Chapter 3--Consolidated Statements: Subsequent to
Acquisition
Student: ___________________________________________________________________________
1. The method of accounting for subsidiaries that better reflects the investment account on parent-only financial
statements is the
A. cost method.
B. simple equity method.
C. investment method.
D. sophisticated equity method.
2. The method of accounting for subsidiaries that is required for influential investments is the
A. cost method.
B. simple equity method.
C. investment method.
D. sophisticated equity method.
3. The method of accounting for subsidiaries where investment income is limited to dividends received is the
A. cost method.
B. simple equity method.
C. investment method.
D. sophisticated equity method.
4. Which of the following statements applying to the use of the equity method versus the cost method is true?
A. A parent company may incur a delay in closing its books while waiting for a subsidiary that it accounts for
using the cost method to determine its income.
B. If no dividends were paid by the subsidiary, the investment account would have the same balance under both
methods.
C. The method used has no impact on consolidated financial statements.
D. An advantage of the equity method is that no amortization of excess adjustments needs to be made on the
consolidated worksheet.
5. On January 1, 20X1, Rabb Corp. purchased 80% of Sunny Corp.'s $10 par common stock for $975,000. On
this date, the carrying amount of Sunny's net assets was $1,000,000. The fair values of Sunny's identifiable
assets and liabilities were the same as their carrying amounts except for plant assets (net), which were $100,000
in excess of the carrying amount.
In the January 1, 20X1, consolidated balance sheet, goodwill should be reported at ____.
A. $0
B. $75,750
C. $95,000
D. $118,750
6. On January 1, 20X1, Promo, Inc. purchased 70% of Set Corporation for $469,000. On that date the book
value of the net assets of Set totaled $500,000. Based on the appraisal done at the time of the purchase, all assets
and liabilities had book values equal to their fair values except as follows:
Inventory
Land
Equipment (useful life 4 years)
Book Value
$100,000
75,000
125,000
Fair Value
$120,000
85,000
165,000
The remaining excess of cost over book value was allocated to a patent with a 10-year useful life.
During 20X1 Promo reported net income of $200,000 and Set had net income of $100,000.
What income from subsidiary did Promo include in its net income if Promo uses the simple equity method?
A. $33,000
B. $42,000
C. $70,000
D. $100,000
7. Pete purchased 100% of the common stock of the Sanburn Company on January 1, 20X1, for $500,000. On
that date, the stockholders' equity of Sanburn Company was $380,000. On the purchase date, inventory of
Sanburn Company, which was sold during 20X1, was understated by $20,000. Any remaining excess of cost
over book value is attributable to patent with a 20-year life. The reported income and dividends paid by Sanburn
Company were as follows:
Net income
Dividends paid
20X1
$80,000
10,000
20X2
$90,000
10,000
Using the simple equity method, which of the following amounts are correct?
Investment Income
Investment Account Balance
20X1
December 31, 20X1
A. $80,000
B. $70,000
C. $70,000
D. $80,000
$570,000
$570,000
$550,000
$550,000
8. Pete purchased 100% of the common stock of the Sanburn Company on January 1, 20X1, for $500,000. On
that date, the stockholders' equity of Sanburn Company was $380,000. On the purchase date, inventory of
Sanburn Company, which was sold during 20X1, was understated by $20,000. Any remaining excess of cost
over book value is attributable to patent with a 20-year life. The reported income and dividends paid by Sanburn
Company were as follows:
20X1
$80,000
10,000
Net income
Dividends paid
20X2
$90,000
10,000
Using the sophisticated (full) equity method, which of the following amounts are correct?
Investment Income
Investment Account Balance
20X1
December 31, 20X1
A. $55,000
B. $55,000
C. $75,000
D. $80,000
$555,000
$545,000
$565,000
$570,000
9. Pete purchased 100% of the common stock of the Sanburn Company on January 1, 20X1, for $500,000. On
that date, the stockholders' equity of Sanburn Company was $380,000. On the purchase date, inventory of
Sanburn Company, which was sold during 20X1, was understated by $20,000. Any remaining excess of cost
over book value is attributable to patent with a 20-year life. The reported income and dividends paid by Sanburn
Company were as follows:
20X1
$80,000
10,000
Net income
Dividends paid
Using the cost method, which of the following amounts are correct?
Investment Income
Investment Account Balance
20X1
December 31, 20X1
A. $10,000
B. $10,000
C.
$0
D. $80,000
$500,000
$570,000
$570,000
$500,000
20X2
$90,000
10,000
10. What is the effect if an unconsolidated subsidiary is accounted for by the equity method but consolidated
statements are being prepared for the parent company and other subsidiaries?
A. All of the unconsolidated subsidiary's accounts will be included individually in the consolidated statements.
B. The consolidated retained earnings will not reflect the earnings of the unconsolidated subsidiary.
C. The consolidated retained earnings will be the same as if the subsidiary had been included in the
consolidation.
D. Dividend revenue from the unconsolidated subsidiary will be reflected in consolidated net income.
11. In consolidated financial statements, it is expected that:
A. Dividends declared equals the sum of the total parent company's declared dividends and the total subsidiary's
declared dividends.
B. Retained Earnings equals the sum of the controlling interest's separate retained earnings and the
noncontrolling interest's separate retained earnings.
C. Common Stock equals the sum of the parent company's outstanding shares and the subsidiary's outstanding
shares.
D. Consolidated Net Income equals the sum of the income distributed to the controlling interest and the income
distributed to the noncontrolling interest.
12. How is the portion of consolidated earnings to be assigned to noncontrolling interest in consolidated
financial statements determined?
A. The net income of the parent is subtracted from the subsidiary's net income to determine the noncontrolling
interest.
B. The subsidiary's net income is extended to the noncontrolling interest.
C. The amount of the subsidiary's earnings is multiplied by the noncontrolling's percentage ownership and is
adjusted for the excess cost amortization applicable to the NCI.
D. The amount of consolidated earnings determined on the consolidated working papers is multiplied by the
noncontrolling interest percentage at the balance-sheet date.
13. If in the consolidation process the investment in subsidiary account is increased or decreased by the amount
determined by the following calculation:
the investment account is being converted from
A. cost to simple equity.
B. cost to sophisticated equity.
C. simple equity to sophisticated equity.
D. simple equity to cost.
14. Balance sheet information for Pawn Company and its 90%-owned subsidiary, Sox Corporation, at
December 31, 20X1, is summarized as follows:
Current assets-net
Property, plant, and equipment-net
Investment in Sox
Current liabilities
Capital stock
Retained earnings
Pawn
$ 200,000
1,000,000
558,000
$1,758,000
Sox
$ 50,000
600,000
$ 100,000
800,000
858,000
$1,758,000
$ 30,000
400,000
220,000
$650,000
$650,000
Pawn acquired its interest in Sox for cash at book value several years ago when Sox's assets and liabilities were equal to their fair values.
