Deck 5: Consolidation Subsequent to Acquisition Date

Question 1

An impairment loss can be reversed when

A)the impairment loss no longer exists or has been reduced and there has been a change in the estimates used to determine the assets recoverable amount.
B)with the exception of goodwill,all intangible assets carrying values exceed their fair market values.
C)the intangible assets carrying values exceed their undiscounted future cash flows.
D)the recoverable amount is determined and compared to the carrying amount.If the recoverable amount is greater than the carrying amount then the impairment loss previously recorded is reversed)

Answer 1

A

Question 2

Prior to July 2001,the required treatment of Goodwill was:

A)to amortize it over its useful life,to a maximum of 40 years.
B)to amortize it over its useful life,to a maximum of 20 years.
C)to re-allocate a portion of it to other intangible assets.
D)to capitalize but not amortize the amount.

Answer 2

A

Question 3

The following information pertains to questions
Errant Inc purchased 100% of the outstanding voting shares of Grub Inc.for $200,000 on January 1,2004.On that date,Grub Inc had common stock and retained earnings worth $100,000 and $60,000,respectively.Goodwill is tested annually for impairment.The Balance Sheets of both companies,as well as Grub's fair market values on the date of acquisition are disclosed below: The net incomes for Errant and Grub for the year ended December 31,2007 were $160,000 and $90,000 respectively.Grub paid $9,000 in Dividends to Errant during the year.There were no other inter-company transactions during the year.Moreover,an impairment test conducted on December 31,2007 revealed that the Goodwill should actually have a value of $20,000.Both companies use a FIFO system,and most of Grub's inventory on the date of acquisition was sold during the year.Errant did not declare any dividends during the year.
Assume that Errant Inc.uses the Equity Method unless stated otherwise.
Assuming that Errant uses the Cost Method,what would be the journal entry to record the dividends received by Errant during the year?

Answer 3

B

Question 4

Which of the following statements best describes the accounting treatment of Intangible Assets with indefinite lives?

A)all intangible assets are written down when their carrying values exceed their fair market values.
B)with the exception of Goodwill,all intangible assets are written down when their carrying values exceed their fair market values.
C)all intangible assets are written down when their carrying values exceed their undiscounted future cash flows.
D)the recoverable amount is determined and compared to the carrying amount.If the recoverable amount is greater than the carrying amount than no impairment exists.Otherwise,there is an impairment and the asset is written down to its recoverable amount.

Question 5

The rationale behind allocating goodwill across a subsidiary's various cash-generating units is:

A)that doing so will result in more accurate asset valuations.
B)that it is necessary to comply with IASB requirements.
C)that doing so would facilitate comparisons between operating segments
D)that the cash-generating units will benefit from the synergies of the combination.

Question 6

The following information pertains to questions
Errant Inc purchased 100% of the outstanding voting shares of Grub Inc.for $200,000 on January 1,2004.On that date,Grub Inc had common stock and retained earnings worth $100,000 and $60,000,respectively.Goodwill is tested annually for impairment.The Balance Sheets of both companies,as well as Grub's fair market values on the date of acquisition are disclosed below: The net incomes for Errant and Grub for the year ended December 31,2007 were $160,000 and $90,000 respectively.Grub paid $9,000 in Dividends to Errant during the year.There were no other inter-company transactions during the year.Moreover,an impairment test conducted on December 31,2007 revealed that the Goodwill should actually have a value of $20,000.Both companies use a FIFO system,and most of Grub's inventory on the date of acquisition was sold during the year.Errant did not declare any dividends during the year.
Assume that Errant Inc.uses the Equity Method unless stated otherwise.
What would be Errant's journal entry to record Grub's Net Income for 2004?

Question 7

The following information pertains to questions
Errant Inc purchased 100% of the outstanding voting shares of Grub Inc.for $200,000 on January 1,2004.On that date,Grub Inc had common stock and retained earnings worth $100,000 and $60,000,respectively.Goodwill is tested annually for impairment.The Balance Sheets of both companies,as well as Grub's fair market values on the date of acquisition are disclosed below: The net incomes for Errant and Grub for the year ended December 31,2007 were $160,000 and $90,000 respectively.Grub paid $9,000 in Dividends to Errant during the year.There were no other inter-company transactions during the year.Moreover,an impairment test conducted on December 31,2007 revealed that the Goodwill should actually have a value of $20,000.Both companies use a FIFO system,and most of Grub's inventory on the date of acquisition was sold during the year.Errant did not declare any dividends during the year.
Assume that Errant Inc.uses the Equity Method unless stated otherwise.
Which of the following journal entries would be required on December 31,2007 to record the Impairment of the Goodwill?

Question 8

The following information pertains to questions
Errant Inc purchased 100% of the outstanding voting shares of Grub Inc.for $200,000 on January 1,2004.On that date,Grub Inc had common stock and retained earnings worth $100,000 and $60,000,respectively.Goodwill is tested annually for impairment.The Balance Sheets of both companies,as well as Grub's fair market values on the date of acquisition are disclosed below: The net incomes for Errant and Grub for the year ended December 31,2007 were $160,000 and $90,000 respectively.Grub paid $9,000 in Dividends to Errant during the year.There were no other inter-company transactions during the year.Moreover,an impairment test conducted on December 31,2007 revealed that the Goodwill should actually have a value of $20,000.Both companies use a FIFO system,and most of Grub's inventory on the date of acquisition was sold during the year.Errant did not declare any dividends during the year.
Assume that Errant Inc.uses the Equity Method unless stated otherwise.
What would be the net income reported on Errant's Consolidated Income Statement on December 31,2007? Assume that Errant's income for the year does not include any income from Grub.

A)$90,000
B)$250,000
C)$160,000
D)$230,000

Question 9

Under the Equity Method,

A)the parent's investment in the subsidiary is recorded at Cost,and never changed thereafter.
B)the parent records its pro rata share of the subsidiary's post-acquisition income as an increase to the investment account and reduces the investment account with its share of the dividends declared by the subsidiary.
C)the parent records its pro rata share of the subsidiary's cumulative earnings as an increase to the investment account and reduces the investment account with its share of the dividends declared by the subsidiary.
D)the parent's investment in the Subsidiary is recorded at Cost and reduced by any excess dividends received from the subsidiary.

