ACC 401 Week 6 Quiz - Strayer
Click on the Link Below to
Purchase A+ Graded Course Material
Quiz 5 Chapter 5
Allocation and
Depreciation of Differences Between Implied and Book Value
Multiple Choice
1. When the implied value exceeds the
aggregate fair values of identifiable net assets, the residual difference is
accounted for as
a. excess of implied over fair value.
b. a deferred credit.
c. difference between implied and fair value.
d. goodwill.
2. Long-term debt and other obligations of
an acquired company should be valued for consolidation purposes at their
a. book value.
b. carrying value.
c. fair value.
d. face value.
3. On January 1, 2010, Lester Company
purchased 70% of Stork Corporation's $5 par common stock for $600,000. The book
value of Stork net assets was $640,000 at that time. The fair value of Stork's
identifiable net assets were the same as their book value except for equipment
that was $40,000 in excess of the book value. In the January 1, 2010,
consolidated balance sheet, goodwill would be reported at
a. $152,000.
b. $177,143.
c. $80,000.
d. $0.
4. When the value implied by the purchase
price of a subsidiary is in excess of the fair value of identifiable net
assets, the workpaper entry to allocate the difference between implied and book
value includes a
1. debit to Difference Between Implied and Book
Value.
2. credit to Excess of Implied over Fair Value.
3. credit to Difference Between Implied and Book
Value.
a. 1
b. 2
c. 3
d. Both 1 and 2
5. If the fair value of the subsidiary's
identifiable net assets exceeds both the book value and the value implied by
the purchase price, the workpaper entry to eliminate the investment account
a. debits Excess of Fair Value over Implied
Value.
b. debits Difference Between Implied and Fair
Value.
c. debits Difference Between Implied and Book
Value.
d. credits Difference Between Implied and Book
Value.
6. The entry to amortize the amount of
difference between implied and book value allocated to an unspecified
intangible is recorded
1. on the subsidiary's books.
2. on the parent's books.
3. on the consolidated statements workpaper.
a. 1
b. 2
c. 3
d. Both 2 and 3
7. The excess of fair value over implied
value must be allocated to reduce proportionally the fair values initially
assigned to
a. current assets.
b. noncurrent assets.
c. both current and noncurrent assets.
d. none of the above.
8. The SEC requires the use of push down
accounting when the ownership change is greater than
a. 50%
b. 80%
c. 90%
d. 95%
9. Under push down accounting, the
workpaper entry to eliminate the investment account includes a
a. debit to Goodwill.
b. debit to Revaluation Capital.
c. credit to Revaluation Capital.
d. debit to Revaluation Assets.
10. In a business combination accounted for
as an acquisition, how should the excess of fair value of identifiable net
assets acquired over implied value be treated?
a. Amortized as a credit to income over a period
not to exceed forty years.
b. Amortized as a charge to expense over a
period not to exceed forty years.
c. Amortized directly to retained earnings over
a period not to exceed forty years.
d. Recognized as an ordinary gain in the year of
acquisition.
11. On November 30, 2010, Pulse Incorporated
purchased for cash of $25 per share all 400,000 shares of the outstanding
common stock of Surge Company. Surge 's balance sheet at November 30, 2010,
showed a book value of $8,000,000. Additionally, the fair value of Surge's
property, plant, and equipment on November 30, 2010, was $1,200,000 in excess
of its book value. What amount, if any, will be shown in the balance sheet
caption "Goodwill" in the November 30, 2010, consolidated balance
sheet of Pulse Incorporated, and its wholly owned subsidiary, Surge Company?
a. $0.
b. $800,000.
c. $1,200,000.
d. $2,000,000.
12. Goodwill represents the excess of the
implied value of an acquired company over the
a. aggregate fair values of identifiable assets
less liabilities assumed.
b. aggregate fair values of tangible assets less
liabilities assumed.
c. aggregate fair values of intangible assets
less liabilities assumed.
d. book value of an acquired company.
