Test Bank ch 3

Chapter 3 Test Bank

AN INTRODUCTION TO CONSOLIDATED FINANCIAL STATEMENTS Multiple Choice Questions LO1 1. What method must be used if FASB 94 prohibits full consolidation of a 70% owned subsidiary? a. The cost method. b. The Liquidation value. c. Market value. d. Equity method. LO1 2. From the standpoint of accounting theory, which of the following statements is the best justification for the preparation of consolidated financial statements? a. In substance the companies are separate, but in form the companies are one entity. b. In substance the companies are one entity, but in form they are separate. c. In substance and form the companies are one entity. d. In substance and form the companies are separate entities. LO2 3. Penguin Corporation owns 90% of the outstanding voting stock of Crevice Company and Burrow Corporation owns the remaining 10% of Crevice’s voting stock. On the consolidated financial statements of Penguin Corporation and Subsidiary, Burrow is a. b. c. d.

LO2 4.

an affiliate. a minority interest. an equity investee. a related party

A major motivation for FASB’s creation of Statement No. 94 was a. temporary control was not being disclosed properly. b. the elimination off-balance sheet financing c. situations occurred where subsidiary control did not lie with the parent company. d. the risk of subsidiary legal reorganization or bankruptcy was not disclosed.

1

LO2 5.

Muttonbird Inc. has 90% ownership of Beach Company, but should exclude Beach under FASB 94 if a. b. c. d.

LO2 6.

Subsequent to an acquisition, the parent company and consolidated financial statement amounts would not be the same for a. b. c. d.

LO3 7.

investments in unconsolidated subsidiaries. investments in consolidated subsidiaries. capital stock. ending retained earnings.

On June 1, 2005, Gull Company acquired 100% of the stock of Scrap Inc. On this date, Gull had Retained Earnings of $200,000 and Scrap had Retained Earnings of $100,000. On December 31, 2005, Gull had Retained Earnings of $240,000 and Scrap had Retained Earnings of $120,000. The amount of Retained Earnings that appeared in the December 31, 2005 consolidated balance sheet was: a. b. c. d.

LO3 8.

Beach is in a regulated industry. Muttonbird uses the equity method for Beach. Muttonbird expects to sell Beach within a year. Beach is in a foreign country and records its books in a foreign currency.

$240,000. $260,000. $300,000. $360,000.

Scrubwren Corporation acquired a 100% interest in Heath Company for $1,780,000 when Heath had no liabilities. The book values and fair values of Heath's assets were Current assets Equipment Land & buildings

Book Value $ 400,000 200,000 600,000

Fair Value $ 700,000 400,000 800,000

Total assets

$1,200,000

$1,900,000

Immediately following the acquisition, equipment will be included on the consolidated balance sheet at a. b. c. d. LO4 9.

$300,000. $340,000. $360,000. $400,000.

A newly acquired subsidiary had pre-existing goodwill on its books. The parent company's consolidated balance sheet will a. not show any value for the subsidiary's pre-existing goodwill. b. treat the goodwill similarly to other intangible assets of the acquired company. c. not show any value for the pre-existing goodwill unless all other assets of the subsidiary are stated at their full fair value. d. always show the pre-existing goodwill of the subsidiary at its book value.

LO4 10.

The unamortized excess account is a. a contra-equity account. b. used in allocating the amounts paid for recorded balance sheet accounts that are above or below their fair values. c. used in allocating the amounts paid for each asset and liability that are above or below their book values, especially when numerous assets or liabilities are involved. d. the excess purchase cost that is attributable to goodwill.

LO5 11.

On January 1, 2005, Tern purchased 90% of Costal Corporation’s outstanding shares for $1,400,000 when the fair value of Costal’s assets were equal to the book values. The balance sheets of Tern and Costal Corporations at year-end 2004 are summarized as follows: Assets

$

Tern 5,900,000 $

Costal 1,450,000

Liabilities Capital stock Retained earnings

$

700,000 $ 3,600,000 1,600,000

250,000 1,000,000 200,000

If a consolidated balance sheet was prepared immediately after the business combination, the minority interest, would be a. b. c. d. LO5 12.

