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O. International Financial Reporting Standards (IFRS)

O. International Financial Reporting Standards (IFRS)

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Module 18: Business Combinations and Consolidations



755



a. If the noncontrolling interest is valued at fair value, the noncontrolling interest is calculated by determining

the market price for equity shares not held by the acquirer. If the market value is not available, other valua­

tion techniques may be used to measure the fair value.

b. The second method for valuing noncontrolling interest is to calculate the fair value of net assets acquired

and multiply that amount times the percentage of shares owned by the noncontrolling interest. Note that

these two methods may result in different amounts of goodwill being recognized by the acquirer.

The calculation of goodwill is

Consideration transferred

+ Noncontrolling interest in acquiree (valued at % of FV or % share of net assets)

+ Fair value of previously held interests in acquiree

– Fair value of net assets acquired

Goodwill







c. If goodwill is negative, a gain from bargain purchase should be recognized in the current period on the in­

come statement.







3. Consolidated financial statements are required for all parent and subsidiaries wherein the parent has control.

Simi­lar to US GAAP, control is presumed if the entity has more than 50% of the voting shares of another entity.

However, under IFRS, a parent may exclude a subsidiary only if three conditions are met: (1) is it wholly or

par­tially owned and its other owners do not object to nonconsolidation; (2) it does not have any debt or equity

in­struments publicly traded; and (3) its parent prepares consolidated financial statements that comply with IFRS.

4. The SEC requires the use of “push-down” accounting as described in M. above whereas IFRS disallows its use.







NOW REVIEW MULTIPLE-CHOICE QUESTIONS 78 THROUGH 79



KEY TERMS

Business. “An integrated set of activities and assets that is capable of being conducted and managed for the pur­pose of

providing a return in the form of dividends, lower costs, or other economic benefits directly to.”

Acquiree. The business that is being acquired.

Acquirer. The entity that obtains control of the acquiree.

Acquisition date. The date on which the acquirer obtains control of the acquiree.

Business combination. A transaction or event in which the acquirer obtains control of one or more businesses.

Control. A controlling financial interest by ownership of a majority of the voting shares of stock. The general rule is

that ownership either directly or indirectly by one company or more than 50% of the outstanding voting shares of another

company constitutes control.

Identifiable asset. Arises from a contractual or legal right, or if it is separable.

Separable. It can be separated or divided from the entity and sold, transferred, licensed, rented, or exchanged.

Goodwill. “An asset representing the future economic benefits that arises from other assets acquired in a business com­

bination that are not individually identified and separately recognized.”

Variable interest entities (VIE). Control is achieved based on contractual, ownership, or other pecuniary interest that

change with changes in the entity’s net asset value.

Primary beneficiary. An entity that has a controlling financial interest in a VIE.

Combined financial statements. The term used to describe financial statements prepared for companies that are

owned by the same parent company or individual.

Contingent consideration. A promise to pay additional cash or to issue additional shares of the equity of the ac­quirer.

Bargain purchase. If the consideration paid by the acquirer plus the fair value of noncontrolling interest is less than

the fair value of the net identifiable assets.



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Multiple-Choice Questions (1–79)

A–C. Accounting for the Combination

1. On April 1, year 1, Dart Co. paid $620,000 for all the

issued and outstanding common stock of Wall Corp. The

recorded assets and liabilities of Wall Corp. on April 1, year 1,

follow:

Cash

Inventory

Property and equipment (net of accumulated

depreciation of $220,000)

Goodwill

Liabilities

Net assets



320,000

100,000

(120,000)

$ 540,000



a.$150,000

b.$120,000

c.$50,000

d.$20,000



2. Which of the following expenses related to the business

acquisition should be included, in total, in the determination

of net income of the combined corporation for the period in

which the expenses are incurred?



a.

b.

c.

d.



Fees of finders

and consultants

Yes

Yes

No

No



Registration fees for

equity securities issued

Yes

No

Yes

No



3. On August 31, year 1, Wood Corp. issued 100,000

shares of its $20 par value common stock for the net assets

of Pine, Inc., in a business combination accounted for by the

acquisition method. The market value of Wood’s common

stock on August 31 was $36 per share. Wood paid a fee of

$160,000 to the consultant who arranged this acquisition.

Costs of registering and issuing the equity securities amounted

to $80,000. No goodwill was involved in the acquisition. What

amount should Wood capital­ize as the cost of acquiring Pine’s

net assets?











a.$3,600,000

b.$3,680,000

c.$3,760,000

d.$3,840,000



Items 4 and 5 are based on the following:

On December 31, year 1, Saxe Corporation was acquired

by Poe Corporation. In the business combination, Poe issued

200,000 shares of its $10 par common stock, with a market

price of $18 a share, for all of Saxe’s common stock. The



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Common stock

Additional paid-in

capital

Retained earnings



$ 60,000

180,000



On April 1, year 1, Wall’s inventory had a fair value of

$150,000, and the property and equipment (net) had a fair

value of $380,000. What is the amount of goodwill resulting

from the business combination?











