Question 1

Paro Company purchased 80% of the voting common stock of Sabon Company for $900,000. There are no liabilities. The following book and fair values are available for Sabon:  The machinery will appear on the consolidated balance sheet at ____.
A) $600,000
B) $540,000
C) $480,000
D) $300,000

Accepted Answer

A

Question 2

A subsidiary was acquired for cash in a business combination on December 31, 20X1. The purchase price exceeded the fair value of identifiable net assets. The acquired company owned equipment with a fair value in excess of the book value as of the date of the combination. A consolidated balance sheet prepared on December 31, 20X1, would
A) report the excess of the fair value over the book value of the equipment as part of goodwill.
B) report the excess of the fair value over the book value of the equipment as part of the plant and equipment account.
C) reduce retained earnings for the excess of the fair value of the equipment over its book value.
D) make no adjustment for the excess of the fair value of the equipment over book value. Instead, it is an adjustment to expense over the life of the equipment.

Accepted Answer

The consolidated balance sheet includes the subsidiary accounts at full fair value.

Question 3

When it purchased Sutton, Inc. on January 1, 20X1, Pavin Corporation issued 500,000 shares of its $5 par voting common stock. On that date the fair value of those shares totaled $4,200,000. Related to the acquisition, Pavin had payments to the attorneys and accountants of $200,000, and stock issuance fees of $100,000. Immediately prior to the purchase, the equity sections of the two firms appeared as follows:  Immediately after the purchase, the consolidated balance sheet should report paid-in capital in excess of par of
A) $8,900,000
B) $9,100,000
C) $9,200,000
D) $9,300,000

Accepted Answer

C

Question 4

The goal of the consolidation process is for:
A) asset acquisitions and 100% stock acquisitions to result in the same balance sheet.
B) goodwill to appear on the balance sheet of the consolidated entity.
C) the assets of the noncontrolling interest to be predominately displayed on the balance sheet.
D) the investment in the subsidiary to be properly valued on the consolidated balance sheet.

Accepted Answer

The answer of The goal of the consolidation process is...

Question 5

Scenario 2-1
Pinehollow acquired all of the outstanding stock of Stonebriar by issuing 100,000 shares of its $1 par value stock. The shares have a fair value of $15 per share. Pinehollow also paid $25,000 in direct acquisition costs. Prior to the transaction, the companies have the following balance sheets:
  The fair values of Stonebriar's inventory and plant, property and equipment are $700,000 and $1,000,000, respectively.
-Refer to Scenario 2-1. The journal entry to record the purchase of Stonebriar would include a
A) credit to common stock for $1,500,000.
B) credit to additional paid-in capital for $1,100,000.
C) debit to investment for $1,500,000.
D) debit to investment for $1,525,000.

Accepted Answer

The purchase of Stonebriar would be recorded as a debit to investment for the purchase price of $1,500,000.

Question 6

Which of the following costs of a business combination can be included in the value charged to paid-in-capital in excess of par?
A) direct and indirect acquisition costs
B) direct acquisition costs
C) direct acquisition costs and stock issue costs if stock is issued as consideration
D) stock issue costs if stock is issued as consideration

Accepted Answer

Stock issue costs, if stock is issued as consideration, can be included in the value charged to paid-in-capital in excess of par. Direct acquisition costs are expensed as incurred.

Question 7

Scenario 2-1
Pinehollow acquired all of the outstanding stock of Stonebriar by issuing 100,000 shares of its $1 par value stock. The shares have a fair value of $15 per share. Pinehollow also paid $25,000 in direct acquisition costs. Prior to the transaction, the companies have the following balance sheets:
  The fair values of Stonebriar's inventory and plant, property and equipment are $700,000 and $1,000,000, respectively.
-Refer to Scenario 2-1. Goodwill associated with the purchase of Stonebriar is ____.
A) $100,000
B) $125,000
C) $300,000
D) $325,000

Accepted Answer

The answer of Scenario 2-1
Pinehollow acquired all of the outstanding...

Question 8

Parr Company purchased 100% of the voting common stock of Super Company for $2,000,000. There are no liabilities. The following book and fair values are available:  The machinery will appear on the consolidated balance sheet at ____.
A) $560,000
B) $860,000
C) $600,000
D) $900,000

Accepted Answer

The answer of Parr Company purchased 100% of the voting...

