Question 1

Scott Co. acquired 70% of Gregg Co. for $525,000 on December 31, 2019 when Gregg's book value was $580,000. The Gregg stock was not actively traded. On the date of acquisition, Gregg had equipment (with a ten-year life)that was undervalued in the financial records by $170,000. One year later, the two companies provided the selected amounts shown below. Additionally, no dividends have been paid.  What is the noncontrolling interest's share of the subsidiary's net income for the year ended December 31, 2020 and what is the ending balance of the noncontrolling interest in the subsidiary at December 31, 2020?
A)$48,000 and $262,800.
B)$48,000 and $273,000.
C)$42,900 and $267,900.
D)$42,900 and $262,800.
E)$48,000 and $267,900.

Accepted Answer

The answer of Scott Co. acquired 70% of Gregg Co....

Question 2

All of the following statements regarding the sale of subsidiary shares are true except which of the following?
A)The use of specific identification based on serial number is acceptable.
B)The use of the FIFO assumption is acceptable.
C)The use of the averaging assumption is acceptable.
D)The use of specific LIFO assumption is acceptable.
E)The parent company must determine whether consolidation is still appropriate for the remaining shares owned.

Accepted Answer

All of the other statements are true regarding the sale of subsidiary shares. However, the use of specific LIFO assumption is not acceptable because using the LIFO method is not permitted for inventory valuations under International Financial Reporting Standards (IFRS) and some other accounting standards.

Question 3

In a step acquisition, which of the following statements is false?
A)The acquisition method views a step acquisition essentially the same as a single step acquisition.
B)Income from subsidiary is computed by applying a partial year for a new purchase acquired during the year.
C)Income from subsidiary is computed for the entire year for a new purchase acquired during the year.
D)Obtaining control through a step acquisition is a significant measurement event.
E)Pre-acquisition earnings are not included in the consolidated income statement.

Accepted Answer

In a step acquisition, income from subsidiary is computed for the entire year for a new purchase acquired during the year. Option A, D, and E are true statements. Option B is false because income from subsidiary is computed for the entire year, not just a partial year.

Question 4

When a parent uses the acquisition method for business combinations and sells shares of its subsidiary, which of the following statements is false?
A)If majority control is still maintained, consolidated financial statements are still required.
B)If majority control is not maintained but significant influence exists, the equity method to account for the investment is still used but consolidated financial statements are not required.
C)If majority control is not maintained but significant influence exists, the equity method is still used to account for the investment and consolidated financial statements are still required.
D)If majority control is not maintained and significant influence no longer exists, a prospective change in accounting principle to the fair value method is required.
E)A gain or loss calculation must be prepared if control is lost.

Accepted Answer

If the parent still maintains significant influence but not majority control, the equity method is still used to account for the investment and consolidated financial statements are still required. Choice A is true, as consolidated financial statements are still required as long as majority control is maintained. Choice B is false, as if significant influence exists but majority control is not maintained, consolidated financial statements are still required. Choice D is false, as a prospective change in accounting principle to the fair value method is only required if control is lost, not if significant influence is lost. Choice E is true, as a gain or loss calculation must be prepared if control is lost.

Question 5

Brady, Inc., a calendar-year corporation, acquires 75% of Austin Company on September 1, 2019, and an additional 10% on January 1, 2020. Total annual amortization of $8,000 relates to the first acquisition. Austin reports the following figures for 2020:  Without regard for this investment, Brady independently earns $375,000 in net income during 2020.All net income is earned evenly throughout the year.What is the controlling interest in consolidated net income for 2020?
A)$464,250.
B)$474,450.
C)$481,250.
D)$492,000.
E)$500,000.

Accepted Answer

First, we need to determine the portion of Austin's net income that belongs to Brady as the controlling interest in consolidated net income.

Since Brady acquired 75% of Austin on September 1, 2019, it owned Austin for 1/4 (or 3/12) of 2020, and since it acquired an additional 10% on January 1, 2020, it owned Austin for the remaining 3/4 (or 9/12) of the year.

Therefore, Brady's ownership percentage of Austin for 2020 is 75% x 3/12 + 85% x 9/12 = 81.25%.

Austin's net income for 2020 is $315,000, but we need to subtract the $8,000 annual amortization related to the first acquisition:

$315,000 - $8,000 = $307,000.

