Test Questions & Answers Ch9 Bond Holdings Consolidated

Package Title: Test Bank Questions

Course Title: Advanced Accounting, 6e

Chapter Number: 9

Question Type: Multiple Choice

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.

Question Title: Test Bank (Multiple Choice) Question 01

Difficulty: Easy 9.1

Learning Objective: 2 Describe how the gain or loss on constructive retirement of intercompany bond holdings is allocated between the purchasing and issuing companies.

Section Reference: 9.3

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

Question Title: Test Bank (Multiple Choice) Question 02

Difficulty: Easy

Learning Objective: 2 Describe how the gain or loss on constructive retirement of intercompany bond holdings is allocated between the purchasing and issuing companies.

Section Reference: 9.3

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.

Question Title: Test Bank (Multiple Choice) Question 03

Difficulty: Medium

Learning Objective: 1 Describe the term “constructive retirement of debt.”, 2 Describe how the gain or loss on constructive retirement of intercompany bond holdings is allocated between the purchasing and issuing companies.

Section Reference: 9.3

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.

Question Title: Test Bank (Multiple Choice) Question 04

Difficulty: Easy

Learning Objective: 4 Determine the effect on the consolidated financial statements when a subsidiary issues a stock dividend.

Section Reference: 9.8

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.

Question Title: Test Bank (Multiple Choice) Question 05

Difficulty: Easy

Learning Objective: 4 Determine the effect on the consolidated financial statements when a subsidiary issues a stock dividend., 5 Understand the difference in how stock dividends and cash dividends issued by a subsidiary company affect the consolidated financial statements., 6 Determine the impact on the investment account when a subsidiary issues a stock dividend from preacquisition earnings and from postacquisition earnings.

Section Reference: 9.8

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.

Question Title: Test Bank (Multiple Choice) Question 06

Difficulty: Medium

Learning Objective: 7 Explain how the purchase price is allocated when the subsidiary has both common and preferred stock outstanding.

Section Reference: 9.10

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 consolidation.

Question Title: Test Bank (Multiple Choice) Question 07

Difficulty: Easy

Learning Objective: 7 Explain how the purchase price is allocated when the subsidiary has both common and preferred stock outstanding., 8 Determine the controlling interest in income when the parent company owns both common and preferred stock of the subsidiary.

Section Reference: 9.10

8) Pallet Corporation owns 90% of the outstanding common stock of Stealth Company. On January 1, 2014, Stealth Company issued $500,000, 12%, ten-year bonds.

On January 1, 2016, Pallet Corporation paid $412,000 for Stealth 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. Pallet Corporation accounts for the investment using the cost method of accounting.

The total gain or loss on the constructive retirement of the debt to be reported in the 2016 consolidated income statement is

a) $12,000 loss.

b) $12,000 gain.

c) $18,400 loss.

d) $18,400 gain.

Question Title: Test Bank (Multiple Choice) Question 8

Difficulty: Easy

Learning Objective: 2 Describe how the gain or loss on constructive retirement of intercompany bond holdings is allocated between the purchasing and issuing companies.

Section Reference: 9.3

9) Pallet Corporation owns 90% of the outstanding common stock of Stealth Company. On January 1, 2014, Stealth Company issued $500,000, 12%, ten-year bonds.

On January 1, 2016, Pallet Corporation paid $412,000 for Stealth 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. Pallet Corporation accounts for the investment using the cost method of accounting.

Pallet Corporation would report a balance in the Investment in Stealth Company Bonds account on December 31, 2016, of

a) $412,000.

b) $393,600.

c) $410,500.

d) $400,000.

Question Title: Test Bank (Multiple Choice) Question 9

Difficulty: Hard

Learning Objective: 2 Describe how the gain or loss on constructive retirement of intercompany bond holdings is allocated between the purchasing and issuing companies.

Section Reference: 9.3

10) Pallet Corporation owns 90% of the outstanding common stock of Stealth Company. On January 1, 2014, Stealth Company issued $500,000, 12%, ten-year bonds.

On January 1, 2016, Pallet Corporation paid $412,000 for Stealth 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. Pallet Corporation accounts for the investment using the cost method of accounting.