Question 9

On June 30, 20X1, Naeder Corporation purchased for cash at $10 per share all 100,000 shares of the outstanding common stock of the Tedd Company. The total fair value of all identifiable net assets of Tedd was $1,400,000. The only noncurrent asset is property with a fair value of $350,000. The consolidated balance sheet of Naeder and its wholly owned subsidiary on June 30, 20X1, should report
A) a retained earnings balance that is inclusive of a gain of $400,000.
B) goodwill of $400,000.
C) a retained earnings balance that is inclusive of a gain of $350,000.
D) a gain of $400,000

Accepted Answer

11eb11de_9333_80e4_ad38_b1be97c7e540_TB2014_00

Question 10

Pagach Company purchased 100% of the voting common stock of Rage Company for $1,800,000. The following book and fair values are available:  The bonds payable will appear on the consolidated balance sheet
A) at $300,000 (with no premium or discount shown).
B) at $300,000 less a discount of $50,000.
C) at $0; assets are recorded net of liabilities.
D) at an amount less than $250,000 since it is a bargain purchase.

Accepted Answer

The answer of Pagach Company purchased 100% of the voting...

Question 11

The investment in a subsidiary should be recorded on the parent's books at the
A) underlying book value of the subsidiary's net assets.
B) fair value of the subsidiary's net identifiable assets.
C) fair value of the consideration given.
D) fair value of the consideration given plus an estimated value for goodwill.

Accepted Answer

The investment in a subsidiary is recorded at the fair value of the consideration given at the time of acquisition.

Question 12

The SEC requires the use of push-down accounting in some specific situations. Push-down accounting results in:
A) goodwill be recorded in the parent company separate accounts.
B) eliminating subsidiary retained earnings and paid-in capital in excess of par.
C) reflecting fair values on the subsidiary's separate accounts.
D) changing the consolidation worksheet procedure because no adjustment is necessary to eliminate the investment in subsidiary account.

Accepted Answer

Push-down accounting requires reflecting fair values on the subsidiary's separate accounts, which means that the subsidiary's assets and liabilities are recorded at their fair values as of the acquisition date. This will result in an adjustment to the subsidiary's separate accounts and will affect the parent company's consolidated financial statements. Push-down accounting does not eliminate subsidiary retained earnings and paid-in capital in excess of par, as stated in choice B. Goodwill is not recorded in the parent company separate accounts; rather, it is calculated as the excess of fair value of consideration transferred over the fair value of the net assets acquired and is recorded on the consolidated balance sheet. Choice D is also incorrect as push-down accounting does not change the consolidation worksheet procedure; rather, it affects the subsidiary's separate accounts.

Question 13

The SEC and FASB has recommended that a parent corporation should consolidate the financial statements of the subsidiary into its financial statements when it exercises control over the subsidiary, even without majority ownership. In which of the following situations would control NOT be evident?
A) Access to subsidiary assets is available to all shareholders.
B) Dividend policy is set by the parent.
C) The subsidiary does not determine compensation for its main employees.
D) Substantially all cash flows of the subsidiary flow to the controlling shareholders.

Accepted Answer

Access to subsidiary assets being available to all shareholders does not necessarily constitute control by the parent corporation. Control is determined by the ability to make or influence significant decisions related to the subsidiary's operations and financial policies. The other options (B, C, and D) indicate factors that would indicate control by the parent corporation.

Question 14

In an 80% purchase accounted for as a tax-free exchange, the excess of cost over book value is $200,000. The equipment's book value for tax purposes is $100,000 and its fair value is $150,000. All other identifiable assets and liabilities have fair values equal to their book values. The tax rate is 30%. What is the total deferred tax liability that should be recognized on the consolidated balance sheet on the date of purchase?
A) $12,000
B) $60,000
C) $72,857
D) $85,714

Accepted Answer

The answer of In an 80% purchase accounted for as...

Question 15

Supernova Company had the following summarized balance sheet on December 31, 20X1:
  The fair value of the inventory and property and plant is $600,000 and $850,000, respectively.
Assume that Redstar Corporation exchanges 75,000 of its $3 par value shares of common stock, when the fair price is $20/share, for 100% of the common stock of Supernova Company. Redstar incurred acquisition costs of $5,000 and stock issuance costs of $5,000.
Required: 
a.
What journal entry will Redstar Corporation record for the investment in Supernova?
b.
Prepare a supporting value analysis and determination and distribution of excess schedule
c.
Prepare Redstar's elimination and adjustment entry for the acquisition of Supernova.

Accepted Answer

The answer of Supernova Company had the following summarized balance...

Question 16

Consolidated financial statements are designed to provide:
A) informative information to all shareholders.
B) the results of operations, cash flow, and the balance sheet in an understandable and informative manner for creditors.
C) the results of operations, cash flow, and the balance sheet as if the parent and subsidiary were a single entity.
D) subsidiary information for the subsidiary shareholders.

Accepted Answer

Consolidated financial statements combine the financial information of a parent company and its subsidiaries, presenting them as if they were a single entity. This provides a comprehensive view of the financial position and performance of the entire group. The purpose of consolidated financial statements is to provide informative information not just to shareholders, but also to other stakeholders such as creditors, investors, and regulatory authorities.