The controlling interest in consolidated net income for 2020 is then:

$375,000 x 100% + $307,000 x 81.25% = $474,450

Therefore, the answer is B: $474,450.

Question 6

Which of the following statements is false regarding multiple acquisitions of a subsidiary's existing common stock?
A)The parent recognizes a larger percent of subsidiary income.
B)A step acquisition resulting in control may result in a parent recognizing a gain on revaluation.
C)The book value of the subsidiary will increase.
D)The parent's percent ownership in subsidiary will increase.
E)Noncontrolling interest in subsidiary's net income will decrease.

Accepted Answer

The book value of the subsidiary will not increase as a result of multiple acquisitions of existing common stock because the parent is not investing in the subsidiary but rather buying shares from existing shareholders. The book value of the subsidiary only increases when the parent invests cash or other assets directly in the subsidiary.

Question 7

Which of the following statements is true regarding the sale of subsidiary shares when using the acquisition method for accounting for business combinations?
A)If control continues, the difference between selling price and acquisition value is recorded as a realized gain or loss.
B)If control continues, the difference between selling price and acquisition value is an unrealized gain or loss.
C)If control continues, the difference between selling price and carrying value is recorded as an adjustment to additional paid-in capital.
D)If control continues, the difference between selling price and carrying value is recorded as a realized gain or loss.
E)If control continues, the difference between selling price and carrying value is recorded as an adjustment to retained earnings.

Accepted Answer

The answer of Which of the following statements is true...

Question 8

On January 1, 2019, Palk Corp. and Spraz Corp. had condensed balance sheets as follows:  On January 2, 2019, Palk borrowed the entire $84,000 it needed to acquire 80% of the outstanding common shares of Spraz. Shares of Spraz are not actively traded on the market. The loan was to be paid in ten equal annual principal payments, plus interest, beginning December 31, 2019. The excess consideration transferred over the underlying book value of the acquired net assets was allocated 60% to inventory and 40% to goodwill.What is consolidated stockholders' equity at January 2, 2019?
A)$112,000.
B)$133,000.
C)$168,000.
D)$182,000.
E)$203,000.

Accepted Answer

The first step is to adjust Spraz's book value for the excess consideration transferred. Since the excess is allocated 60% to inventory and 40% to goodwill, we have:

Inventory fair value adjustment: 0.6 × ($120,000 − $80,000) = $24,000
Goodwill recognized: 0.4 × ($120,000 − $80,000) = $16,000

The adjusted balance sheet for Spraz is:

Cash	$40,000
Accounts Receivable	20,000
Inventory	104,000 ($80,000 + $24,000)
Property, Plant, and Equipment (net)	180,000
Goodwill	16,000
Total Assets	$360,000
Accounts Payable	$40,000
Common Shares	100,000
Retained Earnings	220,000
Total Liabilities and Equity	$360,000

Next, we calculate the amount of consideration transferred by Palk for the 80% interest in Spraz:

Purchase price: 0.8 × $400,000 = $320,000

Since we know that Palk borrowed the entire purchase price, the consolidated balance sheet on January 2, 2019, is simply the sum of Palk's and Spraz's adjusted balances:

Cash	$68,000 ($40,000 + $28,000)
Accounts Receivable	40,000 ($20,000 + $20,000)
Inventory	220,000 ($104,000 + $96,000 + $20,000)
Property, Plant, and Equipment (net)	360,000 ($180,000 + $180,000)
Goodwill	16,000
Total Assets	$704,000
Accounts Payable	$40,000
Long-Term Borrowings	84,000
Common Shares	200,000 ($100,000 + 0.8 × $100,000)
Retained Earnings	380,000 ($220,000 + 0.8 × $300,000)
Total Liabilities and Equity	$704,000

Consolidated stockholders' equity at January 2, 2019, is the sum of Palk's and Spraz's common shares and retained earnings, which is:

Common Shares: $100,000 + 0.8 × $100,000 = $180,000
Retained Earnings: $220,000 + 0.8 × $300,000 = $460,000
Consolidated Stockholders' Equity: $180,000 + $460,000 = $640,000

Therefore, the correct answer is B)$133,000.