Consolidated total assets of Pawn and Sox, at December 31, 20X1, will be ____.
A. $1,785,000
B. $1,850,000
C. $2,343,000
D. $2,408,000
15. Balance sheet information for Pawn Company and its 90%-owned subsidiary, Sox Corporation, at
December 31, 20X1, is summarized as follows:
Current assets-net
Property, plant, and equipment-net
Investment in Sox
Current liabilities
Capital stock
Retained earnings
Pawn
$ 200,000
1,000,000
558,000
$1,758,000
Sox
$ 50,000
600,000
$ 100,000
800,000
858,000
$1,758,000
$ 30,000
400,000
220,000
$650,000
$650,000
Pawn acquired its interest in Sox for cash at book value several years ago when Sox's assets and liabilities were equal to their fair values.
The consolidated balance sheet of Pawn and Sox at December 31, 20X1 will show
A. Investment in Sioux, $558,000.
B. Capital stock, $800,000.
C. Retained earnings, $1,078,000.
D. Noncontrolling interest, $65,000.
16. On January 1, 20X1, Promo, Inc. purchased 70% of Set Corporation for $469,000. On that date the book
value of the net assets of Set totaled $500,000. Based on the appraisal done at the time of the purchase, all assets
and liabilities had book values equal to their fair values except as follows:
Inventory
Land
Equipment (useful life 4 years)
Book Value
$100,000
75,000
125,000
Fair Value
$120,000
85,000
165,000
The remaining excess of cost over book value was allocated to a patent with a 10-year useful life.
During 20X1 Promo reported net income of $200,000 and Set had net income of $100,000.
What is consolidated net income if Promo recognizes income from Set using the sophisticated equity method?
A. $242,000
B. $249,000
C. $270,000
D. $300,000
17. On January 1, 20X1, Promo, Inc. purchased 70% of Set Corporation for $469,000. On that date the book
value of the net assets of Set totaled $500,000. Based on the appraisal done at the time of the purchase, all assets
and liabilities had book values equal to their fair values except as follows:
Inventory
Land
Equipment (useful life 4 years)
Book Value
$100,000
75,000
125,000
The remaining excess of cost over book value was allocated to a patent with a 10-year useful life.
During 20X1 Promo reported net income of $200,000 and Set had net income of $100,000.
What income from subsidiary did Promo include in its net income if Promo uses the sophisticated equity method?
A. $42,000
B. $49,000
C. $70,000
D. $100,000
Fair Value
$120,000
85,000
165,000
18. On January 1, 20X1, Payne Corp. purchased 70% of Shayne Corp.'s $10 par common stock for $900,000.
On this date, the carrying amount of Shayne's net assets was $1,000,000. The fair values of Shayne's identifiable
assets and liabilities were the same as their carrying amounts except for plant assets (net), which were $200,000
in excess of the carrying amount. For the year ended December 31, 20X1, Shayne had net income of $150,000
and paid cash dividends totaling $90,000. Excess attributable to plant assets is amortized over 10 years.
In the December 31, 20X1, consolidated balance sheet, noncontrolling interest should be reported at ____.
A. $282,714
B. $300,500
C. $397,714
D. $345,500
19. In a mid-year purchase when the subsidiary's books are not closed until the end of the year, the consolidated
net income contains the parent's share of the
A. subsidiary's income earned for the entire year.
B. subsidiary's income earned from the beginning of the year to the date of acquisition.
C. subsidiary's income earned from the date of acquisition to the end of the year.
D. dividends received from the subsidiary during the period of ownership.
20. Alpha purchased an 80% interest in Beta on June 30, 20X1. Both Alpha's and Beta's reporting periods end
December 31. Which of the following represents the controlling interest in consolidated net income for 20X1?
A. 100% of Alpha's July 1-December 31 income plus 80% of Beta's July 1-December 31 income
B. 100% of Alpha's July 1-December 31 income plus 100% of Beta's July 1-December 31 income
C. 100% of Alpha's January 1-December 31 income plus 80% of Beta's July 1-December 31 income
D. 100% of Alpha's January 1-December 31 income plus 80% of Beta's January 1-December 31 income
21. Under IASB for small and medium entities, goodwill:
A. is subject to impairment procedures.
B. is never adjusted.
C. is amortized over ten years.
D. is not recorded in an acquisition.
22. Prossart Company owned 70% of the outstanding stock of Say Company. During the annual goodwill
impairment test, the following information pertaining to Say was noted:
Book value of net assets
Fair value of Say Company
Estimated fair value of net identifiable assets
Recorded goodwill
$2,000,000
1,800,000
1,700,000
200,000
The amount of goodwill impairment loss that would be recorded on Prossart’s books would be:
A. $200,000
B. $140,000
C. $100,000
D. $70,000
23. On January 1, 20X1, Piston, Inc. acquired Spur Corp. While recording the acquisition, Piston established a
deferred tax liability. It is most likely that this account was created because
A. the transaction was a tax-free exchange to Piston.
B. Piston had not paid all of the income taxes due the government when acquiring Spur.
C. the transaction was a tax-free exchange to Spur.
D. Spur had not paid all of the income taxes due the government prior to the acquisition by Piston.
24. Which of the following is not true regarding a subsidiary’s tax loss carryovers in an acquisition?
A. The resulting deferred tax asset should be considered when determining the amount of goodwill.
B. The parent will always be able to use a portion of the tax loss carryovers in the current period.
C. A valuation allowance should be provided if it is probable the benefit will not be used.
D. the resulting deferred tax asset should be separated into current and noncurrent components.
25. On January 1, 20X1, Parent Company purchased 80% of the common stock of Subsidiary Company for
$316,000. On this date, Subsidiary had common stock, other paid-in capital, and retained earnings of $40,000,
$120,000, and $190,000, respectively. Net income and dividends for 2 years for Subsidiary Company were as
follows:
Net income
Dividends
20X1
$50,000
10,000
20X2
$90,000
20,000
On January 1, 20X1, the only tangible assets of Subsidiary that were undervalued were inventory and building. Inventory, for which FIFO is used,
was worth $5,000 more than cost. The inventory was sold in 20X1. Building, which was worth $15,000 more than book value, has a remaining life of
8 years, and straight-line depreciation is used. Any remaining excess is goodwill.