stockholders’ equity section of each company’s balance sheet

immediately before the combination was

Poe

$3,000,000



Saxe

$1,500,000



1,300,000

2,500,000

$6,800,000



150,000

850,000

$2,500,000



4. In the December 31, year 1 consolidated balance sheet,

additional paid-in capital should be reported at











a.$950,000

b.$1,300,000

c.$1,450,000

d.$2,900,000



5. In the December 31, year 1 consolidated balance sheet,

common stock should be reported at











a.$3,000,000

b.$3,500,000

c.$4,000,000

d.$5,000,000



6. On December 31, year 1, Neal Co. issued 100,000 shares

of its $10 par value common stock in exchange for all of Frey

Inc.’s outstanding stock. The fair value of Neal’s common

stock on December 31, year 1, was $19 per share. The carrying

amounts and fair values of Frey’s assets and liabilities on

December 31, year 1, were as follows:

Cash

Receivables

Inventory

Property, plant, and

equipment

Liabilities

Net assets



Carrying amount

$ 240,000

270,000

435,000



Fair value

$ 240,000

270,000

405,000



1,305,000

(525,000)

$1,725,000



1,440,000

(525,000)

$1,830,000



What is the amount of goodwill resulting from the business

com­bination?











a.$175,000

b.$105,000

c.$70,000

d.$0



7. Consolidated financial statements are typically prepared

when one company has a controlling financial interest in

another unless











a. The subsidiary is a finance company.

b. The fiscal year-ends of the two companies are more

than three months apart.

c. The investee is in bankruptcy.

d. The two companies are in unrelated industries, such as

manufacturing and real estate.



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Module 18: Business Combinations and Consolidations



8. On January 1, year 1, Lake Corporation acquired 100%

of the outstanding common stock of Shore Corporation for

$800,000. On the date of acquisition, the fair value of Shore’s

net identifiable assets is $820,000. The book value of Shore

Corpo­ration’s net assets is $760,000. In Lake’s year 1 financial

state­ments, Lake should recognize











a. Goodwill on the balance sheet.

b. A gain from bargain purchase.

c. A reduction in certain noncurrent assets on the

balance sheet.

d. An extraordinary gain.



9. A business combination is accounted for appropriately

as an acquisition. Which of the following should be deducted

in de­termining the combined corporation’s net income for the

current period?

Direct costs

of acquisition



a.

b.

c.

d.



Yes

Yes

No

No



General expenses

related to acquisition



No

Yes

Yes

No



10. Which of the following situations would require the use of

the acquisition method in a business combination?











a.

b.

c.

d.



The acquisition of a group of assets.

The formation of a joint venture.

The purchase of more than 50% of a business.

All of the above would require the use of the acquisi­

tion method.



11. ASC Topic 805 (SFAS 141[R]) sets forth certain steps in

accounting for an acquisition. Which of the following is not

one of those steps?











a. Prepare pro forma financial statements prior to

acquisi­tion.

b. Determine the acquisition date.

c. Identify the acquirer.

d. Expense the costs and general expenses of the acquisi­

tion in the period of acquisition.



12. Kennedy Company is acquiring Ross Company in an

acquisi­tion. What date should be used as the acquisition date

for the transaction?











a. The date Kennedy signs the contract to purchase the

business.

b. The date Kennedy obtains control of Ross.

c. The date that all contingencies related to the transac­

tion are resolved.

d. The date Kennedy purchased more than 20% of the

stock of Ross.



13. Lebow Corp. acquired control of Wilson Corp. by

purchas­ing stock in steps. Which of the following regarding

this type of acquisition is true?





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a. The cost of acquisition equals the amount paid for the

previously held shares plus the fair value of shares is­

sued at the date of acquisition.







757



b. The previously held shares should be remeasured at

fair value on the acquisition date, and any gain on pre­

viously held shares should be included in other com­

prehensive income for the period.

c. The previously held shares should be remeasured at

fair value on the acquisition date and the gain recog­

nized in earnings of the period.

d. The acquisition cost includes only the newly

issued shares measured at fair value on the date of

acquisition.









14. In accounting for a business combination, which of the

fol­lowing intangibles should not be recognized as an asset

apart from goodwill?











a.Trademarks.

b. Lease agreements.

c. Employee quality.

d.Patents.



15. With respect to the allocation of the cost of a business ac­

quisition, ASC Topic 805 (SFAS 141[R]) requires





a. Cost to be allocated to the assets based on their carry­

ing values.

b. Cost to be allocated based on relative fair values.

c. Cost to be allocated based on original costs.

d. None of the above.











D. and E.  Date of Combination Consolidated

Balance Sheet—Acquisition Accounting

Items 16 through 20 are based on the following:

On January 1, year 1, Polk Corp. and Strass Corp. had con­

densed balance sheets as follows:



Current assets

Noncurrent assets

Total assets

Current liabilities

Long-term debt

Stockholders’ equity

Total liabilities and

stockholders’ equity



Polk

$ 70,000

90,000

$160,000

$ 30,000

50,000

80,000



Strass

$20,000

40,000

$60,000

$10,000

-50,000



$160,000



$60,000



On January 2, year 1, Polk borrowed $60,000 and used the

proceeds to purchase 90% of the outstanding common shares

of Strass. This debt is payable in ten equal annual principal

pay­ments, plus interest, beginning December 30, year 1.

