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Test Bank Advanced Accounting 3rd Jeter & Chaney

Chapter 1: Introduction to Business Combinations and the Conceptual Framework
Multiple Choice
1. Stock given as consideration for a business combination is valued at
a. fair market value
b. par value
c. historical cost
d. None of the above
2. Which of the following situations best describes a business combination to be accounted for as a statutory merger?
a. Both companies in a combination continue to operate as separate, but related, legal entities.
b. Only one of the combining companies survives and the other loses its separate identity.
c. Two companies combine to form a new third company, and the original two companies are dissolved.
d. One company transfers assets to another company it has created.
3. A firm can use which method of financing for an acquisition structured as either an asset or stock acquisition?
a. Cash
b. Issuing Debt
c. Issuing Stock
d. All of the above
4. The objectives of FASB 141R (Business Combinations) and FASB 160 (NonControlling Interests in
Consolidated Financial Statements) are as follows:
a. to improve the relevance, comparibility, and transparency of financial information related to business combinations.
b. to eliminate the amortization of Goodwill.
c. to facilitate the convergence project of the FASB and the International Accounting Standards Board.
d. a and b only
5. A business combination in which the boards of directors of the potential combining companies negotiate mutually agreeable terms is a(n)
a. agreeable combination.
b. friendly combination.
c. hostile combination.
d. unfriendly combination.
6. A merger between a supplier and
a. customer is a(n)
a. friendly combination.
b. horizontal combination.
c. unfriendly combination.
d. vertical combination.

7. When a business acquisition is financed using debt, the interest payments are tax deductible and create
a. operating synergy.
b. international synergy.
c. financial synergy.
d. diversification synergy.

8. The defense tactic that involves purchasing shares held by the would-be acquiring company at a price substantially in excess of their fair value is called
a. poison pill.
b. pac-man defense.
c. greenmail.
d. white knight.

9. The third period of business combinations started after World War II and is called
a. horizontal integration.
b. merger mania.
c. operating integration.
d. vertical integration.

10. A statutory results when one company acquires all the net assets of another company and the acquired company ceases to exist as a separate legal entity.
a. acquisition.
b. combination.
c. consolidation.
d. merger.

11. When a new corporation is formed to acquire two or more other corporations and the acquired corporations cease to exist as separate legal entities, the result is a statutory
a. acquisition.
b. combination.
c. consolidation.
d. merger.

12. The excess of the amount offered in an acquisition over the prior stock price of the acquired firm is the
a. bonus.
b. goodwill.
c. implied offering price.
d. takeover premium.

13. The difference between normal earnings and expected future earnings is
a. average earnings.
b. excess earnings.
c. ordinary earnings.
d. target earnings.

14. The first step in estimating goodwill in the excess earnings approach is to
a. determine normal earnings.
b. identify a normal rate of return for similar firms.
c. compute excess earnings.
d. estimate expected future earnings.

15. A potential offering price for a company is computed by adding the estimated goodwill to the
a. book value of the company’s net assets.
b. book value of the company’s net identifiable assets.
c. fair value of the company’s net assets.
d. fair value of the company’s net identifiable assets.

16. Estimated goodwill is determined by computing the present value of the
a. average earnings.
b. excess earnings.
c. expected future earnings.
d. normal earnings.

17. Which of the following statements would not be a valid or logical reason for entering into a business combination?
a. to increase market share.
b. to avoid becoming a takeover target.
c. to reduce risk by acquiring established product lines.
d. the operating costs of the combined entity would be more than the sum of the separate entities.

18. The parent company concept of consolidation represents the view that the primary purpose of consolidated financial statements is:
a. to provide information relevant to the controlling stockholders.
b. to represent the view that the affiliated companies are a separate, identifiable economic entity.
c. to emphasis control of the whole by a single management.
d. to include only a portion of the subsidiary’s assets, liabilities, revenues, expenses, gains, and losses.

19. Which of the following statements is correct?
a. Total elimination is consistent with the parent company concept.
b. Partial elimination is consistent with the economic unit concept.
c. Past accounting standards required the total elimination of unrealized intercompany profit in assets
acquired from affiliated companies.
d. none of these.

20. Under the parent company concept, consolidated net income the consolidated net income under the economic unit concept.
a. is the same as
b. is higher than
c. is lower than
d. can be higher or lower than

Chapter 2: Accounting for Business Combinations
1. SFAS 141R requires that all business combinations be accounted for using
a. the pooling of interests method.
b. the acquisition method.
c. either the acquisition or the pooling of interests methods.
d. neither the acquisition nor the pooling of interests methods.

2. Under the acquisition method, if the fair values of identifiable net assets exceed the value implied by the purchase Pratt of the acquired company, the excess should be
a. accounted for as goodwill.
b. allocated to reduce current and long-lived assets.
c. allocated to reduce current assets and classify any remainder as an extraordinary gain.
d. allocated to reduce any previously recorded goodwill and classify any remainder as an ordinary gain.

3. In a period in which an impairment loss occurs, SFAS No. 142 requires each of the following note disclosures except
a. a description of the facts and circumstances leading to the impairment.
b. the amount of goodwill by reporting segment.
c. the method of determining the fair value of the reporting unit.
d. the amounts of any adjustments made to impairment estimates from earlier periods, if significant.

4. Once a reporting unit is determined to have a fair value below its carrying value, the goodwill impairment loss is computed by comparing the
a. fair value of the reporting unit and the fair value of the identifiable net assets.
b. carrying value of the goodwill to its implied fair value.
c. fair value of the reporting unit to its carrying amount (goodwill included).
d. carrying value of the reporting unit to the fair value of the identifiable net assets.

5. SFAS 141R requires that the acquirer disclose each of the following for each material business combination except the
a. name and a description of the acquiree.
b. percentage of voting equity instruments acquired.
c. fair value of the consideration transferred.
d. Each of the above is a required disclosure

6. In a leveraged buyout, the portion of the net assets of the new corporation provided by the management group is recorded at
a. appraisal value.
b. book value.
c. fair value.
d. lower of cost or market.

7. When the acquisition price of an acquired firm is less than the fair value of the identifiable net assets, all of the following are recorded at fair value except
a. Assumed liabilities.
b. Current assets.
c. Long-lived assets.
d. Each of the above is recorded at fair value.

8. Under SFAS 141R,
a. both direct and indirect costs are to be capitalized.
b. both direct and indirect costs are to be expensed.
c. direct costs are to be capitalized and indirect costs are to be expensed.
d. indirect costs are to be capitalized and direct costs are to be expensed.

9. A business combination is accounted for properly as an acquisition. Which of the following expenses related to effecting the business combination should enter into the determination of net income of the combined corporation for the period in which the expenses are incurred?

Security Overhead allocated
issue costs to the merger
a. Yes Yes
b. Yes No
c. No Yes
d. No No

10. In a business combination, which of the following costs are assigned to the valuation of the security?

Professional or Security
consulting fees issue costs
a. Yes Yes
b. Yes No
c. No Yes
d. No No

11. Par Company and Sub Company were combined in an acquisition transaction. Par was able to acquire Sub at a bargain Pratt. The sum of the fair values of identifiable assets acquired less the fair value of liabilities assumed exceeded the cost to Par. After eliminating previously recorded goodwill, there was still some “negative goodwill.” Proper accounting treatment by Par is to report the amount as
a. paid-in capital.
b. a deferred credit, which is amortized.
c. an ordinary gain.
d. an extraordinary gain.

