Chapter 4 Test Bank
CONSOLIDATION TECHNIQUES AND PROCEDURES
Multiple Choice Questions
LO1
1. Which of the following will be debited to the Investment account when the equity method is used?
a.
b.
Investee net losses. Investee net profits.
c.
d.
Investee declaration of dividends.
Depreciation of excess purchase cost attributable to investee equipment.
LO1
2. A parent company uses the equity method to account for its wholly-owned subsidiary. The company correctly uses this method and has fully reflected all items of subsidiary gain, loss, income, deductions, and dividends. If the parent company is preparing the consolidation working papers, which of the following will be a correct working paper procedure for the
Investment account?
a. A debit for a subsidiary loss and a credit for dividends received.
b. A credit for subsidiary income and a debit for dividends received.
c. A debit for subsidiary dividends received and a credit for a subsidiary loss.
LO1
3. A parent corporation owns 55% of the outstanding voting common stock of one domestic subsidiary, but does not control the subsidiary because it is in bankruptcy. Which of the following statements is correct?
a. The parent corporation must still prepare consolidated financial statements for the economic entity.
b. The parent corporation must stop using the equity method of accounting for the subsidiary and start using the cost method.
c. The parent company may continue to use the equity method but the subsidiary cannot be consolidated.
d. The parent company would suspend the operation of the
Investment account until notified by the bankruptcy court
that the subsidiary has emerged from bankruptcy.
LO1
Use the following information to answer questions 4 through 9.
On January 1, 2005, Finch Corporation purchased 75% of the common stock of Grass Co. Separate balance sheet data for the companies at the combination date are given below:
At the date of combination, the book values of Grass’s net assets were equal to the fair value except for Grass’s inventory, which had a fair value of $60,000.
4. What amount of Inventory will be reported?
a. $170,000. b. $169,000. c. $186,500. d. $192,000.
5. What amount of Goodwill will be reported?
a. $10,500. b. $20,000. c. $42,000. d. $75,500.
6. What amount of total liabilities will be reported?
a. $206,000. b. $261,000. c. $302,500. d. $348,000.
7. What is the reported amount for the minority interest?
a. $ 69,333. b. $100,000. c. $130,666. d. $150,000.
8. What is the amount of consolidated Retained Earnings?
a. $224,000. b. $299,000. c. $324,000. d. $346,666.
9. What is the amount of total assets?
LO2
10. Bird Corporation has several subsidiaries that are included in its consolidated financial statements and several other investments in corporations that are not consolidated. In its year-end trial balance, the following intercompany balances appear. Ostrich Corporation is the unconsolidated company; the rest are consolidated.
Due from Pheasant Corporation $ 25,000 Due from Turkey Corporation 5,000 Cash advance to Skylark Company 8,000 Cash advance to Starling 15,000 Current receivable from Ostrich 10,000
What amount should Bird report as intercompany receivables on its consolidated balance sheet?
a. $0.
b. $10,000.
c. $30,000.
d. $63,000.
LO3
11. The majority of errors in consolidated statements
a. result because the Investment in Subsidiary account on the parent’s books and the subsidiary equity accounts on the subsidiary’s books are reciprocal.
b. have conceptual problems from the minority interest representation of the equity investment in consolidated net assets by stockholders outside the affiliation structure. c. involve the amortization of book/market differences.
LO3
12. At the beginning of 2005, Starling Inc. acquired an 80% interest in Orchard Corporation when the book values of identifiable net assets equaled their fair values. On December 26, 2005, Orchard declared dividends of $50,000, and the dividends were unpaid at year-end. Starling had not recorded the dividend receivable at December 31. A consolidated working paper entry is necessary to
a. enter $50,000 dividends receivable in the consolidated balance sheet.
b. enter $40,000 dividends receivable in the consolidated balance sheet.
c. reduce the dividends payable account by $40,000 in the consolidated balance sheet.
d. eliminate the dividend payable account from the consolidated balance sheet.
LO3
13. A parent company uses the equity method to account for its wholly-owned subsidiary, but has applied it incorrectly. In each of the past four full years, the company adjusted the
Investment account when it received dividends from the
subsidiary but did not adjust the account for any of the subsidiary’s profits. The subsidiary had four years of profits and paid yearly dividends in amounts that were less than reported net incomes. Which one of the following statements is correct if the parent company discovered its mistake at the end of the fourth year, and is now preparing consolidation working papers?
a. The parent company's Retained Earnings will be increased by the cumulative total of four years of subsidiary profits.
b.
c.
d.
