Advanced Accounting 12th Edition Beams Test Bank

Advanced Accounting  12th Edition Beams  Test Bank
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Advanced Accounting, 12e (Beams et al.)
Chapter 8 Consolidations Changes in Ownership Interests

8.1 Multiple Choice Questions

1) Which of the following is correct? The direct sale of additional shares of stock at book value per share to only the parent company from a subsidiary
A) decreases the parents interest and decreases the noncontrolling shareholders interest.
B) decreases the parents interest and increases the noncontrolling shareholders interest.
C) increases the parents interest and increases the noncontrolling shareholders interest.
D) increases the parents interest and decreases the noncontrolling shareholders interest.
Answer: D
Objective: LO3
Difficulty: Moderate

Use the following information to answer the question(s) below.

On December 31, 2013, Giant Corporations Investment in Penguin Corporation account had a balance of $500,000. The balance consisted of 80% of Penguins $625,000 stockholders equity on that date. Giant owns 80% of Penguin. On January 2, 2014, Penguin increased its outstanding common stock from 15,000 to 18,000 shares.

2) Assume that Penguin sold the additional 3,000 shares directly to Giant for $150,000 on January 2, 2014. Giants percentage ownership in Penguin immediately after the purchase of the additional stock is
A) 66-2/3%.
B) 80%.
C) 83-1/3%.
D) 86-2/3%
Answer: C
Explanation: C) (Parent had 80% of 15,000 shares, or 12,000 shares. They now hold 15,000 of 18,000 shares) = 83.33%
Objective: LO3
Difficulty: Moderate

3) Assume that Penguin sold the additional 3,000 shares to outside interests for $150,000 on January 2, 2014. Giants percentage ownership immediately after the sale of additional stock would be
A) 66-2/3%.
B) 75%.
C) 80%.
D) 83-1/3%.
Answer: A
Explanation: A) (12,000 shares/18,000 shares) = 66.67%
Objective: LO3
Difficulty: Moderate
Use the following information to answer the question(s) below.

Bird Corporation purchased an 80% interest in Brush Corporation on July 1, 2013 at its book value, and on January 1, 2014 its Investment in Brush account was $300,000, equal to its book value. Brushs net income for 2014 was $99,000 (earned uniformly); no dividends were declared. On March 1, 2014, Bird reduced its interest in Brush by selling a 20% interest, one-fourth of its investment, for $84,000.

4) If Bird uses a beginning-of-the-year sale assumption, its gain on sale and income from Brush for 2014 will be
A)
Gain on Sale Income from Brush
$5,700 $59,400

B)
Gain on Sale Income from Brush
$5,700 $62,700

C)
Gain on Sale Income from Brush
$9,000 $59,400

D)
Gain on Sale Income from Brush
$9,000 $62,700

Answer: C
Explanation: C) Selling price $84,000
Book value of interest sold
$300,000 (20% / 80%) = 75,000
Gain on sale $9,000

Income from Brush
$99,000 (80% 20%) = $59,400
Objective: LO2
Difficulty: Moderate

5) If Bird uses the actual-sale-date sales assumption, its gain on the sale and income from Brush for 2014 will be
A)
Gain on Sale Income from Brush
$5,700 $59,400

B)
Gain on Sale Income from Brush
$5,700 $62,700

C)
Gain on Sale Income from Brush
$21,360 $59,400

D)
Gain on Sale Income from Brush
$21,360 $62,700

Answer: B
Explanation: B) Selling price $84,000
Book value of interest sold:
Beginning balance $300,000
Income for 2 months
$99,000 1/6 80% = 13,200
Adjusted book value 313,200
Percentage of interest sold 1/4
Book value applied 78,300 78,300
Gain on sale $5,700

Income from Brush:
Jan 1 Mar 1 $99,000 2/12 80% = $13,200
Mar 1 Dec 31 $99,000 10/12 60% = 49,500
Income from Brush $62,700
Objective: LO2
Difficulty: Moderate

6) Jersey Company acquired 90% of York Company on April 1, 2014. Both Jersey Company and York Company have December 31 fiscal year ends. Under current GAAP, which of the following statements is false?
A) The consolidated income statement in 2014 should not include Yorks revenues and expenses prior to April 1, 2014.
B) When preparing consolidating work papers in 2014, Yorks revenues prior to April 1, 2014 are eliminated.
C) Yorks earnings prior to April 1, 2014 should appear as a deduction on the consolidated income statement in 2014.
D) The consolidated income statement in 2014 should include Yorks revenues and expenses after April 1, 2014.
Answer: C
Objective: LO1
Difficulty: Moderate
7) Utah Company holds 80% of the stock of a subsidiary company. The subsidiary issues 100 additional shares of stock to Utah Company at a price above book value per share. The subsidiary does not issue any additional shares at the same time. How will Utah Company record the purchase?
A) Utah Company records a gain on sale of stock.
B) Utah Company increases additional paid-in capital.
C) Utah Company decreases additional paid-in capital.
D) Utah Company assigns any excess cost over book value acquired to increase undervalued identifiable assets or goodwill as appropriate.
Answer: D
Objective: LO3
Difficulty: Moderate

Use the following information to answer the question(s) below.

