Package Title: Test Bank Questions

Course Title: Advanced Accounting, 6e

Chapter Number: 3

Question Type: Multiple Choice

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.

Question Title: Test Bank (Multiple Choice) Question 01

Difficulty: Medium

Learning Objective: 5 List the requirements for inclusion of a subsidiary in consolidated financial statements.

Section Reference: 3.2

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.

Question Title: Test Bank (Multiple Choice) Question 02

Difficulty: Easy

Learning Objective: 7 Record the investment in the subsidiary on the parent’s books at the date of acquisition.

Section Reference: 3.5

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.

Question Title: Test Bank (Multiple Choice) Question 03

Difficulty: Easy

Learning Objective: 8 Prepare the consolidated workpapers and eliminating entries at the date of acquisition.

Section Reference: 3.6

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) the existence of unrecorded contingent liabilities.

Question Title: Test Bank (Multiple Choice) Question 04

Difficulty: Easy

Learning Objective: 3 Describe the reasons why a company acquires a subsidiary rather than its net assets.

Section Reference: 3.3

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.

Question Title: Test Bank (Multiple Choice) Question 05

Difficulty: Easy

Learning Objective: 7 Record the investment in the subsidiary on the parent’s books at the date of acquisition., 8 Prepare the consolidated workpapers and eliminating entries at the date of acquisition.

Section Reference: 3.6

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.

Question Title: Test Bank (Multiple Choice) Question 06

Difficulty: Easy

Learning Objective: 8 Prepare the consolidated workpapers and eliminating entries at the date of acquisition.

Section Reference: 3.6

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.

Question Title: Test Bank (Multiple Choice) Question 07

Difficulty: Medium

Learning Objective: 5 List the requirements for inclusion of a subsidiary in consolidated financial statements.

Section Reference: 3.2

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 these.

Question Title: Test Bank (Multiple Choice) Question 08

Difficulty: Easy

Learning Objective: 4 Describe the valuation and classification of accounts in consolidated financial statements.

Section Reference: 3.4

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.

Question Title: Test Bank (Multiple Choice) Question 09

Difficulty: Medium

Learning Objective: 4 Describe the valuation and classification of accounts in consolidated financial statements., 9 Compute and allocate the difference between implied value and book value of the acquired firm’s equity.

Section Reference: 3.6

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.

Question Title: Test Bank (Multiple Choice) Question 10

Difficulty: Easy

Learning Objective: 2 Explain the role of a noncontrolling interest in business combinations.

Section Reference: 3.6

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.

Question Title: Test Bank (Multiple Choice) Question 11

Difficulty: Easy

Learning Objective: 6 Discuss the limitations of consolidated financial statements.

Section Reference: 3.8

12) Pina Corp. owns 60% of Simon Corp.'s outstanding common stock. On May 1, 2016, Pina advanced Simon $90,000 in cash, which was still outstanding at December 31, 2016. What portion of this advance should be eliminated in the preparation of the December 31, 2016 consolidated balance sheet?

a) $90,000.

b) $54,000.

c) $36,000.

d) $-0-.

Question Title: Test Bank (Multiple Choice) Question 12

Difficulty: Easy

Learning Objective: 8 Prepare the consolidated workpapers and eliminating entries at the date of acquisition.

Section Reference: 3.6, 3.7

13) On January 1, 2016, Pell Company and Sand Company had condensed balance sheets as follows:

On January 2, 2016 Pell borrowed $240,000 and used the proceeds to purchase 90% of the outstanding common stock of Sand. This debt is payable in 10 equal annual principal payments, plus interest, starting December 30, 2016. Any difference between book value and the value implied by the purchase price relates to land.

On Pell's January 2, 2016 consolidated balance sheet, noncurrent assets should be:

a) $520,000.

b) $536,000.

c) $544,000.

d) $586,667.

Question Title: Test Bank (Multiple Choice) Question 13

Difficulty: Medium

Learning Objective: 9 Compute and allocate the difference between implied value and book value of the acquired firm’s equity.

