ACC 401 Advanced Accounting Week 6 Quiz – Strayer
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Allocation and Depreciation of Differences Between Implied and Book Value
1. When the implied value exceeds the aggregate fair values of identifiable net assets, the residual difference is accounted for as
a. excess of implied over fair value.
b. a deferred credit.
c. difference between implied and fair value.
2. Long-term debt and other obligations of an acquired company should be valued for consolidation purposes at their
a. book value.
b. carrying value.
c. fair value.
d. face value.
3. On January 1, 2010, Lester Company purchased 70% of Stork Corporation’s $5 par common stock for $600,000. The book value of Stork net assets was $640,000 at that time. The fair value of Stork’s identifiable net assets were the same as their book value except for equipment that was $40,000 in excess of the book value. In the January 1, 2010, consolidated balance sheet, goodwill would be reported at
4. When the value implied by the purchase price of a subsidiary is in excess of the fair value of identifiable net assets, the workpaper entry to allocate the difference between implied and book value includes a
1. debit to Difference Between Implied and Book Value.
2. credit to Excess of Implied over Fair Value.
3. credit to Difference Between Implied and Book Value.
d. Both 1 and 2
5. If the fair value of the subsidiary’s identifiable net assets exceeds both the book value and the value implied by the purchase price, the workpaper entry to eliminate the investment account
a. debits Excess of Fair Value over Implied Value.
b. debits Difference Between Implied and Fair Value.
c. debits Difference Between Implied and Book Value.
d. credits Difference Between Implied and Book Value.
6. The entry to amortize the amount of difference between implied and book value allocated to an unspecified intangible is recorded
1. on the subsidiary’s books.
2. on the parent’s books.
3. on the consolidated statements workpaper.
d. Both 2 and 3
7. The excess of fair value over implied value must be allocated to reduce proportionally the fair values initially assigned to
a. current assets.
b. noncurrent assets.
c. both current and noncurrent assets.
d. none of the above.
8. The SEC requires the use of push down accounting when the ownership change is greater than
9. Under push down accounting, the workpaper entry to eliminate the investment account includes a
a. debit to Goodwill.
b. debit to Revaluation Capital.
c. credit to Revaluation Capital.
d. debit to Revaluation Assets.
10. In a business combination accounted for as an acquisition, how should the excess of fair value of identifiable net assets acquired over implied value be treated?
a. Amortized as a credit to income over a period not to exceed forty years.
b. Amortized as a charge to expense over a period not to exceed forty years.
c. Amortized directly to retained earnings over a period not to exceed forty years.
d. Recognized as an ordinary gain in the year of acquisition.
11. On November 30, 2010, Pulse Incorporated purchased for cash of $25 per share all 400,000 shares of the outstanding common stock of Surge Company. Surge ‘s balance sheet at November 30, 2010, showed a book value of $8,000,000. Additionally, the fair value of Surge’s property, plant, and equipment on November 30, 2010, was $1,200,000 in excess of its book value. What amount, if any, will be shown in the balance sheet caption “Goodwill” in the November 30, 2010, consolidated balance sheet of Pulse Incorporated, and its wholly owned subsidiary, Surge Company?
12. Goodwill represents the excess of the implied value of an acquired company over the
a. aggregate fair values of identifiable assets less liabilities assumed.
b. aggregate fair values of tangible assets less liabilities assumed.
c. aggregate fair values of intangible assets less liabilities assumed.
d. book value of an acquired company.
13. Scooter Company, a 70%-owned subsidiary of Pusher Corporation, reported net income of $240,000 and paid dividends totaling $90,000 during Year 3. Year 3 amortization of differences between current fair values and carrying amounts of Scooter’s identifiable net assets at the date of the business combination was $45,000. The noncontrolling interest in net income of Scooter for Year 3 was
14. Porter Company acquired an 80% interest in Strumble Company on January 1, 2010, for $270,000 cash when Strumble Company had common stock of $150,000 and retained earnings of $150,000. All excess was attributable to plant assets with a 10-year life. Strumble Company made $30,000 in 2010 and paid no dividends. Porter Company’s separate income in 2010 was $375,000. Controlling interest in consolidated net income for 2010 is:
15. In preparing consolidated working papers, beginning retained earnings of the parent company will be adjusted in years subsequent to acquisition with an elimination entry whenever:
a. a noncontrolling interest exists.
b. it does not reflect the equity method.
c. the cost method has been used only.
d. the complete equity method is in use.
16. Dividends declared by a subsidiary are eliminated against dividend income recorded by the parent under the
a. partial equity method.
b. equity method.
c. cost method.
d. equity and partial equity methods.
