Deck 2: Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries With No Differential

Question 1

A change from carrying securities at fair value to the equity method of accounting for an investment in common stock resulting from an increase in the number of shares held by the investor requires:

A)only a footnote disclosure.
B)that the cumulative amount of the change be shown as a line item on the income statement,net of tax.
C)retroactive restatement as if the investor always had used the equity method.
D)that the investor begins accruing income earned by the investee under the equity method at the date of acquisition of the new shares.

Answer 1

D

Question 2

Usually,an investment of 20 to 50 percent in another company's voting stock is reported under the:

A)cost method.
B)full consolidation method.
C)equity method.
D)fair value method.

Answer 2

C

Question 3

If instead,Poke could not exercise significant influence over the investee,by what amount will Poke's 20X7 income increase due to its investment in Shove?

A)$17,500
B)$12,500
C)$11,250
D)$7,500

Answer 3

A

Question 4

On January 1,20X4,Pony Company acquired 25% of Stallion Company's common stock at underlying book value of $200,000.Stallion has 80,000 shares of $10 par value,6 percent cumulative preferred stock outstanding.No dividends are in arrears.Stallion reported net income of $270,000 for 20X4 and paid total dividends of $140,000.Pony uses the equity method to account for this investment.
Based on the preceding information,what amount would Pony Company receive as dividends from Stallion for the year?

A)$23,000
B)$35,000
C)$37,500
D)$92,000

Question 5

On January 2,20X5,Park Co.purchased 10 percent of Sky,Inc.'s outstanding common shares for $400,000.Park is the largest single shareholder in Sky,and Park's officers are a majority on Sky's board of directors.As a result,Park is able to exercise significant influence over Sky.Sky reported net income of $500,000 for 20X5,and paid dividends of $150,000.In its December 31,20X5,balance sheet,what amount should Park report as investment in Sky?

A)$385,000
B)$450,000
C)$400,000
D)$435,000

Question 6

On July 1,20X4,Pillow Corp.obtained significant influence over Sleep Co.through the purchase of 3,000 shares of Sleep's 10,000 outstanding shares of common stock for $20 per share.On December 15,20X4,Sleep paid $40,000 in dividends to its common stockholders.Sleep's net income for the year ended December 31,20X4,was $120,000,earned evenly throughout the year.In its 20X4 income statement,what amount of income from this investment should Pillow report?

A)$12,000
B)$36,000
C)$18,000
D)$6,000

Question 7

Which of the following observations is NOT consistent with the accounting for investments in equity securities where there is no significant influence?

A)Changes in the number of investment shares resulting from stock dividends,stock splits,or reverse splits must be formally recorded by the investor.
B)Investments are carried by the investor at fair value.
C)The investor recognizes income from the investment as dividends are declared by the investee.
D)When the securities are remeasured to fair value as of the end of each period,any resulting difference is an unrealized gain or loss to be recognized in income.

Question 8

If instead,Poke could not exercise significant influence over the investee,by what amount will Poke's 20X8 income increase due to its investment in Shove?

A)$11,250
B)$2,500
C)$6,250
D)$7,500

Question 9

On January 1,20X9 Pathlon Company acquired 30 percent of the common stock of Sopteron Corporation,at underlying book value.For the same year,Sopteron reported net income of $55,000,which includes a gain from discontinued operations of $40,000.It did not pay any dividends during the year.By what amount would Pathlon's investment in Sopteron Corporation increase for the year,if Pathlon used the equity method?

A)$0
B)$16,500
C)$4,500
D)$12,000

Question 10

On January 1,20X4,Pony Company acquired 25% of Stallion Company's common stock at underlying book value of $200,000.Stallion has 80,000 shares of $10 par value,6 percent cumulative preferred stock outstanding.No dividends are in arrears.Stallion reported net income of $270,000 for 20X4 and paid total dividends of $140,000.Pony uses the equity method to account for this investment.
Based on the preceding information,what amount of investment income will Pony Company report from its investment in Stallion for the year?