Compute the noncontrolling interest in the 2016 consolidated income assuming that Pallet Corporation reported a net income of $300,000 (includes dividend income from Stealth Company). Stealth 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

Question Title: Test Bank (Multiple Choice) Question 10

Difficulty: Hard

Learning Objective: 2 Describe how the gain or loss on constructive retirement of intercompany bond holdings is allocated between the purchasing and issuing companies.

Section Reference: 9.5

11) Soren Corporation is an 80% owned subsidiary of Passia Company. Soren purchased bonds of Passia Company for $103,000. Passia 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.

Question Title: Test Bank (Multiple Choice) Question 11

Difficulty: Easy

Learning Objective: 2 Describe how the gain or loss on constructive retirement of intercompany bond holdings is allocated between the purchasing and issuing companies.

Section Reference: 9.3

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.

Question Title: Test Bank (Multiple Choice) Question 12

Difficulty: Easy

Learning Objective: 1 Describe the term “constructive retirement of debt.”

Section Reference: 9.3

13) Search Company is a 90% owned subsidiary of Passage Company. On January 1, 2016, Search Company purchased for $680,000 bonds of Passage Company that had a carrying value of $725,000 (par value $700,000). The bonds mature on December 31, 2017. Both companies use the straight-line method of amortization and have a December 31 year-end. The increase in 2016 consolidated income (i.e., income before subtracting noncontrolling interest) is:

a) $45,000.

b) $44,000.

c) $54,000.

d) $36,000.

Question Title: Test Bank (Multiple Choice) Question 13

Difficulty: Medium

Learning Objective: 2 Describe how the gain or loss on constructive retirement of intercompany bond holdings is allocated between the purchasing and issuing companies.

Section Reference: 9.3, 9.4, 9.5

14) Polish Company acquired 90% of Sandwich Company's common stock for $780,000 and 40% of its preferred stock for $180,000. On January 1, 2016, the date of acquisition, the companies reported the following account balances:

The preferred stock is 10%, cumulative, nonparticipating, and has a liquidation value equal to 104% of par value. Dividends were not paid during 2015. During 2016, Sandwich Company reported net income of $120,000 and declared and paid cash dividends in the amount of $70,000.

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.

Question Title: Test Bank (Multiple Choice) Question 14

Difficulty: Hard

Learning Objective: 7 Explain how the purchase price is allocated when the subsidiary has both common and preferred stock outstanding.

Section Reference: 9.10

15) Polish Company acquired 90% of Sandwich Company's common stock for $780,000 and 40% of its preferred stock for $180,000. On January 1, 2016, the date of acquisition, the companies reported the following account balances:

The preferred stock is 10%, cumulative, nonparticipating, and has a liquidation value equal to 104% of par value. Dividends were not paid during 2015. During 2016, Sandwich Company reported net income of $120,000 and declared and paid cash dividends in the amount of $70,000.

Noncontrolling interest in the 2016 reported net income of Sandwich Company is:

a) $29,500.

b) $12,000.

c) $34,000.

d) $30,000.

Question Title: Test Bank (Multiple Choice) Question 15

Difficulty: Hard

Learning Objective: 7 Explain how the purchase price is allocated when the subsidiary has both common and preferred stock outstanding.

Section Reference: 9.10

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.

Question Title: Test Bank (Multiple Choice) Question 16

Difficulty: Easy

Learning Objective: 2 Describe how the gain or loss on constructive retirement of intercompany bond holdings is allocated between the purchasing and issuing companies.

Section Reference: 9.3

17) Pointe Company purchased bonds issued by Sentient Company on the open market at a premium. Sentient Company is a 100% owned subsidiary of Pointe Company. Pointe 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.

Question Title: Test Bank (Multiple Choice) Question 17

Difficulty: Medium

Learning Objective: 2 Describe how the gain or loss on constructive retirement of intercompany bond holdings is allocated between the purchasing and issuing companies.

Section Reference: 9.3

18) On January 1, 2016, Pale Company has $700,000 of 6%, 10-year bonds with an unamortized discount of $28,000. Slugg Company, an 80% subsidiary, purchased $350,000 of these bonds at 102. The gain or (loss) on the retirement of Pale’s bonds is:

a) $14,000 loss.

b) $14,000 gain.

c) $21,000 loss.

d) $21,000 gain.