Prepare Parent’s 20X1 and 20X2 journal entries (after the purchase has been recorded) to record the transactions related to its investment in
Subsidiary under the
a.
cost method
b.
simple equity method
26. On January 1, 20X1, Parent Company purchased 80% of the common stock of Subsidiary Company for
$316,000. On this date, Subsidiary had common stock, other paid-in capital, and retained earnings of $40,000,
$120,000, and $190,000, respectively. Net income and dividends for 2 years for Subsidiary Company were as
follows:
Net income
Dividends
20X1
$50,000
10,000
20X2
$90,000
20,000
On January 1, 20X1, the only tangible assets of Subsidiary that were undervalued were inventory and building. Inventory, for which FIFO is used,
was worth $5,000 more than cost. The inventory was sold in 20X1. Building, which was worth $15,000 more than book value, has a remaining life of
8 years, and straight-line depreciation is used. Any remaining excess is goodwill.
Prepare Parent’s 20X1 and 20X2 journal entries (after the purchase has been recorded) to record the transactions related to its investment in
Subsidiary under the sophisticated equity method.
27. On January 1, 20X1, Parent Company purchased 80% of the common stock of Subsidiary Company for
$316,000. On this date, Subsidiary had common stock, other paid-in capital, and retained earnings of $40,000,
$120,000, and $190,000, respectively. Net income and dividends for 2 years for Subsidiary Company were as
follows:
Net income
Dividends
20X1
$50,000
10,000
20X2
$90,000
20,000
On January 1, 20X1, the only tangible assets of Subsidiary that were undervalued were inventory and building. Inventory, for which FIFO is used,
was worth $5,000 more than cost. The inventory was sold in 20X1. Building, which was worth $15,000 more than book value, has a remaining life of
8 years, and straight-line depreciation is used. Any remaining excess is goodwill.
Required:
a. Prepare a value analysis schedule
b. Prepare a determination and distribution of excess schedule
28. On January 1, 20X1, Parent Company purchased 80% of the common stock of Subsidiary Company for
$316,000. On this date, Subsidiary had common stock, other paid-in capital, and retained earnings of $40,000,
$120,000, and $190,000, respectively. Net income and dividends for 2 years for Subsidiary Company were as
follows:
Net income
Dividends
20X1
$50,000
10,000
20X2
$90,000
20,000
On January 1, 20X1, the only tangible assets of Subsidiary that were undervalued were inventory and building. Inventory, for which FIFO is used,
was worth $5,000 more than cost. The inventory was sold in 20X1. Building, which was worth $15,000 more than book value, has a remaining life of
8 years, and straight-line depreciation is used. Any remaining excess is goodwill.
Prepare the necessary date alignment entries for the consolidating worksheet for December 31, 20X1 and December 31, 20X2 assuming that Parent
records its investment in Subsidiary using
a. the cost method
b. the simple equity method
If date alignment entries are not required, give rationale.
29. On January 1, 20X1, Parent Company purchased 80% of the common stock of Subsidiary Company for
$316,000. On this date, Subsidiary had common stock, other paid-in capital, and retained earnings of $40,000,
$120,000, and $190,000, respectively. Net income and dividends for 2 years for Subsidiary Company were as
follows:
Net income
Dividends
20X1
$50,000
10,000
20X2
$90,000
20,000
On January 1, 20X1, the only tangible assets of Subsidiary that were undervalued were inventory and building. Inventory, for which FIFO is used,
was worth $5,000 more than cost. The inventory was sold in 20X1. Building, which was worth $15,000 more than book value, has a remaining life of
8 years, and straight-line depreciation is used. Any remaining excess is goodwill.
Prepare all necessary elimination entries for the consolidating worksheet of December 31, 20X1. Assume Parent uses the simple equity method of
accounting for its investment in Subsidiary.
30. On January 1, 20X1, Parent Company purchased 80% of the common stock of Subsidiary Company for
$316,000. On this date, Subsidiary had common stock, other paid-in capital, and retained earnings of $40,000,
$120,000, and $190,000, respectively. Net income and dividends for 2 years for Subsidiary Company were as
follows:
Net income
Dividends
20X1
$50,000
10,000
20X2
$90,000
20,000
On January 1, 20X1, the only tangible assets of Subsidiary that were undervalued were inventory and building. Inventory, for which FIFO is used,
was worth $5,000 more than cost. The inventory was sold in 20X1. Building, which was worth $15,000 more than book value, has a remaining life of
8 years, and straight-line depreciation is used. Any remaining excess is goodwill.
Prepare all necessary elimination entries for the consolidating worksheet of December 31, 20X2. Assume Parent uses the simple equity method of
accounting for its investment in Subsidiary.
31. Refer to the information below and Worksheet 3-1.
On January 1, 20X1, Parent Company purchased 80% of the common stock of Subsidiary Company for
$316,000. On this date, Subsidiary had common stock, other paid-in capital, and retained earnings of $40,000,
$120,000, and $190,000, respectively. Net income and dividends for 2 years for Subsidiary Company were as
follows:
Net income
Dividends
20X1
$50,000
10,000
20X2
$90,000
20,000
On January 1, 20X1, the only tangible assets of Subsidiary that were undervalued were inventory and building. Inventory, for which FIFO is used,
was worth $5,000 more than cost. The inventory was sold in 20X1. Building, which was worth $15,000 more than book value, has a remaining life of
8 years, and straight-line depreciation is used. Any remaining excess is goodwill.
Required:
a. Complete the consolidating worksheet for December 31, 20X2.
b. Prepare supportive Income Distribution Schedules for Subsidiary and Parent.
32. The Paris Company purchased an 80% interest in Seine, Inc. for $600,000 on July 1, 20X1, when Seine had
the following balance sheet:
Assets
Accounts receivable
Inventory
Land
Building
Equipment
Total
$ 50,000
120,000
80,000
270,000
80,000
$600,000
Liabilities and Equity
Current liabilities
Common stock, $5 par
Paid-in capital in excess of par
Retained earnings (July 1)
Total
$100,000
50,000
150,000
300,000
$600,000
The inventory is understated by $20,000 and is sold in the third quarter of 20X1. The building has a fair value of $320,000 and a 10-year remaining
life. The equipment has a fair value of $120,000 and a remaining life of 5 years. Any remaining excess is attributed to goodwill.
From July 1 through December 31, 20X1, Seine had net income of $100,000 and paid $10,000 in dividends.
Assume that Paris uses the cost method to record its investment in Seine.
Required:
a.
Prepare a determination and distribution of excess schedule as of July 1, 20X1.
b.
Prepare the eliminations and adjustments that would be made on the December 31, 20X1, consolidated worksheet to eliminate the
investment in Seine. Distribute and amortize any excess.
33. The determination and distribution schedule for the consolidation of Petoskey (80% interest) and Sable
reads in part:
Adjust identifiable accounts:
Inventory
Building
Equipment
Goodwill
Total
$ 20,000
50,000
40,000
140,000
$250,000
Life
[sold in third
quarter]
10
5
Amort/Year
5,000
8,000
Prepare the elimination entries to distribute and amortize the excess purchase cost on
a. 1/1/X1, the date of acquisition
b. 12/31/X1, the end of the first year following the acquisition
c. 12/31/X3, the end of the third year following the acquisition.