The parent company's Retained Earnings will be increased by the cumulative total of the first three years of subsidiary profit, and the Subsidiary Income account will be increased by the profit for the current year.
The parent company's Subsidiary Income account will be increased by the cumulative total of four years of subsidiary profits.
A prior period adjustment must be recorded for the cumulative effect of four years of accounting errors.
LO4
14. Pigeon Corporation acquired a 60% interest in Home Company on January 1, 2005, for $70,000 cash when Home had Capital Stock of $60,000 and Retained Earnings of $40,000. All excess purchase cost was attributable to equipment with a 10-year (straight-line) life. Home suffered a $10,000 net loss in 2005 and paid no dividends. At year-end 2005, Home owed Pigeon $12,000 on account. Pigeon’s separate income for 2005 was $150,000. Consolidated net income for 2005 was
15. On consolidated working papers, a subsidiary’s income has
a. to be reduced from beginning retained earnings. b. to be completely eliminated.
c. to have an allocation between the noncontrolling interest share and the parent’s share (which is eliminated).
d. only an entry in the parent company's general ledger.
LO4
16. Which one of the following will increase consolidated retained earnings?
a. An increase in the value of goodwill subsequent to the parent's date of acquisition.
b. The amortization of a $10,000 excess in the fair value of a note payable over its recorded book value.
c. The depreciation of a $10,000 excess in the fair value of equipment over its recorded book value.
d. The sale of inventory by a subsidiary that had a $10,000 excess in fair value over recorded book value on the parent's date of acquisition.
LO5
17. In contrast with single entity organizations, consolidated financial statements include which of the following in the calculation of cash flows from operating activities under the direct method?
a. The change in the balance sheet of the investee account. b. Noncontrolling interest dividends.
LO5
18. In contrast with single entity organizations, consolidated financial statements include which of the following in the calculation of cash flows from operating activities under the indirect method?
a. The change in the balance sheet of the investee account. b. Noncontrolling interest dividends.
c. Noncontrolling interest income expense. d. Cash dividends from equity investees. LO5
19. In contrast with single entity organizations, in preparing consolidated financial statements which of the following is a subtraction in the calculation of cash flows from operating activities under the indirect method?
a. The change in the balance sheet of the investee account. b. Noncontrolling interest dividends.
c. Noncontrolling interest income expense. d. Undistributed income of equity investees.
LO6 20. new
Which of the following would be used if the trial balance approach is followed?
a. Post-closing trial balances. b. Adjusted trial balances. c. Unadjusted trial balances.
LO1
Exercise 1
Parrot Corporation acquired 80% of Hollow Co. on January 1, 2005 for $24,000 cash when Hollow’s stockholders’ equity consisted of $10,000 of Common Stock and $3,000 of Retained Earnings. The difference between the price paid by Parrot and the underlying equity acquired in Hollow was allocated solely to a patent amortized over 10 years. The separate company statements for Parrot and Hollow appear in the first two columns of the partially completed consolidation working papers.
Required:
Parrot Corporation and Subsidiary Consolidated Balance Sheet Working Papers
at December 31, 2005
Parrot Hollow
Eliminations Non-LIAB. & EQUITY
Accounts payable 90,900 83,100
TOTAL LIAB. & EQUITY
$
141,080 $100,400
LO2
Exercise 2
Cuckoo Company acquired all the voting stock of Perch Corporation on January 1, 2004 for $70,000 when Perch had Capital Stock of $50,000 and Retained Earnings of $8,000. The excess of cost over book value was allocated $3,000 to inventories that were sold in 2004, $4,000 to equipment with a 4-year remaining useful life under the straight-line method, and the remainder to goodwill.
Financial statements for Cuckoo and Perch at the end of the fiscal year ended December 31, 2005 (two years after acquisition), appear in the first two columns of the partially completed consolidation working papers. Cuckoo has accounted for its investment in Slim using an incomplete equity method of accounting.