Goldberg Corporation owned a 70% interest in Savannah Corporation on December 31, 2013, and Goldbergs Investment in Savannah account had a balance of $3,900,000. Savannahs stockholders equity on this date was as follows:

Capital stock, $10 par value $3,000,000
Retained Earnings 2,400,000
Total Stockholders Equity $5,400,000

On January 1, 2014, Savannah issues 80,000 new shares of common stock to Goldberg for $16 each.

8) What is Goldbergs percentage ownership in Savannah after Savannah issues its stock to Goldberg?
A) 76.32%
B) 80.43%
C) 82.57%
D) 83.43%
Answer: A
Explanation: A) (210,000 + 80,000)/380,000
Objective: LO3
Difficulty: Moderate
9) On January 1, 2014, assume the fair values of Savannahs identifiable assets and liabilities equal book values. What is the change in the amount of goodwill associated with the issuance of 80,000 additional shares to Goldberg? (Use four decimal places.)
A) Increase goodwill $38,176.
B) Decrease goodwill $38,176.
C) Increase goodwill $384,000.
D) Decrease goodwill $384,000.
Answer: B
Explanation: B) Savannahs equity after the issuance of
the new shares ($5,400,000 + $1,280,000) $6,680,000
Goldbergs ownership percentage 76.32%
Goldbergs share of Savannahs equity now $5,098,176
Goldbergs previous share of Savannahs equity ($5,400,000 70%) 3,780,000
Savannahs equity acquired in the purchase $1,318,176
Amount spent to acquire stock 1,280,000
Excess book value acquired over cost $ 38,176
Objective: LO3
Difficulty: Difficult

Use the following information to answer the question(s) below.

Great Corporation acquired a 90% interest in SOS Corporation at its $810,000 book value on December 31, 2013. A summary of the stockholders equity for SOS at the end of 2013 and 2014 is as follows:

12/31/13 12/31/14
Capital stock, $10 par $600,000 $600,000
Additional paid-in capital 30,000 30,000
Retained Earnings 270,000 420,000
Total stockholders equity $900,000 $1,050,000

On January 1, 2015, SOS sold 10,000 new shares of its $10 par value common stock for $45 per share.

10) If SOS sold the additional shares to the general public, Greats Investment in SOS account after the sale would be ________. (Use four decimal places.)
A) $945,000
B) $1,157,100
C) $1,225,000
D) $1,245,000
Answer: B
Explanation: B) SOSs stockholders equity prior to the stock issuance $1,050,000
Plus: Capital received from new stock issued 450,000
New stockholders equity $1,500,000
Greats ownership (54,000/(60,000 + 10,000)) 77.14%
Greats adjusted investment in SOS $1,157,100
Objective: LO3
Difficulty: Moderate

11) If SOS sold the additional shares directly to Great, Greats Investment in SOS account after the sale would be
A) $1,350,000.
B) $1,395,000.
C) $1,425,000.
D) $1,500,000.
Answer: B
Explanation: B) Investment balance at 12/31/2014
($1,050,000 90%) $945,000
Additional investment (10,000 shares $45) 450,000
Investment account balance, 12/31/2014 $1,395,000
Objective: LO3
Difficulty: Moderate

12) Consider a sale of stock by a subsidiary to parties outside the consolidated entity. This transaction requires an adjustment of the parents investment and additional paid-in capital accounts except when
A) the shares are sold below book value per share.
B) the shares are sold above book value per share.
C) the shares are sold at book value per share.
D) All of the above are correct.
Answer: C
Objective: LO3
Difficulty: Moderate

13) If a parent company and outside investors purchase shares of a subsidiary in relation to existing stock ownership (ratably), then
A) there will be an adjustment to additional paid-in capital if the stock is sold above book value.
B) there will be no adjustment to additional paid-in capital regardless whether the stock is sold above or below book value.
C) there will be an adjustment to additional paid-in capital if the stock is sold below book value.
D) there will be the elimination of a gain.
Answer: B
Objective: LO3
Difficulty: Easy

14) A subsidiary split its stock 2 for 1. Which of the following statements is false?
A) A stock split does not affect the amount of net assets of the subsidiary.
B) A stock split does not affect parent and noncontrolling interest ownership percentages.
C) A stock split does not affect consolidation procedures.
D) A 2 for 1 stock split decreases the number of shares outstanding.
Answer: D
Objective: LO3
Difficulty: Moderate
Use the following information to answer the question(s) below.

Bower Corporation purchased a 70% interest in Stage Corporation on June 1, 2013 at a purchase price of $350,000. On June 1, 2013, the book values of Stages assets and liabilities were equal to fair values. On June 1, 2013, Stages stockholders equity consisted of $290,000 of Common Stock and $210,000 of Retained Earnings. All cost-book differentials were attributed to goodwill.

During 2013, Stage earned $120,000 of net income, earned uniformly throughout the year and paid $6,000 of dividends on March 1 and another $6,000 on September 1.

