Deck 5: Allocation and Depreciation of Differences Between Implied and Book Values

Question 1

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.

Answer 1

D

Question 2

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

Answer 2

D

Question 3

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 .

Answer 3

C

Question 4

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 5

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 6

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 7

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 8

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 9

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 10

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 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 12

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 13

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 14

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 15

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 16

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 17

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 18

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 19

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 20

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 21

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.

Question 22

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

Question 23

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:
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.

Question 24

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.

Question 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 26

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:
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.

Question 27

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:
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.

Question 28

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 29

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:
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.

Question 30

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.

Question 31

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 32

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:
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.

Question 33

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 34

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:
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.

Question 35

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 36

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.