Question 1 (3 points)
A parent sells land costing $40,000 to a subsidiary in 2018 for $55,000. The subsidiary sells the land in 2020 to a third party for $65,000. On the consolidated income statement for 2020, the gain on sale of land is
Question 1 options:
a) $10,000
b) $15,000
c) $0
d) $25,000
Question 2 (3 points)
A parent provides consulting services to its wholly-owned subsidiary during the year. The parent charged the subsidiary $300,000 for the services. The parent’s cost of providing the services is $265,000. The companies use service revenue and service expense, as appropriate, to record this transaction on their own books. The consolidation eliminating entry or entries related to the intercompany services include an adjustment to the parent’s accounts as follows
Question 2 options:
a) a credit to service revenue, $265,000
b) a debit to service revenue, $300,000
c) a debit to service expense, $265,000
d) a credit to service expense, $300,000
Question 3 (3 points)
Assume a U.S. company decides to quantitatively test its goodwill for impairment. A division’s book value exceeds its fair value by $8 million, and its goodwill has a book value of $6 million. The division’s goodwill impairment loss is
Question 3 options:
a) $2 million
b) $0
c) $8 million
d) $6 million
Question 4 (2 points)
How is the noncontrolling interest in a subsidiary valued at the date of acquisition, following U.S. GAAP?
Question 4 options:
a) The noncontrolling interest’s share of the fair value of the subsidiary’s identifiable net assets at the date of acquisition
b) The noncontrolling interest’s share of the book value of the subsidiary at the date of acquisition plus its share of date-of-acquisition goodwill
c) The noncontrolling interest’s share of the book value of the subsidiary at the date of acquisition
d) Fair value at the date of acquisition
Question 5 (10 points)
acquires 90% of the voting stock of Schultz on January 1, 2020 for $5,000. The fair value of the noncontrolling interest is $550. Schultz’s equity is reported at $4,800 at the date of acquisition. Its net assets are reported at amounts approximating fair value, but it has previously unreported identifiable intangible assets (5-year life, straight-line), valued at $1,000. Peppard uses the complete equity method to account for its investment. Schultz reports net income of $300 for 2020.
REQUIRED:
What is meant by non-controlling interest?
What journal entry does Peppard record on its books for its investment in Schultz?
Question 5 options:
Question 6 (14 points)
On January 1, 2017, a subsidiary sold equipment to its parent for $520,000. The subsidiary’s original cost was $200,000 and as of January 1, 2017, $20,000 in depreciation had been recorded on the subsidiary’s books. At the date of sale, the equipment had a 10-year remaining life, straight-line. It is now December 31, 2021 (5 years since the sale), and the parent still holds the equipment.
REQUIRED:
Prepare the consolidation eliminating entries for 2021
Question 6 options:
Question 7 (2 points)
Pratt Company buys 65% of the voting stock of Sully Corporation at a 40% premium over the market price of Sully’s stock. Which statement is most likely to be true concerning the goodwill resulting from this acquisition?
Question 7 options:
a) Goodwill is allocated 65% to Pratt and 35% to the noncontrolling interest in Sully
b) All goodwill is allocated to the noncontrolling interest in Sully
c) Goodwill is allocated 60% to Pratt and 40% to the noncontrolling interest in Sully
d) The goodwill allocation to Pratt is more than 65% of the total goodwill
Question 8 (2 points)
When a subsidiary has a 20% noncontrolling interest, and the acquisition is a bargain purchase, the gain on acquisition is
Question 8 options:
a) The fair value of identifiable net assets acquired less acquisition cost
b) 80% of the fair value of identifiable net assets less acquisition cost
c) The acquisition cost plus the fair value of noncontrolling interest less the fair value of identifiable net assets acquired
d) 80% of the fair value of identifiable net assets less acquisition cost less fair value of noncontrolling interest
Question 9 (3 points)
Pontos Corporation buys 80% of the voting stock of Springfield Company on January 1, 2017. At the date of acquisition, it is determined that Springfield has a secret recipe for its famous cookies, not currently reported on its balance sheet, that has a fair value of $20,000. The secret cookie recipe meets ASC Topic 805 requirements for capitalization as an intangible asset, and has an estimated life of 5 years, straight-line. On the consolidated balance sheet at December 31, 2020, at what value is the secret cookie recipe reported?
Question 9 options:
a) $16,000
b) $ 4,000
c) $ 3,200
d) $ 8,000
Question 10 (15 points)
A merger on January 1, 2021 generates goodwill of $50,000,000, which is properly allocated to three divisions of the organization. At the end of 2021, the following information is available:
Division 1 Division 2 Division 3
January 1, 2021 balance of goodwill $ 30,000,000 $ 15,000,000 $ 5,000,000
Fair value of division 65,000,000 44,000,000 15,000,000
Book value of division 70,000,000 43,000,000 17,000,000
Due to a downturn in the economy in 2021, it is more likely than not that goodwill is impaired in all three divisions.
REQUIRED:
Which divisions (if any) have impaired goodwill? Explain (be specific).