Question 10

Consolidated Net Income is equal to

A)the sum of the net incomes of both the parent and its subsidiaries.
B)the sum of the net incomes of both the parent and its subsidiaries less any inter-company dividends.
C)the parent's net income excluding any income arising from its investment in the Subsidiary.
D)the parent's net income excluding any income arising from its investment in the Subsidiary,plus the parent's share of the Net Income of the subsidiary less the amortization of the acquisition differential.

Question 11

The following information pertains to questions
Errant Inc purchased 100% of the outstanding voting shares of Grub Inc.for $200,000 on January 1,2004.On that date,Grub Inc had common stock and retained earnings worth $100,000 and $60,000,respectively.Goodwill is tested annually for impairment.The Balance Sheets of both companies,as well as Grub's fair market values on the date of acquisition are disclosed below: The net incomes for Errant and Grub for the year ended December 31,2007 were $160,000 and $90,000 respectively.Grub paid $9,000 in Dividends to Errant during the year.There were no other inter-company transactions during the year.Moreover,an impairment test conducted on December 31,2007 revealed that the Goodwill should actually have a value of $20,000.Both companies use a FIFO system,and most of Grub's inventory on the date of acquisition was sold during the year.Errant did not declare any dividends during the year.
Assume that Errant Inc.uses the Equity Method unless stated otherwise.
The amount of goodwill arising from this business combination is

A)Nil
B)($24,000)
C)$24,000
D)$12,000

Question 12

The following information pertains to questions
Errant Inc purchased 100% of the outstanding voting shares of Grub Inc.for $200,000 on January 1,2004.On that date,Grub Inc had common stock and retained earnings worth $100,000 and $60,000,respectively.Goodwill is tested annually for impairment.The Balance Sheets of both companies,as well as Grub's fair market values on the date of acquisition are disclosed below: The net incomes for Errant and Grub for the year ended December 31,2007 were $160,000 and $90,000 respectively.Grub paid $9,000 in Dividends to Errant during the year.There were no other inter-company transactions during the year.Moreover,an impairment test conducted on December 31,2007 revealed that the Goodwill should actually have a value of $20,000.Both companies use a FIFO system,and most of Grub's inventory on the date of acquisition was sold during the year.Errant did not declare any dividends during the year.
Assume that Errant Inc.uses the Equity Method unless stated otherwise.
The amount of retained earnings appearing on Errant's Consolidated Balance Sheet as at December 31,2007 would be

A)$130,000
B)$160,000
C)$60,000
D)$300,000

Question 13

The following information pertains to questions
Errant Inc purchased 100% of the outstanding voting shares of Grub Inc.for $200,000 on January 1,2004.On that date,Grub Inc had common stock and retained earnings worth $100,000 and $60,000,respectively.Goodwill is tested annually for impairment.The Balance Sheets of both companies,as well as Grub's fair market values on the date of acquisition are disclosed below: The net incomes for Errant and Grub for the year ended December 31,2007 were $160,000 and $90,000 respectively.Grub paid $9,000 in Dividends to Errant during the year.There were no other inter-company transactions during the year.Moreover,an impairment test conducted on December 31,2007 revealed that the Goodwill should actually have a value of $20,000.Both companies use a FIFO system,and most of Grub's inventory on the date of acquisition was sold during the year.Errant did not declare any dividends during the year.
Assume that Errant Inc.uses the Equity Method unless stated otherwise.
What would be Errant's journal entry to record the Acquisition differential (excluding any goodwill impairment)on December 31,2007? Assume that any difference between the fair values and book values of the equipment,trademark and bonds payable would all be amortized over 10 years.

Question 14

The following information pertains to questions
Errant Inc purchased 100% of the outstanding voting shares of Grub Inc.for $200,000 on January 1,2004.On that date,Grub Inc had common stock and retained earnings worth $100,000 and $60,000,respectively.Goodwill is tested annually for impairment.The Balance Sheets of both companies,as well as Grub's fair market values on the date of acquisition are disclosed below: The net incomes for Errant and Grub for the year ended December 31,2007 were $160,000 and $90,000 respectively.Grub paid $9,000 in Dividends to Errant during the year.There were no other inter-company transactions during the year.Moreover,an impairment test conducted on December 31,2007 revealed that the Goodwill should actually have a value of $20,000.Both companies use a FIFO system,and most of Grub's inventory on the date of acquisition was sold during the year.Errant did not declare any dividends during the year.
Assume that Errant Inc.uses the Equity Method unless stated otherwise.
The amount of Retained Earnings appearing on the Consolidated Balance Sheet as at January 1,2007 would be:

A)$130,000
B)$70,000
C)$60,000
D)$160,000

Question 15

The following information pertains to questions
Errant Inc purchased 100% of the outstanding voting shares of Grub Inc.for $200,000 on January 1,2004.On that date,Grub Inc had common stock and retained earnings worth $100,000 and $60,000,respectively.Goodwill is tested annually for impairment.The Balance Sheets of both companies,as well as Grub's fair market values on the date of acquisition are disclosed below: The net incomes for Errant and Grub for the year ended December 31,2007 were $160,000 and $90,000 respectively.Grub paid $9,000 in Dividends to Errant during the year.There were no other inter-company transactions during the year.Moreover,an impairment test conducted on December 31,2007 revealed that the Goodwill should actually have a value of $20,000.Both companies use a FIFO system,and most of Grub's inventory on the date of acquisition was sold during the year.Errant did not declare any dividends during the year.
Assume that Errant Inc.uses the Equity Method unless stated otherwise.
What would be the journal entry to record the dividends received by Errant during the year?

Question 16

Consolidated Net Income would be:

A)higher if the parent chooses to use Equity Method rather than the Cost Method)
B)higher if the parent chooses to use the Equity Method rather than the Cost Method,provided that the subsidiary showed a profit.
C)lower if the parent chooses to use Equity Method rather than the Cost Method)
D)the same under both the Cost and Equity Methods.

Question 17

Intangible assets with definite useful lives should be amortized:

A)over their useful lives.
B)over the time periods provided under IAS 36 which prescribes amortization periods for different classes of assets.
C)under the applicable capital cost allowance rates provided by the Canada Revenue Agency.
D)not at all.

