Jeter Ch.5 Test Bank Depreciation Implied & Book Value

Package Title: Test Bank Questions

Course Title: Advanced Accounting, 6e

Chapter Number: 5

Question Type: Multiple Choice

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.

Question Title: Test Bank (Multiple Choice) Question 01

Difficulty: Easy

Learning Objective: 1 Calculate the difference between implied and book values and allocate to the subsidiary’s assets and liabilities.

Section Reference: 5-1

2) Under which set of circumstances would it not be appropriate to assume the value the noncontrolling shares is the same as the controlling shares?

a) The acquisition is for less than 100% of the subsidiary.

b) The fair value of the noncontrolling shares can be inferred from the value implied by the acquisition price.

c) Active market prices for shares not obtained by the acquirer imply a different value.

d) The amount of the “control premium” cannot be determined .

Question Title: Test Bank (Multiple Choice) Question 02

Difficulty: Medium

Learning Objective: 4 Describe how the allocation process differs if less than 100% of the subsidiary is acquired.

Section Reference: 5.1

3) On January 1, 2016, 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, 2016, consolidated balance sheet, goodwill would be reported at:

a) $152,000.

b) $177,143.

c) $80,000.

d) $0.

Question Title: Test Bank (Multiple Choice) Question 03

Difficulty: Hard

Learning Objective: 4 Describe how the allocation process differs if less than 100% of the subsidiary is acquired.

Section Reference: 5-1

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:

a) debit to Difference Between Implied and Book Value.

b) credit to Excess of Implied over Fair Value.

c) credit to Difference Between Implied and Book Value.

d) debit to Difference Between Implied and Book Value and credit to Excess of Implied over Fair Value.

Question Title: Test Bank (Multiple Choice) Question 04

Difficulty: Medium

Learning Objective: 4 Describe how the allocation process differs if less than 100% of the subsidiary is acquired.

Section Reference: 5-1

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.

Question Title: Test Bank (Multiple Choice) Question 05

Difficulty: Medium

Learning Objective: 2 Describe FASB’s position on accounting for bargain acquisitions.; 6 Prepare workpapers for the year of acquisition and the year(s) subsequent to the acquisition, assuming that the parent accounts for the investment alternatively using the cost, the partial equity, and the complete equity methods.

Section Reference: 5-1

6) The entry to amortize the amount of difference between implied and book value allocated to an unspecified intangible is recorded:

a) on the subsidiary's books.

b) on the parent's books.

c) on the consolidated statements workpaper.

d) on the parent's books and on the consolidated statements workpaper.

Question Title: Test Bank (Multiple Choice) Question 06

Difficulty: Medium

Learning Objective: 3 Explain how goodwill is measured at the time of the acquisition.; 4 Describe how the allocation process differs if less than 100% of the subsidiary is acquired.

Section Reference: 5-1

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 these

Question Title: Test Bank (Multiple Choice) Question 07

Difficulty: Easy

Learning Objective: 1 Calculate the difference between implied and book values and allocate to the subsidiary’s assets and liabilities.; 2 Describe FASB’s position on accounting for bargain acquisitions.

Section Reference: 5-1

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%

Question Title: Test Bank (Multiple Choice) Question 08

Difficulty: Easy

Learning Objective: 10 Understand the concept of push down accounting.

Section Reference: 5-10

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.

Question Title: Test Bank (Multiple Choice) Question 09

Difficulty: Medium

Learning Objective: 10 Understand the concept of push down accounting.

Section Reference: 5-10

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.

Question Title: Test Bank (Multiple Choice) Question 10

Difficulty: Easy

Learning Objective: 2 Describe FASB’s position on accounting for bargain acquisitions.

Section Reference: 5-1

11) On November 30, 2016, Piani 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, 2016, showed a book value of $8,000,000. Additionally, the fair value of Surge's property, plant, and equipment on November 30, 2016, 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, 2016, consolidated balance sheet of Piani Incorporated, and its wholly owned subsidiary, Surge Company?

a) $0.

b) $800,000.

c) $1,200,000.

d) $2,000,000.

Question Title: Test Bank (Multiple Choice) Question 11

Difficulty: Medium

Learning Objective: 1 Calculate the difference between implied and book values and allocate to the subsidiary’s assets and liabilities.

Section Reference: 5-1

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.