A)$140,000
B)$67,500
C)$55,500
D)$35,000

Question 11

In the case of an investment in equity securities where the investor does not have significant influence and the investment is carried at fair value,a dividend from the investee is:

A)A reduction of the carrying amount of the investment.
B)Income to the investor in the period of declaration.
C)An expense to the investor in the period of declaration.
D)A direct increase to retained earnings of the investor to offset the direct decrease to retained earnings of the investee.

Question 12

On January 1,20X8,Pullman Company acquired 30 percent of Skate Company's common stock,at underlying book value of $100,000.Skate has 100,000 shares of $2 par value,5 percent cumulative preferred stock outstanding.No dividends are in arrears.Skate reported net income of $150,000 for 20X8 and paid total dividends of $72,000.Pullman uses the equity method to account for this investment.
Based on the preceding information,what amount would Pullman Company receive as dividends from Skate for the year?

A)$62,000
B)$21,600
C)$18,600
D)$54,000

Question 13

On January 1,20X4,Pony Company acquired 25% of Stallion Company's common stock at underlying book value of $200,000.Stallion has 80,000 shares of $10 par value,6 percent cumulative preferred stock outstanding.No dividends are in arrears.Stallion reported net income of $270,000 for 20X4 and paid total dividends of $140,000.Pony uses the equity method to account for this investment.
Based on the preceding information,what amount would be reported by Pony Company as the balance in its investment account on December 31,20X4?

A)$200,000
B)$220,500
C)$232,500
D)$255,500

Question 14

On January 1,20X8,Pullman Company acquired 30 percent of Skate Company's common stock,at underlying book value of $100,000.Skate has 100,000 shares of $2 par value,5 percent cumulative preferred stock outstanding.No dividends are in arrears.Skate reported net income of $150,000 for 20X8 and paid total dividends of $72,000.Pullman uses the equity method to account for this investment.
Based on the preceding information,what amount would be reported by Pullman Company as the balance in its investment account on December 31,20X8?

A)$100,000
B)$123,400
C)$120,400
D)$142,000

Question 15

If Push Company owned 51 percent of the outstanding common stock of Shove Company,which method would be appropriate for financial reporting purposes?

A)Cost method
B)Full consolidation method
C)Equity method
D)Fair value method

Question 16

Under the equity method of accounting for a stock investment,the investment initially should be recorded at:

A)cost.
B)cost minus any differential.
C)proportionate share of the fair value of the investee company's net assets.
D)proportionate share of the book value of the investee company's net assets.

Question 17

On January 1,20X8,Pullman Company acquired 30 percent of Skate Company's common stock,at underlying book value of $100,000.Skate has 100,000 shares of $2 par value,5 percent cumulative preferred stock outstanding.No dividends are in arrears.Skate reported net income of $150,000 for 20X8 and paid total dividends of $72,000.Pullman uses the equity method to account for this investment.
Based on the preceding information,what amount of investment income will Pullman Company report from its investment in Skate for the year?

A)$45,000
B)$42,000
C)$62,000
D)$35,000

Question 18

If instead,Poke could not exercise significant influence over the investee,what amount will be reported by Poke as balance in investment in Shove on December 31,20X8?

A)$105,000
B)$118,750
C)$100,000
D)$122,500

Question 19

On January 1,20X7,Poke Corporation acquired 25 percent of the outstanding shares of Shove Corporation for $100,000 cash.Shove Company reported net income of $75,000 and paid dividends of $30,000 for both 20X7 and 20X8.The fair value of shares held by Poke was $110,000 and $105,000 on December 31,20X7 and 20X8 respectively.
Based on the preceding information,what amount will be reported by Poke as balance in investment in Shove on December 31,20X8,if it used the equity method of accounting?

A)$108,250
B)$118,750
C)$100,000
D)$122,500

Question 20

On January 1,20X7,Poke Corporation acquired 25 percent of the outstanding shares of Shove Corporation for $100,000 cash.Shove Company reported net income of $75,000 and paid dividends of $30,000 for both 20X7 and 20X8.The fair value of shares held by Poke was $110,000 and $105,000 on December 31,20X7 and 20X8 respectively.
Based on the preceding information,what amount will be reported by Poke as income from its investment in Shove for 20X8,if it used the equity method of accounting?