Question 18

The following information pertains to questions
Errant Inc purchased 100% of the outstanding voting shares of Grub Inc.for $200,000 on January 1,2004.On that date,Grub Inc had common stock and retained earnings worth $100,000 and $60,000,respectively.Goodwill is tested annually for impairment.The Balance Sheets of both companies,as well as Grub's fair market values on the date of acquisition are disclosed below: The net incomes for Errant and Grub for the year ended December 31,2007 were $160,000 and $90,000 respectively.Grub paid $9,000 in Dividends to Errant during the year.There were no other inter-company transactions during the year.Moreover,an impairment test conducted on December 31,2007 revealed that the Goodwill should actually have a value of $20,000.Both companies use a FIFO system,and most of Grub's inventory on the date of acquisition was sold during the year.Errant did not declare any dividends during the year.
Assume that Errant Inc.uses the Equity Method unless stated otherwise.
How much Goodwill will be carried on Grub's Balance Sheet on December 31,2007?

A)Nil
B)($24,000)
C)$24,000
D)$20,000

Question 19

Testing intangible assets with indefinite useful lives for impairment

A)occurs every year.
B)occurs when only there has been an indication of an impairment in the value of the asset such as a reduction in cash flow generation,idle assets,etc.
C)never occurs because the asset has an indefinite useful life.
D)whenever required by the company's auditors..

Question 20

Under the Cost Method,

A)the parent's investment in the subsidiary is recorded at cost,and never changed thereafter.
B)the parent records its pro rata share of the subsidiary's post-acquisition income as an increase to the investment account and reduces the investment account with its share of the dividends declared by the subsidiary.
C)the parent records its pro rata share of the subsidiary's cumulative earnings as an increase to the investment account and reduces the investment account with its share of the dividends declared by the subsidiary.
D)the parent's investment in the Subsidiary is recorded at Cost and reduced by an excess dividends received from the subsidiary.

Question 21

The following information pertains to questions
GNR Inc owns 100% of NMX Inc.During the year,NMX Inc earned a net income of $40,000 and paid Dividends of $10,000.
Assuming that GNR Inc uses the Cost Method,what effect would the above information have on GNR's investment in NMX account?

A)An increase of $30,000.
B)An increase of $40,000.
C)An increase of $10,000
D)No effect.

Question 22

The following information pertains to questions
Big Guy Inc.purchased 80% of the outstanding voting shares of Humble Corp.for $360,000 on July 1,2001.On that date,Humble Corp had Common Stock and Retained Earnings worth $180,000 and $90,000,respectively.The Equipment had a remaining useful life of 5 years from the date of acquisition.Humble's Bonds mature on July 1,2011.Both companies use straight line amortization,and no salvage value is assumed for assets.The trademark is assumed to have an indefinite useful life.
Goodwill is tested annually for impairment.The Balance Sheets of Both Companies,as well as Humble's Fair Market Values on the date of acquisition are disclosed below: The following are the Financial Statements for both companies for the fiscal year ended July 1,2004:
Income Statements: An impairment test conducted in September 2002 on Big Guy's goodwill resulted in an impairment loss of $10,000 being recorded)Both companies use a FIFO system,and Humble's entire inventory on the date of acquisition was sold during the following year.During 2004,Humble Inc borrowed $20,000 in Cash from Big Guy Inc.interest free to finance its operations.Big Guy uses the Equity Method to account for its investment in Humble Corp.Assume that the entity method applies.
What amount of dividends would appear on Big Guy's Consolidated Statement of Retained Earnings as at July 1,2004?

A)$20,000
B)$22,000
C)$21,600
D)$ 2,000

Question 23

The following information pertains to questions
Big Guy Inc.purchased 80% of the outstanding voting shares of Humble Corp.for $360,000 on July 1,2001.On that date,Humble Corp had Common Stock and Retained Earnings worth $180,000 and $90,000,respectively.The Equipment had a remaining useful life of 5 years from the date of acquisition.Humble's Bonds mature on July 1,2011.Both companies use straight line amortization,and no salvage value is assumed for assets.The trademark is assumed to have an indefinite useful life.
Goodwill is tested annually for impairment.The Balance Sheets of Both Companies,as well as Humble's Fair Market Values on the date of acquisition are disclosed below: The following are the Financial Statements for both companies for the fiscal year ended July 1,2004:
Income Statements: An impairment test conducted in September 2002 on Big Guy's goodwill resulted in an impairment loss of $10,000 being recorded)Both companies use a FIFO system,and Humble's entire inventory on the date of acquisition was sold during the following year.During 2004,Humble Inc borrowed $20,000 in Cash from Big Guy Inc.interest free to finance its operations.Big Guy uses the Equity Method to account for its investment in Humble Corp.Assume that the entity method applies.
The Net Income appearing on Big Guy's Consolidated Income Statement on July 1,2004 would be:

A)$216,080.
B)$218,480.
C)$228,480.
D)$279,600.

Question 24

The following information pertains to questions
Big Guy Inc.purchased 80% of the outstanding voting shares of Humble Corp.for $360,000 on July 1,2001.On that date,Humble Corp had Common Stock and Retained Earnings worth $180,000 and $90,000,respectively.The Equipment had a remaining useful life of 5 years from the date of acquisition.Humble's Bonds mature on July 1,2011.Both companies use straight line amortization,and no salvage value is assumed for assets.The trademark is assumed to have an indefinite useful life.
Goodwill is tested annually for impairment.The Balance Sheets of Both Companies,as well as Humble's Fair Market Values on the date of acquisition are disclosed below: The following are the Financial Statements for both companies for the fiscal year ended July 1,2004:
Income Statements: An impairment test conducted in September 2002 on Big Guy's goodwill resulted in an impairment loss of $10,000 being recorded)Both companies use a FIFO system,and Humble's entire inventory on the date of acquisition was sold during the following year.During 2004,Humble Inc borrowed $20,000 in Cash from Big Guy Inc.interest free to finance its operations.Big Guy uses the Equity Method to account for its investment in Humble Corp.Assume that the entity method applies.
The amount of non-controlling interest appearing on Big Guy's July 1,2004 Consolidated Income Statement would be:

A)Nil.
B)$3,600.
C)$2,000.
D)$2,120.