Question Title: Test Bank (Multiple Choice) Question 12

Difficulty: Easy

Learning Objective: 1 Calculate the difference between implied and book values and allocate to the subsidiary’s assets and liabilities.

Section Reference: 5-1

13) Simple Company, a 70%-owned subsidiary of Punter 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 Simple's identifiable net assets at the date of the business combination was $45,000. The noncontrolling interest in net income of Simple for Year 3 was:

a) $58,500.

b) $13,500.

c) $27,000.

d) $72,000.

Question Title: Test Bank (Multiple Choice) Question 13

Difficulty: Hard

Learning Objective: 6 Prepare workpapers for the year of acquisition and the year(s) subsequent to the acquisition, assuming that the parent accounts for the investment alternatively using

the cost, the partial equity, and the complete equity methods.

Section Reference: 5.2, 5.4, 5.6

14) Pinta Company acquired an 80% interest in Strummer Company on January 1, 2016, for $270,000 cash when Strummer 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. Strummer Company made $30,000 in 2016 and paid no dividends. Pinta Company’s separate income in 2016 was $375,000. Controlling interest in consolidated net income for 2016 is:

a) $405,000.

b) $399,000.

c) $396,000.

d) $375,000.

Question Title: Test Bank (Multiple Choice) Question 14

Difficulty: Hard

Learning Objective: 6 Prepare workpapers for the year of acquisition and the year(s) subsequent to the acquisition, assuming that the parent accounts for the investment alternatively using

the cost, the partial equity, and the complete equity methods.

Section Reference: 5.2, 5.4, 5.6

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.

Question Title: Test Bank (Multiple Choice) Question 15

Difficulty: Medium

Learning Objective: 6 Prepare workpapers for the year of acquisition and the year(s) subsequent to the acquisition, assuming that the parent accounts for the investment alternatively using

the cost, the partial equity, and the complete equity methods.

Section Reference: 5.2, 5.7

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.

Question Title: Test Bank (Multiple Choice) Question 16

Difficulty: Medium

Learning Objective: 5 Record the entries needed on the parent’s books to account for the investment under the three methods: the cost, the partial equity, and the complete equity methods.

Section Reference: 5.3

17) On January 1, 2016, Pamela Company purchased 75% of the common stock of Snicker Company. Separate balance sheet data for the companies at the combination date are given below:

Determine below what the consolidated balance would be for each of the requested accounts on January 2, 2016.

What amount of inventory will be reported?

a) $125,000

b) $132,750

c) $139,250

d) $144,000

Question Title: Test Bank (Multiple Choice) Question 17

Difficulty: Easy

Learning Objective: 1 Calculate the difference between implied and book values and allocate to the subsidiary’s assets and liabilities.; 5 Record the entries needed on the parent’s books to account for the investment under the three methods: the cost, the partial equity, and the complete equity methods.; 6 Prepare workpapers for the year of acquisition and the year(s) subsequent to the acquisition, assuming that the parent accounts for the investment alternatively using the cost, the partial equity, and the complete equity methods.

Section Reference: 5.1, 5.3, 5.5

18) On January 1, 2016, Pamela Company purchased 75% of the common stock of Snicker Company. Separate balance sheet data for the companies at the combination date are given below:

Determine below what the consolidated balance would be for each of the requested accounts on January 2, 2016.

What amount of goodwill will be reported?

a) ($20,000)

b) ($25,000)

c) $25,000

d) $0

Question Title: Test Bank (Multiple Choice) Question 18

Difficulty: Easy

Learning Objective: 1 Calculate the difference between implied and book values and allocate to the subsidiary’s assets and liabilities.; 5 Record the entries needed on the parent’s books to account for the investment under the three methods: the cost, the partial equity, and the complete equity methods.; 6 Prepare workpapers for the year of acquisition and the year(s) subsequent to the acquisition, assuming that the parent accounts for the investment alternatively using the cost, the partial equity, and the complete equity methods.

Section Reference: 5.1, 5.3, 5.5

19) On January 1, 2016, Pamela Company purchased 75% of the common stock of Snicker Company. Separate balance sheet data for the companies at the combination date are given below:

Determine below what the consolidated balance would be for each of the requested accounts on January 2, 2016.

