Advanced Accounting 9th Edition, Fischer, Taylor & Cheng Test Bank

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Advanced Accounting 9th Edition, Fischer, Taylor & Cheng Test Bank

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Test Bank Advanced Accounting 9th Fischer, Taylor & Cheng

Chapter 1 Business Combinations: Americas Most Popular Business Activity, Bringing an End to the Controversy

MULTIPLE CHOICE

1. An economic advantage of a business combination includes
a. Utilizing duplicative assets.
b. Creating separate management teams.
c. Coordinated marketing campaigns.
d. Horizontally combining levels within the marketing chain.

2. A tax advantage of business combination can occur when the existing owner of a company sells out and receives:
a. cash to defer the taxable gain as a tax-free reorganization.
b. stock to defer the taxable gain as a tax-free reorganization.
c. cash to create a taxable gain.
d. stock to create a taxable gain.

3. A controlling interest in a company implies that the parent company
a. owns all of the subsidiarys stock.
b. has influence over a majority of the subsidiarys assets.
c. has paid cash for a majority of the subsidiarys stock.
d. has transferred common stock for a majority of the subsidiarys outstanding bonds and debentures.

4. Which of the following is a potential abuse that may arise when a business combination is accounted for as a pooling of interests?
a. Assets of the buyer may be overvalued when the price paid by the investor is allocated among specific assets.
b. Earnings of the pooled entity may be increased because of the combination only and not as a result of efficient operations.
c. Liabilities may be undervalued when the price paid by the investor is allocated to specific liabilities.
d. An undue amount of cost may be assigned to goodwill, thus potentially allowing an understatement of pooled earnings.

5. Company B acquired the assets (net of liabilities) of Company S in exchange for cash. The acquisition price exceeds the fair value of the net assets acquired. How should Company B determine the amounts to be reported for the plant and equipment, and for long-term debt of the acquired Company S?

Plant and Equipment Long-Term Debt
a. Fair value Ss carrying amount
b. Fair value Fair value
c. Ss carrying amount Fair value
d. Ss carrying amount Ss carrying amount

6. Publics Company acquired the net assets of Citizen Company during 20X5.
The purchase price was $800,000. On the date of the transaction, Citizen had no long-term investments in marketable equity securities and $400,000 in liabilities. The fair value of Citizen assets on the acquisition date was as follows:

Current assets $ 800,000
Noncurrent assets. 600,000
$1,400,000
==========

How should Publics account for the $200,000 difference between the fair value of the net assets acquired, $1,000,000, and the cost, $800,000?
a. Retained earnings should be reduced by $200,000.
b. Current assets should be recorded at $685,000 and noncurrent assets recorded at $515,000.
c. The noncurrent assets should be recorded at $400,000.
d. A deferred credit of $200,000 should be set up and subsequently amortized to future net income over a period not to exceed 40 years.

7. ABC Co. is acquiring XYZ Inc. XYZ has the following Intangible assets: Patent on a product that is deemed to have no useful life $10,000. Customer List with an observable fair value of $50,000. A 5-year operating lease with favorable terms with a discounted present value of $8,000. Identifiable R & D of $100,000.

ABC will record how much for acquired Intangible Assets from the
Purchase of XYZ Inc?
a. $168,000
b. $58,000
c. $158,000
d. $150,000

8. Vibe Company purchased the net assets of Atlantic Company in a business combination accounted for as a purchase. As a result, goodwill was recorded. For tax purposes, this combination was considered to be a tax-free merger. Included in the assets is a building with an appraised value of $210,000 on the date of the business combination. This asset had a net book value of $70,000, based on the use of accelerated depreciation for accounting purposes. The building had an adjusted tax basis to Atlantic (and to Vibe as a result of the merger) of $120,000. Assuming a 36% income tax rate, at what amount should Vibe record this building on its books after the purchase?

a. $120,000
b. $134,400
c. $140,000
d. $210,000

9. Goodwill represents the excess cost of an acquisition over the
a. sum of the fair values assigned to intangible assets less liabilities assumed.
b. sum of the fair values assigned to tangible and intangible assets acquired less liabilities assumed.
c. sum of the fair values assigned to intangibles acquired less liabilities assumed.
d. book value of an acquired company.

10. When purchasing a company occurs, FASB recommends disclosing all of the following EXCEPT:
a. goodwill related to each reporting segment.
b. contingent payment agreements, options, or commitments included in the purchase agreement, including accounting methods to be followed.
c. results of operations for the current period if both companies had remained separate.
d. amount of in-process R&D purchased and written-off during the period.

11. Cozzi Company is being purchased and has the following balance sheet as of the purchase date:

Current assets. $200,000 Liabilities. $ 90,000
Fixed assets 180,000 Equity 290,000
Total.. $380,000 Total.. $380,000
======== =======

The price paid for Cozzis net assets (the purchaser assumes the liabilities) is $500,000. The fixed assets have a fair value of
$220,000, and the liabilities have a fair value of $110,000. The amount
of goodwill to be recorded in the purchase is .
a. $0
b. $50,000
c. $70,000
d. $90,000

12. Separately identified intangible assets are accounted for by amortizing:
a. exclusively by using impairment testing.
b. based upon a pattern that reflects the benefits conveyed by the asset.
c. over the useful economic life less residual value using only the straight-line method.
d. amortizing over a period not to exceed a maximum of 40 years.

13. Acme Co. is preparing a pro-forma set of financial statements after an acquisition of Coyote Co. The purchase price is less than the fair value of the assets acquired. However, the purchase price is greater than net book value of the acquired company.
a. Acmes goodwill will decrease over time.
b. Acmes amortization of intangible assets will increase over time.
c. Depreciation expense will be greater than Coyote Companys expense.
d. Coyotes loss on the sale of the assets will create a net loss carryforward.

14. While performing a goodwill impairment test, the company had the following information:
Estimated implied fair value of reporting unit
(without goodwill) $420,000
Existing net book value of reporting unit
(without goodwill) $380,000
Book value of goodwill $60,000

Based upon this information the proper conclusion is:
a. The existing net book value plus goodwill is in excess of the implied fair value, therefore, no adjustment is required.
b. The existing net book value plus goodwill is less than the implied fair value plus goodwill, therefore, no adjustment is required.
c. The existing net book value plus goodwill is in excess of the implied fair value, therefore, goodwill needs to be decreased.
d. The existing net book value is less than the estimated implied fair value; therefore, goodwill needs to be decreased.

15. Balter Inc. acquired Jersey Company on January 1, 20X5. When the purchase occurred Jersey Company had the following information related to fixed assets:
Land $ 80,000
Building 200,000
Accumulated Depreciation (100,000)
Equipment 100,000
Accumulated Depreciation (50,000)

The building has a 10-year remaining useful life and the equipment has a 5-year remaining useful life. The fair value of the assets on that date were:
Land $100,000
Building 130,000
Equipment 75,000

What is the 20X5 depreciation expense Balter will record related to purchasing Jersey Company?

a. $8,000
b. $15,000
c. $28,000
d. $30,000

16. In performing the 20X7 impairment test for goodwill, the company had the following 20X6 and 20X7 information is available.