Question 25

The following information pertains to questions
GNR Inc owns 100% of NMX Inc.During the year,NMX Inc earned a net income of $40,000 and paid Dividends of $10,000.
Assuming that GNR Inc uses the Equity Method,what effect would the above information have on GNR's investment in NMX account?

A)An increase of $30,000.
B)An increase of $40,000.
C)An increase of $10,000
D)No effect.

Question 26

The following information pertains to questions
Big Guy Inc.purchased 80% of the outstanding voting shares of Humble Corp.for $360,000 on July 1,2001.On that date,Humble Corp had Common Stock and Retained Earnings worth $180,000 and $90,000,respectively.The Equipment had a remaining useful life of 5 years from the date of acquisition.Humble's Bonds mature on July 1,2011.Both companies use straight line amortization,and no salvage value is assumed for assets.The trademark is assumed to have an indefinite useful life.
Goodwill is tested annually for impairment.The Balance Sheets of Both Companies,as well as Humble's Fair Market Values on the date of acquisition are disclosed below: The following are the Financial Statements for both companies for the fiscal year ended July 1,2004:
Income Statements: An impairment test conducted in September 2002 on Big Guy's goodwill resulted in an impairment loss of $10,000 being recorded)Both companies use a FIFO system,and Humble's entire inventory on the date of acquisition was sold during the following year.During 2004,Humble Inc borrowed $20,000 in Cash from Big Guy Inc.interest free to finance its operations.Big Guy uses the Equity Method to account for its investment in Humble Corp.Assume that the entity method applies.
The amount of interest expense appearing on Big Guy's July 1,2004 Consolidated Income Statement would be:

A)$63,000.
B)$36,000.
C)$62,400.
D)$57,600.

Question 27

The following information pertains to questions
Big Guy Inc.purchased 80% of the outstanding voting shares of Humble Corp.for $360,000 on July 1,2001.On that date,Humble Corp had Common Stock and Retained Earnings worth $180,000 and $90,000,respectively.The Equipment had a remaining useful life of 5 years from the date of acquisition.Humble's Bonds mature on July 1,2011.Both companies use straight line amortization,and no salvage value is assumed for assets.The trademark is assumed to have an indefinite useful life.
Goodwill is tested annually for impairment.The Balance Sheets of Both Companies,as well as Humble's Fair Market Values on the date of acquisition are disclosed below: The following are the Financial Statements for both companies for the fiscal year ended July 1,2004:
Income Statements: An impairment test conducted in September 2002 on Big Guy's goodwill resulted in an impairment loss of $10,000 being recorded)Both companies use a FIFO system,and Humble's entire inventory on the date of acquisition was sold during the following year.During 2004,Humble Inc borrowed $20,000 in Cash from Big Guy Inc.interest free to finance its operations.Big Guy uses the Equity Method to account for its investment in Humble Corp.Assume that the entity method applies.
The amount of other expenses appearing on Big Guy's July 1,2004 Consolidated Income Statement would be:

A)$12,000.
B)$13,000.
C)$11,600.
D)$13,400.

Question 28

The following information pertains to questions
GNR Inc owns 100% of NMX Inc.During the year,NMX Inc earned a net income of $40,000 and paid Dividends of $10,000.
Assuming once again that GNR owned 80% of NXR instead of 100%,what would be the effect on GNR's investment in NMX account under the cost method if GNR received $9,000 in dividends from NMX?

A)An increase of $1,000.
B)No effect
C)A decrease of $1,000.
D)An increase of $23,000.

Question 29

The following information pertains to questions
GNR Inc owns 100% of NMX Inc.During the year,NMX Inc earned a net income of $40,000 and paid Dividends of $10,000.
Assuming that GNR owned 80% of NXR instead of 100%,what would be the effect on GNR's investment in NMX account under the Equity Method?

A)An increase of $30,000.
B)An increase of $40,000.
C)An increase of $24,000.
D)No effect.

Question 30

The following information pertains to questions
Big Guy Inc.purchased 80% of the outstanding voting shares of Humble Corp.for $360,000 on July 1,2001.On that date,Humble Corp had Common Stock and Retained Earnings worth $180,000 and $90,000,respectively.The Equipment had a remaining useful life of 5 years from the date of acquisition.Humble's Bonds mature on July 1,2011.Both companies use straight line amortization,and no salvage value is assumed for assets.The trademark is assumed to have an indefinite useful life.
Goodwill is tested annually for impairment.The Balance Sheets of Both Companies,as well as Humble's Fair Market Values on the date of acquisition are disclosed below: The following are the Financial Statements for both companies for the fiscal year ended July 1,2004:
Income Statements: An impairment test conducted in September 2002 on Big Guy's goodwill resulted in an impairment loss of $10,000 being recorded)Both companies use a FIFO system,and Humble's entire inventory on the date of acquisition was sold during the following year.During 2004,Humble Inc borrowed $20,000 in Cash from Big Guy Inc.interest free to finance its operations.Big Guy uses the Equity Method to account for its investment in Humble Corp.Assume that the entity method applies.
The amount of Non-Controlling Interest on Big Guy's Consolidated Balance Sheet on July 1,2001 would be:

A)$0.
B)$88,000.
C)$90,000.
D)$270,000.

Question 31

Consolidated Shareholder Equity

A)includes any Non-Controlling Interest.
B)is equal to the sum of the Shareholder Equity Sections of both the parent and the Subsidiary.
C)is equal to that of the parent company under the Equity Method.
D)is higher under the Equity Method when the subsidiary does not declare dividends.

Question 32

Consolidated Retained Earnings include:

A)Consolidated Net Income less any dividends declared by either the parent or the Subsidiary.
B)Consolidated Net Income less any dividends declared by the parent only.
C)the parent's Net Income plus its share of the Subsidiary's income less any dividends declared by either the parent or the Subsidiary.
D)the parent's Net Income less any dividends declared by the parent.

