The answers below are to the best of my knowledge.
1. An economic advantage of a business combination includes
a. Utilizing duplicative assets c. Coordinated marketing campaigns
b. Creating separate management teams d. Horizontally combining levels within the marketing chain.
2. Which of the following is a potential abuse that may arise when a business combination is accounted for as a pooling of interests?
a. Assets of the buyer may be overvalued when the price paid by the investor is allocated among specific assets.
b. Earnings of the pooled entity may be increased because of the combination only and not as a result of efficient operations.
c. Liabilities may be undervalued when the price paid by the investor is allocated to specific liabilities.
d. An undue amount of cost may be assigned to goodwill, thus potentially allowing an understatement of pooled earnings.
3. Goodwill represents the excess cost of an acquisition over the
a. sum of the fair values assigned to intangible assets less liability assumed.
b. sum of the fair values assigned to tangible and intangible assets acquired less liabilities assumed.
c. sum of the fair values assigned to intangibles acquired less liabilities assumed.
d. book value of an acquired company.
4. Cozzi Company is being purchased and has the following balance sheet as of the purchase date:
Current assets.......... $200,000 Liabilities.... $ 90,000
Fixed assets............ 180,000 Equity......... 290,000
Total..................$ 380,000 Total........ $ 380,000
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The price paid for Cozzi's net assets (the purchaser assumes the liabilities) is $380,000. The fixed assets have a fair value of $220,000, and the liabilities have a fair value of $110,000. The amount of goodwill to be recorded in the purchase is __________.
a. $ 0
5. In a purchase, the direct acquisition, indirect acquisition and security issuance costs are accounted for as follows:
Direct Acquisition Indirect Acquisition Security Issuance
a. Added to price paid Added to price paid Added to price paid
b. Added to price paid Expensed Deducted from value
&nbs p; of security issued
c. Expensed Expensed Deducted from value
&nbs p; of security issued &nbs p;
d. Expensed Expensed Expensed
6. Account Investor Investee
Sales 500,000 300,000
Cost of Goods Sold 230,000 170,000
Gross Profit 270,000 130,000
Selling & Admin.
Expenses 120,000 100,000
Net Income 150,000 30,000
Dividends paid 50,000 10,000
Assuming Investor owns 70% of Investee. What is the amount that will be recorded as Net Income for the Controlling Interest?
7. The goal of the consolidation process is for:
a. asset acquisitions and stock acquisitions to result in the same balance sheet.
b. goodwill to appear on the balance sheet of the consolidated entity.
c. the assets of the noncontrolling interest to be predominately displayed on the balance sheet.
d. the investment in the subsidiary to be properly valued on the consolidated balance sheet.
8. When it purchased Sutton, Inc. on January 1, 20X1, Pavin Corporation issued 500,000 shares of its $5 par voting common stock. On that date the fair value of those shares totaled $4,200,000. Related to the acquisition, Pavin had payments to the attorneys and accountants of $200,000, and stock issuance fees of $100,000. Immediately prior to the purchase, the equity sections of the two firms appeared as follows:
&nbs p; Pavin Sutton
Common stock........................ $ 4,000,000 $ 700,000
Paid-in capital in excess of par.... 7,500,000 900,000
Retained earnings................... 5,500,000 500,000
Total............................... $17,000,000 $2,100,000
Immediately after the purchase, the consolidated balance sheet should report paid-in capital in excess of par of
9. Jordan Company issued nonvoting preferred stock with a fair value of $1,600,000 in exchange for all the outstanding common stock of the Barkley Corporation. On the date of the exchange, Barkley had tangible net assets with a book value of $900,000 and a fair value of $1,400,000. In addition, Jordan issued preferred stock valued at $200,000 to an individual as a finder's fee for arranging the transaction. As a result of these transactions, Jordan should report an increase in net assets of __________.
10. On June 30, 20X1, Needle Corporation purchased for cash at $10 per share all 100,000 shares of the outstanding common stock of the Thread Company. The total fair value of all identifiable net assets of Thread was $1,500,000. The only noncurrent asset is property with a fair value of $350,000. The consolidated balance sheet of Needle and its wholly owned subsidiary on June 30, 20X1, should reflect
a. an extraordinary gain of $150,000
B. goodwill of $150,000
C. an extraordinary gain of $400,000
D. goodwill of $400,000
11. Pedro purchased 100% of the common stock of the Sanburn Company on January 1, 20X1, for $500,000. On that date, the stockholders' equity of Sanburn Company was $380,000. On the purchase date, inventory of Sanburn Company, which was sold during 20X1, was understated by $20,000. Any remaining excess of cost over book value is attributable to patent with a 20-year life. The reported income and dividends paid by Sanburn Company were as follows:
&nbs p; 20X1 20X2
Net income.......................... $80,000 $90,000
Dividends paid...................... 10,000 10,000
Using the sophisticated (full) equity method, which of the following amounts are correct?
