Question 1

How does a parent company account for the sale of a portion of an investment in a subsidiary?

Accepted Answer

If control is maintained after the sale,then the difference between the sales proceeds and the book value is an adjustment to the parent's owners' equity (APIC).If control is not maintained,then such difference is a gain or loss on sale of investment.In either situation,the book value of the investment should be on the equity method basis in order to calculate the proper entry for the sale.Therefore,if the investment has been kept under the initial value or the partial equity method,the investor adjusts the book value of its investment in order to bring an initial value method or partial equity method investment basis to an equity method basis.

Question 2

REFERENCE: 04-09
Pell Company acquires 80% of Demers Company for $500,000 on January 1,2019.Demers reported common stock of $300,000 and retained earnings of $210,000 on that date.Equipment was undervalued by $30,000 and buildings were undervalued by $40,000,each having a 10-year remaining life.Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life.Based on an annual review,goodwill has not been impaired.
Demers earns income and pays dividends as follows:
 $$\begin{array} { l r r r } 
& 2019 & 2020 & 2021 \
\text { Net income } & \$ 100,000 & \$ 120,000 & \$ 130,000 \
\text { Dividends } & 40,000 & 50,000 & 60,000
\end{array}$$ Assume the initial value method is applied.
-Compute the noncontrolling interest in Demers at December 31,2019.

Accepted Answer

A) $135,600. 
B) $ 80,000. 
C) $117,000. 
D) $100,000. 
E) $110,600. 
A) $135,600. 
B) $ 80,000. 
C) $117,000. 
D) $100,000. 
E) $110,600. A

Question 3

Prevatt,Inc.owns 80% of Franklin Company.During the current year,a portion of the investment in Franklin is sold.Prior to recording the sale,Prevatt adjusts the carrying value of its investment.What is the purpose of the adjustment?

Accepted Answer

If control is maintained after the sale,then the difference between the sales proceeds and the book value is an adjustment to the parent's owners' equity.If control is not maintained,then such difference is a gain or loss on sale of investment.In either situation,the carrying value of the investment should be on the equity method basis in order to calculate the proper entry for the sale.Therefore,if Prevatt adjusts the carrying value of its investment,it is in order to bring an initial value method or partial equity method investment basis to an equity method basis.

Question 4

REFERENCE: 04-14
On January 1,2019,Jannison Inc.acquired 90% of Techron Co.by paying $477,000 cash.There is no active trading market for Techron stock.Techron Co.reported a Common Stock account balance of $140,000 and Retained Earnings of $280,000 at that date.The fair value of Techron Co.was appraised at $530,000.The total annual amortization was $11,000 as a result of this transaction.The subsidiary earned $98,000 in 2019 and $126,000 in 2020 with dividend payments of $42,000 each year.Without regard for this investment,Jannison had income of $308,000 in 2019 and $364,000 in 2020.
-Prepare a proper presentation of consolidated net income and its allocation for 2020.

Accepted Answer

None

Question 5

On January 1,2018,Vacker Co.acquired 70% of Carper Inc.by paying $650,000.This included a $20,000 control premium.Carper reported common stock on that date of $420,000 with retained earnings of $252,000.A building was undervalued in the company's financial records by $28,000.This building had a ten-year remaining life.Copyrights of $80,000 were to be recognized and amortized over 20 years.
Carper earned income and paid cash dividends as follows:
On December 31,2020,Vacker owed $30,800 to Carper.There have been no changes in Carper's common stock account since the acquisition.
 $\begin{array}{llr}
&\text { Net } & \text { Dividends } \
&\text { Income } & \text { Paid }\
2018& \$105,000 &\$54,600\
2019&134,400 &61,600\
2020&154,000&84,000\
\end{array}$
 
Required:
If the equity method had been applied by Vacker for this acquisition,what were the consolidation entries needed as of December 31,2020?