Use the following information to answer questions 17 through 20.
On January 1, 2010, Pandora Company purchased 75% of the common stock of Saturn Company. Separate balance sheet data for the companies at the combination date are given below:
Saturn Co. Saturn Co.
Pandora Co. Book Values Fair Values
Cash $ 18,000 $155,000 $155,000
Accounts receivable 108,000 20,000 20,000
Inventory 99,000 26,000 45,000
Land 60,000 24,000 45,000
Plant assets 525,000 225,000 300,000
Acc. depreciation (180,000) (45,000)
Investment in Saturn Co. 330,000
Total assets $960,000 $405,000 $565,000
Accounts payable $156,000 $105,000 $105,000
Capital stock 600,000 225,000
Retained earnings 204,000 75,000
Total liabilities & equities $960,000 $405,000
Determine below what the consolidated balance would be for each of the requested accounts on January 2, 2010.
17. What amount of inventory will be reported?
18. What amount of goodwill will be reported?
19. What is the amount of consolidated retained earnings?
20. What is the amount of total assets?
21. Sensible Company, a 70%-owned subsidiary of Proper Corporation, reported net income of $600,000 and paid dividends totaling $225,000 during Year 3. Year 3 amortization of differences between current fair values and carrying amounts of Sensible’s identifiable net assets at the date of the business combination was $112,500. The noncontrolling interest in consolidated net income of Sensible for Year 3 was
22. Primer Company acquired an 80% interest in SealCoat Company on January 1, 2010, for $450,000 cash when SealCoat Company had common stock of $250,000 and retained earnings of $250,000. All excess was attributable to plant assets with a 10-year life. SealCoat Company made $50,000 in 2010 and paid no dividends. Primer Company’s separate income in 2010 was $625,000. The controlling interest in consolidated net income for 2010 is:
Use the following information to answer questions 23 through 25.
On January 1, 2010, Poole Company purchased 75% of the common stock of Swimmer Company. Separate balance sheet data for the companies at the combination date are given below:
Swimmer Co. Swimmer Co.
Poole Co. Book Values Fair Values
Cash $ 24,000 $206,000 $206,000
Accounts receivable 144,000 26,000 26,000
Inventory 132,000 38,000 60,000
Land 78,000 32,000 60,000
Plant assets 700,000 300,000 350,000
Acc. depreciation (240,000) (60,000)
Investment in Swimmer Co. 440,000
Total assets $1,278,000 $542,000 $702,000
Accounts payable $206,000 $142,000 $142,000
Capital stock 800,000 300,000
Retained earnings 272,000 100,000
Total liabilities & equities $1,278,000 $542,000
Determine below what the consolidated balance would be for each of the requested accounts on January 2, 2010.
23. What amount of inventory will be reported?
24. What amount of goodwill will be reported?
25. What is the amount of total assets?
5-1 Phillips Company purchased a 90% interest in Standards Corporation for $2,340,000 on January 1, 2010. Standards Corporation had $1,650,000 of common stock and $1,050,000 of retained earnings on that date.
The following values were determined for Standards Corporation on the date of purchase:
Book Value Fair Value
Inventory $240,000 $300,000
Land 2,400,000 2,700,000
Equipment 1,620,000 1,800,000
A. Prepare a computation and allocation schedule for the difference between the implied and book value in the consolidated statements workpaper.
B. Prepare the January 1, 2010, workpaper entries to eliminate the investment account and allocate the difference between implied and book value.
5-2 Pullman Corporation acquired a 90% interest in Sleeper Company for $6,500,000 on January 1 2010. At that time Sleeper Company had common stock of $4,500,000 and retained earnings of $1,800,000. The balance sheet information available for Sleeper Company on January 1, 2010, showed the following:
Book Value Fair Value
Inventory (FIFO) $1,300,000 $1,500,000
Equipment (net) 1,500,000 1,900,000
Land 3,000,000 3,000,000
The equipment had a remaining useful life of ten years. Sleeper Company reported $240,000 of net income in 2010 and declared $60,000 of dividends during the year.
Prepare the workpaper entries assuming the cost method is used, to eliminate dividends, eliminate the investment account, and to allocate and depreciate the difference between implied and book value for 2010.
5-3 On January 1, 2010, Preston Corporation acquired an 80% interest in Spiegel Company for $2,400,000. At that time Spiegel Company had common stock of $1,800,000 and retained earnings of $800,000. The book values of Spiegel Company’s assets and liabilities were equal to their fair values except for land and bonds payable. The land’s fair value was $120,000 and its book value was $100,000. The outstanding bonds were issued on January 1, 2005, at 9% and mature on January 1, 2015. The bond principal is $600,000 and the current yield rate on similar bonds is 8%.
