Deck 3: An Introduction to Consolidated Financial Statements

Question 1

In the consolidated income statement of Wattlebird Corporation and its 85% owned Forest subsidiary,the noncontrolling interest share was reported at $45,000.Assume the book value and fair value of Forest's net assets were equal at the acquisition date.What amount of net income did Forest have for the year?

A)$52,941
B)$38,250
C)$235,000
D)$300,000

Answer 1

D

Question 2

Subsequent to an acquisition,the parent company and consolidated financial statement amounts would not be the same for

A)investments in unconsolidated subsidiaries.
B)investments in consolidated subsidiaries.
C)capital stock.
D)ending retained earnings.

Answer 2

B

Question 3

On January 1,2014,Packaging International purchased 90% of Shipaway Corporation's outstanding shares for $135,000 when the fair value of Shipaway's net assets were equal to the book values.The balance sheets of Packaging and Shipaway Corporations at year-end 2013 are summarized as follows:
If a consolidated balance sheet was prepared immediately after the business combination,the noncontrolling interest would be

A)$9,000.
B)$13,500.
C)$15,000.
D)$16,667.

Answer 3

C

Question 4

Pardo Corporation paid $140,000 for a 70% interest in Spedeal Inc.on January 1,2014,when Spedeal had Capital Stock of $50,000 and Retained Earnings of $100,000.Fair values of identifiable net assets were the same as recorded book values.During 2014,Spedeal had income of $40,000,declared dividends of $15,000,and paid $10,000 of dividends.On December 31,2014,the consolidated financial statements will show

A)investment in Spedeal account of $170,000.
B)investment in Spedeal account of $165,000.
C)consolidated goodwill of $50,000.
D)consolidated dividends receivable of $5,000.

Question 5

A newly acquired subsidiary had pre-existing goodwill on its books.The parent company's consolidated balance sheet will

A)not show any value for the subsidiary's pre-existing goodwill.
B)treat the goodwill similarly to other intangible assets of the acquired company.
C)not show any value for the pre-existing goodwill unless all other assets of the subsidiary are stated at their full fair value.
D)always show the pre-existing goodwill of the subsidiary at its book value.

Question 6

Perth Corporation acquired a 100% interest in Sansone Company for $1,600,000 when Sansone had no liabilities.The book values and fair values of Sansone's assets were:
Immediately following the acquisition,equipment will be included on the consolidated balance sheet at

A)$150,000.
B)$200,000.
C)$210,000.
D)$280,000.

Question 7

A subsidiary can be excluded from consolidation if

A)control does not rest with the majority owner.
B)the subsidiary is in legal reorganization.
C)the subsidiary is operating under severe foreign-exchange restrictions.
D)All of the above are correct.

Question 8

On July 1,2014,when Salaby Company's total stockholders' equity was $360,000,Pogana Corporation purchased 14,000 shares of Salaby's common stock at $30 per share.Salaby had 20,000 shares of common stock outstanding both before and after the purchase by Pogana,and the book value of Salaby's net assets on July 1,2014 was equal to the fair value.On a consolidated balance sheet prepared at July 1,2014,goodwill would be

A)$60,000.
B)$85,714.
C)$100,000.
D)$240,000.

Question 9

Percy Inc.acquired 80% of the outstanding stock of Sillson Company in a business combination.The book values of Sillson's net assets are equal to the fair values except for the building,whose net book value and fair value are $500,000 and $800,000,respectively.At what amount is the building reported on the consolidated balance sheet?

A)$400,000
B)$500,000
C)$640,000
D)$800,000

Question 10

Pinata Corporation acquired an 80% interest in Smackem Inc.for $130,000 on January 1,2014,when Smackem had Capital Stock of $125,000 and Retained Earnings of $25,000.Assume the fair value and book value of Smackem's net assets were equal on January 1,2014.Pinata's separate income statement and a consolidated income statement for Pinata and Subsidiary as of December 31,2014,are shown below.
Smackem's separate income statement must have reported net income of

A)$13,750.
B)$14,750.
C)$15,750.
D)$15,250.

Question 11

From the standpoint of accounting theory,which of the following statements is the best justification for the preparation of consolidated financial statements?

A)In substance the companies are separate,but in form the companies are one entity.
B)In substance the companies are one entity,but in form they are separate.
C)In substance and form the companies are one entity.
D)In substance and form the companies are separate entities.

