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Test Bank For Advanced Accounting 10th Edition By Fischer

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WITH ANSWERS

 

Advanced Accounting 10th Edition By Fischer  
Test Bank 

Chapter 2Consolidated Statements: Date of Acquisition

 

MULTIPLE CHOICE

 

Account Investor Investee
Sales $500,000 $300,000
Cost of Goods Sold   230,000   170,000
Gross Profit $270,000 $130,000
Selling & Admin. Expenses   120,000   100,000
Net Income $150,000 $  30,000
     
Dividends paid 50,000 10,000

 

Assuming Investor owns 70% of Investee. What is the amount that will be recorded as Net Income for the Controlling Interest?

a. $164,000
b. $171,000
c. $178,000
d. $180,000

 

 

ANS:  B                    DIF:    M                   OBJ:   2-1

 

  1. 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 manner for creditors.
c. the results of operations, cash flow, and the balance sheet as if the parent and subsidiary were a single entity.
d. subsidiary information for the subsidiary shareholders.

 

 

ANS:  C                    DIF:    M                   OBJ:   2-2

 

  1. Consolidated financial statements are appropriate even without a majority ownership 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.

 

 

ANS:  B                    DIF:    M                   OBJ:   2-3

 

  1. 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.

 

 

ANS:  A                    DIF:    E                    OBJ:   2-3

 

  1. The goal of the consolidation process is for:
a. asset acquisitions and 100% 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.

 

 

ANS:  A                    DIF:    E                    OBJ:   2-4

 

  1. 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.

 

 

ANS:  B                    DIF:    D                   OBJ:   2-5

 

  1. 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

 

 

ANS:  C                    DIF:    M                   OBJ:   2-5

 

  1. 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. at an amount less than $250,000 since it is a bargain purchase.

 

ANS:  B                    DIF:    M                   OBJ:   2-5

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

 

 

ANS:  C                    DIF:    E                    OBJ:   2-6

 

  1. Which of the following costs of a business combination can be 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

 

 

ANS:  D                    DIF:    M                   OBJ:   2-6

 

  1. 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

 

 

ANS:  C                    DIF:    M                   OBJ:   2-6

 

  1. 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

 

 

ANS:  C                    DIF:    M                   OBJ:   2-6

 

  1. 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

 

 

ANS:  D                    DIF:    D                   OBJ:   2-6

 

  1. 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 report
a. a retained earnings balance that is inclusive of a gain of $400,000.
b. goodwill of $400,000.
c. a retained earnings balance that is inclusive of a gain of $350,000.
d. a gain of $400,000

 

 

ANS:  A                    DIF:    M                   OBJ:   2-6 | 2-7

 

Scenario 2-1

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 companies have 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.

 

  1. Refer to Scenario 2-1. 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. debit to investment for $1,500,000.
d. debit to investment for $1,525,000.

 

 

ANS:  C                    DIF:    M                   OBJ:   2-6 | 2-7

 

  1. Refer to Scenario 2-1. Goodwill associated with the purchase of Stonebriar is ____.
a. $100,000
b. $125,000
c. $300,000
d. $325,000

 

 

ANS:  A                    DIF:    M                   OBJ:   2-6 | 2-7

  1. On April 1, 20X1, Paape Company paid $950,000 for all the issued and outstanding stock of Simon Corporation. The recorded assets and liabilities of the Simon 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 Simon 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

 

 

ANS:  C                    DIF:    D                   OBJ:   2-7

 

  1. 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 for Sabon:

 

  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 ?

 

The machinery will appear on the consolidated balance sheet at ____.

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

 

 

ANS:  A                    DIF:    M                   OBJ:   2-8

 

  1. 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.

 

 

ANS:  C                    DIF:    M                   OBJ:   2-9

 

  1. 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.

 

 

ANS:  C                    DIF:    M                   OBJ:   2-10

 

PROBLEM

 

  1. Supernova Company had the following summarized balance sheet on December 31, 20X1:

 

Assets  
Accounts receivable $   200,000
Inventory 450,000
Property and plant (net) 600,000
Goodwill      150,000
     Total $1,400,000
   
Liabilities and Equity  
Notes payable $   600,000
Common stock, $5 par 300,000
Paid-in capital in excess of par 400,000
Retained earnings      100,000
     Total $1,400,000

 

The fair value of the inventory and property and plant is $600,000 and $850,000, respectively.