15) Noncontrolling interest share for 2013 is
A) $21,000.
B) $32,400.
C) $36,000.
D) $50,000.
Answer: A
Explanation: A) ($120,000 7/12 30%)
Objective: LO2
Difficulty: Moderate

16) Preacquisition income for 2013 is
A) $50,000.
B) $35,000.
C) $44,000.
D) $36,000.
Answer: A
Explanation: A) ($120,000 5/12)
Objective: LO2
Difficulty: Moderate

17) Anthony Company declared and paid $20,000 of dividends during 2014. The schedule of dividends follows:

Date Dividend Declared & Paid Amount Paid
March 31, 2014 $5,000
June 30, 2014 $5,000
September 30, 2014 $5,000
December 31, 2014 $5,000

Anthony Company was acquired on June 1, 2014 by Google Company. Google acquired 100 percent of Anthony Company. Both companies have a December 31 fiscal year end. What is the amount of preacquisition dividends in 2014?
A) 0
B) $5,000
C) $10,000
D) $15,000
Answer: B
Objective: LO1
Difficulty: Moderate
18) On April 1, 2014, Paramount Company acquires 100% of the outstanding stock of Yester Company on the open market. Paramount and Yester have December 31 fiscal year ends. Under GAAP, a consolidated income statement for the year ending December 31, 2014, will include
A) 100 percent of the revenues and expenses in 2014 of Yester Company after January 1, 2014.
B) no revenues and expenses in 2014 of Yester Company.
C) 80 percent of the revenues and expenses in 2014 of Yester Company.
D) 100 percent of the revenues and expenses in 2014 of Yester Company after April 1, 2014.
Answer: D
Objective: LO1
Difficulty: Moderate

19) The acquisition of treasury stock by a subsidiary from noncontrolling shareholders at a price above book value
A) decreases the parents share of subsidiary book value and decreases the parents ownership percentage.
B) decreases the parents share of subsidiary book value and increases the parents ownership percentage.
C) increases the parents share of subsidiary book value and decreases the parents ownership percentage.
D) increases the parents share of subsidiary book value and increases the parents ownership percentage.
Answer: B
Objective: LO3
Difficulty: Moderate

20) A 15% stock dividend by a subsidiary causes
A) the parent company investment account to decrease.
B) the parent company investment account to remain the same.
C) the parent company investment account to increase.
D) the noncontrolling interest equity to increase.
Answer: B
Objective: LO3
Difficulty: Moderate
8.2 Exercises

1) At December 31, 2013, the stockholders equity of Gost Corporation and its 80%-owned subsidiary, Tree Corporation, are as follows:

Gost Tree
Common stock, $10 par value $20,000 $12,000
Retained earnings 8,000 6,000
Totals $28,000 $18,000

Gosts Investment in Tree is equal to 80 percent of Trees book value. Tree Corporation issued 225 additional shares of common stock directly to Gost on January 1, 2014 at $18 per share.

Required:
1. Compute the balance in Gosts Investment in Tree account on January 1, 2014 after the new investment is recorded.

2. Determine the increase or decrease in goodwill from Gosts new investment in the 225 Tree shares. Use four decimal places for the ownership percentage. Assume the fair values of Trees assets and liabilities are equal to book values.
Answer:
Requirement 1
Cost of investment ($18,000 80%) $14,400
Plus: Purchase of 225 Tree shares at $18 on January 1, 2014 4,050
Investment account balance $18,450

Requirement 2
Trees stockholders equity at January 1, 2014 $18,000
Plus: Additional capital from the shares issued 4,050
Total stockholders equity after issuance of the new shares $22,050
Gosts percentage
(960 + 225)/1425 = 0.8316
Gosts share of Trees equity after issuance $18,337
Gosts share of Trees equity before stock issuance 14,400
Equity acquired in the purchase 3,937
Cost of interest acquired 4,050
Increase goodwill $ 113
Objective: LO3
Difficulty: Moderate
2) At December 31, 2013, the stockholders equity of Godwin Corporation and its 80%-owned subsidiary, Goldberg Corporation, are as follows:

Godwin Goldberg
Common stock, $10 par value $20,000 $12,000
Retained earnings 8,000 6,000
Totals $28,000 $18,000

Godwins Investment in Goldberg is equal to 80 percent of Goldbergs book value. Goldberg Corporation issued 225 additional shares of common stock directly to Godwin on January 1, 2014 at $28 per share.

Required:
1. Compute the balance in Godwins Investment in Goldberg account on January 1, 2014 after the new investment is recorded.

2. Determine the increase or decrease in goodwill from Godwins new investment in the 225 Goldberg shares. Use four decimal places for the ownership percentage. Assume the fair value and book value of Goldbergs assets and liabilities are equal.
Answer: Requirement 1
Cost of investment ($18,000 80%) $14,400
Plus: Purchase of 225 Goldberg shares at $28 on January 1, 2014 6,300
Investment account balance $20,700

Requirement 2
Goldbergs stockholders equity at January 1, 2014 $18,000
Plus: Additional capital from the shares issued 6,300
Total stockholders equity after issuance of the new shares $24,300
Godwins percentage
(960 + 225)/1425 = 0.8316
Godwins share of Goldbergs equity after issuance $20,208
Godwins share of Goldbergs equity before stock issuance 14,400
Equity acquired in the purchase 5,808
Cost of interest acquired 6,300
Increase in goodwill $ 492
Objective: LO3
Difficulty: Moderate

3) At December 31, 2013, the stockholders equity of Pearson Corporation and its 80%-owned subsidiary, Trompeter Corporation, are as follows:

Pearson Trompeter
Common stock, $10 par value $20,000 $12,000
Retained earnings 8,000 6,000
Totals $28,000 $18,000

Pearsons Investment in Trompeter is equal to 80 percent of Trompeters book value. Trompeter Corporation issued 400 additional shares of common stock directly to Pearson on January 1, 2014 at $10 per share.