A)$7,500
B)$11,250
C)$18,750
D)$26,250

Question 21

Prime Company acquired 100 percent of the voting common shares of Standard Video Corporation,its bitter rival,by issuing bonds with a par value and fair value of $150,000.Immediately prior to the acquisition,Prime reported total assets of $500,000,liabilities of $280,000,and stockholders' equity of $220,000.At that date,Standard Video reported total assets of $400,000,liabilities of $250,000,and stockholders' equity of $150,000.Included in Standard's liabilities was an account payable to Prime in the amount of $20,000,which Prime included in its accounts receivable.
Based on the preceding information,what amount of total liabilities was reported in the consolidated balance sheet immediately after acquisition?

A)$500,000
B)$530,000
C)$280,000
D)$660,000

Question 22

Prime Company acquired 100 percent of the voting common shares of Standard Video Corporation,its bitter rival,by issuing bonds with a par value and fair value of $150,000.Immediately prior to the acquisition,Prime reported total assets of $500,000,liabilities of $280,000,and stockholders' equity of $220,000.At that date,Standard Video reported total assets of $400,000,liabilities of $250,000,and stockholders' equity of $150,000.Included in Standard's liabilities was an account payable to Prime in the amount of $20,000,which Prime included in its accounts receivable.
Based on the preceding information,what amount of stockholders' equity was reported in the consolidated balance sheet immediately after acquisition?

A)$220,000
B)$150,000
C)$370,000
D)$350,000

Question 23

Prime Company acquired 100 percent of the voting common shares of Standard Video Corporation,its bitter rival,by issuing bonds with a par value and fair value of $150,000.Immediately prior to the acquisition,Prime reported total assets of $500,000,liabilities of $280,000,and stockholders' equity of $220,000.At that date,Standard Video reported total assets of $400,000,liabilities of $250,000,and stockholders' equity of $150,000.Included in Standard's liabilities was an account payable to Prime in the amount of $20,000,which Prime included in its accounts receivable.
Based on the preceding information,what amount of total assets was reported in the consolidated balance sheet immediately after acquisition?

A)$650,000
B)$880,000
C)$920,000
D)$750,000

Question 24

Phips Co.purchases 100 percent of Sips Company on January 1,20X2,when Phips' retained earnings balance is $320,000 and Sips' is $120,000.During 20X2,Sips reports $20,000 of net income and declares $8,000 of dividends.Phips reports $125,000 of separate operating earnings plus $20,000 of equity-method income from its 100 percent interest in Sips;Phips declares dividends of $35,000.
Based on the preceding information,what is the consolidated retained earnings balance on December 31,20X2?

A)$402,000
B)$410,000
C)$430,000
D)$562,000

Question 25

Parent Co.purchases 100 percent of Son Company on January 1,20X1,when Parent's retained earnings balance is $520,000 and Son's is $150,000.During 20X1,Son reports $15,000 of net income and declares $6,000 of dividends.Parent reports $105,000 of separate operating earnings plus $15,000 of equity-method income from its 100 percent interest in Son;Parent declares dividends of $40,000.
Based on the preceding information,what is the consolidated retained earnings balance on December 31,20X1?

A)$470,000
B)$585,000
C)$600,000
D)$759,000

Question 26

The Salmon Corporation (Salmon)reported net income for the current year of $200,000 and paid cash dividends of $30,000.The Pond Company (Pond)holds 22 percent of the outstanding voting stock of Salmon.However,another corporation holds the other 78 percent ownership and does not take Pond's input into consideration when making financing and operating decisions for Salmon.What investment income should Pond recognize for the current year?

A)$6,600
B)$0
C)$44,000
D)$50,600

Question 27

Prime Company acquired 100 percent of the voting common shares of Standard Video Corporation,its bitter rival,by issuing bonds with a par value and fair value of $150,000.Immediately prior to the acquisition,Prime reported total assets of $500,000,liabilities of $280,000,and stockholders' equity of $220,000.At that date,Standard Video reported total assets of $400,000,liabilities of $250,000,and stockholders' equity of $150,000.Included in Standard's liabilities was an account payable to Prime in the amount of $20,000,which Prime included in its accounts receivable.
Based on the preceding information,what amount of total assets did Prime report in its separate balance sheet immediately after the acquisition before any consolidation with Standard Video?