What is the amount of consolidated retained earnings?

a) $204,000

b) $209,250

c) $260,250

d) $279,000

Question Title: Test Bank (Multiple Choice) Question 19

Difficulty: Medium

Learning Objective: 1 Calculate the difference between implied and book values and allocate to the subsidiary’s assets and liabilities.; 5 Record the entries needed on the parent’s books to account for the investment under the three methods: the cost, the partial equity, and the complete equity methods.; 6 Prepare workpapers for the year of acquisition and the year(s) subsequent to the acquisition, assuming that the parent accounts for the investment alternatively using the cost, the partial equity, and the complete equity methods.

Section Reference: 5.1, 5.3, 5.5

20) On January 1, 2016, Pamela Company purchased 75% of the common stock of Snicker Company. Separate balance sheet data for the companies at the combination date are given below:

Determine below what the consolidated balance would be for each of the requested accounts on January 2, 2016.

What is the amount of total assets?

a) $921,000

b) $1,185,000

c) $1,525,000

d) $1,195,000

Question Title: Test Bank (Multiple Choice) Question 20

Difficulty: Medium

Learning Objective: 1 Calculate the difference between implied and book values and allocate to the subsidiary’s assets and liabilities.; 5 Record the entries needed on the parent’s books to account for the investment under the three methods: the cost, the partial equity, and the complete equity methods.; 6 Prepare workpapers for the year of acquisition and the year(s) subsequent to the acquisition, assuming that the parent accounts for the investment alternatively using the cost, the partial equity, and the complete equity methods.

Section Reference: 5.1, 5.3, 5.5

21) Sleepy Company, a 70%-owned subsidiary of Pickle Corporation, reported net income of $600,000 and paid dividends totaling $225,000 during Year 3. Year 3 amortization of differences between current fair values and carrying amounts of Sleepy's identifiable net assets at the date of the business combination was $112,500. The noncontrolling interest in consolidated net income of Sleepy for Year 3 was:

a) $146,250.

b) $33,750.

c) $67,500.

d) $180,000.

Question Title: Test Bank (Multiple Choice) Question 21

Difficulty: Hard

Learning Objective: 4 Describe how the allocation process differs if less than 100% of the subsidiary is acquired.; 5 Record the entries needed on the parent’s books to account for the investment under the three methods: the cost, the partial equity, and the complete equity methods.; 6 Prepare workpapers for the year of acquisition and the year(s) subsequent to the acquisition, assuming that the parent accounts for the investment alternatively using the cost, the partial equity, and the complete equity methods.

Section Reference: 5.5, 5.6

22) Primer Company acquired an 80% interest in SealCoat Company on January 1, 2016, for $450,000 cash when SealCoat Company had common stock of $250,000 and retained earnings of $250,000. All excess was attributable to plant assets with a 10-year life. SealCoat Company made $50,000 in 2016 and paid no dividends. Primer Company’s separate income in 2016 was $625,000. The controlling interest in consolidated net income for 2016 is:

a) $675,000.

b) $665,000.

c) $660,000.

d) $625,000.

Question Title: Test Bank (Multiple Choice) Question 22

Difficulty: Medium

Learning Objective: 6 Prepare workpapers for the year of acquisition and the year(s) subsequent to the acquisition, assuming that the parent accounts for the investment alternatively using the cost, the partial equity, and the complete equity methods.

Section Reference: 5.2, 5.4, 5.6, 5.8

23) On January 1, 2016, Poole Company purchased 75% of the common stock of Swimmer Company. Separate balance sheet data for the companies at the combination date are given below:

Determine below what the consolidated balance would be for each of the requested accounts on January 2, 2016.

What amount of inventory will be reported?

a) $170,000.

b) $177,000.

c) $186,500.

d) $192,000.

Question Title: Test Bank (Multiple Choice) Question 23

Difficulty: Easy

Learning Objective: 1 Calculate the difference between implied and book values and allocate to the subsidiary’s assets and liabilities.; 5 Record the entries needed on the parent’s books to account for the investment under the three methods: the cost, the partial equity, and the complete equity methods.; 6 Prepare workpapers for the year of acquisition and the year(s) subsequent to the acquisition, assuming that the parent accounts for the investment alternatively using the cost, the partial equity, and the complete equity methods.

Section Reference: 5.1, 5.3, 5.5

24) On January 1, 2016, Poole Company purchased 75% of the common stock of Swimmer Company. Separate balance sheet data for the companies at the combination date are given below:

Determine below what the consolidated balance would be for each of the requested accounts on January 2, 2016.