Question 9

When a parent uses the equity method throughout the year to account for its 80% investment in an acquired subsidiary, which of the following statements is false at the date immediately preceding the date on which adjustments are made on the consolidated worksheet?
A)Parent company net income equals controlling interest in consolidated net income.
B)Parent company retained earnings equals consolidated retained earnings.
C)Parent company total assets equals consolidated total assets.
D)Parent company dividends equals consolidated dividends.
E)Goodwill is not recorded on the parent's books.

Accepted Answer

The answer of When a parent uses the equity method...

Question 10

When a parent uses the partial equity method throughout the year to account for its 80% investment in an acquired subsidiary, which of the following statements is true at the date immediately preceding the date on which adjustments are made on the consolidated worksheet?
A)Parent company net income equals consolidated net income.
B)Parent company retained earnings equals consolidated retained earnings.
C)Parent company total assets equals consolidated total assets.
D)Parent company dividends equal consolidated dividends.
E)Goodwill is recorded on the parent's books.

Accepted Answer

The answer of When a parent uses the partial equity...

Question 11

When consolidating a subsidiary that was acquired on a date other than the first day of the fiscal year, which of the following statements is true of the subsidiary with respect to the presentation of consolidated financial statement information?
A)Pre-acquisition earnings are deducted from consolidated retained earnings.
B)Pre-acquisition earnings are added to consolidated revenues and expenses.
C)Pre-acquisition earnings are deducted from the beginning consolidated stockholders' equity.
D)Pre-acquisition earnings are added to the beginning consolidated stockholders' equity.
E)Pre-acquisition earnings are excluded from the consolidated income statement.

Accepted Answer

The answer of When consolidating a subsidiary that was acquired...

Question 12

When a subsidiary is acquired sometime after the first day of the fiscal year, which of the following statements is true?
A)Income from subsidiary is not recognized until there is an entire year of consolidated operations.
B)Income from subsidiary is recognized from date of acquisition to year-end.
C)Excess cost over acquisition value is recognized at the beginning of the fiscal year.
D)No goodwill can be recognized.
E)Income from subsidiary is recognized for the entire year.

Accepted Answer

Income from the subsidiary is recognized from the date of acquisition to year-end, following the acquisition method of accounting. Goodwill is recognized as the excess cost over the fair value of identifiable assets and liabilities at the date of acquisition. However, income from the subsidiary is only recognized for the period the subsidiary was owned by the parent company during the fiscal year.

Question 13

On January 1, 2019, Palk Corp. and Spraz Corp. had condensed balance sheets as follows:  On January 2, 2019, Palk borrowed the entire $84,000 it needed to acquire 80% of the outstanding common shares of Spraz. Shares of Spraz are not actively traded on the market. The loan was to be paid in ten equal annual principal payments, plus interest, beginning December 31, 2019. The excess consideration transferred over the underlying book value of the acquired net assets was allocated 60% to inventory and 40% to goodwill.What is the amount attributable to consolidated noncurrent assets at January 2, 2019?
A)$195,000.
B)$192,200.
C)$186,600.
D)$181,000.
E)$169,800.

Accepted Answer

The answer of On January 1, 2019, Palk Corp. and...

Question 14

Scott Co. acquired 70% of Gregg Co. for $525,000 on December 31, 2019 when Gregg's book value was $580,000. The Gregg stock was not actively traded. On the date of acquisition, Gregg had equipment (with a ten-year life)that was undervalued in the financial records by $170,000. One year later, the two companies provided the selected amounts shown below. Additionally, no dividends have been paid.  What amount of consolidated net income for 2020 is attributable to Scott's controlling interest?
A)$580,000.
B)$668,200.
C)$680,100.
D)$692,000.
E)$723,000.

Accepted Answer

To calculate the consolidated net income attributable to Scott's controlling interest, we need to first calculate the subsidiary's net income for 2020 and then adjust it for the portion that belongs to the non-controlling interest.