20X6 20X7 Implied fair value of reporting unit $350,000 $400,000
Net book value of reporting unit (including goodwill) $380,000 $360,000

Based upon this information what are the 20X6 and 20X7 adjustment to goodwill, if any?
a. 20X6 $0
20X7 $40,000 decrease
b. 20X6 $30,000 increase
20X7 $40,000 decrease
c. 20X6 $30,000 decrease
20X7 $40,000 decrease
d. 20X6 $30,000 decrease
20X7 $0

17. Couples Corporation purchases Players Corporation. The fair value of the net assets of Players is $750,000 and the fair value of priority accounts (including a deduction for depreciation) is $600,000. Which of the following purchase prices would require using allocation
procedures?
a. $500,000
b. $600,000
c. $700,000
d. $800,000

18. ACME Co. paid $110,000 for the net assets of Comb Corp. At the time of the acquisition the following information was available related to

Combs balance sheet:
Book Value Fair Value
Current Assets $50,000 $ 50,000
Building 80,000 100,000
Equipment 40,000 50,000
Liabilities 30,000 30,000

What is the amount recorded by ACME for the Building?
a. $40,000
b. $60,000
c. $80,000
d. $100,000

19. Which of the following business combination expenses would NOT qualify as a direct acquisition expense for a purchase?
a. Fees for purchase audit
b. Outside legal fees
c. Stock issuance fees
d. All are direct acquisition expenses.

20. Polk issues common stock to acquire all the assets of the Sam Company on January 1, 20X5. There is a contingent share agreement, which states that if the income of the Sam Division exceeds a certain level during 20X5 and 20X6, additional shares will be issued on January 1, 20X7. The impact of issuing the additional shares is to
a. increase the price assigned to fixed assets.
b. have no effect on asset values, but to reassign the amounts assigned to equity accounts.
c. reduce retained earnings.
d. record additional goodwill.

Chapter 2 Consolidated Statements: Date of Acquisition
2. Consolidated financial statements are designed to provide:
a. informative information to all shareholders.
b. the results of operations, cash flow, and the balance sheet in an understandable and informative manor for creditors.
c. the results of operations, cash flow, and the balance sheet as ifthere was a single entity.
d. subsidiary information for the subsidiary shareholders.

3. The FASB Exposure Draft assumes consolidation financial statements are appropriate even without a majority of controlling share if which of the following exists:
a. the subsidiary has the right to appoint members of the parent companys board of directors.
b. the parent company has the right to appoint a majority of the members of the subsidiarys board of directors through a large minority voting interest.
c. the subsidiary owns a large minority voting interest in the parent company.
d. The parent company has an ability to assume the role of general partner in a limited partnership with the approval of the subsidiarys board of directors.

4. The SEC and FASB has recommended that a parent corporation should consolidate the financial statements of the subsidiary into its financial statements when it exercises control over the subsidiary, even without majority ownership. In which of the following situations would control NOT be evident?
a. Access to subsidiary assets is available to all shareholders.
b. Dividend policy is set by the parent.
c. The subsidiary does not determine compensation for its main employees.
d. Substantially all cash flows of the subsidiary flow to the controlling shareholders.

5. The goal of the consolidation process is for:
a. asset acquisitions and stock acquisitions to result in the same balance sheet.
b. goodwill to appear on the balance sheet of the consolidated entity.
c. the assets of the noncontrolling interest to be predominately displayed on the balance sheet.
d. the investment in the subsidiary to be properly valued on the consolidated balance sheet.

6. A subsidiary was acquired for cash in a business combination on December 31, 20X1. The purchase price exceeded the fair value of identifiable net assets. The acquired company owned equipment with a fair value in excess of the book value as of the date of the combination. A consolidated balance sheet prepared on December 31, 20X1, would
a. report the excess of the fair value over the book value of the equipment as part of goodwill.
b. report the excess of the fair value over the book value of the equipment as part of the plant and equipment account.
c. reduce retained earnings for the excess of the fair value of the equipment over its book value.
d. make no adjustment for the excess of the fair value of the equipment over book value. Instead, it is an adjustment to expense over the life of the equipment.

7. Parr Company purchased 100% of the voting common stock of Super Company for $2,000,000. There are no liabilities. The following book and fair values are available:

Book Value Fair Value
Current assets. $300,000 $600,000
Land and building. 600,000 900,000
Machinery 500,000 600,000
Goodwill. 100,000 ?

The machinery will appear on the consolidated balance sheet at .
a. $560,000
b. $860,000
c. $600,000
d. $900,000

8. Pagach Company purchased 100% of the voting common stock of Rage Company for $1,800,000. The following book and fair values are available:

Book Value Fair Value
Current assets. $ 150,000 $300,000
Land and building. 280,000 280,000
Machinery 400,000 700,000
Bonds payable.. (300,000) (250,000)
Goodwill. 150,000 ?

The bonds payable will appear on the consolidated balance sheet
a. at $300,000 (with no premium or discount shown).
b. at $300,000 less a discount of $50,000.
c. at $0; assets are recorded net of liabilities.
d. under a net amount of $250,000 since it is a bargain purchase.

9. The investment in a subsidiary recorded as a purchase by the parent should be recorded on the parents books at
a. underlying book value of the subsidiarys net assets.
b. the fair value of the subsidiarys net identifiable assets.
c. the fair value of the consideration given.
d. the fair value of the consideration given plus an estimated value for goodwill.

10. Which of the following costs of a business combination are included in the value charged to paid-in-capital in excess of par?
a. direct and indirect acquisition costs b. direct acquisition costs
c. direct acquisition costs and stock issue costs if stock is issued as consideration
d. stock issue costs if stock is issued as consideration

11. When it purchased Sutton, Inc. on January 1, 20X1, Pavin Corporation issued 500,000 shares of its $5 par voting common stock. On that date the fair value of those shares totaled $4,200,000. Related to the acquisition, Pavin had payments to the attorneys and accountants of $200,000, and stock issuance fees of $100,000. Immediately prior to the purchase, the equity sections of the two firms appeared as follows:

Pavin Sutton
Common stock $ 4,000,000 $ 700,000
Paid-in capital in excess of par. 7,500,000 900,000
Retained earnings. 5,500,000 500,000
Total. $17,000,000 $2,100,000
=========== ==========

Immediately after the purchase, the consolidated balance sheet should report paid-in capital in excess of par of

a. $8,900,000
b. $9,100,000
c. $9,200,000
d. $9,300,000
12. Judd Company issued nonvoting preferred stock with a fair value of $1,500,000 in exchange for all the outstanding common stock of the Bath Corporation. On the date of the exchange, Bath had tangible net assets with a book value of $900,000 and a fair value of $1,400,000. In addition, Judd issued preferred stock valued at $100,000 to an individual as a finders fee for arranging the transaction. As a result of these transactions, Judd should report an increase in net assets of .
a. $900,000
b. $1,400,000
c. $1,500,000
d. $1,600,000
13. In an 80% purchase accounted for as a tax-free exchange, the excess of cost over book value is $200,000. The equipments book value for tax purposes is $100,000 and its fair value is $150,000. All other identifiable assets and liabilities have fair values equal to their book values. The tax rate is 30%. What is the total deferred tax liability that should be recognized on the consolidated balance sheet on the date of purchase?
a. $12,000
b. $60,000
c. $72,857
d. $85,714