Section Reference: 3.6

14) On January 1, 2016, Pell Company and Sand Company had condensed balance sheets as follows:

On January 2, 2016 Pell borrowed $240,000 and used the proceeds to purchase 90% of the outstanding common stock of Sand. This debt is payable in 10 equal annual principal payments, plus interest, starting December 30, 2016. Any difference between book value and the value implied by the purchase price relates to land.

On Pell's January 2, 2016 consolidated balance sheet, current liabilities should be:

a) $200,000.

b) $184,000.

c) $160,000.

d) $120,000.

Question Title: Test Bank (Multiple Choice) Question 14

Difficulty: Medium

Learning Objective: 9 Compute and allocate the difference between implied value and book value of the acquired firm’s equity.

Section Reference: 3.6

15) On January 1, 2016, Pell Company and Sand Company had condensed balance sheets as follows:

On January 2, 2016 Pell borrowed $240,000 and used the proceeds to purchase 90% of the outstanding common stock of Sand. This debt is payable in 10 equal annual principal payments, plus interest, starting December 30, 2016. Any difference between book value and the value implied by the purchase price relates to land.

On Pell's January 2, 2016 consolidated balance sheet, noncurrent liabilities should be:

a) $440,000.

b) $416,000.

c) $240,000.

d) $216,000.

Question Title: Test Bank (Multiple Choice) Question 15

Difficulty: Medium

Learning Objective: 9 Compute and allocate the difference between implied value and book value of the acquired firm’s equity.

Section Reference: 3.6

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.

Question Title: Test Bank (Multiple Choice) Question 16

Difficulty: Easy

Learning Objective: 9 Compute and allocate the difference between implied value and book value of the acquired firm’s equity.

Section Reference: 3.6

17) The Difference between Implied and Book Value account is:

a) an asset or liability account reflected on the consolidated balance sheet.

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

Question Title: Test Bank (Multiple Choice) Question 17

Difficulty: Easy

Learning Objective: 9 Compute and allocate the difference between implied value and book value of the acquired firm’s equity.

Section Reference: 3.6

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.

Question Title: Test Bank (Multiple Choice) Question 18

Difficulty: Easy

Learning Objective: 1 Understand the concept of control as used in reference to consolidations.

Section Reference: 3.1

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.

Question Title: Test Bank (Multiple Choice) Question 19

Difficulty: Easy

Learning Objective: 5 List the requirements for inclusion of a subsidiary in consolidated financial statements.

Section Reference: 3.2

20) Price Company acquired 75 percent of the common stock of Shandie Corporation on December 31, 2016. On the date of acquisition, Price held land with a book value of $150,000 and a fair value of $300,000; Shandie 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? 

a) $650,000

b) $500,000

c) $550,000

d) $375,000

Question Title: Test Bank (Multiple Choice) Question 20

Difficulty: Easy

Learning Objective: 8 Prepare the consolidated workpapers and eliminating entries at the date of acquisition.

Section Reference: 3.6

21) On January 1, 2016, Pent Company and Shelter Company had condensed balance sheets as follows:

On January 2, 2016 Pent borrowed $180,000 and used the proceeds to purchase 90% of the outstanding common stock of Shelter. This debt is payable in 10 equal annual principal payments, plus interest, starting December 30, 2016. Any difference between book value and the value implied by the purchase price relates to land.

On Pent's January 2, 2016 consolidated balance sheet, noncurrent assets should be:

a) $390,000.

b) $402,000.

c) $408,000.

d) $440,000.

Question Title: Test Bank (Multiple Choice) Question 21

Difficulty: Medium

Learning Objective: 9 Compute and allocate the difference between implied value and book value of the acquired firm’s equity.

Section Reference: 3.6

22) On January 1, 2016, Pent Company and Shelter Company had condensed balance sheets as follows:

On January 2, 2016 Pent borrowed $180,000 and used the proceeds to purchase 90% of the outstanding common stock of Shelter. This debt is payable in 10 equal annual principal payments, plus interest, starting December 30, 2016. Any difference between book value and the value implied by the purchase price relates to land.

On Pent's January 2, 2016 consolidated balance sheet, current liabilities should be:

a) $150,000.

b) $138,000.

c) $120,000.

d) $90,000.