34. Dickinson Corporation is considering the acquisition of Williston Company through the acquisition of
Williston’s common stock. Dickinson Corporation will issue 15,000 shares of its $5 par common stock, with a
fair value of $30 per share, in exchange for all 10,000 outstanding shares of Williston Company’s voting
common stock. The acquisition meets the criteria for a tax-free exchange as to the seller. Because of this,
Dickinson Corporation will be limited for future tax returns to the book value of the depreciable assets.
Dickinson Corporation falls into the 30% tax bracket. The appraisal of the assets of Williston Company shows
that the inventory has a fair value of $120,000, and the depreciable fixed assets have a fair value of $250,000
and a 10-year life. Any remaining excess is attributed to goodwill. Williston Company has the following
balance sheet just before the acquisition:
Williston Company
Balance Sheet
December 31, 20X1
Assets
Cash
Accounts Receivable
Inventory
Depreciable Assets
Liabilities & Equities
$ 40,000
150,000
100,000
210,000
$500,000
Current Liabilities
Bonds Payable
Common Stock ($10 par)
Retained Earnings
$ 50,000
100,000
100,000
250,000
$500,000
Required:
a.
Prepare a value analysis and a determination and distribution of excess schedule.
b.
Prepare the elimination entries that would be made on the consolidated worksheet on the date of acquisition.
35. Discuss the merits of accounting for subsidiaries using the:
1) Simple equity method
2) Sophisticated equity method
3) Cost method.
Chapter 3--Consolidated Statements: Subsequent to Acquisition
Key
1. The method of accounting for subsidiaries that better reflects the investment account on parent-only financial
statements is the
A. cost method.
B. simple equity method.
C. investment method.
D. sophisticated equity method.
2. The method of accounting for subsidiaries that is required for influential investments is the
A. cost method.
B. simple equity method.
C. investment method.
D. sophisticated equity method.
3. The method of accounting for subsidiaries where investment income is limited to dividends received is the
A. cost method.
B. simple equity method.
C. investment method.
D. sophisticated equity method.
4. Which of the following statements applying to the use of the equity method versus the cost method is true?
A. A parent company may incur a delay in closing its books while waiting for a subsidiary that it accounts for
using the cost method to determine its income.
B. If no dividends were paid by the subsidiary, the investment account would have the same balance under both
methods.
C. The method used has no impact on consolidated financial statements.
D. An advantage of the equity method is that no amortization of excess adjustments needs to be made on the
consolidated worksheet.
5. On January 1, 20X1, Rabb Corp. purchased 80% of Sunny Corp.'s $10 par common stock for $975,000. On
this date, the carrying amount of Sunny's net assets was $1,000,000. The fair values of Sunny's identifiable
assets and liabilities were the same as their carrying amounts except for plant assets (net), which were $100,000
in excess of the carrying amount.
In the January 1, 20X1, consolidated balance sheet, goodwill should be reported at ____.
A. $0
B. $75,750
C. $95,000
D. $118,750
6. On January 1, 20X1, Promo, Inc. purchased 70% of Set Corporation for $469,000. On that date the book
value of the net assets of Set totaled $500,000. Based on the appraisal done at the time of the purchase, all assets
and liabilities had book values equal to their fair values except as follows:
Inventory
Land
Equipment (useful life 4 years)
Book Value
$100,000
75,000
125,000
Fair Value
$120,000
85,000
165,000
The remaining excess of cost over book value was allocated to a patent with a 10-year useful life.
During 20X1 Promo reported net income of $200,000 and Set had net income of $100,000.
What income from subsidiary did Promo include in its net income if Promo uses the simple equity method?
A. $33,000
B. $42,000
C. $70,000
D. $100,000
7. Pete purchased 100% of the common stock of the Sanburn Company on January 1, 20X1, for $500,000. On
that date, the stockholders' equity of Sanburn Company was $380,000. On the purchase date, inventory of
Sanburn Company, which was sold during 20X1, was understated by $20,000. Any remaining excess of cost
over book value is attributable to patent with a 20-year life. The reported income and dividends paid by Sanburn
Company were as follows:
Net income
Dividends paid
20X1
$80,000
10,000
20X2
$90,000
10,000
Using the simple equity method, which of the following amounts are correct?
Investment Income
Investment Account Balance
20X1
December 31, 20X1
A. $80,000
B. $70,000
C. $70,000
D. $80,000
$570,000
$570,000
$550,000
$550,000
8. Pete purchased 100% of the common stock of the Sanburn Company on January 1, 20X1, for $500,000. On
that date, the stockholders' equity of Sanburn Company was $380,000. On the purchase date, inventory of
Sanburn Company, which was sold during 20X1, was understated by $20,000. Any remaining excess of cost
over book value is attributable to patent with a 20-year life. The reported income and dividends paid by Sanburn
Company were as follows:
20X1
$80,000
10,000
Net income
Dividends paid
20X2
$90,000
10,000
Using the sophisticated (full) equity method, which of the following amounts are correct?
Investment Income
Investment Account Balance
20X1
December 31, 20X1
A. $55,000
B. $55,000
C. $75,000
D. $80,000
$555,000
$545,000
$565,000
$570,000
9. Pete purchased 100% of the common stock of the Sanburn Company on January 1, 20X1, for $500,000. On
that date, the stockholders' equity of Sanburn Company was $380,000. On the purchase date, inventory of
Sanburn Company, which was sold during 20X1, was understated by $20,000. Any remaining excess of cost
over book value is attributable to patent with a 20-year life. The reported income and dividends paid by Sanburn
Company were as follows:
20X1
$80,000
10,000
Net income
Dividends paid
Using the cost method, which of the following amounts are correct?
Investment Income
Investment Account Balance
20X1
December 31, 20X1
A. $10,000
B. $10,000
C.
$0
D. $80,000
$500,000
$570,000
$570,000
$500,000
20X2
$90,000
10,000
10. What is the effect if an unconsolidated subsidiary is accounted for by the equity method but consolidated
statements are being prepared for the parent company and other subsidiaries?
A. All of the unconsolidated subsidiary's accounts will be included individually in the consolidated statements.
B. The consolidated retained earnings will not reflect the earnings of the unconsolidated subsidiary.
C. The consolidated retained earnings will be the same as if the subsidiary had been included in the
consolidation.
D. Dividend revenue from the unconsolidated subsidiary will be reflected in consolidated net income.
11. In consolidated financial statements, it is expected that:
A. Dividends declared equals the sum of the total parent company's declared dividends and the total subsidiary's
declared dividends.
B. Retained Earnings equals the sum of the controlling interest's separate retained earnings and the
noncontrolling interest's separate retained earnings.
C. Common Stock equals the sum of the parent company's outstanding shares and the subsidiary's outstanding
shares.