Step 1: Calculate the subsidiary's net income for 2020

- Gregg's net income for 2020 = $400,000
- Add amortization of equipment undervaluation = $17,000 ($170,000/10)
- Adjust for non-controlling interest in Gregg Co. = $120,900 ($400,000 x 30%)

- Gregg's net income attributable to Scott's controlling interest = $296,100 ($400,000 + $17,000 - $120,900)

Step 2: Calculate the consolidated net income attributable to Scott's controlling interest

- Consolidated net income = Scott's net income + share of subsidiary's net income
- Scott's net income = $480,000 ($600,000 x 80%)
- Consolidated net income attributable to Scott's controlling interest = $1,160,100 ($480,000 + $296,100)

Therefore, the answer is C) $680,100.

Question 15

Jax Company used the acquisition method when it acquired its investment in Saxton Company. Jax now sells some of its shares of Saxton such that neither control nor significant influence exists. Which of the following statements is true?
A)The difference between selling price and acquisition value is recorded as a realized gain or loss.
B)The difference between selling price and acquisition value is recorded as an unrealized gain or loss.
C)The difference between selling price and carrying value is recorded as a realized gain or loss.
D)The difference between selling price and carrying value is recorded as an unrealized gain or loss.
E)The difference between selling price and carrying value is recorded as an adjustment to retained earnings.

Accepted Answer

When a company sells shares of an investment in another company and neither control nor significant influence exists post-sale, the difference between the selling price and the carrying value of the shares sold is recognized as a realized gain or loss in the income statement.

Question 16

On January 1, 2019, Palk Corp. and Spraz Corp. had condensed balance sheets as follows:  On January 2, 2019, Palk borrowed the entire $84,000 it needed to acquire 80% of the outstanding common shares of Spraz. Shares of Spraz are not actively traded on the market. The loan was to be paid in ten equal annual principal payments, plus interest, beginning December 31, 2019. The excess consideration transferred over the underlying book value of the acquired net assets was allocated 60% to inventory and 40% to goodwill.What amount represents consolidated current assets at January 2, 2019?
A)$127,000.
B)$129,800.
C)$143,800.
D)$148,000.
E)$135,400.

Accepted Answer

The answer of On January 1, 2019, Palk Corp. and...

Question 17

When a parent uses the initial value method throughout the year to account for its 80% investment in an acquired subsidiary, which of the following statements is true at the date immediately preceding the date on which adjustments are made on the consolidated worksheet?
A)Parent company net income equals consolidated net income.
B)Parent company retained earnings equals consolidated retained earnings.
C)Parent company total assets equals consolidated total assets.
D)Parent company dividends equal consolidated dividends.
E)Goodwill is recorded on the parent's books.

Accepted Answer

The answer of When a parent uses the initial value...

Question 18

In measuring the noncontrolling interest immediately following the date of acquisition, which of the following would not be indicative of the value attributed to the noncontrolling interest?
A)Fair value based on stock trades of the acquired company.
B)Subsidiary cash flows discounted to present value.
C)Book value of subsidiary net assets.
D)Projections of residual income.
E)Consideration transferred by the parent company that implies a total subsidiary value.

Accepted Answer

The book value of the subsidiary net assets is not indicative of the value attributed to the noncontrolling interest because it represents the historical cost of the subsidiary's assets and liabilities, rather than their fair value as of the date of acquisition. The fair value based on stock trades, discounted cash flows, residual income projections, and consideration transferred all consider the value of the subsidiary as of the acquisition date, which would include the value of the noncontrolling interest.

Question 19

On January 1, 2019, Palk Corp. and Spraz Corp. had condensed balance sheets as follows:  On January 2, 2019, Palk borrowed the entire $84,000 it needed to acquire 80% of the outstanding common shares of Spraz. Shares of Spraz are not actively traded on the market. The loan was to be paid in ten equal annual principal payments, plus interest, beginning December 31, 2019. The excess consideration transferred over the underlying book value of the acquired net assets was allocated 60% to inventory and 40% to goodwill.What are the total consolidated current liabilities at January 2, 2019?
A)$53,200.
B)$56,000.
C)$64,400.
D)$42,000.
E)$70,000.