Question 12

Panini Corporation owns 85% of the outstanding voting stock of Strathmore Company and Malone Corporation owns the remaining 15% of Strathmore's voting stock.On the consolidated financial statements of Panini Corporation and Strathmore,Malone is

A)an affiliate.
B)a noncontrolling interest.
C)an equity investee.
D)a related party.

Question 13

In the preparation of consolidated financial statements,which of the following intercompany transactions must be eliminated as part of the preparation of the consolidation working papers?

A)All revenues,expenses,gains,losses,receivables,and payables
B)All revenues,expenses,gains,and losses but not receivables and payables
C)Receivables and payables but not revenues,expenses,gains,and losses
D)Only sales revenue and cost of goods sold

Question 14

Pregler Inc.has 70% ownership of Sach Company,but should exclude Sach from its consolidated financial statements if

A)Sach is in a regulated industry.
B)Pregler uses the equity method for Sach.
C)Sach is in legal reorganization.
D)Sach is in a foreign country and records its books in a foreign currency.

Question 15

On June 1,2014,Puell Company acquired 100% of the stock of Sorrell Inc.On this date,Puell had Retained Earnings of $100,000 and Sorrell had Retained Earnings of $50,000.On December 31,2014,Puell had Retained Earnings of $120,000 and Sorrell had Retained Earnings of $60,000.The amount of Retained Earnings that appeared in the December 31,2014 consolidated balance sheet was

A)$120,000.
B)$130,000.
C)$170,000.
D)$180,000.

Question 16

The unamortized excess account is

A)a contra-equity account.
B)used in allocating the amounts paid for recorded balance sheet accounts that are above or below their fair values.
C)used in allocating the amounts paid for each asset and liability that are above or below their book values,especially when numerous assets or liabilities are involved.
D)the excess purchase cost that is attributable to goodwill.

Question 17

What method must be used if FASB Statement No.94 prohibits full consolidation of a 70% owned subsidiary?

A)The cost method
B)The Liquidation value
C)Market value
D)Equity method

Question 18

Pental Corporation bought 90% of Sedacor Company's common stock at its book value of $400,000 on January 1,2014.During 2014,Sedacor reported net income of $130,000 and paid dividends of $40,000.At what amount should Pental's Investment in Sedacor account be reported on December 31,2014?

A)$400,000
B)$481,000
C)$490,000
D)$530,000

Question 19

Pomograte Corporation bought 75% of Sycamore Company's common stock,with a book value of $900,000,on January 2,2014 for $750,000.The law firm of Dewey,Cheatam and Howe was paid $55,000 to facilitate the purchase.At what amount should Pomograte's Investment in Sycamore account be reported on January 2,2014?

A)$675,000
B)$695,000
C)$750,000
D)$845,000

Question 20

Push-down accounting

A)requires a subsidiary to use the same accounting principles as its parent company.
B)is required when the parent company uses the equity method to account for its investment in a subsidiary.
C)is required when the parent company uses the cost method to account for its investment in a subsidiary.
D)is the process of recording the effects of the purchase price assignment directly on the books of the subsidiary.

Question 21

Pattalle Co purchases Senday,Inc.on January 1 of the current year for $70,000 more than the fair value of Senday's net assets.Push-down accounting is used.At that date,the following values exist:
Requirement: Determine what amounts will appear in the listed accounts on Pattalle's general ledger,on Senday's general ledger,and on the consolidated balance sheet immediately following the acquisition.Make sure you post the entry to record the investment on Pattalle's books.

Question 22

Parrot Inc.acquired an 85% interest in Sparrow Corporation on January 2,2014 for $42,500 cash when Sparrow had Capital Stock of $15,000 and Retained Earnings of $25,000.Sparrow's assets and liabilities had book values equal to their fair values except for inventory that was undervalued by $2,000.Balance sheets for Parrot and Sparrow on January 2,2014,immediately after the business combination,are presented in the first two columns of the consolidated balance sheet working papers.

Required:
Complete the consolidation balance sheet working papers for Parrot and subsidiary at January 1,2014.

Question 23

On January 1,2014,Pinnead Incorporated paid $300,000 for an 80% interest in Shalle Company.At that time,Shalle's total book value was $300,000.Patents were undervalued in the amount of $10,000.Patents had a 5-year remaining useful life,and any remaining excess value was attributed to goodwill.The income statements for the year ended December 31,2014 of Pinnead and Shalle are summarized below:
Requirements:
1.Calculate the goodwill that will appear in the consolidated balance sheet of Pinnead and Subsidiary at December 31,2014.
2.Calculate consolidated net income for 2014.
3.Calculate the noncontrolling interest share for 2014.

