ACC 401 Week 3 Quiz – Strayer
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Consolidated Financial Statements—Date of Acquisition
1. 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.
2. 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.
3. 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.
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. none of these.
5. 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.
6. 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.
7. 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.
8. 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 the above.
9. 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.
10. 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.
11. 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.
12. Pine Corp. owns 60% of Sage Corp.’s outstanding common stock. On May 1, 2011, Pine advanced Sage $90,000 in cash, which was still outstanding at December 31, 2011. What portion of this advance should be eliminated in the preparation of the December 31, 2011 consolidated balance sheet?
Use the following information for questions 13-15.
On January 1, 2011, Polk Company and Sigler Company had condensed balance sheets as follows:
Current assets $ 280,000 $ 80,000
Noncurrent assets _360,000 __160,000
Total assets $ 640,000 $240,000
Current liabilities $ 120,000 $ 40,000
Long-term debt 200,000 -0-
Stockholders’ equity __320,000 200,000
Total liabilities & stockholders’ equity $ 640,000 $240,000
On January 2, 2011 Polk borrowed $240,000 and used the proceeds to purchase 90% of the outstanding common stock of Sigler. This debt is payable in 10 equal annual principal payments, plus interest, starting December 30, 2011. Any difference between book value and the value implied by the purchase price relates to land.
On Polk’s January 2, 2011 consolidated balance sheet,
13. Noncurrent assets should be
14. Current liabilities should be
15. Noncurrent liabilities should be
16. 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.
17. The Difference between Implied and Book Value account is:
a. an account necessary for the preparation of consolidated working papers.
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
18. 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.
19. 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.
20. Princeton Company acquired 75 percent of the common stock of Sheffield Corporation on December 31, 2011. On the date of acquisition, Princeton held land with a book value of $150,000 and a fair value of $300,000; Sheffield 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?
Use the following information to answer questions 21 – 23.
On January 1, 2011, Pena Company and Shelby Company had condensed balanced sheets as follows:
Current assets $ 210,000 $ 60,000
Noncurrent assets 270,000 120,000
Total assets $480,000 $180,000
Current liabilities $ 90,000 $ 30,000
Long-term debt 150,000 -0-
Stock holders’ equity 240,000 150,000
Total liabilities & stockholders’ equity $ 480,000 $ 180,000
On January 2, 2011 Pena borrowed $180,000 and used the proceeds to purchase 90% of the outstanding common stock of Shelby. This debt is payable in 10 equal annual principal payments, plus interest, starting December 30, 2011. Any difference between book value and the value implied by the purchase price relates to land.
On Pena’s January 2, 2011 consolidated balance sheet,
21. Noncurrent assets should be
22. Current liabilities should be
23. Noncurrent liabilities should be
24. On January 1, 2011, Primer Corporation acquired 80 percent of Sutter Corporation’s voting common stock.
Sutters’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 Sutter’s buildings and equipment will be reported in the consolidated
3-1 On December 31, 2011, Page 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:
Current assets $ 1,680,000
Plant and equipment 1,580,000
Total assets $3,540,000
Liabilities $ 1,320,000
Common stock, $10 par value 1,440,000
Other contributed capital 700,000
Retained earnings 240,000
Treasury stock at cost, 5,000 shares 160,000
Total equities $3,540,000
Prepare the elimination entry(s) required for the preparation of a consolidated balance sheet workpaper on December 31, 2011, 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.
3-2 P Company purchased 80% of the outstanding common stock of S Company on January 2, 2011, for $380,000. Balance sheets for P Company and S Company immediately after the stock acquisition were as follows:
P Company S Company
Current assets $ 166,000 $ 96,000
Investment in S Company 380,000 -0-
Plant and equipment (net) 560,000 224,000
Land 40,000 120,000
Current liabilities $ 120,000 $ 44,000
Long-term notes payable -0- 36,000
Common stock 480,000 160,000
Other contributed capital 244,000 64,000
Retained earnings 302,000 136,000
S Company owed P Company $16,000 on open account on the date of acquisition.
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.
3-3 P Company acquired 54,000 shares of the common stock of S Company on January 1, 2011, for $950,000 cash. The stockholders’ equity section of S Company’s balance sheet on that date was as follows:
Common stock, $10 par value $600,000
Other contributed capital 80,000
Retained earnings 320,000
On the date of acquisition, S Company owed P Company $10,000 on open account.
Present, in general journal form, the elimination entries for the preparation of a consolidated balance sheet workpaper on January 1, 2011. 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.
3-4 On January 2, 2011, Potter Company acquired 90% of the outstanding common stock of Smiley Company for $480,000 cash. Just before the acquisition, the balance sheets of the two companies were as follows:
Cash $ 650,000 $ 160,000
Accounts Receivable (net) 360,000 60,000
Inventory 290,000 140,000
Plant and Equipment (net) 970,000 240,000
Land 150,000 80,000
Total Assets $2,420,000 $680,000
Accounts Payable $ 260,000 $ 120,000
Mortgage Payable 180,000 100,000
Common Stock, $2 par value 1,000,000 170,000
Other Contributed Capital 520,000 50,000
Retained Earnings 460,000 240,000
Total Equities $2,420,000 $680,000
The fair values of Smiley’s assets and liabilities are equal to their book values with the exception of land.
