Exam 4: Consolidated Financial Statements and Outside Ownership

Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2010. 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: 2010 2011 2012 Net income \ 100,000 \ 120,000 \ 130,000 Dividends 40,000 50,000 60,000 Assume the partial equity method is applied. -Compute Pell's investment in Demers at December 31,2011.

One company buys a controlling interest in another company on April 1.How should the preacquisition subsidiary revenues and expenses be handled in the consolidated balances for the year of acquisition?

On January 1, 2008, prior to the effective date for use of the acquisition method, Cranston Inc. reported net assets of $1,064,000, although equipment (with a four-year life) with a book value of $616,000 was worth $700,000. Peak Corp. paid $969,000 on that date for an 80% ownership interest in Cranston. Cranston's stock is not actively traded. Peak still owns its 80% interest in 2011. -What is the excess amortization for 2011 using the purchase method of accounting for business combinations?

McLaughlin,Inc.acquires 70 percent of Ellis Corporation on September 1,2010,and an additional 10 percent on November 1,2011.Annual amortization of $8,400 attributed to the controlling interest relates to the first acquisition.Ellis reports the following figures for 2011: Revenues \ 500,000 Expenses 350,000 Retained earnings, 1/1/11 3,500,000 Dividends paid 40,000 Common stock 400,000 Without regard for this investment,McLaughlin earns $480,000 in net income ($840,000 revenues less $360,000 expenses;incurred evenly through the year)during 2011. Required: Prepare a schedule of consolidated net income and apportionment to noncontrolling and controlling interests for 2011.

Where may a noncontrolling interest be presented in a consolidated balance sheet?

On January 1, 2010, Glenville Co. acquired an 80% interest in Acron Corp. for $500,000. There is no active trading market for Acron's stock. The fair value of Acron's net assets was $600,000 and Glenville accounts for its interest using the acquisition method. -Determine the value assigned to the noncontrolling interest as of the date of the acquisition.

Keefe,Inc. ,a calendar-year corporation,acquires 70% of George Company on September 1,2010,and an additional 10% on April 1,2011.Total annual amortization of $6,000 relates to the first acquisition.George reports the following figures for 2011: Revenues \ 500,000 Expenses 400,000 Retained earnings, 1/1/11 300,000 Dividends paid 50,000 Common stock 200,000 Without regard for this investment,Keefe independently earns $300,000 in net income during 2011. All net income is earned evenly throughout the year. What is the controlling interest in consolidated net income for 2011?

Tosco Co.paid $540,000 for 80% of the stock of Martz Co.when the book value of Martz's net assets was $600,000.For all of Martz's assets and liabilities,book value and fair value were approximately equal. Required: Using the acquisition method,what amount of goodwill should appear in a consolidated balance sheet prepared immediately after the combination?

Jax Company uses the acquisition method for accounting for its investment in Saxton Company.Jax sells some of its shares of Saxton such that neither control nor significant influence exists.Which of the following statements is true?

On January 1,2011,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 1,2011. Land Buildings (seven-year remaining life) Equipment (five-year remaining life) Book \ 1,700,000 2,700,000 3,700,000 Fair \ 2,550,000 3,400,000 3,300,000 For internal reporting purposes,JDE employed the equity method to account for this investment. -The following account balances are for the year ending December 31,2011 for both companies. $\begin{array}{lcc}&\text { John Doe } & \text { Bubba } \\&\underline{\text { Enterprises } }& \underline{\text { Manufacturing }}\\ \text { Revenues } & \$(298,000,000) & \$(103,750,000) \\ \text { Expenses } & 271,000,000 & 95,800,000 \\ \text { Equity in income of Bubba Manufacturing } & (4,361,500) & \underline{0} \\ \text { Net income } & \$(31,361,500) & \$(7,950,000) \\\\ \text { Retained earnings, January 1, } 2011 & \$(2,500,000) & \$( 100,000) \\ \text { Net income (above) } & (31,361,500) & ( 7,950,000) \\ \text { Dividends paid } & 5.000 .000 & 3,000.000 \\ \text { Retained earnings, December } 31,2011 & \$(28,861,500) & \$( 5,050,000) \\\\\text { Current Assets } & \$ 30,500,000 & \$ 20,800,000 \\\text { Investment in Bubba Manufacturing } & 13,161,500 & \\\text { Land } & 1,500,000 & 1,700,000 \\\text { Buildings } & 5,600,000 & 2,360,000 \\\text { Equipment (net) } & 3,100,000 & 2,960,000 \\\text { Total assets } & \$ 53,861,500 & \$ 27,820,000 \\\\\text { Accounts payable } & \$(3,100,000) & (4,900,000) \\ \text { Notes payable } & & 1,000,000) \\\text { Common stock } & 2,900,000) & 6,000,000) \\ \text { Additional paid-in capital } & (19,000,000) & (10,870,000) \\ \text { Retained earnings, Dec. 31,2011 ( above) } & (28,861,500) & 5.050 .000) \\\text { Total liabilities and stockholders' equity } & \$(53,861,500) & \$(27,820,000) \\\end{array}$ Required: Prepare a consolidation worksheet for this business combination.Assume goodwill has been reviewed and there is no goodwill impairment.

McGuire company acquired 90 percent of Hogan Company on January 1, 2010, for $234,000 cash. This amount is reflective of Hogan's total 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: Book Value Fair Value Buildings (10-year life) \ 10,000 \ 8,000 Equipment (4-year life) 14,000 18,000 Land 5,000 12,000 Any excess consideration transferred over fair value is attributable to an unamortized patent with a useful life of 5 years. -In consolidation at January 1,2010,what adjustment is necessary for Hogan's Land account?

Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2010. 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: 2010 2011 2012 Net income \ 100,000 \ 120,000 \ 130,000 Dividends 40,000 50,000 60,000 Assume the partial equity method is applied. -Compute Pell's investment in Demers at December 31,2010.

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?

When a subsidiary is acquired sometime after the first day of the fiscal year,which of the following statements is true?

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?

McGuire company acquired 90 percent of Hogan Company on January 1, 2010, for $234,000 cash. This amount is reflective of Hogan's total 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: Book Value Fair Value Buildings (10-year life) \ 10,000 \ 8,000 Equipment (4-year life) 14,000 18,000 Land 5,000 12,000 Any excess consideration transferred over fair value is attributable to an unamortized patent with a useful life of 5 years. -In consolidation at December 31,2011,what adjustment is necessary for Hogan's Buildings account?

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 Float Corp.'s net assets that would be represented in a consolidated balance sheet prepared at the date of acquisition?

On January 1, 2010, Palk Corp. and Spraz Corp. had condensed balance sheets as follows: Palk Corp. Spraz Corp. Current assets \ 99,000 28,000 Noncurrent assets \ 125,000 56,000 Total assets \ 224,000 84,000 Current liabilities 42,000 \ 14,000 Long-term debt 70,000 \ - Stockholders' equity \ 112,000 \ 70,000 Total liabilities and stockholders' equity \ 224,000 \ 84,000 On January 2, 2010, Palk borrowed the entire $84,000 it needed to acquire 80% of the outstanding common shares of Spraz. The loan was to be paid in ten equal annual principal payments, plus interest, beginning December 31, 2010. 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 consolidated current assets at January 2,2010?

When a parent uses the partial equity method throughout the year to account for its investment in an acquired subsidiary,which of the following statements is false before making adjustments on the consolidated worksheet?

Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2010. 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: 2010 2011 2012 Net income \ 100,000 \ 120,000 \ 130,000 Dividends 40,000 50,000 60,000 Assume the equity method is applied. -Compute Pell's investment in Demers at December 31,2012.