Exam 3: Consolidations-Subsequent to the Date of Acquisition

Figure: Perry Company acquires 100% of the stock of Hurley Corporation on January 1, 2010, for $3,800 cash. As of that date Hurley has the following trial balance; Any excess of consideration transferred over fair value of net assets acquired is considered goodwill with an indefinite life. FIFO inventory valuation method is used. -Compute the amount of Hurley's buildings that would be reported in a December 31, 2010, consolidated balance sheet.

Fesler Inc. acquired all of the outstanding common stock of Pickett Company on January 1, 2010. Annual amortization of $22,000 resulted from this transaction. On the date of the acquisition, Fesler reported retained earnings of $520,000 while Pickett reported a $240,000 balance for retained earnings. Fesler reported net income of $100,000 in 2010 and $68,000 in 2011, and paid dividends of $25,000 in dividends each year. Pickett reported net income of $24,000 in 2010 and $36,000 in 2011, and paid dividends of $10,000 in dividends each year. Assume that Fesler's reported net income includes Equity in Subsidiary Income. -If the parent's net income reflected use of the equity method, what were the consolidated retained earnings on December 31, 2011?

Figure: Pritchett Company recently acquired three businesses, recognizing goodwill in each acquisition. Pritchett has allocated its acquired goodwill to its three reporting units: Apple, Banana, and Carrot. Pritchett provides the following information in performing the 2011 annual review for impairment: -Which of Pritchett's reporting units require both steps to test for goodwill impairment?

Figure: Watkins, Inc. acquires all of the outstanding stock of Glen Corporation on January 1, 2010. At that date, Glen owns only three assets and has no liabilities: Book Fair Value Value Inventory (FIFO method) \ 40,000 \ 50,000 Equipment (10-year life) 80,000 75,000 Building (20-year life) 200,000 300,000 -If Watkins pays $300,000 in cash for Glen, at what amount would the subsidiary's Building be represented in a January 2, 2010 consolidation?

For an acquisition when the subsidiary retains its incorporation, which method of internal recordkeeping gives the most accurate portrayal of the accounting results for the entire business combination?

For each of the following situations, select the best answer that applies to consolidating financial information subsequent to the acquisition date:

On January 1, 2010, Franel Co. acquired all of the common stock of Hurlem Corp. For 2010, Hurlem earned net income of $360,000 and paid dividends of $190,000. Amortization of the patent allocation that was included in the acquisition was $6,000. -How much difference would there have been in Franel's income with regard to the effect of the investment, between using the equity method or using the partial equity method of internal recordkeeping?

Jaynes Inc. acquired all of Aaron Co.'s common stock on January 1, 2010, by issuing 11,000 shares of $1 par value common stock. Jaynes' shares had a $17 per share fair value. On that date, Aaron reported a net book value of $120,000. However, its equipment (with a five-year remaining life) was undervalued by $6,000 in the company's accounting records. Any excess of consideration transferred over fair value of assets and liabilities is assigned to an unrecorded patent to be amortized over ten years. -What was consolidated net income for the year ended December 31, 2011?

What is the basic objective of all consolidations?

Kaye Company acquired 100% of Fiore Company on January 1, 2011. Kaye paid $1,000 excess consideration over book value which is being amortized at $20 per year. Fiore reported net income of $400 in 2011 and paid dividends of $100. -Assume the initial value method is applied. How much will Kaye's income increase or decrease as a result of Fiore's operations?

Figure: Watkins, Inc. acquires all of the outstanding stock of Glen Corporation on January 1, 2010. At that date, Glen owns only three assets and has no liabilities: Book Fair Value Value Inventory (FIFO method) \ 40,000 \ 50,000 Equipment (10-year life) 80,000 75,000 Building (20-year life) 200,000 300,000 -If Watkins pays $450,000 in cash for Glen, at what amount would Glen's Inventory acquired be represented in a December 31, 2010 consolidated balance sheet?

Figure: Watkins, Inc. acquires all of the outstanding stock of Glen Corporation on January 1, 2010. At that date, Glen owns only three assets and has no liabilities: Book Fair Value Value Inventory (FIFO method) \ 40,000 \ 50,000 Equipment (10-year life) 80,000 75,000 Building (20-year life) 200,000 300,000 -If Watkins pays $400,000 in cash for Glen, what amount would be represented as the subsidiary's Building in a consolidation at December 31, 2012, assuming the book value of the building at that date is still $200,000?