A. Prepare the journal entry necessary to record the purchase of Smiley’s common stock.
B. Prepare a consolidated balance sheet at the date of acquisition.
3-5 P Corporation paid $420,000 for 70% of S Corporation’s $10 par common stock on December 31, 2011, 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, 2011, 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.
P S Debit Credit
Noncontrolling Interest Consolidated Balances
Cash $40,000 $30,000
receivable-net 30,000 45,000
Inventories 185,000 165,000
Land 45,000 120,000
net 480,000 240,000
S Corp. 420,000
Difference between implied and book value
Total Assets $1,200,000 $600,000
liabilities $170,000 $150,000
Capital stock 600,000 300,000
Additional paid-in capital 150,000 90,000
Retained earnings 280,000 60,000
Total Equities $1,200,000 $600,000
Complete the consolidated balance sheet workpaper for P Corporation and Subsidiary.
3-6 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:
Sewell Company Equity Balances
Cash Percent of Stock Owned Investment Cost Common Stock Other Contributed Capital Retained Earnings
a. 90 $675,000 $450,000 $180,000 $75,000
b. 80 318,000 620,000 140,000 20,000
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.
3-7 On December 31, 2011, Pryor Company purchased a controlling interest in Shelby Company for $1,060,000. The consolidated balance sheet on December 31, 2011 reported noncontrolling interest in Shelby Company of $265,000.
On the date of acquisition, the stockholders’ equity section of Shelby Company’s balance sheet was as follows:
Common stock $520,000
Other contributed capital 380,000
Retained earnings 280,000
A. Compute the noncontrolling interest percentage on December 31, 2011.
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.
3-8 On January 1, 2011, Primer 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 Swartz 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:
Cash $ 73,000 $13,000
Accounts Receivable (net) 95,000 19,000
Inventory 58,000 25,000
Plant and Equipment (net) 95,000 43,000
Land 26,000 20,000
Total Assets $ 347,000 $ 120,000
Accounts Payable $ 66,000 16,000
Notes Payable 82,000 21,000
Common Stock, $20 par value 100,000 40,000
Other Contributed Capital 60,000 24,000
Retained Earnings 39,000 19,000
Total Liabilities and Equities $ 347,000 $ 120,000
Any differences between the book value of equity and the value implied by the purchase price relates to Land.
A. Prepare the journal entry on Primer’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, 2011:
3. Common Stock
4. Other Contributed Capital
1. 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.
2. 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.
Short Answer Questions from the Textbook
1. What are the advantages of acquiring the majority of the voting stock of another company rather than acquiring all its voting stock?
2. What is the justification for preparing consolidated financial statements when, in fact, it is ap-parent that the consolidated group is not a legal entity?
3. Why is it often necessary to prepare separate financial statements for each legal entity in a consolidated group even though consolidated statements provide a better economic picture of the combined activities?
4. What aspects of control must exist before a subsidiary is consolidated?
5. Why are consolidated work papers used in pre-paring consolidated financial statements?
6. Define noncontrolling (minority) interest. List three methods that might be used for reporting the noncontrolling interest in a consolidated balance sheet, and state which is preferred under the SFAS No. 160[topic 810].
7. Give several reasons why a parent company would be willing to pay more than book value for subsidiary stock acquired.
8. What effect do subsidiary treasury stock holdings have at the time the subsidiary is acquired? How should the treasury stock be treated on consolidated work papers?
9. What effect does a noncontrolling interest have on the amount of intercompany receivables and payables eliminated on a consolidated balance sheet?
10 A.SFAS No. 109and SFAS No. 141R[ASC 740 and805] require that a deferred tax asset or liability be recognized for likely differences between the reported values and tax bases of assets and liabilities recognized in business combinations (for example, in exchanges that are nontaxable to the selling shareholders). Does this decision change the amount of consolidated net income reported in years subsequent to the business combination? Explain.
Business Ethics Question from the Textbook
Part I. You are working on the valuation of accounts receivable, and bad debt reserves for the current year’s annual report. The CFO stops by and asks you to reduce the reserve by enough to increase the current year’s EPS by 2 cents a share. The company’s policy has always been to use the previous year’s actual bad debt percentage adjusted for a specific economic index. The CFO’s suggested change would still be within acceptable GAAP. However, later, you learn that with the increased EPS, the CFO would qualify for a significant bonus. What do you do and why?
Part II. Consider the following: Accounting firm KPMG created tax shelters called BLIPS, FLIP, OPIS, and SOS that were based largely in the Cayman Islands and allowed wealthy clients (there were 186) to create $5 billion in losses, which were then deducted from their income for IRS tax purposes. BLIPS (Bond Linked Issue Premium Structures) had clients borrow from an offshore bank for purposes of purchasing currency. The client would then sell the currency back to the lender for a loss. However, the IRS contends the losses were phony and that there was never any risk to the client in the deals. The IRS has indicted eight former KPMG partners and an outside lawyer alleging that the transactions were shams, illegal methods for avoiding taxes. KPMG has agreed to pay a$456 million fine, no longer to do tax shelters, and to cooperate with the government in its prosecution of the nine individuals involved in the tax shelter scheme. Many argue that the courts have not always held that such tax avoidance schemes show criminal intent because the tax laws permit individuals to minimize taxes. However, the IRS argues that these shelters evidence intent because of the lack of risk.
In this case, the IRS contends that the losses generated by the tax shelters were phony and that the clients never incurred any risk. Do tax avoidance schemes indicate criminal intent if the tax laws permit individuals to minimize taxes? Justify your answer.