ACC 401 Week 3 Quiz - Strayer
Click on the Link Below to
Purchase A+ Graded Course Material
Chapter 3
Consolidated
Financial Statements—Date of Acquisition
Multiple Choice
1. A majority-owned subsidiary that is in
legal reorganization should normally be accounted for using
a. consolidated financial statements.
b. the equity method.
c. the market value method.
d. the cost method.
2. Under the acquisition method, indirect
costs relating to acquisitions should be
a. included in the investment cost.
b. expensed as incurred.
c. deducted from other contributed capital.
d. none of these.
3. Eliminating entries are made to cancel
the effects of intercompany transactions and are made on the
a. books of the parent company.
b. books of the subsidiary company.
c. workpaper only.
d. books of both the parent company and the
subsidiary.
4. One reason a parent company may pay an
amount less than the book value of the subsidiary's stock acquired is
a. an undervaluation of the subsidiary's assets.
b. the existence of unrecorded goodwill.
c. an overvaluation of the subsidiary's
liabilities.
d. none of these.
5. In a business combination accounted for
as an acquisition, registration costs related to common stock issued by the
parent company are
a. expensed as incurred.
b. deducted from other contributed capital.
c. included in the investment cost.
d. deducted from the investment cost.
6. On the consolidated balance sheet,
consolidated stockholders' equity is
a. equal to the sum of the parent and subsidiary
stockholders' equity.
b. greater than the parent's stockholders'
equity.
c. less than the parent's stockholders' equity.
d.
equal
to the parent's stockholders' equity.
7. Majority-owned subsidiaries should be
excluded from the consolidated statements when
a. control does not rest with the majority
owner.
b. the subsidiary operates under governmentally
imposed uncertainty.
c. a foreign subsidiary is domiciled in a
country with foreign exchange restrictions or controls.
d. any of these circumstances exist.
8. Under the economic entity concept,
consolidated financial statements are intended primarily for the benefit of the
a. stockholders of the parent company.
b. creditors of the parent company.
c. minority stockholders.
d. all of the above.
9. Reasons a parent company may pay more
than book value for the subsidiary company's stock include all of the following
except
a. the fair value
of one of the subsidiary's assets may exceed its recorded value because of
appreciation.
b. the existence of unrecorded goodwill.
c. liabilities may be overvalued.
d. stockholders' equity may be undervalued.
10. What is the method of presentation
required by SFAS 160 of “non-controlling interest” on a consolidated balance
sheet?
a. As a deduction from goodwill from
consolidation.
b. As a separate item within the long-term
liabilities section.
c. As a part of stockholders' equity.
d. As a separate item between liabilities and
stockholders' equity.
11. Which of the following is a limitation of
consolidated financial statements?
a. Consolidated statements provide no benefit
for the stockholders and creditors of the parent company.
b. Consolidated statements of highly diversified
companies cannot be compared with industry standards.
c. Consolidated statements are beneficial only
when the consolidated companies operate within the same industry.
d.
Consolidated
statements are beneficial only when the consolidated companies operate in
different industries.
12. Pine Corp. owns 60% of Sage Corp.'s
outstanding common stock. On May 1, 2011, Pine advanced Sage $90,000 in cash,
which was still outstanding at December 31, 2011. What portion of this advance
should be eliminated in the preparation of the December 31, 2011 consolidated
balance sheet?
a. $90,000.
b. $54,000.
c. $36,000.
d.
$-0-.
Use the
following information for questions 13-15.
On
January 1, 2011, Polk Company and Sigler Company had condensed balance sheets
as follows:
Polk Sigler
Current assets $ 280,000 $ 80,000
Noncurrent assets _360,000 __160,000
Total assets $ 640,000 $240,000
Current liabilities $ 120,000 $ 40,000
Long-term
debt 200,000 -0-
Stockholders'
equity __320,000
200,000
Total
liabilities & stockholders' equity $ 640,000 $240,000
On
January 2, 2011 Polk borrowed $240,000 and used the proceeds to purchase 90% of
the outstanding common stock of Sigler. This debt is payable in 10 equal annual
principal payments, plus interest, starting December 30, 2011. Any difference
between book value and the value implied by the purchase price relates to land.
