Practice Midterm

Chapter #1 1. Estimated goodwill is determined by computing the present value of the A) average earnings. B)

excess earnings.

C)

expected future earnings.

D) normal earnings.

2. Which of the following statements would not be a valid or logical reason for entering into a business combination? A) to increase market share. B)

to avoid becoming a takeover target.

C)

to reduce risk by acquiring established product lines.

D) the operating costs of the combined entity would be more than the sum of the separate entities. 3. The parent company concept of consolidation represents the view that the primary purpose of consolidated financial statements is: A) to provide information relevant to the controlling stockholders. B) C)

to represent the view that the affiliated companies are a separate, identifiable economic entity. to emphasis control of the whole by a single management.

D) to include only a portion of the subsidiary's assets, liabilities, revenues, expenses, gains, and losses. 4. Which of the following statements is correct? A) Total elimination is consistent with the parent company concept. B)

Partial elimination is consistent with the economic unit concept.

C)

Past accounting standards required the total elimination of unrealized intercompany profit in assets acquired from affiliated companies. D) none of these.

Page 1

5. Under the parent company concept, consolidated net income __________ the consolidated net income under the economic unit concept. A) is the same as B)

is higher than

C)

is lower than

D) can be higher or lower than

6. Under the economic unit concept, noncontrolling interest in net assets is treated as A) a liability. B)

an asset.

C)

stockholders' equity.

D) an expense.

7. The parent company concept adjusts subsidiary net asset values for the A) differences between cost and fair value. B)

differences between cost and book value.

C)

total fair value implied by the price paid by the parent.

D) total cost implied by the price paid by the parent.

8. According to the economic unit concept, the primary purpose of consolidated financial statements is to provide information that is relevant to A) majority stockholders. B)

minority stockholders.

C)

creditors.

D) both majority and minority stockholders.

9. Which of the following statements is correct? A) The economic unit concept suggests partial elimination of unrealized intercompany profits. B) The parent company concept suggests partial elimination of unrealized intercompany profits. Page 2

C)

The economic unit concept suggests no elimination of unrealized intercompany profits. D) The parent company concept suggests total elimination of unrealized intercompany profits. 10. When following the parent company concept in the preparation of consolidated financial statements, noncontrolling interest in combined income is considered a(n) A) prorated share of the combined income. B)

addition to combined income to arrive at consolidated net income.

C)

expense deducted from combined income to arrive at consolidated net income.

D) deduction from current assets in the balance sheet.

11. When following the economic unit concept in the preparation of consolidated financial statements, the basis for valuing the noncontrolling interest in net assets is the A) book values of subsidiary assets and liabilities. B)

fair values of subsidiary assets and liabilities.

C)

general price level adjusted values of subsidiary assets and liabilities.

D) fair values of parent company assets and liabilities.

12. The view that consolidated financial statements represent those of a single economic entity with several classes of stockholder interest is consistent with the A) parent company concept. B)

current practice concept.

C)

historical cost company concept.

D) economic unit concept.

13. The view that the noncontrolling interest in income reflects the noncontrolling stockholders' allocated share of consolidated income is consistent with the A) economic unit concept. B)

parent company concept.

C)

current practice concept.

Page 3

D) historical cost company concept.

14. The view that only the parent company's share of the unrealized intercompany profit recognized by the selling affiliate that remains in assets should be eliminated in the preparation of consolidated financial statements is consistent with the A) economic unit concept. B)

current practice concept.

C)

parent company concept.

D) historical cost company concept.

Answer Key 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14.

B D A C A C B D B C B D A C

Chapter #2 1. Par Company and Sub Company were combined in an acquisition transaction. Par was able to acquire Sub at a bargain Pratt. The sum of the fair values of identifiable assets acquired less the fair value of liabilities assumed exceeded the cost to Par. After eliminating previously recorded goodwill, there was still some "negative goodwill." Proper accounting treatment by Par is to report the amount as A) paid-in capital. B)

a deferred credit, which is amortized.

C)

an ordinary gain.