Prepare the workpaper entries necessary on December 31, 2010, to allocate, amortize, and depreciate the difference between implied and book value.
Present value of 1 of Annuity of 1
9%, 5 periods .64993 3.88965
8%, 5 periods .68058 3.99271
5-4 Pennington Corporation purchased 80% of the voting common stock of Stafford Corporation for $3,200,000 cash on January 1, 2010. On this date the book values and fair values of Stafford Corporation’s assets and liabilities were as follows:
Book Value Fair Value
Cash $ 70,000 $ 70,000
Receivables 240,000 240,000
Inventories 600,000 700,000
Other Current Assets 340,000 405,000
Land 600,000 720,000
Buildings – net 1,050,000 1,920,000
Equipment – net 850,000 750,000
Accounts Payable $ 250,000 $250,000
Other Liabilities 740,000 670,000
Capital Stock 2,400,000
Retained Earnings 360,000
Prepare a schedule showing how the difference between Stafford Corporation’s implied value and the book value of the net assets acquired should be allocated.
5-5 Perez Corporation acquired a 75% interest in Schmidt Company on January 1, 2010, for $2,000,000. The book value and fair value of the assets and liabilities of Schmidt Company on that date were as follows:
Book Value Fair Value
Current Assets $ 600,000 $ 600,000
Property & Equipment (net) 1,400,000 1,800,000
Land 700,000 900,000
Deferred Charge 300,000 300,000
Total Assets $3,000,000 $3,600,000
Less Liabilities 600,000 600,000
Net Assets $2,400,000 $3,000,000
The property and equipment had a remaining life of 6 years on January 1, 2010, and the deferred charge was being amortized over a period of 5 years from that date. Common stock was $1,500,000 and retained earnings was $900,000 on January 1, 2010. Perez Company records its investment in Schmidt Company using the cost method.
Prepare, in general journal form, the December 31, 2010, workpaper entries necessary to:
A. Eliminate the investment account.
B. Allocate and amortize the difference between implied and book value.
5-6 On January 1, 2010, Page Company acquired an 80% interest in Schell Company for $3,600,000. On that date, Schell Company had retained earnings of $800,000 and common stock of $2,800,000. The book values of assets and liabilities were equal to fair values except for the following:
Book Value Fair Value
Inventory $ 50,000 $ 85,000
Equipment (net) 540,000 720,000
Land 300,000 660,000
The equipment had an estimated remaining useful life of 8 years. One-half of the inventory was sold in 2010 and the remaining half was sold in 2011. Schell Company reported net income of $240,000 in 2010 and $300,000 in 2011. No dividends were declared or paid in either year. Page Company uses the cost method to record its investment in Schell Company.
Prepare, in general journal form, the workpaper eliminating entries necessary in the consolidated statements workpaper for the year ending December 31, 2011.
5-7 Paddock Company acquired 90% of the stock of Spector Company for $6,300,000 on January 1, 2010. On this date, the fair value of the assets and liabilities of Spector Company was equal to their book value except for the inventory and equipment accounts. The inventory had a fair value of $2,300,000 and a book value of $1,900,000. The equipment had a fair value of $3,300,000 and a book value of $2,800,000.
The balances in Spector Company’s capital stock and retained earnings accounts on the date of acquisition were $3,700,000 and $1,900,000, respectively.
In general journal form, prepare the entries on Spector Company’s books to record the effect of the pushed down values implied by the acquisition of its stock by Paddock Company assuming that:
A values are allocated on the basis of the fair value of Spector Company as a whole imputed from the transaction.
B values are allocated on the basis of the proportional interest acquired by Paddock Company.
5-8 Pruitt Corporation acquired all of the voting stock of Soto Corporation on January 1, 2010, for $210,000 when Soto had common stock of $150,000 and retained earnings of $24,000. The excess of implied over book value was allocated $9,000 to inventories that were sold in 2010, $12,000 to equipment with a 4-year remaining useful life under the straight-line method, and the remainder to goodwill.
Financial statements for Pruitt and Soto Corporations at the end of the fiscal year ended December 31, 2011 (two years after acquisition), appear in the first two columns of the partially completed consolidated statements workpaper. Pruitt Corp. has accounted for its investment in Soto using the partial equity method of accounting.
Complete the consolidated statements workpaper for Pruitt Corporation and Soto Corporation for December 31, 2011.