12. With an acquisition, direct and indirect expenses are
a. expensed in the period incurred.
b. capitalized and amortized over a discretionary period.
c. considered a part of the total cost of the acquired company.
d. charged to retained earnings when incurred

13. In a business combination accounted for as an acquisition, how should the excess of fair value of net assets acquired over the consideration paid 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. Recorded as an ordinary gain.

14. P Corporation issued 10,000 shares of common stock with a fair value of $25 per share for all the outstanding common stock of S Company in a business combination properly accounted for as an acquisition. The fair value of S Company’s net assets on that date was $220,000. P Company also agreed to issue an additional 2,000 shares of common stock with a fair value of $50,000 to the former stockholders of S Company as an earnings contingency. Assuming that the contingency is expected to be met, the $50,000 fair value of the additional shares to be issued should be treated as a(n)
a. decrease in noncurrent liabilities of S Company that were assumed by P Company.
b. decrease in consolidated retained earnings.
c. increase in consolidated goodwill.
d. decrease in consolidated other contributed capital.

15. On February 5, Pryor Corporation paid $1,600,000 for all the issued and outstanding common stock of Shaw, Inc., in a transaction properly accounted for as an acquisition. The book values and fair values of Shaw’s assets and liabilities on February 5 were as follows

Book Value Fair Value
Cash $ 160,000 $ 160,000
Receivables (net) 180,000 180,000
Inventory 315,000 300,000
Plant and equipment (net) 820,000 920,000
Liabilities (350,000) (350,000)
Net assets $1,125,000 $1,210,000

What is the amount of goodwill resulting from the business combination?
a. $-0-.
b. $475,000.
c. $85,000.
d. $390,000.
16. P Company purchased the net assets of S Company for $225,000. On the date of P’s purchase, S Company had no investments in marketable securities and $30,000 (book and fair value) of liabilities. The fair values of S Company’s assets, when acquired, were

Current assets $ 120,000
Noncurrent assets 180,000
Total $300,000

How should the $45,000 difference between the fair value of the net assets acquired ($270,000) and the consideration paid ($225,000) be accounted for by P Company?
a. The noncurrent assets should be recorded at $ 135,000.
b. The $45,000 difference should be credited to retained earnings.
c. The current assets should be recorded at $102,000, and the noncurrent assets should be recorded at $153,000.
d. An ordinary gain of $45,000 should be recorded.

17. If the value implied by the purchase price of an acquired company exceeds the fair values of identifiable net assets, the excess should be
a. allocated to reduce any previously recorded goodwill and classify any remainder as an ordinary gain.
b. allocated to reduce current and long-lived assets.
c. allocated to reduce long-lived assets.
d. accounted for as goodwill.

18. P Co. issued 5,000 shares of its common stock, valued at $200,000, to the former shareholders of S Company two years after S Company was acquired in an all-stock transaction. The additional shares were issued because P Company agreed to issue additional shares of common stock if the average post combination earnings over the next two years exceeded $500,000. P Company will treat the issuance of the additional shares as a (decrease in)
a. consolidated retained earnings.
b. consolidated goodwill.
c. consolidated paid-in capital.
d. non-current liabilities of S Company assumed by P Company.

19. In a business combination in which the total fair value of the identifiable assets acquired over liabilities assumed is greater than the consideration paid, the excess fair value is:
a. classified as an extraordinary gain.
b. allocated first to eliminate any previously recorded goodwill, and any remaining excess over the consideration paid is classified as an ordinary gain.
c. allocated first to reduce proportionately non-current assets then to non-monetary current assets,
and any remaining excess over cost is classified as a deferred credit.
d. allocated first to reduce proportionately non-current, depreciable assets to zero, and any remaining excess over cost is classified as a deferred credit.

20. The first step in determining goodwill impairment involves comparing the
a. implied value of a reporting unit to its carrying amount (goodwill excluded).
b. fair value of a reporting unit to its carrying amount (goodwill excluded).
c. implied value of a reporting unit to its carrying amount (goodwill included).
d. fair value of a reporting unit to its carrying amount (goodwill included).

Chapter 3: 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: Polk Sigler
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

120,000

200,00
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
a. $520,000.
b. $536,000.
c. $544,000.
d. $586,667.

14. Current liabilities should be
a. $200,000.
b. $184,000.
c. $160,000.
d. $120,000.

15. Noncurrent liabilities should be
a. $440,000.
b. $416,000.
c. $240,000.
d. $216,000.

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?

Chapter 4: Consolidated Financial Statements after Acquisition
1. An investor adjusts the investment account for the amortization of any difference between cost and book value under the
a. cost method.
b. complete equity method.
c. partial equity method.
d. complete and partial equity methods.

2. Under the partial equity method, the entry to eliminate subsidiary income and dividends includes a debit to
a. Dividend Income.
b. Dividends Declared – S Company.
c. Equity in Subsidiary Income.
d. Retained Earnings – S Company.

3. On the consolidated statement of cash flows, the parent‟s acquisition of additional shares of the subsidiary‟s stock directly from the subsidiary is reported as
a. an investing activity.
b. a financing activity.
c. an operating activity.
d. none of these.

4. Under the cost method, the workpaper entry to establish reciprocity
a. debits Retained Earnings – S Company.
b. credits Retained Earnings – S Company.
c. debits Retained Earnings – P Company.
d. credits Retained Earnings – P Company.

5. Under the cost method, the investment account is reduced when
a. there is a liquidating dividend.
b. the subsidiary declares a cash dividend.
c. the subsidiary incurs a net loss.
d. none of these.

6. The parent company records its share of a subsidiary‟s income by
a. crediting Investment in S Company under the partial equity method.
b. crediting Equity in Subsidiary Income under both the cost and partial equity methods.
c. debiting Equity in Subsidiary Income under the cost method.
d. none of these.

7. In years subsequent to the year of acquisition, an entry to establish reciprocity is made under the
a. complete equity method.
b. cost method.
c. partial equity method.
d. complete and partial equity methods.

8. A parent company received dividends in excess of the parent company‟s share of the subsidiary‟s earnings subsequent to the date of the investment. How will the parent company‟s investment account be affected by those dividends under each of the following accounting methods?

Cost Method Partial Equity Method
a. No effect No effect
b. Decrease No effect
c. No effect Decrease
d. Decrease Decrease

9. P Company purchased 80% of the outstanding common stock of S Company on May 1, 2011, for a cash payment of $1,272,000. S Company‟s December 31, 2010 balance sheet reported common stock of $800,000 and retained earnings of $540,000. During the calendar year 2011, S Company earned $840,000 evenly throughout the year and declared a dividend of $300,000 on November 1. What is the amount needed to establish reciprocity under the cost method in the preparation of a consolidated workpaper on December 31, 2011?
a. $208,000
b. $260,000
c. $248,000
d. $432,000

10. P Company purchased 90% of the outstanding common stock of S Company on January 1, 1997. S Company‟s stockholders‟ equity at various dates was:
1/1/97 1/1/11 12/31/11
Common stock $400,000 $400,000 $400,000
Retained earnings 120,000 380,000 460,000
Total $520,000 $780,000 $860,000

The workpaper entry to establish reciprocity under the cost method in the preparation of a consolidated statements workpaper on December 31, 2011 should include a credit to P Company‟s retained earnings of
a. $80,000.
b. $234,000.
c. $260,000.
d. $306,000.