Question 33

The following information pertains to questions
Big Guy Inc.purchased 80% of the outstanding voting shares of Humble Corp.for $360,000 on July 1,2001.On that date,Humble Corp had Common Stock and Retained Earnings worth $180,000 and $90,000,respectively.The Equipment had a remaining useful life of 5 years from the date of acquisition.Humble's Bonds mature on July 1,2011.Both companies use straight line amortization,and no salvage value is assumed for assets.The trademark is assumed to have an indefinite useful life.
Goodwill is tested annually for impairment.The Balance Sheets of Both Companies,as well as Humble's Fair Market Values on the date of acquisition are disclosed below: The following are the Financial Statements for both companies for the fiscal year ended July 1,2004:
Income Statements: An impairment test conducted in September 2002 on Big Guy's goodwill resulted in an impairment loss of $10,000 being recorded)Both companies use a FIFO system,and Humble's entire inventory on the date of acquisition was sold during the following year.During 2004,Humble Inc borrowed $20,000 in Cash from Big Guy Inc.interest free to finance its operations.Big Guy uses the Equity Method to account for its investment in Humble Corp.Assume that the entity method applies.
The amount of Goodwill arising from this business combination is:

A)Nil.
B)-$40,000.
C)$50,000.
D)$64,000.

Question 34

Assuming the subsidiary showed a profit for the past year,the elimination entry required to remove a subsidiary's income from the parent's books prior to the preparation of Consolidated Financial statements would be:

Question 35

The following information pertains to questions
Big Guy Inc.purchased 80% of the outstanding voting shares of Humble Corp.for $360,000 on July 1,2001.On that date,Humble Corp had Common Stock and Retained Earnings worth $180,000 and $90,000,respectively.The Equipment had a remaining useful life of 5 years from the date of acquisition.Humble's Bonds mature on July 1,2011.Both companies use straight line amortization,and no salvage value is assumed for assets.The trademark is assumed to have an indefinite useful life.
Goodwill is tested annually for impairment.The Balance Sheets of Both Companies,as well as Humble's Fair Market Values on the date of acquisition are disclosed below: The following are the Financial Statements for both companies for the fiscal year ended July 1,2004:
Income Statements: An impairment test conducted in September 2002 on Big Guy's goodwill resulted in an impairment loss of $10,000 being recorded)Both companies use a FIFO system,and Humble's entire inventory on the date of acquisition was sold during the following year.During 2004,Humble Inc borrowed $20,000 in Cash from Big Guy Inc.interest free to finance its operations.Big Guy uses the Equity Method to account for its investment in Humble Corp.Assume that the entity method applies.
The amount of depreciation expense appearing on Big Guy's July 1,2004 Consolidated Income Statement would be:

A)$115,000.
B)$116,280.
C)$113,720.
D)$113,400.

Question 36

The following information pertains to questions
GNR Inc owns 100% of NMX Inc.During the year,NMX Inc earned a net income of $40,000 and paid Dividends of $10,000.
Assuming once again that GNR owned 80% of NMX instead of 100%,what would be the effect on GNR's investment in NMX account under the Cost Method?

A)An increase of $30,000.
B)An increase of $40,000.
C)An increase of $24,000.
D)No effect.

Question 37

Any excess of fair value over book value attributable to land on the date of acquisition is to be

A)allocated to other identifiable assets.
B)capitalized and amortized.
C)charged to Retained Earnings on the date of acquisition.
D)taken into income when the Land is sold.

Question 38

Which of the following adjustments (if any)to Retained Earnings is necessary for the preparation of the Consolidated Balance Sheet?

A)Under both the Cost and Equity methods,the parent must record its share of its Subsidiary's income.
B)Under both the Cost and Equity methods,the parent must record its share of its Subsidiary's income less any dividends received from the subsidiary.
C)No adjustment is required under either the Cost or the Equity methods.
D)No adjustment is required if the parent has been using the Equity Method)

Question 39

The elimination entry required to remove any dividends received from a subsidiary prior to the preparation of Consolidated Financial statements would be

Question 40

A Company sells inventory to its Subsidiary,B Company at a mark-up of 20% on cost.Of what significance is this transaction,should A wish to prepare Consolidated Financial Statements? The inventory is still in B's warehouse at year end)

A)This is not significant.Any inter-company profits are eliminated during the Consolidation process.
B)A's net income will be under-stated)
C)B's income will be over-stated)
D)There will be unrealized profits in inventory which will only be realized once B sells this inventory to outsiders.

Question 41

The following information pertains to questions
Big Guy Inc.purchased 80% of the outstanding voting shares of Humble Corp.for $360,000 on July 1,2001.On that date,Humble Corp had Common Stock and Retained Earnings worth $180,000 and $90,000,respectively.The Equipment had a remaining useful life of 5 years from the date of acquisition.Humble's Bonds mature on July 1,2011.Both companies use straight line amortization,and no salvage value is assumed for assets.The trademark is assumed to have an indefinite useful life.
Goodwill is tested annually for impairment.The Balance Sheets of Both Companies,as well as Humble's Fair Market Values on the date of acquisition are disclosed below: The following are the Financial Statements for both companies for the fiscal year ended July 1,2004:
Income Statements: An impairment test conducted in September 2002 on Big Guy's goodwill resulted in an impairment loss of $10,000 being recorded)Both companies use a FIFO system,and Humble's entire inventory on the date of acquisition was sold during the following year.During 2004,Humble Inc borrowed $20,000 in Cash from Big Guy Inc.interest free to finance its operations.Big Guy uses the Equity Method to account for its investment in Humble Corp.Assume that the entity method applies.
The amount of Accounts Receivable appearing on Big Guy's Consolidated Balance Sheet as at July 1,2004 would be:

A)$325,000.
B)$305,000.
C)$314,000.
D)$270,000.

Question 42

The following information pertains to questions
Big Guy Inc.purchased 80% of the outstanding voting shares of Humble Corp.for $360,000 on July 1,2001.On that date,Humble Corp had Common Stock and Retained Earnings worth $180,000 and $90,000,respectively.The Equipment had a remaining useful life of 5 years from the date of acquisition.Humble's Bonds mature on July 1,2011.Both companies use straight line amortization,and no salvage value is assumed for assets.The trademark is assumed to have an indefinite useful life.
Goodwill is tested annually for impairment.The Balance Sheets of Both Companies,as well as Humble's Fair Market Values on the date of acquisition are disclosed below: The following are the Financial Statements for both companies for the fiscal year ended July 1,2004:
Income Statements: An impairment test conducted in September 2002 on Big Guy's goodwill resulted in an impairment loss of $10,000 being recorded)Both companies use a FIFO system,and Humble's entire inventory on the date of acquisition was sold during the following year.During 2004,Humble Inc borrowed $20,000 in Cash from Big Guy Inc.interest free to finance its operations.Big Guy uses the Equity Method to account for its investment in Humble Corp.Assume that the entity method applies.
The amount of bonds payable appearing on Big Guy's Consolidated Balance Sheet on July 1,2004 would be:

A)$330,000.
B)$317,800.
C)$347,200.
D)$309,000.