14. On June 30, 20X1, Naeder Corporation purchased for cash at $10 per share all 100,000 shares of the outstanding common stock of the Tedd Company. The total fair value of all identifiable net assets of Tedd was $1,400,000. The only noncurrent asset is property with a fair value of $350,000. The consolidated balance sheet of Naeder and its wholly owned subsidiary on June 30, 20X1, should reflect
a. an extraordinary gain of $50,000.
b. goodwill of $50,000.
c. an extraordinary gain of $350,000.
d. goodwill of $350,000.
Pinehollow-Stonebriar Scenario Pinehollow acquired all of the outstanding stock of Stonebriar by issuing 100,000 shares of its $1 par value stock. The shares have a fair value of $15 per share. Pinehollow also paid $25,000 in direct acquisition costs. Prior to the transaction, the have companies has the following balance sheets:

Assets
Pinehollow Stonebriar
Cash.. $ 150,000 $ 50,000
Accounts receivable.. 500,000 350,000
Inventory 900,000 600,000
Property, plant, and equipment(net). 1,850,000 900,000
Total assets $3,400,000 $1,900,000
========== ==========

Liabilities and Stockholders Equity
Current liabilities.. $ 300,000 $ 100,000
Bonds payable.. 1,000,000 600,000
Common stock ($1 par) 300,000 100,000
Paid-in capital in excess of par. 800,000 900,000
Retained earnings. 1,000,000 200,000
Total liabilities and equity.. $3,400,000 $1,900,000
========== ==========

The fair values of Stonebriars inventory and plant, property and equipment are $700,000 and $1,000,000, respectively.

15. Refer to the Pinehollow-Stonebriar Scenario. The journal entry to record the purchase of Stonebriar would include a
a. credit to common stock for $1,500,000.
b. credit to additional paid-in capital for $1,100,000.
c. credit to cash for $1,525,000.
d. debit to investment for $1,525,000.

16. Goodwill associated with the purchase of Stonebriar is .
a. $100,000
b. $125,000
c. $300,000
d. $325,000
17. On April 1, 20X1, Paape Company paid $950,000 for all the issued and outstanding stock of Simon Corporation in a transaction properly recorded as a purchase. The recorded assets and liabilities of the Prime Corporation on April 1, 20X1, follow:

Cash $ 80,000
Inventory. 240,000
Property and equipment
(net of accumulated depreciation
of $320,000). 480,000
Liabilities.. (180,000)

On April 1, 20X1, it was determined that the inventory of Paape had a fair value of $190,000, and the property and equipment (net) had a fair value of $560,000. What is the amount of goodwill resulting from the business combination?

a. $0
b. $120,000
c. $300,000
d. $230,000

18. Paro Company purchased 80% of the voting common stock of Sabon Company for $900,000. There are no liabilities. The following book and fair values are available:

Book Value Fair Value
Current assets. $100,000 $200,000
Land and building. 200,000 200,000
Machinery 300,000 600,000
Goodwill. 100,000 ?

Using the parent company concept, the machinery will appear on the consolidated balance sheet at .

a. $600,000
b. $540,000
c. $480,000
d. $300,000

19. When a company purchases another company that has existing goodwill and the transaction is accounted for as a stock acquisition, the goodwill should be treated in the following manner.
a. Goodwill on the books of an acquired company should be disregarded.
b. Goodwill is recorded prior to recording fixed assets.
c. Goodwill is not recorded until all assets are stated at full fair value.
d. Goodwill is treated consistent with other tangible assets.

20. The SEC requires the use of push-down accounting in some specific situations. Push-down accounting results in:
a. goodwill be recorded in the parent company separate accounts.
b. eliminating subsidiary retained earnings and paid-in capital in excess of par.
c. reflecting fair values on the subsidiarys separate accounts.
d. changing the consolidation worksheet procedure because no adjustment is necessary to eliminate the investment in subsidiary account.

Chapter 3 Consolidated Statements: Subsequent to Acquisition
1. Pedro purchased 100% of the common stock of the Sanburn Company on January 1, 20X1, for $500,000. On that date, the stockholders equity of Sanburn Company was $380,000. On the purchase date, inventory of Sanburn Company, which was sold during 20X1, was understated by $20,000. Any remaining excess of cost over book value is attributable to patent with
a 20-year life. The reported income and dividends paid by Sanburn Company were as follows:

20X1 20X2 Net income.. $80,000 $90,000
Dividends paid. 10,000 10,000

Using the simple equity method, which of the following amounts are correct?

Investment Income Investment Account Balance
20X1 December 31, 20X1
a. $80,000 $570,000
b. $70,000 $570,000
c. $70,000 $550,000
d. $80,000 $550,000
2. Pedro purchased 100% of the common stock of the Sanburn Company on January 1, 20X1, for $500,000. On that date, the stockholders equity of Sanburn Company was $380,000. On the purchase date, inventory of Sanburn Company, which was sold during 20X1, was understated by $20,000. Any remaining excess of cost over book value is attributable to patent with a 20-year life. The reported income and dividends paid by Sanburn Company were as follows:

20X1 20X2 Net income.. $80,000 $90,000
Dividends paid. 10,000 10,000

Using the sophisticated (full) equity method, which of the following amounts are correct?

Investment Income Investment Account Balance
20X1 December 31, 20X1
a. $55,000 $555,000
b. $55,000 $545,000
c. $75,000 $565,000
d. $80,000 $570,000

3. Pedro purchased 100% of the common stock of the Sanburn Company on January 1, 20X1, for $500,000. On that date, the stockholders equity of Sanburn Company was $380,000. On the purchase date, inventory of Sanburn Company, which was sold during 20X1, was understated by $20,000. Any remaining excess of cost over book value is attributable to patent with
a 20-year life. The reported income and dividends paid by Sanburn Company were as follows:

20X1 20X2 Net income.. $80,000 $90,000
Dividends paid. 10,000 10,000

Using the cost method, which of the following amounts are correct?

Investment Income Investment Account Balance
20X1 December 31, 20X1
a. $10,000 $500,000
b. $10,000 $570,000
c. $0 $570,000
d. $80,000 $500,000
4. What is the effect if an unconsolidated subsidiary is accounted for by the equity method but consolidated statements are being prepared for the parent company and other subsidiaries?
a. All of the unconsolidated subsidiarys accounts will be included individually in the consolidated statements.
b. The consolidated retained earnings will not reflect the earnings of the unconsolidated subsidiary.
c. The consolidated retained earnings will be the same as if the subsidiary had been included in the consolidation.
d. Dividend revenue from the unconsolidated subsidiary will be reflected in consolidated net income.

