Test Bank For Advanced Accounting 10th Edition By Fischer
Chapter 3—Consolidated Statements: Subsequent to Acquisition
MULTIPLE CHOICE
Scenario 3-1
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:
|
20X1 |
20X2 |
|
|
Net income |
$80,000 |
$90,000 |
|
Dividends paid |
10,000 |
10,000 |
1.Refer to Scenario 3-1. Using the simple equity method, which of the following amounts are correct?
 Investment Income   Investment Account Balance
  20X1          December 31, 20X1
|
a. |
$80,000Â Â Â Â Â Â Â Â Â $570,000 |
|
b. |
$70,000Â Â Â Â Â Â Â Â Â $570,000 |
|
c. |
$70,000Â Â Â Â Â Â Â Â Â $550,000 |
|
d. |
$80,000Â Â Â Â Â Â Â Â Â $550,000 |
ANS: A DIF: M OBJ: 3-1
2.Refer to Scenario 3-1. 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 Â Â Â Â Â Â Â Â Â $555,000 |
|
b. |
$55,000 Â Â Â Â Â Â Â Â Â $545,000 |
|
c. |
$75,000 Â Â Â Â Â Â Â Â Â $565,000 |
|
d. |
$80,000 Â Â Â Â Â Â Â Â Â $570,000 |
ANS: B DIF: M OBJ: 3-1
3.Refer to Scenario 3-1. Using the cost method, which of the following amounts are correct?
 Investment Income   Investment Account Balance
  20X1          December 31, 20X1
|
a. |
$10,000 Â Â Â Â Â Â Â Â Â $500,000 |
|
b. |
$10,000 Â Â Â Â Â Â Â Â Â $570,000 |
|
c. |
   $0          $570,000 |
|
d. |
$80,000 Â Â Â Â Â Â Â Â Â $500,000 |
ANS: A DIF: M OBJ: 3-1
4.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. |
ANS:CDIF:MOBJ:3-1 | 3-2 | 3-4
Scenario 3-2
On January 1, 20X1, Promo, Inc. purchased 70% of Set Corporation for $469,000. On that date the book value of the net assets of Set totaled $500,000. Based on the appraisal done at the time of the purchase, all assets and liabilities had book values equal to their fair values except as follows:
|
Book Value |
Fair Value |
|
|
Inventory |
$100,000 |
$120,000 |
|
Land |
75,000 |
85,000 |
|
Equipment (useful life 4 years) |
125,000 |
165,000 |
The remaining excess of cost over book value was allocated to a patent with a 10-year useful life.
During 20X1 Promo reported net income of $200,000 and Set had net income of $100,000.
5.Refer to Scenario 3-2. What is consolidated net income if Promo recognizes income from Set using the sophisticated equity method?
|
a. |
$42,000 |
|
b. |
$70,000 |
|
c. |
$200,000 |
|
d. |
$270,000 |
ANS:DDIF:MOBJ:3-1 | 3-4 | 3-6
6.Refer to Scenario 3-2. What income from subsidiary did Promo include in its net income if Promo uses the simple equity method?
|
a. |
$33,000 |
|
b. |
$42,000 |
|
c. |
$70,000 |
|
d. |
$100,000 |
ANS: C DIF: D OBJ: 3-1 | 3-6
7.Refer to Scenario 3-2. What income from subsidiary did Promo include in its net income if Promo uses the sophisticated equity method?
|
a. |
$33,000 |
|
b. |
$49,000 |
|
c. |
$70,000 |
|
d. |
$100,000 |
ANS: B DIF: D OBJ: 3-1 | 3-6
8.On January 1, 20X1, Rabb Corp. purchased 80% of Sunny Corp.’s $10 par common stock for $975,000. On this date, the carrying amount of Sunny’s net assets was $1,000,000. The fair values of Sunny’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.
In the January 1, 20X1, consolidated balance sheet, goodwill should be reported at ____.
|
a. |
$0 |
|
b. |
$75,750 |
|
c. |
$95,000 |
|
d. |
$118,750 |
ANS:DDIF:EOBJ:3-2 | 3-3 | 3-4
9.Which of the following statements applying to the use of the equity method versus the cost method is true?
|
a. |
The equity method is required when one firm owns 20% or more of the common stock of another firm. |
|
b. |
If no dividends were paid by the subsidiary, the investment account would have the same balance under both methods. |
|
c. |
The method used has no significance to consolidated statements. |
|
d. |
An advantage of the equity method is that no amortization of excess adjustments needs to be made on the consolidated worksheet. |
ANS: C DIF: E OBJ: 3-2 | 3-3
10.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. |
ANS:DDIF:EOBJ:3-2 | 3-3 | 3-4
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