Question Title: Test Bank (Multiple Choice) Question 22

Difficulty: Easy

Learning Objective: 9 Compute and allocate the difference between implied value and book value of the acquired firm’s equity.

Section Reference: 3.6

23) On January 1, 2016, Pent Company and Shelter Company had condensed balance sheets as follows:

On January 2, 2016 Pent borrowed $180,000 and used the proceeds to purchase 90% of the outstanding common stock of Shelter. This debt is payable in 10 equal annual principal payments, plus interest, starting December 30, 2016. Any difference between book value and the value implied by the purchase price relates to land.

On Pent's January 2, 2016 consolidated balance sheet, noncurrent liabilities should be:

a) $330,000.

b) $312,000.

c) $180,000.

d) $162,000. 

Question Title: Test Bank (Multiple Choice) Question 23

Difficulty: Easy

Learning Objective: 9 Compute and allocate the difference between implied value and book value of the acquired firm’s equity.

Section Reference: 3.6

24) On January 1, 2016, Prima Corporation acquired 80 percent of Sunder Corporation's voting common stock. Sunders's buildings and equipment had a book value of $300,000 and a fair value of $350,000 at the time of acquisition. At what amount will Sunder’s buildings and equipment will be reported in the consolidated statements? 

a) $350,000

b) $340,000

c) $280,000

d) $300,000

Question Title: Test Bank (Multiple Choice) Question 24

Difficulty: Easy

Learning Objective: 9 Compute and allocate the difference between implied value and book value of the acquired firm’s equity.

Section Reference: 3.6

25) The primary beneficiary of a variable interest entity (VIE) must consolidate the VIE into its financial statements whenever:

a) substantially all of the entity’s activities are conducted on behalf of an investor who has disproportionally few voting rights.

b) the voting rights are not proportional to the obligations to absorb the expected losses or receive expected residual returns.

c) the total equity at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties.

d) the holders of the equity investment at risk have the right to receive the residual returns of the legal entity

Question Title: Test Bank (Multiple Choice) Question 25

Difficulty: Medium

Learning Objective: 1 Understand the concept of control as used in reference to consolidations.

Section Reference: 3.1

26) If an entity is not considered a VIE, the determination of consolidation is based on whether:

a) the voting rights are proportional to the obligations to absorb expected losses or receive expected residual returns.

b) the total equity at risk is sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties.

c) the equity investments or investments in subordinated debt are at risk.

d) one of the entities in the consolidated group directly or indirectly has a controlling financial interest (usually ownership of a majority voting interest) in the other entities.

Question Title: Test Bank (Multiple Choice) Question 26

Difficulty: Easy

Learning Objective: 1 Understand the concept of control as used in reference to consolidations.

Section Reference: 3.1

27) IFRS defines control as:

a) the direct or indirect ability to determine the direction of management and policies through ownership, contract, or otherwise.

b) the power to govern the entity’s financial and operating policies as to obtain benefits from its activities.

c) the power to direct the activities that impact economic performance, the obligation to absorb expected losses, and the right to receive expected residual returns.

d) having a majority of the ownership interests entitled to elect management.

Question Title: Test Bank (Multiple Choice) Question 27

Difficulty: Medium

Learning Objective: 1 Understand the concept of control as used in reference to consolidations., 10 Discuss some of the similarities and differences between U.S. GAAP and IFRS with respect to the preparation of consolidated financial statements at the date of acquisition.

Section Reference: 3.1, 3.8

Question Type: Essay

28) There are several reasons why a company would acquire a subsidiary’s voting common stock rather than its net assets. Identify at least two advantages to acquiring a controlling interest in the voting stock of another company rather than its assets.

• Stock acquisition is relatively simple and avoids the often lengthy and difficult negotiations that are required in a complete takeover.
• Control of the subsidiary's operations can be accomplished with a much smaller investment.
• The separate legal existence of the individual affiliates provides an element of protection of the parent's assets from attachment by subsidiary creditors.