Page 4

D) an extraordinary gain.

2. P Corporation issued 10,000 shares of common stock with a fair value of $25 per share for all the outstanding common stock of S Company in a business combination properly accounted for as an acquisition. The fair value of S Company's net assets on that date was $220,000. P Company also agreed to issue an additional 2,000 shares of common stock with a fair value of $50,000 to the former stockholders of S Company as an earnings contingency. Assuming that the contingency is expected to be met, the $50,000 fair value of the additional shares to be issued should be treated as a(n) A) decrease in noncurrent liabilities of S Company that were assumed by P Company. B)

decrease in consolidated retained earnings.

C)

increase in consolidated goodwill.

D) decrease in consolidated other contributed capital.

3. On February 5, Pryor Corporation paid $1,600,000 for all the issued and outstanding common stock of Shaw, Inc., in a transaction properly accounted for as an acquisition. The book values and fair values of Shaw's assets and liabilities on February 5 were as follows Book Value $ 160,000

Fair Value $ 160,000

Receivables (net)

180,000

180,000

Inventory

315,000

300,000

Plant and equipment (net)

820,000

920,000

Liabilities

(350,000)

(350,000)

Net assets

$1,125,000

$1,210,000

Cash

What is the amount of goodwill resulting from the business combination? A) $-0-. B)

$475,000.

C)

$85,000.

D) $390,000.

Page 5

4. P Company purchased the net assets of S Company for $225,000. On the date of P's purchase, S Company had no investments in marketable securities and $30,000 (book and fair value) of liabilities. The fair values of S Company's assets, when acquired, were Current assets Noncurrent assets Total

$ 120,000 180,000 $300,000

How should the $45,000 difference between the fair value of the net assets acquired ($270,000) and the consideration paid ($225,000) be accounted for by P Company? A) The noncurrent assets should be recorded at $ 135,000. B)

The $45,000 difference should be credited to retained earnings.

C)

The current assets should be recorded at $102,000, and the noncurrent assets should be recorded at $153,000. D) An ordinary gain of $45,000 should be recorded.

5. P Co. issued 5,000 shares of its common stock, valued at $200,000, to the former shareholders of S Company two years after S Company was acquired in an all-stock transaction. The additional shares were issued because P Company agreed to issue additional shares of common stock if the average post combination earnings over the next two years exceeded $500,000. P Company will treat the issuance of the additional shares as a (decrease in) A) consolidated retained earnings. B)

consolidated goodwill.

C)

consolidated paid-in capital.

D) non-current liabilities of S Company assumed by P Company.

6. The first step in determining goodwill impairment involves comparing the A) implied value of a reporting unit to its carrying amount (goodwill excluded). B)

fair value of a reporting unit to its carrying amount (goodwill excluded).

C)

implied value of a reporting unit to its carrying amount (goodwill included).

D) fair value of a reporting unit to its carrying amount (goodwill included).

Page 6

7. P Company acquires all of the voting stock of S Company for $930,000 cash. The book values of S Company's assets are $800,000, but the fair values are $840,000 because land has a fair value above its book value. Goodwill from the combination is computed as: A) $130,000. B)

$90,000.

C)

$40,000.

D) $0.

Use the following to answer questions 8-9: Pratt Company issued 24,000 shares of its $20 par value common stock for the net assets of Sele Company in business combination under which Sele Company will be merged into Pratt Company. On the date of the combination, Pratt Company common stock had a fair value of $30 per share. Balance sheets for Pratt Company and Sele Company immediately prior to the combination were as follows: Pratt

Sele

Current Assets Plant and Equipment (net) Total

$1,314,000 1,725,000 $3,039,000

$192,000 408,000 $600,000

Liabilities Common Stock, $20 par value Other Contributed Capital Retained Earnings Total

$ 900,000 1,650,000 218,000 271,000 $3,039,000

$150,000 240,000 60,000 150,000 $600,000

8. If the business combination is treated as an acquisition and Sele Company's net assets have a fair value of $686,400, Pratt Company's balance sheet immediately after the combination will include goodwill of A) $30,600. B)

$38,400.