Question Title: Test Bank (Multiple Choice) Question 18

Difficulty: Easy

Learning Objective: 2 Describe how the gain or loss on constructive retirement of intercompany bond holdings is allocated between the purchasing and issuing companies.

Section Reference: 9.3

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.

Question Title: Test Bank (Multiple Choice) Question 19

Difficulty: Medium

Learning Objective: 8 Determine the controlling interest in income when the parent company owns both common and preferred stock of the subsidiary.

Section Reference: 9.11

20) Pinta 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. Pinta owns 80% of Santa Maria Company purchased at book value. Santa Maria has $800,000 of 5% cumulative preferred stock outstanding. Pinta acquired 40% of the preferred stock of Santa Maria for $200,000. After this transaction the balances in Pinta’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.

Question Title: Test Bank (Multiple Choice) Question 20

Difficulty: Medium

Learning Objective: 7 Explain how the purchase price is allocated when the subsidiary has both common and preferred stock outstanding.

Section Reference: 9.10

21) Parker Company owns 90% of the outstanding common stock of Stagger Company. On January 1, 2014, Stagger Company issued $500,000, 12%, ten-year bonds.

On January 1, 2016, Parker Company paid $315,000 for Stagger Company bonds with a par value of $300,000 and a carrying value of $297,600. Both companies use the straight-line method to amortize bond premiums and discounts. Parker Company accounts for the investment using the cost method of accounting.

The total gain or loss on the constructive retirement of the debt to be reported in the 2016 consolidated income statement is:

a) $15,000 loss.

b) $15,000 gain.

c) $17,400 loss.

d) $17,400 gain.

e) $ 2,400 loss.

Question Title: Test Bank (Multiple Choice) Question 21

Difficulty: Medium

Learning Objective: 2 Describe how the gain or loss on constructive retirement of intercompany bond holdings is allocated between the purchasing and issuing companies.

Section Reference: 9.3

22) Parker Company owns 90% of the outstanding common stock of Stagger Company. On January 1, 2014, Stagger Company issued $500,000, 12%, ten-year bonds.

On January 1, 2016, Parker Company paid $315,000 for Stagger Company bonds with a par value of $300,000 and a carrying value of $297,600. Both companies use the straight-line method to amortize bond premiums and discounts. Parker Company accounts for the investment using the cost method of accounting.

Parker Company would report a balance in the Investment in Stagger Company Bonds account on December 31, 2016, of:

a) $315,000.

b) $297,600.

c) $313,125.

d) $300,000

Question Title: Test Bank (Multiple Choice) Question 22

Difficulty: Medium

Learning Objective: 2 Describe how the gain or loss on constructive retirement of intercompany bond holdings is allocated between the purchasing and issuing companies.

Section Reference: 9.3

23) Parker Company owns 90% of the outstanding common stock of Stagger Company. On January 1, 2014, Stagger Company issued $500,000, 12%, ten-year bonds.

On January 1, 2016, Parker Company paid $315,000 for Stagger Company bonds with a par value of $300,000 and a carrying value of $297,600. Both companies use the straight-line method to amortize bond premiums and discounts. Parker Company accounts for the investment using the cost method of accounting.

Compute the noncontrolling interest in the 2016 consolidated income assuming that Parker Company reported a net income of $240,000 (includes dividend income from Stagger Company). Stagger Company reported net income of $150,000 and declared and paid cash dividends of $90,000.

a) $15,000.

b) $14,790.

c) $14,760.

d) $15,210.

Question Title: Test Bank (Multiple Choice) Question 23

Difficulty: Hard

Learning Objective: 2 Describe how the gain or loss on constructive retirement of intercompany bond holdings is allocated between the purchasing and issuing companies.

Section Reference: 9.4

24) Pentagon Company acquired 90% of Smoker Company's common stock for $1,300,000 and 40% of its preferred stock for $300,000. On January 1, 2016, the date of acquisition, the companies reported the following account balances:

The preferred stock is 10%, cumulative, nonparticipating, and has a liquidation value equal to 102% of par value. Dividends were not paid during 2015. During 2016, Smoker Company reported net income of $200,000 and declared and paid cash dividends in the amount of $120,000.