What amount of goodwill will be reported?

a) $26,667.

b) $20,000.

c) $42,000.

d) $86,667.

Question Title: Test Bank (Multiple Choice) Question 24

Difficulty: Easy

Learning Objective: 1 Calculate the difference between implied and book values and allocate to the subsidiary’s assets and liabilities.; 5 Record the entries needed on the parent’s books to account for the investment under the three methods: the cost, the partial equity, and the complete equity methods.; 6 Prepare workpapers for the year of acquisition and the year(s) subsequent to the acquisition, assuming that the parent accounts for the investment alternatively using the cost, the partial equity, and the complete equity methods.

Section Reference: 5.1, 5.3, 5.5

25) On January 1, 2016, Poole Company purchased 75% of the common stock of Swimmer Company. Separate balance sheet data for the companies at the combination date are given below:

Determine below what the consolidated balance would be for each of the requested accounts on January 2, 2016.

What is the amount of total assets?

a) $1,626,667.

b) $1,566,667

c) $1,980,000.

d) $2,006,667.

Question Title: Test Bank (Multiple Choice) Question 25

Difficulty: Easy

Learning Objective: 1 Calculate the difference between implied and book values and allocate to the subsidiary’s assets and liabilities.; 5 Record the entries needed on the parent’s books to account for the investment under the three methods: the cost, the partial equity, and the complete equity methods.; 6 Prepare workpapers for the year of acquisition and the year(s) subsequent to the acquisition, assuming that the parent accounts for the investment alternatively using the cost, the partial equity, and the complete equity methods.

Section Reference: 5.1, 5.3, 5.5

Question Type: Essay

26) When the value implied by the acquisition price is below the fair value of the identifiable net assets the residual amount will be negative (bargain acquisition). Explain the difference in accounting for bargain acquisition between past accounting and proposed accounting requirements.

Under proposed accounting requirements, no assets are reduced below fair value. Instead the credit (negative) balance will be shown as an ordinary gain in the year of acquisition.

Question Title: Test Bank (Essay) Question 26

Difficulty: Medium

Learning Objective: 2 Describe FASB’s position on accounting for bargain acquisitions.

Section Reference: 5.1

27) Push down accounting is an accounting method required for the subsidiary in some instances such as the banking industry. Briefly explain the concept of push down accounting.

Question Title: Test Bank (Essay) Question 27

Difficulty: Medium

Learning Objective: 10 Understand the concept of push down accounting.

Section Reference: 5.10

28) Phillips Company purchased a 90% interest in Standards Corporation for $2,340,000 on January 1, 2016. Standards Corporation had $1,650,000 of common stock and $1,050,000 of retained earnings on that date.

The following values were determined for Standards Corporation on the date of purchase:

Book Value Fair Value

Inventory $240,000 $300,000

Land 2,400,000 2,700,000

Equipment 1,620,000 1,800,000

Required:

A. Prepare a computation and allocation schedule for the difference between the implied and book value in the consolidated statements workpaper.

B. Prepare the January 1, 2016, workpaper entries to eliminate the investment account and allocate the difference between implied and book value.

A. Allocation of Difference Between Implied and Book Value

Non-

Parent Controlling Entire

Share Share Value

Purchase price and implied value $2,340,000 260,000 2,600,000

Less: Book value of equity acquired 2,430,000 270,000 2,700,000

Difference between implied and book value (90,000) (10,000) (100,000)

Inventory (54,000) (6,000) (60,000)

Land (270,000) (30,000) (300,000)

Equipment (162,000) (18,000) (180,000)

Balance (excess of FV over implied value) (576,000) (64,000) (640,000)

Gain 576,000

Increase Noncontrolling interest to fair value of assets 64,000

Total allocated bargain 640,000

Balance -0- -0- -0-

B. Common Stock – Standards 1,650,000

Beginning R/E – Standards 1,050,000

Investment in Standards Corp. 2,340,000

Difference Between Implied and Book Value 100,000

Noncontrolling Interest in Equity 260,000

Difference Between Implied and Book Value 100,000

Inventory 60,000

Land 300,000

Equipment 180,000

Gain on Acquisition 576,000

Noncontrolling Interest 64,000

Question Title: Test Bank (Problem) Question 5-1

Difficulty: Hard

Learning Objective: 1 Calculate the difference between implied and book values and allocate to the subsidiary’s assets and liabilities.