A)$500,000
B)$650,000
C)$750,000
D)$900,000

Question 28

Phips Co.purchases 100 percent of Sips Company on January 1,20X2,when Phips' retained earnings balance is $320,000 and Sips' is $120,000.During 20X2,Sips reports $20,000 of net income and declares $8,000 of dividends.Phips reports $125,000 of separate operating earnings plus $20,000 of equity-method income from its 100 percent interest in Sips;Phips declares dividends of $35,000.
Based on the preceding information,what is Phips' post-closing retained earnings balance on December 31,20X2?

A)$305,000
B)$410,000
C)$430,000
D)$465,000

Question 29

The consolidation process consists of all the following except:

A)Combining the financial statements of two or more legally separate companies.
B)Eliminating intercompany transactions and holdings.
C)Closing the individual subsidiary's revenue and expense accounts into the parent's retained earnings.
D)Combining the accounts of separate companies,creating a single set of financial statements.

Question 30

What account balances in the subsidiary stockholders' equity accounts should be eliminated in preparing a consolidated balance sheet?

A)Common stock
B)Additional paid-in capital
C)Retained Earnings
D)All of these account balances are eliminated

Question 31

Phips Co.purchases 100 percent of Sips Company on January 1,20X2,when Phips' retained earnings balance is $320,000 and Sips' is $120,000.During 20X2,Sips reports $20,000 of net income and declares $8,000 of dividends.Phips reports $125,000 of separate operating earnings plus $20,000 of equity-method income from its 100 percent interest in Sips;Phips declares dividends of $35,000.
Based on the preceding information,what is Sips' post-closing retained earnings balance on December 31,20X2?

A)$108,000
B)$120,000
C)$132,000
D)$140,000

Question 32

Parent Co.purchases 100 percent of Son Company on January 1,20X1,when Parent's retained earnings balance is $520,000 and Son's is $150,000.During 20X1,Son reports $15,000 of net income and declares $6,000 of dividends.Parent reports $105,000 of separate operating earnings plus $15,000 of equity-method income from its 100 percent interest in Son;Parent declares dividends of $40,000.
Based on the preceding information,what is Son's post-closing retained earnings balance on December 31,20X1?

A)$141,000
B)$150,000
C)$159,000
D)$165,000

Question 33

Pickup Company acquired 100 percent of the voting common shares of Sedan Corporation by issuing bonds with a par value and fair value of $200,000.Immediately prior to the acquisition,Pickup reported total assets of $600,000,liabilities of $370,000,and stockholders' equity of $230,000.At that date,Sedan reported total assets of $500,000,liabilities of $300,000,and stockholders' equity of $200,000.Included in Sedan's liabilities was an account payable to Pickup in the amount of $50,000,which Pickup included in its accounts receivable.
Based on the preceding information,what amount of total assets was reported in the consolidated balance sheet immediately after acquisition?

A)$600,000
B)$800,000
C)$1,050,000
D)$1,150,000

Question 34

Slide Corporation reported net income for the current year of $370,000 and paid cash dividends of $50,000.Power Company holds 40 percent of the outstanding voting stock of Slide.However,another corporation holds the other 60 percent ownership and does not take Power's input into consideration when making financing and operating decisions for Slide.What investment income should Power recognize for the current year?

A)$0
B)$20,000
C)$128,000
D)$148,000

Question 35

Pickup Company acquired 100 percent of the voting common shares of Sedan Corporation by issuing bonds with a par value and fair value of $200,000.Immediately prior to the acquisition,Pickup reported total assets of $600,000,liabilities of $370,000,and stockholders' equity of $230,000.At that date,Sedan reported total assets of $500,000,liabilities of $300,000,and stockholders' equity of $200,000.Included in Sedan's liabilities was an account payable to Pickup in the amount of $50,000,which Pickup included in its accounts receivable.
Based on the preceding information,what amount of stockholders' equity was reported in the consolidated balance sheet immediately after acquisition?