The difference between the implied value of the preferred stock and its book value is:

a) $60,000.

b) $78,000

c) $55,200.

d) $36,000.

Question Title: Test Bank (Multiple Choice) Question 24

Difficulty: Hard

Learning Objective: 7 Explain how the purchase price is allocated when the subsidiary has both common and preferred stock outstanding.

Section Reference: 9.10

25) Pentagon Company acquired 90% of Smoker Company's common stock for $1,300,000 and 40% of its preferred stock for $300,000. On January 1, 2016, the date of acquisition, the companies reported the following account balances:

The preferred stock is 10%, cumulative, nonparticipating, and has a liquidation value equal to 102% of par value. Dividends were not paid during 2015. During 2016, Smoker Company reported net income of $200,000 and declared and paid cash dividends in the amount of $120,000.

Noncontrolling interest in the 2016 reported net income of Smoker Company is:

a) $50,000.

b) $20,000.

c) $80,000.

d) $56,000.

Question Title: Test Bank (Multiple Choice) Question 25

Difficulty: Hard

Learning Objective: 8 Determine the controlling interest in income when the parent company owns both common and preferred stock of the subsidiary.

Section Reference: 9.11

26) On January 1, 2016, Pultey Company acquired an 80% interest in Saucey Company for $1,070,000. Saucey reported common stock of $1,000,000 and retained earnings of $400,000 on this date. Any difference between implied value and the book value interest acquired is attributable to land.

Other information available for Saucey Company is shown below:

Net Income Cash Dividends

2016 $130,000 $160,000

Pultey Company uses the cost method to account for its investment in Saucey Company.

Required:

A. Prepare the general journal entries for 2016 to record the receipt of the cash dividends.

B. Prepare in general journal form the workpaper entries necessary in the consolidated statements workpaper for the year end December 31, 2016.

A. Cash (160,000 × 0.8) 128,000

Dividend Income (130,000 × 0.8) 104,000

Investment in Saucey Company 24,000

B. Dividend Income 104,000

Dividends Declared 104,000

Investment in Saucey Company 24,000

Dividends Declared 24,000

Common Stock–Saucey 1,000,000

Beginning R/E–Saucey 400,000

Difference Between Implied and Book Value 62,500

Investment in Saucey Company 1,070,000

Noncontrolling Interest in Equity 267,500

Difference Between Implied and Book Value 62,500

Land 62,500

Question Title: Test Bank (Problem) Question 9-1

Difficulty: Medium

Learning Objective: 2 Describe how the gain or loss on constructive retirement of intercompany bond holdings is allocated between the purchasing and issuing companies.

Section Reference: 9.3

27) Stemberger Company issued 10-year, 8% bonds with a par value of $1,000,000 on January 2, 2015, for $1,040,000. Interest is payable semiannually on June 30 and December 31. On December 31, 2016, Putter Company purchased $700,000 of Stemberger par value bonds for $670,000. Stemberger is an 80% owned subsidiary of Putter. Both companies use the straight-line method to amortize bond discounts and premiums. Stemberger declared cash dividends of $100,000 in 2016 and reported net income of $220,000 for the year.

Putter reported net income of $350,000 for 2016 and paid dividends of $160,000 during 2016.

Required:

A. Compute the total gain or loss on the constructive retirement of the debt.

B. Allocate the total gain or loss between Stemberger Company and Putter Company.

C. Compute the controlling interest in consolidated net income for 2016.

D. Prepare in general journal form the intercompany bond elimination entries for the consolidated statements workpaper prepared on December 31, 2016.