11. Consolidated net income for a parent company and its partially owned subsidiary is best defined as
the parent company‟s
a. recorded net income.
b. recorded net income plus the subsidiary‟s recorded net income.
c. recorded net income plus the its share of the subsidiary‟s recorded net income.
d. income from independent operations plus subsidiary‟s income resulting from transactions with
outside parties.

12. In the preparation of a consolidated statements workpaper, dividend income recognized by a parent company for dividends distributed by its subsidiary is
a. included with parent company income from other sources to constitute consolidated net income.
b. assigned as a component of the noncontrolling interest.
c. allocated proportionately to consolidated net income and the noncontrolling interest.
d. eliminated.

13. In the preparation of a consolidated statement of cash flows using the indirect method of presenting cash flows from operating activities, the amount of the noncontrolling interest in consolidated income is
a. combined with the controlling interest in consolidated net income.
b. deducted from the controlling interest in consolidated net income.
c. reported as a significant noncash investing and financing activity in the notes.
d. reported as a component of cash flows from financing activities.

14. On October 1, 2011, Parr Company acquired for cash all of the voting common stock of Stein Company. The purchase price of Stein‟s stock equaled the book value and fair value of Stein‟s net assets. The separate net income for each company, excluding Parr‟s share of income from Stein was as follows:
Parr Stein
Twelve months ended 12/31/11 $4,500,000 $2,700,000
Three months ended 12/31/11 495,000 450,000

During September, Stein paid $150,000 in dividends to its stockholders. For the year ended December 31, 2011, Parr issued parent company only financial statements. These statements are not considered those of the primary reporting entity. Under the partial equity method, what is the
amount of net income reported in Parr‟s income statement?
a. $7,200,000.
b. $4,650,000.
c. $4,950,000.
d. $1,800,000.

15. A parent company uses the partial equity method to account for an investment in common stock of its subsidiary. A portion of the dividends received this year were in excess of the parent company‟s share of the subsidiary‟s earnings subsequent to the date of the investment. The amount of dividend income that should be reported in the parent company‟s separate income statement should be
a. zero.
b. the total amount of dividends received this year.
c. the portion of the dividends received this year that were in excess of the parent‟s share of subsidiary‟s earnings subsequent to the date of investment.
d. the portion of the dividends received this year that were NOT in excess of the parent‟s share of
subsidiary‟s earnings subsequent to the date of investment.

16. Masters, Inc. owns 40% of Fields Corporation. During the year, Fields had net earnings of $200,000 and paid dividends of $50,000. Masters used the cost method of accounting. What effect would this have on the investment account, net earnings, and retained earnings, respectively?
a. understate, overstate, overstate.
b. overstate, understate, understate
c. overstate, overstate, overstate
d. understate, understate, understate

Use the following information in answering questions 17 and 18.

17. Prior Industries acquired a 70 percent interest in Stevenson Company by purchasing 14,000 of its
20,000 outstanding shares of common stock at book value of $210,000 on January 1, 2010. Stevenson reported net income in 2010 of $90,000 and in 2011 of $120,000 earned evenly
throughout the respective years. Prior received $24,000 dividends from Stevenson in 2010 and
$36,000 in 2011. Prior uses the equity method to record its investment.

Prior should record investment income from Stevenson during 2011 of:

a. $36,000
b. $120,000
c. $84,000
d. $48,000

18. The balance of Prior‟s Investment in Stevenson account at December 31, 2011 is:
a. $210,000
b. $285,000
c. $297,000
d. $315,000

19. Parkview Company acquired a 90% interest in Sutherland Company on December 31, 2010, for
$320,000. During 2011 Sutherland had a net income of $22,000 and paid a cash dividend of $7,000. Applying the cost method would give a debit balance in the Investment in Stock of Sutherland Company account at the end of 2011 of:
a. $335,000
b. $333,500
c. $313,700
d. $320,000

20. Hall, Inc., owns 40% of the outstanding stock of Gloom Company. During 2011, Hall received a
$4,000 cash dividend from Gloom. What effect did this dividend have on Hall‟s 2011 financial statements?
a. Increased total assets.
b. Decreased total assets.
c. Increased income.
d. Decreased investment account.

Chapter 5: 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.
d. goodwill.

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
a. $152,000.
b. $177,143.
c. $80,000.
d. $0.

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.
a. 1
b. 2
c. 3
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.
a. 1
b. 2
c. 3
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
a. 50%
b. 80%
c. 90%
d. 95%

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
a. $58,500.
b. $13,500.
c. $27,000.
d. $72,000.

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:
a. $405,000.
b. $399,000.
c. $396,000.
d. $375,000.

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?
a. $125,000
b. $132,750
c. $139,250
d. $144,000

18. What amount of goodwill will be reported?
a. ($20,000)
b. ($25,000)
c. $25,000
d. $0

19. What is the amount of consolidated retained earnings?
a. $204,000
b. $209,250
c. $260,250
d. $279,000

20. What is the amount of total assets?

Chapter 6: Elimination of Unrealized Profit on Intercompany Sales of Inventory
1. Sales from one subsidiary to another are called
a. downstream sales.
b. upstream sales.
c. intersubsidiary sales.
d. horizontal sales.

2. Noncontrolling interest in consolidated income is never affected by
a. upstream sales.
b. downstream sales.
c. horizontal sales.
d. Noncontrolling interest is affected by all sales.

3. Failure to eliminate intercompany sales would result in an overstatement of consolidated
a. net income.
b. gross profit.
c. cost of sales.
d. all of these.

4. Pratt Company owns 80% of Storey Company’s common stock. During 2011, Storey sold $400,000 of merchandise to Pratt. At December 31, 2011, one-fourth of the merchandise remained in Pratt’s inventory. In 2011, gross profit percentages were 25% for Pratt and 30% for Storey. The amount of unrealized intercompany profit that should be eliminated in the consolidated statements is
a. $80,000.
b. $24,000.
c. $30,000.
d. $25,000.

5. The noncontrolling interest’s share of the selling affiliate’s profit on intercompany sales is
considered to be realized under
a. partial elimination.
b. total elimination.
c. 100% elimination.
d. both total and 100% elimination.

6. The workpaper entry in the year of sale to eliminate unrealized intercompany profit in ending inventory includes a
a. credit to Ending Inventory (Cost of Sales).
b. credit to Sales.
c. debit to Ending Inventory (Cost of Sales).
d. debit to Inventory – Balance Sheet.

7. Perez Company acquired an 80% interest in Seaman Company in 2010. In 2011 and 2012, Sutton reported net income of $400,000 and $480,000, respectively. During 2011, Seaman sold $80,000 of merchandise to Perez for a $20,000 profit. Perez sold the merchandise to outsiders during 2012 for
$140,000. For consolidation purposes, what is the noncontrolling interest’s share of Seaman’s 2011 and 2012 net income?
a. $90,000 and $96,000.
b. $100,000 and $76,000.
c. $84,000 and $92,000.
d. $76,000 and $100,000.

8. A 90% owned subsidiary sold merchandise at a profit to its parent company near the end of 2010.
Under the partial equity method, the workpaper entry in 2011 to recognize the intercompany profit in beginning inventory realized during 2011 includes a debit to
a. Retained Earnings – P.
b. Noncontrolling interest.
c. Cost of Sales.
d. both Retained Earnings – P and Noncontrolling Interest.