5. On January 1, 20X1, Promo, Inc. purchased 70% of Set Corporation for $469,000. On that date the book value of the net assets of Set totaled $500,000. Based on the appraisal done at the time of the purchase, all assets and liabilities had book values equal to their fair values except as follows:

Book Value Fair Value
Inventory $100,000 $120,000
Land . 75,000 85,000
Equipment (useful life 4 years).. 125,000 165,000

The $70,000 of excess of cost over book value was allocated to a patent with a 10-year useful life. During 20X1 Promo reported net income of $200,000 and Set had net income of $100,000.
What is consolidated net income if Promo includes in its net income, income from Set using the sophisticated equity method?

a. $42,000
b. $70,000
c. $200,000
d. $270,000

6. On January 1, 20X1, Promo, Inc. purchased 70% of Set Corporation for $469,000. On that date the book value of the net assets of Set totaled $500,000. Based on the appraisal done at the time of the purchase, all assets and liabilities had book values equal to their fair values except as follows:
During 20X1 Promo reported net income of $200,000 and Set had net income of $100,000.

What income from subsidiary did Promo include in its net income if Promo uses the simple equity method?

a. $33,000
b. $42,000
c. $70,000
d. $100,000

7. On January 1, 20X1, Promo, Inc. purchased 70% of Set Corporation for $469,000. On that date the book value of the net assets of Set totaled $500,000. Based on the appraisal done at the time of the purchase, all assets and liabilities had book values equal to their fair values except
as follows:

Book Value Fair Value
Inventory $100,000 $120,000
Land . 75,000 85,000
Equipment (useful life 4 years).. 125,000 165,000

The $70,000 of excess of cost over book value was allocated to a patent with a 10-year useful life. During 20X1 Promo reported net income of $200,000 and Set had net income of $100,000.
What income from subsidiary did Promo include in its net income if Promo uses the sophisticated equity method?
a. $33,000
b. $42,000
c. $70,000
d. $100,000

8. On January 1, 20X1, Rabb Corp. purchased 80% of Sunny Corp.s $10 par common stock for $975,000. On this date, the carrying amount of Sunnys net assets was $1,000,000. The fair values of Sunnys identifiable assets and liabilities were the same as their carrying amounts except for plant assets (net), which were $100,000 in excess of the carrying amount.
In the January 1, 20X1, consolidated balance sheet, goodwill should be reported at .
a. $0
b. $75,000
c. $95,000
d. $175,000
9. Which of the following statements applying to the use of the equity method versus the cost method is true?
a. The equity method is required when one firm owns 20% or more of the common stock of another firm.
b. If no dividends were paid by the subsidiary, the investment account would have the same balance under both methods.
c. The method used has no significance to consolidated statements.
d. An advantage of the equity method is that no amortization of excess adjustments needs to be made on the consolidated work sheet.
10. In consolidated financial statements it is expected that:
a. Dividends declared equals the sum of the total parent companys declared dividends and the total subsidiarys declared dividends.
b. Retained Earnings equals the sum of the controlling interests separate retained earnings and the noncontrolling interests separate retained earnings.
c. Common Stock equals the sum of the parent companys outstanding shares and the subsidiarys outstanding shares.
d. Net Income equals the sum of the income distributed to the controlling interest and the income distributed to the noncontrolling interest.

11. How is the portion of consolidated earnings to be assigned to noncontrolling interest in consolidated financial statements determined?
a. The net income of the parent is subtracted from the subsidiarys net income to determine the noncontrolling interest.
b. The subsidiarys net income is extended to the noncontrolling interest.
c. The amount of the subsidiarys earnings recognized for consolidation purposes is multiplied by the noncontrollings percentage ownership.
d. The amount of consolidated earnings determined on the consolidated working papers is multiplied by the noncontrolling interest percentage at the balance-sheet date.
12. Patti Corp. has several subsidiaries (Aeta, Beta, and Gaeta) that are included in its consolidated financial statements. In its 12/31/X1 separate balance sheet, Patti had the following intercompany balances before eliminations:
Debit Credit
Current Receivable due from Aeta.. $ 40,000
Noncurrent Receivable due from Beta 100,000
Cash Advance to Beta 26,000
Cash Advance from Gaeta 75,000
Intercompany Payable to Gaeta 40,000

In its 12/31/X1 consolidated balance sheet, what amount should Patti report as intercompany receivables?
a. $166,000
b. $51,000
c. $26,000
d. $0

Pawnee Company Scenario

Balance sheet information for Pawnee Company and its 90% owned subsidiary, Sioux Corporation, at December 31, 20X1 is summarized as follows:

Pawnee Sioux Current assets-net $ 200,000 $ 50,000
Property, plant, and equipment-net.. 1,000,000 600,000
Investment in Sioux.. 558,000
$1,758,000 $650,000
========== ========

Current liabilities.. $ 100,000 $ 30,000
Capital stock.. 800,000 400,000
Retained earnings. 858,000 220,000
$1,758,000 $650,000
========== ========

Pawnee acquired its interest in Sioux for cash at book value several years ago when Siouxs assets and liabilities were equal to their fair values.

13. Refer to the Pawnee Company Scenario. Consolidated total assets of Pawnee and Sioux at December 31, 20X1 will be .
a. $1,785,000
b. $1,850,000
c. $2,343,000
d. $2,408,000
14. Refer to the Pawnee Company Scenario. The consolidated balance sheet of Pawnee and Sioux at December 31, 20X1 will show
a. Investment in Sioux, $558,000.
b. Capital stock, $800,000.
c. Retained earnings, $1,078,000.
d. Noncontrolling interest, $65,000.
15. Pahl Corporation owns a 60% interest in Sauer Corporation, acquired at book value equal to fair value at the beginning of 20X1. On December 20, 20X1 Sauer declares dividends of $80,000, and the dividends remain unpaid at year end. Pahl has not recorded the dividends receivable at December 31. A consolidated working paper entry is necessary to
a. Enter the $80,000 dividends receivable in the consolidated balance sheet.
b. Enter $48,000 dividends receivable in the consolidated balance sheet.
c. Reduce the dividend payable account to $32,000 in the consolidated balance sheet.
d. Eliminate the dividend payable account in the consolidated balance sheet.
16. If the investment in subsidiary account is increased or decreased by the amount determined by the following calculation:

Parent ownership percentage x (current balance in the subsidiarys retained earnings minus the subsidiarys retained earnings balance on the date of acquisition) the investment account is being converted from
a. cost to simple equity.
b. cost to sophisticated equity.
c. simple equity to sophisticated equity.
d. simple equity to cost.

17. On January 1, 20X1, Payne Corp. purchased 70% of Shayne Corp.s $10 par common stock for $900,000. On this date, the carrying amount of Shaynes net assets was $1,000,000. The fair values of Shaynes identifiable assets and liabilities were the same as their carrying amounts except for plant assets (net), which were $200,000 in excess of the carrying amount. For the year ended December 31, 20X1, Shayne had net income of $150,000 and paid cash dividends totaling $90,000. Excess attributable to plant assets is amortized over 10 years.