A. Cost of bond investment $670,000

Par value $1,000,000

Unamortized prem. (40,000 × 16/20) 32,000

Carrying value of bonds 1,032,000

Percent of bonds purchased (700/1,000) 0.70 722,400

Total constructive gain $52,400

B. Putter Company Stemberger Company

---------------- ---------------

Cost of bond investment $670,000 Carrying value of

bonds purchased $722,400

Par value 700,000 Par value 700,000

Constructive gain $ 30,000 Constructive gain $ 22,400 C. 2016

Reported net income – Putter $350,000

- Dividend income ($100,000 × 0.8) - 80,000

Net income from independent oper. – Putter 270,000

+ Constructive gain on bond retirement 30,000

Putter's contribution to consolidated income 300,000

Reported net income – Stemberger $220,000

+ Constructive gain on bond retirement 22,400

Stemberger’s contribution to consolidated income 242,400

× 0.8 193,920

Controlling interest in consolidated net income $493,920

D. December 31, 2016

Investment in Stemberger Co. Bonds 30,000

Constructive Gain on Bond Retirement 30,000

Premium on Bonds Payable ($32,000 × 0.70) 22,400

Constructive Gain on Bond Retirement 22,400

Bonds Payable 700,000

Investment in Stemberger Co. Bonds 700,000

Question Title: Test Bank (Problem) Question 9-2

Difficulty: Hard

Learning Objective: 2 Describe how the gain or loss on constructive retirement of intercompany bond holdings is allocated between the purchasing and issuing companies.

Section Reference: 9.4, 9.5

28) Pratt Company, who owns an 80% interest in Smurfe Company, purchased $2,000,000 of Smurfe’s 8% bonds at 106 on December 31, 2016. The bonds pay interest on January 1 and July 1 and mature on December 31, 2026. Pratt Company uses the cost method to account for its investment in Smurfe. Selected balances from December 31, 2016 accounts of the two companies are as follows:

Pratt _____Smurfe____

Investment in Smurfe 8% bonds $2,120,000 $ ----

Bond discount ---- 300,000

Interest payable ---- 800,000

8% bonds payable ---- 20,000,000

Interest expense ---- 1,700,000

Gain or loss on constructive

retirement of bonds ---- ----

Required:

Prepare in general journal form the workpaper eliminations related to the bonds to consolidated the financial statements of Pratt and its subsidiary for the year ended December 31, 2016 and 2017.

2016 1. Loss on Constructive Retirement of Bonds 120,000

Investment in Smurfe Company Bonds 120,000

2. Loss on Constructive Retirement of Bonds 30,000

Bond Discount 30,000

3. Bonds Payable 2,000,000

Investment in Smurfe Company Bonds 2,000,000

2017 1. Beginning Retained Earnings-Pratt 120,000

Investment in Smurfe Company Bonds 120,000

2. Beginning Retained Earnings-Pratt ($30,000 × 0.80) 24,000

Noncontrolling interest 6,000

Bond Discount 30,000

3. Investment in Smurfe Company Bonds ($120,000/3) 40,000

Interest Revenue 40,000

4. Bond Discount [($300,000/3) × 0.10] 10,000

Interest Expense 10,000

5. Interest Revenue 160,000

Interest Expense 160,000

6. Bonds Payable 2,000,000

Investment in Smurfe Company Bonds 2,000,000

7. Interest Payable 80,000

Interest Receivable 80,000

Question Title: Test Bank (Problem) Question 9-3

Difficulty: Hard

Learning Objective: 2 Describe how the gain or loss on constructive retirement of intercompany bond holdings is allocated between the purchasing and issuing companies.

Section Reference: 9.4, 9.5

29) On January 1, 2016, Power Company purchased 80% of the common stock of Stuckey Company for $400,000. Stuckey Company reported common stock of $200,000 ($10 par value), other contributed capital of $60,000, and retained earnings of $120,000 on this date. The difference between implied value and the book value interest acquired is attributable to the under-valuation of land held by Stuckey Company. Stuckey Company reported net income for 2016 of $100,000. During 2016 Stuckey Company declared and paid a 20% stock dividend and a $24,000 cash dividend. Stuckey Company stock had a market value of $30 per share on the date the stock dividend was declared. Power Company uses the cost method to account for its investment in Stuckey Company.

Required:

A. Prepare the journal entries required in the books of Power Company to account for the investment in Stuckey Company.

B. Prepare in general journal form the workpaper entries necessary in the consolidated statements workpaper for the year ended December 31, 2016.

