Chapter 5
Student: ___________________________________________________________________________
1. Intangible assets with definite useful lives should be amortized:
A. over their useful lives.
B. over the time periods provided under IAS 36 Impairment of Assets which prescribes
amortization periods for different classes of assets.
C. under the applicable capital cost allowance rates provided by the Canada Revenue Agency.
D. over two years.
2. Testing intangible assets with indefinite useful lives for impairment:
A. occurs every year.
B. occurs when only there has been an indication of an impairment in the value of the asset
such as a reduction in cash flow generation, idle assets, etc.
C. never occurs because the asset has an indefinite useful life.
D. occurs whenever required by the company's auditors.
3. Which of the following statements best describes the accounting treatment of Intangible
Assets with indefinite lives?
A. All intangible assets are written down when their carrying values exceed their fair market
values.
B. With the exception of Goodwill, all intangible assets are written down when their carrying
values exceed their fair market values.
C. All intangible assets are written down when their carrying values exceed their
undiscounted future cash flows.
D. The recoverable amount is determined and compared to the carrying amount. If the
recoverable amount is greater than the carrying amount than no impairment exists;
otherwise, there is an impairment and the asset is written down to its recoverable amount.
4. The rationale behind allocating goodwill across a subsidiary's various cash-generating units
is:
A. that doing so will result in more accurate asset valuations.
B. that it is necessary to comply with IASB requirements.
C. that doing so would facilitate comparisons between operating segments.
D. that the cash-generating units will benefit from the synergies of the combination.
5. An impairment loss can be reversed when:
A. there is no indication that the impairment loss no longer exists or has been reduced and
there has not been a change in the estimates used to determine the assets recoverable
amount.
B. with the exception of goodwill, all intangible assets carrying values exceed their fair
market values.
C. the intangible assets carrying values exceed their undiscounted future cash flows.
D. with the exception of goodwill, the recoverable amount is determined and compared to the
carrying amount. If the recoverable amount is greater than the carrying amount then the
impairment loss previously recorded is reversed.
6. Under the Cost Method, which of the following statements is TRUE?
A. The parent's investment in the subsidiary is recorded at cost, and only changed thereafter
if there has been a permanent impairment in the value of the investment.
B. The parent records its pro rata share of the subsidiary's post-acquisition income as an
increase to the investment account and reduces the investment account with its share of
the dividends declared by the subsidiary.
C. The parent records its pro rata share of the subsidiary's cumulative earnings as an
increase to the investment account and reduces the investment account with its share of
the dividends declared by the subsidiary.
D. The parent's investment in the subsidiary is recorded at cost and reduced by any excess
dividends received from the subsidiary.
7. Under the Equity Method, which of the following statements is TRUE?
A. The parent's investment in the subsidiary is recorded at cost, and only changed thereafter
if there has been a permanent impairment in the value of the investment.
B. The parent records its pro rata share of the subsidiary's post-acquisition income as an
increase to the investment account and reduces the investment account with its share of
the dividends declared by the subsidiary.
C. The parent records its pro rata share of the subsidiary's cumulative earnings as an
increase to the investment account and reduces the investment account with its share of
the dividends declared by the subsidiary.
D. The parent's investment in the subsidiary is recorded at cost and reduced by any excess
dividends received from the subsidiary.
8. Consolidated Net Income would be:
A. higher if the parent chooses to use Equity Method rather than the Cost Method.
B. higher if the parent chooses to use the Equity Method rather than the Cost Method,
provided that the subsidiary showed a profit.
C. lower if the parent chooses to use Equity Method rather than the Cost Method.
D. the same under both the Cost and Equity Methods.
9. Consolidated Net Income is equal to:
A. the sum of the net incomes of both the parent and its subsidiaries.
B. the sum of the net incomes of both the parent and its subsidiaries less any inter-company
dividends.
C. the parent's net income excluding any income arising from its investment in the subsidiary.
D. the parent's net income excluding any income arising from its investment in the
Subsidiary, plus the net income of the subsidiary less the amortization of the acquisition
differential and the impairment of goodwill.
Errant Inc. purchased 100% of the outstanding voting shares of Grub Inc. for $200,000 on January
1, 2018. On that date, Grub Inc. had common shares and retained earnings worth $100,000 and
$60,000, respectively. Goodwill is tested annually for impairment. The balance sheets of both
companies, as well as Grub's fair market values on the date of acquisition are disclosed below:
Errant Inc.
Grub Inc.
Grub Inc.
(carrying value)
(carrying value)
(fair value)
Cash
$120,000
$76,000
$76,000
Accounts Receivable
$ 80,000
$40,000
$40,000
Inventory
$ 60,000
$34,000
$50,000
Equipment (net)
$400,000
$80,000
$70,000
Trademark
-
$70,000
$84,000
Total Assets
$660,000
$300,000
Current Liabilities
$180,000
$ 80,000
$80,000
Bonds Payable
$320,000
$ 60,000
$64,000
Common Shares
$ 90,000
$100,000
Retained Earnings
$ 70,000
$ 60,000
Total Liabilities and Equity
$660,000
$300,000
The net incomes for Errant and Grub for the year ended December 31, 2018 were $160,000 and
$90,000 respectively. Grub paid $9,000 in dividends to Errant during the year. There were no
other inter-company transactions during the year. Moreover, an impairment test conducted on
December 31, 2018 revealed that the Goodwill should actually have a value of $20,000. Both
companies use a FIFO system, and most of Grub's inventory on the date of acquisition was sold
during the year. Errant did not declare any dividends during the year.
Assume that Errant Inc. uses the Equity Method unless stated otherwise.
10. The amount of goodwill arising from this business combination is:
A. Nil.
B. $(24,000).
C. $12,000.
D. $24,000.
11. How much Goodwill will be carried on Grub's balance sheet on December 31, 2018?
A. Nil.
B. $(24,000).
C. $20,000.
D. $24,000.
12. Which of the following journal entries would be required on December 31, 2018 to record the
Impairment of the Goodwill?
A. No entry is required.
B.
Debit Credit
Equity method income $4,000
Investment in Grub
C.
$4,000
Debit Credit
Investment in Grub
$4,000
Equity method income
D.
$4,000
Debit Credit
Equity method income $4,000
Investment in Grub
$4,000
13. What would be the journal entry to record the dividends received by Errant during the year?
A.
Debit Credit
Cash
$9,000
Investment in Grub
B.
$9,000
Debit Credit
Cash
$9,000
Equity method income
C.
$9,000
Debit Credit
Cash
$9,000
Acquisition Differential
D.
$9,000
Debit Credit
Cash
$9,000
Goodwill
$9,000
14. Assuming that Errant uses the Cost Method, what would be the journal entry to record the
dividends received by Errant during the year?
A.
Debit Credit
Cash
$9,000
Investment in Grub
B.
$9,000
Debit Credit
Cash
$9,000
Dividend Income
C.
$9,000
Debit Credit
Cash
$9,000
Acquisition Income
D.
Debit Credit
Cash
Goodwill
$9,000
$9,000
$9,000
15. What would be Errant's journal entry to record the amortization of the acquisition differential
(excluding any goodwill impairment) on December 31, 2018? (Assume that any difference
between the fair values and book values of the equipment, trademark and bonds payable
would all be amortized over 10 years.)
A.
Debit
Equity method income $18,800
Investment in Grub
B.
Credit
$18,800
Debit
Credit
Equity method income $16,000
Investment in Grub
C.
$16,000
Debit
Investment in Grub
Credit
$18,800
Equity method income
D.
$18,800
Debit
Investment in Grub
Credit
$16,000
Equity method income
$16,000
16. What would be Errant's journal entry to record Grub's Net Income for 2018?
A.
Debit
Investment in Grub
Equity method income
B.
$81,000
Debit
Credit
Equity method income $90,000
Investment in Grub
C.
Credit
$81,000
$90,000
Debit
Investment in Grub
Credit
$90,000
Equity method income
D. No entry is required.
$90,000
17. If Errant used the equity method to account for its investment in Grub and had net income of
$160,000 from its own operations (before making any entries to reflect its investment in
Grub), what consolidated net income would Errant report in its consolidated income
statement for the year ended December 31, 2018?
A. $90,000.
B. $160,000.
C. $230,000.
D. $250,000.
18. The amount of Retained Earnings appearing on the consolidated balance sheet as at January
1, 2018 would be:
A. $60,000.
B. $70,000.
C. $130,000.
D. $160,000.
19. If Errant used the equity method to account for its investment in Grub and had net income of
$160,000 from its own operations (before making any entries to reflect its investment in
Grub) and paid no dividends in 2018, what amount of consolidated retained earnings would
appear on Errant's consolidated balance sheet as at December 31, 2018?
A. $60,000.
B. $130,000.
C. $160,000.
D. $300,000.
20. Consolidated Retained Earnings include:
A. consolidated net income less any dividends declared by either the parent or the subsidiary.
B. consolidated net income less any dividends declared by the parent only.
C. the parent's net income plus its share of the subsidiary's income less any dividends
declared by either the parent or the subsidiary.
D. the parent's share of consolidated net income less any dividends declared by the parent.
21. Company A sells inventory to its subsidiary, Company B at a mark-up of 20% on cost. Of what
significance is this transaction, should A wish to prepare consolidated financial statements?
The inventory is still in B's warehouse at year end.
A. This is not significant. Any inter-company profits are eliminated during the Consolidation
process.
B. A's net income will be under-stated.
C. B's income will be over-stated.
D. There will be unrealized profits in inventory which will only be realized once B sells this
inventory to outsiders.
22. Which of the following adjustments (if any) to Retained Earnings is necessary for the
preparation of the consolidated balance sheet?
A. Under both the Cost and Equity methods, the parent must record its share of its
Subsidiary's income.
B. Under both the Cost and Equity methods, the parent must record its share of its
Subsidiary's income less any dividends received from the subsidiary.
C. No adjustment is required under either the Cost or the Equity methods.
D. No adjustment is required if the parent has been using the Equity Method.
23. Any excess of fair value over book value attributable to land on the date of acquisition is to
be:
A. allocated to other identifiable assets.
B. capitalized and amortized.
C. charged to Retained Earnings on the date of acquisition.
D. taken into income when the Land is sold.
24. Consolidated shareholders' equity:
A. does not include any non-controlling Interest.
B. is equal to the sum of the Shareholders' Equity Sections of the parent and the subsidiary.
C. is equal to that of the parent company under the Equity Method.
D. is higher under the Equity Method when the subsidiary does not declare dividends.
25. If the parent company used the equity method to account for its investment and the
subsidiary company showed a profit for the past year, the consolidation elimination entry
required to remove a subsidiary's income from the parent's books prior to the preparation of
consolidated financial statements would be:
A.
Debit Credit
Equity method income - Parent $$$
Retained Earnings - Parent
B.
$$$
Debit Credit
Equity method income - Parent $$$
Investment in Subsidiary
C.
$$$
Debit Credit
Equity method income - Parent $$$
Acquisition Differential
D.
$$$
Debit Credit
Investment Income - Subsidiary $$$
Equity method income - Parent
$$$
26. The consolidation elimination entry required to remove any dividends received from a
subsidiary prior to the preparation of consolidated financial statements (assuming that the
parent uses the cost method to record its investment in the sub) would be:
A.
Debit Credit
Equity method income - Parent $$$
Retained Earnings - Parent
B.
$$$
Debit Credit
Dividend Income - Subsidiary $$$
Investment in Subsidiary
C.
$$$
Debit Credit
Dividend Income - Parent $$$
Dividends - Subsidiary
D.
$$$
Debit Credit
Equity method income - Subsidiary $$$
Equity method income - Parent
$$$
27. GNR Inc. owns 100% of NMX Inc. During the year, NMX Inc. earned a net income of $40,000
and paid dividends of $10,000.
Assuming that GNR Inc. uses the Equity Method, what effect would the above information
have on GNR's investment in NMX account?
A. An increase of $10,000.
B. An increase of $30,000.
C. An increase of $40,000.
D. No effect.
28. GNR Inc. owns 100% of NMX Inc. During the year, NMX Inc. earned a net income of $40,000
and paid dividends of $10,000.
Assuming that GNR Inc. uses the Cost Method, what effect would the above information have
on GNR's investment in NMX account?
A. An increase of $10,000.
B. An increase of $30,000.
C. An increase of $40,000
D. No effect.
29. GNR Inc. owns 100% of NMX Inc. During the year, NMX Inc. earned a net income of $40,000
and paid dividends of $10,000.
Assuming that GNR owned 80% of NXR instead of 100%, what would be the effect on GNR's
investment in NMX account under the Equity Method?
A. An increase of $24,000.
B. An increase of $30,000.
C. An increase of $40,000.
D. No effect.
30. GNR Inc. owns 100% of NMX Inc. During the year, NMX Inc. earned a net income of $40,000
and paid dividends of $10,000.
Assuming that GNR owned 80% of NMX instead of 100%, what would be the effect on GNR's
investment in NMX account under the Cost Method?
A. An increase of $24,000.
B. An increase of $30,000.
C. An increase of $40,000.
D. No effect.
31. GNR Inc. owns 100% of NMX Inc. During the year, NMX Inc. earned a net income of $40,000
and paid dividends of $10,000.
Assuming once again that GNR owned 80% of NXR instead of 100%, what would be the effect
on GNR's investment in NMX account under the cost method if GNR received $9,000 in
dividends from NMX?
A. An increase of $23,000.
B. An increase of $1,000
C. No effect.
D. A decrease of $1,000.
Big Guy Inc. purchased 80% of the outstanding voting shares of Humble Corp. for $360,000 on
July 1, 2017. On that date, Humble Corp. had Common Shares and Retained Earnings worth
$180,000 and $90,000, respectively. The Equipment had a remaining useful life of 5 years from
the date of acquisition. Humble's Bonds mature on July 1, 2027. Both companies use straight line
amortization, and no salvage value is assumed for assets. The trademark is assumed to have an
indefinite useful life.
