Question 1

Before the computation of goodwill, the debits in the date-of-business-combination working paper elimination for the consolidated balance sheet of Promo Corporation and its 80%-owned subsidiary subtotaled $640,000, compared with a $540,000 credit to Investment in Sindow Company Common Stock-Promo. The working paper elimination should be completed with:

Accepted Answer

A)  An allocation of the $100,000 bargain-purchase excess to reduce the amounts initially assigned to specified assets of Sindow. 
B)  A $100,000 credit to Minority Interest in Net Assets of Subsidiary 
C)  A $28,000 debit to Goodwill-Promo and a $128,000 credit to Minority Interest in Net Assets of Subsidiary 
D)  A $35,000 debit to Goodwill-Promo and a $135,000 credit to Minority Interest in Net Assets of Subsidiary

Question 2

In a business combination resulting in a parent company-subsidiary relationship, the parent company's Investment in Subsidiary Common Stock ledger account balance is:

Accepted Answer

A)  Allocated to individual asset and liability ledger accounts in a parent company journal entry 
B)  Eliminated with a working paper elimination for the working paper for consolidated balance sheet 
C)  Displayed among noncurrent assets in the consolidated balance sheet 
D)  Used as a basis for adjusting the subsidiary's asset and liability account balances in the subsidiary's ledger to current fair values

Question 3

Minority interest in net assets of subsidiary is displayed in the consolidated balance sheet as:

Accepted Answer

A)  A part of consolidated stockholders' equity under the parent company concept of consolidated financial statements 
B)  A liability under the parent company concept of consolidated financial statements 
C)  An offset to investment in subsidiary common stock under the parent company concept of consolidated financial statements 
D)  An item between liabilities and stockholders' equity under the economic unit concept of consolidated financial statements

Question 4

On April 30, 2006, Press Corporation paid $168,000 cash for 80% of the outstanding common stock of Sow Company. Legal, accounting, and finder's fees paid by Press relative to the business combination totaled $24,000. The current fair value of Sow's identifiable net assets was $220,000 on April 30, 2006; the carrying amount was $200,000.
Prepare a working paper to compute the minority interest and goodwill in the April 30, 2006 consolidated balance sheet of Press Corporation and subsidiary under each of the following independent assumptions:
a. Sow's identifiable net assets are recognized at current fair value; minority interest is based on current fair value of identifiable net assets.
b. Sow's identifiable net assets are recognized at current fair value only to the extent of Press Corporation's interest; balance of net assets and minority interest are reflected at carrying amounts in Sow's accounting records.
c. Current fair value, through inference, is assigned to total net assets of Sow, including goodwill.

Accepted Answer

The answer of On April 30, 2006, Press Corporation paid...

Question 5

A debit to Goodwill-Subsidiary in a working paper elimination (in journal entry format) for a parent company and its wholly owned subsidiary indicates that the current fair values of the subsidiary's identifiable net assets exceeded their carrying amounts on the date of the business combination.

Accepted Answer

A) True 
 B)False

Question 6

A controlling financial interest traditionally has been defined as the investor corporation's ownership of more than 50% of the investee corporation's outstanding common stock.

Accepted Answer

A) True 
 B)False

Question 7

Because minority stockholders exercise no ownership control over the operations of either the parent company or the subsidiary, minority stockholders in substance might be considered a special class of creditors of the consolidated entity.

Accepted Answer

A) True 
 B)False

Question 8

On October 31, 2006, Portugal Corporation acquired 80% of the outstanding common stock of Spain Company in a business combination. Total cost of the investment, including direct out-of-pocket costs, was $480,000. The working paper elimination (in journal entry format, explanation omitted) for Portugal Corporation and Subsidiary on October 31, 2006, was as follows:  If goodwill had been computed based on the implied current fair value of the subsidiary's total net assets, the debit to Goodwill-Portugal in the foregoing working paper elimination would have been:

Accepted Answer

A)  $120,000 
B)  $150,000 
C)  $180,000 
D)  Some other amount

Question 9

On the date of a business combination resulting in a parent-subsidiary relationship, the differences between current fair values and carrying amounts of the subsidiary's identifiable net assets are:

Accepted Answer

A)  Included in a working paper elimination 
B)  Recognized in the applicable asset and liability ledger accounts of the subsidiary 
C)  Recognized in the applicable asset and liability ledger accounts of the parent company 
D)  Accounted for in some other manner

Question 10

Working paper eliminations are entered in:

Accepted Answer

A)  Both the parent company's and the subsidiary's accounting records 
B)  Neither the parent company's nor the subsidiary's accounting records 
C)  The parent company's accounting records only 
D)  The subsidiary's accounting records only

Question 11

Consolidated financial statements are not appropriate if:

Accepted Answer

A)  The subsidiary is in the process of bankruptcy reorganization 
B)  There is a minority interest in the subsidiary 
C)  The subsidiary has a substantial amount of long-term debt payable to outsiders 
D)  The parent company makes substantial purchases of material from the subsidiary

Question 12

Consolidated financial statements are prepared when a parent-subsidiary relationship exists, in recognition of the accounting principle or concept of:

Accepted Answer

A)  Materiality 
B)  Entity 
C)  Reliability 
D)  Going concern

Question 13

In a proposed Statement, "Consolidated Financial Statements: Purpose and Policy," the FASB would replace objectively determined legal form by subjectively determined economic substance as a basis for consolidated financial statements. Majority ownership of an investee's outstanding common stock would no longer be a prerequisite for consolidation. a. Present arguments in support of the FASB's proposal. b. Present arguments in opposition to the FASB's proposal.