13. Scooter Company, a 70%-owned subsidiary
of Pusher Corporation, reported net income of $240,000 and paid dividends
totaling $90,000 during Year 3. Year 3 amortization of differences between
current fair values and carrying amounts of Scooter's identifiable net assets
at the date of the business combination was $45,000. The noncontrolling
interest in net income of Scooter for Year 3 was
a. $58,500.
b. $13,500.
c. $27,000.
d.
$72,000.
14. Porter Company acquired an 80% interest
in Strumble Company on January 1, 2010, for $270,000 cash when Strumble Company
had common stock of $150,000 and retained earnings of $150,000. All excess was
attributable to plant assets with a 10-year life. Strumble Company made $30,000
in 2010 and paid no dividends. Porter Company’s separate income in 2010 was
$375,000. Controlling interest in consolidated net income for 2010 is:
a.
$405,000.
b.
$399,000.
c.
$396,000.
d.
$375,000.
15. In preparing consolidated working papers,
beginning retained earnings of the parent company will be adjusted in years
subsequent to acquisition with an elimination entry whenever:
a.
a
noncontrolling interest exists.
b.
it
does not reflect the equity method.
c.
the
cost method has been used only.
d.
the
complete equity method is in use.
16. Dividends declared by a subsidiary are
eliminated against dividend income recorded by the parent under the
a. partial equity method.
b. equity method.
c. cost method.
d. equity and partial equity methods.
Use the following information to answer
questions 17 through 20.
On January 1, 2010, Pandora Company purchased
75% of the common stock of Saturn Company. Separate balance sheet data for the
companies at the combination date are given below:
Saturn
Co. Saturn Co.
Pandora
Co. Book Values Fair Values
Cash $ 18,000 $155,000 $155,000
Accounts receivable 108,000 20,000 20,000
Inventory 99,000 26,000 45,000
Land 60,000 24,000 45,000
Plant assets 525,000 225,000 300,000
Acc. depreciation (180,000) (45,000)
Investment in Saturn Co. 330,000
Total assets $960,000 $405,000 $565,000
Accounts payable $156,000 $105,000 $105,000
Capital stock 600,000 225,000
Retained earnings 204,000 75,000
Total liabilities &
equities $960,000 $405,000
Determine below
what the consolidated balance would be for each of the requested accounts on
January 2, 2010.
17. What amount of inventory will be
reported?
a.
$125,000
b.
$132,750
c.
$139,250
d.
$144,000
18. What amount of goodwill will be reported?
a.
($20,000)
b.
($25,000)
c.
$25,000
d.
$0
19. What is the amount of consolidated
retained earnings?
a.
$204,000
b.
$209,250
c.
$260,250
d.
$279,000
20. What is the amount of total assets?
a.
$921,000
b.
$1,185,000
c.
$1,525,000
d.
$1,195,000
21. Sensible Company, a 70%-owned subsidiary
of Proper Corporation, reported net income of $600,000 and paid dividends
totaling $225,000 during Year 3. Year 3 amortization of differences between
current fair values and carrying amounts of Sensible's identifiable net assets
at the date of the business combination was $112,500. The noncontrolling
interest in consolidated net income of Sensible for Year 3 was
a. $146,250.
b. $33,750.
c. $67,500.
d. $180,000.
22. Primer Company acquired an 80% interest
in SealCoat Company on January 1, 2010, for $450,000 cash when SealCoat Company
had common stock of $250,000 and retained earnings of $250,000. All excess was
attributable to plant assets with a 10-year life. SealCoat Company made $50,000
in 2010 and paid no dividends. Primer Company’s separate income in 2010 was
$625,000. The controlling interest in consolidated net income for 2010 is:
a. $675,000.
b. $665,000.
c. $660,000.
d. $625,000.
Use the following information to answer
questions 23 through 25.
On January 1, 2010, Poole Company
purchased 75% of the common stock of Swimmer Company. Separate balance sheet
data for the companies at the combination date are given below:
Swimmer
Co. Swimmer Co.
Poole
Co. Book Values Fair Values
Cash $ 24,000 $206,000 $206,000
Accounts receivable 144,000 26,000 26,000
Inventory 132,000 38,000 60,000
Land 78,000 32,000 60,000
Plant assets 700,000 300,000 350,000
Acc. depreciation (240,000) (60,000)
Investment in Swimmer Co. 440,000
Total assets $1,278,000 $542,000 $702,000
Accounts payable $206,000 $142,000 $142,000
Capital stock 800,000 300,000
Retained earnings 272,000 100,000
Total liabilities &
equities $1,278,000 $542,000
Determine below
what the consolidated balance would be for each of the requested accounts on
January 2, 2010.
23. What amount of inventory will be
reported?
a. $170,000.
b. $177,000.
c. $186,500.
d. $192,000.
24. What amount of goodwill will be reported?
a. $26,667.
b. $20,000.
c. $42,000.
d. $86,667.
25. What is the amount of total assets?
a. $1,626,667.
b. $1,566,667
c. $1,980,000.
d. $2,006,667.
Problems
5-1 Phillips Company purchased a 90% interest
in Standards Corporation for $2,340,000 on January 1, 2010. Standards
Corporation had $1,650,000 of common stock and $1,050,000 of retained earnings
on that date.
The following values were determined for
Standards Corporation on the date of purchase:
Book
Value Fair Value
Inventory $240,000 $300,000
Land 2,400,000 2,700,000
Equipment 1,620,000 1,800,000
Required:
A. Prepare a computation and allocation schedule
for the difference between the implied and book value in the consolidated
statements workpaper.
B. Prepare the January 1, 2010, workpaper entries
to eliminate the investment account and allocate the difference between implied
and book value.
5-2 Pullman Corporation acquired a 90%
interest in Sleeper Company for $6,500,000 on January 1 2010. At that time Sleeper
Company had common stock of $4,500,000 and retained earnings of $1,800,000. The
balance sheet information available for Sleeper Company on January 1, 2010,
showed the following:
Book
Value Fair Value
Inventory (FIFO) $1,300,000 $1,500,000
Equipment (net) 1,500,000 1,900,000
Land 3,000,000 3,000,000
The equipment had a remaining useful
life of ten years. Sleeper Company reported $240,000 of net income in 2010 and
declared $60,000 of dividends during the year.
Required:
Prepare the workpaper entries assuming
the cost method is used, to eliminate dividends, eliminate the investment
account, and to allocate and depreciate the difference between implied and book
value for 2010.
5-3 On January 1, 2010, Preston Corporation
acquired an 80% interest in Spiegel Company for $2,400,000. At that time
Spiegel Company had common stock of $1,800,000 and retained earnings of
$800,000. The book values of Spiegel Company's assets and liabilities were
equal to their fair values except for land and bonds payable. The land's fair
value was $120,000 and its book value was $100,000. The outstanding bonds were
issued on January 1, 2005, at 9% and mature on January 1, 2015. The bond
principal is $600,000 and the current yield rate on similar bonds is 8%.
Required:
Prepare the workpaper entries necessary
on December 31, 2010, to allocate, amortize, and depreciate the difference
between implied and book value.
Present Value
Present
value of 1 of Annuity of 1
9%, 5 periods .64993 3.88965
8%, 5 periods .68058 3.99271
5-4 Pennington Corporation purchased 80% of
the voting common stock of Stafford Corporation for $3,200,000 cash on January
1, 2010. On this date the book values and fair values of Stafford Corporation's
assets and liabilities were as follows:
Book
Value Fair Value
Cash $ 70,000
$ 70,000
Receivables 240,000 240,000
Inventories 600,000 700,000
Other Current Assets 340,000 405,000
Land 600,000 720,000
Buildings – net 1,050,000 1,920,000
Equipment – net 850,000 750,000
$3,750,000 $4,805,000
Accounts Payable $
250,000 $250,000
Other Liabilities 740,000 670,000
Capital Stock 2,400,000
Retained Earnings 360,000
$3,750,000
Required:
Prepare a schedule showing how the
difference between Stafford Corporation's implied value and the book value of
the net assets acquired should be allocated.