The excess cost of the investment over Strass’ book value of

acquired net assets should be allocated 60% to inventory and

40% to goodwill. On January 1, year 1, the fair value of Polk

shares held by non­controlling parties was $10,000.

On Polk’s January 2, year 1 consolidated balance sheet,

16. Current assets should be











a.$90,000

b.$99,000

c.$100,000

d.$102,000



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17. Noncurrent assets should be











a.$130,000

b.$136,000

c.$138,000

d.$140,000



24. Company J acquired all of the outstanding common stock

of Company K in exchange for cash. The acquisition price

exceeds the fair value of net assets acquired. How should

Company J determine the amounts to be reported for the plant

and equip­ment and long-term debt acquired from Company K?

Plant and equipment



18. Current liabilities should be











a.$50,000

b.$46,000

c.$40,000

d.$30,000



19. Noncurrent liabilities should be











a.$115,000

b.$109,000

c.$104,000

d.$55,000



20. Stockholders’ equity including noncontrolling interests

should be











a.$80,000

b.$85,000

c.$90,000

d.$130,000



21. On November 30, year 1, Parlor, Inc. purchased for cash

at $15 per share all 250,000 shares of the outstanding common

stock of Shaw Co. At November 30, year 1, Shaw’s balance

sheet showed a carrying amount of net assets of $3,000,000.

At that date, the fair value of Shaw’s property, plant and

equipment ex­ceeded its carrying amount by $400,000. In its

November 30, year 1 consolidated balance sheet, what amount

should Parlor report as goodwill?











a.$750,000

b.$400,000

c.$350,000

d.$0



22. On April 1, year 1, Parson Corp. purchased 80% of the

out­standing stock of Sloan Corp. for $700,000 cash. Parson

deter­mined that the fair value of the net identifiable assets was

$800,000 on the date of acquisition. The fair value of Sloan’s

stock at date of acquisition was $18 per share. Sloan had a

total of 50,000 shares of stock issued and outstanding prior to

the acquisition. What is the amount of goodwill that should be

re­corded by Parson at date of acquisition?











a.$0

b.$60,000

c.$80,000

d.$120,000



23. A subsidiary, acquired for cash in a business combination,

owned inventories with a market value greater than the book

value as of the date of combination. A consolidated balance

sheet prepared immediately after the acquisition would include

this difference as part of











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a. Deferred credits.

b.Goodwill.

c.Inventories.

d. Retained earnings.



a.

b.

c.

d.



K’s carrying amount

K’s carrying amount

Fair value

Fair value



Long-term debt



K’s carrying amount

Fair value

K’s carrying amount

Fair value



25. In a business combination accounted for as an acquisition

the appraised values of the identifiable assets acquired

exceeded the acquisition price. How should the excess

appraised value be reported?









a. As negative goodwill.

b. As additional paid-in capital.

c. As a reduction of the values assigned to certain assets

and an extraordinary gain for any unallocated portion.

d. As a gain in net income for the period.







F.  Consolidated Financial Statements

Subsequent to Acquisition

26. Wright Corp. has several subsidiaries that are included

in its consolidated financial statements. In its December 31,

year 1 trial balance, Wright had the following intercompany

balances before eliminations:

Debit

Current receivable due from

Main Co.

Noncurrent receivable from

Main Co.

Cash advance to Corn Corp.

Cash advance from King Co.

Intercompany payable to King Co.



Credit



$ 32,000

114,000

6,000

$ 15,000

101,000



In its December 31, year 1 consolidated balance sheet, what

amount should Wright report as intercompany receivables?











a.$152,000

b.$146,000

c.$36,000

d.$0



27. Shep Co. has a receivable from its parent, Pep Co. Should

this receivable be separately reported in Shep’s balance sheet

and in Pep’s consolidated balance sheet?



a.

b.

c.

d.



Shep’s

balance sheet



Pep’s consolidated

balance sheet



Yes

Yes

No

No



No

Yes

No

Yes



Items 28 through 30 are based on the following:

Selected information from the separate and consolidated

balance sheets and income statements of Pard, Inc. and its



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Module 18: Business Combinations and Consolidations



sub­sidiary, Spin Co., as of December 31, year 1, and for the

year then ended is as follows:

Pard

Spin Consolidated

Balance sheet accounts

Accounts receivable

$ 26,000 $ 19,000

$ 39,000

Inventory

30,000

25,000

52,000

Investment in Spin

67,000

--Goodwill

--30,000

Noncontrolling interest

--10,000

Stockholders’ equity

154,000

50,000

154,000

Income statement accounts

Revenues

$200,000 $140,000

$308,000

Cost of goods sold

150,000 110,000

231,000

Gross profit

50,000

30,000

77,000

Equity in earnings of

Spin

20,000

--Net income

36,000

20,000

40,000



Additional information









• During year 1, Pard sold goods to Spin at the same

markup on cost that Pard uses for all sales. At Decem­

ber 31, year 1, Spin had not paid for all of these goods

and still held 37.5% of them in inventory.

• Pard acquired its interest in Spin on January 2, year 1.