 

Assume that Redstar Corporation exchanges 75,000 of its $3 par value shares of common stock, when the fair price is $20/share, for 100% of the common stock of Supernova Company. Redstar incurred  acquisition costs of $5,000 and stock issuance costs of $5,000.

 

Required:

 

a. What journal entry will Redstar Corporation record for the investment in Supernova?
   
b. Prepare a supporting value analysis and determination and distribution of excess schedule
   
c. Prepare Redstars elimination and adjustment entry for the acquisition of Supernova.

 

 

ANS:

a. Investment in Supernova (75,000 $20) 1,500,000  
       Common Stock $3 par value   225,000
       Paid-in-capital excess of par   1,275,000
       
  Acquisition expense* 10,000  
       Cash   10,000

*alternative treatment: debit Paid-in capital in excess of par for issue costs

 

  1. b)
Value Analysis      
  Company Implied Fair Value Parent Price

(100%)

NCI Value (0%)
Company fair value  $1,500,000  $1,500,000 N/A
Fair value identifiable net assets    1,050,000    1,050,000  
Goodwill  $   450,000  $   450,000  

 

Determination & Distribution Schedule
  Company

Implied

Fair Value

(100%)

Parent Price

  0%

NCI Value

Fair value of subsidiary  $1,500,000    $1,500,000    
Less book value:          
C Stk  $   300,000        
APIC       400,000        
R/E       100,000        
Total S/E  $   800,000    $   800,000    
Interest Acquired         100%    
Book value      $   800,000    
Excess of fair over book  $   700,000    $   700,000    
Adjustment of identifiable accounts:        
  Adjustment        
Inventory  $   150,000        
Property and equip       250,000        
Goodwill (increase over $150,000)      300,000        
Total  $  700,000        

 

c. Elimination entries    
       
EL Common Stock $5 Par Sub 300,000  
  Paid-in capital in excess of par sub 400,000  
  Retained Earnings sub 100,000  
       Investment in Supernova   800,000
       
D Inventory 150,000  
  Property and Plant 250,000  
  Goodwill 300,000  
       Investment in Supernova   700,000

 

 

DIF:    M                   OBJ:   2-2 | 2-3 | 2-4 | 2-5 | 2-6

 

  1. On December 31, 20X1, Priority Company purchased 80% of the common stock of Subsidiary Company for $1,550,000. On this date, Subsidiary had total owners equity of $650,000 (common stock $100,000; other paid-in capital, $200,000; and retained earnings, $350,000). Any excess of cost over book value is due to the under or overvaluation of certain assets and liabilities. Assets and liabilities with differences in book and fair values are provided in the following table:

 

  Book Fair
  Value Value
Current Assets $500,000 $800,000
Accounts Receivable 200,000 150,000
Inventory 800,000 800,000
Land 100,000 600,000
Buildings (net) 700,000 900,000
Current Liabilities 800,000 875,000
Long-Term Debt 850,000 930,000

 

Remaining excess, if any, is due to goodwill.

 

Required:

 

a. Using the information above and on the separate worksheet, prepare a schedule to determine and distribute the excess of cost over book value.
   
b. Complete the Figure 2-1 worksheet for a consolidated balance sheet as of December 31, 20X1.