5-5 Perez Corporation acquired a 75% interest
in Schmidt Company on January 1, 2010, for $2,000,000. The book value and fair
value of the assets and liabilities of Schmidt Company on that date were as
follows:
Book
Value Fair Value
Current Assets $ 600,000 $ 600,000
Property & Equipment (net) 1,400,000 1,800,000
Land 700,000 900,000
Deferred Charge 300,000 300,000
Total Assets $3,000,000 $3,600,000
Less Liabilities 600,000 600,000
Net Assets $2,400,000 $3,000,000
The property and equipment had a
remaining life of 6 years on January 1, 2010, and the deferred charge was being
amortized over a period of 5 years from that date. Common stock was $1,500,000
and retained earnings was $900,000 on January 1, 2010. Perez Company records
its investment in Schmidt Company using the cost method.
Required:
Prepare, in general journal form, the
December 31, 2010, workpaper entries necessary to:
A. Eliminate the investment account.
B. Allocate and amortize the difference between
implied and book value.
5-6 On January 1, 2010, Page Company acquired
an 80% interest in Schell Company for $3,600,000. On that date, Schell Company
had retained earnings of $800,000 and common stock of $2,800,000. The book
values of assets and liabilities were equal to fair values except for the
following:
Book
Value Fair Value
Inventory $ 50,000 $ 85,000
Equipment (net) 540,000 720,000
Land 300,000 660,000
The equipment had an estimated remaining
useful life of 8 years. One-half of the inventory was sold in 2010 and the
remaining half was sold in 2011. Schell Company reported net income of $240,000
in 2010 and $300,000 in 2011. No dividends were declared or paid in either year.
Page Company uses the cost method to record its investment in Schell Company.
Required:
Prepare, in general journal form, the
workpaper eliminating entries necessary in the consolidated statements
workpaper for the year ending December 31, 2011.
5-7 Paddock Company acquired 90% of the stock
of Spector Company for $6,300,000 on January 1, 2010. On this date, the fair
value of the assets and liabilities of Spector Company was equal to their book
value except for the inventory and equipment accounts. The inventory had a fair
value of $2,300,000 and a book value of $1,900,000. The equipment had a fair
value of $3,300,000 and a book value of $2,800,000.
The balances in Spector Company's
capital stock and retained earnings accounts on the date of acquisition were
$3,700,000 and $1,900,000, respectively.
Required:
In general journal form, prepare the
entries on Spector Company's books to record the effect of the pushed down
values implied by the acquisition of its stock by Paddock Company assuming
that:
A values are allocated on the basis of the fair
value of Spector Company as a whole imputed from the transaction.
B values are allocated on the basis of the
proportional interest acquired by Paddock Company.
5-8 Pruitt Corporation acquired all of the
voting stock of Soto Corporation on January 1, 2010, for $210,000 when Soto had
common stock of $150,000 and retained earnings of $24,000. The excess of
implied over book value was allocated $9,000 to inventories that were sold in
2010, $12,000 to equipment with a 4-year remaining useful life under the
straight-line method, and the remainder to goodwill.
Financial statements for Pruitt and Soto
Corporations at the end of the fiscal year ended December 31, 2011 (two years
after acquisition), appear in the first two columns of the partially completed
consolidated statements workpaper. Pruitt Corp. has accounted for its
investment in Soto using the partial equity method of accounting.
Required:
Complete the consolidated statements
workpaper for Pruitt Corporation and Soto Corporation for December 31, 2011.