Goodwill is tested annually for impairment. The balance sheets of both companies, as well as
Humble's fair market values on the date of acquisition are disclosed below:
Big Guy
Humble
Humble
(carrying value)
(carrying value)
(fair value)
Cash
$ 820,000
$245,000
$245,000
Accounts Receivable
$ 240,000
$ 40,000
$ 40,000
Inventory
$ 60,000
$ 45,000
$ 50,000
Equipment (net)
$ 900,000
$ 80,000
$ 72,000
Trademark
-
$ 90,000
$193,000
Total Assets
$2,000,000
$500,000
Current Liabilities
$ 200,000
$160,000
$160,000
Bonds Payable
$ 260,000
$ 70,000
$ 40,000
Common Shares
$ 900,000
$180,000
Retained Earnings
$ 640,000
$ 90,000
Total Liabilities and Equity
$2,000,000
$500,000
The following are the Financial Statements for both companies for the fiscal year ended June 30,
2020:
Income Statements:
Big Guy Humble
Sales
$640,000 $240,000
Investment Revenue $ 8,480 Less: Expenses:
Cost of Goods Sold $300,000 $160,000
Depreciation
$ 81,000 $ 34,000
Interest Expense
$ 34,000 $ 26,000
Other Expenses
$ 5,000 $ 8,000
Net Income
$228,480 $ 12,000
Retained Earnings Statements
Big Guy
Humble
Balance, July 1, 2019
$ 960,560 $48,000
Net Income
$ 228,480 $12,000
Dividends
$ 20,000
$ 2,000
Balance, June 30, 2020 $1,169,040 $58,000
Balance Sheets
Big Guy
Humble
Cash
$1,200,000 $365,000
Accounts Receivable
$ 270,000 $ 55,000
Investment in Humble
$ 319,040
Inventory
$ 70,000
Equipment (net)
$ 820,000 $ 65,000
Trademark
-
Total Assets
$2,679,040 $640,000
Current Liabilities
$ 350,000 $332,000
$ 70,000
$ 85,000
Bonds Payable
$ 260,000 $ 70,000
Common Shares
$ 900,000 $180,000
Retained Earnings
$1,169,040 $ 58,000
Total Liabilities and Equity $2,679,040 $640,000
An impairment test conducted in September 2018 on Big Guy's goodwill resulted in an
impairment loss of $10,000 being recorded. Both companies use a FIFO system, and Humble's
entire inventory on the date of acquisition was sold during the following year. During 2020,
Humble Inc. borrowed $20,000 in cash from Big Guy Inc. interest free to finance its operations.
Big Guy uses the Equity Method to account for its investment in Humble Corp. Assume that the
entity method applies.
32. The amount of Goodwill arising from this business combination is:
A. Nil.
B. $(40,000).
C. $50,000.
D. $64,000.
33. The amount of Non-Controlling Interest on Big Guy's consolidated balance sheet on July 1,
2017 would be:
A. $0.
B. $88,000.
C. $90,000.
D. $270,000.
34. The amount of depreciation expense appearing on Big Guy's June 30, 2020 consolidated
income statement would be:
A. $113,400.
B. $113,720.
C. $115,000.
D. $116,280.
35. The amount of interest expense appearing on Big Guy's June 30, 2020 consolidated income
statement would be:
A. $36,000.
B. $57,600.
C. $62,400.
D. $63,000.
36. The amount of other expenses appearing on Big Guy's June 30, 2020 consolidated income
statement would be:
A. $11,600.
B. $12,000.
C. $13,000.
D. $13,400.
37. The amount of non-controlling interest appearing on Big Guy's June 30, 2020 consolidated
income statement would be:
A. Nil.
B. $2,000.
C. $2,120.
D. $3,600.
38. The Net Income attributable to Big Guy appearing on Big Guy's consolidated income
statement on June 30, 2020 would be:
A. $216,080.
B. $218,480.
C. $228,480.
D. $279,600.
39. What amount of dividends would appear on Big Guy's consolidated statement of retained
earnings as at June 30, 2020?
A. $2,000.
B. $20,000.
C. $21,600.
D. $22,000.
40. Big Guy's consolidated retained earnings as at June 30, 2020 would be:
A. $1,169,040.
B. $1,486,400.
C. $1,500,000.
D. $1,508,000.
41. The amount of non-controlling interest appearing on Big Guy's consolidated balance sheet as
at June 30, 2020 would be:
A. $79,760.
B. $83,600.
C. $90,000.
D. $226,400.
42. What amount would appear as Big Guy's investment in Humble Corp. on its June 30, 2020
consolidated balance sheet?
A. $9,600.
B. $12,000.
C. $360,000.
D. The Investment in Humble Account would not appear on the consolidated balance sheet.
43. The amount of goodwill appearing on Big Guy's consolidated balance sheet as at June 30,
2020 would be:
A. Nil.
B. $30,000.
C. $40,000.
D. $50,000.
44. The net amount appearing on Big Guy's consolidated balance sheet for Equipment as at June
30, 2020 would be:
A. $872,000.
B. $878,600.
C. $881,800.
D. $885,000.
45. The amount of Current Liabilities appearing on Big Guy's consolidated balance sheet as at
June 30, 2020 would be:
A. $350,000.
B. $630,000.
C. $662,000.
D. $682,000.
46. The amount of Accounts Receivable appearing on Big Guy's consolidated balance sheet as at
June 30, 2020 would be:
A. $270,000.
B. $305,000.
C. $314,000.
D. $325,000.
47. The amount of Cash on Big Guy's consolidated balance sheet on June 30, 2020 would be:
A. $1,200,000.
B. $1,545,000.
C. $1,565,000.
D. $1,585,000.
48. The amount of Common Shares appearing on Big Guy's consolidated balance sheet on June
30, 2020 would be:
A. $900,000.
B. $1,044,000.
C. $1,080,000.
D. $1,800,000.
49. The amount of Bonds Payable appearing on Big Guy's consolidated balance sheet on June 30,
2020 would be:
A. $309,000.
B. $317,800.
C. $318,000.
D. $330,000.
50. Davis Inc. purchased a controlling interest in Martin Inc. on January 1, 2015, when Martin's
common shares and retained earnings were carried at $180,000 and $60,000 respectively. On
that date, Martin's book values approximated its fair values, with the exception of the
company's inventories and a Patent held by Martin. The patent, which had an estimated
remaining useful life of ten years, had a fair value which was $20,000 higher than its book
value. Martin's Inventories on January 1, 2015 were estimated to have a fair value that was
$16,000 higher than their book value.
It was predicted that Martin's goodwill impairment test, which was to be conducted on
December 31, 2016, would result in a loss equal to 10% of the goodwill (regardless of the
amount) at the date of acquisition being recorded. During 2015, Martin reported a net income
of $60,000 and paid $12,000 in dividends. Martin's 2016 net income and dividends were
$72,000 and $15,000, respectively. Martin uses straight-line amortization for all of its assets.
Assuming that Davis purchases 100% of Martin for $300,000, answer the following:
Required:
a) Prepare Davis' Equity Method journal entries for 2015 and 2016.
b) Compute the following as at December 31, 2016:
i. Investment in Martin Inc.
ii. Goodwill
iii. The amount of unamortized acquisition differential.
51. Davis Inc. purchased a controlling interest in Martin Inc. on January 1, 2015, when Martin's
common shares and retained earnings were carried at $180,000 and $60,000 respectively. On
that date, Martin's book values approximated its fair values, with the exception of the
company's inventories and a Patent held by Martin. The patent, which had an estimated
remaining useful life of ten years, had a fair value which was $20,000 higher than its book
value. Martin's Inventories on January 1, 2015 were estimated to have a fair value that was
$16,000 higher than their book value.
It was predicted that Martin's goodwill impairment test, which was to be conducted on
December 31, 2016, would result in a loss equal to 10% of the goodwill (regardless of the
amount) at the date of acquisition being recorded. During 2015, Martin reported a net income
of $60,000 and paid $12,000 in dividends. Martin's 2016 net income and dividends were
$72,000 and $15,000, respectively. Martin uses straight-line amortization for all of its assets.
Assuming that Davis purchases 80% of Martin for $300,000, answer the following:
Required:
Prepare Davis' Equity-Method journal entries for 2015 and 2016.
a) Compute the following as at December 31, 2016:
i. Investment in Martin Inc.
ii. Goodwill
iii. The amount of unamortized acquisition differential.
52. Linton Inc. purchased 75% of Marsh Inc. on January 1, 2015 for $1,000,000. Marsh's common
shares and retained earnings were worth $400,000 each on that date. The acquisition
differential was allocated as follows:
Trademark $15,000 (which had not been previously recorded)
Inventory $8,000 (fair value in excess of book value)
The balance was allocated to goodwill. The trademark had an estimated remaining useful life
of 10 years from the date of acquisition. Marsh Inc. uses straight line amortization.
In 2015, Marsh's net income was $40,000. Marsh paid $5,000 in dividends to shareholders on
record as at December 31, 2015. In 2016, Marsh reported a net income of $8,000 and
declared $1,000 in dividends.
Required:
a) Prepare the equity method journal entries for Linton for 2015 and 2016.
b) Calculate the value of Marsh's trademark as at December 31, 2016.
c) Prepare a statement that shows the changes in Linton's non-controlling interest in 2016.
53. Selectron Inc. acquired 60% of Insor Inc. on January 1, 2016 for $180,000, when Insor's
Common Shares and Retained Earnings were worth $60,000 and $180,000 respectively.
Insor's fair values approximated their book values on that date. Selectron currently uses the
Equity Method to account for its investment in Insor.
During 2016, investment Income in the amount of $12,000 and Dividends in the amount of
$1,200 were recorded in Selectron's investment in Insor account. During 2017, investment
income in the amount of $24,000 and Dividends in the amount of $2,400 were recorded in
Selectron's investment in Insor account. Typically, Insor declares dividends in the amount of
10% of its earnings.
Required:
a) Compute Insor's net income for 2016 and 2017.
b) Compute the amount of dividends declared by Insor in each year.
c) Compute the balance in the non-controlling interest count as at December 31, 2017.
54. Brand X Inc. purchased a controlling interest in Brand Y Inc. on January 1, 2017. On that date,
Brand Y Inc. had common shares and retained earnings worth $180,000 and $20,000,
respectively. Goodwill is tested annually for impairment. At the date of acquisition, Brand Y's
assets and liabilities were assessed for fair value as follows:
Inventory
$5,000 less than book value
Equipment
$30,000 less than book value
Patent
$24,000 greater than fair value
Bonds Payable $5,000 less than book value
The balance sheets of both companies, as at December 31, 2017 are disclosed below:
Brand X Inc. Brand Y Inc.
Cash
$200,000
$ 45,000
Accounts Receivable
$100,000
$ 40,000
Inventory
$ 80,000
$ 55,000
Equipment (net)
$220,000
$100,000
Patent
-
$ 60,000
Investment in Brand Y
$348,000
-
Total Assets
$948,000
$300,000
Current Liabilities
$480,000
$ 53,000
Bonds Payable
$270,000
$ 50,000
Common Shares
$100,000
$180,000
Retained Earnings
$98,000
$ 19,000
Total Liabilities and Equity $948,000
$300,000
The net incomes for Brand X and Brand Y for the year ended December 31, 2017 were $1,000
and $50,000 respectively. An impairment test conducted on December 31, 2017 revealed that
the Goodwill should actually have a value $2,000 lower than the amount calculated on the
date of acquisition. Both companies use a FIFO system, and Brand Y's inventory on the date
of acquisition was sold during the year. Brand X did not declare any dividends during the
year. However, Brand Y paid $51,000 in dividends to make up for several years in which the
company had never paid any dividends. Brand Y's equipment and patent have useful lives of
10 years and 6 years respectively from the date of acquisition. All bonds payable mature on
January 1, 2022.
Prepare Brand X's consolidated balance sheet as at December 31, 2017, assuming that Brand
X purchased 100% of Brand Y for $350,000 and accounts for its investment using the equity
method.
55. Brand X Inc. purchased a controlling interest in Brand Y Inc. on January 1, 2017. On that date,
Brand Y Inc. had common shares and retained earnings worth $180,000 and $20,000,
respectively. Goodwill is tested annually for impairment. At the date of acquisition, Brand Y's
assets and liabilities were assessed for fair value as follows:
Inventory
$5,000 less than book value
Equipment
$30,000 less than book value
Patent
$24,000 greater than fair value
Bonds Payable $5,000 less than book value
The balance sheets of both companies, as at December 31, 2017 are disclosed below:
Brand X Inc. Brand Y Inc.
Cash
$200,000
$ 45,000
Accounts Receivable
$100,000
$ 40,000
Inventory
$ 80,000
$ 55,000
Equipment (net)
$220,000
$100,000
Patent
-
$ 60,000
Investment in Brand Y
$348,000
-
Total Assets
$948,000
$300,000
Current Liabilities
$480,000
$ 53,000
Bonds Payable
$270,000
$ 50,000
Common Shares
$100,000
$180,000
Retained Earnings
$98,000
$ 19,000
Total Liabilities and Equity $948,000
$300,000
The net incomes for Brand X and Brand Y for the year ended December 31, 2017 were $1,000
and $50,000 respectively. An impairment test conducted on December 31, 2017 revealed that
the Goodwill should actually have a value $2,000 lower than the amount calculated on the
date of acquisition. Both companies use a FIFO system, and Brand Y's inventory on the date
of acquisition was sold during the year. Brand X did not declare any dividends during the
year. However, Brand Y paid $51,000 in dividends to make up for several years in which the
company had never paid any dividends. Brand Y's equipment and patent have useful lives of
10 years and 6 years respectively from the date of acquisition. All bonds payable mature on
January 1, 2022.
Prepare Brand X's consolidated balance sheet as at December 31, 2017, assuming that Brand
X purchased 80% of Brand Y for $350,000 and accounts for its investment using the equity
method.
Par Inc. purchased 70% of the outstanding voting shares of Sub Inc. for $700,000 on July 1,
2015. On that date, Sub Inc. had common shares and retained earnings worth $410,000 and
$170,000, respectively. The Equipment had a remaining useful life of 5 years from the date of
acquisition. Sub's bonds mature on July 1, 2020. The inventory was sold in the year following
the acquisition. Both companies use straight line amortization, and no salvage value is
assumed for assets. Par Inc. and Sub Inc. declared and paid $10,000 and $5,000 in dividends,
respectively during the year.
The balance sheets of both companies, as well as Sub's fair values immediately following the
acquisition are shown below:
Par Inc.
Sub Inc.
Sub Inc.
(carrying value) (carrying value) (fair value)
Cash
$ 600,000
$515,000
$515,000
Accounts Receivable
$ 140,000
$ 85,000
$ 85,000
Inventory
$ 60,000
$ 45,000
$ 60,000
Investment in Sub Inc.
$ 700,000
-
Equipment (net)
$ 50,000
$180,000
$185,000
Land
-
$115,000
$200,000
Total Assets
$1,550,000
$940,000
Current Liabilities
$ 100,000
$280,000
$280,000
Bonds Payable
$ 160,000
$ 80,000
$ 60,000
Common Shares
$ 800,000
$410,000
Retained Earnings
$ 490,000
$170,000
Total Liabilities and Equity $1,550,000
$940,000
The following are the financial statements for both companies for the fiscal year ended June
30, 2016:
Income Statements
Sales
$800,000 $300,000
Investment Revenue $ 21,000 Less: Expenses:
Cost of Goods Sold $240,000 $180,000
Depreciation
$ 10,000 $ 20,000
Interest Expense
$ 12,000 $ 40,000
Other Expenses
$ 8,000 $ 10,000
Net Income
$551,000 $ 50,000
Retained Earnings Statements
Balance, July 1, 2015
$ 490,000 $170,000
Net Income
$ 551,000 $ 50,000
Dividends
$ (10,000) $ (5,000)
Balance, June 30, 2016 $1,031,000 $215,000
Balance Sheets
Par Inc.
Sub Inc.
Cash
$ 647,500 $ 665,000
Accounts Receivable
$ 250,000 $ 35,000
Investment in Sub
$ 717,500
Inventory
$ 90,000
Equipment (net)
$ 750,000 $ 170,000
Land
-
Total Assets
$2,455,000 $1,030,000
Current Liabilities
$ 464,000 $ 325,000
Bonds Payable
$ 160,000 $ 80,000
$ 45,000
$ 115,000
Common Shares
$ 800,000 $ 410,000
Retained Earnings
$1,031,000 $ 215,000
Total Liabilities and Equity $2,455,000 $1,030,000
Both companies use a FIFO system, and Sub's entire inventory on the date of acquisition was
sold during the following year. During 2015, Sub Inc. borrowed $10,000 in cash from Par Inc.
interest free to finance its operations. Par uses the Equity Method to account for its
investment in Sub Inc. Corp.
56. Prepare Par's consolidated balance sheet as at the date of acquisition.
57. Prepare Par's consolidated income statement for the year ended June 30, 2016. Show the
allocation of consolidated net income between the controlling and non-controlling interests.
58. Prepare Par's statement of consolidated retained earnings for the year ended June 30, 2016.
59. Prepare a statement of changes in Non-Controlling Interest for the year ended June 30,
2016.
60. Prepare a consolidated balance sheet for Par Inc. as at June 30, 2016.
Remburn Inc. Inc. purchased 90% of the outstanding voting shares of Stanton Inc. for $90,000
on January 1, 2015. On that date, Stanton Inc. had common shares and retained earnings
worth $30,000 and $20,000, respectively. The equipment had a remaining useful life of 10
years from the date of acquisition. Stanton's trademark is estimated to have a remaining life
of 5 years from the date of acquisition. Stanton's bonds mature on January 1, 2035. The
inventory was sold in the year following the acquisition. Both companies use straight line
amortization, and no salvage value is assumed for assets. Remburn Inc. and Stanton Inc.
declared and paid $12,000 and $4,000 in dividends, respectively during the year.
The balance sheets of both companies, as well as Stanton's fair values on the date of
acquisition are shown below:
Remburn Inc. Stanton Inc.
Stanton Inc.
(carrying value) (carrying value) (fair value)
Cash
$400,000
$ 5,000
$ 5,000
Accounts Receivable
$240,000
$ 30,000
$30,000
Inventory
$ 60,000
$ 30,000
$50,000
Investment in Stanton Inc.
$ 90,000
-
Equipment (net)
$160,000
$ 25,000
$20,000
Land
-
$ 20,000
$30,000
Trademark
-
$ 10,000
$15,000
Total Assets
$950,000
$120,000
Current Liabilities
$500,000
$ 50,000
$50,000
Bonds Payable
$120,000
$ 20,000
$30,000
Common Shares
$200,000
$ 30,000
Retained Earnings
$130,000
$ 20,000
Total Liabilities and Equity $950,000
$120,000
The following are the financial statements for both companies for the fiscal year ended
December 31, 2015:
Income Statements
Sales
$295,750 $125,000
Dividend income
$ 3,600 -
Less: Expenses:
Cost of Goods Sold $200,000 $ 19,000
Depreciation
$ 10,000 $ 25,000
Interest Expense
$ 16,000 $ 36,000
Other Expenses
$ 5,000 $ 28,000
Gain on Sale of Land $ Net Income
$ (8,000)
$ 68,350 $ 25,000
Retained Earnings Statements
Balance, January 1, 2015
$130,000 $20,000
Net Income
$ 68,350 $25,000
Dividends
$(12,000) $(4,000)
Balance, December 31, 2015 $186,350 $41,000
Balance Sheets
Remburn Inc. Stanton Inc.
Cash
$190,950
$156,000
Accounts Receivable
$200,000
$150,000
Investment in Stanton Inc.
$ 90,000
Inventory
$100,000
$ 30,000
Equipment (net)
$350,000
$ 25,000
Trademark
-
$ 10,000
Total Assets
$930,950
$371,000
Current Liabilities
$424,600
$280,000
Bonds Payable
$120,000
$ 20,000
Common Shares
$200,000
$ 30,000
Retained Earnings
$186,350
$ 41,000
Total Liabilities and Equity $930,950
$371,000
Both companies use a FIFO system, and Stanton's entire inventory on the date of acquisition
was sold during the following year. During 2015, Stanton Inc. borrowed $20,000 in cash from
Remburn Inc. interest free to finance its operations. Remburn uses the Cost Method to
account for its investment in Stanton Inc. Moreover, Stanton sold all of its land during the
year for $18,000. Goodwill impairment for 2015 was determined to be $7,000. Remburn has
chosen to value the non-controlling interest in Stanton on the acquisition date at the fair
value of the subsidiary's identifiable net assets (parent company extension method).
61. Prepare Remburn's consolidated income statement for the year ended December 31, 2015
and show the allocation of the consolidated net income between the controlling and noncontrolling interests.
62. Prepare Remburn's statement of consolidated retained earnings as at December 31, 2015.
63. Prepare a statement of changes in Non-Controlling Interest for the year ended December 31,
2015.
64. Prepare a consolidated balance sheet for Remburn Inc. as at December 31, 2015.
65. Assume that Stanton's Equipment, Land and Trademark on the date of acquisition form part
of a single asset group. Assume also that these assets are expected to generate future cash
flows of $40,000. Does this mean that Stanton will have to recognize an impairment loss?
Explain.
66. Assume that Stanton had other Intangible assets with indefinite lives on its books at the date
of acquisition. How would the impairment test differ from that which would apply to its
amortizable assets, if at all? A simple explanation is required. Please do not use any numbers
to support your answer.
67. Assume that Stanton Inc.'s common shares had a fair market value of $51,000 on December
31, 2015. Assume also that the fair values of Stanton's identifiable net assets amounted to
$36,000. Assuming that Rembrandt's fair values equaled its book values on the date of
acquisition, has the consolidated Goodwill calculated above been impaired, and if so, by how
much?
Chapter 5 Key
1.
Intangible assets with definite useful lives should be amortized:
A. over their useful lives.
B. over the time periods provided under IAS 36 Impairment of Assets which prescribes
amortization periods for different classes of assets.
C. under the applicable capital cost allowance rates provided by the Canada Revenue
Agency.
D. over two years.
Accessibility: Keyboard Navigation
Blooms: Knowledge
Difficulty: Easy
Gradable: automatic
Hilton - Chapter 05 #1
Learning Objective: 05-01 Perform impairment tests on property, plant, equipment, intangible assets, and goodwill.
Topic: 05-03 Testing Goodwill and Other Assets for Impairment
Topic: 05-04 Property, Plant, Equipment, and Intangible Assets with Definite Useful Lives
2.
Testing intangible assets with indefinite useful lives for impairment:
A. occurs every year.
B. occurs when only there has been an indication of an impairment in the value of the
asset such as a reduction in cash flow generation, idle assets, etc.
C. never occurs because the asset has an indefinite useful life.
D. occurs whenever required by the company's auditors.
Accessibility: Keyboard Navigation
Blooms: Application
Difficulty: Easy
Gradable: automatic
Hilton - Chapter 05 #2
Learning Objective: 05-01 Perform impairment tests on property, plant, equipment, intangible assets, and goodwill.
Topic: 05-03 Testing Goodwill and Other Assets for Impairment
Topic: 05-05 Intangible Assets with Indefinite Useful Lives
3.
Which of the following statements best describes the accounting treatment of Intangible
Assets with indefinite lives?
A. All intangible assets are written down when their carrying values exceed their fair
market values.
B. With the exception of Goodwill, all intangible assets are written down when their
carrying values exceed their fair market values.
C. All intangible assets are written down when their carrying values exceed their
undiscounted future cash flows.
D. The recoverable amount is determined and compared to the carrying amount. If the
recoverable amount is greater than the carrying amount than no impairment exists;
otherwise, there is an impairment and the asset is written down to its recoverable
amount.
Accessibility: Keyboard Navigation
Blooms: Knowledge
Difficulty: Easy
Gradable: automatic
Hilton - Chapter 05 #3
Learning Objective: 05-01 Perform impairment tests on property, plant, equipment, intangible assets, and goodwill.
Topic: 05-03 Testing Goodwill and Other Assets for Impairment
Topic: 05-06 Cash-Generating Units and Goodwill
4.
The rationale behind allocating goodwill across a subsidiary's various cash-generating
units is:
A. that doing so will result in more accurate asset valuations.
B. that it is necessary to comply with IASB requirements.
C. that doing so would facilitate comparisons between operating segments.
D. that the cash-generating units will benefit from the synergies of the combination.
Accessibility: Keyboard Navigation
Blooms: Application
Difficulty: Moderate
Gradable: automatic
Hilton - Chapter 05 #4
Learning Objective: 05-01 Perform impairment tests on property, plant, equipment, intangible assets, and goodwill.
Topic: 05-03 Testing Goodwill and Other Assets for Impairment
Topic: 05-08 Disclosure Requirements
5.
An impairment loss can be reversed when:
A. there is no indication that the impairment loss no longer exists or has been reduced and
there has not been a change in the estimates used to determine the assets recoverable
amount.
B. with the exception of goodwill, all intangible assets carrying values exceed their fair
market values.
C. the intangible assets carrying values exceed their undiscounted future cash flows.
D. with the exception of goodwill, the recoverable amount is determined and compared to
the carrying amount. If the recoverable amount is greater than the carrying amount then
the impairment loss previously recorded is reversed.
Accessibility: Keyboard Navigation
Blooms: Application
Difficulty: Moderate
Gradable: automatic
Hilton - Chapter 05 #5
Learning Objective: 05-01 Perform impairment tests on property, plant, equipment, intangible assets, and goodwill.
Topic: 05-03 Testing Goodwill and Other Assets for Impairment
Topic: 05-07 Reversing an Impairment Loss
6.
Under the Cost Method, which of the following statements is TRUE?
A. The parent's investment in the subsidiary is recorded at cost, and only changed
thereafter if there has been a permanent impairment in the value of the investment.
B. The parent records its pro rata share of the subsidiary's post-acquisition income as an
increase to the investment account and reduces the investment account with its share
of the dividends declared by the subsidiary.
C. The parent records its pro rata share of the subsidiary's cumulative earnings as an
increase to the investment account and reduces the investment account with its share
of the dividends declared by the subsidiary.
D. The parent's investment in the subsidiary is recorded at cost and reduced by any
excess dividends received from the subsidiary.
Accessibility: Keyboard Navigation
Blooms: Comprehension
Difficulty: Moderate
Gradable: automatic
Hilton - Chapter 05 #6
Learning Objective: 05-01 Perform impairment tests on property, plant, equipment, intangible assets, and goodwill.
Topic: 05-01 Methods of Accounting for an Investment in a Subsidiary
7.
Under the Equity Method, which of the following statements is TRUE?
A. The parent's investment in the subsidiary is recorded at cost, and only changed
thereafter if there has been a permanent impairment in the value of the investment.
B. The parent records its pro rata share of the subsidiary's post-acquisition income as an
increase to the investment account and reduces the investment account with its share
of the dividends declared by the subsidiary.
C. The parent records its pro rata share of the subsidiary's cumulative earnings as an
increase to the investment account and reduces the investment account with its share
of the dividends declared by the subsidiary.
D. The parent's investment in the subsidiary is recorded at cost and reduced by any
excess dividends received from the subsidiary.
Accessibility: Keyboard Navigation
Blooms: Knowledge
Difficulty: Moderate
Gradable: automatic
Hilton - Chapter 05 #7
Learning Objective: 05-01 Perform impairment tests on property, plant, equipment, intangible assets, and goodwill.
Topic: 05-01 Methods of Accounting for an Investment in a Subsidiary
8.
Consolidated Net Income would be:
A. higher if the parent chooses to use Equity Method rather than the Cost Method.
B. higher if the parent chooses to use the Equity Method rather than the Cost Method,
provided that the subsidiary showed a profit.
C. lower if the parent chooses to use Equity Method rather than the Cost Method.
D. the same under both the Cost and Equity Methods.
Accessibility: Keyboard Navigation
Blooms: Comprehension
Difficulty: Easy
Gradable: automatic
Hilton - Chapter 05 #8
Learning Objective: 05-01 Perform impairment tests on property, plant, equipment, intangible assets, and goodwill.
Topic: 05-01 Methods of Accounting for an Investment in a Subsidiary
9.
Consolidated Net Income is equal to:
A. the sum of the net incomes of both the parent and its subsidiaries.
B. the sum of the net incomes of both the parent and its subsidiaries less any intercompany dividends.
C. the parent's net income excluding any income arising from its investment in the
subsidiary.