Required:
Cuckoo Company and Subsidiary
Consolidated Balance Sheet Working Papers at December 31, 2005
Cuckoo Perch
LIAB. & EQUITY
Liabilities 56,000 15,000
TOTAL LIAB. &
EQUITY 190,000 83,000
LO2
Exercise 3
Owl Corporation acquired 90% of the voting stock of Hunt Corporation on January 1, 2004 for $7,000 when Hunt had Capital Stock of $5,000 and Retained Earnings of $1,500. The excess of cost over book value was allocated $150 to inventories that were sold in 2004, $200 to undervalued land, $400 to undervalued equipment with a remaining useful life of 5 years under the straight-line method, and the remainder to goodwill.
Financial statements for Owl and Hunt Corporations at the end of the fiscal year ended December 31, 2005 appear in the first two columns of the partially completed consolidation working papers. Owl has accounted for its investment in Hunt using the equity method of accounting. Owl Corporation owed Hunt Corporation $100 on open account at the end of the year. Dividends receivable in the amount of $450 payable from Hunt to Owl is included in Owl’s net receivables.
Required:
Owl Corporation and Subsidiary
Consolidated Balance Sheet Working Papers at December 31, 2005
Owl Hunt LIAB. & EQUITY
LO3
Exercise 4
Koel Corporation acquired all the voting stock of Rain Company for $500,000 on January 1, 2005 when Rain had Capital Stock of $300,000 and Retained Earnings of $150,000. Rain’s assets and liabilities were fairly valued except for the plant assets. The entire cost-book differential is allocated to plant assets and is fully depreciated on a straight-line basis over a 10-year period.
During 2005, Koel borrowed $25,000 on a short-term non-interest-bearing note from Rain, and on December 31, 2005, Koel mailed a check to Rain to settle the note. Rain deposited the check on January 5, 2006, but receipt of payment of the note was not reflected in Rain’s December 31, 2005 balance sheet.
Required:
Koel Corporation and Subsidiary Consolidated Balance Sheet Working Papers
at December 31, 2005
Koel Rain
Cost of Sales (350,000) (200,000)
Other expenses (100,000) (60,000)
Net income 185,000 140,000
Koel Retained
Earnings 1/1 300,000 Rain Retained
Earnings 150,000
Add:
Net income $ 185,000 $140,000 Less:
Dividends (70,000) Retained
Earnings 12/31 $ 485,000 $220,000
BALANCE SHEET Note Receivable
from Koel 25,000 Other current
assets 210,000 300,000 Plant assets-
net 200,000 425,000 Investment in
Rain Company 565,000
TOTAL ASSETS $ 975,000 $750,000 EQUITIES
Liabilities 290,000 230,000
Capital Stock 200,000 300,000 Retained
Earnings 485,000 220,000
LO4
Exercise 5
Owl Corporation acquired 90% of Barn Corporation on January 1, 2005 for $72,000 cash when Barn’s stockholders’ equity consisted of $30,000 of Common Stock and $30,000 of Retained Earnings. The difference between the price paid by Owl and the underlying equity acquired in Barn was allocated to a plant asset with a remaining 10-year straight-line life that was overvalued by $5,000. The remainder was attributable to goodwill. The separate company statements for Owl and Barn appear in the first two columns of the partially completed consolidation working papers.
Required:
Owl Corporation and Subsidiary
Consolidated Balance Sheet Working Papers at December 31, 2005
Owl Barn LIAB. & EQUITY
Accounts payable 32,820 50,600
TOTAL LIAB. & EQUITY
$
238,330 $111,000
LO4
Exercise 6
Lorikeet Company has the following information collected in order to do make a cash flow statement and uses the direct format for Cash Flow from Operations. The annual report year end is December 31, 2005.
Noncontrolling Interest Dividends $20,000 Dividends Received from Equity Investees 17,000 Cash Paid to Employees 37,000 Cash Paid for Other Operating Activities 34,000 Cash Paid for Interest Expense 22,300 Cash Proceeds from the Sale of Equipment 70,000 Cash Paid to Suppliers 192,700 Cash Received from Customers 412,600
Required:
1. Prepare the Cash Flow for Operations part of the cash flow statement for Lorikeet.
LO4
Exercise 7
Bronzewing Company has the following information collected in order to do make a cash flow statement and uses the indirect format for Cash Flow from Operations. The annual report year end is December 31, 2005.