In the December 31, 20X1, consolidated balance sheet, noncontrolling interest should be reported at .

a. $282,500
b. $300,500
c. $318,000
d. $345,000
18. Alpha purchased an 80% interest in Beta on June 30, 20X1. Both Alphas and Betas reporting periods end December 31. Which of the following represents the controlling interest in consolidated net income for 20X1?
a. 100% of Alphas July 1-December 31 income plus 80% of Betas July 1-December 31 income
b. 100% of Alphas July 1-December 31 income plus 100% of Betas July 1-December 31 income
c. 100% of Alphas January 1-December 31 income plus 80% of Betas July 1-December 31 income
d. 100% of Alphas January 1-December 31 income plus 80% of Betas January 1-December 31 income
19. In a mid-year purchase when the subsidiarys books are not closed until the end of the year, the purchased income account contains the parents share of the
a. subsidiarys income earned for the entire year.
b. subsidiarys income earned from the beginning of the year to the date of acquisition.
c. subsidiarys income earned from the date of acquisition to the end of the year.
d. Consolidated Net Income.
20. On January 1, 20X1, Piston, Inc. acquired Spur Corp. While recording the acquisition Piston established a deferred tax liability. It is most likely that this account was created because
a. the transaction was a tax-free exchange to Piston.
b. Piston had not paid all of the income taxes due the government when acquiring Spur.
c. the transaction was a tax-free exchange to Spur.
d. Spur had not paid all of the income taxes due the government prior to the acquisition by Piston.

Chapter 4 Intercompany Transactions: Merchandise, Plant Assets, and Notes
1. Schiff Company owns 100% of the outstanding common stock of the Viel Company. During 20X1, Schiff sold merchandise to Viel that Viel, inturn, sold to unrelated firms. There were no such goods in Viels ending inventory. However, some of the intercompany purchases from Schiff had not yet been paid. Which of the following amounts will be incorrect in the consolidated statements if no adjustments are made?
a. inventory, accounts payable, net income
b. inventory, sales, cost of goods sold, accounts receivable
c. sales, cost of goods sold, accounts receivable, accounts payable.
d. accounts receivable, accounts payable
2. The material sale of inventory items by a parent company to an affiliated company
a. enters the consolidated revenue computation only if the transfer was the result of arms length bargaining.
b. affects consolidated net income under a periodic inventory system but not under a perpetual inventory system.
c. does not result in consolidated income until the merchandise is sold to outside entities.
d. does not require a working paper adjustment if the merchandise was transferred at cost.
3. Williard Corporation regularly sells inventory items to its subsidiary, Petty, Inc. If unrealized profits in Pettys 20X1 year-end inventory exceed the unrealized profits in its 20X2 year-end inventory, combined
a. cost of sales will be less than consolidated cost of sales in 20X2.
b. gross profit will be greater than consolidated gross profit in 20X2.
c. sales will be less than consolidated sales in 20X2.
d. cost of sales will be greater than consolidated cost of sales in 20X2.
4. Sally Corporation, an 80%-owned subsidiary of Reynolds Company, buys half of its raw materials from Reynolds. The transfer price is exactly the same price as Sally pays to buy identical raw materials from outside suppliers and the same price as Reynolds sells the materials to unrelated customers. In preparing consolidated statements for Reynolds Company and Subsidiary
a. the intercompany transactions can be ignored because the transfer price represents arms length bargaining.
b. any unrealized profit from intercompany sales remaining in Reynolds ending inventory must be offset against the unrealized profit in Reynolds beginning inventory.
c. any unrealized profit on the intercompany transactions in Sallys ending inventory is eliminated in its entirety.
d. eighty percent of any unrealized profit on the intercompany transactions in Sallys ending inventory is eliminated.
5. Cattle Company sold inventory with a cost of $40,000 to its 90%-owned subsidiary, Range Corp., for $100,000 in 20X1. Range resold $75,000 of this inventory for $100,000 in 20X1. The amount of inventory reported on the consolidated financial statements at the end of 20X1 is .
a. $10,000
b. $18,000
c. $21,000
d. $30,000
6. Diller owns 80% of Lake Company common stock. During October 20X7, Lake sold merchandise to Diller for $300,000. On December 31, 20X7, one-half of this merchandise remained in Dillers inventory. For 20X7, gross profit percentages were 30% for Diller and 40% for Lake. The amount of unrealized profit in the ending inventory on December 31, 20X7 that should be eliminated in consolidation is .
. $80,000
b. $60,000
c. $32,000
d. $30,000
7. Perry, Inc. owns a 90% interest in Brown Corp. During 20X6, Brown sold $100,000 in merchandise to Perry at a 30% gross profit. Ten percent of the goods are unsold by Perry at year end. The noncontrolling interest will receive what gross profit as a result of these sales?
a. $0
b. $2,700
c. $3,000
d. $27,000
8. On January 1, 20X1 Bullock, Inc. sells land to its 80%-owned subsidiary, Humphrey Corporation, at a $20,000 gain. The land is still held by Humphrey on December 31, 20X3. What is the effect of the intercompany sale of land on consolidated net income?
a. Consolidated net income will be the same as it would have been had the sale not occurred.
b. Consolidated net income will be $20,000 less than it would have been had the sale not occurred.
c. Consolidated net income will be $16,000 less than it would have been had the sale not occurred.
d. Consolidated net income will be $20,000 greater than it would have been had the sale not occurred.
9. Emron Company owns a 100% interest in the common stock of the Dietz Company. On January 1, 20X2, Emron sold Dietz a fixed asset that Dietz will use over a 5-year period. The asset was sold at a $5,000 profit. In the consolidated statements, this profit will
a. not be recorded.
b. be recognized over 5 years.
c. be recognized in the year of sale.
d. be recognized when the asset is resold to outside parties at the end of its period of use.
10. Pease Corporation owns 100% of Sade Corporation common stock. On January 2, 20X6, Pease sold machinery with a carrying amount of $30,000 to Sade for $50,000. Sade is depreciating the acquired machinery over a 5-year life using the straight-line method. The net adjustments to compute the 20X6 and 20X7 consolidated income before income tax would be an increase (decrease) of

20X6 20X7
a. $(16,000) $4,000
b. $(16,000) $0
c. $(20,000) $4,000
d. $(20,000) $0

11. On January 1, 20X1, Poe Corp. sold a machine for $900,000 to Saxe Corp., its wholly-owned subsidiary. Poe paid $1,100,000 for this machine. On the sale date, accumulated depreciation was $250,000. Poe estimated a $100,000 salvage value and depreciated the machine on the straight-line method over 20 years, a policy that Saxe continued. In Poes December 31, 20X1, consolidated balance sheet, this machine should be included in cost and accumulated depreciation as

Cost Accumulated Depreciation
a. $1,100,000 $300,000
b. $1,100,000 $290,000
c. $ 900,000 $ 40,000
d. $ 850,000 $ 42,500

12. Porch Company owns a 90% interest in the Screen Company. Porch sold Screen a milling machine on January 1, 20X1, for $50,000 when the book value of the machine on Porchs books was $40,000. Porch financed the sale with Screen signing a 3-year, 8% interest, note for the entire $50,000. The machine will be used for 10 years and depreciated using the straight-line method. The following amounts related to this transaction were located on the companies trial balances:
Interest Revenue $4,000
Interest Expense $4,000
Depreciation Expense $5,000
Based upon the information related to this transaction what will be the amounts eliminated in preparing the consolidated financial statements?