C)

$33,600.

D) $56,400.

Page 7

9. If the business combination is treated as an acquisition and the fair value of Sele Company's current assets is $270,000, its plant and equipment is $726,000, and its liabilities are $168,000, Pratt Company's financial statements immediately after the combination will include A) Negative goodwill of $108,000. B)

Plant and equipment of $2,451,000.

C)

Plant and equipment of $2,343,000.

D) An ordinary gain of $108,000.

10. On May 1, 2011, the Phil Company paid $1,200,000 for 80% of the outstanding common stock of Sage Corporation in a transaction properly accounted for as an acquisition. The recorded assets and liabilities of Sage Corporation on May 1, 2011, follow: Cash Inventory Property & equipment (Net of accumulated depreciation) Liabilities

$100,000 200,000 800,000 (160,000)

On May 1, 2011, it was determined that the inventory of Sage had a fair value of $220,000 and the property and equipment (net) has a fair value of $1,200,000. What is the amount of goodwill resulting from the business combination? A) $0. B)

$112,000.

C)

$140,000.

D) $28,000.

Page 8

Use the following to answer questions 11-12: Posch Company issued 12,000 shares of its $20 par value common stock for the net assets of Sato Company in a business combination under which Sato Company will be merged into Posch Company. On the date of the combination, Posch Company common stock had a fair value of $30 per share. Balance sheets for Posch Company and Sato Company immediately prior to the combination were as follows: Posch

Sato

Current Assets Plant and Equipment (net) Total

$ 657,000 863,000 $1,520,000

$ 96,000 204,000 $300,000

Liabilities Common Stock, $20 par value Other Contributed Capital Retained Earnings Total

$ 450,000 825,000 109,000 136,000 $1,520,000

$ 75,000 120,000 30,000 75,000 $300,000

11. If the business combination is treated as an acquisition and Sato Company's net assets have a fair value of $343,200, Posch Company's balance sheet immediately after the combination will include goodwill of A) $15,300. B)

$19,200.

C)

$16,800.

D) $28,200.

12. If the business combination is treated as an acquisition and the fair value of Sato Company's current assets is $135,000, its plant and equipment is $363,000, and its liabilities are $84,000, Posch Company's financial statements immediately after the combination will include A) Negative goodwill of $54,000. B)

Plant and equipment of $1,226,000.

C)

Plant and equipment of $1,172,000.

D) An ordinary gain of $54,000.

Page 9

13. Following its acquisition of the net assets of Sandy Company, Potter Company assigned goodwill of $60,000 to one of the reporting divisions. Information for this division follows: Cash

Carrying Amount $ 20,000

Fair Value $20,000

Inventory

35,000

40,000

Equipment

125,000

160,000

Goodwill

60,000

Accounts Payable

30,000

30,000

Based on the preceding information, what amount of goodwill will be reported for this division if its fair value is determined to be $200,000? A) $0 B)

$60,000

C)

$30,000

D) $10,000

14. The fair value of net identifiable assets of a reporting unit exclusive of goodwill of Y Company is $270,000. The carrying value of the reporting unit's net assets on Y Company's books is $320,000, including $50,000 goodwill. If the reported goodwill impairment for the unit is $10,000, what would be the fair value of the reporting unit? A) $320,000 B)

$310,000

C)

$270,000

D) $290,000

Page 10

15. Potter Corporation acquired Sims Company through an exchange of common shares. All of Sims' assets and liabilities were immediately transferred to Potter. Potter Company's common stock was trading at $20 per share at the time of exchange. The following selected information is also available:

Par value of shares outstanding Additional Paid in Capital

Potter Company Before Acquisition After Acquisition $200,000 $250,000 350,000 550,000

What number of shares was issued at the time of the exchange? A) 5,000 B)

17,500

C)

12,500

D) 10,000

Answer Key 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15.