D. the parent's net income excluding any income arising from its investment in the
Subsidiary, plus the net income of the subsidiary less the amortization of the
acquisition differential and the impairment of goodwill.
Accessibility: Keyboard Navigation
Blooms: Knowledge
Difficulty: Easy
Gradable: automatic
Hilton - Chapter 05 #9
Learning Objective: 05-01 Perform impairment tests on property, plant, equipment, intangible assets, and goodwill.
Topic: 05-02 Consolidated Income and Retained Earnings Statement
Errant Inc. purchased 100% of the outstanding voting shares of Grub Inc. for $200,000 on January
1, 2018. On that date, Grub Inc. had common shares and retained earnings worth $100,000 and
$60,000, respectively. Goodwill is tested annually for impairment. The balance sheets of both
companies, as well as Grub's fair market values on the date of acquisition are disclosed below:
Errant Inc.
Grub Inc.
Grub Inc.
(carrying value)
(carrying value)
(fair value)
Cash
$120,000
$76,000
$76,000
Accounts Receivable
$ 80,000
$40,000
$40,000
Inventory
$ 60,000
$34,000
$50,000
Equipment (net)
$400,000
$80,000
$70,000
Trademark
-
$70,000
$84,000
Total Assets
$660,000
$300,000
Current Liabilities
$180,000
$ 80,000
$80,000
Bonds Payable
$320,000
$ 60,000
$64,000
Common Shares
$ 90,000
$100,000
Retained Earnings
$ 70,000
$ 60,000
Total Liabilities and Equity
$660,000
$300,000
The net incomes for Errant and Grub for the year ended December 31, 2018 were $160,000 and
$90,000 respectively. Grub paid $9,000 in dividends to Errant during the year. There were no
other inter-company transactions during the year. Moreover, an impairment test conducted on
December 31, 2018 revealed that the Goodwill should actually have a value of $20,000. Both
companies use a FIFO system, and most of Grub's inventory on the date of acquisition was sold
during the year. Errant did not declare any dividends during the year.
Assume that Errant Inc. uses the Equity Method unless stated otherwise.
Hilton - Chapter 05
10.
The amount of goodwill arising from this business combination is:
A. Nil.
B. $(24,000).
C. $12,000.
D. $24,000.
Calculation and allocation of acquisition differential:
Blooms: Application
Difficulty: Easy
Gradable: automatic
Hilton - Chapter 05 #10
Learning Objective: 05-02 Prepare schedules to allocate and amortize the acquisition differential on both an annual and a cumulative basis.
Topic: 05-09 Consolidation of a 100%-Owned Subsidiary
11.
How much Goodwill will be carried on Grub's balance sheet on December 31, 2018?
A. Nil.
B. $(24,000).
C. $20,000.
D. $24,000.
On Grub's separate entity financial statement balance sheet, there would be no goodwill
(the goodwill is recorded on the consolidated balance sheet).
Accessibility: Keyboard Navigation
Blooms: Comprehension
Difficulty: Easy
Gradable: automatic
Hilton - Chapter 05 #11
Learning Objective: 05-05 Prepare journal entries and calculate balance in the investment account under the equity method.
Topic: 05-20 Equity Method of Recording
12.
Which of the following journal entries would be required on December 31, 2018 to record
the Impairment of the Goodwill?
A. No entry is required.
B.
Debit Credit
Equity method income $4,000
Investment in Grub
C.
$4,000
Debit Credit
Investment in Grub
$4,000
Equity method income
D.
$4,000
Debit Credit
Equity method income $4,000
Investment in Grub
$4,000
Impairment of goodwill = $24,000 carrying value - $20,000 recoverable amount = $4,000
impairment.
Blooms: Application
Difficulty: Easy
Gradable: automatic
Hilton - Chapter 05 #12
Learning Objective: 05-05 Prepare journal entries and calculate balance in the investment account under the equity method.
Topic: 05-20 Equity Method of Recording
13.
What would be the journal entry to record the dividends received by Errant during the
year?
A.
Debit Credit
Cash
$9,000
Investment in Grub
B.
$9,000
Debit Credit
Cash
$9,000
Equity method income
C.
Debit Credit
Cash
$9,000
Acquisition Differential
D.
$9,000
$9,000
Debit Credit
Cash
$9,000
Goodwill
$9,000
Under the equity method, dividends received are a reduction to the Investment in
Subsidiary account.
Blooms: Comprehension
Difficulty: Easy
Gradable: automatic
Hilton - Chapter 05 #13
Learning Objective: 05-05 Prepare journal entries and calculate balance in the investment account under the equity method.
Topic: 05-20 Equity Method of Recording
14.
Assuming that Errant uses the Cost Method, what would be the journal entry to record the
dividends received by Errant during the year?
A.
Debit Credit
Cash
$9,000
Investment in Grub
B.
$9,000
Debit Credit
Cash
$9,000
Dividend Income
C.
$9,000
Debit Credit
Cash
$9,000
Acquisition Income
D.
$9,000
Debit Credit
Cash
Goodwill
$9,000
$9,000
Under the cost method, dividends received are recorded in the income statement as
revenue.
Blooms: Comprehension
Difficulty: Easy
Gradable: automatic
Hilton - Chapter 05 #14
Learning Objective: 05-02 Prepare schedules to allocate and amortize the acquisition differential on both an annual and a cumulative basis.
Topic: 05-09 Consolidation of a 100%-Owned Subsidiary
15.
What would be Errant's journal entry to record the amortization of the acquisition
differential (excluding any goodwill impairment) on December 31, 2018? (Assume that any
difference between the fair values and book values of the equipment, trademark and
bonds payable would all be amortized over 10 years.)
A.
Debit
Equity method income $18,800
Investment in Grub
B.
$18,800
Debit
$16,000
Debit
Investment in Grub
$18,800
Debit
Investment in Grub
Equity method income
Credit
$18,800
Equity method income
D.
Credit
Equity method income $16,000
Investment in Grub
C.
Credit
Credit
$16,000
$16,000
Schedule of amortization and impairment of acquisition differential:
Blooms: Application
Difficulty: Moderate
Gradable: automatic
Hilton - Chapter 05 #15
Learning Objective: 05-02 Prepare schedules to allocate and amortize the acquisition differential on both an annual and a cumulative basis.
Topic: 05-09 Consolidation of a 100%-Owned Subsidiary
16.
What would be Errant's journal entry to record Grub's Net Income for 2018?
A.
Debit
Investment in Grub
$81,000
Equity method income
B.
$81,000
Debit
Credit
Equity method income $90,000
Investment in Grub
C.
Credit
$90,000
Debit
Investment in Grub
Credit
$90,000
Equity method income
$90,000
D. No entry is required.
Under the equity method, the subsidiary's net income is recorded as an increase to the
investment asset account and as revenue in the income statement.
Blooms: Application
Difficulty: Moderate
Gradable: automatic
Hilton - Chapter 05 #16
Learning Objective: 05-05 Prepare journal entries and calculate balance in the investment account under the equity method.
Topic: 05-20 Equity Method of Recording
17.
If Errant used the equity method to account for its investment in Grub and had net income
of $160,000 from its own operations (before making any entries to reflect its investment in
Grub), what consolidated net income would Errant report in its consolidated income
statement for the year ended December 31, 2018?
A. $90,000.
B. $160,000.
C. $230,000.
D. $250,000.
Errant's consolidated net income using the equity method (The parent's separate-entity
net income should be equal to consolidated net income attributable to shareholders of the
parent):
Blooms: Application
Difficulty: Moderate
Gradable: automatic
Hilton - Chapter 05 #17
Learning Objective: 05-05 Prepare journal entries and calculate balance in the investment account under the equity method.
Topic: 05-20 Equity Method of Recording
18.
The amount of Retained Earnings appearing on the consolidated balance sheet as at
January 1, 2018 would be:
A. $60,000.
B. $70,000.
C. $130,000.
D. $160,000.
$70,000. The retained earnings on the consolidated financial statements is equal to the
parent's retained earnings on the date of acquisition.
Accessibility: Keyboard Navigation
Blooms: Comprehension
Difficulty: Easy
Gradable: automatic
Hilton - Chapter 05 #18
Learning Objective: 05-05 Prepare journal entries and calculate balance in the investment account under the equity method.
Topic: 05-20 Equity Method of Recording
19.
If Errant used the equity method to account for its investment in Grub and had net income
of $160,000 from its own operations (before making any entries to reflect its investment in
Grub) and paid no dividends in 2018, what amount of consolidated retained earnings
would appear on Errant's consolidated balance sheet as at December 31, 2018?
A. $60,000.
B. $130,000.
C. $160,000.
D. $300,000.
consolidated retained earnings = $300,000 = opening retained earnings of parent $70,000
+ parent's separate entity net income excluding any investment income from subsidiary
$160,000 + subsidiary's net income flowed to the parent $70,000 (= $90,000 net income $16,000 amortization on inventory acquisition differential - $4,000 goodwill acquisition
differential impairment loss).
Accessibility: Keyboard Navigation
Blooms: Application
Difficulty: Moderate
Gradable: automatic
Hilton - Chapter 05 #19
Learning Objective: 05-05 Prepare journal entries and calculate balance in the investment account under the equity method.
Topic: 05-20 Equity Method of Recording
20.
Consolidated Retained Earnings include:
A. consolidated net income less any dividends declared by either the parent or the
subsidiary.
B. consolidated net income less any dividends declared by the parent only.
C. the parent's net income plus its share of the subsidiary's income less any dividends
declared by either the parent or the subsidiary.
D. the parent's share of consolidated net income less any dividends declared by the
parent.
Accessibility: Keyboard Navigation
Blooms: Comprehension
Difficulty: Moderate
Gradable: automatic
Hilton - Chapter 05 #20
Learning Objective: 05-03 Prepare consolidated financial statements using the entity theory subsequent to the date of acquisition.
Topic: 05-12 Consolidation of an 80%-Owned SubsidiaryDirect Approach
21.
Company A sells inventory to its subsidiary, Company B at a mark-up of 20% on cost. Of
what significance is this transaction, should A wish to prepare consolidated financial
statements? The inventory is still in B's warehouse at year end.
A. This is not significant. Any inter-company profits are eliminated during the
Consolidation process.
B. A's net income will be under-stated.
C. B's income will be over-stated.
D. There will be unrealized profits in inventory which will only be realized once B sells this
inventory to outsiders.
Accessibility: Keyboard Navigation
Blooms: Knowledge
Difficulty: Easy
Gradable: automatic
Hilton - Chapter 05 #21
Learning Objective: 05-03 Prepare consolidated financial statements using the entity theory subsequent to the date of acquisition.
Topic: 05-12 Consolidation of an 80%-Owned SubsidiaryDirect Approach
22.
Which of the following adjustments (if any) to Retained Earnings is necessary for the
preparation of the consolidated balance sheet?
A. Under both the Cost and Equity methods, the parent must record its share of its
Subsidiary's income.
B. Under both the Cost and Equity methods, the parent must record its share of its
Subsidiary's income less any dividends received from the subsidiary.
C. No adjustment is required under either the Cost or the Equity methods.
D. No adjustment is required if the parent has been using the Equity Method.
Accessibility: Keyboard Navigation
Blooms: Comprehension
Difficulty: Easy
Gradable: automatic
Hilton - Chapter 05 #22
Learning Objective: 05-03 Prepare consolidated financial statements using the entity theory subsequent to the date of acquisition.
Topic: 05-12 Consolidation of an 80%-Owned SubsidiaryDirect Approach
23.
Any excess of fair value over book value attributable to land on the date of acquisition is to
be:
A. allocated to other identifiable assets.
B. capitalized and amortized.
C. charged to Retained Earnings on the date of acquisition.
D. taken into income when the Land is sold.
Accessibility: Keyboard Navigation
Blooms: Knowledge
Difficulty: Easy
Gradable: automatic
Hilton - Chapter 05 #23
Learning Objective: 05-01 Perform impairment tests on property, plant, equipment, intangible assets, and goodwill.
Topic: 05-02 Consolidated Income and Retained Earnings Statement
24.
Consolidated shareholders' equity:
A. does not include any non-controlling Interest.
B. is equal to the sum of the Shareholders' Equity Sections of the parent and the
subsidiary.
C. is equal to that of the parent company under the Equity Method.
D. is higher under the Equity Method when the subsidiary does not declare dividends.
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Blooms: Knowledge
Difficulty: Easy
Gradable: automatic
Hilton - Chapter 05 #24
Learning Objective: 05-05 Prepare journal entries and calculate balance in the investment account under the equity method.
Topic: 05-20 Equity Method of Recording
25.
If the parent company used the equity method to account for its investment and the
subsidiary company showed a profit for the past year, the consolidation elimination entry
required to remove a subsidiary's income from the parent's books prior to the preparation
of consolidated financial statements would be:
A.
Debit Credit
Equity method income - Parent $$$
Retained Earnings - Parent
B.
$$$
Debit Credit
Equity method income - Parent $$$
Investment in Subsidiary
C.
$$$
Debit Credit
Equity method income - Parent $$$
Acquisition Differential
D.
$$$
Debit Credit
Investment Income - Subsidiary $$$
Equity method income - Parent
$$$
Blooms: Comprehension
Difficulty: Moderate
Gradable: automatic
Hilton - Chapter 05 #25
Learning Objective: 05-08 (Appendix 5B) Prepare consolidated financial statements subsequent to date of acquisition using the working paper
approach.
Topic: 05-22 Year 1 Consolidated Financial Statement Working Paper
26.
The consolidation elimination entry required to remove any dividends received from a
subsidiary prior to the preparation of consolidated financial statements (assuming that the
parent uses the cost method to record its investment in the sub) would be:
A.
Debit Credit
Equity method income - Parent $$$
Retained Earnings - Parent
B.
$$$
Debit Credit
Dividend Income - Subsidiary $$$
Investment in Subsidiary
C.
$$$
Debit Credit
Dividend Income - Parent $$$
Dividends - Subsidiary
D.
$$$
Debit Credit
Equity method income - Subsidiary $$$
Equity method income - Parent
$$$
Blooms: Comprehension
Difficulty: Moderate
Gradable: automatic
Hilton - Chapter 05 #26
Learning Objective: 05-08 (Appendix 5B) Prepare consolidated financial statements subsequent to date of acquisition using the working paper
approach.