28. What was the amount of intercompany sales from Pard to

Spin during year 1?











a.$3,000

b.$6,000

c.$29,000

d.$32,000



29. At December 31, year 1, what was the amount of Spin’s

payable to Pard for intercompany sales?











a.$3,000

b.$6,000

c.$29,000

d.$32,000



30. In Pard’s consolidated balance sheet, what was the

carrying amount of the inventory that Spin purchased from

Pard?











a.$3,000

b.$6,000

c.$9,000

d.$12,000



31. On January 1, year 1, Palm, Inc. purchased 80% of

the stock of Stone Corp. for $4,000,000 cash. Prior to the

acquisition, Stone had 100,000 shares of stock outstanding.

On the date of acquisition, Stone’s stock had a fair value of

$52 per share. Dur­ing the year Stone reported $280,000 in net

income and paid dividends of $50,000. What is the balance in

the noncontrolling interest account on Palm’s balance sheet on

December 31, year 1?











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a.$1,000,000

b.$1,040,000

c.$1,086,000

d.$1,096,000



759



32. On January 1, year 1, Owen Corp. purchased all of Sharp

Corp.’s common stock for $1,200,000. On that date, the fair

values of Sharp’s assets and liabilities equaled their carrying

amounts of $1,320,000 and $320,000, respectively. During

year 1, Sharp paid cash dividends of $20,000.

Selected information from the separate balance sheets and

income statements of Owen and Sharp as of December 31,

year 1, and for the year then ended follows:

Balance sheet accounts

Investment in subsidiary

Retained earnings

Total stockholders’ equity

Income statement accounts

Operating income

Equity in earnings of Sharp

Net income



Owen



Sharp



$1,320,000

1,240,000

2,620,000



-560,000

1,120,000



420,000

140,000

400,000



200,000

-140,000



In Owen’s December 31, year 1 consolidated balance

sheet, what amount should be reported as total retained

earnings?











a.$1,240,000

b.$1,360,000

c.$1,380,000

d.$1,800,000



33. When a parent-subsidiary relationship exists, consolidated

financial statements are prepared in recognition of the account­

ing concept of











a.Reliability.

b.Materiality.

c. Legal entity.

d. Economic entity.



34. A subsidiary was acquired for cash in a business combina­

tion on January 1, year 1. The consideration given exceeded

the fair value of identifiable net assets. The acquired company

owned equipment with a market value in excess of the carrying

amount as of the date of combination. A consolidated balance

sheet prepared on December 31, year 1, would











a. Report the unamortized portion of the excess of the

mar­ket value over the carrying amount of the equip­

ment as part of goodwill.

b. Report the unamortized portion of the excess of the

mar­ket value over the carrying amount of the equip­

ment as part of plant and equipment.

c. Report the excess of the market value over the

carrying amount of the equipment as part of plant and

equip­ment.

d. Not report the excess of the market value over the

carry­ing amount of the equipment because it would be

expensed in the year of the acquisition.



35. Pride, Inc. owns 80% of Simba, Inc.’s outstanding

common stock. Simba, in turn, owns 10% of Pride’s

outstanding common stock. What percentage of the common

stock cash dividends declared by the individual companies

should be reported as divi­dends declared in the consolidated

financial statements?



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760



a.

b.

c.

d.



Dividends

declared by

Pride



Dividends

declared by

Simba



90%

90%

100%

100%



0%

20%

0%

20%



36. It is generally presumed that an entity is a variable interest

entity subject to consolidation if its equity is











a.

b.

c.

d.



Less than 50% of total assets.

Less than 25% of total assets.

Less than 10% of total assets.

Less than 10% of total liabilities.



37. Morton Inc., Gilman Co., and Willis Corporation estab­

lished a special-purpose entity (SPE) (variable interest entity)

to perform leasing activities for the three corporations.

If at the time of formation the SPE is determined to be a

variable interest entity subject to consolidation, which of the

corporations should consolidate the SPE?











a. The corporation with the largest interest in the entity.

b. The corporation that is the primary beneficiary.

c. The corporation that has the most voting equity

interest.

d. Each corporation should consolidate one-third of the

SPE.



38. The determination of whether an interest holder must con­

solidate a variable interest entity is made











a. By reassessing on an ongoing basis.

b. When the interest holder initially gets involved with

the variable interest entity.

c. Every time the cash flows of the variable interest

entity change.

d. Interests in variable interest entities are never

consolidated.



39. Matt Co. included a foreign subsidiary in its year 5

consoli­dated financial statements. The subsidiary was acquired

in year 1 and was excluded from previous consolidations. The

change was caused by the elimination of foreign exchange

controls. Includ­ing the subsidiary in the year 5 consolidated

financial statements results in an accounting change that

should be reported











a. By footnote disclosure only.

b. Currently and prospectively.

c. Currently with footnote disclosure of pro forma

effects of retroactive application.

d. By restating the financial statements of all prior

periods presented.