A)$200,000
B)$230,000
C)$380,000
D)$430,000

Question 36

The main guidance on equity-method reporting,found in ASC 323 and 325 requires all of the following except:

A)The investor's share of the investee's discontinued operations should be reported.
B)The investor's share of the investee's prior-period adjustments should be reported.
C)Continued use of the equity-method even if continued losses result in a zero or negative balance in the investment account.
D)Preferred dividends of the investee should be deducted from net income before the investor computes its share of investee earnings.

Question 37

Parent Co.purchases 100 percent of Son Company on January 1,20X1,when Parent's retained earnings balance is $520,000 and Son's is $150,000.During 20X1,Son reports $15,000 of net income and declares $6,000 of dividends.Parent reports $105,000 of separate operating earnings plus $15,000 of equity-method income from its 100 percent interest in Son;Parent declares dividends of $40,000.
Based on the preceding information,what is Parent's post-closing retained earnings balance on December 31,20X1?

A)$485,000
B)$505,000
C)$525,000
D)$600,000

Question 38

On January 1,20X4,Plimsol Company acquired 100 percent of Shipping Corporation's voting shares,at underlying book value.Plimsol accounts for its investment in Shipping at cost.Shipping's retained earnings was $75,000 on the date of acquisition.On December 31,20X4,the trial balance data for the two companies are as follows:

Based on the information provided,what amount of net income will be reported in the consolidated financial statements prepared on December 31,20X4?

A)$100,000
B)$85,000
C)$110,000
D)$125,000

Question 39

Pickup Company acquired 100 percent of the voting common shares of Sedan Corporation by issuing bonds with a par value and fair value of $200,000.Immediately prior to the acquisition,Pickup reported total assets of $600,000,liabilities of $370,000,and stockholders' equity of $230,000.At that date,Sedan reported total assets of $500,000,liabilities of $300,000,and stockholders' equity of $200,000.Included in Sedan's liabilities was an account payable to Pickup in the amount of $50,000,which Pickup included in its accounts receivable.
Based on the preceding information,what amount of total liabilities was reported in the consolidated balance sheet immediately after the acquisition?

A)$370,000
B)$670,000
C)$820,000
D)$870,000

Question 40

Pickup Company acquired 100 percent of the voting common shares of Sedan Corporation by issuing bonds with a par value and fair value of $200,000.Immediately prior to the acquisition,Pickup reported total assets of $600,000,liabilities of $370,000,and stockholders' equity of $230,000.At that date,Sedan reported total assets of $500,000,liabilities of $300,000,and stockholders' equity of $200,000.Included in Sedan's liabilities was an account payable to Pickup in the amount of $50,000,which Pickup included in its accounts receivable.
Based on the preceding information,what amount of total assets did Pickup report in its balance sheet immediately after the acquisition?

A)$1,100,000
B)$1,000,000
C)$800,000
D)$1,600,000

Question 41

On January 1,20X4,Plimsol Company acquired 100 percent of Shipping Corporation's voting shares,at underlying book value.Plimsol accounts for its investment in Shipping at cost.Shipping's retained earnings was $75,000 on the date of acquisition.On December 31,20X4,the trial balance data for the two companies are as follows:

Based on the information provided,what amount of total assets will be reported in the consolidated balance sheet prepared on December 31,20X4?

A)$425,000
B)$525,000
C)$650,000
D)$630,000

Question 42

On January 1,20X7,Plimsol Company acquired 100 percent of Shipping Corporation's voting shares,at underlying book value.Plimsol uses the cost method in accounting for its investment in Shipping.Shipping's reported retained earnings of $75,000 on the date of acquisition.The trial balances for Plimsol Company and Shipping Corporation as of December 31,20X8,follow:

Required:
1.Provide all consolidating entries required to prepare a full set of consolidated statements for 20X8.
2.Prepare a three-part consolidation worksheet in good form as of December 31,20X8.