Accepted Answer

From the acquisition value,$28,000 was a

Question 6

REFERENCE: 04-08
Pell Company acquires 80% of Demers Company for $500,000 on January 1,2019.Demers reported common stock of $300,000 and retained earnings of $210,000 on that date.Equipment was undervalued by $30,000 and buildings were undervalued by $40,000,each having a 10-year remaining life.Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life.Based on an annual review,goodwill has not been impaired.
Demers earns income and pays dividends as follows:
 $$\begin{array} { l r r r } 
& 2019 & 2020 & 2021 \
\text { Net income } & \$ 100,000 & \$ 120,000 & \$ 130,000 \
\text { Dividends } & 40,000 & 50,000 & 60,000
\end{array}$$ Assume the equity method is applied.
-Compute the noncontrolling interest in Demers at December 31,2020.

Accepted Answer

A) $107,000. 
B) $126,000. 
C) $109,200. 
D) $149,600. 
E) $148,200. 
A) $107,000. 
B) $126,000. 
C) $109,200. 
D) $149,600. 
E) $148,200.

Question 7

REFERENCE: 04-15
On January 1,2020,John Doe Enterprises (JDE)acquired a 55% interest in Bubba Manufacturing,Inc.(BMI).JDE paid for the transaction with $3 million cash and 500,000 shares of JDE common stock (par value $1.00 per share).At the time of the acquisition,BMI's book value was $16,970,000.
On January 1,JDE stock had a market value of $14.90 per share and there was no control premium in this transaction.Any consideration transferred over book value is assigned to goodwill.BMI had the following balances on January 1,2020.
 $\begin{array}{lrr}
&\text { Book } & \text { Fair } \
&\text { Value } & \text { Value } \
\text { Land } & \$ 1,700,000 & \$ 2,550,000 \
\text { Buildings (seven-year remaining life) } & 2,700,000 & 3,400,000 \
\text { Equipment (five-vear remaining life) } & 3,700,000 & 3,300,000
\end{array}$
 For internal reporting purposes,JDE employed the equity method to account for this investment.
-Prepare a schedule to determine goodwill,and the amortization and allocation amounts.

Accepted Answer

The answer of REFERENCE: 04-15
On January 1,2020,John Doe Enterprises (JDE)acquired...

Question 8

REFERENCE: 04-10
Pell Company acquires 80% of Demers Company for $500,000 on January 1,2019.Demers reported common stock of $300,000 and retained earnings of $210,000 on that date.Equipment was undervalued by $30,000 and buildings were undervalued by $40,000,each having a 10-year remaining life.Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life.Based on an annual review,goodwill has not been impaired.
Demers earns income and pays dividends as follows:
Assume the partial equity method is applied.
 $$\begin{array} { l r r r } 
& 2019 & 2020 & 2021 \
\text { Net income } & \$ 100,000 & \$ 120,000 & \$ 130,000 \
\text { Dividends } & 40,000 & 50,000 & 60,000
\end{array}$$
-Compute the noncontrolling interest in Demers at December 31,2020.

Accepted Answer

A) $124,000. 
B) $126,000. 
C) $109,200. 
D) $149,600. 
E) $ 148,200. 
A) $124,000. 
B) $126,000. 
C) $109,200. 
D) $149,600. 
E) $ 148,200.

Question 9

REFERENCE: 04-01
When Jolt Co.acquired 75% of the common stock of Yelts Corp. ,Yelts owned land with a book value of $70,000 and a fair value of $100,000.
-What is the amount of excess land allocation attributed to the controlling interest at the acquisition date?

Accepted Answer

A) $ 0. 
B) $30,000. 
C) $22,500. 
D) $25,000. 
E) $17,500. 
A) $ 0. 
B) $30,000. 
C) $22,500. 
D) $25,000. 
E) $17,500.

Question 10

When a parent uses the acquisition method for business combinations and sells shares of its subsidiary,which of the following statements is false?