C C D D C D B C D C C D D B C

Page 11

Chapter #3 Use the following to answer questions 1-3: On January 1, 2011, Polk Company and Sigler Company had condensed balance sheets as follows: Polk Sigler Current assets $ 280,000 $ 80,000 Noncurrent assets

_360,000

160,000

Total assets

$640,000

$240,000

Current liabilities Long-term debt Stockholders' equity Total liabilities & stockholders' equity

$ 120,000 200,000 120,000 $640,000

$ 40,000 -0200,000 $240,000

On January 2, 2011 Polk borrowed $240,000 and used the proceeds to purchase 90% of the outstanding common stock of Sigler. This debt is payable in 10 equal annual principal payments, plus interest, starting December 30, 2011. Any difference between book value and the value implied by the purchase price relates to land. On Polk's January 2, 2011 consolidated balance sheet, 1. Noncurrent assets should be A) $520,000. B)

$536,000.

C)

$544,000.

D) $586,667.

2. Current liabilities should be A) $200,000. B)

$184,000.

C)

$160,000.

D) $120,000.

Page 12

3. Noncurrent liabilities should be A) $440,000. B)

$416,000.

C)

$240,000.

D) $216,000.

4. In which of the following cases would consolidation be inappropriate? A) The subsidiary is in bankruptcy. B)

Subsidiary's operations are dissimilar from those of the parent.

C)

The parent owns 90 percent of the subsidiary's common stock, but all of the subsidiary's nonvoting preferred stock is held by a single investor. D) Subsidiary is foreign.

5. Princeton Company acquired 75 percent of the common stock of Sheffield Corporation on December 31, 2011. On the date of acquisition, Princeton held land with a book value of $150,000 and a fair value of $300,000; Sheffield held land with a book value of $100,000 and fair value of $500,000. What amount would land be reported in the consolidated balance sheet prepared immediately after the combination? A) $650,000 B)

$500,000

C)

$550,000

D) $375,000

Page 13

Use the following to answer questions 6-8: On January 1, 2011, Pena Company and Shelby Company had condensed balanced sheets as follows: Pena $210,000

Shelby $ 60,000

270,000

120,000

Total assets

$480,000

$180,000

Current liabilities Long-term debt Stock holders' equity Total liabilities & stockholders' equity

$ 90,000 150,000 240,000 $ 480,000

$ 30,000 -0150,000 $ 180,000

Current assets Noncurrent assets

On January 2, 2011 Pena borrowed $180,000 and used the proceeds to purchase 90% of the outstanding common stock of Shelby. This debt is payable in 10 equal annual principal payments, plus interest, starting December 30, 2011. Any difference between book value and the value implied by the purchase price relates to land. On Pena's January 2, 2011 consolidated balance sheet, 6. Noncurrent assets should be A) $390,000. B)

$402,000.

C)

$408,000.

D) $440,000.

7. Current liabilities should be A) $150,000. B)

$138,000.

C)

$120,000.

D) $90,000.

Page 14

8. Noncurrent liabilities should be A) $330,000. B)

$312,000.

C)

$180,000.

D) $162,000.

9. On January 1, 2011, Primer Corporation acquired 80 percent of Sutter Corporation's voting common stock. Sutters's buildings and equipment had a book value of $300,000 and a fair value of $350,000 at the time of acquisition. At what amount will Sutter's buildings and equipment will be reported in the consolidated statements? A) $350,000 B)

$340,000

C)

$280,000

D) $300,000

Answer Key 1. 2. 3. 4. 5. 6. 7. 8. 9.

D B B A A D B B A

Page 15

Chapter #4 1. P Company purchased 90% of the outstanding common stock of S Company on January 1, 1997. S Company's stockholders' equity at various dates was:

Common stock Retained earnings Total

1/1/97 $400,000

1/1/11 $400,000

12/31/11 $400,000

120,000

380,000

460,000

$520,000

$780,000

$860,000

The workpaper entry to establish reciprocity under the cost method in the preparation of a consolidated statements workpaper on December 31, 2011 should include a credit to P Company's retained earnings of A) $80,000. B)

$234,000.

C)

$260,000.

D) $306,000.