Interest Revenue Interest Expense Depreciation Expense
a. 4,000 4,000 5,000
b. 4,000 4,000 1,000
c. 3,600 3,600 900
d. 3,600 3,600 4,500

13. On 1/1/X1 Peck sells a machine with a $20,000 book value to its subsidiary Shea for $30,000. Shea intends to use the machine for 4 years. On 12/31/X2 Shea sells the machine to an outside party for $14,000. What amount of gain or (loss) for the sale of assets is reported on the consolidated financial statements?
a. loss of $6,000 b. loss of $1,000 c. gain of $4,000 d. gain of $14,000
14. Stroud Corporation is an 80%-owned subsidiary of Pennie, Inc., acquired by Pennie several years ago. On January 1, 20X2, Pennie sold land with a book value of $60,000 to Stroud for $90,000. Stroud resold the land to an unrelated party for $100,000 on September 26, 20X3. The land will be included in the December 31, 20X2 consolidated balance sheet of Pennie, Inc. and Subsidiary at .
a. $48,000
b. $60,000
c. $72,000
d. $90,000
15. Stroud Corporation is an 80%-owned subsidiary of Pennie, Inc., acquired by Pennie several years ago. On January 1, 20X2, Pennie sold land with a book value of $60,000 to Stroud for $90,000. Stroud resold the land to an unrelated party for $100,000 on September 26, 20X3. The gain from sale of land that will appear in the consolidated income statements for 20X2 and 20X3, respectively, is .
a. $0 and $10,000
b. $0 and $40,000
c. $30,000 and $10,000
d. $30,000 and $40,000
16. Company P owns 100% of the common stock of Company S. Company P is constructing an asset for Company S that will be used in Company Ss manufacturing operations over a 5-year period. The asset was 50% complete at the end of 20X1 and was completed on December 31, 20X2. Company P is recording the construction under the percentage of completion method. The asset was put into use by Company S on January 1, 20X3. The profit on the asset was estimated to be $50,000. Actual results complied to the estimate. On the consolidated statements, the
profit will appear as

20X1 20X2 20X3 20X4 20X7
a. 0 50,000 0 0
b. 25,000 25,000 0 0
c. 0 0 10,000 10,000
d. 0 0 50,000 0

17. The following accounts were noted in reviewing the trial balance for Parent Co. and Subsidiary Corp.:
Assets under Construction
Contracts Receivable
Billings on Construction in Progress
Earned Income on Long-Term Contracts
Contracts Payable

Which of these accounts do you expect to eliminate when producing Parent Co. consolidated financial statements?
a. Assets under Construction; Billings on Construction in Progress; Earned Income on Long-Term Contracts
b. Contracts Receivable; Billings on Construction in Progress; Earned Income on Long-Term Contracts
c. Assets under Construction; Contracts Receivable; Billings on Construction in Progress; Earned Income on Long-Term Contracts; Contracts Payable
d. Contracts Receivable; Billings on Construction in Progress; Earned Income on Long-Term Contracts; Contracts Payable
18. During 20X3, a parent company billed its 100%-owned subsidiary for computer services at the rate of $1,000 per month. At year end, one months bill remained unpaid. As a part of the consolidation process, net income
a. should be reduced $12,000.
b. should be reduced $1,000.
c. needs no adjustment.
d. needs an adjustment, but the amount is not provided by this information.
19. On January 1, 20X1, a parent loaned $30,000 to its 100%-owned subsidiary on a 5-year, 8% note. The note requires a principal payment at the end of each year of $6,000 plus payment of interest accrued to date. The following accounts require adjustment in the consolidation process:

Controlling
Assets Debt Retained Earnings
a. Yes Yes Yes
b. No No Yes
c. Yes Yes No
d. No No No
20. Phelps Co. uses the sophisticated equity method to account for the 80% investment in its subsidiary Shore Corp. Based upon the following information what amount does Phelps Co. record as subsidiary income?
Phelps internally generated income: $250,000
Shore internally generated income: $ 50,000
Intercompany profit on Shore beginning inventory: $ 10,000
Intercompany profit on Shore ending inventory: $ 15,000