Section Reference: 5.1

29) Pullman Corporation acquired a 90% interest in Sleeter Company for $6,500,000 on January 1 2016. At that time Sleeter Company had common stock of $4,500,000 and retained earnings of $1,800,000. The balance sheet information available for Sleeter Company on January 1, 2016, showed the following:

Book Value Fair Value

Inventory (FIFO) $1,300,000 $1,500,000

Equipment (net) 1,500,000 1,900,000

Land 3,000,000 3,000,000

The equipment had a remaining useful life of ten years. Sleeter Company reported $240,000 of net income in 2016 and declared $60,000 of dividends during the year.

Required:

Prepare the workpaper entries assuming the cost method is used, to eliminate dividends, eliminate the investment account, and to allocate and depreciate the difference between implied and book value for 2016.

Dividend Income (.90 × 60,000) 54,000

Dividends Declared 54,000

Beginning R/E – Sleeter 1,800,000

Common Stock – Sleeter 4,500,000

Difference Between Implied and Book Value 922,222*

Investment in Sleeter Company 6,500,000

Noncontrolling Interest 722,222

*$6,500,000/.9 - $1,800,000 - $4,500,000 = $922,222

Allocated to: $922,222

Inventory (200,000)

Equipment (400,000)

Goodwill $ 322,222

Cost of Goods Sold 200,000

Depreciation Expense 400,000/10 40,000

Equipment 400,000– 40,000 360,000

Goodwill 322,222

Difference Between Implied and Book Value 922,222

Question Title: Test Bank (Problem) Question 5-2

Difficulty: Hard

Learning Objective: 1 Calculate the difference between implied and book values and allocate to the subsidiary’s assets and liabilities.; 4 Describe how the allocation process differs if less than 100% of the subsidiary is acquired; 5 Record the entries needed on the parent’s books to account for the investment under the three methods: the cost, the partial equity, and the complete equity methods.

Section Reference: 5.1, 5.2, 5.3

30) On January 1, 2016, Preston Corporation acquired an 80% interest in Spiegel Company for $2,400,000. At that time Spiegel Company had common stock of $1,800,000 and retained earnings of $800,000. The book values of Spiegel Company's assets and liabilities were equal to their fair values except for land and bonds payable. The land's fair value was $120,000 and its book value was $100,000. The outstanding bonds were issued on January 1, 2005, at 9% and mature on January 1, 2018. The bond principal is $600,000 and the current yield rate on similar bonds is 8%.

Required:

Prepare the workpaper entries necessary on December 31, 2016, to allocate, amortize, and depreciate the difference between implied and book value.

Present Value

Present value of 1 of Annuity of 1

9%, 5 periods .64993 3.88965

8%, 5 periods .68058 3.99271

Non-

Parent Controlling Entire

Share Share Value

Purchase price and implied value $2,400,000 600,000 3,000,000

Less: Book value of equity acquired 2,080,000 520,000 2,600,000

Difference between implied and book value 320,000 80,000 400,000

Land ($120,000 – $100,000) (16,000) (4,000) (20,000)

Premium on Bonds Payable (623,954*– 600,000) 19,163 4,791 23,954

Balance 323,163 80,791 403,954

Goodwill (323,163) (80,791) (403,954)

Balance -0- -0- -0-

Present Value of 9% Bonds Payable discounted at 8% for 5 periods:

$600,000 × .68058 = $408,348

54,000 × 3.99271 = 215,606

$623,954*

Land 20,000

Goodwill 403,954

Difference Between Implied and Book Value 400,000

Interest Expense 4,084**

Unamortized Premium on Bonds Payable 19,870

(23,954 – 4,084)

**[54,000 – (623,954 × .08)]

Alternative Entries

Land 20,000

Goodwill 403,954

Premium on Bonds Payable 23,954

Difference Between Implied and Book Value 400,000

Premium on Bonds Payable 4,084

Interest Expense 4,084

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

Difficulty: Hard

Learning Objective: 1 Calculate the difference between implied and book values and allocate to the subsidiary’s assets and liabilities.; 4 Describe how the allocation process differs if less than 100% of the subsidiary is acquired; 5 Record the entries needed on the parent’s books to account for the investment under the three methods: the cost, the partial equity, and the complete equity methods.; 7 Understand the allocation of the difference between implied and book values to long-term debt components.

