Deck 3: Consolidated Financial Statements Date of Acquisition

Question 1

Which of the following is a limitation of consolidated financial statements?

A)Consolidated statements provide no benefit for the stockholders and creditors of the parent company.
B)Consolidated statements of highly diversified companies cannot be compared with industry standards.
C)Consolidated statements are beneficial only when the consolidated companies operate within the same industry.
D)Consolidated statements are beneficial only when the consolidated companies operate in different industries.

Answer 1

B

Question 2

Majority-owned subsidiaries should be excluded from the consolidated statements when:

A)control does not rest with the majority owner.
B)the subsidiary operates under governmentally imposed uncertainty.
C)a foreign subsidiary is domiciled in a country with foreign exchange restrictions or controls.
D)any of these circumstances exist.

Answer 2

D

Question 3

In which of the following cases would consolidation be inappropriate?

A)The subsidiary is in bankruptcy.
B)Subsidiary's operations are dissimilar from those of the parent.
C)The parent owns 90 percent of the subsidiary's common stock,but all of the subsidiary's nonvoting preferred stock is held by a single investor.
D)Subsidiary is foreign.

Answer 3

A

Question 4

One reason a parent company may pay an amount less than the book value of the subsidiary's stock acquired is:

A)an undervaluation of the subsidiary's assets.
B)the existence of unrecorded goodwill.
C)an overvaluation of the subsidiary's liabilities.
D)the existence of unrecorded contingent liabilities.

Question 5

Under the economic entity concept,consolidated financial statements are intended primarily for the benefit of the:

A)stockholders of the parent company.
B)creditors of the parent company.
C)minority stockholders.
D)all of these.

Question 6

Price Company acquired 75 percent of the common stock of Shandie Corporation on December 31,2016.On the date of acquisition,Price held land with a book value of $150,000 and a fair value of $300,000; Shandie held land with a book value of $100,000 and fair value of $500,000.What amount would land be reported in the consolidated balance sheet prepared immediately after the combination?

A)$650,000
B)$500,000
C)$550,000
D)$375,000

Question 7

In a business combination accounted for as an acquisition,registration costs related to common stock issued by the parent company are:

A)expensed as incurred.
B)deducted from other contributed capital.
C)included in the investment cost.
D)deducted from the investment cost.

Question 8

What is the method of presentation required by SFAS 160 of "non-controlling interest" on a consolidated balance sheet?

A)As a deduction from goodwill from consolidation.
B)As a separate item within the long-term liabilities section.
C)As a part of stockholders' equity.
D)As a separate item between liabilities and stockholders' equity.

Question 9

The main evidence of control for purposes of consolidated financial statements involves:

A)possessing majority ownership
B)having decision-making ability that is not shared with others.
C)being the sole shareholder
D)having the parent company and the subsidiary participating in the same industry.

Question 10

On the consolidated balance sheet,consolidated stockholders' equity is:

A)equal to the sum of the parent and subsidiary stockholders' equity.
B)greater than the parent's stockholders' equity.
C)less than the parent's stockholders' equity.
D)equal to the parent's stockholders' equity.

Question 11

On January 1,2016,Pell Company and Sand Company had condensed balance sheets as follows: On January 2,2016 Pell borrowed $240,000 and used the proceeds to purchase 90% of the outstanding common stock of Sand.This debt is payable in 10 equal annual principal payments,plus interest,starting December 30,2016.Any difference between book value and the value implied by the purchase price relates to land.
On Pell's January 2,2016 consolidated balance sheet,noncurrent liabilities should be:

A)$440,000.
B)$416,000.
C)$240,000.
D)$216,000.

Question 12

Eliminating entries are made to cancel the effects of intercompany transactions and are made on the:

A)books of the parent company.
B)books of the subsidiary company.
C)workpaper only.
D)books of both the parent company and the subsidiary.

Question 13

On January 1,2016,Pell Company and Sand Company had condensed balance sheets as follows: On January 2,2016 Pell borrowed $240,000 and used the proceeds to purchase 90% of the outstanding common stock of Sand.This debt is payable in 10 equal annual principal payments,plus interest,starting December 30,2016.Any difference between book value and the value implied by the purchase price relates to land.
On Pell's January 2,2016 consolidated balance sheet,noncurrent assets should be:

A)$520,000.
B)$536,000.
C)$544,000.
D)$586,667.

Question 14

Under the acquisition method,indirect costs relating to acquisitions should be:

A)included in the investment cost.
B)expensed as incurred.
C)deducted from other contributed capital.
D)none of these.

Question 15

A newly acquired subsidiary has pre-existing goodwill on its books.The parent company's consolidated balance sheet will:

A)treat the goodwill the same as other intangible assets of the acquired company.
B)will always show the pre-existing goodwill of the subsidiary at its book value.
C)not show any value for the subsidiary's pre-existing goodwill.
D)do an impairment test to see if any of it has been impaired.