C. Prepare the workpaper entry to establish reciprocity in the 2017 consolidated statements workpaper.

A. Investment in Stuckey Company 400,000

Cash 400,000

Memorandum entry – Received stock dividend of 3,200 shares of Stuckey Company stock (16,000 × 0.20)

Cash 19,200

Dividend Income 19,200

B. Common Stock – Stuckey 32,000

Other Contributed Capital – Stuckey 64,000

Stock Dividends Declared – Stuckey 96,000

Dividend Income 19,200

Dividends Declared 19,200

Beginning Retained Earnings – Stuckey 120,000

Common Stock – Stuckey 200,000

Other Contributed Capital – Stuckey 60,000

Difference Between Implied and Book Value 120,000

Investment in Stuckey Company 400,000

Noncontrolling Interest in Equity 100,000

Land 120,000

Difference Between Implied and Book Value 120,000

C. Investment in Stuckey Company 28,800

Beginning Retained Earnings – Power Company 28,800

Question Title: Test Bank (Problem) Question 9-4

Difficulty: Hard

Learning Objective: 2 Describe how the gain or loss on constructive retirement of intercompany bond holdings is allocated between the purchasing and issuing companies.

Section Reference: 9.4

30) On January 1, 2016, Prosser Company acquired 90% of the common stock of Simone Company for $720,000 and 20% of the preferred stock for $70,000. On this date, Simone Company reported the following account balances:

Common stock ($10 par value) $600,000

Preferred stock ($100 par value, 8%,

cumulative, nonparticipating, liquidation

value equal to par value) 300,000

Other contributed capital - premium on

common stock 120,000

Retained earnings 80,000

Simone Company did not declare a cash dividend during 2015. Prosser Company uses the cost method.

Required:

A. During 2016 Simone Company reported net income of $360,000 and declared cash dividends of $160,000. Calculate the 2016 noncontrolling interest in net income and the amount of the cash dividends Prosser Company should have received during the year from each of the stock investments.

B. Prepare, in general journal form, the workpaper entries that would be made in the preparation of the December 31, 2016, consolidated statements workpaper. The difference between the implied value of the common stock and the book value interest acquired is attributable to an undervaluation in the land of Simone Company. Any difference between the implied value of the preferred stock and its book value is allocated to other contributed capital.

A. Noncontrolling interest in net income

Net income reported by Simone $360,000

Allocated to preferred stock ($300,000 × 0.08) 24,000 × 0.80 = 19,200

Residual to common stock 336,000 × 0.10 = 33,600

Noncontrolling interest in income $52,800

Cash dividends to Prosser Company

Preferred stock dividend ($24,000 × 2) $ 48,000 × 0.20 = $ 9,600

Residual to common stock 112,000 × 0.90 = 100,800

Total dividends received by Prosser Company $110,400

B. Dividend Income 110,400

Dividends Declared – Preferred Stock 9,600

Dividends Declared – Common Stock 100,800

Beginning Retained Earnings - Simone Company 24,000

Preferred Stock - Simone Company 300,000

Difference Between Implied and Book Value 26,000

Investment in Simone Company Preferred Stock 70,000

Noncontrolling Interest in Equity 280,000

Other Contributed Capital—Prosser Company 5,200

Noncontrolling Interest in Equity 20,800

Difference Between Implied and Book Value 26,000

Beginning Retained Earnings – Simone Company 56,000

Common Stock – Simone Company 600,000

Other Contributed Capital – Simone Company 120,000

Difference Between Implied and Book Value 24,000

Investment in Simone Company Common Stock 720,000

Noncontrolling Interest in Equity 80,000

Land 24,000

Difference Between Implied and Book Value 24,000

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

Difficulty: Hard

Learning Objective: 7 Explain how the purchase price is allocated when the subsidiary has both common and preferred stock outstanding., 8 Determine the controlling interest in income when the parent company owns both common and preferred stock of the subsidiary.

