $180,000 cash.On January 1,2011,Lampire Company had the following assets and liabilities:
Push-down accounting is used for the acquisition.
Required:
1.Assume both companies use the entity theory.Record the push-down adjustment on Lampire's separate books on January 1,2011.
2.Assume both companies use the parent company theory.Record the push-down adjustment on Lampire's separate books on January 1,2011.

Question 37

On January 1,2011,Jeff Company acquired a 90% interest in Marian Company for $198,000 cash.On January 1,2011,Marian Company had the following assets and liabilities:
Push-down accounting is used for the acquisition.
Required:
1.Assume both companies use the entity theory.Prepare the elimination entry(ies)on consolidating work papers on January 1,2011.
2.Assume both companies use the parent company theory.Prepare the elimination entry(ies)on consolidating work papers on January 1,2011.

Question 38

On January 1,2011,Brody Company acquired an 80% interest in Kristin Company for $240,000 cash.On January 1,2011,Kristin Company had the following assets and liabilities:
Push-down accounting is used for the acquisition.Both companies use the entity theory.
Required:
1.What is the goodwill associated with Kristin Company on January 1,2011?
2.Prepare the journal entry(ies)on Kristin's books on January 1,2011.
3.Prepare the journal entry(ies)on Brody's books on January 1,2011.
4.Prepare the elimination entry(ies)on the consolidating working papers on January 1,2011.

Question 39

On July 1,2010,Parslow Corporation acquired a 75% interest in Sanderson Corporation for $150,000.Sanderson's net assets on this date had a book value of $140,000 and a fair value of $160,000.The excess of fair value over book value at acquisition was due to understated plant assets with a remaining useful life of five years from July 1,2010.Separate net incomes (excluding investment income)of Parslow and Sanderson for 2011 were $400,000 and $20,000,respectively.
Required:
1.Compute goodwill at July 1,2010 under the parent company theory and the entity theory.
2.Determine consolidated net income and noncontrolling interest share for 2011 under the parent company theory and the entity theory.

Question 40

Patane Corporation acquired 80% of the outstanding voting common stock of Sanlon Corporation on January 1,2011,for $500,000.Sanlon Corporation's stockholders' equity at this date consisted of $250,000 in Capital Stock and $100,000 in Retained Earnings.The fair value of Sanlon's assets was equal to the book value of the assets except for land with a fair value $40,000 greater than its book value,and marketable securities with a fair value $50,000 greater than its book value.Sanlon also had a valuable patent with a fair value of $25,000 and a book value of zero because its development costs were expensed as incurred.The fair value of Sanlon's liabilities is $10,000 higher than the $40,000 book value.
Required:
Calculate the amount of goodwill under the parent company and entity theories of consolidation.