9. The noncontrolling interest in consolidated income when the selling affiliate is an 80% owned subsidiary is calculated by multiplying the noncontrolling minority ownership percentage by the subsidiary’s reported net income
a. plus unrealized profit in ending inventory less unrealized profit in beginning inventory.
b. plus realized profit in ending inventory less realized profit in beginning inventory.
c. less unrealized profit in ending inventory plus realized profit in beginning inventory.
d. less realized profit in ending inventory plus realized profit in beginning inventory.

10. In determining controlling interest in consolidated income in the consolidated financial statements, unrealized intercompany profit on inventory acquired by a parent from its subsidiary should:
a. not be eliminated.
b. be eliminated in full.
c. be eliminated to the extent of the parent company’s controlling interest in the subsidiary.
d. be eliminated to the extent of the noncontrolling interest in the subsidiary.

11. P Company sold merchandise costing $240,000 to S Company (90% owned) for $300,000. At the end of the current year, one-third of the merchandise remains in S Company’s inventory. Applying the lower-of- cost-or-market rule, S Company wrote this inventory down to $92,000. What amount of intercompany profit should be eliminated on the consolidated statements workpaper?
a. $20,000.
b. $18,000.
c. $12,000.
d. $10,800.

12. The material sale of inventory items by a parent company to an affiliated company:
a. enters the consolidated revenue computation only if the transfer was the result of arm’s length
bargaining.
b. affects consolidated net income under a periodic inventory system but not under a perpetual inventory system.
c. does not result in consolidated income until the merchandise is sold to outside parties.
d. does not require a working paper adjustment if the merchandise was transferred at cost.

13. A parent company regularly sells merchandise to its 80%-owned subsidiary. Which of the following statements describes the computation of noncontrolling interest income?
a. the subsidiary’s net income times 20%.
b. (the subsidiary’s net income x 20%) + unrealized profits in the beginning inventory –
unrealized profits in the ending inventory.
c. (the subsidiary’s net income + unrealized profits in the beginning inventory – unrealized profits in the ending inventory) × 20%.
d. (the subsidiary’s net income + unrealized profits in the ending inventory – unrealized profits in the beginning inventory) × 20%.

14. P Corporation acquired a 60% interest in S Corporation on January 1, 2011, at book value equal to fair value. During 2011, P sold merchandise that cost $135,000 to S for $189,000. One-third of this merchandise remained in S’s inventory at December 31, 2011. S reported net income of $120,000 for 2011. P’s income from S for 2011 is:
a. $36,000.
b. $50,400.
c. $54,000.
d. $61,200.

Use the following information for Questions 15 & 16:

P Company regularly sells merchandise to its 80%-owned subsidiary, S Corporation. In 2010, P sold merchandise that cost $240,000 to S for $300,000. Half of this merchandise remained in S’s December 31,
2010 inventory. During 2011, P sold merchandise that cost $375,000 to S for $468,000. Forty percent of
this merchandise inventory remained in S’s December 31, 2011 inventory. Selected income statement information for the two affiliates for the year 2011 is as follows:

P _ S _
Sales Revenue $2,250,000 $1,125,000
Cost of Goods Sold 1,800,000 937,500
Gross profit $450,000 $187,500

15. Consolidated sales revenue for P and Subsidiary for 2011 are:
a. $2,907,000.
b. $3,000,000.
c. $3,205,500.
d. $3,375,000.

16. Consolidated cost of goods sold for P Company and Subsidiary for 2011 are:
a. $2,260,500.
b. $2,268,000.
c. $2,276,700.
d. $2,737,500.

Use the following information for Questions 17 & 18:

P Company owns an 80% interest in S Company. During 2011, S sells merchandise to P for $200,000 at a profit of $40,000. On December 31, 2011, 50% of this merchandise is included in P’s inventory. Income statements for P and S are summarized below:

P S
Sales $1,200,000 $600,000
Cost of Sales (600,000) (400,000)
Operating Expenses (300,000) ( 80,000)
Net Income (2011) $300,000 $120,000

17. Controlling interest in consolidated net income for 2011 is:
a. $300,000.
b. $380,000.
c. $396,000.
d. $420,000.

18. Noncontrolling interest in income for 2011 is:
a. $4,000.
b. $19,200.
c. $20,000.
d. $24,000.

19. The amount of intercompany profit eliminated is the same under total elimination and partial elimination in the case of
1. upstream sales where the selling affiliate is a less than wholly owned subsidiary.
2. all downstream sales.
3. horizontal sales where the selling affiliate is a wholly owned subsidiary.
a. 1.
b. 2.
c. 3.
d. both 2 and 3.

20. Paige, Inc. owns 80% of Sigler, Inc. During 2011, Paige sold goods with a 40% gross profit to Sigler. Sigler sold all of these goods in 2011. For 2011 consolidated financial statements, how should the summation of Paige and Sigler income statement items be adjusted?
a. Sales and cost of goods sold should be reduced by the intercompany sales.
b. Sales and cost of goods sold should be reduced by 80% of the intercompany sales.
c. Net income should be reduced by 80% of the gross profit on intercompany sales.
d. No adjustment is necessary.

Chapter 7: Elimination of Unrealized Gains or Losses on Intercompany Sales of Property and Equipment
1. In the year a subsidiary sells land to its parent company at a gain, a workpaper entry is made debiting
1. Retained Earnings – P Company.
2. Retained Earnings – S Company.
3. Gain on Sale of Land.
a. 1
b. 2
c. 3
d. both 1 and 2.

2. In years subsequent to the year a 90% owned subsidiary sells equipment to its parent company at a gain, the noncontrolling interest in consolidated income is computed by multiplying the noncontrolling interest percentage by the subsidiary‟s reported net income
a. minus the net amount of unrealized gain on the intercompany sale.
b. plus the net amount of unrealized gain on the intercompany sale.
c. minus intercompany gain considered realized in the current period.
d. plus intercompany gain considered realized in the current period.

3. Company S sells equipment to its parent company (P) at a gain. In years subsequent to the year of the intercompany sale, a workpaper entry is made under the cost method debiting
a. Retained Earnings – P.
b. Noncontrolling interest.
c. Equipment.
d. all of these.

4. Pinick Corp. owns 90% of the outstanding common stock of Shell Company. On December 31, 2011, Shell sold equipment to Pinick for an amount greater than the equipment‟s book value but less than its original cost. The equipment should be reported on the December 31, 2011 consolidated balance sheet at
a. Pinick‟s original cost less 90% of Shell‟s recorded gain.
b. Pinick‟s original cost less Shell‟s recorded gain.
c. Shell‟s original cost.
d. Pinick‟s original cost.

5. Pratt Company owns 100% of Sage Corporation. On January 1, 2011 Pratt sold equipment to Sage at a gain. Pratt had owned the equipment for four years and used a ten-year straight-line rate with no residual value. Sage is using an eight-year straight-line rate with no residual value. In the consolidated income statement, Sage‟s recorded depreciation expense on the equipment for 2011 will be reduced by
a. 10% of the gain on sale.
b. 12 1/2% of the gain on sale.
c. 80% of the gain on sale.
d. 100% of the gain on sale.