On July 1, 2005, when Worm Company’s total stockholders’ equity was $180,000, Bird Corporation purchased 7,000 shares of Worm’s common stock at $30 per share. Worm Company had 10,000 shares of common stock outstanding both before and after the purchase by Bird, and the book value of Worm’s net assets on July 1, 2005 was equal to the fair value. On a consolidated balance sheet prepared at July 1, 2005, goodwill would be a. b. c. d.

LO5 13.

LO5 14.

$100,000. $155,556. $140,000. $520,000.

$30,000. $40,000. $50,000. $120,000.

Bowerbird Inc acquired 60% of the outstanding stock of Mimicry Company in a business combination. The book values of Mimicry’s net assets are equal to the fair values except for the building, whose net book value and fair value are $400,000 and 600,000, respectively. At what amount is the building reported on the consolidated balance sheet? a. $360,000. b. $400,000. c. $520,000. d. $600,000. In the preparation of consolidated financial statements, which of the following intercompany transactions must be eliminated as part of the preparation of the consolidation working papers? a. All revenues, expenses, gains, deductions, receivables, and payables. b. All revenues, expenses, gains, and deductions but not receivables and payables. c. Receivables and payables but not revenues, expenses, gains, and deductions. d. only sales revenue and cost of goods sold.

LO6 15.

Pardolate Corporation paid $200,000 for a 60% interest in Arthropod Inc on January 1, 2005, when Arthropod had Capital Stock of $200,000 and Retained Earnings of $100,000. Fair values of identifiable net assets were the same as recorded book values. During 2005, Arthropod had income of $30,000, declared dividends of $10,000, and paid $5,000 of dividends. On December 31, 2005, Pardolate will have a. b. c. d.

LO6 16.

Spinebill Corporation bought 80% of Nectar Company’s common stock at its book value of $500,000 on January 1, 2005. During 2005, Nectar reported net income of $150,000 and paid dividends of $45,000. At what amount should Spinebill’s Investment in Nectar account be reported on December 31, 2005? a. b. c. d.

LO6 ``

$500,000 $548,000 $584,000 $605,000

Weebill Corporation bought 80% of Tree Company’s common stock at its book value of $800,000 on January 2, 2005 for $700,000. The law firm of Dewey, Cheatam and Howe did $25,000 to facilitate the purchase. At what amount should Weebill’s Investment in Tree account be reported on January 2, 2005? a. b. c. d.

LO7 18.

investment in Salem account of $240,000. investment in Salem account of $218,000. goodwill of $33,333. dividends receivable of $3,000.

$640,000. $665,000. $700,000. $725,000.

Bellbird Corporation acquired an 80% interest in Honey Inc for $130,000 on January 1, 2005, when Honey had Capital Stock of $125,000 and Retained Earnings of $25,000. Bellbird’s separate income statement and a consolidated income statement for Bellbird Corporation and Subsidiary as of December 31, 2005, are shown below. ConsoliBellbird dated Sales revenue $ 150,000 $ 234,750 Income from Corporal 11,600 Cost of sales ( 60,000 ) ( 100,000 )

Other expenses Noncontrolling interest income Net income

a. b. c. d. LO7 19.

$

20,000 ) 81,600

$

(

50,000 )

(

3,150 ) 81,600

Honey’s separate income statement must have reported net income of: $13,750. $14,750. $15,750. $15,250.

In the consolidated income statement of Wattlebird Corporation and its 85% owned Forest subsidiary, the noncontrolling interest income was reported at $45,000. What amount of net income did the Forest have for the year? a. b. c. d.

LO8 20.

(

$52,941 $38,250 $235,000 $300,000.

Push-down accounting a. requires a subsidiary to use the same accounting principles as its parent company. b. is required by the SEC if a subsidiary is wholly owned. c. is required when the parent company uses the cost method to account for its investment in the subsidiary. d. results in a push-up residual account on the subsidiaries books.