On
Polk's January 2, 2011 consolidated balance sheet,
13. Noncurrent assets should be
a. $520,000.
b. $536,000.
c. $544,000.
d. $586,667.
14. Current liabilities should be
a. $200,000.
b. $184,000.
c. $160,000.
d. $120,000.
15. Noncurrent liabilities should be
a. $440,000.
b. $416,000.
c. $240,000.
d.
$216,000.
16. A newly acquired subsidiary has pre-existing
goodwill on its books. The parent
company’s consolidated balance sheet will:
a.
treat
the goodwill the same as other intangible assets of the acquired company.
b.
will
always show the pre-existing goodwill of the subsidiary at its book value.
c.
not
show any value for the subsidiary’s pre-existing goodwill.
d.
do
an impairment test to see if any of it has been impaired.
17. The Difference between Implied and
Book Value account is:
a.
an
account necessary for the preparation of consolidated working papers.
b.
used
in allocating the amounts paid for recorded balance sheet accounts that are
different than
their fair values.
c.
the
excess implied value assigned to goodwill.
d.
the
unamortized excess that cannot be assigned to any related balance sheet
accounts
18. The main evidence of control for purposes
of consolidated financial statements involves
a.
possessing
majority ownership
b.
having
decision-making ability that is not shared with others.
c.
being
the sole shareholder
d.
having
the parent company and the subsidiary participating in the same industry.
19. In which
of the following cases would consolidation be inappropriate?
a. The
subsidiary is in bankruptcy.
b. Subsidiary's
operations are dissimilar from those of the parent.
c. The
parent owns 90 percent of the subsidiary's common stock, but all of the
subsidiary's nonvoting preferred stock is held by a single investor.
d. Subsidiary
is foreign.
20. Princeton Company acquired 75 percent of
the common stock of Sheffield Corporation on December 31, 2011. On the date of
acquisition, Princeton held land with a book value of $150,000 and a fair value
of $300,000; Sheffield held land with a book value of $100,000 and fair value
of $500,000. What amount would land be reported in the consolidated balance
sheet prepared immediately after the combination?
a. $650,000
b. $500,000
c. $550,000
d. $375,000
Use
the following information to answer questions 21 - 23.
On
January 1, 2011, Pena Company and Shelby Company had condensed balanced sheets
as follows:
Pena
Shelby
Current assets $
210,000 $
60,000
Noncurrent assets 270,000 120,000
Total assets $480,000 $180,000
Current liabilities $
90,000 $
30,000
Long-term debt 150,000 -0-
Stock holders' equity 240,000
150,000
Total liabilities &
stockholders' equity
$ 480,000 $ 180,000
On
January 2, 2011 Pena borrowed $180,000 and used the proceeds to purchase 90% of
the outstanding common stock of Shelby. This debt is payable in 10 equal annual
principal payments, plus interest, starting December 30, 2011. Any difference
between book value and the value implied by the purchase price relates to land.
On
Pena's January 2, 2011 consolidated balance sheet,
21. Noncurrent assets should be
a. $390,000.
b. $402,000.
c. $408,000.
d. $440,000.
22. Current liabilities should be
a. $150,000.
b. $138,000.
c. $120,000.
d. $90,000.
23. Noncurrent liabilities should be
a. $330,000.
b. $312,000.
c. $180,000.
d. $162,000.
24. On
January 1, 2011, Primer Corporation acquired 80 percent of Sutter Corporation's
voting common stock.