40. On June 30, year 1, Purl Corp. issued 150,000 shares

of its $20 par common stock for which it received all of

Scott Corp.’s common stock. The fair value of the common

stock issued is equal to the book value of Scott Corp.’s net

assets. Both corpora­tions continued to operate as separate

businesses, maintaining accounting records with years ending

December 31. Net income from separate company operations

and dividends paid were



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Net income

Six months ended

6/30/Y1

Six months ended

12/31/Y1

Dividends paid

March 25, year 1

November 15, year 1



Purl



Scott



$750,000



$225,000



825,000



375,000



950,000

--



-300,000



On December 31, year 1, Scott held in its inventory

merchandise acquired from Purl on December 1, year 1, for

$150,000, which included a $45,000 markup. In the year 1

consolidated income statement, net income should be reported at











a.$1,650,000

b.$1,905,000

c.$1,950,000

d.$2,130,000



41. On January 1, year 2, Pane Corp. exchanged 150,000

shares of its $20 par value common stock for all of Sky

Corp.’s common stock. At that date, the fair value of Pane’s

common stock issued was equal to the book value of Sky’s

net assets. Both corpora­tions continued to operate as separate

businesses, maintaining accounting records with years ending

December 31. Pane uses the equity method to account for

its investment in Sky. Infor­mation from separate company

operations follows:

Retained earnings—12/31/Y1

Net income—six months

ended 6/30/Y2

Dividends paid—3/25/Y2



Pane

$3,200,000



Sky

$925,000



800,000

750,000



275,000

--



What amount of retained earnings would Pane report in its

June 30, year 2 consolidated balance sheet?











a.$5,200,000

b.$4,450,000

c.$3,525,000

d.$3,250,000



G. and H.  Intercompany Transactions

and Profit Confirmation and Subsequent

Consolidated Financial Statements

Items 42 and 43 are based on the following:

Scroll, Inc., a wholly owned subsidiary of Pirn, Inc., began

operations on January 1, year 1. The following information

is from the condensed year 1 income statements of Pirn and

Scroll:

Sales to Scroll

Sales to others

Cost of goods sold:

Acquired from Pirn

Acquired from others



Pirn

$100,000

400,000

500,000



Scroll

$

-300,000

300,000



-350,000



80,000

190,000



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Module 18: Business Combinations and Consolidations

Gross profit

Depreciation

Other expenses

Income from operations

Gain on sale of equipment

to Scroll

Income before income taxes



150,000

40,000

60,000

50,000



30,000

10,000

15,000

5,000



12,000

$ 62,000



-$ 5,000



Additional information







• Sales by Pirn to Scroll are made on the same terms as

those made to third parties.

• Equipment purchased by Scroll from Pirn for $36,000

on January 1, year 1, is depreciated using the straightline method over four years.



What amount should Parker report as cost of sales in its

year 1 consolidated income statement?











a.$30,000

b.$20,000

c.$10,000

d.$6,000



43. What amount should be reported as depreciation expense

in Pirn’s year 1 consolidated income statement?











a.$50,000

b.$47,000

c.$44,000

d.$41,000



44. Clark Co. had the following transactions with affiliated

par­ties during year 1:









• Sales of $60,000 to Dean, Inc., with $20,000 gross profit.

Dean had $15,000 of this inventory on hand at year-end.

Clark owns a 15% interest in Dean and does not exert

significant influence.

• Purchases of raw materials totaling $240,000 from Kent

Corp., a wholly owned subsidiary. Kent’s gross profit on

the sale was $48,000. Clark had $60,000 of this inven­tory

remaining on December 31, year 1.



Before eliminating entries, Clark had consolidated current assets

of $320,000. What amount should Clark report in its Decem­

ber 31, year 1 consolidated balance sheet for current assets?











a.$320,000

b.$317,000

c.$308,000

d.$303,000



45. Parker Corp. owns 80% of Smith Inc.’s common stock.

During year 1, Parker sold Smith $250,000 of inventory on

the same terms as sales made to third parties. Smith sold all of

the inventory purchased from Parker in year 1. The following

infor­mation pertains to Smith and Parker’s sales for year 1:

Sales

Cost of sales



Parker

$1,000,000

400,000

$ 600,000



Smith

$700,000

350,000

$350,000



a.$750,000

b.$680,000

c.$500,000

d.$430,000



46. Selected information from the separate and consolidated

balance sheets and income statements of Pare, Inc. and its sub­

sidiary, Shel Co., as of December 31, year 1, and for the year

then ended is as follows:

Pare

Shel

Consolidated

Balance sheet accounts

Accounts receivable $ 52,000 $ 38,000

$ 78,000

Inventory

60,000

50,000

104,000

Income statement accounts

Revenues

$400,000 $280,000

$616,000

Cost of goods sold

300,000

220,000

462,000

Gross profit

$100,000 $ 60,000

$154,000



42. In Pirn’s December 31, year 1, consolidating worksheet,

how much intercompany profit should be eliminated from

Scroll’s inventory?











761



Additional information

During year 1, Pare sold goods to Shel at the same markup

on cost that Pare uses for all sales.

In Pare’s consolidating worksheet, what amount of unreal­

ized intercompany profit was eliminated?











a.$6,000

b.$12,000

c.$58,000

d.$64,000



47. During year 1, Pard Corp. sold goods to its 80%-owned

subsidiary, Seed Corp. At December 31, year 1, one-half

of these goods were included in Seed’s ending inventory.

