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1. Question : (TCO A) All of the following would require use of the equity method for investments except
: Material inter-company transactions
Investor participation in the policy-making pro
...
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1. Question : (TCO A) All of the following would require use of the equity method for investments except
: Material inter-company transactions
Investor participation in the policy-making process of the investee
Valuation at fair value (ch 1, pg 6)
Technological dependency
Significant control
Points Received: 7 of 7
Comments:
2. Question : (TCO A) Gaw Company owns 15% of the common stock of Trace Corporation and used the fair-value method to account for this investment. Trace reported net income of $110,000 for 2008 and paid dividends of $60,000 on October 1, 2008.
How much income should Gaw recognize on this investment in 2008?
: $16,500
$9,000 (ch. 1, pg. 2)
$25,500
$7,500
$50,000
Instructor Explanation: 15% x $90,000
Points Received: 7 of 7
Comments:
3. Question : (TCO A) Club Co. appropriately uses the equity method to account for its investment in Chip Corp. As of the end of 2008, Chip's common stock had suffered a significant decline in fair value, which is expected to be recovered over the next several months. How should Club account for the decline in value?
: Club should switch to the fair-value method
No accounting because the decline in fair value is temporary (ch 1, pg 11)
Club should decrease the balance in the investment account to the current value and recognize a loss on the income statement
Club should not record its share of Chip's 2008 earnings until the decline in the fair value of the stock has been recovered
Club should decrease the balance in the investment account to the current value and recognize an unrealized loss on the balance sheet
Points Received: 7 of 7
Comments:
4. Question : (TCO A) Which of the following results in a decrease in the Equity in Investee Income account when applying the equity method?
: Dividends paid by the investor
Net income of the investee
Unrealized gain on inter-company inventory transfers for the current year (@ ch 1, pg 17-20)
Unrealized gain on inter-company inventory transfers for the prior year
Extraordinary gain of the investee
Points Received: 7 of 7
Comments:
5. Question : (TCO A) On January 1, 2008, Dawson, Incorporated, paid $100,000 for a 30% interest in Sacco Corporation. This investee had assets with a book value of $550,000 and liabilities of $300,000. A patent held by Sacco having a book value of $10,000 was actually worth $40,000 with a six year remaining life. Any goodwill associated with this acquisition is considered to have an indefinite life. During 2008, Sacco reported income of $50,000 and paid dividends of $20,000 while in 2009 it reported income of $75,000 and dividends of $30,000.
Assume Dawson has the ability to significantly influence the operations of Sacco. The amount allocated to goodwill at January 1, 2008 is
: $25,000
$13,000
$9,000
$16,000 (ch 1, pg 13)
$10,000
Instructor Explanation: Net book value = $250K + $30K - bring patent to fair value = $280K x 30% = $84,000. Paid $100,000, so goodwill is difference of $16,000.
Points Received: 7 of 7
Comments:
6. Question : (TCO B) Which of the following statements is true regarding a statutory merger?
: The original companies dissolve while remaining as separate divisions of a newly created company
Both companies remain in existence as legal corporations with one corporation now a subsidiary of the acquiring company
The acquired company dissolves as a separate corporation and becomes a division of the acquiring company (ch 2, pg 42)
The acquiring company acquires the stock of the acquired company as an investment
A statutory merger is no longer a legal option
Points Received: 0 of 7
Comments:
7. Question : (TCO B) In a purchase or acquisition where control is achieved, how would the land accounts of the parent and the land accounts of the subsidiary be combined?
Parent Subsidiary
A Book Value Book Value
B Book Value Fair Value
C Fair Value Fair Value
D Fair Value Book Value
E Cost Cost
: Entry A
Entry B (ch 2, pg 49 & 63)
Entry C
Entry D
Entry E
Points Received: 7 of 7
Comments:
8. Question : (TCO B) Which of the following statements is true regarding a statutory consolidation?
: The original companies dissolve while remaining as separate divisions of a newly created company (ch 2, pg 42)
Both companies remain in existence as legal corporations with one corporation now a subsidiary of the acquiring company
The acquired company dissolves as a separate corporation and becomes a division of the acquiring company
The acquiring company acquires the stock of the acquired company as an investment
A statutory consolidation is no longer a legal option
Points Received: 0 of 7
Comments:
9. Question : (TCO B) Bullen Inc. assumed 100% control over Vicker Inc. on January 1, 20X1. The book value and fair value of Vicker's accounts on that date (prior to creating the combination) follow, along with the book value of Bullen's accounts:
Bullen Vicker Vicker
Book Book Fair
Value Value Value
Retained earnings, 1/1/X1 $160,000 $240,000
Cash receivables 170,000 70,000 $70,000
Inventory 230,000 170,000 210,000
Land 280,000 220,000 240,000
Buildings(net) 480,000 240,000 270,000
Equipment(net) 120,000 90,000 90,000
Liabilities 650,000 430,000 420,000
Common stock 360,000 80,000
Additional paid-in capital 20,000 40,000
Assume that Bullen paid a total of $480,000 in cash for all of the shares of Vicker. In addition, Bullen paid $35,000 to a group of attorneys for their work in arranging the combination to be accounted for as a purchase. What will be the balance in consolidated goodwill?