Exercises LO4 Exercise 1 Alarm Bird Inc. acquired an 85% interest in Clock Corporation on January 2, 2005 for $38,000 cash when Clock had Capital Stock of $15,000 and Retained Earnings of $25,000. Clock’s assets and liabilities had book values equal to their fair values except for inventory that was undervalued by $2,000. Balance sheets for Alarm Bird and Clock on January 2, 2005, immediately after the business combination, are presented in the first two columns of the consolidated balance sheet working papers. Alarm Bird Corporation and Subsidiary Consolidated Balance Sheet Working Papers at January 2, 2005 Eliminations Alarm Bird ASSETS Cash Accounts Receivable-net

$

Inventories Plant assets-net Investment in Clock

Clock

68,000

$ 4,000

75,000

9,000

39,000

10,000

170,000

35,000

38,000

Total Assets

$

390,000

$58,000

EQUITIES Payables

$

120,000

$18,000

100,000

15,000

170,000

25,000

390,000

$58,000

Capital stock Retained Earnings Minority Interest TOTAL EQUITIES

$

Debit

Credit

Balance Sheet

Required: Complete the consolidation balance sheet working papers for Alarm Bird and subsidiary at January 1, 2005. LO4 Exercise 2 On January 1, 2005, Myna Corporation issued 10,000 shares of its own $10 par value common stock for 9,000 shares of the outstanding stock of Berry Corporation in an acquisition. Myna common stock at January 1, 2005 was selling at $70 per share. Just before the business combination, balance sheet information of the two corporations was as follows: Myna Book Value Cash Inventories Other current assets Land Plant and equipment-net

$

$ Liabilities Capital stock, $10 par value Additional paid-in capital Retained earnings

$

$

25,000 $ 55,000 110,000 100,000 660,000 950,000 $

Berry Book Value 12,000 $ 32,000 90,000 30,000 250,000 414,000 $

Berry Fair Value 12,000 36,000 110,000 90,000 375,000 623,000

220,000 $ 500,000 170,000 60,000 950,000 $

50,000 $ 100,000 40,000 224,000 414,000

50,000

Required: 1. Prepare the journal entry on Myna Corporation’s books to account for the business combination. 2. Prepare a consolidated balance sheet for Myna Corporation and Subsidiary immediately after the business combination.

LO5 Exercise 3 The consolidated balance sheet of Treecreeper Corporation and Ants Farm, its 90% owned subsidiary, as of December 31, 2005, contains the following accounts and balances: Treecreeper Corporation and Subsidiary Consolidated Balance Sheet at December 31, 2005

Cash Accounts receivable-net Inventories Other current assets Plant assets-net Goodwill from consolidation

$

$ Accounts payable Other liabilities Capital stock Retained earnings Minority interest

Balances 19,000 70,000 110,000 85,000 290,000 39,000 613,000

$

73,000 70,000 350,000 80,000 40,000 613,000

$

Treecreeper Corporation acquired its 90% interest in Ants Farm on January 1, 2005, when Ants Farm had $150,000 of Capital Stock and $70,000 of Retained Earnings. Ants Farm’s net assets had fair values equal to their book values when Treecreeper acquired its interest. No changes have occurred in the amount of outstanding stock since the date of the business combination. Treecreeper uses the equity method of accounting for its investment. Required: Determine the following amounts: 1. The balance of Treecreeper's Capital Stock and Retained Earnings accounts at December 31, 2005. 2. Cost of Treecreeper's purchase of Ants Farm on January 1, 2005. 3. Ants Farms’s stockholders' equity on December 31, 2005. 4. Treecreeper’s Investment December 31, 2005.