Question 43

Prepare a Consolidated Balance Sheet for Remburn Inc.as at December 31,2002.

Question 44

The following information pertains to questions
Big Guy Inc.purchased 80% of the outstanding voting shares of Humble Corp.for $360,000 on July 1,2001.On that date,Humble Corp had Common Stock and Retained Earnings worth $180,000 and $90,000,respectively.The Equipment had a remaining useful life of 5 years from the date of acquisition.Humble's Bonds mature on July 1,2011.Both companies use straight line amortization,and no salvage value is assumed for assets.The trademark is assumed to have an indefinite useful life.
Goodwill is tested annually for impairment.The Balance Sheets of Both Companies,as well as Humble's Fair Market Values on the date of acquisition are disclosed below: The following are the Financial Statements for both companies for the fiscal year ended July 1,2004:
Income Statements: An impairment test conducted in September 2002 on Big Guy's goodwill resulted in an impairment loss of $10,000 being recorded)Both companies use a FIFO system,and Humble's entire inventory on the date of acquisition was sold during the following year.During 2004,Humble Inc borrowed $20,000 in Cash from Big Guy Inc.interest free to finance its operations.Big Guy uses the Equity Method to account for its investment in Humble Corp.Assume that the entity method applies.
What amount would appear as Big Guy's investment in Humble Corp.on its July 1,2004
Consolidated Balance Sheet?

A)$360,000
B)The investment in Humble Account would not appear on the Consolidated Balance Sheet.
C)$9,600
D)$12,000

Question 45

The following information pertains to questions
Big Guy Inc.purchased 80% of the outstanding voting shares of Humble Corp.for $360,000 on July 1,2001.On that date,Humble Corp had Common Stock and Retained Earnings worth $180,000 and $90,000,respectively.The Equipment had a remaining useful life of 5 years from the date of acquisition.Humble's Bonds mature on July 1,2011.Both companies use straight line amortization,and no salvage value is assumed for assets.The trademark is assumed to have an indefinite useful life.
Goodwill is tested annually for impairment.The Balance Sheets of Both Companies,as well as Humble's Fair Market Values on the date of acquisition are disclosed below: The following are the Financial Statements for both companies for the fiscal year ended July 1,2004:
Income Statements: An impairment test conducted in September 2002 on Big Guy's goodwill resulted in an impairment loss of $10,000 being recorded)Both companies use a FIFO system,and Humble's entire inventory on the date of acquisition was sold during the following year.During 2004,Humble Inc borrowed $20,000 in Cash from Big Guy Inc.interest free to finance its operations.Big Guy uses the Equity Method to account for its investment in Humble Corp.Assume that the entity method applies.
Big Guy's Consolidated Retained Earnings for the year ended July 1,2004 would be:

A)$1,500,000.
B)$1,486,400.
C)$1,169,040.
D)$1,508,000.

Question 46

The following information pertains to questions
Big Guy Inc.purchased 80% of the outstanding voting shares of Humble Corp.for $360,000 on July 1,2001.On that date,Humble Corp had Common Stock and Retained Earnings worth $180,000 and $90,000,respectively.The Equipment had a remaining useful life of 5 years from the date of acquisition.Humble's Bonds mature on July 1,2011.Both companies use straight line amortization,and no salvage value is assumed for assets.The trademark is assumed to have an indefinite useful life.
Goodwill is tested annually for impairment.The Balance Sheets of Both Companies,as well as Humble's Fair Market Values on the date of acquisition are disclosed below: The following are the Financial Statements for both companies for the fiscal year ended July 1,2004:
Income Statements: An impairment test conducted in September 2002 on Big Guy's goodwill resulted in an impairment loss of $10,000 being recorded)Both companies use a FIFO system,and Humble's entire inventory on the date of acquisition was sold during the following year.During 2004,Humble Inc borrowed $20,000 in Cash from Big Guy Inc.interest free to finance its operations.Big Guy uses the Equity Method to account for its investment in Humble Corp.Assume that the entity method applies.
The NET amount appearing on Big Guy's Consolidated Balance Sheet for equipment as at July 1,2004 would be:

A)$885,000
B)$872,000
C)$881,200
D)$878,600

Question 47

The following information pertains to questions
Big Guy Inc.purchased 80% of the outstanding voting shares of Humble Corp.for $360,000 on July 1,2001.On that date,Humble Corp had Common Stock and Retained Earnings worth $180,000 and $90,000,respectively.The Equipment had a remaining useful life of 5 years from the date of acquisition.Humble's Bonds mature on July 1,2011.Both companies use straight line amortization,and no salvage value is assumed for assets.The trademark is assumed to have an indefinite useful life.
Goodwill is tested annually for impairment.The Balance Sheets of Both Companies,as well as Humble's Fair Market Values on the date of acquisition are disclosed below: The following are the Financial Statements for both companies for the fiscal year ended July 1,2004:
Income Statements: An impairment test conducted in September 2002 on Big Guy's goodwill resulted in an impairment loss of $10,000 being recorded)Both companies use a FIFO system,and Humble's entire inventory on the date of acquisition was sold during the following year.During 2004,Humble Inc borrowed $20,000 in Cash from Big Guy Inc.interest free to finance its operations.Big Guy uses the Equity Method to account for its investment in Humble Corp.Assume that the entity method applies.
The amount of common shares appearing on Big Guy's Consolidated Balance Sheet on July 1,2004 would be:

A)$1,800,000
B)$1,080,000
C)$900,000
D)$1,044,000.