Accepted Answer

The answer of In a proposed Statement, "Consolidated Financial Statements:...

Question 14

How is the minority interest in net assets of subsidiary displayed in a consolidated balance sheet under the economic unit concept of consolidated financial statements?

Accepted Answer

A)  As a separate item in the liabilities section 
B)  As a deduction from consolidated goodwill, if any 
C)  By means of a note to the consolidated financial statements 
D)  As a separate item in the stockholders' equity section

Question 15

On December 31, 2006, the balance sheet of Sint Company included stockholders' equity of $2,000,000. On that date, Plane Corporation acquired for cash a controlling interest in the common stock of Sint. The December 31, 2006, current fair values of Sint's identifiable net assets totaled $2,400,000, and goodwill computed as the difference between Plane's cost and its share of the current fair value of Sint's identifiable net assets was $180,000.
Prepare a working paper to compute the total cost of Plane's investment in Sint if Plane owns:
a. 100% of Sint's common stock
b. 90% of Sint's common stock
c. 80% of Sint's common stock

Accepted Answer

The answer of On December 31, 2006, the balance sheet...

Question 16

On November 30, 2006, Pegler Corporation paid $500,000 cash and issued 100,000 shares of $1 par common stock with a current fair value of $10 a share for all 50,000 outstanding shares of $5 par common stock (carrying amount $20 a share) of Stadler Company, which became a subsidiary of Pegler. Also on November 30, 2006, Pegler paid $50,000 for finder's, accounting, and legal fees related to the business combination and $80,000 for costs associated with the SEC registration statement for the common stock issued in the combination. The net result of Pegler's journal entries to record the combination is to:

Accepted Answer

A)  Debit Investment in Stadler Company Common stock for $1,000,000 
B)  Credit Paid-In Capital in Excess of Par for $900,000 
C)  Debit Expenses of Business Combination for $130,000 
D)  Credit Cash for $630,000

Question 17

Finance-related subsidiaries may be excluded from consolidation at the election of the parent company's management.

Accepted Answer

A) True 
 B)False

Question 18

On March 1, 2006, Pride Corporation paid $400,000 for all the outstanding common stock of Supra Company in a business combination, for which out-of-pocket costs may be disregarded. The carrying amounts of Supra's identifiable assets and liabilities on March 1, 2006, follow:  On March 1, 2006, the inventories of Supra had a current fair value of $95,000, and the plant assets (net) had a current fair value of $280,000.
The amount recognized as goodwill as a result of the business combination is:

Accepted Answer

A)  $0 
B)  $25,000 
C)  $75,000 
D)  $90,000 
E)  Some other amount

Question 19

All out-of-pocket costs of a business combination reduce additional paid-in capital of the combinor.

Accepted Answer

A) True 
 B)False

Exam 6: Consolidated Financial Statements: on Date of Business Combination

In a business combination resulting in a parent company-subsidiary relationship, the parent company's Investment in Subsidiary Common Stock ledger account balance is:

Minority interest in net assets of subsidiary is displayed in the consolidated balance sheet as:

A debit to Goodwill-Subsidiary in a working paper elimination (in journal entry format) for a parent company and its wholly owned subsidiary indicates that the current fair values of the subsidiary's identifiable net assets exceeded their carrying amounts on the date of the business combination.

A controlling financial interest traditionally has been defined as the investor corporation's ownership of more than 50% of the investee corporation's outstanding common stock.

Because minority stockholders exercise no ownership control over the operations of either the parent company or the subsidiary, minority stockholders in substance might be considered a special class of creditors of the consolidated entity.

On the date of a business combination resulting in a parent-subsidiary relationship, the differences between current fair values and carrying amounts of the subsidiary's identifiable net assets are:

Working paper eliminations are entered in:

Consolidated financial statements are not appropriate if:

Consolidated financial statements are prepared when a parent-subsidiary relationship exists, in recognition of the accounting principle or concept of:

How is the minority interest in net assets of subsidiary displayed in a consolidated balance sheet under the economic unit concept of consolidated financial statements?

Finance-related subsidiaries may be excluded from consolidation at the election of the parent company's management.

All out-of-pocket costs of a business combination reduce additional paid-in capital of the combinor.