Pruitt Corporation and Soto Corporation
Consolidated Statements Workpaper
at December 31, 2011
Pruitt Corp. Soto Corp. Debit Credit Consolidated Balances
Sales 618,000 180,000
Equity from Subsidiary Income 36,000
Cost of Sales (450,000) (90,000)
Other Expenses (114,000) (54,000)
Net Income to Ret. Earn. 90,000 36,000
Pruitt Retained Earnings 1/1 72,000
Soto Retained Earnings 1/1 3,000
Add: Net Income 90,000 36,000
Less: Dividends (60,000) (12,000)
Retained Earnings 12/31 102,000 54,000
Cash 42,000 21,000
Inventories 63,000 45,000
Land 33,000 18,000
Equipment and Buildings-net 192,000 165,000
Investment in Soto Corp. 240,000
Total Assets 570,000 249,000
LIA & EQUITIES Liabilities 168,000 45,000
Common Stock 300,000 150,000
Retained Earnings 102,000 54,000
Total Equities 570,000 249,000
5-9 On January 1, 2010, Prescott Company acquired 80% of the outstanding capital stock of Sherlock Company for $570,000. On that date, the capital stock of Sherlock Company was $150,000 and its retained earnings were $450,000.
On the date of acquisition, the assets of Sherlock Company had the following values:
Book Value Value
Inventories $ 90,000 $165,000
Plant and equipment 150,000 180,000
All other assets and liabilities had book values approximately equal to their respective fair market values. The plant and equipment had a remaining useful life of 10 years from January 1, 2010, and Sherlock Company uses the FIFO inventory cost flow assumption.
Sherlock Company earned $180,000 in 2010 and paid dividends in that year of $90,000.
Prescott Company uses the complete equity method to account for its investment in S Company.
A. Prepare a computation and allocation schedule.
B. Prepare the balance sheet elimination entries as of December 31, 2010.
C. Compute the amount of equity in subsidiary income recorded on the books of Prescott Company on December 31, 2010.
D. Compute the balance in the investment account on December 31, 2010.
1. When the value implied by the acquisition price is below the fair value of the identifiable net assets the residual amount will be negative (bargain acquisition). Explain the difference in accounting for bargain acquisition between past accounting and proposed accounting requirements.
2. Push down accounting is an accounting method required for the subsidiary in some instances such as the banking industry. Briefly explain the concept of push down accounting.
Questions from the Textbook
1. Distinguish among the following concepts:(a)Difference between book value and the value implied by the purchase price.(b)Excess of implied value over fair value.(c)Excess of fair value over implied value.(d)Excess of book value over fair value.
2. In what account is the difference between book value and the value implied by the purchase
price recorded on the books of the investor? In what account is the “excess of implied over fair value” recorded?
3. How do you determine the amount of “the difference between book value and the value implied by the purchase price” to be allocated to a specific asset of a less than wholly owned subsidiary?
4. The parent company’s share of the fair value of the net assets of a subsidiary may exceed acquisition cost. How must this excess be treated in the preparation of consolidated financial statements?
5. What are the arguments for and against the alternatives for the handling of bargain acquisitions? Why are such acquisitions unlikely to occur with great frequency?
6. P Company acquired a 100% interest in S Company. On the date of acquisition the fair value of the assets and liabilities of S Company was equal to their book value except for land that had a fair value of $1,500,000 and a book value of $300,000.
At what amount should the land of S Company be included in the consolidated balance sheet?
At what amount should the land of S Company be included in the consolidated balance sheet if P Company acquired an80% interest in S Company rather than a 100%interest?
Business Ethics Question from the Textbook
Consider the following: Many years ago, a student in a consolidated financial statements class came to me and said that Grand Central (a multi-store grocery and variety chain in Salt Lake City and surrounding towns and cities) was going to be acquired and that I should try to buy the stock and make lots of money. I asked him how he knew and he told me that he worked part-time for Grand Central and heard that Fred Meyer was going to acquire it. I did not know whether the student worked in the accounting department at Grand Central or was a custodian at one of the stores. I thanked him for the information but did not buy the stock. Within a few weeks, the announcement was made that Fred Meyer was acquiring Grand Central and the stock price shot up, almost doubling. It was clear that I had missed an opportunity to make a lot of money … I don’t know to this day whether or not that would have been insider trading. How-ever, I have never gone home at night and asked my wife if the SEC called. From “Don’t go to jail and other good advice for accountants,” by Ron Mano, Accounting Today, October 25, 1999.
Question: Do you think this individual would have been guilty of insider trading if he had purchased the stock in Grand Central based on this advice? Why or why not? Are there ever instances where you think it would be wise to miss out on an opportunity to reap benefits simply because the behavior necessitated would have been in a gray ethical area, though not strictly illegal? Defend your position.