Sutters's
buildings and equipment had a book value of $300,000 and a fair value of
$350,000 at the time of
acquisition. At
what amount will Sutter’s buildings and equipment will be reported in the
consolidated
statements
?
a. $350,000
b. $340,000
c. $280,000
d. $300,000
Problems
3-1 On December 31, 2011, Page Company
purchased 80% of the outstanding common stock of Snead Company for cash. At the time of acquisition, Snead Company's
balance sheet was as follows:
Current assets $ 1,680,000
Plant and equipment 1,580,000
Land 280,000
Total assets $3,540,000
Liabilities $ 1,320,000
Common stock, $10 par value 1,440,000
Other contributed capital 700,000
Retained earnings 240,000
Total $3,700,000
Treasury stock at cost, 5,000
shares 160,000
Total equities $3,540,000
Required:
Prepare the elimination entry(s)
required for the preparation of a consolidated balance sheet workpaper on
December 31, 2011, assuming the purchase price of the stock was
$1,670,000. Any difference between the
value implied by the purchase price of the investment and the book value of net
assets acquired relates to subsidiary land.
3-2 P Company purchased 80% of the
outstanding common stock of S Company on January 2, 2011, for $380,000. Balance
sheets for P Company and S Company immediately after the stock acquisition were
as follows:
P
Company S Company
Current assets $ 166,000 $ 96,000
Investment in S
Company 380,000 -0-
Plant and
equipment (net) 560,000 224,000
Land 40,000 120,000
$1,146,000 $440,000
Current
liabilities $
120,000 $ 44,000
Long-term notes
payable -0- 36,000
Common stock 480,000 160,000
Other
contributed capital 244,000 64,000
Retained
earnings 302,000 136,000
$1,146,000 $440,000
S Company owed P Company $16,000 on open
account on the date of acquisition.
Required:
Prepare a consolidated balance sheet for
P and S Companies on the date of acquisition. Any difference between the value
implied by the purchase price of the investment and the book value of net
assets acquired relates to subsidiary land. The book values of S Company's
other assets and liabilities are equal to their fair values.
3-3 P Company acquired 54,000 shares of the
common stock of S Company on January 1, 2011, for $950,000 cash. The
stockholders' equity section of S Company's balance sheet on that date was as
follows:
Common stock,
$10 par value $600,000
Other
contributed capital 80,000
Retained
earnings 320,000
Total $1,000,000
On the date of acquisition, S Company
owed P Company $10,000 on open account.
Required:
Present, in general journal form, the
elimination entries for the preparation of a consolidated balance sheet
workpaper on January 1, 2011. The difference between the value implied by the
purchase price of the investment and the book value of the net assets acquired
relates to subsidiary land.
3-4 On January 2, 2011, Potter Company
acquired 90% of the outstanding common stock of Smiley Company for $480,000
cash. Just before the acquisition, the
balance sheets of the two companies were as follows:
Potter Smiley
Cash $ 650,000 $
160,000
Accounts
Receivable (net)
360,000 60,000
Inventory
290,000 140,000
Plant and
Equipment (net) 970,000 240,000
Land 150,000 80,000
Total Assets $2,420,000 $680,000
Accounts Payable $ 260,000 $ 120,000
Mortgage Payable 180,000 100,000
Common Stock, $2
par value 1,000,000 170,000
Other
Contributed Capital 520,000 50,000
Retained
Earnings 460,000 240,000
Total Equities $2,420,000 $680,000
The fair values of Smiley's assets and
liabilities are equal to their book values with the exception of land.
Required:
A. Prepare the journal entry necessary to record
the purchase of Smiley's common stock.
B. Prepare a consolidated balance sheet at the
date of acquisition.
3-5 P Corporation paid $420,000 for 70% of S
Corporation’s $10 par common stock on December 31, 2011, when S Corporation’s
stockholders’ equity was made up of $300,000 of Common Stock, $90,000 of Other
Contributed Capital and $60,000 of Retained Earnings. S’s identifiable assets and liabilities
reflected their fair values on December 31, 2011, except for S’s inventory
which was undervalued by $60,000 and their land which was undervalued by
$25,000. Balance sheets for P and S
immediately after the business combination are presented in the partially
completed work-paper below.
|
|
|
|
Eliminations
|
|
|
|
|
|
P
|
S
|
Debit
|
Credit
|
Noncontrolling
Interest
|
Consolidated
Balances
|
|
ASSETS
Cash
|
$40,000
|
$30,000
|
|
|
|
|
|
Accounts
receivable-net
|
30,000
|
45,000
|
|
|
|
|
|
Inventories
|
185,000
|
165,000
|
|
|
|
|
|
Land
|
45,000
|
120,000
|
|
|
|
|
|
Plant
assets-
net
|
480,000
|
240,000
|
|
|
|
|
|
Investment
in
S
Corp.
|
420,000
|
|
|
|
|
|
|
Difference
between implied and book value
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
|
Total
Assets
|
$1,200,000
|
$600,000
|
|
|
|
|
|
EQUITIES
Current
liabilities
|
$170,000
|
$150,000
|
|
|
|
|
|
Capital
stock
|
600,000
|
300,000
|
|
|
|
|
|
Additional
paid-in capital
|
150,000
|
90,000
|
|
|
|
|
|
Retained
earnings
|
280,000
|
60,000
|
|
|
|
|
|
Noncontrolling
interest
|
|
|
|
|
|
|
|
Total
Equities
|
$1,200,000
|
$600,000
|
|
|
|
|
Required:
Complete the
consolidated balance sheet workpaper for P Corporation and Subsidiary.
3-6 Prepare in general journal form the
workpaper entries to eliminate Porter Company's investment in Sewell Company in
the preparation of a consolidated balance sheet at the date of acquisition for
each of the following independent cases:
|
|
|
|
Sewell Company
Equity Balances
|
||
|
Cash
|
Percent of
Stock Owned
|
Investment
Cost
|
Common Stock
|
Other
Contributed Capital
|
Retained
Earnings
|
|
a.
|
90
|
$675,000
|
$450,000
|
$180,000
|
$75,000
|
|
b.
|
80
|
318,000
|
620,000
|
140,000
|
20,000
|
Any difference between book value of net
assets acquired and the value implied by the purchase price relates to
subsidiary property, plant, and equipment except for case (b). In case (b)
assume that all book values and fair values are the same.
3-7 On December 31, 2011, Pryor Company
purchased a controlling interest in Shelby Company for $1,060,000. The
consolidated balance sheet on December 31, 2011 reported noncontrolling
interest in Shelby Company of $265,000.
On the date of acquisition, the
stockholders' equity section of Shelby Company's balance sheet was as follows:
Common stock $520,000
Other
contributed capital 380,000
Retained
earnings 280,000
Total 1,180,000
Required:
A. Compute the noncontrolling interest percentage
on December 31, 2011.
B.
Prepare
the investment elimination entry made to prepare a consolidated balance sheet
workpaper. Any difference between book value and the value implied by the
purchase price relates to subsidiary land.
3-8 On January 1, 2011, Primer Company issued 1,500 of its $20 par
value common shares with a fair value of $50 per share in exchange for 2,000
outstanding common shares of Swartz Company in a purchase transaction. Registration costs amounted to $1,700 paid in
cash. Just prior to the acquisition, the balance sheets of the two companies
were as follows:
|
|
Primer
|
Swartz
|
|
|
|
|
|
Cash
|
$ 73,000
|
$13,000
|
|
Accounts
Receivable (net)
|
95,000
|
19,000
|
|
Inventory
|
58,000
|
25,000
|
|
Plant
and Equipment (net)
|
95,000
|
43,000
|
|
Land
|
26,000
|
20,000
|
|
Total Assets
|
$ 347,000
|
$ 120,000
|
|
|
|
|
|
Accounts
Payable
|
$ 66,000
|
16,000
|
|
Notes
Payable
|
82,000
|
21,000
|
|
Common
Stock, $20 par value
|
100,000
|
40,000
|
|
Other
Contributed Capital
|
60,000
|
24,000
|
|
Retained
Earnings
|
39,000
|
19,000
|
|
Total Liabilities and Equities
|
$ 347,000
|
$ 120,000
|
Any
differences between the book value of equity and the value implied by the
purchase price relates to Land.