Required:
1. Compute the balance in Pearsons Investment in Trompeter account on January 1, 2014 after the new investment is recorded.

2. Determine the increase or decrease in goodwill from Pearsons new investment in the 400 Trompeter shares. Use four decimal places for the ownership percentage. Assume the fair value and book value of Trompeters assets and liabilities are equal.
Answer:
Requirement 1
Cost of investment ($18,000 80%) $14,400
Plus: Purchase of 400 Trompeter shares at $10 on January 1, 2014 4,000
Investment account balance $18,400

Requirement 2
Trompeters stockholders equity at January 1, 2014 $18,000
Plus: Additional capital from the shares issued 4,000
Total stockholders equity after issuance of the new shares $22,000
Pearsons percentage
(960 + 400)/1600 = 0.85
Pearsons share of Trompeters equity after issuance $18,700
Pearsons share of Trompeters equity before stock issuance 14,400
Equity acquired in the purchase 4,300
Cost of interest acquired 4,000
Reduce goodwill or identifiable assets (Since no goodwill is
associated with the investment, should reduce overvalued
identifiable assets.) $ 300
Objective: LO3
Difficulty: Moderate

4) On January 1, 2013, Starling Corporation held an 80% interest in Twig Corporation and the investment account balance was $900,000. On January 1, 2013, Twigs total stockholders equity was $1,125,000.

During 2013, Twig uniformly earned $234,000 and paid dividends of $37,500 on April 1 and again on October 1. On August 1, 2013, Starling sold 30% of its investment in Twig for $262,500, thereby reducing its interest in Twig to 56%.

Required: Compute the following using the actual sales date assumption:
1. Gain or loss on sale.

2. Income from Twig for 2013.

3. Noncontrolling interest share for 2013.
Answer: Preliminary computations
Investment balance, January 1 $900,000
Income from Twig ($234,000 7/12 80%) 109,200
Less: April 1 dividends ($37,500 80%) (30,000)
Book value at July 31, 2013 $979,200

Requirement 1
Proceeds from sale $262,500
Book value of interest sold
($979,200 30%) (293,760)
Loss on sale $ (31,260)

Requirement 2
Income from Twig from Jan 1 through July 31
(from above) $109,200
Income from August 1 December 31
($234,000 5/12 56%) 54,600
Income from Twig for 2013 $ 163,800

Requirement 3
Noncontrolling interest share:
Jan 1 to Jul 31 ($234,000 7/12 20%) $27,300
Aug 1 to Dec 31 ($234,000 5/12 44%) 42,900
Noncontrolling interest share $ 70,200
Objective: LO2
Difficulty: Moderate
5) On January 1, 2014, Fly Corporation held a 60% interest in Liptin Corporation. The investment account balance was $2,100,000, consisting of 60% of Liptins $3,500,000 of net assets.

During 2014, Liptin earned $300,000 uniformly and paid dividends of $110,000 on November 1. On October 1, 2014, Fly sold 10% of its investment in Liptin for $364,000, thereby reducing its interest in Liptin to 54%.

Required: Compute the following using the actual sales date assumption:

1. Gain or loss on sale.

2. Income from Liptin for 2014.

3. Noncontrolling interest share for 2014.
Answer: Preliminary computations
Investment balance, January 1 $2,100,000
Income from Liptin ($300,000 9/12 60%) 135,000
Book value at September 30, 2014 $2,235,000

Requirement 1
Proceeds from sale $364,000
Book value of interest sold
($2,235,000 10%) (223,500)
Gain on sale $140,500

Requirement 2
Income from Liptin from Jan 1
through September 30 (from above) $135,000
Income from October 1-December 31
($300,000 3/12 54%) 40,500
Income from Liptin for 2014 $175,500

Requirement 3
Noncontrolling interest share:
Jan 1 to Sep 30 ($300,000 9/12 40%) $90,000
Oct 1 to Dec 31 ($300,000 3/12 46%) 34,500
Noncontrolling interest share $124,500
Objective: LO2
Difficulty: Moderate

6) At December 31, 2015 year-end, Lapwing Corporations investment in Ground Inc. was $200,000 consisting of 80% of Grounds $250,000 stockholders equity on that date. On April 1, 2016, Lapwing sold 20% interest (one-fourth of its holdings) in Ground for $65,000. During 2016, Ground had net income of $75,000(earned uniformly) and on July 1, 2016, Ground paid dividends of $40,000. Lapwing uses the equity method to account for the investment.

Required:
1. What is the gain or loss on sale of the 20% interest?
2. Record the journal entries for Lapwing for the year ending December 31, 2016. Use the actual-sale-date assumption.
Answer:
Requirement 1
Selling price $65,000
Book value of interest sold:
Beginning balance $200,000
Income for 3 months
$75,000 1/4 80% = 15,000
Adjusted book value 215,000
Percentage of interest sold 25%
Book value applied 53,750 (53,750)
Gain on sale $11,250

Requirement 2 Debit Credit
April 1
Investment in Ground 15,000
Income from Ground 15,000

Cash 65,000
Investment in Ground 53,750
Gain from sale of investment in Ground 11,250
July 1
Cash ($40,000 60%) 24,000
Investment in Ground 24,000

December 31
Investment in Ground 33,750
Income from Ground 33,750
($75,000 60% 9/12)
Objective: LO2
Difficulty: Moderate

7) At December 31, 2014 year-end, Arnold Corporations investment in Oakes Inc. was $200,000 consisting of 80% of Oakess $250,000 stockholders equity on that date. On April 1, 2015, Arnold sold 20% interest (one-fourth of its holdings) in Oakes for $65,000. During 2015, Oakes had net income of $75,000 (earned uniformly) and on July 1, 2015, Oakes paid dividends of $40,000. Arnold uses the equity method to account for the investment.

Required:
1. What is the gain or loss on sale of the 20% interest?
2. Record the journal entries for Arnold for the year ending December 31, 2015. Use the beginning-of-the-year-sale-date assumption.
Answer: Requirement 1
Selling price $65,000
Book value of interest sold:
Beginning balance $200,000
Percentage of interest sold 25%
Book value applied 50,000 (50,000)
Gain on sale $15,000

Requirement 2 Debit Credit
April 1
Cash 65,000
Investment in Oakes 50,000
Gain from sale of investment in Oakes 15,000

July 1
Cash ($40,000 60%) 24,000
Investment in Oakes 24,000

December 31
Investment in Oakes 45,000
Income from Oakes 45,000
($75,000 60%)
Objective: LO2
Difficulty: Moderate

8) Candy Corporation paid $240,000 on April 1, 2013 for all of the common stock of Bun Corporation in a business acquisition. On January 1, 2013, Buns stockholders equity was equal to $195,000. Buns first quarter 2013 net income was $10,000 and first quarter 2013 dividends were $5,000. In 2013, preacquisition sales were $32,500 and preacquisition cost of sales was $22,500. (There were no other preacquisition expenses in 2013.) Dividends are paid quarterly on March 31, June 30, September 30 and December 31. Any excess cost over book value acquired is allocated to goodwill.

Additional information:

1. Candy sold equipment with a 5-year remaining useful life to Bun on July 1, 2013 for a gain of $10,000. Salvage value of the equipment is zero and both companies use the straight-line depreciation method.

2. Buns accounts payable balance at December 31 includes $5,000 due to Candy from the sale of equipment.

3. Candy accounts for its investment in Bun using the equity method.

Required:
Complete the working papers to consolidate the financial statements of Candy and Bun Corporations for the year ending December 31, 2013.

Answer:

Objective: LO1, 2
Difficulty: Difficult

9) Olson Corporation paid $62,000 to acquire 100% of Towing Corporations outstanding voting common stock at book value on May 1, 2013. The stockholders equity of Towing on January 1, 2013 consisted of $40,000 Capital Stock and $20,000 Retained Earnings. Towings total dividends for 2013 were $6,000, paid equally on April 1 and October 1. Towings net income was earned uniformly throughout 2013. In 2013, preacquisition sales were $10,000 and preacquisition expenses were cost of sales for $5,000. (There were no other preacquisition expenses in 2013.)

During 2013, Olson made sales of $10,000 to Towing at a gross profit of $3,000. One-half of this merchandise was inventoried by Towing at year-end, and one-half of the 2011 intercompany sales were unpaid at year-end 2013.

Olson sold equipment with a ten-year remaining useful life to Towing at a $2,000 gain on December 31, 2013. The straight-line depreciation method is used by both companies. The equipment has no salvage value.

Financial statements of Olson and Towing Corporations for 2013 appear in the first two columns of the partially completed consolidation working papers.

Required:
Complete the consolidating working papers for Olson Corporation and Subsidiary for the year ending December 31, 2013.

Answer:

Objective: LO1, 2
Difficulty: Difficult

10) Justice Corporation paid $40,000 cash for an 80% interest in the voting common stock of Grace Corporation on July 1, 2014, when Graces stockholders equity consisted of $30,000 of $10 par common stock and $15,000 retained earnings. The excess cost over the book value of the investment was assigned $2,000 to undervalued inventory items that were sold in 2014, with the remaining excess being assigned to goodwill. During the last half of 2014, Grace reported $4,000 net income and declared dividends of $2,000, and Justice reported income from Grace of $1,200.

There were no intercompany sales during the last half of 2014, but during 2015 Justice sold inventory items that cost $8,000 to Grace for $12,000. Half of these inventory items were included in Grace Corporations Inventory at December 31, 2015, with $1,000 unpaid by Grace at December 31, 2015.

On January 5, 2015, Justice sold a plant asset with a book value of $2,500 and a remaining useful life of 5 years to Grace for $4,000. Grace Corporation owned the plant asset at year-end. The plant asset has no salvage value and both companies use the straight-line depreciation method.

Justice Corporation uses the equity method to account for its investment in Grace, and the changes in Justices Investment in Grace account from acquisition until year-end 2015 are as follows:

Investment in Grace, July 1, 2014 $40,000
Income from Grace July 1 December 31, 2014 1,200
Less: Share of dividends received (1,600)
Investment in Grace at December 31, 2014 39,600
Add: Income from Grace for 2015 4,800
Less: Dividends received (3,200)
Investment in Grace at December 31, 2015 $41,200

Required:
Complete the working papers for the year ending December 31, 2015 that are given below.