 

Figure 2-1  
  Trial Balance Eliminations and
  Priority Sub. Adjustments
Account Titles Company Company Debit Credit
Assets:            
Current Assets 425,000 500,000        
Accounts Receivable 530,000 200,000        
Inventory 1,600,000 800,000        
Investment in Sub Co. 1,550,000          
             
             
Land 225,000 100,000        
Buildings and Equipment 1,200,000 1,100,000        
Accumulated Depreciation 800,000 (400,000)        
             
     Total 4,730,000 2,300,000        
             
Liabilities and Equity:            
Current Liabilities 2,100,000 800,000        
Bonds Payable 1,000,000 850,000        
             
             
Common Stock P Co. 900,000          
Addnl paid-in capt P Co 670,000          
Retained Earnings P Co. 60,000          
             
Common Stock S Co.   100,000        
Addnl paid-in capt S Co   200,000        
Retained Earnings S Co.              350,000        
             
NCI            
     Total 4,730,000 2,300,000        
(continued)  

 

    Consolidated
    Balance Sheet
Account Titles NCI Debit Credit
Assets:      
Current Assets      
Accounts Receivable      
Inventory      
Investment in Sub Co.      
       
       
Land      
Buildings and Equipment      
Accumulated Depreciation      
       
     Total      
       
Liabilities and Equity:      
Current Liabilities      
Bonds Payable      
       
       
Common Stock P Co.      
Addnl paid-in capt P Co      
Retained Earnings P Co.      
       
Common Stock S Co.      
Addnl paid-in capt S Co      
Retained Earnings S Co.      
       
NCI      
     Total      

 

 

ANS:

a. Determination and Distribution Schedule:

 

  Company

Implied

Fair Value

  Parent Price   NCI Value
Fair value of subsidiary $  1,937,500   $ 1,550,000   $387,500
Less book value:          
C Stk $     100,000        
APIC        200,000        
R/E        350,000        
Total S/E $     650,000   $    650,000   $650,000
Interest Acquired     80%   20%
Book value     $    520,000   $130,000
Excess of fair over book $  1,287,500   $ 1,030,000   $257,500
           
Adjust identifiable accounts:          
Current assets $     300,000        
Accounts Receivable         (50,000)        
Land        500,000        
Buildings (net)        200,000        
Current liabilities         (75,000)        
Long-term debt         (80,000)        
Goodwill        492,500        
Total  $  1,287,500        

 

b. For the worksheet solution, please refer to Answer 2-1.

 

Answer 2-1  
  Trial Balance

 

Eliminations and Adjustments
  Priority Sub.
Account Titles Company Company Debit Credit
Assets:            
Current Assets 425,000 500,000 (D) 300,000    
Accounts Receivable 530,000 200,000     (D) 50,000
Inventory 1,600,000 800,000        
Investment in Sub. Co. 1,550,000       (EL) 520,000
          (D) 1,030,000
Land 225,000 100,000 (D) 500,000    
Buildings and Equipment 1,200,000 1,100,000 (D) 200,000    
Accumulated Depreciation (800,000) (400,000)        
Goodwill     (D) 492,500    
     Total 4,730,000 2,300,000        
             
Liabilities and Equity:            
Current Liabilities 2,100,000 800,000     (D) 75,000
Bonds Payable 1,000,000 850,000        
Premium on Bonds Pay         (D) 80,000
             
Common Stock P Co. 900,000          
Addnl paid-in capt P Co 670,000          
Ret. Earnings P Co. 60,000          
             
Common Stock S Co.   100,000 (EL) 80,000    
Addnl paid-in capt S Co   200,000 (EL) 160,000    
Ret. Earnings S Co.   350,000 (EL) 280,000 (D) 257,500
             
NCI            
     Total 4,730,000 2,300,000   2,012,500   2,012,500
(continued)  

 

    Consolidated
    Balance Sheet
Account Titles NCI Debit Credit
Assets:      
Current Assets   1,225,000  
Accounts Receivable   680,000  
Inventory   2,400,000  
Investment in Sub. Co.    
       
Land   825,000  
Buildings and Equipment   2,500,000  
Accumulated Depreciation     1,200,000
Goodwill   492,500  
       
       
Liabilities and Equity:      
Current Liabilities     2,975,000
Bonds Payable     1,850,000
Premium on Bonds Pay     80,000
       
Common Stock P Co.     900,000
Addnl paid-in capt P Co     670,000
Ret. Earnings P Co.     60,000
       
Common Stock S Co. 20,000    
Addnl paid-in capt S Co 40,000    
Ret. Earnings S Co. 237,500    
       
NCI 387,500

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