Question 24

Pal Corporation paid $5,000 for a 60% interest in Sonny Inc.on January 1,2014 when Sonny's stockholders' equity consisted of $5,000 Capital Stock and $2,500 Retained Earnings.The fair value and book value of Sonny's assets and liabilities were equal on this date.Two years later,on December 31,2015,the balance sheets of Pal and Sonny are summarized as follows:
Required:
Complete the consolidated balance sheet working papers for Pal Corporation and Subsidiary at December 31,2015.

Question 25

Pool Industries paid $540,000 to purchase 75% of the outstanding stock of Swimmin Corporation,on December 31,2014.Any excess fair value over the identified assets and liabilities is attributed to goodwill.The following year-end information was available just before the purchase:
Required:
1.Prepare Pool's consolidated balance sheet on December 31,2014.

Question 26

Pamula Corporation paid $279,000 for 90% of Shad Corporation's $10 par common stock on December 31,2014,when Shad Corporation's stockholders' equity was made up of $200,000 of Common Stock,$60,000 Additional Paid-in Capital and $40,000 of Retained Earnings.Shad's identifiable assets and liabilities reflected their fair values on December 31,2014,except for Shad's inventory which was undervalued by $5,000 and their land which was undervalued by $2,000.Balance sheets for Pamula and Shad immediately after the business combination are presented in the partially completed working papers.

Required:
Complete the consolidated balance sheet working papers for Pamula Corporation and Subsidiary.

Question 27

Polaris Incorporated purchased 80% of The Solar Company on January 2,2014,when Solar's book value was $800,000.Polaris paid $700,000 for their acquisition,and the fair value of noncontrolling interest was $175,000.At the date of acquisition,the fair value and book value of Solar's identifiable assets and liabilities were equal.At the end of the year,the separate companies reported the following balances:
Requirement 1: Calculate consolidated balances for each of the accounts as of December 31,2014.
Requirement 2: Assuming that Solar has paid no dividends during the year,what is the ending balance of the noncontrolling interest in the subsidiary?

Question 28

On January 1,2014,Parry Incorporated paid $72,000 cash for 80% of Samuel Company's common stock.At that time Samuel had $40,000 capital stock and $30,000 retained earnings.The book values of Samuel's assets and liabilities were equal to fair values,and any excess amount is allocated to goodwill.Samuel reported net income of $18,000 during 2014 and declared $5,000 of dividends on December 31,2014.At the time the dividends were declared,Parry recorded a receivable for the amount they expected to receive the following month.A summary of the balance sheets of Parry and Samuel are shown below.

Required:
Complete the consolidated balance sheet working papers for Parry Corporation and Subsidiary at December 31,2014.

Question 29

On January 2,2014,Power Incorporated paid $630,000 for a 90% interest in Smallsen Company.Smallsen's equity at that time amounted to $600,000,and their book values for assets and liabilities recorded approximated their fair values.Smallsen did not issue any additional stock in 2014.At December 31,2014,the two companies' balance sheets are summarized as follows:
Required: Complete the consolidation worksheet for Power Incorporated and Subsidiary at December 31,2014.

Question 30

On January 1,2014,Myna Corporation issued 10,000 shares of its own $10 par value common stock for 9,000 shares of the outstanding stock of Berry Corporation in an acquisition.Myna common stock at January 1,2014 was selling at $70 per share.Just before the business combination,balance sheet information of the two corporations was as follows:
Required:
1.Prepare the journal entry on Myna Corporation's books to account for the investment in Berry Company.
2.Prepare a consolidated balance sheet for Myna Corporation and Subsidiary immediately after the business combination.

Question 31

On July 1,2014,Piper Corporation issued 23,000 shares of its own $2 par value common stock for 40,000 shares of the outstanding stock of Sector Inc.in an acquisition.Piper common stock at July 1,2014 was selling at $16 per share.Just before the business combination,balance sheet information of the two corporations was as follows:
Required:
1.Prepare the journal entry on Piper Corporation's books to account for the investment in Sector Inc.
2.Prepare a consolidated balance sheet for Piper Corporation and Subsidiary immediately after the business combination.

Question 32

Passcode Incorporated acquired 90% of Safe Systems International for $540,000,the market value at that time.On the date of acquisition,Safe Systems showed the following balances on their ledger:
Safe Systems has determined that their buildings have a remaining life of 10 years,and their equipment has a remaining useful life of 8 years.
Requirement 1: Calculate the amount of goodwill that will appear on the general ledger of Passcode and Safe Systems,as well as the amount that will appear on the consolidated financial statements.
Requirement 2: Calculate the amount of amortization that will appear on the consolidated financial statements for buildings and equipment,and explain how this amortization of excess fair value is shown on the separate general ledgers of Passcode and Safe Systems.