Topic: 05-22 Year 1 Consolidated Financial Statement Working Paper
27.
GNR Inc. owns 100% of NMX Inc. During the year, NMX Inc. earned a net income of
$40,000 and paid dividends of $10,000.
Assuming that GNR Inc. uses the Equity Method, what effect would the above information
have on GNR's investment in NMX account?
A. An increase of $10,000.
B. An increase of $30,000.
C. An increase of $40,000.
D. No effect.
Accessibility: Keyboard Navigation
Blooms: Application
Difficulty: Easy
Gradable: automatic
Hilton - Chapter 05 #27
Learning Objective: 05-05 Prepare journal entries and calculate balance in the investment account under the equity method.
Topic: 05-20 Equity Method of Recording
28.
GNR Inc. owns 100% of NMX Inc. During the year, NMX Inc. earned a net income of
$40,000 and paid dividends of $10,000.
Assuming that GNR Inc. uses the Cost Method, what effect would the above information
have on GNR's investment in NMX account?
A. An increase of $10,000.
B. An increase of $30,000.
C. An increase of $40,000
D. No effect.
Accessibility: Keyboard Navigation
Blooms: Comprehension
Difficulty: Easy
Gradable: automatic
Hilton - Chapter 05 #28
Learning Objective: 05-05 Prepare journal entries and calculate balance in the investment account under the equity method.
Topic: 05-20 Equity Method of Recording
29.
GNR Inc. owns 100% of NMX Inc. During the year, NMX Inc. earned a net income of
$40,000 and paid dividends of $10,000.
Assuming that GNR owned 80% of NXR instead of 100%, what would be the effect on
GNR's investment in NMX account under the Equity Method?
A. An increase of $24,000.
B. An increase of $30,000.
C. An increase of $40,000.
D. No effect.
Accessibility: Keyboard Navigation
Blooms: Application
Difficulty: Moderate
Gradable: automatic
Hilton - Chapter 05 #29
Learning Objective: 05-05 Prepare journal entries and calculate balance in the investment account under the equity method.
Topic: 05-20 Equity Method of Recording
30.
GNR Inc. owns 100% of NMX Inc. During the year, NMX Inc. earned a net income of
$40,000 and paid dividends of $10,000.
Assuming that GNR owned 80% of NMX instead of 100%, what would be the effect on
GNR's investment in NMX account under the Cost Method?
A. An increase of $24,000.
B. An increase of $30,000.
C. An increase of $40,000.
D. No effect.
Accessibility: Keyboard Navigation
Blooms: Application
Difficulty: Moderate
Gradable: automatic
Hilton - Chapter 05 #30
Learning Objective: 05-05 Prepare journal entries and calculate balance in the investment account under the equity method.
Topic: 05-20 Equity Method of Recording
31.
GNR Inc. owns 100% of NMX Inc. During the year, NMX Inc. earned a net income of
$40,000 and paid dividends of $10,000.
Assuming once again that GNR owned 80% of NXR instead of 100%, what would be the
effect on GNR's investment in NMX account under the cost method if GNR received
$9,000 in dividends from NMX?
A. An increase of $23,000.
B. An increase of $1,000
C. No effect.
D. A decrease of $1,000.
Accessibility: Keyboard Navigation
Blooms: Application
Difficulty: Easy
Gradable: automatic
Hilton - Chapter 05 #31
Learning Objective: 05-02 Prepare schedules to allocate and amortize the acquisition differential on both an annual and a cumulative basis.
Topic: 05-09 Consolidation of a 100%-Owned Subsidiary
Big Guy Inc. purchased 80% of the outstanding voting shares of Humble Corp. for $360,000 on
July 1, 2017. On that date, Humble Corp. had Common Shares and Retained Earnings worth
$180,000 and $90,000, respectively. The Equipment had a remaining useful life of 5 years from
the date of acquisition. Humble's Bonds mature on July 1, 2027. Both companies use straight line
amortization, and no salvage value is assumed for assets. The trademark is assumed to have an
indefinite useful life.
Goodwill is tested annually for impairment. The balance sheets of both companies, as well as
Humble's fair market values on the date of acquisition are disclosed below:
Big Guy
Humble
Humble
(carrying value)
(carrying value)
(fair value)
Cash
$ 820,000
$245,000
$245,000
Accounts Receivable
$ 240,000
$ 40,000
$ 40,000
Inventory
$ 60,000
$ 45,000
$ 50,000
Equipment (net)
$ 900,000
$ 80,000
$ 72,000
Trademark
-
$ 90,000
$193,000
Total Assets
$2,000,000
$500,000
Current Liabilities
$ 200,000
$160,000
$160,000
Bonds Payable
$ 260,000
$ 70,000
$ 40,000
Common Shares
$ 900,000
$180,000
Retained Earnings
$ 640,000
$ 90,000
Total Liabilities and Equity
$2,000,000
$500,000
The following are the Financial Statements for both companies for the fiscal year ended June 30,
2020:
Income Statements:
Big Guy Humble
Sales
$640,000 $240,000
Investment Revenue $ 8,480 Less: Expenses:
Cost of Goods Sold $300,000 $160,000
Depreciation
$ 81,000 $ 34,000
Interest Expense
$ 34,000 $ 26,000
Other Expenses
$ 5,000 $ 8,000
Net Income
$228,480 $ 12,000
Retained Earnings Statements
Big Guy
Humble
Balance, July 1, 2019
$ 960,560 $48,000
Net Income
$ 228,480 $12,000
Dividends
$ 20,000
$ 2,000
Balance, June 30, 2020 $1,169,040 $58,000
Balance Sheets
Big Guy
Humble
Cash
$1,200,000 $365,000
Accounts Receivable
$ 270,000 $ 55,000
Investment in Humble
$ 319,040
Inventory
$ 70,000
Equipment (net)
$ 820,000 $ 65,000
Trademark
-
Total Assets
$2,679,040 $640,000
Current Liabilities
$ 350,000 $332,000
$ 70,000
$ 85,000
Bonds Payable
$ 260,000 $ 70,000
Common Shares
$ 900,000 $180,000
Retained Earnings
$1,169,040 $ 58,000
Total Liabilities and Equity $2,679,040 $640,000
An impairment test conducted in September 2018 on Big Guy's goodwill resulted in an
impairment loss of $10,000 being recorded. Both companies use a FIFO system, and Humble's
entire inventory on the date of acquisition was sold during the following year. During 2020,
Humble Inc. borrowed $20,000 in cash from Big Guy Inc. interest free to finance its operations.
Big Guy uses the Equity Method to account for its investment in Humble Corp. Assume that the
entity method applies.
Hilton - Chapter 05
32.
The amount of Goodwill arising from this business combination is:
A. Nil.
B. $(40,000).
C. $50,000.
D. $64,000.
Calculation and allocation of acquisition differential:
Blooms: Application
Difficulty: Moderate
Gradable: automatic
Hilton - Chapter 05 #32
Learning Objective: 05-03 Prepare consolidated financial statements using the entity theory subsequent to the date of acquisition.
Topic: 05-12 Consolidation of an 80%-Owned SubsidiaryDirect Approach
33.
The amount of Non-Controlling Interest on Big Guy's consolidated balance sheet on July 1,
2017 would be:
A. $0.
B. $88,000.
C. $90,000.
D. $270,000.
Acquisition cost for 80% = $360,000.Implied acquisition cost for 100% = $450,000 =
$360,000 / 0.80.NCI = $450,000 x 20% = $90,000.
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Blooms: Application
Difficulty: Moderate
Gradable: automatic
Hilton - Chapter 05 #33
Learning Objective: 05-03 Prepare consolidated financial statements using the entity theory subsequent to the date of acquisition.
Topic: 05-12 Consolidation of an 80%-Owned SubsidiaryDirect Approach
34.
The amount of depreciation expense appearing on Big Guy's June 30, 2020 consolidated
income statement would be:
A. $113,400.
B. $113,720.
C. $115,000.
D. $116,280.
Depreciation expense on consolidated income statement = $113,400.
Blooms: Application
Difficulty: Moderate
Gradable: automatic
Hilton - Chapter 05 #34
Learning Objective: 05-03 Prepare consolidated financial statements using the entity theory subsequent to the date of acquisition.
Topic: 05-12 Consolidation of an 80%-Owned SubsidiaryDirect Approach
35.
The amount of interest expense appearing on Big Guy's June 30, 2020 consolidated
income statement would be:
A. $36,000.
B. $57,600.
C. $62,400.
D. $63,000.
Interest expense on consolidated income statement = $63,000.
Blooms: Application
Difficulty: Moderate
Gradable: automatic
Hilton - Chapter 05 #35
Learning Objective: 05-03 Prepare consolidated financial statements using the entity theory subsequent to the date of acquisition.
Topic: 05-12 Consolidation of an 80%-Owned SubsidiaryDirect Approach
36.
The amount of other expenses appearing on Big Guy's June 30, 2020 consolidated income
statement would be:
A. $11,600.
B. $12,000.
C. $13,000.
D. $13,400.
Other expenses on consolidated income statement = $13,000.
Blooms: Application
Difficulty: Easy
Gradable: automatic
Hilton - Chapter 05 #36
Learning Objective: 05-03 Prepare consolidated financial statements using the entity theory subsequent to the date of acquisition.
Topic: 05-12 Consolidation of an 80%-Owned SubsidiaryDirect Approach
37.
The amount of non-controlling interest appearing on Big Guy's June 30, 2020 consolidated
income statement would be:
A. Nil.
B. $2,000.
C. $2,120.
D. $3,600.
Calculation of consolidated net income:
Blooms: Application
Difficulty: Moderate
Gradable: automatic
Hilton - Chapter 05 #37
Learning Objective: 05-03 Prepare consolidated financial statements using the entity theory subsequent to the date of acquisition.
Topic: 05-12 Consolidation of an 80%-Owned SubsidiaryDirect Approach
38.
The Net Income attributable to Big Guy appearing on Big Guy's consolidated income
statement on June 30, 2020 would be:
A. $216,080.
B. $218,480.
C. $228,480.
D. $279,600.
Calculation of consolidated net income:
Blooms: Comprehension
Difficulty: Easy
Gradable: automatic
Hilton - Chapter 05 #38
Learning Objective: 05-03 Prepare consolidated financial statements using the entity theory subsequent to the date of acquisition.
Topic: 05-12 Consolidation of an 80%-Owned SubsidiaryDirect Approach
39.
What amount of dividends would appear on Big Guy's consolidated statement of retained
earnings as at June 30, 2020?
A. $2,000.
B. $20,000.
C. $21,600.
D. $22,000.
Dividends on consolidated retained earnings = dividends paid by Big Guy (parent) to
parent's shareholders = $20,000.
Accessibility: Keyboard Navigation
Blooms: Comprehension
Difficulty: Easy
Gradable: automatic
Hilton - Chapter 05 #39
Learning Objective: 05-03 Prepare consolidated financial statements using the entity theory subsequent to the date of acquisition.
Topic: 05-12 Consolidation of an 80%-Owned SubsidiaryDirect Approach
40.
Big Guy's consolidated retained earnings as at June 30, 2020 would be:
A. $1,169,040.
B. $1,486,400.
C. $1,500,000.
D. $1,508,000.
Under the equity method, consolidated retained earnings are equal to the retained
earnings of the parent = $1,169,040.
Accessibility: Keyboard Navigation
Blooms: Comprehension
Difficulty: Easy
Gradable: automatic
Hilton - Chapter 05 #40
Learning Objective: 05-03 Prepare consolidated financial statements using the entity theory subsequent to the date of acquisition.
Topic: 05-12 Consolidation of an 80%-Owned SubsidiaryDirect Approach
41.
The amount of non-controlling interest appearing on Big Guy's consolidated balance sheet
as at June 30, 2020 would be:
A. $79,760.
B. $83,600.
C. $90,000.
D. $226,400.
NCI on consolidated balance sheet = $79,760.
Blooms: Application
Difficulty: Moderate
Gradable: automatic
Hilton - Chapter 05 #41
Learning Objective: 05-03 Prepare consolidated financial statements using the entity theory subsequent to the date of acquisition.
Topic: 05-12 Consolidation of an 80%-Owned SubsidiaryDirect Approach
42.
What amount would appear as Big Guy's investment in Humble Corp. on its June 30, 2020
consolidated balance sheet?
A. $9,600.
B. $12,000.
C. $360,000.
D. The Investment in Humble Account would not appear on the consolidated balance
sheet.
Accessibility: Keyboard Navigation
Blooms: Comprehension
Difficulty: Easy
Gradable: automatic
Hilton - Chapter 05 #42
Learning Objective: 05-03 Prepare consolidated financial statements using the entity theory subsequent to the date of acquisition.
Topic: 05-12 Consolidation of an 80%-Owned SubsidiaryDirect Approach
43.
The amount of goodwill appearing on Big Guy's consolidated balance sheet as at June 30,
2020 would be:
A. Nil.
B. $30,000.
C. $40,000.
D. $50,000.
Consolidated goodwill = $40,000 = $50,000 goodwill on original business combination $10,000 impairment loss.
Accessibility: Keyboard Navigation
Blooms: Application
Difficulty: Moderate
Gradable: automatic
Hilton - Chapter 05 #43
Learning Objective: 05-03 Prepare consolidated financial statements using the entity theory subsequent to the date of acquisition.
Topic: 05-12 Consolidation of an 80%-Owned SubsidiaryDirect Approach
44.
The net amount appearing on Big Guy's consolidated balance sheet for Equipment as at
June 30, 2020 would be:
A. $872,000.
B. $878,600.
C. $881,800.
D. $885,000.
Equipment (net) on consolidated balance sheet = $881,800.
Blooms: Application
Difficulty: Moderate
Gradable: automatic
Hilton - Chapter 05 #44
Learning Objective: 05-03 Prepare consolidated financial statements using the entity theory subsequent to the date of acquisition.
Topic: 05-12 Consolidation of an 80%-Owned SubsidiaryDirect Approach
45.