Answer:
Preliminary Calculations:
Implied fair value of Grace, July 1, 2014 $40,000/0.8 = $50,000
Total stockholders equity of Grace, July 1, 2014 45,000
Excess fair value over book value $5,000

Excess fair value over book value allocated:
Inventory $2,000
Goodwill 3,000
Excess fair value over book value $5,000

Objective: LO1, 2
Difficulty: Difficult

11) On September 1, 2013, Beck Corporation acquired an 80% interest in Johnsen Corporation for $700,000. Johnsens stockholders equity at January 1, 2013 consisted of $200,000 of Common Stock and $600,000 of Retained Earnings. The book values of its assets and liabilities were equal to their respective fair values on this date. All excess purchase cost was attributed to goodwill.

During 2013, Johnsen uniformly earned $78,000 and paid dividends of $9,000 on each of four dates: February 1, June 1, August 1, and December 1.
Required: Compute the following:
1. Implied goodwill associated with Johnsen Corporation based on Becks purchase price on September 1, 2013.

2. Becks income from Johnsen for 2013.

3. Preacquisition income for Beck Corporation and Subsidiary for 2013.

4. Noncontrolling interest share for 2013.

5. What is the balance in Becks Investment in Johnsen account at December 31, 2013?
Answer:
Requirement 1
Cost of investment $700,000
Total stockholders equity, Jan. 1 $800,000
Add: Net income($78,000 8/12) 52,000
Less: Dividends($9,000 3) (27,000)
Total stockholders equity, Sep. 1 $825,000

Implied fair value of investment:
$700,000/0.8 $875,000
Total stockholders equity, Sep. 1 (825,000)
Implied goodwill $50,000

Requirement 2
Income from Johnsen
($78,000 1/3 80%) $20,800

Requirement 3
Preacquisition income
($78,000 8/12) $52,000

Requirement 4
Noncontrolling interest share
($78,000 20% 4/12) $5,200

Requirement 5
Investment at December 31, 2013:
$700,000 + $20,800 $9,000 (80%) $713,600
Objective: LO1, 2
Difficulty: Moderate
12) On September 1, 2013, Nelson Corporation acquired a 90% interest in Corbin Corporation for $900,000. Corbins stockholders equity at January 1, 2013 consisted of $200,000 of Common Stock and $600,000 of Retained Earnings. The book values of its assets and liabilities were equal to their respective fair values on this date. All excess purchase cost was attributed to goodwill.

During 2013, Corbin uniformly earned $98,000 and paid dividends of $19,000 on each of four dates: February 1, June 1, August 1, and December 1.

Required: Compute the following:
1. Implied goodwill associated with Corbin Corporation based on Nelsons purchase price on September 1, 2013.

2. Nelsons income from Corbin for 2013.

3. Preacquisition income for Nelson Corporation and Subsidiary for 2013.

4. Noncontrolling interest share for 2013.

5. What is the balance in Nelsons Investment in Corbin account at December 31, 2013?
Answer: Requirement 1
Cost of investment $900,000
Total stockholders equity, Jan. 1 $800,000
Add: Net income($98,000 8/12) 65,333
Less: Dividends($19,000 3) (57,000)
Total stockholders equity, Sep. 1 808,333

Implied fair value of investment:
$900,000/0.9 1,000,000
Total stockholders equity, Sep. 1 (808,333)
Implied goodwill 191,667

Requirement 2
Income from Corbin
($98,000 4/12 90%) $29,400

Requirement 3
Preacquisition income
($98,000 8/12) $65,333

Requirement 4
Noncontrolling interest share
($98,000 10% 4/12) $3,267

Requirement 5
Investment at December 31, 2013:
$900,000 + $29,400 ($19,000 90%) $912,300
Objective: LO1, 2
Difficulty: Moderate
13) At January 1, 2013, the stockholders equity of Raven Corporation and its 60%-owned subsidiary, Trunk Corporation, are as follows:

Raven Trunk
Common stock, $10 par value $700,000 $400,000
Retained earnings 800,000 50,000
Totals $1,500,000 $450,000

Trunks net income for 2013 was $40,000. No dividends were declared or paid in 2013. Ravens Investment in Trunk account balance on December 31, 2013 was equal to its underlying equity on December 31, 2013. Trunk Corporation issued 10,000 additional shares of common stock directly to Raven on January 1, 2014 at $22 per share.

Required:
1. Compute the balance in Ravens Investment in Trunk account on January 1, 2014 after its purchase of the additional Trunk shares.

2. Determine the increase or decrease in goodwill stemming from Ravens investment in the 10,000 Trunk shares. Assume the fair value and book value of Trunks assets and liabilities are equal.
Answer: Requirement 1
Cost of investment ($450,000 60%) $270,000
Share of Trunks income for 2013
($40,000 60%) 24,000
Investment in Trunk balance at December 31, 2013 294,000
Plus: Purchase of 10,000 Trunk shares at $22 on January 1, 2014 220,000
Investment account balance $514,000

Requirement 2
Trunks stockholders equity at January 1, 2014
($450,000 + $40,000 of 2013 net income) $490,000
Plus: Additional capital from the shares issued 220,000
Total stockholders equity after issuance of the new shares $710,000
Ravens percentage
(24,000 + 10,000)/50,000 = 68%
Ravens share of Trunks equity after issuance $482,800
Ravens share of Trunks equity before stock issuance (294,000)
Equity acquired in the purchase 188,800
Cost of interest acquired 220,000
Increase in Goodwill $31,200
Objective: LO3
Difficulty: Moderate

14) On December 31, 2013, Pat Corporation has the following information available:

Common stock, $10 par $100,000
Additional paid-in capital 60,000
Retained earnings 40,000
Total stockholders equity $200,000

On December 31, 2013, Anne Corporation buys an 80% interest in Pat Corporation for $160,000. On December 31, 2013, the fair value of Pats assets and liabilities are equal to the respective book values. Use four decimal places for the ownership percentage.