Reported year 1 selling expenses were $1,100,000 and

$400,000 for Pard and Seed, respectively. Pard’s selling

expenses included $50,000 in freight-out costs for goods sold

to Seed. What amount of selling expenses should be reported

in Pard’s year 1 consolidated in­come statement?











a.$1,500,000

b.$1,480,000

c.$1,475,000

d.$1,450,000



48. On January 1, year 1, Poe Corp. sold a machine for

$900,000 to Saxe Corp., its wholly owned subsidiary. Poe

paid $1,100,000 for this machine, which had accumulated

deprecia­tion of $250,000. Poe estimated a $100,000 salvage

value and depreciated the machine on the straight-line method

over twenty years, a policy which Saxe continued. In Poe’s

December 31, year 1 consolidated balance sheet, this machine

should be included in cost and accumulated depreciation as

Cost



a.

b.

c.

d.



$1,100,000

$1,100,000

$900,000

$850,000



Accumulated depreciation



$300,000

$290,000

$40,000

$42,500



49. Wagner, a holder of a $1,000,000 Palmer, Inc. bonds, col­

lected the interest due on March 31, year 1, and then sold the



c15.indd 761



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762



bonds to Seal, Inc. for $975,000. On that date, Palmer, a 75%

owner of Seal, had a $1,075,000 carrying amount for the bonds.

What was the effect of Seal’s purchase of Palmer’s bond on the

retained earnings and noncontrolling interest amounts reported

in Palmer’s March 31, year 1 consolidated balance sheet?

Retained earnings



a.

b.

c.

d.



Noncontrolling interest



$100,000 increase

$75,000 increase

$0

$0



$0

$25,000 increase

$25,000 increase

$100,000 increase



50. Sun, Inc. is a wholly owned subsidiary of Patton, Inc. On

June 1, year 1, Patton declared and paid a $1 per share cash

divi­dend to stockholders of record on May 15, year 1. On

May 1, year 1, Sun bought 10,000 shares of Patton’s common

stock for $700,000 on the open market, when the book value

per share was $30. What amount of gain should Patton report

from this trans­action in its consolidated income statement for

the year ended December 31, year 1?











a.$0

b.$390,000

c.$400,000

d.$410,000



51. Perez, Inc. owns 80% of Senior, Inc. During year 1, Perez

sold goods with a 40% gross profit to Senior. Senior sold all of

these goods in year 1. For year 1 consolidated financial state­

ments, how should the summation of Perez and Senior income

statement items be adjusted?











a. Sales and cost of goods sold should be reduced by the

in­tercompany sales.

b. Sales and cost of goods sold should be reduced by

80% of the intercompany sales.

c. Net income should be reduced by 80% of the gross

profit on intercompany sales.

d. No adjustment is necessary.



52. Winston Co. owns 80% of the outstanding common

stock of Foster Co. On December 31, year 2, Winston sold

equipment to Foster at a price in excess of Winston’s carrying

amount, but less than its original cost. On a consolidated

balance sheet at De­cember 31, year 2, the carrying amount of

the equipment should be reported at











c15.indd 762



a.

b.

c.

d.



Foster’s original cost.

Winston’s original cost.

Foster’s original cost less Winston’s recorded gain.

Foster’s original cost less 80% of Winston’s recorded

gain.









c. 50% of the gain on sale.

d. 100% of the gain on sale.



54. P Co. purchased term bonds at a premium on the open

market. These bonds represented 20% of the outstanding class

of bonds issued at a discount by S Co., P’s wholly owned

subsidiary. P intends to hold the bonds until maturity. In a

consolidated balance sheet, the difference between the bond

carrying amounts in the two companies would











a. Decrease retained earnings.

b. Increase retained earnings.

c. Be reported as a deferred debit to be amortized over

the remaining life of the bonds.

d. Be reported as a deferred credit to be amortized over

the remaining life of the bonds.



I.  Noncontrolling Interest

55. Planet Company acquired a 70% interest in the Star

Com­pany in year 1. For the year ended December 31, year 2,

Star reported net income of $80,000. During year 2, Planet

sold mer­chandise to Star for $10,000 at a profit of $2,000.

The merchan­dise remained in Star’s inventory at the end of

year 2. For con­solidation purposes what is the noncontrolling

interest’s share of Star’s net income for year 2?











a.$23,400

b.$24,000

c.$24,600

d.$26,000



Items 56 and 57 are based on the following:

On January 1, year 1, 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) with fair val­ues of $100,000 in excess of their carrying

amount. The fair value of the noncontrolling interest in Shaw

on January 1, year 1, was $250,000. For the year ended

December 31, year 1, Shaw had net income of $190,000 and

paid cash dividends totaling $125,000.