The amount of Current Liabilities appearing on Big Guy's consolidated balance sheet as at
June 30, 2020 would be:
A. $350,000.
B. $630,000.
C. $662,000.
D. $682,000.
Current Liabilities on consolidated balance sheet = $662,000.
Blooms: Application
Difficulty: Moderate
Gradable: automatic
Hilton - Chapter 05 #45
Learning Objective: 05-03 Prepare consolidated financial statements using the entity theory subsequent to the date of acquisition.
Topic: 05-12 Consolidation of an 80%-Owned SubsidiaryDirect Approach
46.
The amount of Accounts Receivable appearing on Big Guy's consolidated balance sheet as
at June 30, 2020 would be:
A. $270,000.
B. $305,000.
C. $314,000.
D. $325,000.
Accounts Receivable on consolidated balance sheet = $305,000.
Blooms: Application
Difficulty: Moderate
Gradable: automatic
Hilton - Chapter 05 #46
Learning Objective: 05-03 Prepare consolidated financial statements using the entity theory subsequent to the date of acquisition.
Topic: 05-12 Consolidation of an 80%-Owned SubsidiaryDirect Approach
47.
The amount of Cash on Big Guy's consolidated balance sheet on June 30, 2020 would be:
A. $1,200,000.
B. $1,545,000.
C. $1,565,000.
D. $1,585,000.
Cash on consolidated balance sheet = $1,565,000.
Blooms: Application
Difficulty: Easy
Gradable: automatic
Hilton - Chapter 05 #47
Learning Objective: 05-03 Prepare consolidated financial statements using the entity theory subsequent to the date of acquisition.
Topic: 05-12 Consolidation of an 80%-Owned SubsidiaryDirect Approach
48.
The amount of Common Shares appearing on Big Guy's consolidated balance sheet on
June 30, 2020 would be:
A. $900,000.
B. $1,044,000.
C. $1,080,000.
D. $1,800,000.
Common Shares on consolidated balance sheet = Common Shares on Big Guy (parent)
balance sheet = $900,000.
Accessibility: Keyboard Navigation
Blooms: Comprehension
Difficulty: Easy
Gradable: automatic
Hilton - Chapter 05 #48
Learning Objective: 05-03 Prepare consolidated financial statements using the entity theory subsequent to the date of acquisition.
Topic: 05-12 Consolidation of an 80%-Owned SubsidiaryDirect Approach
49.
The amount of Bonds Payable appearing on Big Guy's consolidated balance sheet on June
30, 2020 would be:
A. $309,000.
B. $317,800.
C. $318,000.
D. $330,000.
Bonds Payable on consolidated balance sheet = $309,000.
Blooms: Application
Difficulty: Moderate
Gradable: automatic
Hilton - Chapter 05 #49
Learning Objective: 05-03 Prepare consolidated financial statements using the entity theory subsequent to the date of acquisition.
Topic: 05-12 Consolidation of an 80%-Owned SubsidiaryDirect Approach
50.
Davis Inc. purchased a controlling interest in Martin Inc. on January 1, 2015, when Martin's
common shares and retained earnings were carried at $180,000 and $60,000 respectively.
On that date, Martin's book values approximated its fair values, with the exception of the
company's inventories and a Patent held by Martin. The patent, which had an estimated
remaining useful life of ten years, had a fair value which was $20,000 higher than its book
value. Martin's Inventories on January 1, 2015 were estimated to have a fair value that was
$16,000 higher than their book value.
It was predicted that Martin's goodwill impairment test, which was to be conducted on
December 31, 2016, would result in a loss equal to 10% of the goodwill (regardless of the
amount) at the date of acquisition being recorded. During 2015, Martin reported a net
income of $60,000 and paid $12,000 in dividends. Martin's 2016 net income and dividends
were $72,000 and $15,000, respectively. Martin uses straight-line amortization for all of its
assets.
Assuming that Davis purchases 100% of Martin for $300,000, answer the following:
Required:
a) Prepare Davis' Equity Method journal entries for 2015 and 2016.
b) Compute the following as at December 31, 2016:
i. Investment in Martin Inc.
ii. Goodwill
iii. The amount of unamortized acquisition differential.
a) Equity Method Journal Entries
2015:
Debit
Credit
Investment in Martin Inc. $300,000
Cash
$300,000
Investment in Martin Inc. $60,000
Investment Income
Investment Income
$60,000
$18,000
Investment in Martin Inc.
Cash
$18,000
$12,000
Investment in Martin Inc.
2016:
$12,000
Debit
Credit
Investment in Martin Inc. $72,000
Investment Income
Investment Income
$72,000
$4,400
Investment in Martin Inc.
Cash
$4,400
$15,000
Investment in Martin Inc.
$15,000
b) i) Investment in Martin Inc.:
Cost:
$300,000
Add: 2015 Income:
$60,000
Less: 2015 Dividends
($12,000)
Less: 2015 Acquisition Differential Amortization: ($18,000)
Add: 2016 Income:
$72,000
Less: 2016 Dividends
($15,000)
Less: 2016 Acquisition Differential Amortization: ($4,400)
Investment in Martin Inc., December 31, 2016: $382,600
ii) Goodwill:
Purchase Price of Martin:
$300,000
Less: book value of Martin's net identifiable assets ($240,000)
Acquisition differential
$60,000
Less: Excess of fair value over book values:
Inventories
($20,000)
Patent
($16,000)
Goodwill at date of acquisition
$24,000
Less: Impairment Loss (10%)
($2,400)
Goodwill
$21,600
iii) The only unamortized acquisition differential remaining would be 8/10 of the excess
fair value of the patent, which would be $16,000 plus the goodwill of $21,600 for a total of
$37,600.
Blooms: Application
Difficulty: Moderate
Gradable: manual
Hilton - Chapter 05 #50
Learning Objective: 05-03 Prepare consolidated financial statements using the entity theory subsequent to the date of acquisition.
Learning Objective: 05-05 Prepare journal entries and calculate balance in the investment account under the equity method.
Topic: 05-12 Consolidation of an 80%-Owned SubsidiaryDirect Approach
Topic: 05-20 Equity Method of Recording
51.
Davis Inc. purchased a controlling interest in Martin Inc. on January 1, 2015, when Martin's
common shares and retained earnings were carried at $180,000 and $60,000 respectively.
On that date, Martin's book values approximated its fair values, with the exception of the
company's inventories and a Patent held by Martin. The patent, which had an estimated
remaining useful life of ten years, had a fair value which was $20,000 higher than its book
value. Martin's Inventories on January 1, 2015 were estimated to have a fair value that was
$16,000 higher than their book value.
It was predicted that Martin's goodwill impairment test, which was to be conducted on
December 31, 2016, would result in a loss equal to 10% of the goodwill (regardless of the
amount) at the date of acquisition being recorded. During 2015, Martin reported a net
income of $60,000 and paid $12,000 in dividends. Martin's 2016 net income and dividends
were $72,000 and $15,000, respectively. Martin uses straight-line amortization for all of its
assets.
Assuming that Davis purchases 80% of Martin for $300,000, answer the following:
Required:
Prepare Davis' Equity-Method journal entries for 2015 and 2016.
a) Compute the following as at December 31, 2016:
i. Investment in Martin Inc.
ii. Goodwill
iii. The amount of unamortized acquisition differential.
a) Equity Method Journal Entries
2015:
Debit
Credit
Investment in Martin Inc. $300,000
Cash
$300,000
Investment in Martin Inc. $48,000
Investment Income
Investment Income
Investment in Martin Inc.
$48,000
$14,400
$14,400
Cash
$9,600
Investment in Martin Inc.
2016:
$9,600
Debit
Credit
Investment in Martin Inc. $57,600
Investment Income
Investment Income
$57,600
$9,520
Investment in Martin Inc.
Cash
$9,520
$12,000
Investment in Martin Inc.
$12,000
b) i) Investment in Martin Inc.:
Cost:
$300,000
Add: 2015 Income:
$48,000
Less: 2015 Dividends
($9,600)
Less: 2015 Acquisition Differential Amortization: ($14,400)
Add: 2016 Income:
$57,600
Less: 2016 Dividends
($12,000)
Less: 2016 Acquisition Differential Amortization: ($9,520)
Investment in Martin Inc., December 31, 2016: $360,080
ii) Goodwill
Purchase Price of Martin: 80%
$300,000
Imputed value at 100%
$375,000
Less: book value of Martin's net identifiable assets $240,000
Acquisition differential
$135,000
Less: excess of fair value over book values:
Inventories
($20,000)
Patent
($16,000)
Goodwill at date of acquisition
$99,000
Less: impairment loss (10%)
($9,900)
Goodwill
$89,100
iii) The only unamortized acquisition differential remaining would be 8/10 of the excess
fair value of the patent, which would be $16,000 plus the goodwill of $89,100 for a total of
$105,100.
Blooms: Application
Difficulty: Moderate
Gradable: manual
Hilton - Chapter 05 #51
Learning Objective: 05-03 Prepare consolidated financial statements using the entity theory subsequent to the date of acquisition.
Learning Objective: 05-05 Prepare journal entries and calculate balance in the investment account under the equity method.
Topic: 05-12 Consolidation of an 80%-Owned SubsidiaryDirect Approach
Topic: 05-20 Equity Method of Recording
52.
Linton Inc. purchased 75% of Marsh Inc. on January 1, 2015 for $1,000,000. Marsh's
common shares and retained earnings were worth $400,000 each on that date. The
acquisition differential was allocated as follows:
Trademark $15,000 (which had not been previously recorded)
Inventory $8,000 (fair value in excess of book value)
The balance was allocated to goodwill. The trademark had an estimated remaining useful
life of 10 years from the date of acquisition. Marsh Inc. uses straight line amortization.
In 2015, Marsh's net income was $40,000. Marsh paid $5,000 in dividends to shareholders
on record as at December 31, 2015. In 2016, Marsh reported a net income of $8,000 and
declared $1,000 in dividends.
Required:
a) Prepare the equity method journal entries for Linton for 2015 and 2016.
b) Calculate the value of Marsh's trademark as at December 31, 2016.
c) Prepare a statement that shows the changes in Linton's non-controlling interest in
2016.
a) Equity Method Journal Entries
2015:
Debit
Credit
Investment in Marsh Inc. $1,000,000
Cash
$1,000,000
Investment in Marsh Inc. $30,000
Investment Income
Investment Income
$30,000
$7,125
Investment in Marsh Inc.
Cash
$7,125
$3,750
Investment in Marsh Inc.
2016:
$3,750
Debit
Credit
Investment in Marsh Inc. $6,000
Investment Income
$6,000
Investment Income
$1,125
Investment in Marsh Inc.
Cash
$1,125
$750
Investment in Marsh Inc.
$750
b) Trademark: $15,000 - ($1,500 x 2) = $12,000
c) Changes in Non-Controlling Interest:
Non-Controlling Interest, January 1, 2015:
($1,333,333 x 25 %)
$333,333
2015 Net Income (Non-Controlling Share)
($40,000 x 25%) - ($8,000+$1,500) x 25%
$7,625
Less: 2015 Dividends (Non-Controlling Share)
($5,000 x 25%)
($1,250)
2016 Net Income (Non-Controlling Share)
($8,000 x 25%) - ($1,500 x 25%)
$1,625
Less: 2016 Dividends (Non-Controlling Share)
($1,000 x 25%)
($250)
Non-Controlling Interest, December 31, 2016 $341,083
Blooms: Application
Difficulty: Moderate
Gradable: manual
Hilton - Chapter 05 #52
Learning Objective: 05-02 Prepare schedules to allocate and amortize the acquisition differential on both an annual and a cumulative basis.
Learning Objective: 05-05 Prepare journal entries and calculate balance in the investment account under the equity method.
Topic: 05-09 Consolidation of a 100%-Owned Subsidiary
Topic: 05-20 Equity Method of Recording
53.
Selectron Inc. acquired 60% of Insor Inc. on January 1, 2016 for $180,000, when Insor's
Common Shares and Retained Earnings were worth $60,000 and $180,000 respectively.
Insor's fair values approximated their book values on that date. Selectron currently uses
the Equity Method to account for its investment in Insor.
During 2016, investment Income in the amount of $12,000 and Dividends in the amount of
$1,200 were recorded in Selectron's investment in Insor account. During 2017, investment
income in the amount of $24,000 and Dividends in the amount of $2,400 were recorded in
Selectron's investment in Insor account. Typically, Insor declares dividends in the amount
of 10% of its earnings.
Required:
a) Compute Insor's net income for 2016 and 2017.
b) Compute the amount of dividends declared by Insor in each year.
c) Compute the balance in the non-controlling interest count as at December 31, 2017.
a) Insor's Net Income for 2016 and 2017 had to be $20,000 and $40,000 respectively.
Insor's Net Income for 2016 is calculated as follows:
2016 Net Income flowing through investment account = $12,000;
$12,000/60% = $20,000
Insor's 2017 net income would be calculated in the same manner, and would be $40,000.
b) Dividends, 2016 = $20,000 x 10 % = $2,000 (or $1,200/60%) Dividends, 2017 = $4,000.
c) Non-Controlling Interest:
Fair value of Insor at date of acquisition: $300,000
Add: 2016 Net Income
$20,000
Less: 2016 Dividends
($2,000)
Add: 2017 Net Income
$40,000
Less: 2017 Dividends
($4,000)
Book value of Insor, December 31, 2017 $354,000
Non-Controlling Interest (40%)
$141,600
Blooms: Application
Difficulty: Moderate
Gradable: manual
Hilton - Chapter 05 #53
Learning Objective: 05-03 Prepare consolidated financial statements using the entity theory subsequent to the date of acquisition.
Learning Objective: 05-05 Prepare journal entries and calculate balance in the investment account under the equity method.
Topic: 05-12 Consolidation of an 80%-Owned SubsidiaryDirect Approach
Topic: 05-20 Equity Method of Recording
54.
Brand X Inc. purchased a controlling interest in Brand Y Inc. on January 1, 2017. On that
date, Brand Y Inc. had common shares and retained earnings worth $180,000 and $20,000,
respectively. Goodwill is tested annually for impairment. At the date of acquisition, Brand
Y's assets and liabilities were assessed for fair value as follows:
Inventory
$5,000 less than book value
Equipment
$30,000 less than book value
Patent
$24,000 greater than fair value
Bonds Payable $5,000 less than book value
The balance sheets of both companies, as at December 31, 2017 are disclosed below:
Brand X Inc. Brand Y Inc.