Section Reference: 9.11

31) On January 1, 2016, Pippert Company acquired 80% of Skyler Company's common stock for $210,000 and 70% of Skyler's preferred stock for $80,000. Skyler Company reported the following stockholders' equity on this date:

Preferred stock, 8%, Par value $20 $ 100,000

Common stock, Par value $50 200,000

Premium on common stock 30,000

Retained earnings 80,000

Total $410,000

The preferred stock is cumulative, nonparticipating, and callable at 104% of par value plus dividends in arrears. On January 1, 2016, dividends were in arrears for one year. Any difference between the implied value of the preferred stock and its book value interest is to be allocated to other contributed capital.

Changes in Skyler Company's retained earnings during 2016 and 2017 were as follows:

January 1, 2016 Balance $ 80,000

2016 net income 20,000

2017 net income 16,000

2017 cash dividends (30,000)

December 31, 2017 Balance $ 86,000

Required:

A. Compute the difference between the implied value and book value interest acquired for the investment in preferred stock.

B. Compute the balance in the Investment in Preferred Stock account on December 31, 2017.

C. Compute the amount of Skyler Company's net income that will be included in the controlling interest in consolidated net income for 2017.

A. Preferred stock $100,000

Call premium ($100,000 × 4%) 4,000

Dividends in arrears ($100,000 × 0.08) 8,000

Book value interest of preferred stock 112,000

Implied value ($80,000/.7) 114,286

Difference between implied and book value $ 2,286

B. Cost of investment $80,000

Less: Liquidating dividend ($8,000 × 0.70) 5,600

Balance – 12/31/10 $74,400

C. Percentage Controlling interest in

Net Income Interest Consolidated Income

Preferred stock $ 8,000 70 $ 5,600

Common stock

($16,000 - $8,000) 8,000 80 6,400

Total $16,000 $12,000

Question Title: Test Bank (Problem) Question 9-6

Difficulty: Hard

Learning Objective: 7 Explain how the purchase price is allocated when the subsidiary has both common and preferred stock outstanding., 8 Determine the controlling interest in income when the parent company owns both common and preferred stock of the subsidiary.

Section Reference: 9.11

32) On January 2, 2016, Porous, Inc. acquired an 80% interest in Simtex Corporation for $2,250,000. Simtex reported total stockholders’ equity of $2,500,000 on this date. An examination of Simtex’s books revealed that book value was equal to fair value for all assets and liabilities except for inventory, which was undervalued by $150,000. All of the undervalued inventory was sold during 2016.

Porous also purchased 30% of the $1,250,000 par value outstanding bonds of Simtex Corporation for $350,000 on January 2, 2016. The bonds mature in 10 years, carry an 11% annual interest rate payable on June 30 and December 31, and had a carrying value of $1,270,000 on the date of purchase. Both companies use the straight-line method to amortize bond discounts and premiums.

Porous reported net income of $750,000 for 2016 and paid dividends of $325,000 during 2016. Simtex Corporation reported net income of $800,000 for 2016 and paid dividends of $225,000 during the year.

Required:

Compute the following items at December 31, 2016.

1. Carrying value of the debt.

2. Interest revenue reported by Porous, Inc.

3. Interest expense reported by Simtex Corporation.

4. Balance in the Investment in Simtex Bonds account.

5. Controlling interest in consolidated net income for 2016 using the t-account approach.

6. Noncontrolling interest in consolidated income for 2016.

1. Carrying value of debt – 1/2/2016 $1,270,000

Less: Premium amortization – [($20,000/20) × 2 periods) 2,000

Carrying value of debt – 12/31/2016 $1,268,000

2. Stated interest (30% of $1,250,000 × 0.11) $41,250

Add: Discount amortization [($25,000/20) × 2 periods)] 2,500

Interest revenue $43,750

3. Stated interest ($1,250,000 × 0.11) $137,500

Less: Premium amortization [($20,000/20) × 2] 2,000

Interest expense $135,500

4. Cost of bond investment (1/2/2016) $350,000

Add: Discount amortization* 2,500

Investment account balance – 12/31/2016 $352,500

*$1,250,000 par × 30% less $350,000 paid divided by 10 years = $2,500.