Question 48

The following information pertains to questions
Big Guy Inc.purchased 80% of the outstanding voting shares of Humble Corp.for $360,000 on July 1,2001.On that date,Humble Corp had Common Stock and Retained Earnings worth $180,000 and $90,000,respectively.The Equipment had a remaining useful life of 5 years from the date of acquisition.Humble's Bonds mature on July 1,2011.Both companies use straight line amortization,and no salvage value is assumed for assets.The trademark is assumed to have an indefinite useful life.
Goodwill is tested annually for impairment.The Balance Sheets of Both Companies,as well as Humble's Fair Market Values on the date of acquisition are disclosed below: The following are the Financial Statements for both companies for the fiscal year ended July 1,2004:
Income Statements: An impairment test conducted in September 2002 on Big Guy's goodwill resulted in an impairment loss of $10,000 being recorded)Both companies use a FIFO system,and Humble's entire inventory on the date of acquisition was sold during the following year.During 2004,Humble Inc borrowed $20,000 in Cash from Big Guy Inc.interest free to finance its operations.Big Guy uses the Equity Method to account for its investment in Humble Corp.Assume that the entity method applies.
The amount of cash on Big Guy's Consolidated Balance Sheet on July 1,2004 would be:

A)$1,200,000.
B)$1,565,000.
C)$1,585,000.
D)$1,545,000.

Question 49

The following information pertains to questions
Brand X Inc.purchased a controlling interest in Brand Y Inc.for $200,000 on January 1,2001.On that date,Brand Y Inc had common stock and retained earnings worth $180,000 and $20,000,respectively.Goodwill is tested annually for impairment.At the date of acquisition,Brand Y's assets and liabilities were assessed for fair value as follows: The Balance Sheets of Both Companies,as at December 31,2001 are disclosed below: The net incomes for Brand X and Brand Y for the year ended December 31,2001 were $1,000 $48,000 respectively.An impairment test conducted on December 31,2001 revealed that the Goodwill should actually have a value $2,000 lower than the amount computed on the date of acquisition.Both companies use a FIFO system,and Brand Y's inventory on the date of acquisition was sold during the year.Brand X did not declare any dividends during the year.However,Brand Y paid $51,000 in dividends to make up for several years in which the company had never paid any dividends.Brand Y's equipment and patent have useful lives of 10 years and 6 years respectively from the date of acquisition.All bonds payable mature on January 1,2006.
Prepare Brand X's Consolidated Balance Sheet as at December 31,2001,assuming that Brand X purchased 80% of Brand Y for $350,000.Assume the Entity Method is applied)

Question 50

Linton Inc.purchased 75% of Marsh Inc.on January 1,2002 for $1,000,000.Marsh's common stock and retained earnings were worth $400,000 each on that date.The acquisition differential was allocated as follows:
The balance was allocated to goodwill.The trademark had an estimated remaining useful life of 10 years from the date of acquisition.Marsh Inc.uses straight line amortization.
In 2002,Marsh's net income was $40,000.Marsh paid $5,000 in dividends to shareholders on record as at December 31,2002.In 2003,Marsh reported a net income of $8,000 and declared $1,000 in dividends.
Required:
a)Prepare the equity method journal entries for Linton for 2002 and 2003.
b)Calculate the value of Marsh's trademark as at December 31,2003.
c)Prepare a statement that shows the changes in Linton's non-controlling interest in 2003.

Question 51

Assume that Stanton had other Intangible assets with indefinite lives on its books at the date of acquisition.How would the impairment test differ from question 67 above,if at all? A simple explanation is required)Please do not use any numbers to support your answer.

Question 52

Explain how the amount was derived for Remburn's investment in Stanton account on December 31,2002.

Question 53

The following information pertains to questions
Davis Inc.purchased a controlling interest in Martin Inc.on January 1,2002,when Martin's common stock and retained earnings were carried at $180,000 and $60,000 respectively.On that date,Martin's book values approximated its fair market values,with the exception of the company's inventories and a Patent held by Martin.The patent,which had an estimated remaining useful life of ten years,had a fair market value which was $20,000 higher than its Book value.Martin's Inventories on January 1,2002 were estimated to have a fair value that was $16,000 higher than their Book value.
It was predicted that Martin's goodwill impairment test,which was to be conducted on December 31,2003,would result in a loss equal to 10% of the goodwill (regardless of the amount)at the date of acquisition being recorded)During 2002,Martin reported a net income of $60,000 and paid $12,000 in dividends.Martin's 2003 net income and dividends were $72,000 and $15,000,respectively.Martin uses straight-line amortization for all of its assets.
Assuming that Davis purchases 80% of Martin for $300,000,answer the following:
Required:
a)Prepare Davis' Equity-Method journal entries for 2002 and 2003.
b)Compute the following as at December 31,2003:
i.Investment in Martin Inc.
ii.Goodwill
iii.The amount of unamortized Acquisition Differential.

Question 54

The following information pertains to questions
Big Guy Inc.purchased 80% of the outstanding voting shares of Humble Corp.for $360,000 on July 1,2001.On that date,Humble Corp had Common Stock and Retained Earnings worth $180,000 and $90,000,respectively.The Equipment had a remaining useful life of 5 years from the date of acquisition.Humble's Bonds mature on July 1,2011.Both companies use straight line amortization,and no salvage value is assumed for assets.The trademark is assumed to have an indefinite useful life.
Goodwill is tested annually for impairment.The Balance Sheets of Both Companies,as well as Humble's Fair Market Values on the date of acquisition are disclosed below: The following are the Financial Statements for both companies for the fiscal year ended July 1,2004:
Income Statements: An impairment test conducted in September 2002 on Big Guy's goodwill resulted in an impairment loss of $10,000 being recorded)Both companies use a FIFO system,and Humble's entire inventory on the date of acquisition was sold during the following year.During 2004,Humble Inc borrowed $20,000 in Cash from Big Guy Inc.interest free to finance its operations.Big Guy uses the Equity Method to account for its investment in Humble Corp.Assume that the entity method applies.
The amount of goodwill appearing on Big Guy's Consolidated Balance Sheet as at July 1,2004 would be:

A)Nil.
B)$40,000.
C)$50,000.
D)$30,000

Question 55

Selectron Inc acquired 60% of Insor Inc.on January 1,2000 for $180,000,when Insor's Common Stock and Retained Earnings were worth $60,000 and $ 180,000 respectively.Insor's fair values approximated their book values on that date.
Selectron currently uses the Equity Method to account for its investment in Insor.
During 2000,investment Income in the amount of $12,000 and Dividends in the amount of $1,200 were recorded in Selectron's investment in Insor account.During 2001,investment income in the amount of $24,000 and Dividends in the amount of $2,400 were recorded in Selectron's investment in Insor account.
Typically,Insor declares dividends in the amount of 10% of its earnings.
Required:
a)Compute Insor's net income for 2000 and 2001.
b)Compute the amount of dividends declared by Insor in each year.
c)Compute the balance in the non-controlling interest count as at December 31,2001.