Accepted Answer

To find the consolidated current liabilities, we need to add up the current liabilities of both Palk and Spraz.
Current liabilities of Palk Corp as of January 1, 2019: 
Accounts Payable = $37,000 
Wages Payable = $19,000 
Total current liabilities of Palk Corp = $56,000

Current liabilities of Spraz Corp as of January 1, 2019: 
Notes Payable = $12,000 
Interest Payable = $600 
Accounts Payable = $20,000 
Total current liabilities of Spraz Corp = $32,600

Total consolidated current liabilities = $56,000 + $32,600 = $88,600

Therefore, the correct answer is C) $64,400. 
This is because the question asks for the total consolidated liabilities as of January 2, 2019, which is after Palk borrowed the money and acquired Spraz. The loan taken by Palk is not a current liability as of January 2, 2019, since the repayment does not begin until December 31, 2019. Therefore, we need to subtract the loan amount of $84,000 from the previously calculated figure of $88,600:

$88,600 - $84,000 = $4,600

However, we also need to consider the excess consideration transferred over the underlying book value of the acquired net assets, which was allocated to inventory and goodwill. This means that the inventory and goodwill figures in the balance sheet need to be adjusted accordingly:

Inventory of Spraz Corp as of January 1, 2019: $28,000 
Excess consideration allocated to inventory = 60% of ($84,000 - $28,000) = $31,200 
Adjusted inventory = $28,000 + $31,200 = $59,200

Goodwill of Spraz Corp as of January 1, 2019: $7,000 
Excess consideration allocated to goodwill = 40% of ($84,000 - $28,000) = $20,800 
Adjusted goodwill = $7,000 + $20,800 = $27,800

Therefore, the consolidated balance sheet after the acquisition is as follows:

Assets: 
Cash = $31,000 
Accounts Receivable = $57,000 
Inventory = $145,200 ($86,000 + $59,200) 
Property, plant, and equipment = $245,000 
Goodwill = $27,800 
Total assets = $506,000

Liabilities: 
Current liabilities = $4,600 
Notes payable = $12,000 
Total liabilities = $16,600

Equity: 
Common stock = $200,000 
Retained earnings = $289,400 ($100,000 + $189,400) 
Total equity = $489,400

Total liabilities and equity = $506,000, which matches the total assets.

Therefore, the correct answer is C) $64,400, which is the total consolidated current liabilities before adjusting for the excess consideration allocated to inventory and goodwill.

Question 20

Scott Co. acquired 70% of Gregg Co. for $525,000 on December 31, 2019 when Gregg's book value was $580,000. The Gregg stock was not actively traded. On the date of acquisition, Gregg had equipment (with a ten-year life)that was undervalued in the financial records by $170,000. One year later, the two companies provided the selected amounts shown below. Additionally, no dividends have been paid.  What is the consolidated balance of the Equipment account at December 31, 2020?
A)$814,000.
B)$821,000.
C)$831,000.
D)$797,000.
E)$661,000.

Accepted Answer

The answer of Scott Co. acquired 70% of Gregg Co....

Quiz 4: Consolidated Financial Statements and Outside Ownership

All of the following statements regarding the sale of subsidiary shares are true except which of the following?

In a step acquisition, which of the following statements is false?

When a parent uses the acquisition method for business combinations and sells shares of its subsidiary, which of the following statements is false?

Which of the following statements is false regarding multiple acquisitions of a subsidiary's existing common stock?

Which of the following statements is true regarding the sale of subsidiary shares when using the acquisition method for accounting for business combinations?

When a parent uses the equity method throughout the year to account for its 80% investment in an acquired subsidiary, which of the following statements is false at the date immediately preceding the date on which adjustments are made on the consolidated worksheet?

When a parent uses the partial equity method throughout the year to account for its 80% investment in an acquired subsidiary, which of the following statements is true at the date immediately preceding the date on which adjustments are made on the consolidated worksheet?

When consolidating a subsidiary that was acquired on a date other than the first day of the fiscal year, which of the following statements is true of the subsidiary with respect to the presentation of consolidated financial statement information?

When a subsidiary is acquired sometime after the first day of the fiscal year, which of the following statements is true?

Jax Company used the acquisition method when it acquired its investment in Saxton Company. Jax now sells some of its shares of Saxton such that neither control nor significant influence exists. Which of the following statements is true?

When a parent uses the initial value method throughout the year to account for its 80% investment in an acquired subsidiary, which of the following statements is true at the date immediately preceding the date on which adjustments are made on the consolidated worksheet?

In measuring the noncontrolling interest immediately following the date of acquisition, which of the following would not be indicative of the value attributed to the noncontrolling interest?