2. On October 1, 2011, Parr Company acquired for cash all of the voting

common stock of Stein Company. The purchase price of Stein's stock equaled the book value and fair value of Stein's net assets. The separate net income for each company, excluding Parr's share of income from Stein was as follows:

Twelve months ended 12/31/11 Three months ended 12/31/11

Parr $4,500,000

Stein $2,700,000

495,000

450,000

During September, Stein paid $150,000 in dividends to its stockholders. For the year ended December 31, 2011, Parr issued parent company only financial statements. These statements are not considered those of the primary reporting entity. Under the partial equity method, what is the amount of net income reported in Parr's income statement? A) $7,200,000. B)

$4,650,000.

C)

$4,950,000.

D) $1,800,000.

Page 16

Use the following to answer questions 3-4: Prior Industries acquired a 70 percent interest in Stevenson Company by purchasing 14,000 of its 20,000 outstanding shares of common stock at book value of $210,000 on January 1, 2010. Stevenson reported net income in 2010 of $90,000 and in 2011 of $120,000 earned evenly throughout the respective years. Prior received $24,000 dividends from Stevenson in 2010 and $36,000 in 2011. Prior uses the equity method to record its investment. 3. Prior should record investment income from Stevenson during 2011 of: A) $36,000 B)

$120,000

C)

$84,000

D) $48,000

4. The balance of Prior's Investment in Stevenson account at December 31, 2011 is: A) $210,000 B)

$285,000

C)

$297,000

D) $315,000

5. P Company purchased 80% of the outstanding common stock of S Company on May 1, 2011, for a cash payment of $318,000. S Company's December 31, 2010 balance sheet reported common stock of $200,000 and retained earnings of $180,000. During the calendar year 2011, S Company earned $210,000 evenly throughout the year and declared a dividend of $75,000 on November 1. What is the amount needed to establish reciprocity under the cost method in the preparation of a consolidated workpaper on December 31, 2011? A) $52,000 B)

$65,000

C)

$62,000

D) $108,000

Page 17

6. P Company purchased 90% of the outstanding common stock of S Company on January 1, 1997. S Company's stockholders' equity at various dates was:

Common stock Retained earnings Total

1/1/97 $200,000

1/1/11 $200,000

12/31/11 $200,000

60,000

190,000

230,000

$260,000

$390,000

$430,000

The workpaper entry to establish reciprocity under the cost method in the preparation of a consolidated statements workpaper on December 31, 2011 should include a credit to P Company's retained earnings of A) $40,000. B)

$117,000.

C)

$130,000.

D) $153,000.

Use the following to answer questions 7-8: Prior Industries acquired an 80 percent interest in Sanderson Company by purchasing 24,000 of its 30,000 outstanding shares of common stock at book value of $105,000 on January 1, 2010. Sanderson reported net income in 2010 of $45,000 and in 2011 of $60,000 earned evenly throughout the respective years. Prior received $12,000 dividends from Sanderson in 2010 and $18,000 in 2011. Prior uses the equity method to record its investment. 7. Prior should record investment income from Sanderson during 2011 of: A) $18,000. B)

$60,000.

C)

$48,000.

D) $33,600.

8. The balance of Prior's Investment in Sanderson account at December 31, 2011 is: A) $105,000. B)

$138,600.

C)

$159,000.

Page 18

D) $165,000.

9. Pendleton Company acquired a 70% interest in Sunflower Company on December 31, 2010, for $380,000. During 2011 Sunflower had a net income of $30,000 and paid a cash dividend of $10,000. Applying the cost method would give a debit balance in the Investment in Stock of Sunflower Company account at the end of 2011 of: A) $400,000. B)

$394,000.

C)

$373,000.

D) $380,000.