Investment Income Investment Account Balance 20X1 December 31, 20X1.
a. $55,000 $555,000
b. $55,000 $545,000
c. $75,000 $565,000
d. $80,000 $570,000
12. What is the effect if an unconsolidated subsidiary is accounted for by the equity method but consolidated statements are being prepared for the parent company and other subsidiaries?
a. All of the unconsolidated subsidiary's accounts will be included individually in the consolidated statements.
b. The consolidated retained earnings will not reflect the earnings of the unconsolidated subsidiary.
c. The consolidated retained earnings will be the same as if the subsidiary had been included in the consolidation.
d. Dividend revenue from the unconsolidated subsidiary will be reflected in consolidated net income.
13. On January 1, 20X2, Ritt Corp. purchased 80% of Shaw Corp.'s $10 par common stock for $975,000. On this date, the carrying amount of Shaw's net assets was $1,000,000. The fair values of Shaw's identifiable assets and liabilities were the same as their carrying amounts except for plant assets (net), which were $100,000 in excess of the carrying amount. For the year ended December 31, 20X2, Shaw had net income of $190,000 and paid cash dividends totaling $125,000.
In the January 1, 20X2, consolidated balance sheet, goodwill should be reported at _______.
14. In consolidated financial statements it is expected that:
a. Dividends declared equals the sum of the total parent company's declared dividends and the total subsidiary's declared dividends.
b. Retained Earnings equals the sum of the controlling interest's separate retained earnings and the noncontrolling interest's separate retained earnings.
c. Common Stock equals the sum of the parent company's outstanding shares and the subsidiary's outstanding shares.
d. Net Income equals the sum of the income distributed to the controlling interest and the income distributed to the noncontrolling interest.
15. Parthenon Corp. has several subsidiaries (Alpha, Beta, and Gamma) that are included in its consolidated financial statements. In its 12/31/X1 separate balance sheet, Parthenon had the following intercompany balances before eliminations:
&nbs p;Debit Credit
Current Receivable due from Alpha..... $ 40,000
Noncurrent Receivable due from Beta... 100,000
Cash Advance to Beta.................. 26,000
Cash Advance from Gamma............... 75,000
Intercompany Payable to Gamma......... 40,000
In its 12/31/X1 consolidated balance sheet, what amount should Parthenon report as intercompany receivables?
16. The material sale of inventory items by a parent company to an affiliated company
a. enters the consolidated revenue computation only if the transfer was the result of arm's length bargaining.
B. affects consolidated net income under a periodic inventory system but not under a perpetual inventory system.
C. does not result in consolidated income until the merchandise is sold to outside entities.
D. does not require a working paper adjustment if the merchandise was transferred at cost.
17. On January 1, 20X1 Bullock, Inc. sells land to its 80%-owned subsidiary, Humphrey Corporation, at a $20,000 gain. The land is still held by Humphrey on December 31, 20X3. What is the effect of the intercompany sale of land on consolidated net income?
a. Consolidated net income will be the same as it would have been had the sale not occurred.
b. Consolidated net income will be $20,000 less than it would have been had the sale not occurred.
c. Consolidated net income will be $16,000 less than it would have been had the sale not occurred.
d. Consolidated net income will be $20,000 greater than it would have been had the sale not occurred.
18. Stroud Corporation is an 80%-owned subsidiary of Pennie, Inc., acquired by Pennie several years ago. On January 1, 20X2, Pennie sold land with a book value of $60,000 to Stroud for $90,000. Stroud resold the land to an unrelated party for $100,000 on September 26, 20X3. The gain from sale of land that will appear in the consolidated income statements for 20X2 and 20X3, respectively, is _______.
A. $0 and $10,000
b. $0 and $40,000
c. $30,000 and $10,000
d. $30,000 and $40,000
19. The following accounts were noted in reviewing the trial balance for Parent Co. and Subsidiary Corp.:
Assets under Construction
Billings on Construction in Progress
Earned Income on Long-Term Contracts
Which of these accounts do you expect to eliminate when producing Parent Co. consolidated financial statements?
a. Assets under Construction; Billings on Construction in Progress; Earned Income on Long-Term Contracts
b. Contracts Receivable; Billings on Construction in Progress; Earned Income on Long-Term Contracts
c. Assets under Construction; Contracts Receivable; Billings on Construction in Progress; Earned Income on Long-Term Contracts;
d. Contracts Receivable; Billings on Construction in Progress; Earned Income on Long-Term Contracts; Contracts Payable
20. Pirate Co.uses the sophisticated equity method to account for the 80% investment in its supplier Ship Corp. Based upon the following information what amount does Pirate Co. record as subsidiary income?
Pirate internally generated income: $250,000
Ship internally generated income: $ 50,000
Unrealized profit on beginning inventory: $ 10,000
Unrealized profit on ending inventory: $ 15,000
a. 50,000 c. 40,000
b. 44,000 d. 36,000