: $0
$20,000
$35,000
$55,000 (ch 2, pg 61- 65)
Instructor Explanation: (in thousands) Net book value = $360 (240+80+40) + specifically allocate 40+20+30+10 liabilities = 100 = $460
Paid $480, so $20 allocated to Goodwill + $35 capitalized = $55
Points Received: 7 of 7
Comments:
10. Question : (TCO B) In a pooling of interests,
: Revenues and expenses are consolidated for the entire fiscal year, even if the combination occurred late in the year (ch 2, pg 65-67)
Goodwill may be recognized
Consolidation is accomplished using the fair values of both companies
The transactions may involve the exchange of preferred stock or debt securities as well as common stock
The transaction is properly regarded as an acquisition of one company by another
Points Received: 7 of 7
Comments:
11. Question : (TCO C) Which one of the following accounts would not appear on the consolidated financial statements at the end of the first fiscal period of the combination?
: Goodwill
Equipment
Investment in Subsidiary (ch 3, pg 90-94)
Common Stock
Additional Paid-In Capital
Points Received: 7 of 7
Comments:
12. Question : (TCO C) Under the partial equity method of accounting for an investment,
: The investment account remains at initial value
Dividends received are recorded as revenue
Amortization of the excess of fair value allocations over book value of net assets is applied over their useful lives to reduce the investment account
Amortization of the excess of fair value allocations over book value is ignored in regard to the investment account (ch 3, pg 101-103)
Dividends received increase the investment account
Points Received: 0 of 7
Comments:
13. Question : (TCO C) When a company applies the initial value method in accounting for its investment in a subsidiary and the subsidiary reports income less than dividends paid, what entry would be made for a consolidated worksheet?
A Retained earnings
Investment in subsidiary
B Investment in subsidiary
Retained earnings
C Investment in subsidiary
Equity in subsidiary's income
D Equity in subsidiary's income
Investment in subsidiary
E Retained earnings
Additional paid-in capital
: A above (ch 3, pg 100-101)
B above
C above
D above
E above
Points Received: 7 of 7
Comments:
14. Question : (TCO C) According to SFAS 142, which of the following statements is true?
: Goodwill recognized in consolidation must be amortized over 20 years
Goodwill recognized in consolidation must be expensed in the period of acquisition
Goodwill recognized in consolidation will not be amortized but subject to an annual test for impairment (ch 3, pg 107-111)
Goodwill recognized in consolidation can never be written off
Goodwill recognized in consolidation must be amortized over 40 years
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1. Question : (TCO A) How does the use of the equity method affect the investor's financial statements?
:
Instructor Explanation:
Points Received: 16 of 16
Comments:
2. Question : (TCO B) Goodwill is often created or purchased, during a business combination. Why doesn't Goodwill show up on the Parent company's trial balance as a separate account?
Points Received: 16 of 16
Comments:
3. Question : (TCO C) TJV Co. obtained all of the common stock of NTB Co. on January 1, 2009. As of that date, NTB had the following trial balance:
During 2009, NTB reported net income of $96,000 while paying dividends of $12,000. During 2010, NTB reported net income of $132,000 while paying dividends of $36,000. Assume that TJV Co. acquired the common stock of NTB Co. for $588,000 in cash and properly accounted for this acquisition under the acquisition method.
As of January 1, 2009, NTB's land had a fair value of $102,000, its buildings were valued at $188,000 and its equipment was appraised at $216,000. Any excess of consideration transferred over fair value of assets and liabilities acquired is due to an unamortized patent to be amortized over 10 years. TJV decided to use the equity method for this investment.
Required:
(A.) Prepare the S, A, I, D and E worksheet entries for December 31, 2009.
(B.) Prepare the S, A, I, D and E worksheet entries for December 31, 2010.
: Consideration transferred for NTB $588,000 Book value 480,000 Excess of consideration transferred over book value $108,000 ...assigned to specific accounts based on fair values Land 12,000 Buildings 48,000 20 years $2,400 annual amortization Equipment(24,000) 8 years (3,000) Patent (remaining excess) $72,000 10 years $7,200 Total amortization, net - $6,600 Consolidated Worksheet Entries-2009: Entry S Common Stock - NTB 300,000 Additional Paid-in Capital 60,000 Retained Earnings, 1/1/09 120,000 Investment in NTB 480,000 Entry A Land 12,000 Buildings 48,000 Patent 72,000 Equipment 24,000 Investment in NTB 108,000 Entry I Investment Income 89,400 Investment in NTB 89,400 Entry D Investment in NTB 12,000 Dividends Paid 12,000 Entry E Expense 6,600 Equipment 3.000 Buildings 2,400 Patent 7,200 Consolidated Worksheet Entries -2010: Entry S Common Stock - NTB 300,000 Additional Paid-in Capital 60,000 Retained Earnings, 1/1/10 204,000 Investment in NTB 564,000 Entry A Land 12,000 Buildings 45,600 Patent 64,800 Equipment 21,000 Investment in NTB 101,400 Entry I Investment Income 125,400 Investment in NTB 125,400 Entry D Investment in NTB 36,000 Dividends Paid 36,000 Entry E Expense 6,600 Equipment 3,000 Buildings 2,400 Patent 7,200
Instructor Explanation: Solution: (click to access Excel solution file) Note that dr to Buildings - entry A - 2010 - should be $45,600
Points Received: 20 of 20
Comments:
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