Required:
1. On January 1, 2014, Pat Corporation sells 2,000 additional shares of common stock to noncontrolling stockholders at $20 per share. Prepare the journal entry for Anne Corporation on January 1, 2014.

2. On January 1, 2014 Pat Corporation sells 2,000 additional shares of common stock to noncontrolling stockholders at $35 per share. Prepare the journal entry for Anne Corporation on January 1, 2014.

3. On January 1, 2014, Pat Corporation sells 2,000 additional shares of common stock to noncontrolling stockholders at $15 per share. Prepare the journal entry for Anne Corporation on January 1, 2014.
Answer:
Requirement 1
No entry is needed.

Requirement 2
Total stockholders equity at January 1, 2014:
$200,000 + $35(2,000) = $270,000
Annes percent ownership:
8,000/12,000 = 0.6667
Annes share of stockholders equity at January 1, 2014:
0.6667 $270,000 = $180,009
Annes prior share of stockholders equity at January 1, 2014 (Before additional sale):
$200,000 80% = $160,000
Increase in ownership: $180,009 $160,000 = $20,009

Investment 20,009
Additional paid-in capital 20,009

Requirement 3
Total stockholders equity at January 1, 2014:
$200,000 + $15(2,000) = $230,000
Annes percent ownership:
8,000/12,000 = 0.6667
Annes share of stockholders equity at January 1, 2014:
0.6667 $230,000 = $153,341
Annes prior share of stockholders equity at January 1, 2014 (Before additional sale):
$200,000 80% = $160,000
Decrease in ownership: $160,000-$153,341 = $6,659

Additional paid-in capital 6,659
Investment 6,659

Objective: LO3
Difficulty: Moderate
15) On December 31, 2013, Dixie Corporation has the following information available:

Common stock, $10 par $200,000
Additional paid-in capital 60,000
Retained earnings 40,000
Total stockholders equity $300,000

On December 31, 2013, Grimsled Corporation buys an 80% interest in Dixie Corporation for $240,000. On December 31, 2013, the fair values of Dixies assets and liabilities are equal to the respective book values.

Required:
1. On January 1, 2014, Dixie Corporation sells 5,000 additional shares of common stock to noncontrolling stockholders at $20 per share. Prepare the journal entry for Grimsled Corporation on January 1, 2014.

2. On January 1, 2014, Dixie Corporation sells 5,000 additional shares of common stock to noncontrolling stockholders at $35 per share. Prepare the journal entry for Grimsled Corporation on January 1, 2014.

3. On January 1, 2014, Dixie Corporation sells 5,000 additional shares of common stock to noncontrolling stockholders at $10 per share. Prepare the journal entry for Grimsled Corporation on January 1, 2014.
Answer: Requirement 1
Total stockholders equity at January 1, 2014:
$300,000 + $20(5,000) = $400,000
Grimsleds percent ownership:
16,000 / 24,000 = 0.64
Grimsleds share of stockholders equity at January 1, 2014:
0.64 $400,000 = $256,000
Grimsleds prior share of stockholders equity at January 1, 2014 (Before additional sale):
$300,000 80% = $240,000
Increase in ownership: $256,000 $240,000 = $16,000


Investment 16,000
Additional paid-in capital 16,000

Requirement 2
Total stockholders equity at January 1, 2014:
$300,000 + $35(5,000) = $475,000
Grimsleds percent ownership:
0.64
Grimsleds share of stockholders equity at January 1, 2014:
0.64 $475,000 = $304,000
Grimsleds prior share of stockholders equity at January 1, 2014 (Before additional sale):
$300,000 80% = $240,000
Increase in ownership: $304,000 $240,000 = $64,000

Investment 64,000
Additional paid-in capital 64,000

Requirement 3
Total stockholders equity at January 1, 2014:
$300,000 + $10(5,000) = $350,000
Grimsleds percent ownership:
0.64
Grimsleds share of stockholders equity at January 1, 2014:
0.64 $350,000 = $224,000
Grimsleds prior share of stockholders equity at January 1, 2014 (Before additional sale):
$300,000 80% = $240,000
Decrease in ownership: $240,000 $224,000 = $16,000

Additional paid-in capital 16,000
Investment 16,000

Objective: LO3
Difficulty: Moderate

16) On December 31, 2013, Lorna Corporation has the following information available:

Common stock, $10 par $200,000
Additional paid-in capital 60,000
Retained earnings 40,000
Total stockholders equity $300,000

On December 31, 2013, Gerald Corporation buys an 80% interest in Lorna Corporation for $240,000. On December 31, 2013, the fair values of Lornas assets and liabilities are equal to the respective book values.

Required:
1. On January 1, 2014, Lorna Corporation buys 500 shares of common stock from noncontrolling stockholders at $20 per share. Prepare the journal entry for Gerald Corporation on January 1, 2014. Use four decimal places for the ownership percentage.

