Exam 7: Consolidated Financial Statements: Subsequent to Date of Business Combination

The minority interest in net assets of a partially owned subsidiary is:

Under the equity method 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.

Under the equity method of accounting, dividends declared by a subsidiary are accounted for by the parent company as:

The equity method of accounting for a subsidiary's operations is similar to home office accounting for a branch's operations.

Which of the following is not an attribute of the equity method of accounting for the operating results of subsidiaries?

On the date of the business combination of Passman Corporation and Slago Company, the following working paper elimination was prepared (in journal entry format): Additional Information 1. On January 31, 2005, the remaining economic life of Slago's plant assets was 10 years, and Slago includes straight-line depreciation in operating expenses. 2. Goodwill was unimpaired on January 31, 2006. 3. Slago declared a dividend of $20,000 to Passman on December 27, 2005, and paid the dividend on January 17, 2006. Slago had a net income of $90,000 for the fiscal year ended January 31, 2006. a. Prepare journal entries for Passman Corporation to record the operating results of Slago Company for the year ended January 31, 2006, under the equity method of accounting. Omit explanations and disregard income taxes. b. Prepare a working paper elimination (in journal entry format) for Passman Corporation and subsidiary on January 31, 2006. Omit explanation and disregard income taxes.

In a classroom discussion of the relative merits of the equity method and the cost method of accounting for operations of subsidiaries, most students of Professor Long's advanced accounting class expressed a preference for the equity method, influenced in large part by their textbook's support for that method. Student Rita, however, suggested that, for a parent company with several subsidiaries, the cost method of accounting might be more cost-effective because it entails fewer journal entries than does the equity method. In Rita's view, it would be more efficient in such circumstances to make the multitudinous entries for subsidiaries' operations in the working paper for consolidated financial statements than in several ledger accounts in computerized accounting records. Do you agree with student Rita's view? Explain.

The method of accounting for a subsidiary's operations that emphasizes the legal form of the parent company-subsidiary relationship is:

Proponents of the equity method of accounting assert that dividends declared by a subsidiary constitute revenue to the parent company.

Under the equity method of accounting, 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.

On September 30, 2005, Phoenix Corporation paid $400,000 for 75% of the outstanding $1 par common stock of Salem Company and $80,000 for legal fees in connection with the business combination. On that date, Salem's stockholders' equity was as follows: Current fair values of Salem's inventories (first-in, first-out cost) and depreciable plant assets (net) exceeded their carrying amounts by $20,000 and $90,000, respectively, on September 30, 2005. Current fair values of Salem's other identifiable net assets equaled their carrying amounts on that date. Salem's depreciable plant assets had a composite economic life of nine years on September 30, 2005, and Salem includes straight-line depreciation expense in cost of goods sold. For the fiscal year ended September 30, 2006, Salem had a net income of $80,000, but did not declare dividends. Goodwill was unimpaired on September 30, 2006. a. Prepare Phoenix Corporation's journal entries to record the business combination of Phoenix and Salem Company on September 30, 2005. b. Prepare a working paper elimination (in journal entry format) for Phoenix Corporation and subsidiary on September 30, 2005. c. Prepare Phoenix Corporation's journal entries, under the equity method of accounting, to record Salem Company's operating results for the fiscal year ended September 30, 2006. d. Prepare working paper eliminations (in journal entry format) for Phoenix Corporation and subsidiary on September 30, 2006. Omit explanations and disregard income taxes.

If a wholly owned subsidiary's net income was $150,000, the subsidiary 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:

Plover Corporation accounts for its 80%-owned purchased subsidiary, Swallow Company, under the equity 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 between current fair values and carrying amounts of Swallow's identifiable net assets for the year ended March 31, 2006, totaled $40,000. Plover's closing entry for the year ended March 31, 2006, includes a:

Use of the equity method of accounting facilitates a parent company's issuances of unconsolidated financial statements to the Securities and Exchange Commission if the SEC requires such statements.

The format of a parent company's journal entry (explanation omitted), under the equity method of accounting, to adjust a wholly owned subsidiary's net income or loss for depreciation and amortization of differences between date-of-combination current fair values and carrying amounts of the subsidiary's identifiable net assets, is:

For the fiscal year ended March 31, 2006, Sable Company, the 80%-owned subsidiary of Pastel Corporation, had a net income of $600,000 and declared and paid dividends of $200,000. Fiscal Year 2006 depreciation and amortization of differences between current fair values and carrying amounts of Sable's identifiable net assets was $30,000; and Fiscal Year 2006 impairment of goodwill recognized in the business combination was $1,000. Prepare journal entries for Pastel Corporation to record the Fiscal Year 2006 operating results of Sable Company under the: a. Equity method of accounting b. Cost method of accounting Omit explanations for the journal entries and disregard income taxes.

A parent company that uses the equity method of accounting for a 90%-owned subsidiary prepared the following journal entry: A possible explanation for the foregoing journal entry is:

In a closing entry for a parent company that has a subsidiary acquired several years ago, there may be either a debit or a credit to the Retained Earnings of Subsidiary ledger account.

On July 1, 2005, Parson Corporation acquired all the outstanding common stock of Scate Company for $900,000. On that date, the carrying amount of Scate's identifiable net assets was $800,000. The difference of $100,000 was allocated as follows: Scate had a net income of $190,000 and declared dividends of $100,000 for the fiscal year ended June 30, 2006. Scate uses straight-line depreciation for plant assets. Goodwill was one-thirtieth impaired on June 30, 2006. Prepare a working paper to compute the following for Parson Corporation under the equity method of accounting (disregard income taxes): a. Balance of Intercompany Investment Income ledger account on June 30, 2006 b. Balance of Investment in Scate Company Common Stock ledger account on June 30, 2006