Use the following to answer questions 10-11: On January 1, 2011, Rotor Corporation acquired 30 percent of Stator Company's stock for $150,000. On the acquisition date, Stator reported net assets of $450,000 valued at historical cost and $500,000 stated at fair value. The difference was due to the increased value of buildings with a remaining life of 10 years. During 2011 Stator reported net income of $25,000 and paid dividends of $10,000. Rotor uses the equity method. 10. What will be the balance in the Investment account as of Dec 31, 2011? A) $150,000 B)

$157,500

C)

$154,500

D) $153,000

11. What amount of investment income will be reported by Rotor for the year 2011? A) $7,500 B)

$6,000

C)

$4,500

D) $25,000

Page 19

12. On January 1, 2011, Potter Company purchased 25 % of Smith Company's common stock; no goodwill resulted from the acquisition. Potter Company appropriately carries the investment using the equity method of accounting and the balance in Potter's investment account was $190,000 on December 31, 2011. Smith reported net income of $120,000 for the year ended December 31, 2011 and paid dividends on its common stock totaling $48,000 during 2011. How much did Potter pay for its 25% interest in Smith? A) $172,000 B)

$202,000

C)

$208,000

D) $232,000

Use the following to answer questions 13-14: On January 1, 2011, Paterson Company purchased 40% of Stratton Company's 30,000 shares of voting common stock for a cash payment of $1,800,000 when 40% of the net book value of Stratton Company was $1,740,000. The payment in excess of the net book value was attributed to depreciable assets with a remaining useful life of six years. As a result of this transaction Paterson has the ability to exercise significant influence over Stratton Company's operating and financial policies. Stratton's net income for the ended December 31, 2011 was $600,000. During 2011, Stratton paid $325,000 in dividends to its shareholders. 13. The income reported by Paterson for its investment in Stratton should be: A) $120,000 B)

$130,000

C)

$230,000

D) $240,000

14. What is the ending balance in Paterson's investment account as of December 31, 2011? A) $1,800,000 B)

$1,900,000

C)

$1,910,000

D) $2,030,000

Page 20

Answer Key 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14.

B C C C A B C C D D B A C B

Chapter #5 1. When the value implied by the purchase price of a subsidiary is in excess of the fair value of identifiable net assets, the workpaper entry to allocate the difference between implied and book value includes a 1. debit to Difference Between Implied and Book Value. 2. credit to Excess of Implied over Fair Value. 3. credit to Difference Between Implied and Book Value. A) 1 B)

2

C)

3

D) Both 1 and 2

2. The excess of fair value over implied value must be allocated to reduce proportionally the fair values initially assigned to A) current assets. B)

noncurrent assets.

C)

both current and noncurrent assets.

D) none of the above.

Page 21

Use the following to answer questions 3-6: On January 1, 2010, Pandora Company purchased 75% of the common stock of Saturn Company. Separate balance sheet data for the companies at the combination date are given below: Pandora Co. $ 18,000

Cash Accounts receivable

Saturn Co. Book Values $155,000

Saturn Co. Fair Values $155,000

108,000

20,000

20,000

Inventory

99,000

26,000

45,000

Land

60,000

24,000

45,000

525,000

225,000

300,000

(180,000)

(45,000)

330,000

________

________

Total assets

$960,000

$405,000

$565,000

Accounts payable Capital stock

$156,000 600,000

$105,000 225,000

$105,000

Retained earnings

204,000

75,000

$960,000

$405,000

Plant assets Acc. depreciation Investment in Saturn Co.

Total liabilities & equities

Determine below what the consolidated balance would be for each of the requested accounts on January 2, 2010. 3. What amount of inventory will be reported? A) $125,000 B)

$132,750

C)

$139,250

D) $144,000

4. What amount of goodwill will be reported? A) ($20,000)

Page 22

B)

($25,000)

C)

$25,000

D) $0

5. What is the amount of consolidated retained earnings? A) $204,000 B)

$209,250

C)

$260,250

D) $279,000

6. What is the amount of total assets? A) $921,000 B)

$1,185,000

C)

$1,525,000

D) $1,195,000

7. Sensible Company, a 70%-owned subsidiary of Proper Corporation, reported net income of $600,000 and paid dividends totaling $225,000 during Year 3. Year 3 amortization of differences between current fair values and carrying amounts of Sensible's identifiable net assets at the date of the business combination was $112,500. The noncontrolling interest in consolidated net income of Sensible for Year 3 was A) $146,250. B)

$33,750.