D. Consolidated Net Income equals the sum of the income distributed to the controlling interest and the income
distributed to the noncontrolling interest.
12. How is the portion of consolidated earnings to be assigned to noncontrolling interest in consolidated
financial statements determined?
A. The net income of the parent is subtracted from the subsidiary's net income to determine the noncontrolling
interest.
B. The subsidiary's net income is extended to the noncontrolling interest.
C. The amount of the subsidiary's earnings is multiplied by the noncontrolling's percentage ownership and is
adjusted for the excess cost amortization applicable to the NCI.
D. The amount of consolidated earnings determined on the consolidated working papers is multiplied by the
noncontrolling interest percentage at the balance-sheet date.
13. If in the consolidation process the investment in subsidiary account is increased or decreased by the amount
determined by the following calculation:
the investment account is being converted from
A. cost to simple equity.
B. cost to sophisticated equity.
C. simple equity to sophisticated equity.
D. simple equity to cost.
14. Balance sheet information for Pawn Company and its 90%-owned subsidiary, Sox Corporation, at
December 31, 20X1, is summarized as follows:
Current assets-net
Property, plant, and equipment-net
Investment in Sox
Current liabilities
Capital stock
Retained earnings
Pawn
$ 200,000
1,000,000
558,000
$1,758,000
Sox
$ 50,000
600,000
$ 100,000
800,000
858,000
$1,758,000
$ 30,000
400,000
220,000
$650,000
$650,000
Pawn acquired its interest in Sox for cash at book value several years ago when Sox's assets and liabilities were equal to their fair values.
Consolidated total assets of Pawn and Sox, at December 31, 20X1, will be ____.
A. $1,785,000
B. $1,850,000
C. $2,343,000
D. $2,408,000
15. Balance sheet information for Pawn Company and its 90%-owned subsidiary, Sox Corporation, at
December 31, 20X1, is summarized as follows:
Current assets-net
Property, plant, and equipment-net
Investment in Sox
Current liabilities
Capital stock
Retained earnings
Pawn
$ 200,000
1,000,000
558,000
$1,758,000
Sox
$ 50,000
600,000
$ 100,000
800,000
858,000
$1,758,000
$ 30,000
400,000
220,000
$650,000
$650,000
Pawn acquired its interest in Sox for cash at book value several years ago when Sox's assets and liabilities were equal to their fair values.
The consolidated balance sheet of Pawn and Sox at December 31, 20X1 will show
A. Investment in Sioux, $558,000.
B. Capital stock, $800,000.
C. Retained earnings, $1,078,000.
D. Noncontrolling interest, $65,000.
16. On January 1, 20X1, Promo, Inc. purchased 70% of Set Corporation for $469,000. On that date the book
value of the net assets of Set totaled $500,000. Based on the appraisal done at the time of the purchase, all assets
and liabilities had book values equal to their fair values except as follows:
Inventory
Land
Equipment (useful life 4 years)
Book Value
$100,000
75,000
125,000
Fair Value
$120,000
85,000
165,000
The remaining excess of cost over book value was allocated to a patent with a 10-year useful life.
During 20X1 Promo reported net income of $200,000 and Set had net income of $100,000.
What is consolidated net income if Promo recognizes income from Set using the sophisticated equity method?
A. $242,000
B. $249,000
C. $270,000
D. $300,000
17. On January 1, 20X1, Promo, Inc. purchased 70% of Set Corporation for $469,000. On that date the book
value of the net assets of Set totaled $500,000. Based on the appraisal done at the time of the purchase, all assets
and liabilities had book values equal to their fair values except as follows:
Inventory
Land
Equipment (useful life 4 years)
Book Value
$100,000
75,000
125,000
The remaining excess of cost over book value was allocated to a patent with a 10-year useful life.
During 20X1 Promo reported net income of $200,000 and Set had net income of $100,000.
What income from subsidiary did Promo include in its net income if Promo uses the sophisticated equity method?
A. $42,000
B. $49,000
C. $70,000
D. $100,000
Fair Value
$120,000
85,000
165,000
18. On January 1, 20X1, Payne Corp. purchased 70% of Shayne Corp.'s $10 par common stock for $900,000.
On this date, the carrying amount of Shayne's net assets was $1,000,000. The fair values of Shayne's identifiable
assets and liabilities were the same as their carrying amounts except for plant assets (net), which were $200,000
in excess of the carrying amount. For the year ended December 31, 20X1, Shayne had net income of $150,000
and paid cash dividends totaling $90,000. Excess attributable to plant assets is amortized over 10 years.
In the December 31, 20X1, consolidated balance sheet, noncontrolling interest should be reported at ____.
A. $282,714
B. $300,500
C. $397,714
D. $345,500
19. In a mid-year purchase when the subsidiary's books are not closed until the end of the year, the consolidated
net income contains the parent's share of the
A. subsidiary's income earned for the entire year.
B. subsidiary's income earned from the beginning of the year to the date of acquisition.
C. subsidiary's income earned from the date of acquisition to the end of the year.
D. dividends received from the subsidiary during the period of ownership.
20. Alpha purchased an 80% interest in Beta on June 30, 20X1. Both Alpha's and Beta's reporting periods end
December 31. Which of the following represents the controlling interest in consolidated net income for 20X1?
A. 100% of Alpha's July 1-December 31 income plus 80% of Beta's July 1-December 31 income
B. 100% of Alpha's July 1-December 31 income plus 100% of Beta's July 1-December 31 income
C. 100% of Alpha's January 1-December 31 income plus 80% of Beta's July 1-December 31 income
D. 100% of Alpha's January 1-December 31 income plus 80% of Beta's January 1-December 31 income
21. Under IASB for small and medium entities, goodwill:
A. is subject to impairment procedures.
B. is never adjusted.
C. is amortized over ten years.
D. is not recorded in an acquisition.
22. Prossart Company owned 70% of the outstanding stock of Say Company. During the annual goodwill
impairment test, the following information pertaining to Say was noted:
Book value of net assets
Fair value of Say Company
Estimated fair value of net identifiable assets
Recorded goodwill
$2,000,000
1,800,000
1,700,000
200,000
The amount of goodwill impairment loss that would be recorded on Prossart’s books would be:
A. $200,000
B. $140,000
C. $100,000
D. $70,000
23. On January 1, 20X1, Piston, Inc. acquired Spur Corp. While recording the acquisition, Piston established a
deferred tax liability. It is most likely that this account was created because
A. the transaction was a tax-free exchange to Piston.
B. Piston had not paid all of the income taxes due the government when acquiring Spur.
C. the transaction was a tax-free exchange to Spur.
D. Spur had not paid all of the income taxes due the government prior to the acquisition by Piston.
24. Which of the following is not true regarding a subsidiary’s tax loss carryovers in an acquisition?
A. The resulting deferred tax asset should be considered when determining the amount of goodwill.
B. The parent will always be able to use a portion of the tax loss carryovers in the current period.
C. A valuation allowance should be provided if it is probable the benefit will not be used.
D. the resulting deferred tax asset should be separated into current and noncurrent components.
25. On January 1, 20X1, Parent Company purchased 80% of the common stock of Subsidiary Company for
$316,000. On this date, Subsidiary had common stock, other paid-in capital, and retained earnings of $40,000,
$120,000, and $190,000, respectively. Net income and dividends for 2 years for Subsidiary Company were as
follows:
Net income
Dividends
20X1
$50,000
10,000
20X2
$90,000
20,000
On January 1, 20X1, the only tangible assets of Subsidiary that were undervalued were inventory and building. Inventory, for which FIFO is used,
was worth $5,000 more than cost. The inventory was sold in 20X1. Building, which was worth $15,000 more than book value, has a remaining life of
8 years, and straight-line depreciation is used. Any remaining excess is goodwill.
Prepare Parent’s 20X1 and 20X2 journal entries (after the purchase has been recorded) to record the transactions related to its investment in
Subsidiary under the
a.
cost method
b.
simple equity method
a. cost method journal entries:
Cash
Dividen
d Income
(1)
(2)
20X1
Debit
8,000 (1)
8,000
Debit
16,000 (2)
Credit
Debit
72,000 (2)
Credit
16,000
80% of $10,000 dividends
80% of $20,000 dividends
b. simple equity method:
20X1
Debit
Investment 40,000 (1)
in
Subsidiary
Subsidi
ary Income
Cash
8,000 (3)
Investm
ent in
Subsidiary
(1)
(2)
(3)
(4)
20X2
Credit
20X2
Credit
40,000
8,000
72,000
16,000 (4)
16,000
80% of $50,000 net income
80% of $90,000 net income
80% of $10,000 dividends
80% of $20,000 dividends
26. On January 1, 20X1, Parent Company purchased 80% of the common stock of Subsidiary Company for
$316,000. On this date, Subsidiary had common stock, other paid-in capital, and retained earnings of $40,000,
$120,000, and $190,000, respectively. Net income and dividends for 2 years for Subsidiary Company were as
follows:
Net income
Dividends
20X1
$50,000
10,000
20X2
$90,000
20,000
On January 1, 20X1, the only tangible assets of Subsidiary that were undervalued were inventory and building. Inventory, for which FIFO is used,
was worth $5,000 more than cost. The inventory was sold in 20X1. Building, which was worth $15,000 more than book value, has a remaining life of
8 years, and straight-line depreciation is used. Any remaining excess is goodwill.
Prepare Parent’s 20X1 and 20X2 journal entries (after the purchase has been recorded) to record the transactions related to its investment in
Subsidiary under the sophisticated equity method.
20X1
Debit
Investme 34,500 (1)
nt in
Subsidia
ry
Subsi
diary
Income
Cash
8,000 (3)
Inves
tment in
Subsidia
ry
(1)
(2)
(3)
(4)
20X2
Credit
Debit
70,500 (2)
Credit
34,500
70,500
16,000 (4)
8,000
16,000
80% of $50,000 net income less
amortization of $5,500
80% of $90,000 net income less
amortization of $1,500
80% of $10,000 dividends
80% of $20,000 dividends
Amortization:
Inventory: $5,000 ´ 80%
Building: $15,000 ´ 80%  8 years
20X1
4,000
1,500
$5,500
20X2
1,500
$1,500
27. On January 1, 20X1, Parent Company purchased 80% of the common stock of Subsidiary Company for
$316,000. On this date, Subsidiary had common stock, other paid-in capital, and retained earnings of $40,000,
$120,000, and $190,000, respectively. Net income and dividends for 2 years for Subsidiary Company were as
follows:
Net income
Dividends
20X1
$50,000
10,000
20X2
$90,000
20,000
On January 1, 20X1, the only tangible assets of Subsidiary that were undervalued were inventory and building. Inventory, for which FIFO is used,
was worth $5,000 more than cost. The inventory was sold in 20X1. Building, which was worth $15,000 more than book value, has a remaining life of
8 years, and straight-line depreciation is used. Any remaining excess is goodwill.
Required:
a. Prepare a value analysis schedule
b. Prepare a determination and distribution of excess schedule
a: Value analysis schedule
Implied entity fair value
Fair value of entity net identifiable assets
Goodwill
b. Determination and distribution schedule
Fair value of subsidiary
Less book value:
Common stock
Paid in capital in excess of par
Retained earnings
Total equity
Interest Acquired
Book value
Excess of fair over book
Adjust identifiable accounts:
Inventory
Building
Goodwill
Total
Company Implied Fair
Value
$395,000
370,000
$ 25,000
Company Implied
Fair Value
$395,000
40,000
120,000
190,000
350,000
$ 45,000
$ 5,000
15,000
25,000
$45,000
Parent Price
NCI Value
$316,000
296,000
$ 20,000
$79,000
74,000
$ 5,000
Parent Price
NCI Value
$316,000
$79,000
350,000
80%
280,000
$ 36,000
350,000
20%
70,000
$ 9,000
Life
[ FIFO; sold in Yr 1]
8
Amort/Year
1,875
28. On January 1, 20X1, Parent Company purchased 80% of the common stock of Subsidiary Company for
$316,000. On this date, Subsidiary had common stock, other paid-in capital, and retained earnings of $40,000,
$120,000, and $190,000, respectively. Net income and dividends for 2 years for Subsidiary Company were as
follows:
Net income
Dividends
20X1
$50,000
10,000
20X2
$90,000
20,000
On January 1, 20X1, the only tangible assets of Subsidiary that were undervalued were inventory and building. Inventory, for which FIFO is used,
was worth $5,000 more than cost. The inventory was sold in 20X1. Building, which was worth $15,000 more than book value, has a remaining life of
8 years, and straight-line depreciation is used. Any remaining excess is goodwill.
Prepare the necessary date alignment entries for the consolidating worksheet for December 31, 20X1 and December 31, 20X2 assuming that Parent
records its investment in Subsidiary using
a. the cost method
b. the simple equity method
If date alignment entries are not required, give rationale.
a. elimination entries for cost method
12/31/X2
12/31/X1
CV
Investment in Subsidiary
R/E-Parent
n/a
CY2
Dividend Income
Dividends Declared-Sub
(2) 8,000
n/a
8,000
(1) 32,000
32,000
(3) 16,000
16,000
n/a for first year: date alignment is automatic; the investment in subsidiary and the subsidiary retained earnings are both as of January 1, 20X1.