Question Title: Test Bank (Essay) Question 28

Difficulty: Medium

Learning Objective: 3 Describe the reasons why a company acquires a subsidiary rather than its net assets.

Section Reference: 3.3

29) A useful first step in the consolidating process is to prepare a Computation and Allocation of Difference (CAD) Schedule. Identify the steps involved in preparing the CAD schedule.

• Determine the percentage of stock acquired in the subsidiary.
• Compute the implied value of the subsidiary by dividing the purchase price by the percentage acquired.
• Allocate any difference between the implied value and the book value of the subsidiary's equity to adjust the underlying assets and/or liabilities of the acquired company.

Question Title: Test Bank (Essay) Question 29

Difficulty: Medium

Learning Objective: 9 Compute and allocate the difference between implied value and book value of the acquired firm’s equity.

Section Reference: 3.6

30) On December 31, 2016, Pinta Company purchased 80% of the outstanding common stock of Snead Company for cash. At the time of acquisition, Snead Company's balance sheet was as follows:

Required:

Prepare the elimination entry(s) required for the preparation of a consolidated balance sheet workpaper on December 31, 2016, assuming the purchase price of the stock was $1,670,000. Any difference between the value implied by the purchase price of the investment and the book value of net assets acquired relates to subsidiary land.

Question Title: Test Bank (Problem) Question 3-1

Difficulty: Medium

Learning Objective: 8 Prepare the consolidated workpapers and eliminating entries at the date of acquisition., 9 Compute and allocate the difference between implied value and book value of the acquired firm’s equity.

Section Reference: 3.6

31) P Company purchased 80% of the outstanding common stock of S Company on January 2, 2016, for $380,000. Balance sheets for P Company and S Company immediately after the stock acquisition were as follows:

S Company owed P Company $16,000 on open account on the date of acquisition.

Required:

Prepare a consolidated balance sheet for P and S Companies on the date of acquisition. Any difference between the value implied by the purchase price of the investment and the book value of net assets acquired relates to subsidiary land. The book values of S Company's other assets and liabilities are equal to their fair values.

Question Title: Test Bank (Problem) Question 3-2

Difficulty: Medium

Learning Objective: 8 Prepare the consolidated workpapers and eliminating entries at the date of acquisition., 9 Compute and allocate the difference between implied value and book value of the acquired firm’s equity.

Section Reference: 3.6

32) P Company acquired 54,000 shares of the common stock of S Company on January 1, 2016, for $950,000 cash. The stockholders' equity section of S Company's balance sheet on that date was as follows:

On the date of acquisition, S Company owed P Company $10,000 on open account.

Required:

Present, in general journal form, the elimination entries for the preparation of a consolidated balance sheet workpaper on January 1, 2016. The difference between the value implied by the purchase price of the investment and the book value of the net assets acquired relates to subsidiary land.

Question Title: Test Bank (Problem) Question 3-3

Difficulty: Medium

Learning Objective: 8 Prepare the consolidated workpapers and eliminating entries at the date of acquisition., 9 Compute and allocate the difference between implied value and book value of the acquired firm’s equity.

Section Reference: 3.6

33) On January 2, 2016, Pope Company acquired 90% of the outstanding common stock of Smithwick Company for $480,000 cash. Just before the acquisition, the balance sheets of the two companies were as follows:

The fair values of Smithwick's assets and liabilities are equal to their book values with the exception of land.

Required:

A. Prepare the journal entry necessary to record the purchase of Smithwick's common stock.

B. Prepare a consolidated balance sheet at the date of acquisition.

A.

Question Title: Test Bank (Problem) Question 3-4

Difficulty: Hard

Learning Objective: 8 Prepare the consolidated workpapers and eliminating entries at the date of acquisition., 9 Compute and allocate the difference between implied value and book value of the acquired firm’s equity.

Section Reference: 3.6

34) P Corporation paid $420,000 for 70% of S Corporation’s $10 par common stock on December 31, 2016, when S Corporation’s stockholders’ equity was made up of $300,000 of Common Stock, $90,000 of Other Contributed Capital and $60,000 of Retained Earnings. S’s identifiable assets and liabilities reflected their fair values on December 31, 2016, except for S’s inventory which was undervalued by $60,000 and their land which was undervalued by $25,000. Balance sheets for P and S immediately after the business combination are presented in the partially completed work-paper below.