Noncontrolling Interest Dividends $17,000 Undistributed Income of Equity Investees 7,500
Depreciation Expense 65,000
Consolidated Net Income 175,000 Increase in Accounts Payable 15,000 Amortization of Patent 13,000 Decrease in Accounts Receivable 48,000 Increase in Inventories 27,500 Gain on sale of equipment 45,000 Noncontrolling Interest Expense 17,000
Required:
LO6
Exercise 8
Swift Corporation paid $88,500 for a 70% interest in Cave Corporation on January 1, 2005, when Cave’s Capital Stock was $70,000 and its Retained Earnings $30,000. The fair values of Cave's identifiable assets and liabilities were the same as the recorded book values on the acquisition date. Trial balances at the end of the year on December 31, 2005 are given below:
Swift
Inc.
Cave Inc.
Cash $ 4,500 $ 20,000
Accounts Receivable 25,000 30,000
Inventory 100,000 80,000
Investment in Cave 88,500
Cost of Goods Sold 60,000 40,000 Operating Expenses 22,000 37,000
Dividends 15,000 10,000
$ 315,000 $ 217,000 Liabilities $ 47,000 $ 27,000 Capital stock, $10 par value 100,000 70,000 Additional Paid-in Capital 10,000 Retained Earnings 31,000 30,000 Sales Revenue 120,000 90,000
Dividend Income 7,000
$ 315,000 $ 217,000
During 2005, Swift made only two journal entries with respect to its investment in Cave. On January 1, 2005, it debited the Investment in Cave account for $88,500 and on November 1, 2005, it credited Dividend Income for $7,000.
Required:
1. Prepare a consolidated income statement and a statement of retained earnings for Swift and Subsidiary for the year ended December 31, 2005.
2. Prepare a consolidated balance sheet for Swift and Subsidiary as of December 31, 2005.
LO6
Exercise 9
Emu Corporation paid $77,000 for a 60% interest in Chick Inc. on January 1, 2005, when Chick’s Capital Stock was $80,000 and its Retained Earnings $20,000. The fair values of Chick's identifiable assets and liabilities were the same as the recorded book values on the acquisition date. Trial balances at the end of the year on December 31, 2005 are given below:
Emu
Inc.
Chick Inc.
Cash $ 4,500 $ 20,000
Accounts Receivable 25,000 30,000
Inventory 100,000 70,000
Investment in Cave 77,000
Cost of Goods Sold 71,500 50,000 Operating Expenses 22,000 37,000
Dividends 15,000 10,000
$ 315,000 $ 217,000 Liabilities $ 47,000 $ 27,000 Capital stock, $10 par value 100,000 80,000 Additional Paid-in Capital 11,000 Retained Earnings 31,000 20,000 Sales Revenue 120,000 90,000
Dividend Income 6,000
$ 315,000 $ 217,000
During 2005, Emu made only two journal entries with respect to its investment in Chick. On January 1, 2005, it debited the Investment in Chick account for $77,000 and on November 1, 2005, it credited Dividend Income for $6,000.
Required:
1. Prepare a consolidated income statement and a statement of retained earnings for Emu and Subsidiary for the year ended December 31, 2005.
SOLUTIONS
Multiple Choice Questions
1 b
2 d
3 c
4 c Parent’s inventory of $132,000 plus subsidiary’s book value of inventory of $38,000 plus 75% of the excess of the fair value over the book value = $132,000+$38,000+(75%)x($22,000) = $186,500
5 d Purchase price minus 75% of Grass’s underlying
book value - $16,500 of excess cost over book value allocated to inventory (see 9) =
$392,000 – (75%)x(400,000) - $16,500 = $75,500 6 d Just add the liability amounts together
7 b (25%)x($400,000) = $100,000
8 a The parent’s Retained Earnings is the amount of consolidated Retained Earnings
10 b Intercompany receivables and
14 c Pigeon’s separate income $ 150,000 Less: 60% of Home’s $10,000 loss
= ( 6,000 )
Less: Equipment depreciation
$10,000/ 10 years = ( 1,000 ) Consolidated net income $ 143,000
15 c
16 b
17 d
18 c
19 d
Exercise 1
Parrot Corporation and Subsidiary Consolidated Balance Sheet Working Papers
at December 31, 2005
Parrot Hollow
Eliminations Non- Cntl. LIB. & EQUITY
Accounts payable 90,900 83,100 $174,000
TOTAL LIAB. &
Exercise 2