Required:
- Prepare the journal entry on
Primer’s books to record the exchange of stock.
- Prepare a Computation and
Allocation Schedule for the Difference between book value and value
implied by the purchase price.
- Calculate the consolidated balance
for each of the following accounts as of December 31, 2011:
1. Cash
2. Land
3. Common Stock
4. Other Contributed Capital
Short
Answer
1. There are several reasons why a company would
acquire a subsidiary’s voting common stock rather than its net assets. Identify
at least two advantages to acquiring a controlling interest in the voting stock
of another company rather than its assets.
2. A useful first step in the consolidating
process is to prepare a Computation and Allocation of Difference (CAD)
Schedule. Identify the steps involved in
preparing the CAD schedule.
Short
Answer Questions from the Textbook
1. What are the
advantages of acquiring the majority of the voting stock of another company
rather than acquiring all its voting stock?
2. What is the justification
for preparing consolidated financial statements when, in fact, it is ap-parent
that the consolidated group is not a legal entity?
3. Why is it often
necessary to prepare separate financial statements for each legal entity in a
consolidated group even though consolidated statements provide a better
economic picture of the combined activities?
4. What aspects of
control must exist before a subsidiary is consolidated?
5. Why are
consolidated work papers used in pre-paring consolidated financial statements?
6. Define
noncontrolling (minority) interest. List three methods that might be used for
reporting the noncontrolling interest in a consolidated balance sheet, and
state which is preferred under the SFAS No. 160[topic 810].
7. Give several
reasons why a parent company would be willing to pay more than book value for
subsidiary stock acquired.
8. What effect do
subsidiary treasury stock holdings have at the time the subsidiary is acquired?
How should the treasury stock be treated on consolidated work papers?
9. What effect does
a noncontrolling interest have on the amount of intercompany receivables and
payables eliminated on a consolidated balance sheet?
10 A.SFAS
No. 109and SFAS No. 141R[ASC 740 and805] require that a deferred tax asset or
liability be recognized for likely differences between the reported values and
tax bases of assets and liabilities recognized in business combinations (for
example, in exchanges that are nontaxable to the selling shareholders). Does
this decision change the amount of consolidated net income reported in years
subsequent to the business combination? Explain.
Business
Ethics Question from the Textbook
Part I. You are working on the valuation
of accounts receivable, and bad debt reserves for the current year’s annual
report. The CFO stops by and asks you to reduce the reserve by enough to
increase the current year’s EPS by 2 cents a share. The company’s policy has
always been to use the previous year’s actual bad debt percentage adjusted for
a specific economic index. The CFO’s suggested change would still be within
acceptable GAAP. However, later, you learn that with the increased EPS, the CFO
would qualify for a significant bonus. What do you do and why?
Part II. Consider the following:
Accounting firm KPMG created tax shelters called BLIPS, FLIP, OPIS, and SOS
that were based largely in the Cayman Islands and allowed wealthy clients
(there were 186) to create $5 billion in losses, which were then deducted from
their income for IRS tax purposes. BLIPS (Bond Linked Issue Premium Structures)
had clients borrow from an offshore bank for purposes of purchasing currency.
The client would then sell the currency back to the lender for a loss. However,
the IRS contends the losses were phony and that there was never any risk to the
client in the deals. The IRS has indicted eight former KPMG partners and an
outside lawyer alleging that the transactions were shams, illegal methods for
avoiding taxes. KPMG has agreed to pay a$456 million fine, no longer to do tax
shelters, and to cooperate with the government in its prosecution of the nine
individuals involved in the tax shelter scheme. Many argue that the courts have
not always held that such tax avoidance schemes show criminal intent because
the tax laws permit individuals to minimize taxes. However, the IRS argues that
these shelters evidence intent because of the lack of risk.
Question
In this case, the IRS contends that the
losses generated by the tax shelters were phony and that the clients never
incurred any risk. Do tax avoidance schemes indicate criminal intent if the tax
laws permit individuals to minimize taxes? Justify your answer.
No comments:
Post a Comment