Required:

Complete the consolidated balance sheet workpaper for P Corporation and Subsidiary.

Question Title: Test Bank (Problem) Question 3-5

Difficulty: Hard

Learning Objective: 8 Prepare the consolidated workpapers and eliminating entries at the date of acquisition., 9 Compute and allocate the difference between implied value and book value of the acquired firm’s equity.

Section Reference: 3.6

35) Prepare in general journal form the workpaper entries to eliminate Porter Company's investment in Sewell Company in the preparation of a consolidated balance sheet at the date of acquisition for each of the following independent cases:

Any difference between book value of net assets acquired and the value implied by the purchase price relates to subsidiary property, plant, and equipment except for case (b). In case (b) assume that all book values and fair values are the same.

Question Title: Test Bank (Problem) Question 3-6

Difficulty: Hard

Learning Objective: 8 Prepare the consolidated workpapers and eliminating entries at the date of acquisition., 9 Compute and allocate the difference between implied value and book value of the acquired firm’s equity.

Section Reference: 3.6

36) On December 31, 2016, Priestly Company purchased a controlling interest in Shelter Company for $1,060,000. The consolidated balance sheet on December 31, 2016 reported noncontrolling interest in Shelter Company of $265,000.

On the date of acquisition, the stockholders' equity section of Shelter Company's balance sheet was as follows:

Required:

A.Compute the noncontrolling interest percentage on December 31, 2016.

B. Prepare the investment elimination entry made to prepare a consolidated balance sheet workpaper. Any difference between book value and the value implied by the purchase price relates to subsidiary land.

A. 265,000/(1,060,000 +265,000) = 20% Noncontrolling interest

B.

Question Title: Test Bank (Problem) Question 3-7

Difficulty: Medium

Learning Objective: 8 Prepare the consolidated workpapers and eliminating entries at the date of acquisition., 9 Compute and allocate the difference between implied value and book value of the acquired firm’s equity.

Section Reference: 3.6

37) On January 1, 2016, Prima Company issued 1,500 of its $20 par value common shares with a fair value of $50 per share in exchange for 2,000 outstanding common shares of Swatch Company in a purchase transaction. Registration costs amounted to $1,700 paid in cash. Just prior to the acquisition, the balance sheets of the two companies were as follows:

Any differences between the book value of equity and the value implied by the purchase price relates to Land.

Required:

1. Prepare the journal entry on Prima’s books to record the exchange of stock.
2. Prepare a Computation and Allocation Schedule for the Difference between book value and value implied by the purchase price.
3. Calculate the consolidated balance for each of the following accounts as of December 31, 2016:
   • 1. Cash
     2. Land
     3. Common Stock
     4. Other Contributed Capital

A. Investment in Swatch Company ($50 × 1,500) 75,000

Common Stock ($20 × 1,500) 30,000

Other Contributed Capital ($30 × 1,500) 45,000

Other Contributed Capital 1,700

Cash 1,700

B. Computation and Allocation of Difference

Non-

Parent Controlling Entire

Share Share Value

Purchase price and implied value $75,000 0 75,000

Less: Book value of equity acquired 83,000 * 0 83,000

Difference between implied and book value 7,000 0 7,000

Land (7,000) (0) (7,000)

Balance - 0 - - 0 - - 0 -

* $40,000 + $24,000 + $19,000 = $83,000

C.

Cash balance: 73,000 + 13,000 –1,700 = $84,300

Land balance: 26,000 + 20,000 + 7,000= $ 53,000

Common Stock balance: 100,000 + 30,000 = $130,000

Other Contributed Capital: 60,000 + 45,000 – 1,700 = $ 103,300

Question Title: Test Bank (Problem) Question 3-8

Difficulty: Hard

Learning Objective: 8 Prepare the consolidated workpapers and eliminating entries at the date of acquisition., 9 Compute and allocate the difference between implied value and book value of the acquired firm’s equity.

Section Reference: 3.6