Question 10 options:
Question 11 (2 points)
If the parent company uses the complete equity method when accounting for its wholly-owned subsidiary on its own books
Question 11 options:
a) The parent’s comprehensive income equals consolidated net income
b) The parent’s net income equals consolidated comprehensive income
c) The parent’s comprehensive income equals consolidated comprehensive income
d) The subsidiary’s comprehensive income equals consolidated comprehensive income
Question 12 (3 points)
A parent company sells merchandise to a subsidiary company during the year at a price of $300,000, a 20% markup over its cost. The subsidiary company sells all the merchandise to outside customers during the year for $550,000. Which statement is true concerning the required consolidation eliminating entries related to these transactions?
Question 12 options:
a) Investment in subsidiary is reduced by $250,000
b) Inventory is reduced by $50,000
c) Retained earnings is reduced by $50,000
d) Cost of goods sold is reduced by $300,000
Question 13 (2 points)
Which of the following is true regarding the Consolidated Statement of Cash Flows?
Question 13 options:
a) The consolidated statement of cash flows is prepared by combining the statement of cash flows of the parent with the statement of cash flows of the subsidiary
b) The consolidated statement of cash flows must be prepared using the direct method
c) The consolidated statement of cash flows is not required; it is an optional statement that most companies prepare in order to provide full disclosure
d) The consolidated statement of cash flows is prepared based on information from the consolidated income statement and the consolidated balance sheet
Question 14 (3 points)
A parent company sells equipment to its subsidiary on January 1, 2018 for $90,000. At the time, the equipment was reported on the parent’s books at a net book value of $60,000. The remaining life of the equipment as of January 1, 2018 is six years, and straight-line depreciation, no residual value is used. At what net value should this equipment be reported on a December 31, 2020 consolidated balance sheet (three years after the intercompany equipment sale)?
Question 14 options:
a) $40,000
b) $30,000
c) $45,000
d) $90,000
Question 15 (2 points)
A subsidiary still holds all net assets revalued at the date of acquisition. Which working paper eliminating entry below is most likely to be the same whether the consolidation takes place at the date of acquisition or in subsequent years
Question 15 options:
a) Write-off eliminating entry (O) adjustment to identifiable intangibles
b) Equity eliminating entry (E) adjustment to capital stock
c) Revaluation eliminating entry (R) adjustment to plant assets
d) Equity eliminating entry (E) adjustment to retained earnings
Question 16 (14 points)
Baracus, Inc. pays $95,000 in cash and stock to acquire 80% of the voting stock of Clover Company. The fair value of the noncontrolling interest is $21,250. The book value of the acquired company is $66,250, and no revaluations of acquired identifiable net assets are necessary.
REQUIRED:
How much is total goodwill?
What amount and percent of goodwill is allocated to the controlling interest?
What amount and percent of goodwill is allocated to the non-controlling interest?
Question 16 options:
Question 17 (24 points)
On January 1, 2018, Prachyl Company acquired 100% of Smith Company’s voting stock for $20,000 in cash. Smith’s total shareholders’ equity at January 1, 2018 was $5,000. Some of Smith’s assets and liabilities at the date of acquisition had fair values that were different from reported values, as follows:
Book Value Fair Value
Plant assets, net (10 years, straight-line) $15,000 $ 10,000
Identifiable intangibles (indefinite life) 0 9,000
It is now December 31, 2020 (3 years later). Impairment of recognized identifiable intangibles totals $400 for 2018 and 2019, and there is no impairment in 2020. There is no goodwill impairment as of the beginning of 2020, but goodwill impairment for 2020 is $1,200. Prachyl uses the complete equity method to account for its investment. December 31, 2020 trial balances for Prachyl and Smith follow:
Prachyl
Dr (Cr) Smith
Dr (Cr)
Current assets $ 5,000 $ 2,500
Plant assets, net 28,700 22,000
Identifiable intangibles – –
Investment in Smith 28,400 –
Goodwill – –
Liabilities (20,300) (11,000)
Capital stock (15,000) (2,000)
Retained earnings, beginning (25,000) (10,000)
Sales revenue (25,000) (14,000)
Equity in net income of Smith (800) –
Cost of goods sold 20,000 9,000
Operating expenses 4,000 3,500
$ 0 $ 0
The total Goodwill generated as a result of this acquisition was $11,000.
REQUIRED:
Prepare the C, E, R and O eliminating entries for 2020.
Question 17 options:
Question 18 (2 points)
When consolidating the accounts of a parent and subsidiary in subsequent years, eliminating entry (O) recognizes total write-offs of subsidiary revaluations:
Question 18 options:
a) As of the beginning of the current year
b) As of the date of acquisition
c) As of the end of the current year
d) For the current year
Question 19 (5 points)
Is the full equity method the only option that the parent company has for internal reporting? Explain why or why not
Question 19 options:
Question 20 (2 points)
Which statement is true concerning U.S. GAAP for the qualitative evaluation of goodwill?
Question 20 options:
a) The qualitative goodwill evaluation is based on general information on the economy, rather than specific information about the reporting unit’s performance
b) You don’t have to quantitatively evaluate goodwill for impairment if the acquired subsidiary is expected to continue operating in the foreseeable future
c) You don’t have to quantitatively evaluate goodwill for impairment if it is more likely than not that the reporting unit’s fair value is less than its book value
d) You don’t have to quantitively evaluate goodwill for impairment if it is more likely than not that the reporting unit’s book value is less than its fair value