2. On January 1, 2014, Lorna Corporation buys 500 shares of common stock from noncontrolling stockholders at $30 per share. Prepare the journal entry for Gerald Corporation on January 1, 2014. Use four decimal places for the ownership percentage.

3. On January 1, 2014, Lorna Corporation buys 500 shares of common stock from noncontrolling stockholders at $10 per share. Prepare the journal entry for Gerald Corporation on January 1, 2014. Use four decimal places for the ownership percentage.
Answer:
Requirement 1
Total stockholders equity at January 1, 2014 $300,000
Less: Treasury stock ($20 500) (10,000)
Total stockholders equity at January 1, 2014 $290,000

Geralds percent ownership:
16,000/19,500 = 0.8205
Geralds share of stockholders equity at January 1, 2014:
0.8205 $290,000 = $237,945
Geralds prior share of stockholders equity at January 1, 2014(Before treasury stock):
$300,000 80% = $240,000
Decrease in ownership: $240,000 $237,945 = $2,055

Additional paid-in capital 2,055
Investment in Lorna Corp. 2,055

Requirement 2
Total stockholders equity at January 1, 2014 $300,000
Less: Treasury stock ($30 500) (15,000)
Total stockholders equity at January 1, 2014 $285,000

Geralds percent ownership:
16,000/19,500 = 0.8205
Geralds share of stockholders equity at January 1, 2014:
0.8205 $285,000 = $233,842.50
Geralds prior share of stockholders equity at January 1, 2014 (Before treasury stock):
$300,000 80% = $240,000
Decrease in ownership: $240,000 $233,842.50 = $6,157.50

Additional paid-in capital 6,157.50
Investment in Lorna Corp. 6,157.50

Requirement 3
Total stockholders equity at January 1, 2014 $300,000
Less: Treasury stock ($10 500) (5,000)
Total stockholders equity at January 1, 2014 $295,000

Geralds percent ownership:
16,000/19,500 = 0.8205
Geralds share of stockholders equity at January 1, 2014:
0.8205 $295,000 = $242,047.50
Geralds prior share of stockholders equity at January 1, 2014 (Before treasury stock):
$300,000 80% = $240,000
Increase in ownership: $242,047.50 $240,000 = $2,047.50
-
Investment in Lorna Corp. 2,047.50
Additional paid-in capital 2,047.50
-
Objective: LO3
Difficulty: Moderate

17) On December 31, 2013, Maria Corporation has the following stockholders equity:

Common stock, $10 par $100,000
Additional paid-in capital 20,000
Retained earnings 80,000
Total stockholders equity $200,000

On January 1, 2014, Maria Corporation declared and issued a 10% stock dividend when the market price per share was $50.

On January 2, 2014, James Corporation purchased an 80% interest in Maria Corporation for $160,000 from the open market. On January 2, 2014, the fair value of Marias individual assets and liabilities was equal to book value.

Required:
1. Prepare the journal entry(ies) for Maria Corporation on January 1, 2014.

2. Prepare the journal entry(ies) for James Corporation on January 2, 2014.

3. Prepare the elimination entry(ies) for consolidating work papers on January 2, 2014.

4. Prepare the elimination entry(ies) for consolidating work papers on January 2, 2014 if the 10% stock dividend is not declared and issued on January 1, 2014.
Answer: Requirement 1
Retained earnings (10,000 $50 10%) 50,000
Common stock (10,000 $10 10% 10,000
Additional paid-in capital 40,000

Requirement 2
Investment 160,000
Cash 160,000

Requirement 3
Common stock 110,000
Additional paid-in capital 60,000
Retained earnings 30,000
Investment 160,000
Noncontrolling interest 40,000

Requirement 4
Common stock 100,000
Additional paid-in capital 20,000
Retained earnings 80,000
Investment 160,000
Noncontrolling interest 40,000
Objective: LO3
Difficulty: Moderate

18) On December 31, 2013, Potter Corporation has the following stockholders equity:

Common stock, $10 par $200,000
Retained earnings 100,000
Total stockholders equity $300,000

On January 1, 2014, Potter Corporation declared and issued a 10% stock dividend when the market price per share was $50.

On January 2, 2014, Corrao Corporation purchased an 80% interest in Potter Corporation for $250,000 on the open market. On January 2, 2014, the fair value of Potters individual assets and liabilities was equal to book value. Any excess cost over book value is attributed to goodwill.

Required:
1. Prepare the journal entry(ies) for Potter Corporation on January 1, 2014.

2. Prepare the journal entry(ies) for Corrao Corporation on January 2, 2014.

3. Prepare the elimination entry(ies) for consolidating work papers on January 2, 2014.

4. Prepare the elimination entry(ies) for consolidating work papers on January 2, 2014 if the 10% stock dividend is not declared and issued on January 1, 2014.
Answer: Requirement 1
Retained earnings (20,000 $50 10%) 100,000
Common stock (20,000 $10 10%) 20,000
Additional paid-in capital 80,000

Requirement 2
Investment 250,000
Cash 250,000

Requirement 3
Common stock 220,000
Additional paid-in capital 80,000
Goodwill 12,500
Investment 250,000
Noncontrolling interest 62,500

Requirement 4
Common stock 200,000
Retained earnings 100,000
Goodwill 12,500
Investment 250,000
Noncontrolling interest 62,500
Goodwill: $300,000 = $12,500
Objective: LO3
Difficulty: Moderate

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