a. $50,000 b. $44,000 c. $40,000 d. $36,000

Chapter 5 Intercompany Transactions: Bonds and Leases
1. The usual impetus for transactions that create a long-term debtor- creditor relationship between members of a consolidated group is due to the:
a. subsidiarys ability to borrow larger amounts of capital at more favorable terms than would be available to the parent.
b. parents ability to borrow larger amounts of capital at more favorable terms than would be available to the subsidiary.
c. parents desire to decentralize asset management and credit control.
d. parents desire to eliminate long-term debt.
2. The motivation of a parent company to purchase the outstanding bonds of a subsidiary could be to:
a. replace the existing debt with new debt at a lower interest rate.
b. reduce the parent companys acquisition price for the subsidiary.
c. increase the parent companys ownership percentage in the subsidiary.
d. create interest revenue to offset interest expense in future income statements.
3. Company S is a 100%-owned subsidiary of Company P. Company S has outstanding 8%, 10-year bonds sold to yield 7%. On January 1 of the current year, Company P purchased all of the Company S outstanding bonds at a price that reflected the current 9% effective interest rate. How should this event be reflected in the current years consolidated statements?
a. The bonds remain in the balance sheet and are accounted for at a 7% effective rate.
b. The bonds remain in the balance sheet and are accounted for at a 9% effective rate.
c. Retirement of the bonds at an extraordinary gain as of the purchase date.
d. Retirement of the bonds at an extraordinary loss as of the purchase date.
4. Company S is a 100%-owned subsidiary of Company P. Company S has outstanding 6%, 10-year bonds sold to yield 7%. On January 1 of the current year, Company P purchased all of the Company S outstanding bonds at a price that reflected the current 9% effective interest rate. How should this event be reflected in the current years consolidated statements?
a. The bonds remain in the balance sheet and are accounted for at a 7% effective rate.
b. The bonds remain in the balance sheet and are accounted for at a 9% effective rate.
c. Retirement of the bonds at an extraordinary gain as of the purchase date.
d. Retirement of the bonds at an extraordinary loss as of the purchase date.
5. Company S is a 100%-owned subsidiary of Company P. Company S has outstanding 6%, 10-year bonds sold to yield 7%. On January 1 of the current year, Company P purchased all of the Company S outstanding bonds at a price that reflected the current 6% effective interest rate. How should this event be reflected in the current years consolidated statements?
a. The bonds remain in the balance sheet and are accounted for at a 7% effective rate.
b. The bonds remain in the balance sheet and are accounted for at a 9% effective rate.
c. Retirement of the bonds at an extraordinary gain as of the purchase date.
d. Retirement of the bonds at an extraordinary loss as of the purchase date.
6. Intercompany debt which must be eliminated from consolidated financial statements may results from:
a. one member of a consolidated group selling its bonds directly to another member of the group.
b. one member of a consolidated group advancing funds to another member of the group so that the member may retire bonds it had issued to outside parties.
c. one member of a consolidated group purchasing bonds from outside parties as an investment that had been issued to outside parities by another member of the group.
d. all of the above.
7. Elimination procedures for intercompany bonds purchased from outside parties by another member of the consolidated group are:
a. not needed except in the period of acquisition if purchased at par.
b. not needed except in the period of acquisition if purchased at a premium or discount.
c. not needed except in the period of acquisition if only a portion of the outstanding bonds are purchased.
d. needed each period as long as there are intercompany bonds.
8. Assuming the correct bond eliminations entry(s) are made for intercompany bonds, intercompany bond interest expense will appear on:
a. the consolidated income statement.
b. the income statement of the bond issuer.
c. the income statement of the bond purchaser.
d. none of the above.
9. Assuming the correct bond eliminations entry(s) are made for intercompany bonds, intercompany bond interest payable will appear on:
a. the consolidated balance sheet.
b. the balance sheet of the bond issuer.
c. the balance sheets of the bond issuer and the bond purchaser.
d. none of the above.
10. Company S is a 100%-owned subsidiary of Company P. On January 1, 20X9, Company S has $200,000 of 8% face rate bonds outstanding, which were issued at face value. The bonds had 5 years to maturity on January 1, 20X9. Premiums or discounts would be amortized on a straight-line basis. On that date, Company P purchased the bonds for $198,000. The amount on the consolidated balance sheet relative to the debt is:
a. bonds payable $200,000.
b. bonds payable $200,000, discount $2,000.
c. bonds payable $200,000, discount $1,600.
d. The bonds do not appear on the balance sheet.
11. Company S is a 100%-owned subsidiary of Company P. On January 1, 20X9, Company S has $100,000 of 8% face rate bonds outstanding. The bonds had 5 years to maturity on January 1, 20X9, and had an amortized discount of $5,000. On that date, Company P purchased the bonds for $99,000. The net adjustment needed to consolidate retained earnings on December 31, 20X9
is .
a. $(4,000)
b. $(3,200)
c. $(800)
d. $0
12. Sun Company is a 100%-owned subsidiary of Peter Company. On January 1, 20X1, Sun Company has $500,000 of 8% face rate bonds outstanding, with an unamortized discount of $5,000 which is being amortized over a 5 year remaining life to maturity. On that date, Peter Company purchased the bonds for $497,000. The adjustment to the consolidated income of the two companies needed in the consolidation process for 20X2 (the following year) is .
a. $2,800
b. $(400)
c. $400
d. $(2,800)
13. Company S is a 100%-owned subsidiary of Company P. Company P purchased, at a premium, Company S bonds that are outstanding and have a remaining discount. Consolidation theory takes the position that:
a. interest expense should be adjusted to reflect the market value of the bonds on the date of Company Ps purchase.
b. the debt has been retired at an extraordinary loss.
c. the debt is outstanding, but should be shown at face value.
d. the gain or loss on retirement should be allocated over the remaining life of the bonds.
14. Company S is a 100%-owned subsidiary of Company P. Company P purchased all the outstanding bonds of Company S at a discount. The bonds had a remaining issuance premium at the time of Company Ps purchase. The bonds have 5 years to maturity. At the end of 5 years, retained earnings:
a. is greater as a result of the purchase.
b. is less as a result of the purchase.
c. is not affected by the purchase.
d. cannot be determined from the information provided.
15. Company P owns 80% of Company S. On January 1, 20X9 Company S has outstanding 6% bonds with a face value of $200,000 and an unamortized discount of $3,000, which is being amortized on a straight-line basis over a remaining term of 10 years. On January 1, 20X9, Company P purchased all the bonds for $205,000. The premium also is amortized on a straight-line basis. The net impact of the purchase on the noncontrolling interest as of December 31, 20X9, is .
a. $(8,000)
b. $(1,600)
c. $(1,440)
d. $(1,200)
16. The purchase of outstanding subsidiary bonds by the parent company has the same impact on consolidated statements as:
a. the subsidiary retiring its own debt with the proceeds of new debt issued to outside parties.
b. the subsidiary retiring the debt with the proceeds of a loan from the parent.
c. the subsidiary retiring the debt with the proceeds of a new stock issue.
d. allowing the bonds to continue to be held by outside interests.
17. A subsidiary has outstanding $100,000 of 8% bonds that were issued at face value. The parent purchased all the bonds for $96,000 with 5 years remaining to maturity. How will the parents use of the effective interest amortization rather than straight-line amortization of the discount affect the consolidated statements?
a. No impact.
b. Will result in a different gain on retirement
c. Will result in more interest expense in the first year after the intercompany purchase.
d. Will result in less interest expense in the first year after the intercompany purchase.
18. Powell Company owns an 80% interest in Sauter, Inc. On January 1, 20X1, Sauter issued $400,000 of 10-year, 12% bonds at a premium of $25,000. On December 31, 20X5, 5 years after original issuance, Powell purchased all of the outstanding bonds for $390,000. Both firms use the straight-line method of amortization.

What is the extraordinary gain on retirement on the 20X5 consolidated income statement?

a. $12,500
b. $22,500
c. $10,000
d. $35,000
19. Powell Company owns an 80% interest in Sauter, Inc. On January 1, 20X1, Sauter issued $400,000 of 10-year, 12% bonds at a premium of $25,000. On December 31, 20X5, 5 years after original issuance, Powell purchased all of the outstanding bonds for $390,000. Both firms use the straight-line method of amortization.

Bond interest expense included in the 20X5 subsidiary income distribution schedule is .

a. $48,000
b. $45,500
c. $47,500
d. $0
20. Subsidiary Company issued $200,000 of 8%, 5-year bonds on January 1, 20X6. The discount on issuance was $12,000. Bond interest is paid annually on December 31. On December 31, 20X8, Parent Company purchased one-half of the outstanding bonds for $96,000. Both companies use the straight-line method of amortization. How much interest expense will
appear on the December 31, 20X8, consolidated income statement?
a. $18,400
b. $16,000
c. $9,200
d. $8,000