Question 56

The following information pertains to questions
Brand X Inc.purchased a controlling interest in Brand Y Inc.for $200,000 on January 1,2001.On that date,Brand Y Inc had common stock and retained earnings worth $180,000 and $20,000,respectively.Goodwill is tested annually for impairment.At the date of acquisition,Brand Y's assets and liabilities were assessed for fair value as follows: The Balance Sheets of Both Companies,as at December 31,2001 are disclosed below: The net incomes for Brand X and Brand Y for the year ended December 31,2001 were $1,000 $48,000 respectively.An impairment test conducted on December 31,2001 revealed that the Goodwill should actually have a value $2,000 lower than the amount computed on the date of acquisition.Both companies use a FIFO system,and Brand Y's inventory on the date of acquisition was sold during the year.Brand X did not declare any dividends during the year.However,Brand Y paid $51,000 in dividends to make up for several years in which the company had never paid any dividends.Brand Y's equipment and patent have useful lives of 10 years and 6 years respectively from the date of acquisition.All bonds payable mature on January 1,2006.
Prepare Brand X's Consolidated Balance Sheet as at December 31,2001,assuming that Brand X purchased 100% of Brand Y for $350,000.

Question 57

Assume that Stanton's Equipment,Land and Trademark on the date of acquisition form part of a single asset group.Assume also that these assets are expected to generate future cash flows of $40,000.Does this mean that Stanton will have to recognize an impairment loss? Explain.

Question 58

The following information pertains to questions
Davis Inc.purchased a controlling interest in Martin Inc.on January 1,2002,when Martin's common stock and retained earnings were carried at $180,000 and $60,000 respectively.On that date,Martin's book values approximated its fair market values,with the exception of the company's inventories and a Patent held by Martin.The patent,which had an estimated remaining useful life of ten years,had a fair market value which was $20,000 higher than its Book value.Martin's Inventories on January 1,2002 were estimated to have a fair value that was $16,000 higher than their Book value.
It was predicted that Martin's goodwill impairment test,which was to be conducted on December 31,2003,would result in a loss equal to 10% of the goodwill (regardless of the amount)at the date of acquisition being recorded)During 2002,Martin reported a net income of $60,000 and paid $12,000 in dividends.Martin's 2003 net income and dividends were $72,000 and $15,000,respectively.Martin uses straight-line amortization for all of its assets.
Assuming that Davis purchases 100% of Martin for $300,000,answer the following:
Required:
a)Prepare Davis' Equity Method journal entries for 2002 and 2003.
b)Compute the following as at December 31,2003:
i.Investment in Martin Inc.
ii.Goodwill
iii.The amount of unamortized acquisition differential.

Question 59

The following information pertains to questions
Big Guy Inc.purchased 80% of the outstanding voting shares of Humble Corp.for $360,000 on July 1,2001.On that date,Humble Corp had Common Stock and Retained Earnings worth $180,000 and $90,000,respectively.The Equipment had a remaining useful life of 5 years from the date of acquisition.Humble's Bonds mature on July 1,2011.Both companies use straight line amortization,and no salvage value is assumed for assets.The trademark is assumed to have an indefinite useful life.
Goodwill is tested annually for impairment.The Balance Sheets of Both Companies,as well as Humble's Fair Market Values on the date of acquisition are disclosed below: The following are the Financial Statements for both companies for the fiscal year ended July 1,2004:
Income Statements: An impairment test conducted in September 2002 on Big Guy's goodwill resulted in an impairment loss of $10,000 being recorded)Both companies use a FIFO system,and Humble's entire inventory on the date of acquisition was sold during the following year.During 2004,Humble Inc borrowed $20,000 in Cash from Big Guy Inc.interest free to finance its operations.Big Guy uses the Equity Method to account for its investment in Humble Corp.Assume that the entity method applies.
The amount of current liabilities appearing on Big Guy's Consolidated Balance Sheet as at July 1,2004 would be:

A)$682,000
B)$662,000
C)$630,000
D)$350,000

Question 60

The following information pertains to questions
Big Guy Inc.purchased 80% of the outstanding voting shares of Humble Corp.for $360,000 on July 1,2001.On that date,Humble Corp had Common Stock and Retained Earnings worth $180,000 and $90,000,respectively.The Equipment had a remaining useful life of 5 years from the date of acquisition.Humble's Bonds mature on July 1,2011.Both companies use straight line amortization,and no salvage value is assumed for assets.The trademark is assumed to have an indefinite useful life.
Goodwill is tested annually for impairment.The Balance Sheets of Both Companies,as well as Humble's Fair Market Values on the date of acquisition are disclosed below: The following are the Financial Statements for both companies for the fiscal year ended July 1,2004:
Income Statements: An impairment test conducted in September 2002 on Big Guy's goodwill resulted in an impairment loss of $10,000 being recorded)Both companies use a FIFO system,and Humble's entire inventory on the date of acquisition was sold during the following year.During 2004,Humble Inc borrowed $20,000 in Cash from Big Guy Inc.interest free to finance its operations.Big Guy uses the Equity Method to account for its investment in Humble Corp.Assume that the entity method applies.
The amount of non-controlling interest appearing on Big Guy's Consolidated Balance Sheet as at July 1,2004 would be:

A)$83,600.
B)$90,000.
C)$79,760.
D)$226,400.

Question 61

Assume that Stanton Inc's common shares had a fair market value of $51,000 on December 31,2002.Assume also that the fair values of Stanton's net assets amounted to $26,000.Assuming that Rembrandt's fair values equalled its book values on the date of acquisition,has the consolidated Goodwill calculated above been impaired,and if so,by how much?