Harrison, Inc. acquires 100% of the voting stock of Rhine Company on January 1, 2010 for $400,000 cash. A contingent payment of $16,500 will be paid on April 15, 2011 if Rhine generates cash flows from operations of $27,000 or more in the next year. Harrison estimates that there is a 20% probability that Rhine will generate at least $27,000 next year, and uses an interest rate of 5% to incorporate the time value of money. The fair value of $16,500 at 5%, using a probability weighted approach, is $3,142. -Assuming Rhine generates cash flow from operations of $27,200 in 2010, how will Harrison record the $16,500 payment of cash on April 15, 2011 in satisfaction of its contingent obligation?

Figure: Following are selected accounts for Green Corporation and Vega Company as of December 31, 2013. Several of Green's accounts have been omitted. Green Vega Revenues \ 900,000 \ 500,000 Cost of goods sold 360,000 200,000 Depreciation expense 140,000 40,000 Other expenses 100,000 60,000 Equity in Vega's income ? Retained earnings, 1/1/13 1,350,000 1,200,000 Dividends 195,000 80,000 Current assets 300,000 1,380,000 Land 450,000 180,000 Building (net) 750,000 280,000 Equipment (net) 300,000 500,000 Liabilities 600,000 620,000 Common stock 450,000 80,000 Additional paid-in capital 75,000 320,000 Green acquired 100% of Vega on January 1, 2009, by issuing 10,500 shares of its $10 par value common stock with a fair value of $95 per share. On January 1, 2009, Vega's land was undervalued by $40,000, its buildings were overvalued by $30,000, and equipment was undervalued by $80,000. The buildings have a 20-year life and the equipment has a 10-year life. $50,000 was attributed to an unrecorded trademark with a 16-year remaining life. There was no goodwill associated with this investment. -Compute the December 31, 2013, consolidated revenues.

Harrison, Inc. acquires 100% of the voting stock of Rhine Company on January 1, 2010 for $400,000 cash. A contingent payment of $16,500 will be paid on April 15, 2011 if Rhine generates cash flows from operations of $27,000 or more in the next year. Harrison estimates that there is a 20% probability that Rhine will generate at least $27,000 next year, and uses an interest rate of 5% to incorporate the time value of money. The fair value of $16,500 at 5%, using a probability weighted approach, is $3,142. -When recording consideration transferred for the acquisition of Rhine on January 1, 2010, Harrison will record a contingent performance obligation in the amount of:

When consolidating a subsidiary under the equity method, which of the following statements is true?

Beatty, Inc. acquires 100% of the voting stock of Gataux Company on January 1, 2010 for $500,000 cash. A contingent payment of $12,000 will be paid on April 1, 2011 if Gataux generates cash flows from operations of $26,500 or more in the next year. Beatty estimates that there is a 30% probability that Gataux will generate at least $26,500 next year, and uses an interest rate of 4% to incorporate the time value of money. The fair value of $12,000 at 4%, using a probability weighted approach, is $3,461. -Assuming Gataux generates cash flow from operations of $27,200 in 2010, how will Beatty record the $12,000 payment of cash on April 1, 2011 in satisfaction of its contingent obligation?

When a company applies the initial value method in accounting for its investment in a subsidiary and the subsidiary reports income less than dividends paid, what entry would be made for a consolidation worksheet? A) Retained earnings Investment in subsidiary B) Investment in subsidiary Retained earnings C) Investment in subsidiary Equity in subsidiary's income D) Equity in subsidiary's income Investment in subsidiary E) Retained earnings Additional paid-in capital

For an acquisition when the subsidiary maintains its incorporation, under the partial equity method, what adjustments are made to the balance of the investment account?

Figure: Following are selected accounts for Green Corporation and Vega Company as of December 31, 2013. Several of Green's accounts have been omitted. Green Vega Revenues \ 900,000 \ 500,000 Cost of goods sold 360,000 200,000 Depreciation expense 140,000 40,000 Other expenses 100,000 60,000 Equity in Vega's income ? Retained earnings, 1/1/13 1,350,000 1,200,000 Dividends 195,000 80,000 Current assets 300,000 1,380,000 Land 450,000 180,000 Building (net) 750,000 280,000 Equipment (net) 300,000 500,000 Liabilities 600,000 620,000 Common stock 450,000 80,000 Additional paid-in capital 75,000 320,000 Green acquired 100% of Vega on January 1, 2009, by issuing 10,500 shares of its $10 par value common stock with a fair value of $95 per share. On January 1, 2009, Vega's land was undervalued by $40,000, its buildings were overvalued by $30,000, and equipment was undervalued by $80,000. The buildings have a 20-year life and the equipment has a 10-year life. $50,000 was attributed to an unrecorded trademark with a 16-year remaining life. There was no goodwill associated with this investment. -Compute the December 31, 2013 consolidated retained earnings.