C)

$67,500.

D) $180,000.

Page 23

Use the following to answer questions 8-10: On January 1, 2010, Poole Company purchased 75% of the common stock of Swimmer Company. Separate balance sheet data for the companies at the combination date are given below: Swimmer Co. Poole Co. $ 24,000

Cash

Book Values $206,000

Swimmer Co. Fair Values $206,000

Accounts receivable

144,000

26,000

26,000

Inventory

132,000

38,000

60,000

78,000

32,000

60,000

700,000

300,000

350,000

(240,000)

(60,000)

440,000

________

________

$1,278,000

$542,000

$702,000

Accounts payable Capital stock

$206,000 800,000

$142,000 300,000

$142,000

Retained earnings

272,000

100,000

$1,278,000

$542,000

Land Plant assets Acc. depreciation Investment in Swimmer Co. Total assets

Total liabilities & equities

Determine below what the consolidated balance would be for each of the requested accounts on January 2, 2010. 8. What amount of inventory will be reported? A) $170,000. B)

$177,000.

C)

$186,500.

D) $192,000.

9. What amount of goodwill will be reported? A) $26,667.

Page 24

B)

$20,000.

C)

$42,000.

D) $86,667.

10. What is the amount of total assets? A) $1,626,667. B)

$1,566,667

C)

$1,980,000.

D) $2,006,667.

Answer Key 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

C D D D A D A D A B

Page 25

Chapter #6 Use the following to answer questions 1-2: P Company regularly sells merchandise to its 80%-owned subsidiary, S Corporation. In 2010, P sold merchandise that cost $240,000 to S for $300,000. Half of this merchandise remained in S's December 31, 2010 inventory. During 2011, P sold merchandise that cost $375,000 to S for $468,000. Forty percent of this merchandise inventory remained in S's December 31, 2011 inventory. Selected income statement information for the two affiliates for the year 2011 is as follows: P $2,250,000

S $1,125,000

Cost of Goods Sold

1,800,000

937,500

Gross profit

$450,000

$187,500

Sales Revenue

1. Consolidated sales revenue for P and Subsidiary for 2011 are: A) $2,907,000. B)

$3,000,000.

C)

$3,205,500.

D) $3,375,000.

2. Consolidated cost of goods sold for P Company and Subsidiary for 2011 are: A) $2,260,500. B)

$2,268,000.

C)

$2,276,700.

D) $2,737,500.

Page 26

Use the following to answer questions 3-4: P Company owns an 80% interest in S Company. During 2011, S sells merchandise to P for $200,000 at a profit of $40,000. On December 31, 2011, 50% of this merchandise is included in P's inventory. Income statements for P and S are summarized below: Sales

P $1,200,000

S $600,000

Cost of Sales

(600,000)

(400,000)

Operating Expenses

(300,000)

( 80,000)

Net Income (2011)

$300,000

$120,000

3. Controlling interest in consolidated net income for 2011 is: A) $300,000. B)

$380,000.

C)

$396,000.

D) $420,000.

4. Noncontrolling interest in income for 2011 is: A) $4,000. B)

$19,200.

C)

$20,000.

D) $24,000.

5. The amount of intercompany profit eliminated is the same under total elimination and partial elimination in the case of 1. upstream sales where the selling affiliate is a less than wholly owned subsidiary. 2. all downstream sales. 3. horizontal sales where the selling affiliate is a wholly owned subsidiary. A) 1. B)

2.

C)

3.

Page 27

D) both 2 and 3.

6. P Corporation acquired a 60% interest in S Corporation on January 1, 2011, at book value equal to fair value. During 2011, P sold merchandise that cost $225,000 to S for $315,000. One-third of this merchandise remained in S's inventory at December 31, 2011. S reported net income of $200,000 for 2011. P's income from S for 2011 is: A) $60,000. B)

$90,000.

C)

$120,000.

D) $102,000.