6. Pratt Corporation owns 100% of Stone Company‟s common stock. On January 1, 2011, Pratt sold equipment with a book value of $210,000 to Stone for $300,000. Stone is depreciating the equipment over a ten-year life by the straight-line method. The net adjustments to compute 2011 and 2012 consolidated income would be an increase (decrease) of
2011 2012
a. ($90,000) $0
b. ($90,000) $9,000
c. ($81,000) $0
d. ($81,000) $9,000

7. In the year an 80% owned subsidiary sells equipment to its parent company at a gain, the noncontrolling interest in consolidated income is calculated by multiplying the noncontrolling interest percentage by the subsidiary‟s reported net income
a. plus the intercompany gain considered realized in the current period.
b. plus the net amount of unrealized gain on the intercompany sale.
c. minus the net amount of unrealized gain on the intercompany sale.
d. minus the intercompany gain considered realized in the current period.

8. The amount of the adjustment to the noncontrolling interest in consolidated net assets is equal to the noncontrolling interest‟s percentage of the
a. unrealized intercompany gain at the beginning of the period.
b. unrealized intercompany gain at the end of the period.
c. realized intercompany gain at the beginning of the period.
d. realized intercompany gain at the end of the period.

9. In January 2008, S Company, an 80% owned subsidiary of P Company, sold equipment to P Company for $1,980,000. S Company‟s original cost for this equipment was $2,000,000 and had accumulated depreciation of $200,000. P Company continued to depreciate the equipment over its 9 year remaining life using the straight-line method. This equipment was sold to a third party on January 1, 2011 for $1,440,000. What amount of gain should
P Company record on its books in 2011?
a. $60,000.
b. $120,000.
c. $240,000.
d. $360,000.

10. In years subsequent to the upstream intercompany sale of nondepreciable assets, the necessary consolidated workpaper entry under the cost method is to debit the
a. Noncontrolling interest and Retained Earnings (Parent) accounts, and credit the nondepreciable asset.
b. Retained Earnings (Parent) account and credit the nondepreciable asset.
c. Nondepreciable asset, and credit the Noncontrolling interest and Investment in Subsidiary accounts.
d. No entries are necessary.

11. When preparing consolidated financial statement workpapers, unrealized intercompany gains, as a result of equipment or inventory sales by affiliates, are allocated proportionately by percent of ownership between parent and subsidiary only when the selling affiliate is
a. the parent and the subsidiary is less than wholly owned.
b. a wholly owned subsidiary.
c. the subsidiary and the subsidiary is less than wholly owned.
d. the parent of a wholly owned subsidiary.
12. Gain or loss resulting from an intercompany sale of equipment between a parent and a subsidiary is
a. recognized in the consolidated statements in the year of the sale.
b. considered to be realized over the remaining useful life of the equipment as an adjustment to depreciation in the consolidated statements.
c. considered to be unrealized in the consolidated statements until the equipment is sold to a third party.
d. amortized over a period not less than 2 years and not greater than 40 years.

13. In 2011, P Company sells land to its 80% owned subsidiary, S Company, at a gain of $50,000. What is the effect of this sale of land on consolidated net income assuming S Company still owns the land at the end of the year?
a. consolidated net income will be the same as if the sale had not occurred.
b. consolidated net income will be $50,000 less than it would had the sale not occurred.
c. consolidated net income will be $40,000 less than it would had the sale not occurred.
d. consolidated net income will be $50,000 greater than it would had the sale not occurred.

14. Several years ago, P Company bought land from S Company, its 80% owned subsidiary, at a gain of $50,000 to S Company. The land is still owned by P Company. The consolidated working papers for this year will require:
a. no entry because the gain happened prior to this year.
b. a credit to land for $50,000.
c. a debit to P‟s retained earnings for $50,000.
d. a debit to Noncontrolling interest for $50,000.

15. On January 1, 2010 S Corporation sold equipment that cost $120,000 and had a book value of $48,000 to P Corporation for $60,000. P Corporation owns 100% of S Corporation and the equipment has a 4-year remaining life. What is the effect of the sale on P Corporation‟s Equity from Subsidiary Income account for 2011?
a. no effect
b. increase of $12,000.
c. decrease of $12,000.
d. increase of $3,000.

16. P Corporation acquired an 80% interest in S Corporation two years ago at an implied value equal to the book value of S. On January 2, 2011, S sold equipment with a five-year remaining life to P for a gain of $120,000. S reports net income of $600,000 for 2011 and pays dividends of $200,000. P‟s Equity from Subsidiary Income for 2011 is:
a. $480,000.
b. $384,000.
c. $403,200.
d. $576,000

17. P Company purchased land from its 80% owned subsidiary at a cost of $100,000 greater than it subsidiary‟s book value. Two years later P sold the land to an outside entity for $50,000 more than it‟s cost. In its current year consolidated income statement P and its subsidiary should report a gain on the sale of land of:

a. $50,000.
b. $120,000.
c. $130,000.
d. $150,000.

18. On January 1, 2010, P Corporation sold equipment with a 3-year remaining life and a book value of $40,000 to its 0% owned subsidiary for a price of $46,000. In the consolidated workpapers for the year ended December 31, 2011, an elimination entry for this transaction will include a:
a. debit to Equipment for $6,000.
b. debit to Gain on Sale of Equipment for $6,000.
c. credit to Depreciation Expense for $6,000.
d. debit to Accumulated Depreciation for $4,000.

19. Parks Corporation owns 100% of Starr Company‟s common stock. On January 1, 2011, Parks sold equipment with a book value of $350,000 to Starr for $500,000. Starr is depreciating the equipment over a ten-year life by the straight-line method. The net adjustments to compute 2011 and 2012 consolidated income would be an increase (decrease) of 2011 2012
a. ($150,000) $0
b. ($150,000) $15,000
c. ($135,000) $0
d. ($135,000) $15,000

20. eIn January 2008, S Company, an 80% owned subsidiary of P Company, sold equipment to P Company for $990,000. S Company‟s original cost for this equipment was $1,000,000 and had accumulated depreciation of $100,000. P Company continued to depreciate the equipment over its 9 year remaining life using the straight-line method. This equipment was sold to a third party on January 1, 2011 for $720,000. What amount of gain should P Company record on its books in 2011?
a. $30,000.
b. $60,000.
c. $120,000.
d. $180,000.

Chapter 8: Changes in Ownership Interest

1. When the parent company sells a portion of its investment in a subsidiary, the workpaper entry to adjust for the current year’s income sold to noncontrolling stockholders includes a
a. debit to Subsidiary Income Sold.
b. debit to Equity in Subsidiary Income.
c. credit to Equity in Subsidiary Income.
d. credit to Subsidiary Income Sold.

2. A parent company may increase its ownership interest in a subsidiary by
a. buying additional subsidiary shares from third parties.
b. buying additional subsidiary shares from the subsidiary.
c. having the subsidiary purchase its shares from third parties.
d. all of these.

3. If a portion of an investment is sold, the value of the shares sold is determined by using the:
1. first-in, first-out method.
2. average cost method.
3. specific identification method.
a. 1
b. 2
c. 3
d. 1 and 3

4. If a parent company acquires additional shares of its subsidiary’s stock directly from the subsidiary for a price less than their book value:
1. total noncontrolling book value interest increases.
2. the controlling book value interest increases.
3. the controlling book value interest decreases.
a. 1
b. 2
c. 3
d. 1 and 3

5. If a subsidiary issues new shares of its stock to noncontrolling stockholders, the book value of the parent’s interest in the subsidiary may
a. increase.
b. decrease.
c. remain the same.
d. increase, decrease, or remain the same.

6. The purchase by a subsidiary of some of its shares from noncontrolling stockholders results in the parent company’s share of the subsidiary’s net assets
a. increasing.
b. decreasing.
c. remaining unchanged.
d. increasing, decreasing, or remaining unchanged.

7. The computation of noncontrolling interest in net assets is made by multiplying the noncontrolling interest percentage at the
a. beginning of the year times subsidiary stockholders’ equity amounts.
b. beginning of the year times consolidated stockholders’ equity amounts.
c. end of the year times subsidiary stockholders’ equity amounts.
d. end of the year times consolidated stockholders’ equity amounts.

8. Under the partial equity method, the workpaper entry that reverses the effect of subsidiary income for the year includes a:
1. credit to Equity in Subsidiary Income.
2. debit to Subsidiary Income Sold.
3. debit to Equity in Subsidiary Income.
a. 1
b. 2
c. 3
d. both 1 and 2

9. Polk Company owned 24,000 of the 30,000 outstanding common shares of Sloan Company on January 1, 2010. Polk’s shares were purchased at book value when the fair values of Sloan’s assets and liabilities were equal to their book values. The stockholders’ equity of Sloan Company on January 1, 2010, consisted of the following:
Common stock, $15 par value $ 450,000
Other contributed capital 337,500
Retained earnings 712,500
Total $1,500,000

Sloan Company sold 7,500 additional shares of common stock for $90 per share on January 2, 2010. If Polk Company purchased all 7,500 shares, the book entry to record the purchase should increase the Investment in Sloan Company account by
a. $562,500.
b. $590,625.
c. $675,000.
d. $150,000.
e. Some other account.

10. Polk Company owned 24,000 of the 30,000 outstanding common shares of Sloan Company on January 1, 2010. Polk’s shares were purchased at book value when the fair values of Sloan’s assets and liabilities were equal to their book values. The stockholders’ equity of Sloan Company on January 1, 2010, consisted of the following:
Common stock, $15 par value $ 450,000
Other contributed capital 337,500
Retained earnings 712,500
Total $1,500,000
Sloan Company sold 7,500 additional shares of common stock for $90 per share on January 2, 2010. If all 7,500 shares were sold to noncontrolling stockholders, the workpaper adjustment needed each time a workpaper is

11. On January 1, 2006, Parent Company purchased 32,000 of the 40,000 outstanding common shares of Sims Company for $1,520,000. On January 1, 2010, Parent Company sold 4,000 of its shares of Sims Company on the open market for $90 per share. Sims Company’s stockholders’ equity on January 1, 2006, and January 1, 2010, was as follows:
1/1/06 1/1/10
Common stock, $10 par value $400,000 $ 400,000
Other contributed capital 400,000 400,000
Retained earnings 800,000 1,400,000
$1,600,000 $2,200,000

The difference between implied and book value is assigned to Sims Company’s land. The amount of the gain on sale of the 4,000 shares that should be recorded on the books of Parent Company is
a. $68,000.
b. $170,000.
c. $96,000.
d. $200,000.
e. None of these.

12. On January 1, 2006, Patterson Corporation purchased 24,000 of the 30,000 outstanding common shares of Stewart Company for $1,140,000. On January 1, 2010, Patterson Corporation sold 3,000 of its shares of Stewart Company on the open market for $90 per share. Stewart Company’s stockholders’ equity on January 1, 2006, and January 1, 2010, was as follows:
1/1/06 1/1/10
Common stock, $10 par value $ 300,000 $ 300,000
Other contributed capital 300,000 300,000
Retained earnings 600,000 1,050,000
$1,200,000 $1,650,000

The difference between implied and book value is assigned to Stewart Company’s land. As a result of the sale, Patterson Corporation’s Investment in Stewart account should be credited for
a. $165,000.
b. $206,250.
c. $120,000.
d. $142,500.
e. None of these.

13. On January 1, 2006, Peterson Company purchased 16,000 of the 20,000 outstanding common shares of Swift Company for $760,000. On January 1, 2010, Peterson Company sold 2,000 of its shares of Swift Company on the open market for $90 per share. Swift Company’s stockholders’ equity on January 1, 2006, and January 1, 2010, was as follows:
1/1/06 1/1/10
Common stock, $10 par value $200,000 $ 200,000
Other contributed capital 200,000 200,000
Retained earnings 400,000 700,000
$800,000 $1,100,000

The difference between implied and book value is assigned to Swift Company’s land. Assuming no other equity transactions, the amount of the difference between implied and book value that would be added to land on a workpaper for the preparation of consolidated statements on December 31,
2010, would be
a. $120,000.
b. $115,000.
c. $105,000.
d. $84,000.
e. None of these.
14. On January 1 2010, Paulson Company purchased 75% of Shields Corporation for $500,000.
Shields’ stockholders’ equity on that date was equal to $600,000 and Shields had 60,000 shares issued and outstanding on that date. Shields Corporation sold an additional 15,000 shares of previously unissued stock on December 31, 2010.
Assume that Paulson Company purchased the additional shares what would be their current percentage ownership on December 31, 2010?

15. On January 1 2010, Powder Mill Company purchased 75% of Selfine Company for $500,000.
Selfine Company’s stockholders’ equity on that date was equal to $600,000 and Selfine Company had 60,000 shares issued and outstanding on that date. Selfine Company Corporation sold an additional 15,000 shares of previously unissued stock on December 31, 2010.
Assume Selfine Company sold the 15,000 shares to outside interests, Powder Mill Company’s
percent ownership would be:
a. 33 1/3%
b. 60%
c. 75%
d. 80%

16. P Corporation purchased an 80% interest in S Corporation on January 1, 2010, at book value for
$300,000. S’s net income for 2010 was $90,000 and no dividends were declared. On May 1, 2010, Preduced its interest in S by selling a 20% interest, or one-fourth of its investment for $90,000. What will be the Consolidated Gain on Sale and Subsidiary Income Sold for 2010?
Consolidated Gain on Sale Subsidiary Income Sold
a. $9,000 $6,000
b. $9,000 $15,000
c. $15,000 $6,000
d. $15,000 $15,000

17. P Corporation purchased an 80% interest in S Corporation on January 1, 2010, at book value for
$300,000. S’s net income for 2010 was $90,000 and no dividends were declared. On May 1, 2010, Preduced its interest in S by selling a 20% interest, or one-fourth of its investment for $90,000. What would be the balance in the Investment of S Corporation account on December 31, 2010?
a. $300,000.
b. $225,000.
c. $279,000.
d. $261,000.

18. The purchase by a subsidiary of some of its shares from the noncontrolling stockholders results in an increase in the parent’s percentage interest in the subsidiary. The parent company’s share of the subsidiary’s net assets will increase if the shares are purchased:
a. at a price equal to book value.
b. at a price below book value.
c. at a price above book value.
d. will not show an increase.

Use the following information for Questions 19-21.

On January 1, 2006, Perk Company purchased 16,000 of the 20,000 outstanding common shares of Self Company for $760,000. On January 1, 2010, Perk Company sold 2,000 of its shares of Self Company on the open market for $90 per share. Self Company’s stockholders’ equity on January 1, 2006, and January 1, 2010, was as follows:
1/1/06 1/1/10
Common stock, $10 par value $ 200,000 $ 200,000
Other contributed capital 200,000 200,000
Retained earnings 400,000 700,000
$800,000 $1,100,000

The difference between implied and book value is assigned to Self Company’s land.
19. The amount of the gain on sale of the 2,000 shares that should be recorded on the books of Perk
Company is
a. $34,000.
b. $85,000.
c. $48,000.
d. $100,000.
e. None of these.