Question 16

Reasons a parent company may pay more than book value for the subsidiary company's stock include all of the following EXCEPT:

A)the fair value of one of the subsidiary's assets may exceed its recorded value because of appreciation.
B)the existence of unrecorded goodwill.
C)liabilities may be overvalued.
D)stockholders' equity may be undervalued.

Question 17

The Difference between Implied and Book Value account is:

A)an asset or liability account reflected on the consolidated balance sheet.
B)used in allocating the amounts paid for recorded balance sheet accounts that are different than their fair values.
C)the excess implied value assigned to goodwill.
D)the unamortized excess that cannot be assigned to any related balance sheet accounts

Question 18

A majority-owned subsidiary that is in legal reorganization should normally be accounted for using:

A)consolidated financial statements.
B)the equity method.
C)the market value method.
D)the cost method.

Question 19

On January 1,2016,Pell Company and Sand Company had condensed balance sheets as follows: On January 2,2016 Pell borrowed $240,000 and used the proceeds to purchase 90% of the outstanding common stock of Sand.This debt is payable in 10 equal annual principal payments,plus interest,starting December 30,2016.Any difference between book value and the value implied by the purchase price relates to land.
On Pell's January 2,2016 consolidated balance sheet,current liabilities should be:

A)$200,000.
B)$184,000.
C)$160,000.
D)$120,000.

Question 20

Pina Corp.owns 60% of Simon Corp.'s outstanding common stock.On May 1,2016,Pina advanced Simon $90,000 in cash,which was still outstanding at December 31,2016.What portion of this advance should be eliminated in the preparation of the December 31,2016 consolidated balance sheet?

A)$90,000.
B)$54,000.
C)$36,000.
D)$-0-.

Question 21

On January 2,2016,Pope Company acquired 90% of the outstanding common stock of Smithwick Company for $480,000 cash.Just before the acquisition,the balance sheets of the two companies were as follows:
The fair values of Smithwick's assets and liabilities are equal to their book values with the exception of land.
Required:
A.Prepare the journal entry necessary to record the purchase of Smithwick's common stock.
B.Prepare a consolidated balance sheet at the date of acquisition.

Question 22

On December 31,2016,Pinta Company purchased 80% of the outstanding common stock of Snead Company for cash.At the time of acquisition,Snead Company's balance sheet was as follows:
Required:
Prepare the elimination entry(s)required for the preparation of a consolidated balance sheet workpaper on December 31,2016,assuming the purchase price of the stock was $1,670,000.Any difference between the value implied by the purchase price of the investment and the book value of net assets acquired relates to subsidiary land.

Question 23

The primary beneficiary of a variable interest entity (VIE)must consolidate the VIE into its financial statements whenever:

A)substantially all of the entity's activities are conducted on behalf of an investor who has disproportionally few voting rights.
B)the voting rights are not proportional to the obligations to absorb the expected losses or receive expected residual returns.
C)the total equity at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties.
D)the holders of the equity investment at risk have the right to receive the residual returns of the legal entity

Question 24

P Company purchased 80% of the outstanding common stock of S Company on January 2,2016,for $380,000.Balance sheets for P Company and S Company immediately after the stock acquisition were as follows:
S Company owed P Company $16,000 on open account on the date of acquisition.
Required:
Prepare a consolidated balance sheet for P and S Companies on the date of acquisition.Any difference between the value implied by the purchase price of the investment and the book value of net assets acquired relates to subsidiary land.The book values of S Company's other assets and liabilities are equal to their fair values.

Question 25

There are several reasons why a company would acquire a subsidiary's voting common stock rather than its net assets.Identify at least two advantages to acquiring a controlling interest in the voting stock of another company rather than its assets.

Question 26

On January 1,2016,Prima Corporation acquired 80 percent of Sunder Corporation's voting common stock.Sunders's buildings and equipment had a book value of $300,000 and a fair value of $350,000 at the time of acquisition.At what amount will Sunder's buildings and equipment will be reported in the consolidated statements?

A)$350,000
B)$340,000
C)$280,000
D)$300,000

Question 27

P Company acquired 54,000 shares of the common stock of S Company on January 1,2016,for $950,000 cash.The stockholders' equity section of S Company's balance sheet on that date was as follows:
On the date of acquisition,S Company owed P Company $10,000 on open account.
Required:
Present,in general journal form,the elimination entries for the preparation of a consolidated balance sheet workpaper on January 1,2016.The difference between the value implied by the purchase price of the investment and the book value of the net assets acquired relates to subsidiary land.