Accepted Answer

A) If majority control is still maintained,consolidated financial statements are still required. 
B) If majority control is not maintained but significant influence exists,the equity method to account for the investment is still used but consolidated financial statements are not required. 
C) If majority control is not maintained but significant influence exists,the equity method is still used to account for the investment and consolidated financial statements are still required. 
D) If majority control is not maintained and significant influence no longer exists,a prospective change in accounting principle to the fair value method is required. 
E) A gain or loss calculation must be prepared if control is lost. 
A) If majority control is still maintained,consolidated financial statements are still required. 
B) If majority control is not maintained but significant influence exists,the equity method to account for the investment is still used but consolidated financial statements are not required. 
C) If majority control is not maintained but significant influence exists,the equity method is still used to account for the investment and consolidated financial statements are still required. 
D) If majority control is not maintained and significant influence no longer exists,a prospective change in accounting principle to the fair value method is required. 
E) A gain or loss calculation must be prepared if control is lost.

Question 11

REFERENCE: 04-09
Pell Company acquires 80% of Demers Company for $500,000 on January 1,2019.Demers reported common stock of $300,000 and retained earnings of $210,000 on that date.Equipment was undervalued by $30,000 and buildings were undervalued by $40,000,each having a 10-year remaining life.Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life.Based on an annual review,goodwill has not been impaired.
Demers earns income and pays dividends as follows:
 $$\begin{array} { l r r r } 
& 2019 & 2020 & 2021 \
\text { Net income } & \$ 100,000 & \$ 120,000 & \$ 130,000 \
\text { Dividends } & 40,000 & 50,000 & 60,000
\end{array}$$ Assume the initial value method is applied.
-How much does Pell record as Income from Demers for the year ended December 31,2020?

Accepted Answer

A) $90,400. 
B) $40,000. 
C) $89,000. 
D) $50,400. 
E) $56,000. 
A) $90,400. 
B) $40,000. 
C) $89,000. 
D) $50,400. 
E) $56,000.

Question 12

One company buys a controlling interest in another company on April 1 during a company's calendar year of operations.How should the pre-acquisition subsidiary revenues and expenses be handled in the consolidated balances for the year of acquisition?

Accepted Answer

Only post-acquisition revenues

Question 13

Alonzo Co.acquired 60% of Beazley Corp.by paying $240,000 cash.There is no active trading market for Beazley Corp.At the time of the acquisition,the book value of Beazley's net assets was $300,000.
Required:
What amount should have been assigned to the noncontrolling interest immediately after the combination?

Accepted Answer

None

Question 14

REFERENCE: 04-09
Pell Company acquires 80% of Demers Company for $500,000 on January 1,2019.Demers reported common stock of $300,000 and retained earnings of $210,000 on that date.Equipment was undervalued by $30,000 and buildings were undervalued by $40,000,each having a 10-year remaining life.Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life.Based on an annual review,goodwill has not been impaired.
Demers earns income and pays dividends as follows:
 $$\begin{array} { l r r r } 
& 2019 & 2020 & 2021 \
\text { Net income } & \$ 100,000 & \$ 120,000 & \$ 130,000 \
\text { Dividends } & 40,000 & 50,000 & 60,000
\end{array}$$ Assume the initial value method is applied.
-Compute the noncontrolling interest in Demers at December 31,2020.

Accepted Answer

A) $126,000. 
B) $106,000. 
C) $109,200. 
D) $149,600. 
E) $148,200. 
A) $126,000. 
B) $106,000. 
C) $109,200. 
D) $149,600. 
E) $148,200.

Question 15

REFERENCE: 04-07
McGuire Company acquired 90 percent of Hogan Company on January 1,2019,for $234,000 cash.This amount is reflective of Hogan's total acquisition-date fair value.Hogan's stockholders' equity consisted of common stock of $160,000 and retained earnings of $80,000.An analysis of Hogan's net assets revealed the following:
 $$\begin{array} { l c c } 
& \text { Book Value } & \text { Fair Value } \
\text { Buildings (10-year life) } & \$ 10,000 & \$ 8,000 \
\text { Equipment (4-year life) } & 14,000 & 18,000 \
\text { Land } & 5,000 & 12,000
\end{array}$$ Any excess consideration transferred over fair value is attributable to an unamortized patent with a useful life of 5 years.
-In consolidation at December 31,2019,what adjustment is necessary for Hogan's Land account?