Cash
$200,000
$ 45,000
Accounts Receivable
$100,000
$ 40,000
Inventory
$ 80,000
$ 55,000
Equipment (net)
$220,000
$100,000
Patent
-
$ 60,000
Investment in Brand Y
$348,000
-
Total Assets
$948,000
$300,000
Current Liabilities
$480,000
$ 53,000
Bonds Payable
$270,000
$ 50,000
Common Shares
$100,000
$180,000
Retained Earnings
$98,000
$ 19,000
Total Liabilities and Equity $948,000
$300,000
The net incomes for Brand X and Brand Y for the year ended December 31, 2017 were
$1,000 and $50,000 respectively. An impairment test conducted on December 31, 2017
revealed that the Goodwill should actually have a value $2,000 lower than the amount
calculated on the date of acquisition. Both companies use a FIFO system, and Brand Y's
inventory on the date of acquisition was sold during the year. Brand X did not declare any
dividends during the year. However, Brand Y paid $51,000 in dividends to make up for
several years in which the company had never paid any dividends. Brand Y's equipment
and patent have useful lives of 10 years and 6 years respectively from the date of
acquisition. All bonds payable mature on January 1, 2022.
Prepare Brand X's consolidated balance sheet as at December 31, 2017, assuming that
Brand X purchased 100% of Brand Y for $350,000 and accounts for its investment using
the equity method.
Brand X Inc.
Consolidated Balance Sheet
As at December 31, 2017
Cash
$245,000
Accounts Receivable
$140,000
Inventory
(80 + 55 + 5 - 5)
$135,000
Equipment (net)
(220 + 100 - 30 + 3) $293,000
Patent
(60 + 24 - 4)
$ 80,000
Goodwill
* see below
$154,000
Total Assets
$1,047,000
Current Liabilities
$533,000
Bonds Payable
(270 + 50 - 5 + 1)
$316,000
Common Shares
$100,000
Retained Earnings
$ 98,000
Total Liabilities and Equity
$1,047,000
The following explanation may help students understand how some of these figures were
derived:
Goodwill:
Purchase Price
$350,000
Less: Fair value of net identifiable assets acquired: $194,000
Goodwill
$156,000
Less: Impairment loss
($2,000)
Goodwill
$154,000
Consolidated Retained Earnings:
Brand X Retained Earnings, January 1, 2017: $48,000
Add: Brand X Net Income
$50,000
Less: Dividends
n/a
Consolidated Retained Earnings
$98,000
Note: Consolidated Net Income under the Equity Method would be Brand X's net
income.
Blooms: Application
Difficulty: Moderate
Gradable: manual
Hilton - Chapter 05 #54
Learning Objective: 05-02 Prepare schedules to allocate and amortize the acquisition differential on both an annual and a cumulative basis.
Learning Objective: 05-05 Prepare journal entries and calculate balance in the investment account under the equity method.
Topic: 05-09 Consolidation of a 100%-Owned Subsidiary
Topic: 05-20 Equity Method of Recording
55.
Brand X Inc. purchased a controlling interest in Brand Y Inc. on January 1, 2017. On that
date, Brand Y Inc. had common shares and retained earnings worth $180,000 and $20,000,
respectively. Goodwill is tested annually for impairment. At the date of acquisition, Brand
Y's assets and liabilities were assessed for fair value as follows:
Inventory
$5,000 less than book value
Equipment
$30,000 less than book value
Patent
$24,000 greater than fair value
Bonds Payable $5,000 less than book value
The balance sheets of both companies, as at December 31, 2017 are disclosed below:
Brand X Inc. Brand Y Inc.
Cash
$200,000
$ 45,000
Accounts Receivable
$100,000
$ 40,000
Inventory
$ 80,000
$ 55,000
Equipment (net)
$220,000
$100,000
Patent
-
$ 60,000
Investment in Brand Y
$348,000
-
Total Assets
$948,000
$300,000
Current Liabilities
$480,000
$ 53,000
Bonds Payable
$270,000
$ 50,000
Common Shares
$100,000
$180,000
Retained Earnings
$98,000
$ 19,000
Total Liabilities and Equity $948,000
$300,000
The net incomes for Brand X and Brand Y for the year ended December 31, 2017 were
$1,000 and $50,000 respectively. An impairment test conducted on December 31, 2017
revealed that the Goodwill should actually have a value $2,000 lower than the amount
calculated on the date of acquisition. Both companies use a FIFO system, and Brand Y's
inventory on the date of acquisition was sold during the year. Brand X did not declare any
dividends during the year. However, Brand Y paid $51,000 in dividends to make up for
several years in which the company had never paid any dividends. Brand Y's equipment
and patent have useful lives of 10 years and 6 years respectively from the date of
acquisition. All bonds payable mature on January 1, 2022.
Prepare Brand X's consolidated balance sheet as at December 31, 2017, assuming that
Brand X purchased 80% of Brand Y for $350,000 and accounts for its investment using the
equity method.
Brand X Inc.
Consolidated Balance Sheet
As at December 31, 2017
Cash
$245,000
Accounts Receivable
$140,000
Inventory
(80 + 55 + 5 - 5)
$135,000
Equipment (net)
(220 + 100 - 30 + 3) $293,000
Patent
(60 + 24 - 4)
$ 80,000
Goodwill
* see below
$241,500
Total Assets
$1,134,500
Current Liabilities
$533,000
Bonds Payable
(270 + 50 - 5 + 1)
$316,000
Non-Controlling Interest
$ 87,500
Common Shares
$100,000
Retained Earnings
$98,000
Total Liabilities and Equity
$1,134,500
The following explanations may help students understand how some of the figures were
derived:
Non-Controlling Interest:
NCI at acquisition
$87,500
Income ($50,000 x .2)
10,000
Dividends ($51,000 x .2) (10,200)
Inventory
1,000
Equipment
200
Patent
(800)
Bond
200
Goodwill
(400)
$87,500
Goodwill:
Purchase Price
$437,500 (imputed at 100% = ($350,000 / 0.8))
Less: Fair value of net identifiable assets acquired: (100% x $194,000) ($194,000)
Goodwill
$243,500
Less: Impairment Loss
($2,000)
Goodwill
$241,500
Blooms: Application
Difficulty: Moderate
Gradable: manual
Hilton - Chapter 05 #55
Learning Objective: 05-02 Prepare schedules to allocate and amortize the acquisition differential on both an annual and a cumulative basis.
Learning Objective: 05-05 Prepare journal entries and calculate balance in the investment account under the equity method.
Topic: 05-09 Consolidation of a 100%-Owned Subsidiary
Topic: 05-20 Equity Method of Recording
Par Inc. purchased 70% of the outstanding voting shares of Sub Inc. for $700,000 on July 1,
2015. On that date, Sub Inc. had common shares and retained earnings worth $410,000
and $170,000, respectively. The Equipment had a remaining useful life of 5 years from the
date of acquisition. Sub's bonds mature on July 1, 2020. The inventory was sold in the year
following the acquisition. Both companies use straight line amortization, and no salvage
value is assumed for assets. Par Inc. and Sub Inc. declared and paid $10,000 and $5,000 in
dividends, respectively during the year.
The balance sheets of both companies, as well as Sub's fair values immediately following
the acquisition are shown below:
Par Inc.
Sub Inc.
Sub Inc.
(carrying value) (carrying value) (fair value)
Cash
$ 600,000
$515,000
$515,000
Accounts Receivable
$ 140,000
$ 85,000
$ 85,000
Inventory
$ 60,000
$ 45,000
$ 60,000
Investment in Sub Inc.
$ 700,000
-
Equipment (net)
$ 50,000
$180,000
$185,000
Land
-
$115,000
$200,000
Total Assets
$1,550,000
$940,000
Current Liabilities
$ 100,000
$280,000
$280,000
Bonds Payable
$ 160,000
$ 80,000
$ 60,000
Common Shares
$ 800,000
$410,000
Retained Earnings
$ 490,000
$170,000
Total Liabilities and Equity $1,550,000
$940,000
The following are the financial statements for both companies for the fiscal year ended
June 30, 2016:
Income Statements
Sales
$800,000 $300,000
Investment Revenue $ 21,000 Less: Expenses:
Cost of Goods Sold $240,000 $180,000
Depreciation
$ 10,000 $ 20,000
Interest Expense
$ 12,000 $ 40,000
Other Expenses
$ 8,000 $ 10,000
Net Income
$551,000 $ 50,000
Retained Earnings Statements
Balance, July 1, 2015
$ 490,000 $170,000
Net Income
$ 551,000 $ 50,000
Dividends
$ (10,000) $ (5,000)
Balance, June 30, 2016 $1,031,000 $215,000
Balance Sheets
Par Inc.
Sub Inc.
Cash
$ 647,500 $ 665,000
Accounts Receivable
$ 250,000 $ 35,000
Investment in Sub
$ 717,500
Inventory
$ 90,000
Equipment (net)
$ 750,000 $ 170,000
Land
-
Total Assets
$2,455,000 $1,030,000
Current Liabilities
$ 464,000 $ 325,000
Bonds Payable
$ 160,000 $ 80,000
$ 45,000
$ 115,000
Common Shares
$ 800,000 $ 410,000
Retained Earnings
$1,031,000 $ 215,000
Total Liabilities and Equity $2,455,000 $1,030,000
Both companies use a FIFO system, and Sub's entire inventory on the date of acquisition
was sold during the following year. During 2015, Sub Inc. borrowed $10,000 in cash from
Par Inc. interest free to finance its operations. Par uses the Equity Method to account for
its investment in Sub Inc. Corp.
Hilton - Chapter 05
56.
Prepare Par's consolidated balance sheet as at the date of acquisition.
Par Inc.
Consolidated Balance Sheet
As at July 1, 2015
Cash
$1,115,000
Accounts Receivable
$225,000
Inventory
$120,000
Equipment (net)
$135,000
Land
$200,000
Goodwill*
$295,000
Total Assets
$2,190,000
Current Liabilities
$380,000
Bonds Payable
$220,000
Non-Controlling Interest
$300,000
Common Shares
$800,000
Retained Earnings
$490,000
Total Liabilities and Equity
$2,190,000
*Purchase Price for 70%
$700,000
Implied value of 100% interest
$1,000,000
Less: Fair value of net identifiable assets acquired $705,000
Goodwill
$295,000
Blooms: Application
Difficulty: Moderate
Gradable: manual
Hilton - Chapter 05 #56
Learning Objective: 05-02 Prepare schedules to allocate and amortize the acquisition differential on both an annual and a cumulative basis.
Learning Objective: 05-03 Prepare consolidated financial statements using the entity theory subsequent to the date of acquisition.
Topic: 05-09 Consolidation of a 100%-Owned Subsidiary
Topic: 05-12 Consolidation of an 80%-Owned SubsidiaryDirect Approach
57.
Prepare Par's consolidated income statement for the year ended June 30, 2016. Show the
allocation of consolidated net income between the controlling and non-controlling
interests.
Par Inc.
Consolidated Income Statement
for the Year ended June 30, 2016
Sales
$1,100,000
Less: Expenses:
Cost of Goods Sold:
$435,000 ($240,000 + $180,000) + $15,000
Depreciation
$31,000
($10,000 + $20,000) + $1,000
Interest Expense
$56,000
($12,000 + $40,000) + $4,000
Other Expenses
$18,000
Consolidated Net Income
$560,000
Less: Non-Controlling Interest ($9,000)
Parent's Share of CNI
($50,000 - $15,000 - $1,000 - $4,000) x 30%
$551,000
Blooms: Application
Difficulty: Moderate
Gradable: manual
Hilton - Chapter 05 #57
Learning Objective: 05-02 Prepare schedules to allocate and amortize the acquisition differential on both an annual and a cumulative basis.
Learning Objective: 05-05 Prepare journal entries and calculate balance in the investment account under the equity method.
Topic: 05-09 Consolidation of a 100%-Owned Subsidiary
Topic: 05-20 Equity Method of Recording
58.
Prepare Par's statement of consolidated retained earnings for the year ended June 30,
2016.
Par Inc.
Statement of Consolidated Retained Earnings
for the year Ended June 30, 2016
Beginning Retained Earnings:
$490,000
Add: Parent's share of Consolidated Net Income: $551,000
Less: Dividends:
($10,000)
Ending Consolidated Retained Earnings:
$1,031,000
Blooms: Application
Difficulty: Moderate
Gradable: manual
Hilton - Chapter 05 #58
Learning Objective: 05-02 Prepare schedules to allocate and amortize the acquisition differential on both an annual and a cumulative basis.
Learning Objective: 05-05 Prepare journal entries and calculate balance in the investment account under the equity method.
Topic: 05-09 Consolidation of a 100%-Owned Subsidiary
Topic: 05-20 Equity Method of Recording
59.
Prepare a statement of changes in Non-Controlling Interest for the year ended June 30,
2016.
Par Inc.
Statement of Changes in Non-Controlling Interest
for the year ended June 30, 2016
Non-controlling interest, July 1, 2015
$300,000
NCI share of consolidated net income
$9,000
NCI share of dividends
($1,500)
Non-controlling interest, June 30, 2016
$307,500
The ending balance can be calculated as follows:
Subsidiary's share capital
$410,000
Subsidiary's retained earnings
$215,000
Unamortized acquisition differential
$400,000
Total
$1,025,000
Noncontrolling interest at 30%
$307,500
Blooms: Application
Difficulty: Moderate
Gradable: manual
Hilton - Chapter 05 #59
Learning Objective: 05-02 Prepare schedules to allocate and amortize the acquisition differential on both an annual and a cumulative basis.
Topic: 05-09 Consolidation of a 100%-Owned Subsidiary
60.
Prepare a consolidated balance sheet for Par Inc. as at June 30, 2016.
Par Inc.