56. In the January 1, year 1 consolidated balance sheet, good­

will should be reported at











a.$0

b.$75,000

c.$95,000

d.$125,000



53. Port, Inc. owns 100% of Salem, Inc. On January 1, year 6,

Port sold Salem delivery equipment at a gain. Port had owned

the equipment for two years and used a five-year straightline depreciation rate with no residual value. Salem is using

a three-year straight-line depreciation rate with no residual

value for the equipment. In the consolidated income statement,

Salem’s re­corded depreciation expense on the equipment for

year 6 will be decreased by



57. In the December 31, year 1 consolidated balance sheet,

noncontrolling interest should be reported at









On January 2, year 1, Pare Co. purchased 75% of Kidd

Co.’s outstanding common stock. On that date, the fair value of



a. 20% of the gain on sale.

b. 33 1/3% of the gain on sale.













a.$200,000

b.$213,000

c.$233,000

d.$263,000



Items 58 through 60 are based on the following:



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Module 18: Business Combinations and Consolidations



the 25% noncontrolling interest was $35,000. During year 1,

Kidd had net income of $20,000. Selected balance sheet data

at De­cember 31, year 1, is as follows:

Total assets

Liabilities

Common stock

Retained earnings



Pare

$420,000

$120,000

100,000

200,000

$420,000



Kidd

$180,000

$ 60,000

50,000

70,000

$180,000



During year 1 Pare and Kidd paid cash dividends of $25,000

and $5,000, respectively, to their shareholders. There were no

other intercompany transactions.

58. In its December 31, year 1 consolidated statement of re­tained

earnings, what amount should Pare report as dividends paid?











a.$5,000

b.$25,000

c.$26,250

d.$30,000



59. In Pare’s December 31, year 1 consolidated balance sheet,

what amount should be reported as noncontrolling interest in

net assets?











a.$30,000

b.$35,000

c.$38,750

d.$40,000



60. In its December 31, year 1 consolidated balance sheet,

what amount should Pare report as common stock?











a.$50,000

b.$100,000

c.$137,500

d.$150,000



61. In a business acquisition, consideration transferred

includes which of the following?

I.The fair value of assets transferred by the acquirer.

II.The fair value of the liabilities incurred by the acquirer.

III.The fair value of contingent consideration transferred by the

acquirer.

IV.The fair value of the equity interests issued by the acquirer as

a part of the acquisition.

V.The fair value of share-based payments voluntarily ex­changed

for outstanding share-based payment awards of the acquiree.













a.

b.

c.

d.



I and II.

I, II, and IV.

I, II, IV, and V.

I, II, III, and IV.



62. On June 30, year 1, Wyler Corporation acquires Boston

Corporation in a transaction properly accounted for as a business

acquisition. At the time of the acquisition, some of the infor­

mation for valuing assets was incomplete. How should Corpora­

tion Wyler, account for the incomplete information in preparing

its financial statements immediately after the acquisition?







c15.indd 763



a. Do not record the uncertain items until complete

infor­mation is available.

b. Record a contra account to the investment account for

the amounts involved.









763



c. Record the uncertain items at the book value of the

acquiree.

d. Record the uncertain items at a provisional amount

measured at the date of acquisition.



63. When does the measurement period end for a business

com­bination in which there was incomplete accounting infor­

mation on the date of acquisition?











a. When the acquirer receives the information or one year

from the acquisition date, whichever occurs earlier.

b. On the final date when all contingencies are resolved.

c. Thirty days from the date of acquisition.

d. At the end of the reporting period in the year of

acquisi­tion.



64. Ross Corporation recorded a provisional amount for

an identifiable asset at the date of its acquisition of Layton

Inc. be­cause the asset’s fair value was uncertain. Before the

measure­ment period ends, Ross obtains new information

that indicates that the asset was overvalued by $20,000. How

should Ross re­port the effects of this new information?











a. As an expense in the current period income statement.

b. As an extraordinary loss on the current period income

statement.

c. As a reduction in recorded goodwill.

d. As a gain from bargain purchase.



65. Able Corp. acquires Bailey Company in a transaction

that is properly accounted for as a business acquisition. The

acquisition contract and Bailey’s share-based compensation

agreement re­quire Able stock to be exchanged for Bailey

common stock issued to Bailey’s employees as share-based

payments. No further ser­vice is required by the employees of

Bailey to qualify for the re­placement awards. How should Able

account for the shares of stock issued as replacement awards to

employees of Bailey?











a.

b.

c.

d.



As a cost of acquisition.

As an expense in the current period.

As a loss in the current period.

As an extraordinary loss in the period.



66. On January 1, year 1, Post Inc. acquires Sam Company

in a transaction properly accounted for as a business

combination. Sam’s employees have share-based payments

that will expire as a consequence of the business combination.

In order to maintain employee morale, Post voluntarily

replaces the awards to em­ployees 30 days after the date of

acquisition. How should Post account for the replacement

awards given to Sam’s employees?











a. Post should include the fair value of the awards as

con­sideration paid in the cost of acquisition.

b. Post should recognize compensation expense for the

value of the awards in the postcombination financial

statements.

c. Post should recognize an extraordinary loss for the

fair value of the replacement awards in its financial

state­ments.

d. Post should capitalize the cost of the awards and

amor­tize the cost over the remaining service years of

the employees.



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Module 18: Business Combinations and Consolidations



764



67. When should an acquirer derecognize a contingent

liability recognized as the result of an acquisition?



At December 31, year 1, the inventory reported on the

combined balance sheet of the two subsidiaries should be

























a. When it becomes more likely than not that the firm

will not be liable.

b. When the contingency is resolved.

c. At the end of the year of acquisition.

d. When it is reasonably possible that the liability will

not require payment.