Question 17

Consolidated financial statements are appropriate even without a majority ownership if which of the following exists:
A) the subsidiary has the right to appoint members of the parent company's board of directors.
B) the parent company has the right to appoint a majority of the members of the subsidiary's board of directors through a large minority voting interest.
C) the subsidiary owns a large minority voting interest in the parent company.
D) the parent company has an ability to assume the role of general partner in a limited partnership with the approval of the subsidiary's board of directors.

Accepted Answer

According to Generally Accepted Accounting Principles (GAAP), if the parent company has the right to appoint a majority of the members of the subsidiary's board of directors through a large minority voting interest, it has effective control over the subsidiary and should consolidate the subsidiary's financial statements with its own. This is known as the "voting interest model." Therefore, even without a majority ownership, the consolidated financial statements are appropriate. The other options (A, C, and D) do not provide sufficient evidence of effective control over the subsidiary to require consolidation.

Question 18

Assuming Investor owns 70% of Investee. What is the amount that will be recorded as Net Income for the Controlling Interest?
A) $164,000
B) $171,000
C) $178,000
D) $180,000

Accepted Answer

To calculate the net income for the controlling interest, we need to multiply the net income of the investee with the percentage of ownership of the investor.

Net income of Investee = $340,000 - $80,000 - $60,000 = $200,000

Net income for the controlling interest = Net income of Investee x Investor's percentage of ownership 
= $200,000 x 70% 
= $140,000

Net income attributed to non-controlling interest = $200,000 x 30% = $60,000

Therefore, the net income for the controlling interest will be $140,000 + investor's share of investee's equity income ($31,000) = $171,000.

Hence, B is the correct choice.

Question 19

When a company purchases another company that has existing goodwill and the transaction is accounted for as a stock acquisition, the goodwill should be treated in the following manner.
A) Goodwill on the books of an acquired company should be disregarded.
B) Goodwill is recorded prior to recording fixed assets.
C) Goodwill is not recorded until all assets are stated at full fair value.
D) Goodwill is treated consistent with other tangible assets.

Accepted Answer

According to the accounting standards, goodwill should only be recorded when all assets of the acquired company are stated at full fair value. This is because goodwill represents the amount paid in excess of the fair value of net assets acquired, and it cannot be determined until all the assets are stated at fair value. Therefore, option C is the correct choice. Options A, B and D are incorrect as they do not follow the accounting standards for recording goodwill in a stock acquisition.

Question 20

Judd Company issued nonvoting preferred stock with a fair value of $1,500,000 in exchange for all the outstanding common stock of the Bath Corporation. On the date of the exchange, Bath had tangible net assets with a book value of $900,000 and a fair value of $1,400,000. In addition, Judd issued preferred stock valued at $100,000 to an individual as a finder's fee for arranging the transaction. As a result of these transactions, Judd should report an increase in net assets of ____.
A) $900,000
B) $1,400,000
C) $1,500,000
D) $1,600,000

Accepted Answer

The fair value of the preferred stock issued to Bath's shareholders is $1,500,000, which is equal to the book value of Bath's tangible net assets. The fair value of Bath's tangible net assets is $1,400,000, which is greater than the book value. Therefore, Judd should report an increase in net assets of $100,000 ($1,500,000 - $1,400,000).

Quiz 2: Consolidated Statements: Date of Acquisition

Paro Company purchased 80% of the voting common stock of Sabon Company for $900,000. There are no liabilities. The following book and fair values are available for Sabon: The machinery will appear on the consolidated balance sheet at ____.

The goal of the consolidation process is for:

Which of the following costs of a business combination can be included in the value charged to paid-in-capital in excess of par?

Parr Company purchased 100% of the voting common stock of Super Company for $2,000,000. There are no liabilities. The following book and fair values are available: The machinery will appear on the consolidated balance sheet at ____.

Pagach Company purchased 100% of the voting common stock of Rage Company for $1,800,000. The following book and fair values are available: The bonds payable will appear on the consolidated balance sheet

The investment in a subsidiary should be recorded on the parent's books at the

The SEC requires the use of push-down accounting in some specific situations. Push-down accounting results in:

The SEC and FASB has recommended that a parent corporation should consolidate the financial statements of the subsidiary into its financial statements when it exercises control over the subsidiary, even without majority ownership. In which of the following situations would control NOT be evident?

Consolidated financial statements are designed to provide:

Consolidated financial statements are appropriate even without a majority ownership if which of the following exists:

Assuming Investor owns 70% of Investee. What is the amount that will be recorded as Net Income for the Controlling Interest?

When a company purchases another company that has existing goodwill and the transaction is accounted for as a stock acquisition, the goodwill should be treated in the following manner.