Consolidated Balance Sheet
As at June 30, 2016
Cash
(647.5 + 665)
$1,312,500
Accounts Receivable
(250 + 35 - 10) $275,000
Inventory
(90 + 45)
Equipment (net)
(750 + 170 + 4) $924,000
Land
(0 + 115 + 85) $200,000
$135,000
Goodwill
$295,000
Total Assets
$3,141,500
Current Liabilities
(464 + 325 - 10) $779,000
Bonds Payable
(160 + 80 - 16) $224,000
Non-Controlling Interest
$307,500
Common Shares
$800,000
Retained Earnings
$1,031,000
Total Liabilities and Equity
$3,141,500
Blooms: Application
Difficulty: Moderate
Gradable: manual
Hilton - Chapter 05 #60
Learning Objective: 05-02 Prepare schedules to allocate and amortize the acquisition differential on both an annual and a cumulative basis.
Learning Objective: 05-05 Prepare journal entries and calculate balance in the investment account under the equity method.
Topic: 05-19 Subsidiary Acquired During the Year
Topic: 05-20 Equity Method of Recording
Remburn Inc. Inc. purchased 90% of the outstanding voting shares of Stanton Inc. for
$90,000 on January 1, 2015. On that date, Stanton Inc. had common shares and retained
earnings worth $30,000 and $20,000, respectively. The equipment had a remaining useful
life of 10 years from the date of acquisition. Stanton's trademark is estimated to have a
remaining life of 5 years from the date of acquisition. Stanton's bonds mature on January
1, 2035. The inventory was sold in the year following the acquisition. Both companies use
straight line amortization, and no salvage value is assumed for assets. Remburn Inc. and
Stanton Inc. declared and paid $12,000 and $4,000 in dividends, respectively during the
year.
The balance sheets of both companies, as well as Stanton's fair values on the date of
acquisition are shown below:
Remburn Inc. Stanton Inc.
Stanton Inc.
(carrying value) (carrying value) (fair value)
Cash
$400,000
$ 5,000
$ 5,000
Accounts Receivable
$240,000
$ 30,000
$30,000
Inventory
$ 60,000
$ 30,000
$50,000
Investment in Stanton Inc.
$ 90,000
-
Equipment (net)
$160,000
$ 25,000
$20,000
Land
-
$ 20,000
$30,000
Trademark
-
$ 10,000
$15,000
Total Assets
$950,000
$120,000
Current Liabilities
$500,000
$ 50,000
$50,000
Bonds Payable
$120,000
$ 20,000
$30,000
Common Shares
$200,000
$ 30,000
Retained Earnings
$130,000
$ 20,000
Total Liabilities and Equity $950,000
$120,000
The following are the financial statements for both companies for the fiscal year ended
December 31, 2015:
Income Statements
Sales
$295,750 $125,000
Dividend income
$ 3,600 -
Less: Expenses:
Cost of Goods Sold $200,000 $ 19,000
Depreciation
$ 10,000 $ 25,000
Interest Expense
$ 16,000 $ 36,000
Other Expenses
$ 5,000 $ 28,000
Gain on Sale of Land $ Net Income
$ (8,000)
$ 68,350 $ 25,000
Retained Earnings Statements
Balance, January 1, 2015
$130,000 $20,000
Net Income
$ 68,350 $25,000
Dividends
$(12,000) $(4,000)
Balance, December 31, 2015 $186,350 $41,000
Balance Sheets
Remburn Inc. Stanton Inc.
Cash
$190,950
$156,000
Accounts Receivable
$200,000
$150,000
Investment in Stanton Inc.
$ 90,000
Inventory
$100,000
$ 30,000
Equipment (net)
$350,000
$ 25,000
Trademark
-
$ 10,000
Total Assets
$930,950
$371,000
Current Liabilities
$424,600
$280,000
Bonds Payable
$120,000
$ 20,000
Common Shares
$200,000
$ 30,000
Retained Earnings
$186,350
$ 41,000
Total Liabilities and Equity $930,950
$371,000
Both companies use a FIFO system, and Stanton's entire inventory on the date of
acquisition was sold during the following year. During 2015, Stanton Inc. borrowed $20,000
in cash from Remburn Inc. interest free to finance its operations. Remburn uses the Cost
Method to account for its investment in Stanton Inc. Moreover, Stanton sold all of its land
during the year for $18,000. Goodwill impairment for 2015 was determined to be $7,000.
Remburn has chosen to value the non-controlling interest in Stanton on the acquisition
date at the fair value of the subsidiary's identifiable net assets (parent company extension
method).
Hilton - Chapter 05
61.
Prepare Remburn's consolidated income statement for the year ended December 31, 2015
and show the allocation of the consolidated net income between the controlling and noncontrolling interests.
Remburn Inc.
Consolidated Income Statement
For the Year ended December 31, 2015
Sales
$420,750
Less: Expenses:
Cost of Goods Sold
(200,000 + 19,000 + 20,000) $ 239,000
Depreciation
(10,000 + 25,000 - 500)
$34,500
Interest Expense
(16,000 + 36,000 - 500)
$51,500
Other Expenses
(5,000 + 28,000 + 1,000)
$34,000
Loss on Sale of Land
(-8,000 + 10,000)
$2,000
Goodwill impairment
$7,000
Consolidated Net Income
$52,750
Less: Non-Controlling Interest
($1,100)
Parent's share of Consolidated Net Income
$51,650
Blooms: Application
Difficulty: Moderate
Gradable: manual
Hilton - Chapter 05 #61
Learning Objective: 05-04 Prepare consolidated financial statements using parent company extension theory subsequent to the date of
acquisition.
Topic: 05-16 Parent Company Extension Theory
62.
Prepare Remburn's statement of consolidated retained earnings as at December 31, 2015.
Remburn Inc.
Statement of Retained Earnings
As at December 31, 2015
Beginning Retained Earnings:
$130,000
Add: Parent's share of Consolidated Net Income: $51,650
Less: Dividends:
($12,000)
Ending Consolidated Retained Earnings:
$169,650
Blooms: Application
Difficulty: Moderate
Gradable: manual
Hilton - Chapter 05 #62
Learning Objective: 05-05 Prepare journal entries and calculate balance in the investment account under the equity method.
Topic: 05-20 Equity Method of Recording
63.
Prepare a statement of changes in Non-Controlling Interest for the year ended December
31, 2015.
Remburn Inc.
Statement of Non-Controlling Interest
For the year ended December 31, 2015
Non-Controlling interest at acquisition $7,000
NCI share of consolidated net income $1,100
NCI share of dividends
($ 400)
Non-Controlling Interest:
$7,700
Blooms: Application
Difficulty: Moderate
Gradable: manual
Hilton - Chapter 05 #63
Learning Objective: 05-04 Prepare consolidated financial statements using parent company extension theory subsequent to the date of
acquisition.
Topic: 05-16 Parent Company Extension Theory
Topic: 05-17 Acquisition Differential Assigned to Liabilities
Topic: 05-18 Intercompany Receivables and Payables
Topic: 05-19 Subsidiary Acquired During the Year
64.
Prepare a consolidated balance sheet for Remburn Inc. as at December 31, 2015.
Remburn Inc.
Consolidated Balance Sheet
As at December 31, 2015
Cash
(190,950 + 156,000)
Accounts Receivable
(200,000 + 150,000 - 20,000) $330,000
Inventory
(100,000 + 30,000)
$130,000
Equipment (net)
(350,000 + 25,000 - 4,500)
$370,500
Trademark
(0 + 10,000 + 4,000)
$14,000
Goodwill
* see below
$20,000
Total Assets
$346,950
$1,211,450
Current Liabilities
(424,600 + 280,000 - 20,000) $684,600
Bonds Payable
(120,000 + 20,000 + 9,500) $149,500
Non-Controlling Interest
$7,700
Common Shares
$200,000
Retained Earnings
$169,650
Total Liabilities and Equity
$1,211,450
*Purchase Price (90%)
$90,000
Value assigned to NCI
$7,000 (10% of $70,000 fair value of identifiable net assets)
$97,000
Less: Fair value of net identifiable assets acquired $50,000
$47,000
Allocated:
Inventory $20,000
Equipment (5,000)
Land 10,000
Trademark 5,000
Bonds payable (10,000)
$20,000
Goodwill (parent's share)
$27,000
Amortization/impairment of acquisition differential:
At acq'n 2015
Balance
Inventory
$20,000 ($20,000) $0
Equipment
($5,000) $500
Land
$10,000 ($10,000) $0
Trademark
$5,000
($1,000) $4,000
Bonds payable ($10,000) $500
Goodwill
($4,500)
($9,500)
$27,000 ($7,000) $20,000
Blooms: Application
Difficulty: Difficult
Gradable: manual
Hilton - Chapter 05 #64
Learning Objective: 05-04 Prepare consolidated financial statements using parent company extension theory subsequent to the date of
acquisition.
Topic: 05-16 Parent Company Extension Theory
Topic: 05-17 Acquisition Differential Assigned to Liabilities
Topic: 05-18 Intercompany Receivables and Payables
Topic: 05-19 Subsidiary Acquired During the Year
65.
Assume that Stanton's Equipment, Land and Trademark on the date of acquisition form
part of a single asset group. Assume also that these assets are expected to generate
future cash flows of $40,000. Does this mean that Stanton will have to recognize an
impairment loss? Explain.
Not necessarily. Given the above information, Stanton has "failed" the first part of the
required two-part impairment test required for long-lived assets since the expected future
cash flows of this asset group of $40,000 falls well short of the carrying values of the
assets within the group, which total $55,000. Given this information, the second part of the
two-part impairment test must be applied.
The second part of the impairment test requires that an impairment loss be recognized if
Stanton fails the first part of the impairment test and the fair values of the assets within
the group are less than their total carrying values. However, since the fair values of the
assets are higher than their carrying values ($65,000 vs. $55,000 respectively), there would
be no impairment loss in this case.
Blooms: Application
Blooms: Comprehension
Difficulty: Moderate
Gradable: manual
Hilton - Chapter 05 #65
Learning Objective: 05-01 Perform impairment tests on property, plant, equipment, intangible assets, and goodwill.
Topic: 05-03 Testing Goodwill and Other Assets for Impairment
Topic: 05-06 Cash-Generating Units and Goodwill
66.
Assume that Stanton had other Intangible assets with indefinite lives on its books at the
date of acquisition. How would the impairment test differ from that which would apply to
its amortizable assets, if at all? A simple explanation is required. Please do not use any
numbers to support your answer.
Only the second part of the two-part impairment test would be required. Thus, an
impairment loss would have to be recognized only if the fair value of the relevant asset
group were less than their carrying values.
Blooms: Application
Blooms: Comprehension
Difficulty: Moderate
Gradable: manual
Hilton - Chapter 05 #66
Learning Objective: 05-01 Perform impairment tests on property, plant, equipment, intangible assets, and goodwill.
Topic: 05-03 Testing Goodwill and Other Assets for Impairment
Topic: 05-04 Property, Plant, Equipment, and Intangible Assets with Definite Useful Lives
67.
Assume that Stanton Inc.'s common shares had a fair market value of $51,000 on
December 31, 2015. Assume also that the fair values of Stanton's identifiable net assets
amounted to $36,000. Assuming that Rembrandt's fair values equaled its book values on
the date of acquisition, has the consolidated Goodwill calculated above been impaired,
and if so, by how much?
Yes, goodwill has been impaired. Stanton's net assets had a carrying value of $81,000,
$30,000 more than their fair values, which indicates that the second part of the two step
impairment test for goodwill must be performed. This is essentially a recalculation of the
consolidated goodwill, which in this case would amount to $15,000 ($51,000 - $36,000).
Since consolidated goodwill is currently $20,000, an impairment loss of $5,000 will have to
be recognized.
Blooms: Application
Blooms: Comprehension
Difficulty: Moderate
Gradable: manual
Hilton - Chapter 05 #67
Learning Objective: 05-01 Perform impairment tests on property, plant, equipment, intangible assets, and goodwill.
Topic: 05-03 Testing Goodwill and Other Assets for Impairment
Topic: 05-04 Property, Plant, Equipment, and Intangible Assets with Definite Useful Lives
Chapter 5 Summary
Category
# of Questio
ns
Accessibility: Keyboard Navigation
28
Blooms: Application
44
Blooms: Comprehension
19
Blooms: Knowledge
7
Difficulty: Difficult
1
Difficulty: Easy
25
Difficulty: Moderate
41
Gradable: automatic
49
Gradable: manual
18
Hilton - Chapter 05
71
Learning Objective: 05-01 Perform impairment tests on property, plant, equipment, intangible assets, and goodwill.
13
Learning Objective: 05-
12
02 Prepare schedules to allocate and amortize the acquisition differential on both an annual and a cumulative basis.
Learning Objective: 05-
25
03 Prepare consolidated financial statements using the entity theory subsequent to the date of acquisition.
Learning Objective: 05-
3
04 Prepare consolidated financial statements using parent company extension theory subsequent to the date of acq
uisition.
Learning Objective: 05-
22
05 Prepare journal entries and calculate balance in the investment account under the equity method.
Learning Objective: 05-
2
08 (Appendix 5B) Prepare consolidated financial statements subsequent to date of acquisition using the working pa
per approach.
Topic: 05-01 Methods of Accounting for an Investment in a Subsidiary
3
Topic: 05-02 Consolidated Income and Retained Earnings Statement
2
Topic: 05-03 Testing Goodwill and Other Assets for Impairment
8
Topic: 05-04 Property, Plant, Equipment, and Intangible Assets with Definite Useful Lives
3
Topic: 05-05 Intangible Assets with Indefinite Useful Lives
1
Topic: 05-06 Cash-Generating Units and Goodwill
2
Topic: 05-07 Reversing an Impairment Loss
1
Topic: 05-08 Disclosure Requirements
1
Topic: 05-09 Consolidation of a 100%-Owned Subsidiary
11
Topic: 05-12 Consolidation of an 80%-Owned SubsidiaryDirect Approach
25
Topic: 05-16 Parent Company Extension Theory
3
Topic: 05-17 Acquisition Differential Assigned to Liabilities
2
Topic: 05-18 Intercompany Receivables and Payables
2
Topic: 05-19 Subsidiary Acquired During the Year
3
Topic: 05-20 Equity Method of Recording
22
Topic: 05-22 Year 1 Consolidated Financial Statement Working Paper
2