J.  Additional Issues Regarding Business

Combinations

68. On September 1, year 1, Phillips, Inc. issued common

stock in exchange for 20% of Sago, Inc.’s outstanding common

stock. On July 1, year 2, Phillips issued common stock for an

additional 75% of Sago’s outstanding common stock. Sago

continues in existence as Phillips’ subsidiary. How much of

Sago’s year 2 net income should be reported as attributable to

Phillips?











a. 20% of Sago’s net income to June 30 and all of Sago’s

net income from July 1 to December 31.

b. 20% of Sago’s net income to June 30 and 95% of

Sago’s net income from July 1 to December 31.

c. 95% of Sago’s net income.

d. All of Sago’s net income.



L.  Combined Financial Statements

69. Mr. & Mrs. Dart own a majority of the outstanding capital

stock of Wall Corp., Black Co., and West, Inc. During year

1, Wall advanced cash to Black and West in the amount of

$50,000 and $80,000, respectively. West advanced $70,000 in

cash to Black. At December 31, year 1, none of the advances

was repaid. In the combined December 31, year 1 balance

sheet of these companies, what amount would be reported as

receivables from affiliates?











a.$200,000

b.$130,000

c.$60,000

d.$0



70. Selected data for two subsidiaries of Dunn Corp. taken from

December 31, year 1 preclosing trial balances are as follows:



Shipments to Banks

Shipments from Lamm

Intercompany inventory

profit on total shipments



Banks Co.

debit

$

-200,000

--



Lamm Co.

credit

$150,000

-50,000



Additional data relating to the December 31, year 1 inventory

are as follows:

Inventory acquired from

outside parties

Inventory acquired from

Lamm



c15.indd 764



$175,000



$250,000



60,000



--



a.$425,000

b.$435,000

c.$470,000

d.$485,000



71. Ahm Corp. owns 90% of Bee Corp.’s common stock

and 80% of Cee Corp.’s common stock. The remaining

common shares of Bee and Cee are owned by their respective

employees. Bee sells exclusively to Cee, Cee buys exclusively

from Bee, and Cee sells exclusively to unrelated companies.

Selected year 1 information for Bee and Cee follows:



Sales

Cost of sales

Beginning inventory

Ending inventory



Bee Corp.

$130,000

100,000

None

None



Cee Corp.

$91,000

65,000

None

65,000



What amount should be reported as gross profit in Bee

and Cee’s combined income statement for the year ended

December 31, year 1?











a.$26,000

b.$41,000

c.$47,800

d.$56,000



72. The following information pertains to shipments of

merchan­dise from Home Office to Branch during year 1:

Home Office’s cost of merchandise

Intracompany billing

Sales by Branch

Unsold merchandise at Branch on

December 31, year 1



$160,000

200,000

250,000

20,000



In the combined income statement of Home Office and Branch

for the year ended December 31, year 1, what amount of the

above transactions should be included in sales?











a.$250,000

b.$230,000

c.$200,000

d.$180,000



73. Mr. and Mrs. Gasson own 100% of the common stock

of Able Corp. and 90% of the common stock of Baker Corp.

Able previously paid $4,000 for the remaining 10% interest in

Baker. The condensed December 31, year 1 balance sheets of

Able and Baker are as follows:

Assets

Liabilities

Common stock

Retained earnings



Able

$600,000

$200,000

100,000

300,000

$600,000



Baker

$60,000

$30,000

20,000

10,000

$60,000



In a combined balance sheet of the two corporations at Decem­

ber 31, year 1, what amount should be reported as total stock­

holders’ equity?



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Module 18: Business Combinations and Consolidations

77. Which of the following items should be treated in the

same manner in both combined financial statements and

consolidated statements?



a.$430,000

b.$426,000

c.$403,000

d.$400,000



74. Mr. Cord owns four corporations. Combined financial

statements are being prepared for these corporations, which

have intercompany loans of $200,000 and intercompany profits

of $500,000. What amount of these intercompany loans and

profits should be included in the combined financial statements?



a.

b.

c.

d.



Intercompany

Loans

Profits

$200,000

$0

$200,000

$500,000

$0

$0

$0

$500,000



Companies under

common management



Commonly

controlled companies



Yes

No

No

Yes



76. Which of the following items should be treated in the

same manner in both combined financial statements and

consolidated statements?

a.

b.

c.

d.



c15.indd 765



No

No

Yes

Yes



Foreign

operations

No

Yes

Yes

No



78. Under IFRS the asset goodwill may be recognized



No

Yes

No

Yes



Income taxes



a.

b.

c.

d.



Different fiscal

periods

No

No

Yes

Yes



O.  International Financial Reporting

Standards (IFRS)



75. Combined statements may be used to present the results

of operations of



a.

b.

c.

d.



765



Noncontrolling interest



No

Yes

Yes

No













a. When it is acquired by purchase.

b. When it is internally generated or acquired by pur­

chase.

c. When it is clear that it exists and has value.

d. When it has future economic benefits.



79. Under IFRS a parent may exclude a subsidiary from

consoli­dation only if all of the following conditions exist,

except











a. It is wholly or partially owned and its owners do not

ob­ject to nonconsolidation.

b. It does not have any debt or equity instruments pub­

licly traded.

c. It has one class of stock.

d. Its parent prepares consolidated financial statements

that comply with IFRS.



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