Chapter 6 Cash Flow, EPS, Taxation, and Unconsolidated Investments
1. The cash purchase of a controlling interest in a firm on the statement of cash flows is considered
a. an operating activity. b. a financing activity. c. an investing activity. d. as all of the preceding.
2. The cash purchase of a controlling interest in a firm requires disclosure on the statement of cash flows in the following as a(n)
a. financing activity only.
b. financing activity and in the schedule of noncash financing and investing activity.
c. investing activity only.
d. investing activity and in the schedule of noncash financing and investing activity.
3. In a noncash purchase of a controlling interest in a firm, disclosure is required on the statement of cash flows disclosure in the following as a(n)
a. financing activity only.
b. financing activity and in the schedule of noncash financing and investing activity.
c. investing activity only.
d. investing activity and in the schedule of noncash financing and investing activity.
4. Amortization of excesses in periods subsequent to the purchase would affect which sections of a cash flow statement?
a. operating activity b. financing activity c. investing activity d. all of the above
5. The purchase of additional shares directly from a subsidiary by the parent results in disclosure in which section of a cash flow statement?
a. operating activities
b. financing activities
c. investing activities
d. not reflected on the statement of cash flows
6. The purchase of additional shares from the noncontrolling interest of a subsidiary by the parent results in disclosure in which section of a cash flow statement?
a. operating activities
b. financing activities
c. investing activities
d. not reflected on the statement of cash flows
7. Dividends paid by a subsidiary have the following affect on the consolidated cash flow
a. all dividends to the parent and to noncontrolling stockholders appear on the statement.
b. only dividends to the parent appear on the statement.
c. only dividends to NCI appear on the statement.
d. neither dividends to the parent or to noncontrolling stockholders appear on the statement
8. Which of the following statements is true?
a. The consolidated statement of cash flows treats the purchase of intercompany bonds from parties outside the consolidated group as a retirement of consolidated debt, and includes the cash outflow under cash flows from financing activities.
b. The consolidated statement of cash flows treats the purchase of intercompany bonds from parties outside the consolidated group as a retirement of consolidated debt, and includes the cash outflow under cash flows from investing activities.
c. The consolidated statement of cash flows treats the intercompany interest payments and amortization of premiums and/or discounts on intercompany bonds under operating activities.
d. The consolidated statement of cash flows treats the intercompany interest payments and amortization of premiums and/or discounts on intercompany bonds under investing activities.
9. Assume investments in the stock of firms not included in the consolidated group result in the nonconsolidated firm reporting income of $200,000 and the firm paid dividends of $50,000. If the consolidated firm paid $10,000 more than book value for its 40% interest and regards the excess as attributable to goodwill, the operating activities, prepared using the indirect method, would reflect a net increase as a result of this investment of .
a. $80,000
b. $70,000
c. $59,000
d. $20,000
10. Ponti Company purchased the net assets of the Sorri Company for $800,000. The net assets of Sorri Company were recorded as follows on the acquisition date:

Cash $ 50,000
Inventory. 150,000
Land 150,000
Building (net).. 400,000
Liabilities.. (200,000)
Net assets. $ 550,000
=========

The market values were as follows: Inventory, $160,000; Land, $170,000; Building, $450,000. The excess purchase price is allocated to goodwill. What is the amount that will appear as cash applied to investing as a result of this purchase?

a. $800,000
b. $720,000
c. $750,000
d. $670,000
11. Company P acquired 80% of the outstanding common stock of the Company S by issuing common stock with a market value of $550,000. The balance sheet of Company S was as follows on the acquisition date:

Assets Liabilities and Equity
Cash .. $ 50,000 Liabilities $120,000
Inventory. 120,000 Common stock, $10 par.. 100,000
Land 100,000 Other paid-in capital.. 150,000
Building (net).. 350,000 Retained earnings 250,000
Total $620,000 Total. $620,000
======== ========

The market values were as follows: Inventory, $130,000; Land, $120,000; Building, $400,000. What is the amount that will appear as cash- investing on the consolidated statement of cash flows, as a result of this purchase?

a. $600,000
b. $500,000
c. $(50,000)
d. $0
12. Company P acquired 75% of the outstanding common stock of the Company S by issuing common stock with a market value of $650,000 on January 1, 20X3. The balance sheet of Company S was as follows on the acquisition date:

Assets Liabilities and Equity
Cash .. $100,000 Liabilities $100,000
Inventory. 90,000 Common stock, $10 par.. 100,000
Land 150,000 Other paid-in capital.. 200,000
Building (net).. 500,000 Retained earnings 440,000
Total $840,000 Total. $840,000
======== ========

The market values were as follows: Inventory, $180,000; Land, $150,000; Building, $600,000. What is the amount that will appear as cash- financing as a result of this purchase?

a. $560,000
b. $100,000
c. $75,000
d. $0
13. Company P acquired 60% of the outstanding common stock of Company S by issuing common stock with a market value of $400,000 on January 1, 20X3. The balance sheet of Company S was as follows on the acquisition date:

Assets Liabilities and Equity
Cash .. $ 50,000 Liabilities $ 80,000
Inventory. 100,000 Common stock, $10 par.. 100,000
Land 100,000 Other paid-in capital.. 120,000
Building (net).. 250,000 Retained earnings 200,000
Total $500,000 Total. $500,000
======== ========

The market values were as follows: Inventory, $130,000; Land, $150,000; Building, $400,000. The inventory was sold during 20X3, the building has a 10-year life, and any excess purchase price is attributed to goodwill. What adjustment is needed to consolidated net income to arrive at cash flow-operations for 20X4, under the indirect method, as a result of amortization of excesses from the purchase?

a. $1,000
b. $9,000
c. $14,800
d. $15,000
14. Company P purchased an 80% interest in Company S on January 1, 20X3, at a price in excess of book value, such that a patent arises in the consolidation process. As a result of amortizing the patent on the consolidated income statement, where would an adjustment be required in the following sections of the consolidated statement of cash flows?

Operating Investing Financing No Adjustment
a. Yes No No No
b. No Yes No No
c. No No Yes No
d. No No No Yes
15. A parent company purchased all the outstanding bonds of its subsidiary. Will this cash transaction appear in the following sections of the consolidated statement of cash flows?

Operating Investing Financing No Adjustment
a. Yes No No No
b. No Yes No No
c. No No Yes No
d. No No No Yes
16. A parent company owns 80% of the common stock of its subsidiary. During the current year, the parent purchases an additional 10% interest from noncontrolling shareholders. On which line of the following sections of the consolidated statement of cash flows would this cash transaction appear?

Operating Investing Financing No Adjustment
a. Yes No No No
b. No Yes No No
c. No No Yes No
d. No No No Yes
17. Basic Earnings Per Share (BEPS) is calculated by dividing
a. consolidated net income by parent company outstanding stock.
b. consolidated net income by parent company outstanding stock and subsidiary outstanding stock.
c. consolidated net income by parent company outstanding stock and subsidiary noncontrolling outstanding stock.
d. the controlling interest in net income by parent company outstanding stock.
18. When the acquisition of a subsidiary occurs during a reporting period using the purchase method, the computation of both BEPS and DEPS includes subsidiary income
a. and subsidiary securities for the entire period.
b. for the entire period and the number of subsidiary shares weighted for the partial period.
c. for the partial period and the number of subsidiary shares weighted for the partial period
d. for the partial period and the number of subsidiary shares entire period
19. For two or more corporations to file a consolidated tax return, the parent must own what percentage of the voting power of all classes of stock and what percentage of the fair value of all the outstanding stock of the corporation?
a. 90% b. 80% c. 70% d. 60%
20. In calculating the voting power and market value for two or more corporations to file a consolidated tax return, preferred stock is included only if it
a.

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