in

Ants

Farm

account

balance

at

LO5 Exercise 4 Monarch Corporation paid $180,000 for a 75% interest in Stem Co.’s outstanding Capital Stock on January 1, 2005, when Stem’s stockholders’ equity consisted of $150,000 of Capital Stock and $50,000 of Retained Earnings. Book values of Stem’s net assets were equal to their fair values on this date. The adjusted trial balances of Monarch and Stem on December 31, 2005 were as follows: Cash Dividends receivable Other current assets Land Plant assets-net Investment in Stem Cost of sales Other expenses Dividends

Accounts payable Dividends payable Capital stock Retained earnings Sales revenue Income from Stem

$

Packer 8,250 7,500 40,000 50,000 100,000 195,000 225,000 45,000 25,000 695,750

$

40,750

$

$

150,000 75,000 400,000 30,000 695,750

35,000 10,000 150,000 50,000 190,000

$

435,000

$

$

Stem 35,000 50,000 30,000 150,000

$

125,000 25,000 20,000 435,000

Required: Complete the partially prepared consolidated balance sheet working papers that appear below.

Monarch Corporation and Subsidiary Consolidated balance Sheet Working Papers at December 31, 2005 Eliminations Monarch ASSETS Cash Dividends Receivable Other current Assets

$

Stem

8,250 $ 35,000 7,500 40,000

50,000

50,000

30,000

Plant assets

100,000

150,000

Investment in Stem

195,000

Land

Total Assets

$

EQUITIES Accounts payable $ Dividends Payable Capital stock Retained Earnings

TOTAL EQUITIES

$

400,750 $285,000

40,750 $ 35,000 10,000 150,000

150,000

210,000

70,000

400,750 $285,000

Debit

Credit

Balance Sheet

LO5 Exercise 5 Zoo Inc paid $268,000 to purchase 80% of the outstanding stock of Bird Corporation, on December 31, 2005. The following year-end information was available just before the purchase: Zoo Book Value Cash Accounts Receivable Inventory Land Plant and equipment-net

$

$ Accounts Payable Bonds Payable Capital stock, $10 par value Capital stock, $15 par value Additional paid-in capital Retained earnings

$

$

378,000 $ 130,000 240,000 220,000 660,000 1,628,000 $ 440,000 $ 468,000 200,000 200,000 320,000 1,628,000 $

Bird Book Value 40,000 $ 76,000 50,000 80,000 200,000 446,000 $

Bird Fair Value 40,000 76,000 55,000 55,000 215,000

11,000 $ 100,000

11,000 95,000

225,000 80,000 30,000 446,000

Required: 1. Prepare Zoo’s consolidated balance sheet on December 31, 2005.

LO5 Exercise 6 On July 1, 2005, Magpie Corporation issued 23,000 shares of its own $2 par value common stock for 35,000 shares of the outstanding stock of Insect Inc. in an acquisition. Magpie common stock at July 1, 2005 was selling at $14 per share. Just before the business combination, balance sheet information of the two corporations was as follows: Magpie Book Value Cash Inventories Other current assets Land Plant and equipment-net

$

$ Liabilities Capital stock, $2 par value Additional paid-in capital Retained earnings

$

$

25,000 $ 55,000 110,000 100,000 660,000 950,000 $

Insect Book Value 17,000 $ 42,000 40,000 45,000 220,000 364,000 $

Insect Fair Value 17,000 47,000 30,000 35,000 280,000 409,000

220,000 $ 500,000 170,000 60,000 950,000 $

70,000 $ 100,000 90,000 104,000 364,000

75,000

Required: 1. Prepare the journal entry on Magpie account for the business combination.

Corporation’s

books

to

2. Prepare a consolidated balance sheet for Magpie Corporation and Subsidiary immediately after the business combination.

LO5 Exercise 7 Manucode Corporation paid $279,000 for 70% of Trumpet Corporation’s $10 par common stock on December 31, 2005, when Trumpet Corporation’s stockholders’ equity was made up of $200,000 of Common Stock, $60,000 Additional Paid-in Capital and $40,000 of Retained Earnings. Trumpet’s identifiable assets and liabilities reflected their fair values on December 31, 2005, except for Trumpet’s inventory which was undervalued by $50,000 and their land which was undervalued by $20,000. Balance sheets for Manucode and Trumpet immediately after the business combination are presented in the partially completed working papers.