(1) (Sub RE 1/1/X2 – Sub RE 1/1/X1 = $40,000) ´ 80%
(2) 80% of $10,000 dividends
(3) 80% of $20,000 dividends
b. elimination entries for simple equity method
CY1
Subsidiary Income
12/31/X1
(4) 40,000
12/31/X2
(
5
)
7
2
,
0
0
0
40,000
Investment in Subsidiary
CY2
Investment in Subsidiary
(2) 8,000
72,000
(
3
)
1
6
,
0
0
0
Dividends Declared-Sub
(4) 80% of $50,000 net income
(5) 80% of $90,000 net income
8,000
16,000
29. On January 1, 20X1, Parent Company purchased 80% of the common stock of Subsidiary Company for
$316,000. On this date, Subsidiary had common stock, other paid-in capital, and retained earnings of $40,000,
$120,000, and $190,000, respectively. Net income and dividends for 2 years for Subsidiary Company were as
follows:
20X1
$50,000
10,000
Net income
Dividends
20X2
$90,000
20,000
On January 1, 20X1, the only tangible assets of Subsidiary that were undervalued were inventory and building. Inventory, for which FIFO is used,
was worth $5,000 more than cost. The inventory was sold in 20X1. Building, which was worth $15,000 more than book value, has a remaining life of
8 years, and straight-line depreciation is used. Any remaining excess is goodwill.
Prepare all necessary elimination entries for the consolidating worksheet of December 31, 20X1. Assume Parent uses the simple equity method of
accounting for its investment in Subsidiary.
CY1
Subsidiary Income ($50,000 x 80%)
Investment in Subsidiary
40,000
CY2
Investment in Subsidiary ($10,000 x 80%)
Dividends Declared-Subsidiary
8,000
EL
Common stock-Sub ($40,000 x 80%)
Paid in capital in excess of par-Sub ($120,000 x 80%)
Retained earnings-Sub ($190,000 x 80%)
Investment in Subsidiary
32,000
96,000
152,000
Cost of Goods Sold
Building
Goodwill
Investment in Subsidiary ($45,000 x 80%)
Retained earnings-Sub (NCI) ($45,000 x 20%)
5,000
15,000
25,000
Depreciation expense ($15,000 / 8 years)
Accumulated depreciation-building
1,875
D
A
40,000
8,000
280,000
36,000
9,000
1,875
30. On January 1, 20X1, Parent Company purchased 80% of the common stock of Subsidiary Company for
$316,000. On this date, Subsidiary had common stock, other paid-in capital, and retained earnings of $40,000,
$120,000, and $190,000, respectively. Net income and dividends for 2 years for Subsidiary Company were as
follows:
Net income
Dividends
20X1
$50,000
10,000
20X2
$90,000
20,000
On January 1, 20X1, the only tangible assets of Subsidiary that were undervalued were inventory and building. Inventory, for which FIFO is used,
was worth $5,000 more than cost. The inventory was sold in 20X1. Building, which was worth $15,000 more than book value, has a remaining life of
8 years, and straight-line depreciation is used. Any remaining excess is goodwill.
Prepare all necessary elimination entries for the consolidating worksheet of December 31, 20X2. Assume Parent uses the simple equity method of
accounting for its investment in Subsidiary.
CY1
Subsidiary Income ($90,000 x 80%)
Investment in Subsidiary
72,000
CY2
Investment in Subsidiary ($20,000 x 80%)
Dividends Declared-Sub
16,000
EL
Common stock-Sub ($40,000 x 80%)
Paid in capital in excess of par-Sub ($120,000 x 80%)
Retained earnings-Sub
[($190,000 + 50,000 - 10,000) x 80%]
Investment in Subsidiary
32,000
96,000
D
A
Retained earnings-Sub (20% inventory)
Retained earnings-Parent (80% inventory)
Building
Goodwill
Investment in Subsidiary
Retained earnings-Sub (NCI)
Depreciation Exp ($15,000 / 8 years)
Retained earnings-Sub
Retained earnings-Parent
Accumulated depreciation-building (2 yrs)
184,000
1,000
4,000
15,000
25,000
1,875
375
1,500
72,000
16,000
312,000
36,000
9,000
3,750
31. Refer to the information below and Worksheet 3-1.
On January 1, 20X1, Parent Company purchased 80% of the common stock of Subsidiary Company for
$316,000. On this date, Subsidiary had common stock, other paid-in capital, and retained earnings of $40,000,
$120,000, and $190,000, respectively. Net income and dividends for 2 years for Subsidiary Company were as
follows:
Net income
Dividends
20X1
$50,000
10,000
20X2
$90,000
20,000
On January 1, 20X1, the only tangible assets of Subsidiary that were undervalued were inventory and building. Inventory, for which FIFO is used,
was worth $5,000 more than cost. The inventory was sold in 20X1. Building, which was worth $15,000 more than book value, has a remaining life of
8 years, and straight-line depreciation is used. Any remaining excess is goodwill.
Required:
a. Complete the consolidating worksheet for December 31, 20X2.
b. Prepare supportive Income Distribution Schedules for Subsidiary and Parent.
a. Consolidating worksheet December 31, 20X2
b. Income distribution schedules:
Subsidiary Income Distribution
Internally generated net income
Building amortization
Adjusted income
Distribution to NCI
Noncontrolling share
Parent Income Distribution
Internally generated net income
Controlling share of subsidiary (88,125 x 80%)
Total
$90,000
(1,875)
88,125
´ 20%
$17,625
$100,000
70,500
$170,500
32. The Paris Company purchased an 80% interest in Seine, Inc. for $600,000 on July 1, 20X1, when Seine had
the following balance sheet:
Assets
Accounts receivable
Inventory
Land
Building
Equipment
Total
$ 50,000
120,000
80,000
270,000
80,000
$600,000
Liabilities and Equity
Current liabilities
Common stock, $5 par
Paid-in capital in excess of par
Retained earnings (July 1)
Total
$100,000
50,000
150,000
300,000
$600,000
The inventory is understated by $20,000 and is sold in the third quarter of 20X1. The building has a fair value of $320,000 and a 10-year remaining
life. The equipment has a fair value of $120,000 and a remaining life of 5 years. Any remaining excess is attributed to goodwill.
From July 1 through December 31, 20X1, Seine had net income of $100,000 and paid $10,000 in dividends.
Assume that Paris uses the cost method to record its investment in Seine.
Required:
a.
Prepare a determination and distribution of excess schedule as of July 1, 20X1.
b.