Accepted Answer

A) $8,000 decrease . 
B) $7,000 increase. 
C) $6,300 increase. 
D) $6,300 decrease. 
E) No adjustment is necessary. 
A) $8,000 decrease . 
B) $7,000 increase. 
C) $6,300 increase. 
D) $6,300 decrease. 
E) No adjustment is necessary.

Question 16

REFERENCE: 04-07
McGuire Company acquired 90 percent of Hogan Company on January 1,2019,for $234,000 cash.This amount is reflective of Hogan's total acquisition-date fair value.Hogan's stockholders' equity consisted of common stock of $160,000 and retained earnings of $80,000.An analysis of Hogan's net assets revealed the following:
 $$\begin{array} { l c c } 
& \text { Book Value } & \text { Fair Value } \
\text { Buildings (10-year life) } & \$ 10,000 & \$ 8,000 \
\text { Equipment (4-year life) } & 14,000 & 18,000 \
\text { Land } & 5,000 & 12,000
\end{array}$$ Any excess consideration transferred over fair value is attributable to an unamortized patent with a useful life of 5 years.
-In consolidation at December 31,2020,what adjustment is necessary for Hogan's Land account?

Accepted Answer

A) $7,000 decrease. 
B) $7,000 increase. 
C) $6,300 increase. 
D) $6,300 decrease. 
E) No adjustment is necessary. 
A) $7,000 decrease. 
B) $7,000 increase. 
C) $6,300 increase. 
D) $6,300 decrease. 
E) No adjustment is necessary.

Question 17

REFERENCE: 04-06
On January 1,2019,Palk Corp.and Spraz Corp.had condensed balance sheets as follows: $\begin{array}{|l|c|c|}
\hline &\text { Palk Corp. }&\text { Spraz Corp. }\
\hline \text { Current assets } & \$ \quad 99,000 & \$ 28,000 \
\hline \text { Noncurrent assets } & \$ 125,000 & 56,000 \
\hline \text { Total assets } & \$ 224,000 & \$84,000 \
\hline\
\hline \text { Current liabilities } & 42,000 & \$ 14,000 \
\hline \text { Long-term debt } & 70,000 & \$ - \
\hline \text { Stockholders' equity } & \$ 112,000 & \$  70,000 \
\hline \text { Total liabilities and stockholders' equity } & \$ 224,000 & \$  84,000 \
\hline
\end{array}$ On January 2,2019,Palk borrowed the entire $84,000 it needed to acquire 80% of the outstanding common shares of Spraz.Shares of Spraz are not actively traded on the market.The loan was to be paid in ten equal annual principal payments,plus interest,beginning December 31,2019.The excess consideration transferred over the underlying book value of the acquired net assets was allocated 60% to inventory and 40% to goodwill.
-What is the amount attributable to consolidated noncurrent assets at January 2,2019?

Accepted Answer

A) $195,000. 
B) $192,200. 
C) $186,600. 
D) $181,000. 
E) $169,800. 
A) $195,000. 
B) $192,200. 
C) $186,600. 
D) $181,000. 
E) $169,800.

Question 18

REFERENCE: 04-02
Perch Co.acquired 80% of the common stock of Float Corp.for $1,600,000.The fair value of Float's net assets was $1,850,000,and the book value was $1,500,000.The noncontrolling interest shares of Float Corp.are not actively traded.
-What is the dollar amount of fair value over book value differences attributed to Perch at the date of acquisition?

Accepted Answer

A) $120,000. 
B) $150,000. 
C) $280,000. 
D) $350,000. 
E) $370,000. 
A) $120,000. 
B) $150,000. 
C) $280,000. 
D) $350,000. 
E) $370,000.

Question 19

REFERENCE: 04-10
Pell Company acquires 80% of Demers Company for $500,000 on January 1,2019.Demers reported common stock of $300,000 and retained earnings of $210,000 on that date.Equipment was undervalued by $30,000 and buildings were undervalued by $40,000,each having a 10-year remaining life.Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life.Based on an annual review,goodwill has not been impaired.
Demers earns income and pays dividends as follows:
Assume the partial equity method is applied.
 $$\begin{array} { l r r r } 
& 2019 & 2020 & 2021 \
\text { Net income } & \$ 100,000 & \$ 120,000 & \$ 130,000 \
\text { Dividends } & 40,000 & 50,000 & 60,000
\end{array}$$
-Compute Pell's investment in Demers at December 31,2020.