20. As a result of the sale, Perk Company’s Investment in Self account should be credited for
a. $110,000.
b. $137,500.
c. $80,000.
d. $95,000.
e. None of these.

Chapter 9: Intercompany Bond Holdings and Miscellaneous Topics – Consolidated Financial Statements
1. Which of the following methods of allocating the gain or loss on an intercompany bond retirement is the soundest conceptually?
a. The gain (loss) is allocated to the company that issued the bonds.
b. The gain (loss) is allocated to the company that purchased the bonds.
c. The gain (loss) is allocated to the parent company.
d. The gain (loss) is allocated between the purchasing and issuing companies.

2. The constructive gain or loss on an intercompany bond retirement is recognized in the consolidated income statement the recognition of the gain or loss on the individual companies’ books.
a. after
b. before
c. at the same time as
d. before or after

3. The constructive gain or loss to the purchasing company is the difference between the
a. book value of the bonds and their par value.
b. book value of the bonds and their purchase price.
c. cost of the bonds and their par value.
d. cost of the bonds and their purchase price.

4. The workpaper eliminating entry for a stock dividend declared by the subsidiary includes a
a. debit to Stock Dividends Declared – S Co.
b. debit to Noncontrolling interest.
c. credit to Stock Dividends Declared – S Co.
d. debit to Dividend Income.

5. The parent company records the receipt of shares from a subsidiary’s stock dividend as
a. dividend income.
b. a reduction of the investment account.
c. an increase in the investment account.
d. none of these.

6. If the book value of preferred stock is greater than its implied value, the difference is accounted for as an increase in
a. consolidated retained earnings.
b. consolidated net income.
c. other contributed capital.
d. investment in subsidiary preferred stock.

7. If a subsidiary has both common and preferred stock outstanding, a parent must own a controlling interest in
a. both the subsidiary’s common and preferred stock to justify consolidation.
b. the subsidiary’s common stock to justify consolidation.
c. the subsidiary’s common stock and at least 20% of the subsidiary’s preferred stock to justify consolidation.
d. the subsidiary’s common stock and more than 50% of the subsidiary’s preferred stock to justify consolid tion.

Use the following information to answer Questions 8, 9, and 10.

Pollard Corporation owns 90% of the outstanding common stock of Steele Company. On January 1, 2008, Steele Company issued $500,000, 12%, ten-year bonds.

On January 1, 2010, Pollard Corporation paid $412,000 for Steele Company bonds with a par value of
$400,000 and a carrying value of $393,600. Both companies use the straight-line method to amortize bond premiums and discounts. Pollard Corporation accounts for the investment using the cost method of
accounting.

8. The total gain or loss on the constructive retirement of the debt to be reported in the 2010 consolidated income statement is
a. $12,000 loss.
b. $12,000 gain.
c. $18,400 loss.
d. $18,400 gain.
e. $6,400 loss.

9. Pollard Corporation would report a balance in the Investment in Steele Company Bonds account on
December 31, 2010, of
a. $412,000.
b. $393,600.
c. $410,500.
d. $400,000.
e. none of these.

10. Compute the noncontrolling interest in the 2010 consolidated income assuming that Pollard Corporation reported a net income of $300,000 (includes dividend income from Steele Company). Steele Company reported net income of $180,000 and declared and paid cash dividends of $100,000.

a. $18,000
b. $17,440
c. $17,360
d. $18,560
e. none of these.

11. Sousa Corporation is an 80% owned subsidiary of Phillips Company. Sousa purchased bonds of Phillips Company for $103,000. Phillips Company reported the bond liability on the date of purchase at $100,000 less unamortized discount of $5,000. Assuming that the constructive gain or loss is material, the consolidated income statement should report an
a. ordinary loss of $8,000.
b. ordinary gain of $8,000.
c. extraordinary loss of $8,000 adjusted for income tax effects.
d. extraordinary gain of $8,000 adjusted for income tax effects.

12. From a consolidated entity point of view, the constructive gain or loss on the open market purchase of a parent company’s bonds by a subsidiary company is
a. considered realized at the date of the open market purchase.
b. realized in future periods through discount and premium amortization on the books of the individual companies.
c. realized only to the extent of the parent company’s interest in the subsidiary.
d. deferred and recognized in the consolidated income statement when the bonds are retired.

13. Stage Company is a 90% owned subsidiary of Princeton Company. On January 1, 2010, Stage Company purchased for $680,000 bonds of Princeton Company that had a carrying value of $725,000 (par value $700,000). The bonds mature on December 31, 2014. Both companies use the straight-line method of amortization and have a December 31 year-end. The increase in 2010 consolidated income (i.e., income before subtracting noncontrolling interest) is
a. $45,000.
b. $44,000.
c. $54,000.
d. $36,000.
e. $46,000.

Use the following information to answer Questions 14 and 15.

Parkes Company acquired 90% of Stanton Company’s common stock for $780,000 and 40% of its preferred stock for $180,000. On January 1, 2010, the date of acquisition, the companies reported the following account balances:
Parkes Company Stanton Company
Preferred stock, $100 par value $ 500,000 $ 360,000
Common stock, $10 par value 1,200,000 600,000
Other contributed capital 190,000 140,000
Retained earnings 210,000 110,000
Total stockholders’ equity $2,100,000 $1,200,000

The preferred stock is 10%, cumulative, nonparticipating, and has a liquidation value equal to 104% of par value. Dividends were not paid during 2009. During 2010, Stanton Company reported net income of $120,000 and declared and paid cash dividends in the amount of $70,000.
14. The difference between the implied value of the preferred stock and its book value is
a. $40,000.
b. $39,600.
c. $34,400.
d. $26,000.
e. 15,840.

15. Noncontrolling interest in the 2010 reported net income of Stanton Company is
a. $29,500.
b. $12,000.
c. $34,000.
d. $21,000.
e. $30,000.

16. Constructive gains and losses from intercompany bond transactions are:
a. treated as extraordinary items on the consolidated income statement
b. included as other revenues and expenses on the consolidated income statement.
c. excluded from the consolidated income statement until realized.
d. eliminated from the consolidated income statement.

17. Pittsford Company purchased bonds from Shay Company on the open market at a premium. Shay Company is a 100% owned subsidiary of Pittsford Company. Pittsford intends to hold the bonds until maturity. In a consolidated balance sheet, the difference between the bond carrying values in the two companies would be:
a. included as a decrease to retained earnings.
b. included as an increase to retained earnings.
c. reported as a deferred debit to be amortized over the remaining life of the bonds.
d. reported as a deferred credit to be amortized over the remaining life of the bonds.

18. On January 1, 2010, Plueger Company has $700,000 of 6%, 10-year bonds with an unamortized discount of $28,000. Steiner Company, an 80% subsidiary, purchased $350,000 of these bonds at 102. The gain or (loss) on the retirement of Plueger’s bonds is:
a. $14,000 loss.
b. $14,000 gain.
c. $21,000 loss.
d. $21,000 gain.