Use the following to answer questions 7-8: P Company regularly sells merchandise to its 80%-owned subsidiary, S Corporation. In 2010, P sold merchandise that cost $192,000 to S for $240,000. Half of this merchandise remained in S's December 31, 2010 inventory. During 2011, P sold merchandise that cost $300,000 to S for $375,000. Forty percent of this merchandise inventory remained in S's December 31, 2011 inventory. Selected income statement information for the two affiliates for the year 2011 is as follows:

Sales Revenue Cost of Goods Sold Gross profit

P

S

$1,800,000 1,440,000 $ 360,000

$900,000 750,000 $150,000

7. Consolidated sales revenue for P and Subsidiary for 2011 are: A) $2,325,000. B)

$2,400,000.

C)

$2,565,000.

D) $2,700,000.

8. Consolidated cost of goods sold for P Company and Subsidiary for 2011 are: A) $1,809,000.

Page 28

B)

$1,815,000.

C)

$1,821,000.

D) $2,190,000.

Use the following to answer questions 9-10: P Company owns an 80% interest in S Company. During 2011, S sells merchandise to P for $150,000 at a profit of $30,000. On December 31, 2011, 50% of this merchandise is included in P's inventory. Income statements for P and S are summarized below: P $900,000

Sales Cost of Sales

(450,000)

S $450,000 (300,000)

Operating Expenses

(225,000)

(60,000)

Net Income (2011)

$225,000

$90,000

9. Controlling interest in consolidated net income for 2011 is: A) $225,000. B)

$285,000.

C)

$297,000.

D) $315,000.

10. Noncontrolling interest in income for 2011 is: A) $3,000. B)

$14,400.

C)

$15,000.

D) $18,000.

Page 29

Answer Key 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

A C B C D C A C B C

Chapter #7 1. On January 1, 2010, P Corporation sold equipment with a 3-year remaining life and a book value of $40,000 to its 70% owned subsidiary for a price of $46,000. In the consolidated workpapers for the year ended December 31, 2011, an elimination entry for this transaction will include a: A) debit to Equipment for $6,000. B)

debit to Gain on Sale of Equipment for $6,000.

C)

credit to Depreciation Expense for $6,000.

D) debit to Accumulated Depreciation for $4,000.

2. In January 2008, S Company, an 80% owned subsidiary of P Company, sold equipment to P Company for $990,000. S Company's original cost for this equipment was $1,000,000 and had accumulated depreciation of $100,000. P Company continued to depreciate the equipment over its 9 year remaining life using the straight-line method. This equipment was sold to a third party on January 1, 2011 for $720,000. What amount of gain should P Company record on its books in 2011? A) $30,000. B)

$60,000.

C)

$120,000.

D) $180,000.

Page 30

3. P Corporation acquired an 80% interest in S Corporation two years ago at an implied value equal to the book value of S. On January 2, 2011, S sold equipment with a fiveyear remaining life to P for a gain of $180,000. S reports net income of $900,000 for 2011 and pays dividends of $300,000. P's Equity from Subsidiary Income for 2011 is: A) $720,000. B)

$576,000.

C)

$604,800.

D) $864,000

4. P Company purchased land from its 80% owned subsidiary at a cost of $30,000 greater than it subsidiary's book value. Two years later P sold the land to an outside entity for $15,000 more than it's cost. In its current year consolidated income statement P and its subsidiary should report a gain on the sale of land of: A) $15,000. B)

$36,000.

C)

$39,000.

D) $45,000.

5. On January 1, 2010, P Corporation sold equipment with a 3-year remaining life and a book value of $100,000 to its 70% owned subsidiary for a price of $115,000. In the consolidated workpapers for the year ended December 31, 2011, an elimination entry for this transaction will include a: A) debit to Equipment for $15,000. B)

debit to Gain on Sale of Equipment for $15,000.

C)

credit to Depreciation Expense for $15,000.

D) debit to Accumulated Depreciation for $10,000.

Page 31

Answer Key 1. 2. 3. 4. 5.

D B C D D

Page 32