Manucode Corporation and Subsidiary Consolidated Balance Sheet Working Papers at December 31, 2005 Eliminations Manucode Trumpet ASSETS Cash Accounts receivable-net

$

Inventories

20,000

30,000

125,000

110,000

30,000

80,000

320,000

160,000

Investment in Trumpet

279,000

Total Assets

$

800,000 $400,000

EQUITIES Current liabilities

$

110,000 $100,000

TOTAL EQUITIES

$

Credit

Balance Sheet

26,000 $ 20,000

Land Plant assets – net

Capital stock Additional paidin capital Retained earnings

Debit

400,000

200,000

100,000

60,000

190,000

40,000

800,000 $400,000

Required: Complete the consolidated balance sheet working papers for Manucode Corporation and Subsidiary.

LO6 Exercise 8 Bower Corporation paid $5,000 for a 60% interest in Fig Inc. on January 1, 2005 when Fig’s stockholders’ equity consisted of $5,000 Capital Stock and $2,500 Retained Earnings. Fig’s assets and liabilities were fairly valued on this date. Two years later, on December 31, 2006, the balance sheets of Bower and Fig are summarized as follows: Bower Corporation and Subsidiary Consolidated balance Sheet Working Papers at December 31, 2006 Eliminations Bower ASSETS Current assets

$

Fixed assets Investment in Fig

Fig

12,550

$ 4,000

21,550

6,500

Credit

Balance Sheet

5,900

Total Assets

$

40,000

$10,500

EQUITIES Liabilities

$

10,000

$ 1,500

20,000

5,000

10,000

4,000

40,000

$10,500

Capital stock Retained Earnings

TOTAL EQUITIES

Debit

$

Required: Complete the consolidated balance sheet working Corporation and Subsidiary at December 31, 2006.

papers

for

Bower

LO7&8 Exercise 9 Currawong Corporation paid $500,000 for 80% of the outstanding voting common stock of Lizard Corporation on January 2, 2005 when the book value of Lizard’s net assets was $460,000. The fair values of Lizard’s identifiable net assets were equal to their book values except as indicated below. Lizard reported net income of $75,000 during $35,000 were declared and paid during the year. Book Value Inventories Buildings-net Note Payable

(sold in 2005) (15-year life) (paid in 2005)

$

80,000 $ 200,000 20,000

2005;

dividends

of

Fair Value 112,000 170,000 21,250

Required: 1. Prepare a schedule to allocate the cost/book differential to the specific identifiable assets and liabilities. 2. Determine Currawong’s income from Lizard for 2005. 3. Determine the correct balance account as of December 31, 2005.

in

the

Investment

in

Lizard

SOLUTIONS Multiple Choice Questions 1

d

2

b

3

b

4

b

5

c

6

b

7

a

8

c

The parent’s retained earnings Purchase cost Current asset fair value Excess to non-current assets Fair value of non-current assets Allocation shortfall Equipment share of shortfall: $400,000/$1,200,000 X $120,000 = Allocation to equipment: $400,000 - $40,000 =

9

c

10

c

11

b

$1,400,000 / 90% = $1,555,556. 10% of $1,555,556 = $155,556

12

d

Bird’s cost = 7,000 x $30 Implied fair value of Worm ($210,000 / 70%) Less: Book value Goodwill acquired

13

$

$ $ $

$ ( $

1,780,000 700,000 1,080,000 1,200,000 120,000 40,000 360,000

210,000 300,000 180,000 ) 120,000

d

14

a

15

c

Pardolate’s cost

Implied fair value of Arthropod ($200,000 / 60%) Less: Book value Goodwill acquired

$

600,000

$

200,000 333,333

( $

300,000 ) 33,333

16

c

Investment cost + 80% (subsidiary income) – (80%)(subsidiary dividends = $500,000 + $120,000 - $36,000 =

17

d

18

c

$3,150/0.20 = $15,750

19

d

$45,000/15% = $300,000

20

d

584,000

$

Exercise 1 Preliminary computations $ $38,000 Fair value (purchase price) of 90% interest Eliminations acquired Alarm Clock Debit Credit January 2, 2005 Bird ASSETS Implied fair value of Cash $ Book value of Clock’s Accounts Excess cost over book Receivable-net

Clock ($38,000 / 90% 68,000 $ 4,000 net assets value acquired 75,000 9,000=

( $

Balance Sheet

$44,706 $72,000 40,000) 4,706 84,000

Inventories 39,000 10,000 $2,000 51,000 Allocation of excess of cost over book avalue: Plant assetsInventory $ 2,000 Net 35,000 205,000 Remainder to goodwill170,000 2,706 Investment in Excess of fair value over book value $ 4,706 Charlie 38,000 a $38,000

Total Assets

Alarm Bird Corporation and a 2,706 Subsidiary Consolidated Balance Sheet Working Papers at January 1, 2005 390,000 $58,000 $

$414,706

EQUITIES Payables

$

$138,000

Goodwill

Capital stock Retained Earnings Minority Interest Total equities

120,000

2,706

$18,000

100,000

15,000 a

$15,000

100,000

170,000

25,000 a

25,000

170,000 a

$

390,000

6,706

$58,000

6,706 $414,706

44,706

44,706

Exercise 2 Requirement 1: Investment in 0Berry Co. Common stock Paid-in capital

70 ,000

100,000 600,000

Requirement 2:

Preliminary computations Fair value (purchase price) of 90% interest acquired January $ 2, 2005

$700,000

Implied fair value of Berry ($700,000 / 90% Book value of Clock’s net assets Excess fair value over book value acquired =

$777,778 364,000) 413,778

Allocation of excess of cost over book value: Inventory Other current assets Land Plant assets Remainder to goodwill Excess of fair value over book value

( $

$

4,000 20,000 60,000 125,000 204,778

$

413,778

Myna Corporation and Subsidiary Consolidated Balance Sheet Working Papers at January 1, 2005 Myna ASSETS Cash

$

25,000

Berry

Eliminations Debit Credit

$ 12,000

Balance Sheet $

37,000

Inventories Other current Assets

55,000

32,000 b

$ 4,000

91,000

110,000

90,000 b

20,000

220,000

Land

100,000

30,000 b

60,000

190,000

Plant assets Goodwill Investment in Berry Total Assets

660,000

250,000 b b

125,000 204,778

1,035,000 204,778

$ 1,650,000

$414,000

$1,777,778

EQUITIES Liabilities

$

$ 50,000

270,000

Capital stock Additional paidin capital Retained earnings Minority Interest Total equities

b a

700,000

220,000

$413,778 286,222

600,000

100,000 a

100,000

600,000

770,000

40,000 a

40,000

770,000

60,000

224,000 a

224,000

60,000 a77,778

$ 1,650,000

$414,000

77,778 $1,777,778

Exercise 3 Preliminary computations Requirement 1: On the consolidated balance sheet, the balance in the Capital Stock and Retained Earnings accounts will be those of the parent, so the Capital Stock balance is $350,000, and the Retained Earnings balance is $80,000. Requirement 2 (Ant Farm’s equity on January 1, 2005)x(90%) = ($220,000)x(90%) Original goodwill = Original acquisition cost =

$ $

198,000 39,000 237,000

Ant Farm’s stockholders’ equity = (minority interest) divided by (minority interest percentage) =($40,000/10%) $

400,000

Requirement 4 Treecreeper’s book value in 90% of Ants Farm at December 31, 2005 = ($400,000 (from above)) x 90% $ Plus: goodwill (from balance sheet)

360,000 39,000

Balance in Investment account at December 31, 2005

399,000

Requirement 3

$

Exercise 4 Preliminary computations Fair value (purchase price) of 75% interest acquired $ on January 1, 2005 Implied fair value of Stem (($180,000 / 75%) $ Book value of Stem’s net assets $ Excess cost over book value acquired $

240,000 200,000 40,000

Initial investment cost Income from Stem: (75%)($40,000)= Dividends ($20,000)(75%) =

$

180,000 30,000 -15,000

Balance in Investment in Stem at December 31,2005

$

195,000

180,000

Monarch Corporation and Subsidiary Consolidated Balance Sheet Working Papers at December 31, 2005 Monarch ASSETS Cash Dividends Receivable Other current Assets

$

8,250

$ 35,000

Plant assets Investment in Stem

b

$ 7,500

40,000

50,000

90,000

50,000

30,000

80,000

100,000

150,000

250,000

195,000

a

Goodwill

a

$

Balance Sheet $ 43,250

7,500

Land

Total Assets

Eliminations Debit Credit

Stem

400,750

$265,000

$ 40,000

195,000 40,000

$503,250

EQUITIES Accounts payable $ Dividends Payable Capital stock Retained Earnings Minority Interest Total equities

40,750

$ 35,000

$75,750

10,000 b

7,500

2,500

150,000

150,000 a

150,000

150,000

210,000

70,000 a

70,000

210,000 a

$

400,750

65,000

65,000

$265,000 $503,250 267,500

267,500

Exercise 5 Requirement 1:

Preliminary computations Fair value (purchase price) of 80% interest acquired $ on December 31, 2005 Implied fair value of Bird (($268,000 / 80%) $ Book value of Bird’s net assets $ Excess cost over book value acquired $

268,000 335,000 335,000 0

Zoo Corporation and Subsidiary Consolidated Balance Sheet Working Papers at December 31, 2005 Zoo ASSETS Cash

$

Bird

110,000

40,000

130,000

76,000

240,000

50,000 b

Land

220,000

80,000

PP&E Investment in Bird Total Assets

660,000

Accounts Receivable Inventory

Eliminations Debit Credit

Balance Sheet $

150,000 206,000

$

5,000

295,000 b

EQUITIES Accounts Payable $ Bonds Payable Capital stock Additional paidin capital Retained earnings Minority Interest Total equities

200,000 b

25,000 15,000

268,000 $ 1,628,000

275,000 875,000

a

268,000

$446,000

$1,801,000

440,000 468,000

$11,000 100,000 b

$ 5,000

451,000 563,000

200,000

225,000 a

225,000

200,000

200,000

80,000 a

80,000

200,000

320,000

30,000 a

30,000

320,000 a

$ 1,628,000

67,000

$446,000

67,000 $1,801,000

360,000

360,000

Exercise 6 Requirement 1: Investment in Insect Inc. Common stock Paid-in capital

322,000

46,000 276,000

Requirement 2: Preliminary computations Fair value (purchase price) of 70% interest acquired July 1, $ 2005

$322,000

Implied fair value of Insect ($322,000 / 70% Book value of Insect’s net assets Excess cost over book value acquired =

$460,000 294,000) 166,000

Allocation of excess of cost over book value: Inventory Other current assets Land Plant and Equipment Liabilities Remainder to goodwill Excess of fair value over book value

( $

$ ( ( ( $

5,000 10,000) 10,000) 60,000 5,000) 126,000 166,000

Magpie Corporation and Subsidiary Consolidated Balance Sheet Working Papers July 1, 2005 Magpie ASSETS Cash

$

25,000

Eliminations Debit Credit

Insect $ 17,000

$

110,000

40,000

b $

10,000

140,000

Land

100,000

45,000

b

10,000

135,000

Plant assets Goodwill Investment in Insect Total Assets

660,000

$ 1,272,000

EQUITIES Liabilities

$

Total equities

42,000 b

220,000 b b

$

5,000

42,000

Inventories Other current Assets

Capital stock Additional paidin capital Retained Earnings Minority Interest

55,000

Balance Sheet

102,000

60,000 126,000

940,000 126,000 b a

322,000

166,000 156,000

$364,000

220,000 $

$1,485,000

70,000

b

5,000

$ 295,000

546,000

100,000 a

100,000

546,000

446,000

90,000 a

90,000

446,000

60,000

104,000 a

104,000

60,000 a

$ 1,272,000

138,000

$364,000

138,000 $1,485,000

$

485,000 $

485,000

Exercise 7 Preliminary computations Fair value (purchase price) of 70% interest acquired December 31, 2005 Implied fair value of Trumpet ($279,000 / 70%) Book value of Trumpet’s net assets Excess cost over book value acquired = Allocation of excess of cost over book value: Inventory Land Remainder to goodwill Excess of fair value over book value

$

( $

$

$

$279,000 $398,571 300,000) 98,571

50,000 20,000 28,571 98,571

Manucode Corporation and Subsidiary Consolidated Balance Sheet Working Papers at December 31, 2005 Manucode ASSETS Cash

$

Receivables-net Inventories Land Plant assets – net Investment in Trumpet Goodwill Total Assets

Trumpet $ 20,000

$ 46,000

20,000

30,000

50,000

125,000

110,000 b

30,000

80,000 b

$50,000

130,000

160,000

480,000 a b b

$

285,000

20,000

279,000

$

Balance Sheet

26,000

320,000

EQUITIES Current $ liabilities Capital Stock Additional paidIn capital Retained earnings Minority Interest Total equities

Eliminations Debit Credit

180,429 98,571 28,571

28,571

800,000

$400,000

$1,019,571

110,000

$100,000

$210,000

400,000

200,000 a

200,000

400,000

100,000

60,000 a

60,000

100,000

190,000

40,000 a

40,000

190,000 a

800,000

119,571

$400,000

119,571 $1,019,571

398,571

398,571

Exercise 8 Preliminary computations Fair value (purchase price) of 60% interest acquired January $ 1, 2005

$5,000

Implied fair value of Fig ($5,000 / 60% Book value of Fig’s net assets Excess cost over book value acquired =

$8,333 7,500) 833

( $

Allocation of excess of cost over book value: Remainder to goodwill Excess of fair value over book value

833 833

$

Bower Corporation and Subsidiary Consolidated Balance Sheet Working Papers at December 31, 2006 Bower ASSETS Current assets

$

Fixed assets Investment in Fig

Eliminations Debit Credit

Fig

Balance Sheet

12,550

$ 4,000

$16,550

21,550

6,500

28,050

5,900

a

Goodwill

a

$ 5,900

$ 833

833

Total assets

$

40,000

$10,500

$45,433

EQUITIES Liabilities

$

10,000

$ 1,500

$11,500

Capital stock Retained earnings Minority Interest Total equities

20,000

5,000 a

5,000

20,000

10,000

4,000 a

4,000

10,000 a

$

40,000

3,933

$10,500

3,933 $45,433

9,833

9,833

Exercise 9 Preliminary computations Fair value (purchase price) of 80% interest acquired January $ 2, 2005

$500,000

Implied fair value of Lizard ($500,000 / 80% Book value of Lizard’s net assets Excess cost over book value acquired =

( $

$625,000 460,000) 165,000

Requirement 1 Allocation of excess of cost over book value: Inventory Buildings-net Note payable Remainder to goodwill Excess of fair value over book value

$ ( ( $

Requirement 2 Currawong’s share of Lizard income =(80%)x(75,000) = $ Less: Excess allocated in inventory which was sold in the current year Add: Depreciation adjustment on building = +($24,000/15 years) Add: Excess allocated to Note payable Net adjustment to investment account Currowong’s share of Lizard’s income

due

to

60,000 (25,600) 1,600 1,000

$

37,000

$

500,000

$

37,000 (28,000) 509,000

Requirement 3 Original cost of investment in Brazil Plus: Currawong’s share of Lizard’s income (from Requirement 2 Less: Dividends received (80%)x(35,000) = Investment in Lizard account at December 31, 2005

32,000 30,000) 1,250) 164,250 165,000