5. Reported net income – Porous $750,000

Less: Dividend income ($225,000 × 0.80) 180,000

Independent net income 570,000

Add: Constructive gain on bond retirement 25,000

Less: Constructive gain recorded during year (2,500)

Contribution of Porous to consolidated income 592,500

Reported net income – Simtex $800,000

Less: Amortization of difference between

implied and book value:

Cost of goods sold (150,000)

Add: Constructive gain on bond retirement 650,000

[($1,270,000 - $1,250,000) × 0.30] = 6,000

Less: Constructive gain recorded during year (600)

Income after adjustment in constructive gain 655,400

× 0.80

Porous’s share of adjusted income 524,320

Controlling interest in consolidated net income $1,116,820

Implied value of investment ($2,250,000/0.80) $2,812,500

Book value of equity acquired 2,500,000

Difference between implied and book value 312,500

Allocated to inventory 150,000

Goodwill (Excess implied value over fair value) $ 162,500

6. Noncontrolling interest in consolidated income ($2,250,000/0.80) – $2,250,000 = $562,500

Question Title: Test Bank (Problem) Question 9-7

Difficulty: Hard

Learning Objective: 2 Describe how the gain or loss on constructive retirement of intercompany bond holdings is allocated between the purchasing and issuing companies.

Section Reference: 9.3, 9.4

33) On January 2, 2016, Palomine Corporation purchased 80% of the outstanding common stock and 30% of the outstanding cumulative, nonparticipating, preferred stock of Sour Company for $800,000 and $140,000, respectively. At this date, Sour Company reported account balances of $800,000 in common stock, $400,000 in preferred stock and $200,000 in retained earnings. No other contributed capital accounts exist. The difference between implied and book value of the common stock is attributable to under- or overvalued land. Dividends on the 12% cumulative preferred stock (par $10) were not paid during 2015.

Palomine Sour

Corporation Company

1/2/2016 Retained Earnings $ 90,000 $200,000

2016 Reported Net Income 169,200 180,000

2016 Dividends Declared 50,000 100,000

Required:

A. Prepare the journal entries made by Palomine Corporation in 2016 to account for the investments assuming the partial equity method is used.

B. Compute the noncontrolling interest in Sour Company’s net income.

C. Prepare the 2016 workpaper entries related to the foregoing investments assuming the partial equity method is used to account for the investment.

A. Investment in Sour Company Preferred Stock 140,000

Investment in Sour Company Common Stock 800,000

Cash 940,000

Cash (preferred stock) 28,800

Equity in Subsidiary Income – Preferred Stock 14,400

Investment in Sour Company Common Stock 14,400

Cash 3,200

Investment in Sour Company Common Stock 3,200

Investment in Sour Company Common Stock 105,600

Equity in Subsidiary Income {[($180,000 –

($400,000 × 0.12)] × (.80)} 105,600

Preferred Common

Stock Stock

Arrears $48,000

Current year 48,000 $4,000

Total 96,000 4,000

Percentage interest 0.30 0.80

$28,800 $3,200

B. Reported net income – 2016 $180,000

Allocation to preferred stock interest ($400,000 × 0.12) 48,000 × 0.70 = $33,600

Residual to common stock interest $132,000 × 0.20 = 26,400

Noncontrolling interest in 2016 net income $60,000

C. Investment in Sour Company Preferred Stock 14,400

Investment in Sour Company Common Stock 14,400

Dividends Declared – Preferred Stock 28,800

Equity in Subsidiary Income 105,600

Dividends Declared – Common Stock 3,200

Investment in Sour Company Common Stock 102,400

Beginning Retained Earnings – Sour Company 48,000

Preferred Stock 400,000

Other Contributed Capital (or Retained Earnings) 5,600

Investment in Sour Company Preferred Stock 140,000

Noncontrolling Interest in Equity* 313,600

*($400,000 + $48,000)] × 0.7 = $313,600

Beginning Retained Earnings – Sour Company 152,000

Common Stock 800,000

Difference between Implied and Book Value 48,000

Investment in Sung Company Common Stock 800,000

Noncontrolling Interest in Equity 200,000

Question Title: Test Bank (Problem) Question 9-8

Difficulty: Hard

Learning Objective: 7 Explain how the purchase price is allocated when the subsidiary has both common and preferred stock outstanding., 8 Determine the controlling interest in income when the parent company owns both common and preferred stock of the subsidiary.

Section Reference: 9.11