Section Reference: 5.1, 5.2, 5.3, 5.9

31) Pennington Corporation purchased 80% of the voting common stock of Stafford Corporation for $3,200,000 cash on January 1, 2016. On this date the book values and fair values of Stafford Corporation's assets and liabilities were as follows:

Book Value Fair Value

Cash $ 70,000 $ 70,000

Receivables 240,000 240,000

Inventories 600,000 700,000

Other Current Assets 340,000 405,000

Land 600,000 720,000

Buildings – net 1,050,000 1,920,000

Equipment – net 850,000 750,000

$3,750,000 $4,805,000

Accounts Payable $ 250,000 $250,000

Other Liabilities 740,000 670,000

Capital Stock 2,400,000

Retained Earnings 360,000

$3,750,000

Required:

Prepare a schedule showing how the difference between Stafford Corporation's implied value and the book value of the net assets acquired should be allocated.

Non-

Parent Controlling Entire

Share Share Value

Purchase price and implied value $3,200,000 800,000 4,000,000

Less: Book value of equity acquired 2,208,000 552,000 2,760,000

Difference between implied and book value 992,000 248,000 1,240,000

Inventories (80,000) (20,000) (100,000)

Other Current assets (52,000) (13,000) (65,000)

Land (96,000) (24,000) (120,000)

Buildings (net) (696,000) (174,000) (870,000)

Other liabilities (56,000) (14,000) (70,000) *

Equipment (net) 80,000 20,000 100,000

Balance 92,000 23,000 115,000

Goodwill (92,000) (23,000) (115,000)

Balance -0- -0- -0-

*A debit to Other Liabilities is a reduction of their carrying value.

Question Title: Test Bank (Problem) Question 5-4

Difficulty: Hard

Learning Objective: 1 Calculate the difference between implied and book values and allocate to the subsidiary’s assets and liabilities.; 4 Describe how the allocation process differs if less than 100% of the subsidiary is acquired; 5 Record the entries needed on the parent’s books to account for the investment under the three methods: the cost, the partial equity, and the complete equity methods.; 8 Explain how to allocate the difference between implied and book values when some assets have fair values below book values.

Section Reference: 5.1, 5.2, 5.3, 5.9

32) Plain Corporation acquired a 75% interest in Swampy Company on January 1, 2016, for $2,000,000. The book value and fair value of the assets and liabilities of Swampy Company on that date were as follows:

Book Value Fair Value

Current Assets $ 600,000 $ 600,000

Property & Equipment (net) 1,400,000 1,800,000

Land 700,000 900,000

Deferred Charge 300,000 300,000

Total Assets $3,000,000 $3,600,000

Less Liabilities 600,000 600,000

Net Assets $2,400,000 $3,000,000

The property and equipment had a remaining life of 6 years on January 1, 2016, and the deferred charge was being amortized over a period of 5 years from that date. Common stock was $1,500,000 and retained earnings was $900,000 on January 1, 2016. Plain Company records its investment in Swampy Company using the cost method.

Required:

Prepare, in general journal form, the December 31, 2016, workpaper entries necessary to:

A. Eliminate the investment account.

B. Allocate and amortize the difference between implied and book value.

A. Beginning Retained Earnings (Swampy) 900,000

Capital Stock (Swampy) 1,500,000

Difference Between Implied and Book Value 266,667

Investment in Swampy 2,000,000

Noncontrolling Interest in Equity 666,667

B. Depreciation Expense ($400,000/6) 66,667

Equipment (net) ($400,000 – $66,667) 333,333

Land ($900,000 - $700,000) 200,000

Gain on Acquisition ($200,000+$400,000-$266,667) × 0.75 250,000

Difference Between Implied and Book Value 266,667

Noncontrolling Interest ($200,000+$400,000-$266,667) × 0.25 83,333

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

Difficulty: Medium

Learning Objective: 1 Calculate the difference between implied and book values and allocate to the subsidiary’s assets and liabilities.

Section Reference: 5.1

33) On January 1, 2016, Pilsner Company acquired an 80% interest in Smalley Company for $3,600,000. On that date, Smalley Company had retained earnings of $800,000 and common stock of $2,800,000. The book values of assets and liabilities were equal to fair values except for the following:

Book Value Fair Value

Inventory $ 50,000 $ 85,000

Equipment (net) 540,000 720,000

Land 300,000 660,000

The equipment had an estimated remaining useful life of 8 years. One-half of the inventory was sold in 2016 and the remaining half was sold in 2017. Smalley Company reported net income of $240,000 in 2016 and $300,000 in 2017. No dividends were declared or paid in either year. Pilsner Company uses the cost method to record its investment in Smalley Company.