19. On a consolidated balance sheet, subsidiary preferred stock will be shown:
a. as part of consolidated stockholder’s equity.
b. combined with any preferred stock of the parent.
c. as part of the noncontrolling interest amount to the extent such balance represents preferred stock held by the parent.
d. as part of the noncontrolling interest amount to the extent such balance represents preferred
stock held by outside interests.

20. Pettijohn Company has total stockholders’ equity of $2,000,000 consisting of $400,000 of $1 par value common stock, $400,000 of other contributed capital, and $1,200,000 of retained earnings. Pettijohn owns 80% of Spencer Company purchased at book value. Spencer has $800,000 of 5% cumulative preferred stock outstanding. Pettijohn acquired 40% of the preferred stock of Spencer for $200,000. After this transaction the balances in Pettijohn’s retained earnings and other contributed capital accounts are:
a. $1,200,000 and $400,000.
b. $1,200,000 and $520,000.
c. $1,320,000 and $400,000.
d. $1,080,000 and $400,000.

Chapter 10: Insolvency – Liquidation and Reorganization
1. A corporation that is unable to pay its debts as they become due is:
a. bankrupt.
b. overdrawn.
c. insolvent.
d. liquidating.

2. When a business becomes insolvent, it generally has three possible courses of action. Which of the following is not one of the three possible courses of action?
a. The debtor and its creditors may enter into a contractual agreement, outside of formal bankruptcy proceedings.
b. The debtor continues operating the business in the normal course of the day-to-day operations.
c. The debtor or its creditors may file a bankruptcy petition, after which the debtor is liquidated under
d. The debtor or its creditors may file a petition for reorganization under Chapter 11.

3. Assets transferred by the debtor to a creditor to settle a debt are transferred at:
a. book value of the debt.
b. book value of the transferred assets.
c. fair market value of the debt.
d. fair market value of the transferred assets.

4. A composition agreement is an agreement between the debtor and its creditors whereby the creditors agree to:
a. accept less than the full amount of their claims.
b. delay settlement of the claim until a latter date.
c. force the debtor into a liquidation.
d. accrue interest at a higher rate.

5. In a troubled debt restructuring involving a modification of terms, the debtor’s gain on restructuring:
a. will equal the creditor’s gain on restructuring.
b. will equal the creditor’s loss on restructuring.
c. may not equal the creditor’s gain on restructuring.
d. may not equal the creditor’s loss on restructuring.

6. A bankruptcy petition filed by a firm is a:
a. chapter petition.
b. involuntary petition.
c. voluntary petition.
d. chapter 11 petition.

7. When a bankruptcy court enters an “order for relief” it has:
a. accepted the petition.
b. dismissed the petition.
c. appointed a trustee.
d. started legal action against the debtor by its creditors.

8. An involuntary petition filed by a firm’s creditors whereby there are twelve or more creditors must be signed by at least:
a. two creditors. b. three creditors.
c. five creditors. d. six creditors.

9. The duties of the trustee include:
a. appointing creditors’ committees in liquidation cases.
b. approving all payments for debts incurred before the bankruptcy filing.
c. examining claims and disallowing any that are improper.
d. calling a meeting of the debtor’s creditors.

10. Which of the following items is not a specified priority for unsecured creditors in a bankruptcy petition?
a. Administration fees incurred in administering the bankrupt’s estate.
b. Unsecured claims for wages earned within 90 days and are less than $4,650 per employee.
c. Unsecured claims of governmental units for unpaid taxes.
d. Unsecured claims on credit card charges that do not exceed $3,000.

11. Which statement with respect to gains and losses on troubled debt restructuring is correct?
a. Creditors losses on restructuring are extraordinary.
b. Debtor’s gains and losses on asset transfers and debtor’s gains on restructuring are combined
and treated as extraordinary.
c. Debtor gains and creditor losses on restructuring are extraordinary, if material in amount.
d. Debtor losses on asset transfers and debtor gains on restructuring are reported as a component of net income.

12. When fresh-start reporting is used according to Statement of Position (SOP) 90-7, the implication is that a new firm exists. Which of the following statements is not correct about fresh-start accounting?
a. Assets are reported at fair values.
b. Beginning retained earnings is reported at zero.
c. The fair value of the assets must be less than the post liabilities and allowed claims.
d. The original owners must own less than 50% of the voting stock after reorganization.

13. A Statement of Affairs is a report designed to show:
a. an estimated amount that would be received by each class of creditor’s claims in the event of liquidation.
b. a balance sheet prepared on the going-concern assumption.
c. assets and liabilities classified as current and noncurrent.
d. assets and liabilities reported at their current book values.

14. When a secured claim is not fully settled by the selling of the underlying collateral, the remaining portion:
a. of the claim cannot be collected by the creditor.
b. remains as a secured claim.
c. is classified as an unsecured priority claim.
d. is classified as an unsecured nonpriority claim.

15. Layne Corporation entered into a troubled debt restructuring agreement with their local bank. The bank agreed to accept land with a carrying amount of $360,000 and a fair value of $540,000 in exchange for a note with a carrying amount of $765,000. Ignoring income taxes, what amount should Layne report as a gain on its income statement?
a. $0.
b. $180,000.
c. $225,000.
d. $405,000.

16. The following information pertains to the transfer of real estate in regards to a troubled debt restructuring by Nen Co. to Baker Co. in full settlement of Nen’s liability to Baker:

Carrying amount of liability settled $450,000
Carrying amount of real estate transferred $300,000
Fair value of real estate transferred $330,000

What amount should Nen report as ordinary gain (loss) on transfer of real estate?
a. $(30,000).
b. $30,000.
c. $120,000.
d. $150,000.

17. The following information pertains to the transfer of real estate in regards to a troubled debt restructuring by Nen Co. to Baker Co. in full settlement of Nen’s liability to Baker:

Carrying amount of liability settled $450,000
Carrying amount of real estate transferred $300,000
Fair value of real estate transferred $330,000

What amount should Baker report as a gain or (loss) on restructuring?
a. $120,000 ordinary loss.
b. $120,000 extraordinary loss.
c. $150,000 ordinary loss.
d. $150,000 extraordinary loss.

18. Dobler Corporation was forced into bankruptcy and is in the process of liquidating assets and paying claims. Unsecured claims will be paid at the rate of thirty cents on the dollar. Carson holds a note receivable from Dobler for $75,000 collateralized by an asset with a book value of $50,000 and a liquidation value of $25,000. The amount to be realized by Carson on this note is:
a. $25,000.
b. $40,000.
c. $50,000.
d. $75,000.

19. Bad Company filed a voluntary bankruptcy petition, and the statement of affairs reflected the following amounts:
Estimated
Assets Book Value Current Value
Assets pledged with fully secured creditors $ 900,000 $ 1,110,000
Assets pledged partially secured creditors 540,000 360,000
Free assets 1,260,000 960,000
$2,700,000 $2,430,000
Liabilities
Liabilities with priority $ 210,000
Fully secured creditors 780,000
Partially secured creditors 600,000
Unsecured creditors 1,620,000
$3,210,000

Assume the assets are converted to cash at their estimated current values. What amount of cash will be available to pay unsecured nonpriority claims?

a. $720,000.
b. $840,000.
c. $960,000.
d. $1,080,000.

20. The final settlement with unsecured creditors is computed by dividing:
a. total net realizable value by total unsecured creditor claims.
b. net free assets by total secured creditor claims.
c. total net realizable value by total secured creditor claims.
d. net free assets by total unsecured creditor claims.

AND MUCH MORE