Question 33

Petra Corporation paid $500,000 for 80% of the outstanding voting common stock of Sizable Corporation on January 2,2014 when the book value of Sizable's net assets was $460,000.The fair values of Sizable's identifiable net assets were equal to their book values except as indicated below.
Sizable reported net income of $75,000 during 2014;dividends of $35,000 were declared and paid during the year.
Required:
1.Prepare a schedule to allocate the fair value/book value differential to the specific identifiable assets and liabilities.
2.Determine Petra's income from Sizable for 2014.
3.Determine the correct balance in the Investment in Sizable account as of December 31,2014.

Question 34

Pool Industries paid $540,000 to purchase 75% of the outstanding stock of Swimmin Corporation,on December 31,2014.Any excess fair value over the identified assets and liabilities is attributed to goodwill.The following year-end information was available just before the purchase:
Using the data provided above,assume that Pool decided rather than paying $540,000 cash,Pool issued 10,000 shares of their own stock to the owners of Swimmin.At the time of issue,the $10 par value stock had a market value of $60 per share.
Required: Prepare Pool's consolidated balance sheet on December 31,2014.

Question 35

Park Corporation paid $180,000 for a 75% interest in Stem Co.'s outstanding Capital Stock on January 1,2014,when Stem's stockholders' equity consisted of $150,000 of Capital Stock and $50,000 of Retained Earnings.Book values of Stem's net assets were equal to their fair values on this date.The adjusted trial balances of Park and Stem on December 31,2014 were as follows:
Required: Complete the partially prepared consolidated balance sheet working papers that appear below.

Question 36

On July 1,2014,Polliwog Incorporated paid cash for 21,000 shares of Salamander Company's $10 par value stock,when it was trading at $22 per share.At that time,Salamander's total stockholders' equity was $597,000,and they had 30,000 shares of stock outstanding,both before and after the purchase.The book value of Salamander's net assets is believed to approximate the fair values.
Requirement 1: Prepare the journal entry that Polliwog would record at the date of acquisition on their general ledger.
Requirement 2: Calculate the balance of the goodwill that would be recorded on Polliwog's general ledger,on Salamander's general ledger,and in the consolidated financial statements.

Question 37

Passerby International purchased 80% of Standaround Company's outstanding common stock for $200,000 on January 2,2014.At that time,the fair value of Standaround's net assets were equal to the book values.The balance sheets of Passerby and Standaround at January 2,2014 are summarized as follows:
Required: Determine the consolidated balances as of January 2,2014 for the following five balance sheet line items: Goodwill,Liabilities,Capital Stock,Retained Earnings,and Noncontrolling Interest.

Question 38

The consolidated balance sheet of Pasker Corporation and Shishobee Farm,its 80% owned subsidiary,as of December 31,2014,contains the following accounts and balances:
Pasker Corporation acquired its interest in Shishobee Farm on January 1,2014,when Shishobee Farm had $450,000 of Capital Stock and $210,000 of Retained Earnings.Shishobee Farm's net assets had fair values equal to their book values when Pasker acquired its interest.No changes have occurred in the amount of outstanding stock since the date of the business combination.Pasker uses the equity method of accounting for its investment.
Required: Determine the following amounts:
1.The balance of Pasker's Capital Stock and Retained Earnings accounts at December 31,2014.
2.Cost of Pasker's purchase of Shishobee Farm on January 1,2014.

Question 39

Patterson Company acquired 90% of Starr Corporation on January 1,2014 for $2,250,000.Starr had net assets at that time with a fair value of $2,500,000.At the time of the acquisition,Patterson computed the annual excess fair-value amortization to be $20,000,based on the difference between Starr's net book value and net fair value.Assume the fair value exceeds the book value,and $20,000 pertains to the whole company.Separate from any earnings from Starr,Patterson reported net income in 2014 and 2015 of $550,000 and $575,000,respectively.Starr reported the following net income and dividend payments:
Required: Calculate the following:
• Investment in Starr shown on Patterson's ledger at December 31,2014 and 2015.
• Investment in Starr shown on the consolidated statements at December 31,2014 and 2015.
• Consolidated net income for 2014 and 2015.
• Noncontrolling interest balance on Patterson's ledger at December 31,2014 and 2015.
• Noncontrolling interest balance on the consolidated statements at December 31,2014 and 2015.