Accepted Answer

A) $676,000. 
B) $629,000. 
C) $580,000. 
D) $604,000. 
E) $572,000. 
A) $676,000. 
B) $629,000. 
C) $580,000. 
D) $604,000. 
E) $572,000.

Question 20

REFERENCE: 04-08
Pell Company acquires 80% of Demers Company for $500,000 on January 1,2019.Demers reported common stock of $300,000 and retained earnings of $210,000 on that date.Equipment was undervalued by $30,000 and buildings were undervalued by $40,000,each having a 10-year remaining life.Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life.Based on an annual review,goodwill has not been impaired.
Demers earns income and pays dividends as follows:
 $$\begin{array} { l r r r } 
& 2019 & 2020 & 2021 \
\text { Net income } & \$ 100,000 & \$ 120,000 & \$ 130,000 \
\text { Dividends } & 40,000 & 50,000 & 60,000
\end{array}$$ Assume the equity method is applied.
-Compute the noncontrolling interest in the net income of Demers at December 31,2021.

Accepted Answer

A) $20,400. 
B) $24,600. 
C) $26,000. 
D) $14,000. 
E) $12,600. 
A) $20,400. 
B) $24,600. 
C) $26,000. 
D) $14,000. 
E) $12,600.

How does a parent company account for the sale of a portion of an investment in a subsidiary?

Prevatt,Inc.owns 80% of Franklin Company.During the current year,a portion of the investment in Franklin is sold.Prior to recording the sale,Prevatt adjusts the carrying value of its investment.What is the purpose of the adjustment?

REFERENCE: 04-01 When Jolt Co.acquired 75% of the common stock of Yelts Corp. ,Yelts owned land with a book value of $70,000 and a fair value of $100,000. -What is the amount of excess land allocation attributed to the controlling interest at the acquisition date?

When a parent uses the acquisition method for business combinations and sells shares of its subsidiary,which of the following statements is false?

One company buys a controlling interest in another company on April 1 during a company's calendar year of operations.How should the pre-acquisition subsidiary revenues and expenses be handled in the consolidated balances for the year of acquisition?

The Equity Method of Accounting for Investments

Consolidation of Financial Information

Consolidations - Subsequent to the Date of Acquisition

Consolidated Financial Statements Intra-Entity Asset Transactions

Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues

Foreign Currency Transactions and Hedging Foreign Exchange Risk

Translation of Foreign Currency Financial

Partnerships: Formation and Operation

Partnerships: Termination and Liquidation

Accounting for State and Local Governments, part I

Accounting for State and Local Governments, part II

Filters

Exam 4: Consolidated Financial Statements and Outside Ownership

How does a parent company account for the sale of a portion of an investment in a subsidiary?

Prevatt,Inc.owns 80% of Franklin Company.During the current year,a portion of the investment in Franklin is sold.Prior to recording the sale,Prevatt adjusts the carrying value of its investment.What is the purpose of the adjustment?

REFERENCE: 04-01 When Jolt Co.acquired 75% of the common stock of Yelts Corp. ,Yelts owned land with a book value of $70,000 and a fair value of $100,000. -What is the amount of excess land allocation attributed to the controlling interest at the acquisition date?

When a parent uses the acquisition method for business combinations and sells shares of its subsidiary,which of the following statements is false?

One company buys a controlling interest in another company on April 1 during a company's calendar year of operations.How should the pre-acquisition subsidiary revenues and expenses be handled in the consolidated balances for the year of acquisition?

The Equity Method of Accounting for Investments

Consolidation of Financial Information

Consolidations - Subsequent to the Date of Acquisition

Consolidated Financial Statements Intra-Entity Asset Transactions

Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues

Foreign Currency Transactions and Hedging Foreign Exchange Risk

Translation of Foreign Currency Financial

Partnerships: Formation and Operation

Partnerships: Termination and Liquidation

Accounting for State and Local Governments, part I

Accounting for State and Local Governments, part II

Filters