Required:

Prepare, in general journal form, the workpaper eliminating entries necessary in the consolidated statements workpaper for the year ending December 31, 2017.

Calculations

Cost of Investment and Implied Value ($3,600,000/0.8) $4,500,000

Book Value of Equity Acquired 3,600,000

Difference between Implied and Book Value $ 900,000

Annual Adjustment in

Determining Consolidated

Net Income

Difference Between

Implied and Book Value 2016 2017

Land $360,000 --- ---

Equipment (net) 180,000 $22,500 $22,500

Inventory 35,000 17,500 17,500

Goodwill 325,000 --- ---

$900,000 $40,000 $40,000

(1) Investment in Smalley 192,000

Beginning Retained Earnings (Pilsner) 192,000

(2) Beginning Retained Earnings (Smalley) 1,040,000

Difference between Implied and Book Value 900,000

Common Stock (Smalley) 2,800,000

Investment in Smalley ($3,600,000 +

$192,000) 3,792,000

Noncontrolling Interest in Equity 948,000

(3) Beginning Retained Earnings – PilsnerSmalley 32,000

Noncontrolling Interest 8,000

Depreciation Expense 22,500

Cost of Goods Sold (Beginning Inventory) 17,500

Goodwill 325,000

Land 360,000

Equipment (net)

($180,000 – $22,500 – $22,500) 135,000

Difference between Implied and Book Value 900,000

Question Title: Test Bank (Problem) Question 5-6

Difficulty: Hard

Learning Objective: 1 Calculate the difference between implied and book values and allocate to the subsidiary’s assets and liabilities.; 3 Explain how goodwill is measured at the time of the acquisition.; 4 Describe how the allocation process differs if less than 100% of the subsidiary is acquired; 5 Record the entries needed on the parent’s books to account for the investment under the three methods: the cost, the partial equity, and the complete equity methods.

Section Reference: 5.1, 5.2, 5.3, 5.4

34) Pulman Company acquired 90% of the stock of Spectrum Company for $6,300,000 on January 1, 2016. On this date, the fair value of the assets and liabilities of Spectrum Company was equal to their book value except for the inventory and equipment accounts. The inventory had a fair value of $2,300,000 and a book value of $1,900,000. The equipment had a fair value of $3,300,000 and a book value of $2,800,000.

The balances in Spectrum Company's capital stock and retained earnings accounts on the date of acquisition were $3,700,000 and $1,900,000, respectively.

Required:

In general journal form, prepare the entries on Spectrum Company's books to record the effect of the pushed down values implied by the acquisition of its stock by Pulman Company assuming that:

A values are allocated on the basis of the fair value of Spectrum Company as a whole imputed from the transaction.

B values are allocated on the basis of the proportional interest acquired by Pulman Company.

A Net Assets

Imputed Value ($6,300,000/.9) $7,000,000

Recorded Value ($1,900,000 + $3,700,000) 5,600,000

Unrecorded Values $1,400,000

Allocate to identifiable assets

Inventory ($2,300,000 – $1,900,000) $400,000

Equipment ($3,300,000 – $2,800,000) 500,000 900,000

Goodwill $ 500,000

Inventory 400,000

Equipment 500,000

Goodwill 500,000

Revaluation Capital 1,400,000

B

Unrecorded Value Imputed by Pulman Company's

Proportionate Interest (.9 × $1,400,000) $1,260,000

Allocate to

Inventory ($2,300,000 – $1,900,000) × .9 $360,000

Equipment ($3,300,000 – $2,800,000) × .9 450,000 810,000

Goodwill $ 450,000

Inventory 360,000

Equipment 450,000

Goodwill 450,000

Revaluation Capital 1,260,000

Question Title: Test Bank (Problem) Question 5-7

Difficulty: Hard

Learning Objective: 10 Understand the concept of push down accounting.

Section Reference: 5.10

35) Pruin Corporation acquired all of the voting stock of Satto Corporation on January 1, 2016, for $210,000 when Satto had common stock of $150,000 and retained earnings of $24,000. The excess of implied over book value was allocated $9,000 to inventories that were sold in 2016, $12,000 to equipment with a 4-year remaining useful life under the straight-line method, and the remainder to goodwill.

Financial statements for Pruitt and Satto Corporations at the end of the fiscal year ended December 31, 2017 (two years after acquisition), appear in the first two columns of the partially completed consolidated statements workpaper. Pruin Corp. has accounted for its investment in Satto using the partial equity method of accounting.

Required:

Complete the consolidated statements workpaper for Pruin Corporation and Satto Corporation for December 31, 2017.

Pruin Corporation and Satto Corporation

Consolidated Statements Workpaper

at December 31, 2017

Pruin Corporation and Satto Corporation

Consolidated Statements Workpaper

at December 31, 2017

Question Title: Test Bank (Problem) Question 5-8

Difficulty: Hard

Learning Objective: 1 Calculate the difference between implied and book values and allocate to the subsidiary’s assets and liabilities.; 3 Explain how goodwill is measured at the time of the acquisition.; 4 Describe how the allocation process differs if less than 100% of the subsidiary is acquired; 5 Record the entries needed on the parent’s books to account for the investment under the three methods: the cost, the partial equity, and the complete equity methods.; 6 Prepare workpapers for the year of acquisition and the year(s) subsequent to the acquisition, assuming that the parent accounts for the investment alternatively using the cost, the partial equity, and the complete equity methods.

Section Reference: 5.1, 5.5, 5.6

36) On January 1, 2016, Phoenix Company acquired 80% of the outstanding capital stock of Skyler Company for $570,000. On that date, the capital stock of Skyler Company was $150,000 and its retained earnings were $450,000.

On the date of acquisition, the assets of Skyler Company had the following values:

Fair Market

Book Value Value

Inventories $ 90,000 $165,000

Plant and equipment 150,000 180,000

All other assets and liabilities had book values approximately equal to their respective fair market values. The plant and equipment had a remaining useful life of 10 years from January 1, 2016, and Skyler Company uses the FIFO inventory cost flow assumption.

Skyler Company earned $180,000 in 2016 and paid dividends in that year of $90,000.

Phoenix Company uses the complete equity method to account for its investment in S Company.

Required:

A. Prepare a computation and allocation schedule.

B. Prepare the balance sheet elimination entries as of December 31, 2016.

C. Compute the amount of equity in subsidiary income recorded on the books of Phoenix Company on December 31, 2016.

D. Compute the balance in the investment account on December 31, 2016.

A.

Phoenix Non- Entire

Share Controlling Value

Share

Purchase price and implied value $570,000 142,500 712,500

Less: Book value of equity acquired 480,000 120,000 600,000

Difference between implied and book value 90,000 22,500 112,500

Inventories (60,000) (15,000) (75,000)

Equipment (net) (24,000) (6,000) (30,000)

Balance 6,000 1,500 7,500

Goodwill (6,000) (1,500) (7,500)

Balance -0- -0- -0-

B. Common Stock – Skyler 150,000

Retained Earnings – Skyler 450,000

Difference Between Implied and Book Value 112,500

Investment in Skyler Company 570,000

Noncontrolling Interest in Equity 142,500

Cost of Goods Sold 75,000

Depreciation Expense ($30,000/10 years) 3,000

Plant and Equipment ($30,000 – $3,000) 27,000

Goodwill 7,500

Difference Between Implied and Book Value 112,500

C. Skyler Company net income $180,000 × 80% = $144,000

Less: Inventory sold (60,000)

Plant & equipment depreciation ( 2,400)

Equity in subsidiary income $81,600

D. Investment balance 1/1/10 $570,000

+ Equity in subsidiary income 81,600

– Dividends ($90,000 × 80%) (72,000)

Investment balance 12/31/10 $579,600

Question Title: Test Bank (Problem) Question 5-9

Difficulty: Hard

Learning Objective: 1 Calculate the difference between implied and book values and allocate to the subsidiary’s assets and liabilities.; 3 Explain how goodwill is measured at the time of the acquisition.; 4 Describe how the allocation process differs if less than 100% of the subsidiary is acquired; 5 Record the entries needed on the parent’s books to account for the investment under the three methods: the cost, the partial equity, and the complete equity methods.; 6 Prepare workpapers for the year of acquisition and the year(s) subsequent to the acquisition, assuming that the parent accounts for the investment alternatively using the cost, the partial equity, and the complete equity methods.

Section Reference: 5.1, 5.7, 5.8