Cuckoo Company and Subsidiary
Consolidated Balance Sheet Working Papers at December 31, 2005
Cuckoo Perch
Perch Corporation 80,000
a LIAB. & EQUITY
Exercise 3
Owl Corporation and Subsidiary Consolidated Balance Sheet Working Papers
at December 31, 2005
Owl Hunt
Eliminations Balance
Exercise 4
Koel Corporation and Subsidiary Consolidated Balance Sheet Working Papers
at December 31, 2005
Koel Rain
LIAB & EQUITY
Liabilities 290,000 230,000 520,000
Capital Stock 200,000 300,000 c 300,000 200,000
Retained
Earnings 485,000 220,000 485,000
Exercise 5
Owl Corporation and Subsidiary
Consolidated Balance Sheet Working Papers at December 31, 2005
Preliminary computations
Investment cost on January 1, 19X4 $ 72,000 Less: Book value acquired = (90%)x($60,000) = 54,000 Excess cost over book value acquired = $ 18,000
Excess allocated to:
Overvalued equipment ($5,000) x (90%)= $ ( 4,500) Remainder to goodwill 22,500 Excess cost over book value $ 18,000
Income from Barn Corporation:
Equity in Barn’s net income (90%)x(3,400)= $ 3,060
Depreciation “savings” on equipment $4,500/10 yrs = 450
Income from Barn $ 1,260
Investment in Barn account:
Initial investment cost $ 72,000 Plus: Income from Barn 3,510 Less: Dividends (3,000)x(90%)= ( 2,700) Investment in Barn at December 31 $ 72,810
Exercise 6
Lorikeet Company and Subsidiary Consolidated Statement of Cash Flows for the Year Ended December 31,2005
Cash Flows from Operating Activities
Cash Received from Customers $412,600 Dividends Received from Equity Investees 17,000
Less Cash Paid to Suppliers $192,700
Cash Paid to Employees 37,000 Cash Paid for Other Operating Activities 34,000
Exercise 7
Bronzewing Company and Subsidiary Consolidated Statement of Cash Flows for the Year Ended December 31,2005
Cash Flows from Operating Activities
Consolidated Net Income $175,000
Adjustments to reconcile net income to cash Noncontrolling Interest Expense $17,000 Undistributed Income of Equity Investees ( 7,500 )
Depreciation Expense 65,000
Increase in Accounts Payable 15,000 Amortization of Patent 13,000 Decrease in Accounts Receivable 48,000 Increase in Inventories ( 27,500 )
Gain on sale of equipment ( 45,000 ) 78,000 Net cash flows from operating activities 253,000
Exercise 8
Requirement 1
Swift and Subsidiary Corporation Consolidated Income Statement for the year ended December 31, 2005
Sales Revenue $ 210,000
Cost of Goods Sold 100,000
Gross Profit 110,000
Operating Expenses $ 59,000 Minority Interest Income 3,900
Total Expenses and Minority Income 62,900
Consolidated Net Income 47,100
Retained Earnings, January 1, 2005 31,000
Dividends ( 15,000)
Requirement 2
Swift and Subsidiary Corporation Consolidated Balance Sheet
December 31, 2005
Assets
Cash $ 24,500
Accounts Receivable 55,000
Inventory 180,000
Goodwill 18,500
Total Assets $ 278,000
Equities
Liabilities $ 74,000
Capital Stock 100,000 Additional Paid-in Capital 10,000 Retained Earnings 63,100 Minority Interest 30,900 Total Liabilities and Equities $ 278,000
Minority Interest Calculation:
$30,000 Beginning equity + $3,900 Net income - $3,000 Dividends = $30,900
Exercise 9
Requirement 1
Emu and Subsidiary Corporation Consolidated Income Statement for the year ended December 31, 2005
Sales Revenue $ 210,000 Cost of Goods Sold 121,500
Gross Profit 88,500
Operating Expenses $ 59,000 Minority Interest Income 1,200
Total Expenses and Minority Income 60,200 Consolidated Net Income 28,300 Retained Earnings, January 1, 2005 31,000
Dividends ( 15,000)
Retained Earnings, December 31, 2005 $ 44,300
Requirement 2
Emu and Subsidiary Corporation Consolidated Balance Sheet
December 31, 2005
Assets
Cash $ 24,500
Accounts Receivable 55,000
Inventory 170,000
Goodwill 17,000
Total Assets $ 266,500
Equities
Liabilities $ 74,000
Capital Stock 100,000 Additional Paid-in Capital 11,000 Retained Earnings 44,300 Minority Interest 37,200 Total Liabilities and Equities $ 266,500
Minority Interest Calculation:
