Advanced Accounting 12th Edition Test Bank – Hoyle - Thomas Schaefer- Timothy Doupnik

Advanced Accounting 12th Edition Test Bank – Hoyle – Thomas Schaefer

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Title : Advanced Accounting

Author : Joe Ben Hoyle – Thomas Schaefer- Timothy Doupnik

Edition : 12th Edition

Type : Test Bank

Product Description

Advanced Accounting 12th Edition Test Bank – Hoyle – Thomas Schaefer – Timothy Doupnik

Advanced Accounting 12th Edition Test Bank – Hoyle – Thomas Schaefer – Timothy Doupnik

 

Sample

File: Chapter 03 – Consolidations – Subsequent to the Date of Acquisition

Multiple Choice:

[QUESTION]
1. Which one of the following accounts would not appear in the consolidated financial statements at the end of the first fiscal period of the combination?
A) Goodwill.
B) Equipment.
C) Investment in Subsidiary.
D) Common Stock.
E) Additional Paid-In Capital.
Answer: C
Learning Objective: 03-01
Difficulty: Medium
Bloom’s: Understand
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
2. Which of the following internal record-keeping methods can a parent choose to account for a subsidiary acquired in a business combination?
A) initial value or book value.
B) initial value, lower-of-cost-or-market-value, or equity.
C) initial value, equity, or partial equity.
D) initial value, equity, or book value.
E) initial value, lower-of-cost-or-market-value, or partial equity.
Answer: C
Learning Objective: 03-02
Difficulty: Easy
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
3. Which one of the following varies between the equity, initial value, and partial equity methods of accounting for an investment?
A) the amount of consolidated net income.
B) total assets on the consolidated balance sheet.
C) total liabilities on the consolidated balance sheet.
D) the balance in the investment account on the parent’s books.
E) the amount of consolidated cost of goods sold.
Answer: D
Learning Objective: 03-04
Difficulty: Medium
Bloom’s: Understand
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
4. Under the partial equity method, the parent recognizes income when
A) dividends are received from the investee.
B) dividends are declared by the investee.
C) the related expense has been incurred.
D) the related contract is signed by the subsidiary.
E) it is earned by the subsidiary.
Answer: E
Learning Objective: 03-02
Difficulty: Easy
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
5. Push-down accounting is concerned with the
A) impact of the purchase on the subsidiary’s financial statements.
B) recognition of goodwill by the parent.
C) correct consolidation of the financial statements.
D) impact of the purchase on the separate financial statements of the parent.
E) recognition of dividends received from the subsidiary.
Answer: A
Learning Objective: 03-08
Difficulty: Medium
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
6. Racer Corp. acquired all of the common stock of Tangiers Co. in 2011. Tangiers maintained its incorporation. Which of Racer’s account balances would vary between the equity method and the initial value method?
A) Goodwill, Investment in Tangiers Co., and Retained Earnings.
B) Expenses, Investment in Tangiers Co., and Equity in Subsidiary Earnings.
C) Investment in Tangiers Co., Equity in Subsidiary Earnings, and Retained Earnings.
D) Common Stock, Goodwill, and Investment in Tangiers Co.
E) Expenses, Goodwill, and Investment in Tangiers Co.
Answer: C
Learning Objective: 03-03a
Learning Objective: 03-03b
Difficulty: Hard
Bloom’s: Understand
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
7. How does the partial equity method differ from the equity method?
A) In the total assets reported on the consolidated balance sheet.
B) In the treatment of dividends.
C) In the total liabilities reported on the consolidated balance sheet.
D) Under the partial equity method, subsidiary income does not increase the balance in the parent’s investment account.
E) Under the partial equity method, the balance in the investment account is not decreased by amortization on allocations made in the acquisition of the subsidiary.
Answer: E
Learning Objective: 03-02
Learning Objective: 03-03a
Learning Objective: 03-03c
Difficulty: Medium
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
8. Jansen Inc. acquired all of the outstanding common stock of Merriam Co. on January 1, 2012, for $257,000. Annual amortization of $19,000 resulted from this acquisition. Jansen reported net income of $70,000 in 2012 and $50,000 in 2013 and paid $22,000 in dividends each year. Merriam reported net income of $40,000 in 2012 and $47,000 in 2013 and paid $10,000 in dividends each year. What is the Investment in Merriam Co. balance on Jansen’s books as of December 31, 2013, if the equity method has been applied?
A) $286,000.
B) $295,000.
C) $276,000.
D) $344,000.
E) $324,000.
Answer: A
Learning Objective: 03-02
Learning Objective: 03-03a
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: $257,000 + $40,000 + $47,000 – $10,000 – $19,000 – $10,000 – $19,000 = $286,000

[QUESTION]
9. Velway Corp. acquired Joker Inc. on January 1, 2012. The parent paid more than the fair value of the subsidiary’s net assets. On that date, Velway had equipment with a book value of $500,000 and a fair value of $640,000. Joker had equipment with a book value of $400,000 and a fair value of $470,000. Joker decided to use push-down accounting. Immediately after the acquisition, what Equipment amount would appear on Joker’s separate balance sheet and on Velway’s consolidated balance sheet, respectively?
A) $400,000 and $900,000
B) $400,000 and $970,000
C) $470,000 and $900,000
D) $470,000 and $970,000
E) $470,000 and $1,040,000
Answer: D
Learning Objective: 03-08
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: FV of EQ = $470,000 for Joker B/S; Consolidated B/S = BV of Parent EQ $500,000 + FV of Sub EQ $470,000 = $970,000

[QUESTION]
10. Parrett Corp. acquired one hundred percent of Jones Inc. on January 1, 2011, at a price in excess of the subsidiary’s fair value. On that date, Parrett’s equipment (ten-year life) had a book value of $360,000 but a fair value of $480,000. Jones had equipment (ten-year life) with a book value of $240,000 and a fair value of $350,000. Parrett used the partial equity method to record its investment in Jones. On December 31, 2013, Parrett had equipment with a book value of $250,000 and a fair value of $400,000. Jones had equipment with a book value of $170,000 and a fair value of $320,000. What is the consolidated balance for the Equipment account as of December 31, 2013?
A) $387,000.
B) $497,000.
C) $508.000.
D) $537,000.
E) $570,000.
Answer: B
Learning Objective: 03-03c
Difficulty: Hard
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Excess of Sub’s FV = $110,000 + Parent’s BV $250,000 + Sub’s BV $170,000 – Excess Amortization ($11,000 X 3yrs) = $497,000

REFERENCE: 03-01
On January 1, 2012, Cale Corp. paid $1,020,000 to acquire Kaltop Co. Kaltop maintained separate incorporation. Cale used the equity method to account for the investment. The following information is available for Kaltop’s assets, liabilities, and stockholders’ equity accounts on January 1, 2012:

Kaltop earned net income for 2012 of $126,000 and paid dividends of $48,000 during the year.

[QUESTION]
REFER TO: 03-01
11. The 2012 total amortization of allocations is calculated to be
A) $ 4,000.
B) $ 6,400.
C) $(2,400).
D) $(1,000).
E) $ 3,800.
Answer: D
Learning Objective: 03-02
Learning Objective: 03-03a
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Building = FV $268,000 – BV $240,000 = $28,000 / 20 yrs = $1,400 Equipment = FV $516,000 – BV $540,000 = ($24,000) / 10 yrs = ($2,400)
($2,400) + $1,400 = ($1,000)

[QUESTION]
REFER TO: 03-01
12. In Cale’s accounting records, what amount would appear on December 31, 2012 for equity in subsidiary earnings?
A) $ 77,000.
B) $ 79,000.
C) $125,000.
D) $127,000.
E) $ 81,800.
Answer: D
Learning Objective: 03-02
Learning Objective: 03-03a
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: $126,000 + $1,000 = $127,000

[QUESTION]
REFER TO: 03-01
13. What is the balance in Cale’s investment in subsidiary account at the end of 2012?
A) $1,099,000.
B) $1,020,000.
C) $1,096,200.
D) $1,098,000.
E) $1,144,400.
Answer: A
Learning Objective: 03-02
Learning Objective: 03-03a
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: $1,020,000 + ($126,000 + $1,000) – $48,000 = $1,099,000

[QUESTION]
REFER TO: 03-01
14. At the end of 2012, the consolidation entry to eliminate Cale’s accrual of Kaltop’s earnings would include a credit to Investment in Kaltop Co. for
A) $124,400.
B) $126,000.
C) $127,000.
D) $ 76,400.
E) $ 0.
Answer: C
Learning Objective: 03-03a
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: $126,000 + $1,000 = $127,000

[QUESTION]
REFER TO: 03-01
15. If Cale Corp. had net income of $444,000 in 2012, exclusive of the investment, what is the amount of consolidated net income?
A) $569,000.
B) $570,000.
C) $571,000.
D) $566,400.
E) $444,000.
Answer: C
Learning Objective: 03-03a
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: $444,000 + ($126,000 + $1,000) = $571,000

REFERENCE: 03-02
On January 1, 2012, Franel Co. acquired all of the common stock of Hurlem Corp. For 2012, Hurlem earned net income of $360,000 and paid dividends of $190,000. Amortization of the patent allocation that was included in the acquisition was $6,000.

[QUESTION]
REFER TO: 03-02
16. How much difference would there have been in Franel’s income with regard to the effect of the investment, between using the equity method or using the initial value method of internal recordkeeping?
A) $190,000.
B) $360,000.
C) $164,000.
D) $354,000.
E) $150,000.
Answer: C
Learning Objective: 03-02
Learning Objective: 03-03a
Learning Objective: 03-03b
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Initial Value Method = $0 Recognized from Sub Income (only dividend income) Equity Method = $360,000 – $6,000 – $190,000 = $164,000 Sub Income Added in Consolidation $164,000 – $0 = $164,000
[QUESTION]
REFER TO: 03-02
17. How much difference would there have been in Franel’s income with regard to the effect of the investment, between using the equity method or using the partial equity method of internal recordkeeping?
A) $170,000.
B) $354,000.
C) $164,000.
D) $ 6,000.
E) $174,000.
Answer: D
Learning Objective: 03-02
Learning Objective: 03-03a
Learning Objective: 03-03c
Difficulty: Easy
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Equity Method = $360,000 – $6,000 – $190,000 = $164,000 Added in Consolidation – Partial Equity Method = $360,000 – $190,000 = $170,000 Added in Consolidation $170,000 – $164,000 = $6,000
REFERENCE: 03-03
Cashen Co. paid $2,400,000 to acquire all of the common stock of Janex Corp. on January 1, 2012. Janex’s reported earnings for 2012 totaled $432,000, and it paid $120,000 in dividends during the year. The amortization of allocations related to the investment was $24,000. Cashen’s net income, not including the investment, was $3,180,000, and it paid dividends of $900,000.

[QUESTION]
REFER TO: 03-03
18. On the consolidated financial statements for 2012, what amount should have been shown for Equity in Subsidiary Earnings?
A) $432,000.
B) $ -0-
C) $408,000.
D) $120,000.
E) $288,000.
Answer: B
Learning Objective: 03-01
Learning Objective: 03-04
Learning Objective: 03-04
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: $0; (Income is eliminated from the investment account)

[QUESTION]
REFER TO: 03-03
19. On the consolidated financial statements for 2012, what amount should have been shown for consolidated dividends?
A) $ 900,000.
B) $1,020,000.
C) $ 876,000.
D) $ 996,000.
E) $ 948,000.
Answer: A
Learning Objective: 03-01
Learning Objective: 03-04
Learning Objective: 03-04
Difficulty: Easy
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: $900,000 Parent’s Dividends Only

QUESTION]
REFER TO: 03-03
20. What is the amount of consolidated net income for the year 2012?
A) $3,180,000.
B) $3,612,000.
C) $3,300,000.
D) $3,588,000.
E) $3,420,000.
Answer: D
Learning Objective: 03-01
Learning Objective: 03-04
Learning Objective: 03-04
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Parent Income $3,180,000 + Sub Income $432,000 – Amortization Allocations $24,000 = Consolidated Net Income $3,588,000

REFERENCE: 03-04
Jans Inc. acquired all of the outstanding common stock of Tysk Corp. on January 1, 2011, for $372,000. Equipment with a ten-year life was undervalued on Tysk’s financial records by $46,000. Tysk also owned an unrecorded customer list with an assessed fair value of $67,000 and an estimated remaining life of five years.
Tysk earned reported net income of $180,000 in 2011 and $216,000 in 2012. Dividends of $70,000 were paid in each of these two years. Selected account balances as of December 31, 2013, for the two companies follow.

Jans Tysk
Revenues $1,080,000 $840,000
Expenses 480,000 600,000
Investment income Not given 0
Retained earnings, 1/1/13 840,000 600,000
Dividends paid 132,000 70,000

[QUESTION]
REFER TO: 03-04
21. If the partial equity method had been applied, what was 2013 consolidated net income?
A) $840,000.
B) $768,400.
C) $822,000.
D) $240,000.
E) $600,000.
Answer: C
Learning Objective: 03-03c
Difficulty: Hard
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Parent $1,080,000 – $480,000 = $600,000; Sub $840,000 – $600,000 = $240,000 $600,000 + $240,000 = $840,000 – ($46,000 / 10) – ($67,000 / 5) = $822,000
[QUESTION]
REFER TO: 03-04
22. If the equity method had been applied, what would be the Investment in Tysk Corp. account balance within the records of Jans at the end of 2013?
A) $612,100.
B) $744,000.
C) $774,150.
D) $372,000.
E) $844,150.
Answer: B
Learning Objective: 03-02
Learning Objective: 03-03a
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Initial Investment $372,000
2011 Entries: $180,000 – $70,000 – $18,000 = $92,000
2012 Entries: $216,000 – $70,000 – $18,000 = $128,000
2013 Entries: $240,000 – $70,000 – $18,000 = $152,000
$372,000 + $92,000 + $128,000 + $152,000 = $744,000

[QUESTION]
23. Red Co. acquired 100% of Green, Inc. on January 1, 2012. On that date, Green had inventory with a book value of $42,000 and a fair value of $52,000. This inventory had not yet been sold at December 31, 2012. Also, on the date of acquisition, Green had a building with a book value of $200,000 and a fair value of $390,000. Green had equipment with a book value of $350,000 and a fair value of $280,000. The building had a 10-year remaining useful life and the equipment had a 5-year remaining useful life. How much total expense will be in the consolidated financial statements for the year ended December 31, 2012 related to the acquisition allocations of Green?
A) $43,000.
B) $33,000.
C) $ 5,000.
D) $15,000.
E) 0.
Answer: D
Learning Objective: 03-01
Learning Objective: 03-04
Learning Objective: 03-04
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Inventory Adjustment $10,000 + Building Adjustment ($190,000 / 10) $19,000 + Equipment Adjustment ( [$70,000] / 5) [$14,000] = $15,000

[QUESTION]
24. All of the following are acceptable methods to account for a majority-owned investment in subsidiary except
A) The equity method.
B) The initial value method.
C) The partial equity method.
D) The fair-value method.
E) Book value method.
Answer: D
Learning Objective: 03-02
Difficulty: Easy
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
25. Under the equity method of accounting for an investment,
A) The investment account remains at initial value.
B) Dividends received are recorded as revenue.
C) Goodwill is amortized over 20 years.
D) Income reported by the subsidiary increases the investment account.
E) Dividends received increase the investment account.
Answer: D
Learning Objective: 03-02
Difficulty: Easy
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
26. Under the partial equity method of accounting for an investment,
A) The investment account remains at initial value.
B) Dividends received are recorded as revenue.
C) The allocations for excess fair value allocations over book value of net assets at date of acquisition are applied over their useful lives to reduce the investment account.
D) Amortization of the excess of fair value allocations over book value is ignored in regard to the investment account.
E) Dividends received increase the investment account.
Answer: D
Learning Objective: 03-02
Difficulty: Medium
Bloom’s: Understand
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
27. Under the initial value method, when accounting for an investment in a subsidiary,
A) Dividends received by the subsidiary decrease the investment account.
B) The investment account is adjusted to fair value at year-end.
C) Income reported by the subsidiary increases the investment account.
D) The investment account remains at initial value.
E) Dividends received are ignored.
Answer: D
Learning Objective: 03-02
Difficulty: Medium
Bloom’s: Understand
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
28. According to GAAP regarding amortization of goodwill and other intangible assets, which of the following statements is true?
A) Goodwill recognized in consolidation must be amortized over 20 years.
B) Goodwill recognized in consolidation must be expensed in the period of acquisition.
C) Goodwill recognized in consolidation will not be amortized but subject to an annual test for impairment.
D) Goodwill recognized in consolidation can never be written off.
E) Goodwill recognized in consolidation must be amortized over 40 years.
Answer: C
Learning Objective: 03-05
Difficulty: Easy
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
29. When a company applies the initial method in accounting for its investment in a subsidiary and the subsidiary reports income in excess of dividends paid, what entry would be made for a consolidation worksheet?
A) Retained earnings
Investment in subsidiary
B) Investment in subsidiary
Retained earnings
C) Investment in subsidiary
Equity in subsidiary’s income
D) Equity in subsidiary’s income
Investment in subsidiary
E) Additional paid-in capital
Retained earnings

A) A above
B) B above
C) C above
D) D above
E) E above
Answer: B
Learning Objective: 03-03b
Difficulty: Medium
Bloom’s: Analyze
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
30. When a company applies the initial value method in accounting for its investment in a subsidiary and the subsidiary reports income less than dividends paid, what entry would be made for a consolidation worksheet?

A) Retained earnings
Investment in subsidiary
B) Investment in subsidiary
Retained earnings
C) Investment in subsidiary
Equity in subsidiary’s income
D) Investment in subsidiary
Additional paid-in capital
E) Retained earnings
Additional paid-in capital

A) A above
B) B above
C) C above
D) D above
E) E above
Answer: A
Learning Objective: 03-03b
Difficulty: Medium
Bloom’s: Analyze
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
31. When a company applies the partial equity method in accounting for its investment in a subsidiary and the subsidiary’s equipment has a fair value greater than its book value, what consolidation worksheet entry is made in a year subsequent to the initial acquisition of the subsidiary?

A) Retained earnings
Investment in subsidiary
B) Investment in subsidiary
Retained earnings
C) Investment in subsidiary
Equity in subsidiary’s income
D) Investment in subsidiary
Additional paid-in capital
E) Retained earnings
Additional paid-in capital

A) A above
B) B above
C) C above
D) D above
E) E above
Answer: A
Learning Objective: 03-03c
Difficulty: Medium
Bloom’s: Analyze
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
32. When a company applies the partial equity method in accounting for its investment in a subsidiary and initial value, book values, and fair values of net assets acquired are all equal, what consolidation worksheet entry would be made?

A) Retained earnings
Investment in subsidiary
B) Investment in subsidiary
Retained earnings
C) Investment in subsidiary
Equity in subsidiary’s income
D) Investment in subsidiary
Additional paid-in capital
E) No entry is necessary.

A) A above
B) B above
C) C above
D) D above
E) E above
Answer: E
Learning Objective: 03-03c
Difficulty: Medium
Bloom’s: Analyze
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
33. When consolidating a subsidiary under the equity method, which of the following statements is true?
A) Goodwill is never recognized.
B) Goodwill required is amortized over 20 years.
C) Goodwill may be recorded on the parent company’s books.
D) The value of any goodwill should be tested annually for impairment in value.
E) Goodwill should be expensed in the year of acquisition.
Answer: D
Learning Objective: 03-05
Difficulty: Easy
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
34. When consolidating a subsidiary under the equity method, which of the following statements is true with regard to the subsidiary subsequent to the year of acquisition?
A) All net assets are revalued to fair value and must be amortized over their useful lives.
B) Only net assets that had excess fair value over book value when acquired by the parent must be amortized over their useful lives.
C) All depreciable net assets are revalued to fair value at date of acquisition and must be amortized over their useful lives.
D) Only depreciable net assets that have excess fair value over book value must be amortized over their useful lives.
E) Only assets that have excess fair value over book value must be amortized over their useful lives.
Answer: B
Learning Objective: 03-02
Learning Objective: 03-03a
Difficulty: Medium
Bloom’s: Understand
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
35. Which of the following statements is false regarding push-down accounting?
A) Push-down accounting simplifies the consolidation process.
B) Fewer worksheet entries are necessary when push-down accounting is applied.
C) Push-down accounting provides better information for internal evaluation.
D) Push-down accounting must be applied for all business combinations under a pooling of interests.
E) Push-down proponents argue that a change in ownership creates a new basis for subsidiary assets and liabilities.
Answer: D
Learning Objective: 03-08
Difficulty: Easy
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
36. Which of the following is false regarding contingent consideration in business combinations?
A) Contingent consideration payable in cash is reported under liabilities.
B) Contingent consideration payable in stock shares is reported under stockholders’ equity.
C) Contingent consideration is recorded because of its substantial probability of eventual payment.
D) The contingent consideration fair value is recognized as part of the acquisition regardless of whether eventual payment is based on future performance of the target firm or future stock price of the acquirer.
E) Contingent consideration is reflected in the acquirer’s balance sheet at the present value of the potential expected future payment.
Answer: C
Learning Objective: 03-07
Difficulty: Medium
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
37. Factors that should be considered in determining the useful life of an intangible asset include
A) Legal, regulatory, or contractual provisions.
B) The residual value of the asset.
C) The entity’s expected use of the intangible asset.
D) The effects of obsolescence, competition, and technological change.
E) All of the above choices are used in determining the useful life of an intangible asset.
Answer: E
Learning Objective: 03-06
Difficulty: Medium
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
38. Consolidated net income using the equity method for an acquisition combination is computed as follows:
A) Parent company’s income from its own operations plus the equity from subsidiary’s income recorded by the parent.
B) Parent’s reported net income.
C) Combined revenues less combined expenses less equity in subsidiary’s income less amortization of fair-value allocations in excess of book value.
D) Parent’s revenues less expenses for its own operations plus the equity from subsidiary’s income recorded by parent.
E) All of the above.
Answer: D
Learning Objective: 03-03a
Difficulty: Medium
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

REFERENCE: 03-05
Perry Company acquires 100% of the stock of Hurley Corporation on January 1, 2012, for $3,800 cash. As of that date Hurley has the following trial balance;

Any excess of consideration transferred over fair value of net assets acquired is considered goodwill with an indefinite life. FIFO inventory valuation method is used.

[QUESTION]
REFER TO: 03-05
39. Compute the consideration transferred in excess of book value acquired at January 1, 2012.
A) $ 150.
B) $ 700.
C) $2,200.
D) $ 550.
E) $2,900.
Answer: B
Learning Objective: 03-04
Difficulty: Easy
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Acquisition Price $3,800 – Total Equity at Acquisition $3,100 = $700

[QUESTION]
REFER TO: 03-05
40. Compute goodwill, if any, at January 1, 2012.
A) $ 150.
B) $ 250.
C) $ 700.
D) $1,200.
E) $ 550.
Answer: A
Learning Objective: 03-04
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Identified BVs $2,950 – Identified FVs $3,100 = $150 Excess Unidentified (Goodwill)

[QUESTION]
REFER TO: 03-05
41. Compute the amount of Hurley’s inventory that would be reported in a January 1, 2012, consolidated balance sheet.
A) $800.
B) $100.
C) $900.
D) $150.
E) $ 0.
Answer: C
Learning Objective: 03-01
Learning Objective: 03-04
Learning Objective: 03-04
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Fair Value at Acquisition = $900
[QUESTION]
REFER TO: 03-05
42. Compute the amount of Hurley’s buildings that would be reported in a December 31, 2012, consolidated balance sheet.
A) $1,560.
B) $1,260.
C) $1,440.
D) $1,160.
E) $1,140.
Answer: B
Learning Objective: 03-01
Learning Objective: 03-04
Learning Objective: 03-04
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: FV $1,200 + Excess Amortization ($300 / 5) $60 = $1,260

[QUESTION]
REFER TO: 03-05
43. Compute the amount of Hurley’s equipment that would be reported in a December 31, 2012, consolidated balance sheet.
A) $1,000.
B) $1,250.
C) $ 875.
D) $1,125.
E) $ 750.
Answer: D
Learning Objective: 03-01
Learning Objective: 03-04
Learning Objective: 03-04
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: FV $1,250 – Excess Amortization ($250 / 2) $125 = $1,125

[QUESTION]
REFER TO: 03-05
44. Compute the amount of total expenses reported in an income statement for the year ended December 31, 2012, in order to recognize acquisition-date allocations of fair value and book value differences,
A) $140.
B) $190.
C) $260.
D) $285.
E) $310.
Answer: B
Learning Objective: 03-01
Learning Objective: 03-04
Learning Objective: 03-04
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
REFER TO: 03-05
45. Compute the amount of Hurley’s long-term liabilities that would be reported in a December 31, 2012, consolidated balance sheet.
A) $1,800.
B) $1,700.
C) $1,725.
D) $1,675.
E) $3,500.
Answer: C
Learning Objective: 03-01
Learning Objective: 03-04
Learning Objective: 03-04
Difficulty: Hard
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: FV $1,700 + Excess Amortization ($100 / 4) $25 = $1,725

[QUESTION]
REFER TO: 03-05
46. Compute the amount of Hurley’s buildings that would be reported in a December 31, 2013, consolidated balance sheet.
A) $1,620.
B) $1,380.
C) $1,320.
D) $1,080.
E) $1,500.
Answer: C
Learning Objective: 03-01
Learning Objective: 03-04
Learning Objective: 03-04
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: FV $1,200 + Excess Amortization ($300 / 5) $60 X 2 = $1,320

[QUESTION]
REFER TO: 03-05
47. Compute the amount of Hurley’s equipment that would be reported in a December 31, 2013, consolidated balance sheet.
A) $ 0.
B) $1,000.
C) $1,250.
D) $1,125.
E) $1,200.
Answer: B
Learning Objective: 03-01
Learning Objective: 03-04
Learning Objective: 03-04
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: FV $1,250 – Excess Amortization ($250 / 2) $125 X 2 = $1,000

[QUESTION]
REFER TO: 03-05
48. Compute the amount of Hurley’s land that would be reported in a December 31, 2013, consolidated balance sheet.
A) $ 900.
B) $1,300.
C) $ 400.
D) $1,450.
E) $2,200.
Answer: B
Learning Objective: 03-01
Learning Objective: 03-04
Learning Objective: 03-04
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: FV $1,300

[QUESTION]
REFER TO: 03-05
49. Compute the amount of Hurley’s long-term liabilities that would be reported in a December 31, 2013, consolidated balance sheet.
A) $1,700.
B) $1,800.
C) $1,650.
D) $1,750.
E) $3,500.
Answer: D
Learning Objective: 03-01
Learning Objective: 03-04
Learning Objective: 03-04
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: FV $1,700 + Excess Amortization ($100 / 4) $25 X 2 = $1,750

REFERENCE: 03-06
Kaye Company acquired 100% of Fiore Company on January 1, 2013. Kaye paid $1,000 excess consideration over book value which is being amortized at $20 per year. Fiore reported net income of $400 in 2013 and paid dividends of $100.

[QUESTION]
REFER TO: 03-06
50. Assume the equity method is applied. How much will Kaye’s income increase or decrease as a result of Fiore’s operations?
A) $400 increase.
B) $300 increase.
C) $380 increase.
D) $280 increase.
E) $480 increase.
Answer: C
Learning Objective: 03-02
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: 2013 Income $400 – Amortization $20 = $380 Increase

[QUESTION]
REFER TO: 03-06
51. Assume the partial equity method is applied. How much will Kaye’s income increase or decrease as a result of Fiore’s operations?
A) $400 increase.
B) $300 increase.
C) $380 increase.
D) $280 increase.
E) $480 increase.
Answer: A
Learning Objective: 03-02
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: 2013 Income = $400 Increase

[QUESTION]
REFER TO: 03-06
52. Assume the initial value method is applied. How much will Kaye’s income increase or decrease as a result of Fiore’s operations?
A) $400 increase.
B) $300 increase.
C) $380 increase.
D) $100 increase.
E) $210 increase.
Answer: D
Learning Objective: 03-02
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: 2013 Dividends = $100 Increase

[QUESTION]
REFER TO: 03-06
53. Assume the partial equity method is used. In the years following acquisition, what additional worksheet entry must be made for consolidation purposes that is not required for the equity method?

A) Retained earnings 20
Investment in Fiore 20
B) Investment in Fiore 20
Retained earnings 20
C) Expenses 20
Investment in Fiore 20
D) Expenses 20
Retained earnings 20
E) Retained earnings 20
Additional paid-in capital 20

A) Entry A.
B) Entry B.
C) Entry C.
D) Entry D.
E) Entry E.
Answer: A
Learning Objective: 03-03c
Difficulty: Medium
Bloom’s: Analyze
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
REFER TO: 03-06
54. Assume the initial value method is used. In the year subsequent to acquisition, what additional worksheet entry must be made for consolidation purposes that is not required for the equity method?

A) Investment in Fiore 380
Retained earnings 380
B) Retained earnings 380
Investment in Fiore 380
C) Investment in Fiore 280
Retained earnings 280
D) Retained earnings 280
Investment in Fiore 280
E) Additional paid-in capital 280
Retained earnings 280

A) Entry A.
B) Entry B.
C) Entry C.
D) Entry D.
E) Entry E.
Answer: C
Learning Objective: 03-03b
Difficulty: Hard
Bloom’s: Analyze
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
55. Hoyt Corporation agreed to the following terms in order to acquire the net assets of Brown Company on January 1, 2013:
(1.) To issue 400 shares of common stock ($10 par) with a fair value of $45 per share.
(2.) To assume Brown’s liabilities which have a fair value of $1,500.
On the date of acquisition, the consideration transferred for Hoyt’s acquisition of Brown would be
A) $18,000.
B) $16,500.
C) $20,000.
D) $18,500.
E) $19,500.
Answer: E
Learning Objective: 03-02
Difficulty: Easy
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Common Stock (400 shares X $45) $18,000 + Liabilities Assumed $1,500 = $19,500

REFERENCE: 03-07
Following are selected accounts for Green Corporation and Vega Company as of December 31, 2015. Several of Green’s accounts have been omitted.

Green Vega
Revenues $900,000 $500,000
Cost of goods sold 360,000 200,000
Depreciation expense 140,000 40,000
Other expenses 100,000 60,000
Equity in Vega’s income ?
Retained earnings, 1/1/15 1,350,000 1,200,000
Dividends 195,000 80,000
Current assets 300,000 1,380,000
Land 450,000 180,000
Building (net) 750,000 280,000
Equipment (net) 300,000 500,000
Liabilities 600,000 620,000
Common stock 450,000 80,000
Additional paid-in capital 75,000 320,000

Green acquired 100% of Vega on January 1, 2011, by issuing 10,500 shares of its $10 par value common stock with a fair value of $95 per share. On January 1, 2011, Vega’s land was undervalued by $40,000, its buildings were overvalued by $30,000, and equipment was undervalued by $80,000. The buildings have a 20-year life and the equipment has a 10-year life. $50,000 was attributed to an unrecorded trademark with a 16-year remaining life. There was no goodwill associated with this investment.

[QUESTION]
REFER TO: 03-07
56. Compute the book value of Vega at January 1, 2011.
A) $ 997,500.
B) $ 857,500.
C) $1,200,000.
D) $1,600,000.
E) $ 827,500.
Answer: B
Learning Objective: 03-02
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Common Stock Fair Value $997,500 – Fair Value Asset Adjustment (Land $40,000 – Building $30,000 + Equipment $80,000 + Unrecorded Trademark $50,000) $140,000 = $857,500

[QUESTION]
REFER TO: 03-07
57. Compute the December 31, 2015, consolidated revenues.
A) $1,400,000.
B) $ 800,000.
C) $ 500,000.
D) $1,590,375.
E) $1,390,375.
Answer: A
Learning Objective: 03-01
Learning Objective: 03-04
Learning Objective: 03-04
Difficulty: Easy
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: $900,000 + $500,000 = $1,400,000

[QUESTION]
REFER TO: 03-07
58. Compute the December 31, 2015, consolidated total expenses.
A) $620,000.
B) $280,000.
C) $900,000.
D) $909,625.
E) $299,625.
Answer: D
Learning Objective: 03-01
Learning Objective: 03-04
Learning Objective: 03-04
Difficulty: Hard
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
58. Feedback: COGS ($360,000 + $200,000) + Depreciation ($140,000 + $40,000) + Other Exp ($100,000 + $60,000) + Excess FV Amortization (Blg [$1,500] + Equip $8,000 + Trademark $3,125) = $909,625

[QUESTION]
REFER TO: 03-07
59. Compute the December 31, 2015, consolidated buildings.
A) $1,037,500.
B) $1,007,500.
C) $1,000,000.
D) $1,022,500.
E) $1,012,500.
Answer: B
Learning Objective: 03-01
Learning Objective: 03-04
Learning Objective: 03-04
Difficulty: Hard
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: $750,000 + $280,000 – $30,000 = $1,000,000 + Amortization ($1,500 X 5) = $1,007,500

[QUESTION]
REFER TO: 03-07
60. Compute the December 31, 2015, consolidated equipment.
A) $800,000.
B) $808,000.
C) $840,000.
D) $760,000.
E) $848,000.
Answer: C
Learning Objective: 03-01
Learning Objective: 03-04
Learning Objective: 03-04
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: $300,000 + $580,000 = $880,000 – Amortization ($8,000 X 5) = $840,000

[QUESTION]
REFER TO: 03-07
61. Compute the December 31, 2015, consolidated land.
A) $220,000.
B) $180,000.
C) $670,000.
D) $630,000.
E) $450,000.
Answer: C
Learning Objective: 03-01
Learning Objective: 03-04
Learning Objective: 03-04
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: $450,000 + $220,000 = $670,000

[QUESTION]
REFER TO: 03-07
62. Compute the December 31, 2015, consolidated trademark.
A) $50,000.
B) $46,875.
C) $ 0.
D) $34,375.
E) $37,500.
Answer: D
Learning Objective: 03-01
Learning Objective: 03-04
Learning Objective: 03-04
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: $50,000 – Amortization ($3,125 X 5) = $34,375

[QUESTION]
REFER TO: 03-07
63. Compute the December 31, 2015, consolidated common stock.
A) $450,000.
B) $530,000.
C) $555,000.
D) $635,000.
E) $525,000.
Answer: A
Learning Objective: 03-01
Learning Objective: 03-04
Learning Objective: 03-04
Difficulty: Easy
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: $450,000 (Parent Only)

[QUESTION]
REFER TO: 03-07
64. Compute the December 31, 2015, consolidated additional paid-in capital.
A) $ 210,000.
B) $ 75,000.
C) $1,102,500.
D) $ 942,500.
E) $ 525,000.
Answer: B
Learning Objective: 03-01
Learning Objective: 03-04
Learning Objective: 03-04
Difficulty: Easy
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: $75,000 (Parent Only)

[QUESTION]
REFER TO: 03-07
65. Compute the December 31, 2015 consolidated retained earnings.
A) $1,645,375.
B) $1,350,000.
C) $1,565,375.
D) $1,840,375.
E) $1,265,375.
Answer: A
Learning Objective: 03-01
Learning Objective: 03-04
Learning Objective: 03-04
Difficulty: Hard
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
REFER TO: 03-07
66. Compute the equity in Vega’s income to be included in Green’s consolidated income statement for 2015.
A) $500,000.
B) $300,000.
C) $190,375.
D) $200,000.
E) $290,375.
Answer: C
Learning Objective: 03-01
Learning Objective: 03-04
Learning Objective: 03-04
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
67. One company acquires another company in a combination accounted for as an acquisition. The acquiring company decides to apply the initial value method in accounting for the combination. What is one reason the acquiring company might have made this decision?
A) It is the only method allowed by the SEC.
B) It is relatively easy to apply.
C) It is the only internal reporting method allowed by generally accepted accounting principles.
D) Operating results on the parent’s financial records reflect consolidated totals.
E) When the initial method is used, no worksheet entries are required in the consolidation process.
Answer: B
Learning Objective: 03-02
Difficulty: Easy
Bloom’s: Understand
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
68. One company acquires another company in a combination accounted for as an acquisition. The acquiring company decides to apply the equity method in accounting for the combination. What is one reason the acquiring company might have made this decision?
A) It is the only method allowed by the SEC.
B) It is relatively easy to apply.
C) It is the only internal reporting method allowed by generally accepted accounting principles.
D) Operating results on the parent’s financial records reflect consolidated totals.
E) When the equity method is used, no worksheet entries are required in the consolidation process.
Answer: D
Learning Objective: 03-02
Difficulty: Easy
Bloom’s: Understand
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
69. When is a goodwill impairment loss recognized?
A) Annually on a systematic and rational basis.
B) Never.
C) If both the fair value of a reporting unit and its associated implied goodwill fall below their respective carrying values.
D) If the fair value of a reporting unit falls below its original acquisition price.
E) Whenever the fair value of the entity declines significantly.
Answer: C
Learning Objective: 03-05
Difficulty: Medium
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
70. Which of the following will result in the recognition of an impairment loss on goodwill?
A) Goodwill amortization is to be recognized annually on a systematic and rational basis.
B) Both the fair value of a reporting unit and its associated implied goodwill fall below their respective carrying values.
C) The fair value of the entity declines significantly.
D) The fair value of a reporting unit falls below the original consideration transferred for the acquisition.
E) The entity is investigated by the SEC and its reputation has been severely damaged.
Answer: B
Learning Objective: 03-05
Difficulty: Medium
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

REFERENCE: 03-08
Goehler, Inc. acquires all of the voting stock of Kenneth, Inc. on January 4, 2012, at an amount in excess of Kenneth’s fair value. On that date, Kenneth has equipment with a book value of $90,000 and a fair value of $120,000 (10-year remaining life). Goehler has equipment with a book value of $800,000 and a fair value of $1,200,000 (10-year remaining life). On December 31, 2013, Goehler has equipment with a book value of $975,000 but a fair value of $1,350,000 and Kenneth has equipment with a book value of $105,000 but a fair value of $125,000.

[QUESTION]
REFER TO: 03-08
71. If Goehler applies the equity method in accounting for Kenneth, what is the consolidated balance for the Equipment account as of December 31, 2013?
A) $1,080,000.
B) $1,104,000.
C) $1,100,000.
D) $1,468,000.
E) $1,475,000.
Answer: B
Learning Objective: 03-04
Learning Objective: 03-03a
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
REFER TO: 03-08
72. If Goehler applies the partial equity method in accounting for Kenneth, what is the consolidated balance for the Equipment account as of December 31, 2013?
A) $1,080,000.
B) $1,104,000.
C) $1,100,000.
D) $1,468,000.
E) $1,475,000.
Answer: B
Learning Objective: 03-04
Learning Objective: 03-03c
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
REFER TO: 03-08
73. If Goehler applies the initial value method in accounting for Kenneth, what is the consolidated balance for the Equipment account as of December 31, 2013?
A) $1,080,000.
B) $1,104,000.
C) $1,100,000.
D) $1,468,000.
E) $1,475,000.
Answer: B
Learning Objective: 03-04
Learning Objective: 03-03b
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
74. How is the fair value allocation of an intangible asset allocated to expense when the asset has no legal, regulatory, contractual, competitive, economic, or other factors that limit its life?
A) Equally over 20 years.
B) Equally over 40 years.
C) Equally over 20 years with an annual impairment review.
D) No amortization, but annually reviewed for impairment and adjusted accordingly.
E) No amortization over an indefinite period time.
Answer: D
Learning Objective: 03-06
Difficulty: Easy
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

REFERENCE: 03-09
Harrison, Inc. acquires 100% of the voting stock of Rhine Company on January 1, 2012 for $400,000 cash. A contingent payment of $16,500 will be paid on April 15, 2013 if Rhine generates cash flows from operations of $27,000 or more in the next year. Harrison estimates that there is a 20% probability that Rhine will generate at least $27,000 next year, and uses an interest rate of 5% to incorporate the time value of money. The fair value of $16,500 at 5%, using a probability weighted approach, is $3,142.

[QUESTION]
REFER TO: 03-09
75. What will Harrison record as its Investment in Rhine on January 1, 2012?
A) $400,000.
B) $403,142.
C) $406,000.
D) $409,142.
E) $416,500.
Answer: B
Learning Objective: 03-07
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Cash Payment $400,000 + Weighted Fair Value of Contingency $3,142 = $403,142

[QUESTION]
REFER TO: 03-09
76. Assuming Rhine generates cash flow from operations of $27,200 in 2012, how will Harrison record the $16,500 payment of cash on April 15, 2013 in satisfaction of its contingent obligation?
A) Debit Contingent performance obligation $16,500, and Credit Cash $16,500.
B) Debit Contingent performance obligation $3,142, debit Loss from revaluation of contingent performance obligation $13,358, and Credit Cash $16,500.
C) Debit Investment in Subsidiary and Credit Cash, $16,500.
D) Debit Goodwill and Credit Cash, $16,500.
E) No entry.
Answer: B
Learning Objective: 03-07
Difficulty: Hard
Bloom’s: Analyze
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
REFER TO: Ref. 03-09
77. When recording consideration transferred for the acquisition of Rhine on January 1, 2012, Harrison will record a contingent performance obligation in the amount of:
A) $ 628.40
B) $ 2,671.60
C) $ 3,142.00
D) $13,358.00
E) $16,500.00
Answer: C
Learning Objective: 03-07
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Weighted Fair Value of Contingency = $3,142

REFERENCE: 03-10
Beatty, Inc. acquires 100% of the voting stock of Gataux Company on January 1, 2012 for $500,000 cash. A contingent payment of $12,000 will be paid on April 1, 2013 if Gataux generates cash flows from operations of $26,500 or more in the next year. Beatty estimates that there is a 30% probability that Gataux will generate at least $26,500 next year, and uses an interest rate of 4% to incorporate the time value of money. The fair value of $12,000 at 4%, using a probability weighted approach, is $3,461.

[QUESTION]
REFER TO: 03-10
78. What will Beatty record as its Investment in Gataux on January 1, 2012?
A) $500,000.
B) $503,461.
C) $512,000.
D) $515,461.
E) $526,500.
Answer: B
Learning Objective: 03-07
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Cash Payment $500,000 + Weighted Fair Value of Contingency $3,461 = $503,461

[QUESTION]
REFER TO: 03-10
79. Assuming Gataux generates cash flow from operations of $27,200 in 2012, how will Beatty record the $12,000 payment of cash on April 1, 2013 in satisfaction of its contingent obligation?
A) Debit Contingent performance obligation $3,461, debit Goodwill $8,539, and Credit Cash $12,000.
B) Debit Contingent performance obligation $3,461, debit Loss from revaluation of contingent performance obligation $8,539, and Credit Cash $12,000.
C) Debit Goodwill and Credit Cash, $12,000.
D) Debit Goodwill $27,200, credit Contingent performance obligation $15,200, and Credit Cash $12,000.
E) No entry.
Answer: B
Learning Objective: 03-07
Difficulty: Hard
Bloom’s: Analyze
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
REFER TO: 03-10
80. When recording consideration transferred for the acquisition of Gataux on January 1, 2012, Beatty will record a contingent performance obligation in the amount of:
A) $ 692.20
B) $ 3,040.00
C) $ 3,461.00
D) $12,000.00
E) $15,200.00
Answer: C
Learning Objective: 03-07
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Weighted Fair Value of Contingency = $3,461

REFERENCE: 03-11
Prince Company acquires Duchess, Inc. on January 1, 2011. The consideration transferred exceeds the fair value of Duchess’ net assets. On that date, Prince has a building with a book value of $1,200,000 and a fair value of $1,500,000. Duchess has a building with a book value of $400,000 and fair value of $500,000.

[QUESTION]
REFER TO: 03-11
81. If push-down accounting is used, what amounts in the Building account appear in Duchess’ separate balance sheet and in the consolidated balance sheet immediately after acquisition?
A) $400,000 and $1,600,000.
B) $500,000 and $1,700,000.
C) $400,000 and $1,700,000.
D) $500,000 and $2,000,000.
E) $500,000 and $1,600,000.
Answer: B
Learning Objective: 03-08
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Fair Value ($500,000) & Parent BV + Sub FV ($1,700,000)

[QUESTION]
REFER TO: 03-11
82. If push-down accounting is not used, what amounts in the Building account appear on Duchess’ separate balance sheet and on the consolidated balance sheet immediately after acquisition?
A) $400,000 and $1,600,000.
B) $500,000 and $1,700,000.
C) $400,000 and $1,700,000.
D) $500,000 and $2,000,000.
E) $500,000 and $1,600,000.
Answer: C
Learning Objective: 03-08
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
82. Feedback: Book Value ($400,000) & Parent BV + Sub FV ($1,700,000)

REFERENCE: 03-12
Watkins, Inc. acquires all of the outstanding stock of Glen Corporation on January 1, 2012. At that date, Glen owns only three assets and has no liabilities:

Book Fair
Value Value
Inventory (FIFO method) $ 40,000 $ 50,000
Equipment (10-year life) 80,000 75,000
Building (20-year life) 200,000 300,000

[QUESTION]
REFER TO: 03-12
83. If Watkins pays $450,000 in cash for Glen, what amount would be represented as the subsidiary’s Building in a consolidation at December 31, 2014, assuming the book value of the building at that date is still $200,000?
A) $200,000.
B) $285,000.
C) $290,000.
D) $295,000.
E) $300,000.
Answer: B
Learning Objective: 03-01
Learning Objective: 03-04
Learning Objective: 03-04
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Fair Value at Acquisition ($300,000) – Amortization [($100,000 / 20) X 3] = $285,000

[QUESTION]
REFER TO: 03-12
84. If Watkins pays $400,000 in cash for Glen, what amount would be represented as the subsidiary’s Building in a consolidation at December 31, 2014, assuming the book value of the building at that date is still $200,000?
A) $200,000.
B) $285,000.
C) $260,000.
D) $268,000.
E) $300,000.
Answer: B
Learning Objective: 03-01
Learning Objective: 03-04
Learning Objective: 03-04
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Fair Value at Acquisition ($300,000) – Amortization [($100,000 / 20) X 3] = $285,000

[QUESTION]
REFER TO: 03-12
85. If Watkins pays $450,000 in cash for Glen, what amount would be represented as the subsidiary’s Equipment in a consolidation at December 31, 2014, assuming the book value of the equipment at that date is still $80,000?
A) $70,000.
B) $73,500.
C) $75,000.
D) $76,500.
E) $80,000.
Answer: D
Learning Objective: 03-04
Learning Objective: 03-04
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Fair Value at Acquisition ($75,000) + Amortization [($5,000 / 10) X 3] = $76,500

[QUESTION]
REFER TO: 03-12
86. If Watkins pays $450,000 in cash for Glen, what acquisition-date fair value allocation, net of amortization, should be attributed to the subsidiary’s Equipment in consolidation at December 31, 2014?
A) $(5,000.)
B) $80,000.
C) $75,000.
D) $73,500.
E) $ (3,500.)
Answer: E
Learning Objective: 03-01
Learning Objective: 03-04
Learning Objective: 03-04
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Fair Value Differential at Acquisition [$5,000] + Amortization ([$5000] / 10 X 3) = [$3,500]

[QUESTION]
REFER TO: 03-12
87. If Watkins pays $300,000 in cash for Glen, at what amount would the subsidiary’s Building be represented in a January 2, 2012 consolidation?
A) $200,000.
B) $225,000.
C) $273,000.
D) $279,000.
E) $300,000.
Answer: E
Learning Objective: 03-02
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Fair Value at Acquisition = $300,000

[QUESTION]
REFER TO: 03-12
88. If Watkins pays $450,000 in cash for Glen, at what amount would Glen’s Inventory acquired be represented in a December 31, 2012 consolidated balance sheet?
A) $40,000.
B) $50,000.
C) $ 0.
D) $10,000.
E) $90,000.
Answer: C
Learning Objective: 03-04
Learning Objective: 03-04
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Zero (Under FIFO all Inventory would go to COGS)

[QUESTION]
REFER TO: 03-12
89. If Watkins pays $450,000 in cash for Glen, and Glen earns $50,000 in net income and pays $20,000 in dividends during 2012, what amount would be reflected in consolidated net income for 2012 as a result of the acquisition?
A) $20,000 under the initial value method.
B) $30,000 under the partial equity method.
C) $50,000 under the partial equity method.
D) $44,500 under the equity method.
E) $45,500 regardless of the internal accounting method used.
Answer: E
Learning Objective: 03-04
Learning Objective: 03-04
Difficulty: Hard
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Sub Income $50,000 – Amortizations ([$5,000] / 10) – ($100,000 / 20) = $45,500

[QUESTION]
90. According to the FASB ASC regarding the testing procedures for Goodwill Impairment, the proper procedure for conducting impairment testing is:
A) Goodwill recognized in consolidation may be amortized uniformly and only tested if the amortization method originally chosen is changed.
B) Goodwill recognized in consolidation must only be impairment tested prior to disposal of the consolidated unit to eliminate the impairment of goodwill from the gain or loss on the sale of that specific entity.
C) Goodwill recognized in consolidation may be impairment tested in a two-step approach, first by quantitative assessment of the possible impairment of the fair value of the unit relative to the book value, and then a qualitative assessment as to why the impairment, if any, occurred for disclosure.
D) Goodwill recognized in consolidation may be impairment tested in a two-step approach, first by qualitative assessment of the possibility of impairment of the unit fair value relative to the book value, and then quantitative assessments as to how much impairment, if any, occurred for disclosure.
E) Goodwill recognized in consolidation may be impairment tested in a two-step approach, first by qualitative assessment of the possibility of impairment of the unit fair value relative to the book value, and then quantitative assessments as to how much impairment, if any, occurred for asset write-down.
Answer: E
Learning Objective: 03-05
Difficulty: Medium
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
91. When is a goodwill impairment loss recognized?
A) Only after both a quantitative and qualitative assessment of the fair value of goodwill of a reporting unit.
B) After only definitive quantitative assessments of the fair value of goodwill is completed.
C) After only definitive qualitative assessments of the fair value of goodwill is completed.
D) If the fair value of a reporting unit falls to zero or below its original acquisition price.
E) Never.
Answer: B
Learning Objective: 03-05
Difficulty: Medium
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Essay:

[QUESTION]
92. For an acquisition when the subsidiary retains its incorporation, which method of internal recordkeeping is the easiest for the parent to use?
Answer: The initial value method is the easiest to use.
Learning Objective: 03-02
Difficulty: Easy
Bloom’s: Understand
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
93. For an acquisition when the subsidiary retains its incorporation, which method of internal recordkeeping gives the most accurate portrayal of the accounting results for the entire business combination?
Answer: The equity method gives the most accurate portrayal of the results for the combined entity.
Learning Objective: 03-02
Difficulty: Medium
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
94. For an acquisition when the subsidiary maintains its incorporation, under the partial equity method, what adjustments are made to the balance of the investment account?
Answer: The balance of the investment account is increased for the subsidiary’s net income. It is decreased for subsidiary dividends and losses. The amortization of excess fair value allocations does not affect the account balance.
Learning Objective: 03-02
Difficulty: Medium
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
95. From which methods can a parent choose for its internal recordkeeping related to the operations of a subsidiary?
Answer: The parent can choose from among the initial value method, equity method, and partial equity method.
Learning Objective: 03-02
Difficulty: Easy
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
96. What accounting method requires a subsidiary to record acquisition fair value allocations and the amortization of allocations in its internal accounting records?
Answer: The appropriate method is termed push-down accounting.
Learning Objective: 03-08
Difficulty: Medium
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
97. What is the partial equity method? How does it differ from the equity method? What are its advantages and disadvantages compared to the equity method?
Answer: The partial equity method is a compromise between the initial value method and the equity method. It provides some of the advantages of the equity method but is easier to use. Under the partial equity method, the balance in the investment account is increased by the accrual of the subsidiary’s income and decreased when the subsidiary pays dividends. The method is simpler than the equity method because amortization of excess fair value allocations is not done.
Learning Objective: 03-02
Difficulty: Medium
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
98. What advantages might push-down accounting offer for internal reporting?
Answer: Push-down accounting requires the subsidiary to record acquisition fair value allocations and amortizations in its accounting records. One advantage that the method offers to internal reporting is that it simplifies the consolidation process. More important, it provides better information for internal evaluation.
Learning Objective: 03-08
Difficulty: Medium
Bloom’s: Understand
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
99. What is the basic objective of all consolidations?
Answer: The basic objective of all consolidations is to combine asset, liability, revenue, expense, and stockholders’ equity accounts in a manner consistent with the concepts of the acquisition method to reflect substance over form in financial reporting for consolidations. When a parent has control (substance) over a subsidiary and separate incorporation is maintained (form), the consolidated financial statements will reflect results as if the multiple entities were one entity.
Learning Objective: 03-01
Difficulty: Medium
Bloom’s: Understand
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
100. Yules Co. acquired Noel Co. in an acquisition transaction. Yules decided to use the partial equity method to account for the investment. The current balance in the investment account is $416,000. Describe in words how this balance was derived.
Answer: The initial balance in the investment account would be the acquisition value implied by the fair value of consideration transferred. This would not include consideration paid for costs to effect the combination. After the acquisition, the balance in the account is increased by the parent’s accrual of the subsidiary’s income and decreased by the dividends paid by the subsidiary.
Learning Objective: 03-02
Difficulty: Medium
Bloom’s: Analyze
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
101. Paperless Co. acquired Sheetless Co. and in effecting this business combination, there was a cash-flow performance contingency to be paid in cash, and a market-price performance contingency to be paid in additional shares of stock. In what accounts and in what section(s) of a consolidated balance sheet are these contingent consideration items shown?
Answer: A cash-flow performance contingency is shown as a contingent performance obligation which is in the liability section of the consolidated balance sheet. A market-price performance contingency to be paid in stock is shown as additional paid-in capital – contingent equity outstanding which is in the stockholders’ equity section of the consolidated balance sheet.
Learning Objective: 03-07
Difficulty: Medium
Bloom’s: Analyze
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
102. Avery Company acquires Billings Company in a combination accounted for as an acquisition and adopts the equity method to account for Investment in Billings. At the end of four years, the Investment in Billings account on Avery’s books is $198,984. What items constitute this balance?
Answer: Since the equity method has been applied by Avery, the $198,984 is composed of four items:
(a.) The acquisition value of consideration transferred by the parent;
(b.) The annual accruals made by Avery to recognize income as it is earned by the subsidiary;
(c.) The reductions that are created by the subsidiary’s payment of dividends;
(d.) The periodic amortization recognized by Avery in connection with the excess fair value allocations identified with its acquisition.
Learning Objective: 03-02
Difficulty: Medium
Bloom’s: Understand
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
103. Dutch Co. has loaned $90,000 to its subsidiary, Hans Corp., which retains separate incorporation. How would this loan be treated on a consolidated balance sheet?
Answer: The loan represents an intra-entity payable for Hans and receivable for Dutch, and each receivable and payable would be eliminated in preparing a consolidated balance sheet.
Learning Objective: 03-06
Difficulty: Medium
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
104. An acquisition transaction results in $90,000 of goodwill. Several years later a worksheet is being produced to consolidate the two companies. Describe in words at what amount goodwill will be reported at this date.
Answer: The $90,000 attributed to goodwill is reported at its original amount unless a portion of goodwill is impaired or a unit of the business where goodwill resides is sold.
Learning Objective: 03-05
Difficulty: Easy
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
105. Why is push-down accounting a popular internal reporting technique?
Answer: Push-down accounting has become popular for the parent’s internal reporting purposes for two reasons. First, this method simplifies the consolidation process each year. If acquisition value allocations and subsequent amortization are recorded by the subsidiary, they do not need to be repeated each year on a consolidation worksheet. Second, recording of amortization by the subsidiary enables that company’s information to provide a good representation of the impact that the acquisition has on the earnings of the business combination. For example, if the subsidiary earns $100,000 each year but annual amortization is $80,000, the acquisition is only adding $20,000 to the income of the combination each year rather than the $100,000 that is reported by the subsidiary unless push-down accounting is used.
Learning Objective: 03-08
Difficulty: Medium
Bloom’s: Understand
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

Problems:

[QUESTION]
106. On January 1, 2012, Jumper Co. acquired all of the common stock of Cable Corp. for $540,000. Annual amortization associated with the purchase amounted to $1,800. During 2012, Cable earned net income of $54,000 and paid dividends of $24,000. Cable’s net income and dividends for 2013 were $86,000 and $24,000, respectively.
Required:
Assuming that Jumper decided to use the partial equity method, prepare a schedule to show the balance in the investment account at the end of 2013.
Answer:
Investment in Cable Corp. – initial cost $540,000
Income accrual – 2012 54,000
Dividends collected – 2012 (24,000)
Income accrual– 2013 86,000
Dividends collected – 2013 (24,000)
Investment in Cable Corp., December 31, 2013 $632,000

Learning Objective: 03-02
Learning Objective: 03-03c
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
107. Hanson Co. acquired all of the common stock of Roberts Inc. on January 1, 2012, transferring consideration in an amount slightly more than the fair value of Roberts’ net assets. At that time, Roberts had buildings with a twenty-year useful life, a book value of $600,000, and a fair value of $696,000. On December 31, 2013, Roberts had buildings with a book value of $570,000 and a fair value of $648,000. On that date, Hanson had buildings with a book value of $1,878,000 and a fair value of $2,160,000.
Required:
What amount should be shown for buildings on the consolidated balance sheet dated December 31, 2013?
Answer:
Building balance – Hanson Co. $1,878,000
Building balance – Roberts Co. 570,000
Original fair value allocation to Roberts’ buildings ($696,000 – 600,000)
96,000
Amortization of allocation [($96,000/20 years) x 2 years] (9,600)
Buildings, consolidated balance $2,534,400
Learning Objective: 03-01
Learning Objective: 03-04
Learning Objective: 03-04
Difficulty: Hard
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
108. Carnes Co. decided to use the partial equity method to account for its investment in Domino Corp. An unamortized trademark associated with the acquisition was $30,000, and Carnes decided to amortize the trademark over ten years. For 2013, Carnes’ Equity in Subsidiary Earnings was $78,000.
Required:
What balance would have been in the Equity in Subsidiary Earnings account if Carnes had used the equity method?
Answer:
Learning Objective: 03-02
Learning Objective: 03-03a
Learning Objective: 03-03c
Difficulty: Easy
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

REFERENCE: 03-13
Fesler Inc. acquired all of the outstanding common stock of Pickett Company on January 1, 2012. Annual amortization of $22,000 resulted from this transaction. On the date of the acquisition, Fesler reported retained earnings of $520,000 while Pickett reported a $240,000 balance for retained earnings. Fesler reported net income of $100,000 in 2012 and $68,000 in 2013, and paid dividends of $25,000 in dividends each year. Pickett reported net income of $24,000 in 2012 and $36,000 in 2013, and paid dividends of $10,000 in dividends each year.
Assume that Fesler’s reported net income includes Equity in Subsidiary Income.

[QUESTION]
REFER TO: 03-13
109. If the parent’s net income reflected use of the equity method, what were the consolidated retained earnings on December 31, 2013?
Answer:

Learning Objective: 03-03a
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
REFER TO: 03-13
110. If the parent’s net income reflected use of the partial equity method, what were the consolidated retained earnings on December 31, 2013?
Answer:

Learning Objective: 03-04
Learning Objective: 03-03c
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
REFER TO: 03-13
111. If the parent’s net income reflected use of the initial value method, what were the consolidated retained earnings on December 31, 2013?
Answer:

Learning Objective: 03-04
Learning Objective: 03-03b
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

REFERENCE: 03-14
Jaynes Inc. acquired all of Aaron Co.’s common stock on January 1, 2012, by issuing 11,000 shares of $1 par value common stock. Jaynes’ shares had a $17 per share fair value. On that date, Aaron reported a net book value of $120,000. However, its equipment (with a five-year remaining life) was undervalued by $6,000 in the company’s accounting records. Any excess of consideration transferred over fair value of assets and liabilities is assigned to an unrecorded patent to be amortized over ten years.

[QUESTION]
REFER TO: 03-14
112. What balance would Jaynes’ Investment in Aaron Co. account have shown on December 31, 2012, when the equity method was applied for this acquisition?
Answer:
An allocation of the acquisition value (based on the fair value of the shares issued) must first be made.
Annual
Life Amortization
Acquisition value (11,000 shares x 17) $187,000
Book value equivalency (120,000)
Excess of fair value over book value $ 67,000
Excess of fair value assigned to specific
accounts based on fair value
Equipment 6,000 5 years $ 1,200
Patent $ 61,000 10 years 6,100
Total $ 7,300

Original acquisition value $187,000
2012 income accrual ($276,000 – $144,000) 132,000
2012 dividends paid by Aaron (60,000)
2012 amortization (from above) (7,300)
2013 income accrual ($336,000 – $180,000) 156,000
2013 dividends paid by Aaron (50,000)
2013 amortization (7,300)
Investment in Aaron Co. – December 31, 2013 $350,400

Learning Objective: 03-02
Learning Objective: 03-03a
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
REFER TO: 03-14
113. What was consolidated net income for the year ended December 31, 2013?
Answer:
Net income of Jaynes Inc. ($840,000 – $552,000) $288,000
Net income of Aaron Co. ($336,000 – $180,000) 156,000
Amortization expense (from above) (7,300)
Consolidated net income – 2013 $436,700

Learning Objective: 03-01
Learning Objective: 03-04
Learning Objective: 03-04
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
REFER TO: 03-14
114. What was consolidated equipment as of December 31, 2013?
Answer:
Equipment balance – Jaynes Inc. $600,000
Equipment balance – Aaron Co. 360,000
Allocation based on fair value (from above) 6,000
Amortization for 2012-2013 ($1,200 x 2) (2,400)
Consolidated equipment – December 31, 2013 $963,600

Learning Objective: 03-01
Learning Objective: 03-04
Learning Objective: 03-04
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
REFER TO: 03-14
115. What was the total for consolidated patents as of December 31, 2013?
Answer:
Allocation to patent based on acquisition price (from above) $61,000
Amortization for 2012-2013 ($6,100 x 2) (12,200)
Consolidated patent – December 31, 2013 $48,800

Learning Objective: 03-01
Learning Objective: 03-04
Learning Objective: 03-04
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

REFERENCE: 03-15
Utah Inc. acquired all of the outstanding common stock of Trimmer Corp. on January 1, 2011. At that date, Trimmer owned only three assets and had no liabilities:

[QUESTION]
REFER TO: 03-15
116. If Utah paid $300,000 in cash for Trimmer, what allocation should have been assigned to the subsidiary’s Building account and its Equipment account in a December 31, 2013 consolidation?
Answer:
Since Utah paid more than the $288,000 fair value of Trimmer’s net assets, all allocations are based on fair value with the excess $12,000 assigned to goodwill.
Accounts Fair Value Allocation Life Annual Amortization
Building $60,000 10 years $6,000
Equipment (24,000) 5 years (4,800)

Building:
Allocation – January 1, 2011 $60,000
Amortization during past years ($6,000 x 2 years) (12,000)
Amortization for current year (6,000)
Allocation – December 31, 2013 $42,000

Equipment:
Allocation – January 1, 2011 (valuation reduction) $(24,000)
Amortization during past years ($4,800 x 2 years) 9,600
Amortization for current year 4,800
Allocation – December 31, 2013 $(9,600)

Learning Objective: 03-01
Learning Objective: 03-04
Learning Objective: 03-04
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
[QUESTION]
117. Matthews Co. acquired all of the common stock of Jackson Co. on January 1, 2012. As of that date, Jackson had the following trial balance:

During 2012, Jackson reported net income of $96,000 while paying dividends of $12,000. During 2013, Jackson reported net income of $132,000 while paying dividends of $36,000.
Assume that Matthews Co. acquired the common stock of Jackson Co. for $588,000 in cash. As of January 1, 2012, Jackson’s land had a fair value of $102,000, its buildings were valued at $188,000, and its equipment was appraised at $216,000. Any excess of consideration transferred over fair value of assets and liabilities acquired is due to an unamortized patent to be amortized over 10 years.
Matthews decided to use the equity method for this investment.
Required:
(A.) Prepare consolidation worksheet entries for December 31, 2012.
(B.) Prepare consolidation worksheet entries for December 31, 2013.
Answer:
Annual
Life Amortization
Consideration transferred for Jackson Co. $588,000
Book value (480,000)
Excess of consideration transferred over book value $108,000
Excess consideration transferred, assigned to specific accounts based on fair values
Land 12,000 – –
Buildings 48,000 20 years $ 2,400
Equipment (24,000) 8 years (3,000)
Patent (remaining excess) 72,000 10 years 7,200
Total 6,600
A.
Consolidated Worksheet Entries-2012:

Entry S

Common Stock-Jackson Co. 300,000
Additional Paid-In Capital 60,000
Retained Earnings, 1/1/12 120,000
Investment in Jackson Co. 480,000

Entry A

Land 12,000
Buildings 48,000
Patent 72,000
Equipment 24,000
Investment in Jackson Co. 108,000

Entry 1

Investment Income 89,400
Investment in Jackson Co. 89,400

Entry D

Investment in Jackson Co. 12,000
Dividends Paid 12,000

Entry E

Expense 6,600
Equipment 3,000
Buildings 2,400
Patent 7,200
B. Consolidated Worksheet Entries -2013:
Entry S

Common Stock-Jackson Co. 300,000
Additional Paid-In Capital 60,000
Retained Earnings, 1/1/13 204,000
Investment in Jackson Co. 564,000

Entry A

Land 12,000
Buildings 45,600
Patent 64,800
Equipment 21,000
Investment in Jackson Co. 101,400

Entry 1

Investment Income 125,400
Investment in Jackson Co. 125,400

Entry D

Investment in Jackson Co. 36,000
Dividends Paid 36,000

Entry E

Expense 6,600
Equipment 3,000
Buildings 2,400
Patent 7,200

Learning Objective: 03-03a
Difficulty: Hard
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
118. On January 1, 2011, Rand Corp. issued shares of its common stock to acquire all of the outstanding common stock of Spaulding Inc. Spaulding’s book value was only $140,000 at the time, but Rand issued 12,000 shares having a par value of $1 per share and a fair value of $20 per share. Rand was willing to convey these shares because it felt that buildings (ten-year life) were undervalued on Spaulding’s records by $60,000 while equipment (five-year life) was undervalued by $25,000. Any consideration transferred over fair value of identified net assets acquired is assigned to goodwill.
Following are the individual financial records for these two companies for the year ended December 31, 2014.

Rand Spaulding
Corp. Inc.
Revenues $ 372,000 $108,000
Expenses (264,000) (72,000)
Equity in subsidiary earnings 25,000 0
Net income $ 133,000 $ 36,000

Retained earnings, January 1, 2014 $ 765,000 $102,000
Net income (above) 133,000 36,000
Dividends paid (84,000) (24,000)
Retained earnings, December 31, 2014 $ 814,000 $114,000

Current assets $ 150,000 $ 22,000
Investment in Spaulding Inc. 242,000 0
Buildings (net) 525,000 85,000
Equipment (net) 389,250 129,000
Total assets $1,306,250 $236,000

Liabilities $ 82,250 $ 50,000
Common stock 360,000 72,000
Additional paid-in capital 50,000 0
Retained earnings, December 31, 2014 (above) 814,000 114,000
Total liabilities and stockholders’ equity $1,306,250 $236,000

Required:
Prepare a consolidation worksheet for this business combination.
Answer:
Consolidation Worksheet for Rand and Spaulding:
CONSOLIDATION WORKSHEET-Acquisition
For the Year Ended 12/31/2014
Rand Spaulding Consolidation Entries
Consolidated
Account Corp. Inc. DR CR Balance
Revenues 372,000 108,000 480,000
Expenses (264,000) (72,000) (E) 11,000 (347,000)
Equity in Sub Income 25,000 _____ (I) 25,000 ______
Net Income 133,000 36,000 133,000

R/E, 1/1/14 765,000 102,000 (S) 102,000 765,000
Net Income 133,000 36,000 133,000
Dividends (84,000) (24,000) (D) 24,000 (84,000)
R/E, 12/31/14 814,000 114,000 814,000

Current assets 150,000 22,000 172,000
Investment in Spaulding 242,000 (D) 24,000 (S) 174,000
(A) 67,000
(I) 25,000
Building (net) 525,000 85,000 (A) 42,000 (E) 6,000 646,000
Equipment (net) 389,250 129,000 (A) 10,000 (E) 5,000 523,250
Goodwill _______ ______ (A) 15,000 15,000
Total Assets 1,306,250 236,000 1,356,250

Liabilities 82,250 50,000 132,250
Common Stock 360,000 72,000 (S) 72,000 360,000
Additional Paid-in Capital 50,000 50,000
R/E, 12/31/14 814,000 114,000 814,000
Total liabilities& ________ _______ _______ _______ ________
Stockholders’ Equity 1,306,250 236,000 301,000 301,000 1,356,250

Learning Objective: 03-03a
Difficulty: Hard
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

REFERENCE: 03-16
Pritchett Company recently acquired three businesses, recognizing goodwill in each acquisition. Destin has allocated its acquired goodwill to its three reporting units: Apple, Banana, and Carrot. Pritchett provides the following information in performing the 2013 annual review for impairment:

[QUESTION]
REFER TO: 03-16
119. Which of Pritchett’s reporting units require both steps to test for goodwill impairment?
Answer:
Goodwill Impairment Test—Step 1
Total fair Carrying Potential goodwill
Value (w/o GW) Value (w/GW) impairment?
Apple $400,000 < $515,000 yes
Banana 468,000 > 433,000 no
Carrot 215,000 < 230,000 yes

Therefore, the Apple and the Carrot reporting units require both steps to test for goodwill impairment.

LO 6
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
REFER TO: 03-16
120. How much goodwill impairment should Pritchett report for 2013?
Answer:
Goodwill Impairment Test—Step 2 (Apple and Carrot only)

Apple—total fair value $525,000
Fair values of identifiable net assets
Tangible assets $320,000
Trademark 10,000
Licenses 90,000
Liabilities ( 20,000) 400,000
Implied value of goodwill 125,000
Carrying value of goodwill 130,000
Impairment loss $ 5,000 $ 5,000

Carrot—total fair value $215,000
Fair values of identifiable net assets
Tangible assets $120,000
Unpatented technology 50,000
Customer list 45,000 215,000
Implied value of goodwill 0
Carrying value of goodwill 75,000
Impairment loss 75,000 75,000
Total impairment loss $ 80,000
Total impairment loss $5,000 + $75,000 = $80,000

Learning Objective: 03-06
Difficulty: Hard
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

REFERENCE: 03-17
On 4/1/11, Sey Mold Corporation acquired 100% of DotDot.Com for $2,000,000 cash. On the date of acquisition, DotDot’s net book value was $900,000. DotDot’s assets included land that was undervalued by $300,000, a building that was undervalued by $400,000, and equipment that was overvalued by $50,000. The building had a remaining useful life of 8 years and the equipment had a remaining useful life of 4 years. Any excess fair value over consideration transferred is allocated to an undervalued patent and is amortized over 5 years.

[QUESTION]
REFER TO: 03-17
121. Determine the amortization expense related to the combination at the year-end date of 12/31/11.
Answer:
Amortization for
Amount Life 3/4 of the year
Fair value consideration transferred in Sey Mold’s acquisition $2,000,000
BV of DotDot.com at 4/1/11 (900,000)
Fair value in excess of BV, to be allocated: $1,100,000
Land (300,000)
Building (400,000) 8 $37,500
Equipment 50,000 4 (9,375)
Patent $ 450,000 5 67,500
Total Amortization $95,625

Learning Objective: 03-01
Learning Objective: 03-04
Learning Objective: 03-04
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
REFER TO: 03-17
122. Determine the amortization expense related to the combination at the year-end date of 12/31/15.
Answer:
Amortization for December 31, 2015:
Building $ 50,000
Equipment (1/4 year remaining) (3,125)
Patent 90,000
Total $136,875

Learning Objective: 03-01
Learning Objective: 03-04
Learning Objective: 03-04
Difficult: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
REFER TO: 03-17
123. Determine the amortization expense related to the consolidation at the year-end date of 12/31/19.
Answer:
By 2019, all of the fair value adjustments and the patent will have been fully amortized. The amortization expense for 2019 related to the combination will be $0.
Learning Objective: 03-01
Learning Objective: 03-04
Learning Objective: 03-04
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
124. For each of the following situations, select the best answer that applies to consolidating financial information subsequent to the acquisition date:
(A) Initial value method.
(B) Partial equity method.
(C) Equity method.
(D) Initial value method and partial equity method but not equity method.
(E) Partial equity method and equity method but not initial value method.
(F) Initial value method, partial equity method, and equity method.

_____1. Method(s) available to the parent for internal record-keeping.
_____2. Easiest internal record-keeping method to apply.
_____3. Income of the subsidiary is recorded by the parent when earned.
_____4. Designed to create a parallel between the parent’s investment accounts and changes in the underlying equity of the acquired company.
_____5. For years subsequent to acquisition, requires the *C entry.
_____6. Uses the cash basis for income recognition.
_____7. Investment account remains at initially recorded amount.
_____8. Dividends received by the parent from the subsidiary reduce the parent’s investment account.
_____9. Often referred to in accounting as a single-line consolidation.
_____10. Increases the investment account for subsidiary earnings, but does not decrease the subsidiary account for equity adjustments such as amortizations.
Answer: (1) F; (2) A; (3) E; (4) C; (5) D; (6) A; (7) A; (8) E; (9) C; (10) B
Learning Objective: 03-02
Learning Objective: 03-04
Difficulty: Hard
Bloom’s: Understand
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

Advanced Accounting 12th Edition Test Bank – Hoyle – Thomas Schaefer – Timothy Doupnik

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