Prepare the eliminations and adjustments that would be made on the December 31, 20X1, consolidated worksheet to eliminate the
investment in Seine. Distribute and amortize any excess.
a. Determination and distribution of excess schedule as of July 1, 20X1:
Fair value of subsidiary
Less book value:
Common stock
Paid in capital in excess of par
Retained earnings
Total equity
Interest Acquired
Book value
Excess of fair over book
Adjust identifiable accounts:
Inventory
Building
Equipment
Goodwill
Total
Company Implied Fair Parent Price
Value
$750,000
$600,000
50,000
150,000
300,000
500,000
$250,000
$ 20,000
50,000
40,000
140,000
$250,000
500,000
80%
400,000
$200,000
Life
[sold in third quarter]
10
5
NCI Value
$150,000
500,000
20%
100,000
$ 50,000
Amort/Year
5,000
8,000
b. Eliminations and adjustments for the December 31, 20X1, consolidating worksheet
Debit
n/a
Credit
CV
Investment in Subsidiary*
R/E-Par
CY2
Investment in Subsidiary ($10,000 x 80%)
Dividends Declared-Sub
8,000
EL
Common Stock-Sub ($50,000 x 80%)
Paid in capital in excess of par-Sub (150,000 x 80%)
Retained earnings-Sub ($300,000 x 80%)
Investment in Sub
40,000
120,000
240,000
Cost of Goods Sold (for inventory)
Building
Equipment
Goodwill
Investment in Sub (80%)
Retained earnings-Sub (NCI) (20%)
20,000
50,000
40,000
140,000
Depreciation expense (5,000 x 1/2)
Accumulated depreciation-Building
Depreciation expense (8,000 x 1/2)
Accumulated depreciation-Equipment
2,500
D
A
n/a
8,000
400,000
200,000
50,000
2,500
4,000
4,000
*conversion from cost to simple equity not required at end of first year
33. The determination and distribution schedule for the consolidation of Petoskey (80% interest) and Sable
reads in part:
Adjust identifiable accounts:
Inventory
Building
Equipment
Goodwill
Total
$ 20,000
50,000
40,000
140,000
$250,000
Life
[sold in third
quarter]
10
5
Amort/Year
5,000
8,000
Prepare the elimination entries to distribute and amortize the excess purchase cost on
a. 1/1/X1, the date of acquisition
b. 12/31/X1, the end of the first year following the acquisition
c. 12/31/X3, the end of the third year following the acquisition.
a. On date of acquisition
D
Inventory
Building
Equipment
Goodwill
Investment in Subsidiary (80%)
Retained earnings-Sub (NCI) (20%)
20,000
50,000
40,000
140,000
200,000
50,000
b. At the end of the first year following the acquisition
D
Cost of Goods Sold
Building
Equipment
Goodwill
Investment in Subsidiary (80%)
Retained earnings-Sub (NCI) (20%)
A
Depreciation expense
Accumulated depreciation-Building
Depreciation expense
Accumulated depreciation-Equipment
c. at the end of the third year following the acquisition.
D
Retained earnings-Parent (80% inventory)
Retained earnings-Sub (20% inventory)
Building
Equipment
Goodwill
Investment in Subsidiary (80%)
Retained earnings-Sub (NCI) (20%)
A
Depreciation expense
Depreciation expense
Retained earnings-Parent
Retained earnings-Sub (NCI)
Accumulated depreciation-Building (3 years)
Accumulated depreciation-Equipment (3 years)
20,000
50,000
40,000
140,000
5,000
8,000
16,000
4,000
50,000
40,000
140,000
5,000
8,000
20,800
5,200
200,000
50,000
5,000
8,000
200,000
50,000
15,000
24,000
34. Dickinson Corporation is considering the acquisition of Williston Company through the acquisition of
Williston’s common stock. Dickinson Corporation will issue 15,000 shares of its $5 par common stock, with a
fair value of $30 per share, in exchange for all 10,000 outstanding shares of Williston Company’s voting
common stock. The acquisition meets the criteria for a tax-free exchange as to the seller. Because of this,
Dickinson Corporation will be limited for future tax returns to the book value of the depreciable assets.
Dickinson Corporation falls into the 30% tax bracket. The appraisal of the assets of Williston Company shows
that the inventory has a fair value of $120,000, and the depreciable fixed assets have a fair value of $250,000
and a 10-year life. Any remaining excess is attributed to goodwill. Williston Company has the following
balance sheet just before the acquisition:
Williston Company
Balance Sheet
December 31, 20X1
Assets
Cash
Accounts Receivable
Inventory
Depreciable Assets
Liabilities & Equities
$ 40,000
150,000
100,000
210,000
$500,000
Current Liabilities
Bonds Payable
Common Stock ($10 par)
Retained Earnings
$ 50,000
100,000
100,000
250,000
$500,000
Required:
a.
Prepare a value analysis and a determination and distribution of excess schedule.
b.
Prepare the elimination entries that would be made on the consolidated worksheet on the date of acquisition.
a. Value analysis and determination and distribution of excess schedule:
Implied entity fair value
Fair value of entity net identifiable assets [1]
Goodwill
[1] $350,000 + [($20,000 + $40,000) ´ (1 - 30%)]
Fair value of subsidiary
Less book value:
Common Stock
Paid in capital in excess of par
Retained earnings
Total equity
Interest Acquired
Book value
Excess of fair over book
Adjust identifiable accounts:
Inventory
Deferred tax liability (20,000 x 30%)
Depreciable assets
Deferred tax liability (40,000 x 30%)
Goodwill
Total
b. Elimination entries on the date of acquisition.
EL
Common Stock-Sub
Retained earnings-Sub
Investment in Subsidiary
D
Inventory
Building
Goodwill
Deferred tax liability ($6,000 + 12,000)
Investment in Subsidiary
Company Implied Fair Parent Price
Value
$450,000
$450,000
392,000
392,000
$ 58,000
$ 58,000
Company Implied Fair Parent Price
Value
$450,000
$450,000
100,000
250,000
350,000
$100,000
$ 20,000
(6,000)
40,000
(12,000)
58,000
$100,000
350,000
100%
350,000
$100,000
1
1
Life
10
10
100,000
250,000
20,000
40,000
58,000
Annual Amort
4,000
(1,200)
350,000
18,000
100,000
35. Discuss the merits of accounting for subsidiaries using the:
1) Simple equity method
2) Sophisticated equity method
3) Cost method.
The equity method views the earning of income by a controlled subsidiary as sufficient reason to record the
parent’s share of that income. The advantage of using the simple equity method is that every dollar of change
in the subsidiary’s stock holder equity is recorded on a pro-rata basis in the investment account which expedites
the elimination of the investment account in the consolidated worksheets.
The sophisticated equity method requires the investment account to be adjusted for the amortizations of the
excess of the fair values of the identifiable net assets acquired over their book values so it better reflects the
investment account in parent only statements. It is required for accounting for some unconsolidated
subsidiaries.
When the cost method is used, the investment in subsidiary account is retained at its original cost-of-the
acquisition balance and is not adjusted for income earned by the subsidiary. It is simple to use and avoids the
delay of waiting for subsidiary results at the end of the year.