Test Bank For Advanced Accounting 10th Edition By Fischer

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.	$80,000                  $570,000
b.	$70,000                  $570,000
c.	$70,000                  $550,000
d.	$80,000                  $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                   $555,000
b.	$55,000                   $545,000
c.	$75,000                   $565,000
d.	$80,000                   $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                   $500,000
b.	$10,000                   $570,000
c.	$0                   $570,000
d.	$80,000                   $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