Question 28

IFRS defines control as:

A)the direct or indirect ability to determine the direction of management and policies through ownership,contract,or otherwise.
B)the power to govern the entity's financial and operating policies as to obtain benefits from its activities.
C)the power to direct the activities that impact economic performance,the obligation to absorb expected losses,and the right to receive expected residual returns.
D)having a majority of the ownership interests entitled to elect management.

Question 29

On January 1,2016,Prima Company issued 1,500 of its $20 par value common shares with a fair value of $50 per share in exchange for 2,000 outstanding common shares of Swatch Company in a purchase transaction.Registration costs amounted to $1,700 paid in cash.Just prior to the acquisition,the balance sheets of the two companies were as follows:
Any differences between the book value of equity and the value implied by the purchase price relates to Land.
Required:
A.Prepare the journal entry on Prima's books to record the exchange of stock.
B.Prepare a Computation and Allocation Schedule for the Difference between book value and value implied by the purchase price.
C.Calculate the consolidated balance for each of the following accounts as of December 31,2016:
1.Cash
2.Land
3.Common Stock
4.Other Contributed Capital

Question 30

On January 1,2016,Pent Company and Shelter Company had condensed balance sheets as follows: On January 2,2016 Pent borrowed $180,000 and used the proceeds to purchase 90% of the outstanding common stock of Shelter.This debt is payable in 10 equal annual principal payments,plus interest,starting December 30,2016.Any difference between book value and the value implied by the purchase price relates to land.
On Pent's January 2,2016 consolidated balance sheet,noncurrent assets should be:

A)$390,000.
B)$402,000.
C)$408,000.
D)$440,000.

Question 31

On December 31,2016,Priestly Company purchased a controlling interest in Shelter Company for $1,060,000.The consolidated balance sheet on December 31,2016 reported noncontrolling interest in Shelter Company of $265,000.
On the date of acquisition,the stockholders' equity section of Shelter Company's balance sheet was as follows:
Required:
A.Compute the noncontrolling interest percentage on December 31,2016.
B.Prepare the investment elimination entry made to prepare a consolidated balance sheet workpaper.Any difference between book value and the value implied by the purchase price relates to subsidiary land.

Question 32

On January 1,2016,Pent Company and Shelter Company had condensed balance sheets as follows: On January 2,2016 Pent borrowed $180,000 and used the proceeds to purchase 90% of the outstanding common stock of Shelter.This debt is payable in 10 equal annual principal payments,plus interest,starting December 30,2016.Any difference between book value and the value implied by the purchase price relates to land.
On Pent's January 2,2016 consolidated balance sheet,current liabilities should be:

A)$150,000.
B)$138,000.
C)$120,000.
D)$90,000.

Question 33

P Corporation paid $420,000 for 70% of S Corporation's $10 par common stock on December 31,2016,when S Corporation's stockholders' equity was made up of $300,000 of Common Stock,$90,000 of Other Contributed Capital and $60,000 of Retained Earnings.S's identifiable assets and liabilities reflected their fair values on December 31,2016,except for S's inventory which was undervalued by $60,000 and their land which was undervalued by $25,000.Balance sheets for P and S immediately after the business combination are presented in the partially completed work-paper below.
Required:
Complete the consolidated balance sheet workpaper for P Corporation and Subsidiary.

Question 34

A useful first step in the consolidating process is to prepare a Computation and Allocation of Difference (CAD)Schedule.Identify the steps involved in preparing the CAD schedule.

Question 35

Prepare in general journal form the workpaper entries to eliminate Porter Company's investment in Sewell Company in the preparation of a consolidated balance sheet at the date of acquisition for each of the following independent cases:
Any difference between book value of net assets acquired and the value implied by the purchase price relates to subsidiary property,plant,and equipment except for case (b).In case (b)assume that all book values and fair values are the same.

Question 36

If an entity is not considered a VIE,the determination of consolidation is based on whether:

A)the voting rights are proportional to the obligations to absorb expected losses or receive expected residual returns.
B)the total equity at risk is sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties.
C)the equity investments or investments in subordinated debt are at risk.
D)one of the entities in the consolidated group directly or indirectly has a controlling financial interest (usually ownership of a majority voting interest)in the other entities.

Question 37

On January 1,2016,Pent Company and Shelter Company had condensed balance sheets as follows: On January 2,2016 Pent borrowed $180,000 and used the proceeds to purchase 90% of the outstanding common stock of Shelter.This debt is payable in 10 equal annual principal payments,plus interest,starting December 30,2016.Any difference between book value and the value implied by the purchase price relates to land.
On Pent's January 2,2016 consolidated balance sheet,noncurrent liabilities should be:

A)$330,000.
B)$312,000.
C)$180,000.
D)$162,000.