Question 43

On January 1,20X4,Plimsol Company acquired 100 percent of Shipping Corporation's voting shares,at underlying book value.Plimsol accounts for its investment in Shipping at cost.Shipping's retained earnings was $75,000 on the date of acquisition.On December 31,20X4,the trial balance data for the two companies are as follows:

Based on the information provided,what amount of total liabilities will be reported in the consolidated balance sheet prepared on December 31,20X4?

A)$525,000
B)$115,000
C)$125,000
D)$190,000

Question 44

Parent Company purchased 100 percent of Son Inc.on January 1,20X2 for $420,000.Son reported earnings of $82,000 and declared dividends of $4,000 during 20X2.
Based on the preceding information and assuming Parent carries its investment in Son at cost,what is the balance in Parent's Investment in Son account on December 31,20X2,prior to consolidation?

A)$416,000
B)$420,000
C)$424,000
D)$498,000

Question 45

In the absence of other evidence,common stock ownership of between 20 and 50 percent is viewed as indicating that the investor is able to exercise significant influence over the investee.What are some of the other factors that could constitute evidence of the ability to exercise significant influence?

Question 46

On January 1,20X4,Plimsol Company acquired 100 percent of Shipping Corporation's voting shares,at underlying book value.Plimsol accounts for its investment in Shipping at cost.Shipping's retained earnings was $75,000 on the date of acquisition.On December 31,20X4,the trial balance data for the two companies are as follows:

Based on the information provided,what amount of total stockholders' equity will be reported in the consolidated balance sheet prepared on December 31,20X4?

A)$190,000
B)$335,000
C)$460,000
D)$310,000

Question 47

Pone Company purchased 100 percent of Sone Inc.on January 1,20X9 for $625,000.Sone reported earnings of $76,000 and declared dividends of $8,000 during 20X9.
Based on the preceding information and assuming Pone carries its investment in Sone at cost,what is the balance in Pone's Investment in Sone account on December 31,20X9,prior to consolidation?

A)$617,000
B)$625,000
C)$633,000
D)$693,000

Question 48

On January 1,20X4,Plimsol Company acquired 100 percent of Shipping Corporation's voting shares,at underlying book value.Plimsol accounts for its investment in Shipping at cost.Shipping's retained earnings was $75,000 on the date of acquisition.On December 31,20X4,the trial balance data for the two companies are as follows:

Based on the information provided,what amount of retained earnings will be reported in the consolidated balance sheet prepared on December 31,20X4?

A)$235,000
B)$210,000
C)$310,000
D)$225,000

Question 49

On January 1,20X9,Peery Company acquired 100 percent of Standard Company's common shares at underlying book value.Peery uses the equity method in accounting for its ownership of Standard.On December 31,20X9,the trial balances of the two companies are as follows:

Required:
1.Prepare the consolidation entries needed as of December 31,20X9,to complete a consolidation worksheet.
2.Prepare a three-part consolidation worksheet as of December 31,20X9.

Question 50

Pone Company purchased 100 percent of Sone Inc.on January 1,20X9 for $625,000.Sone reported earnings of $76,000 and declared dividends of $8,000 during 20X9.
Based on the preceding information and assuming Pone uses the equity method to account for its investment in Sone,what is the balance in Pone's Investment in Sone account on December 31,20X9,prior to consolidation?

A)$617,000
B)$625,000
C)$633,000
D)$693,000

Question 51

Parent Company purchased 100 percent of Son Inc.on January 1,20X2 for $420,000.Son reported earnings of $82,000 and declared dividends of $4,000 during 20X2.
Based on the preceding information and assuming Parent uses the equity method to account for its investment in Son,what is the balance in Parent's Investment in Son account on December 31,20X2,prior to consolidation?

A)$416,000
B)$420,000
C)$424,000
D)$498,000

Question 52

Pocket Corporation acquired 100 percent of the voting shares of Sleeve Inc.by issuing 10,000 new shares of $5 par value common stock with a $30 market value.
Required:
1.Which company is the parent and which is the subsidiary?
2.Define a subsidiary corporation.
3.Define a parent corporation.
4.Which entity prepares the consolidated worksheet?
5.Why are consolidation entries used?