Pruitt
Corporation and Soto Corporation
Consolidated
Statements Workpaper
at December 31,
2011
|
|
|
|
Eliminations
|
|
|
|
|
Pruitt Corp.
|
Soto Corp.
|
Debit
|
Credit
|
Consolidated
Balances
|
|
INCOME
STATEMENT
Sales
|
618,000
|
180,000
|
|
|
|
|
Equity
from Subsidiary Income
|
36,000
|
|
|
|
|
|
Cost of Sales
|
(450,000)
|
(90,000)
|
|
|
|
|
Other Expenses
|
(114,000)
|
(54,000)
|
|
|
|
|
Net Income to Ret. Earn.
|
90,000
|
36,000
|
|
|
|
|
Pruitt Retained Earnings 1/1
|
72,000
|
|
|
|
|
|
Soto Retained Earnings 1/1
|
|
3,000
|
|
|
|
|
Add: Net Income
|
90,000
|
36,000
|
|
|
|
|
Less: Dividends
|
(60,000)
|
(12,000)
|
|
|
|
|
Retained Earnings 12/31
|
102,000
|
54,000
|
|
|
|
|
BALANCE SHEET
|
|
|
|
|
|
|
Cash
|
42,000
|
21,000
|
|
|
|
|
Inventories
|
63,000
|
45,000
|
|
|
|
|
Land
|
33,000
|
18,000
|
|
|
|
|
Equipment
and Buildings-net
|
192,000
|
165,000
|
|
|
|
|
Investment
in Soto Corp.
|
240,000
|
 |
|
|
|
|
Total Assets
|
570,000
|
249,000
|
|
|
|
|
LIA & EQUITIES Liabilities
|
168,000
|
45,000
|
|
|
|
|
Common Stock
|
300,000
|
150,000
|
|
|
|
|
Retained Earnings
|
102,000
|
54,000
|
|
|
|
|
Total Equities
|
570,000
|
249,000
|
|
|
|
5-9 On January
1, 2010, Prescott Company acquired 80% of the outstanding capital stock of
Sherlock Company for $570,000. On that date, the capital stock of Sherlock
Company was $150,000 and its retained earnings were $450,000.
On
the date of acquisition, the assets of Sherlock Company had the following
values:
Fair
Market
Book
Value Value
Inventories............................................................... $ 90,000 $165,000
Plant and equipment.................................................... 150,000 180,000
All other
assets and liabilities had book values approximately equal to their respective
fair market values. The plant and equipment had a remaining useful life of 10
years from January 1, 2010, and Sherlock Company uses the FIFO inventory cost
flow assumption.
Sherlock
Company earned $180,000 in 2010 and paid dividends in that year of $90,000.
Prescott
Company uses the complete equity method to account for its investment in S
Company.
Required:
A. Prepare a computation and allocation schedule.
B. Prepare the balance sheet elimination entries
as of December 31, 2010.
C. Compute
the amount of equity in subsidiary income recorded on the books of Prescott
Company on December 31, 2010.
D. Compute the balance in the investment account
on December 31, 2010.
Short Answer
1. When the value implied by the
acquisition price is below the fair value of the identifiable net assets the
residual amount will be negative (bargain acquisition). Explain the difference
in accounting for bargain acquisition between past accounting and proposed
accounting requirements.
2. Push down accounting is an accounting method
required for the subsidiary in some instances such as the banking industry.
Briefly explain the concept of push down accounting.
Questions from the Textbook
1.
Distinguish
among the following concepts:(a)Difference between book value and the value implied
by the purchase price.(b)Excess of implied value over fair value.(c)Excess of
fair value over implied value.(d)Excess of book value over fair value.
2.
In
what account is the difference between book value and the value implied by the
purchase
price
recorded on the books of the investor? In what account is the “excess of
implied over fair value” recorded?
3.
How
do you determine the amount of “the difference between book value and the value
implied by the purchase price” to be allocated to a specific asset of a less
than wholly owned subsidiary?
4.
The
parent company’s share of the fair value of the net assets of a subsidiary may
exceed acquisition cost. How must this excess be treated in the preparation of
consolidated financial statements?
5.
What
are the arguments for and against the alternatives for the handling of bargain
acquisitions? Why are such acquisitions unlikely to occur with great frequency?
6. P Company
acquired a 100% interest in S Company. On the date of acquisition the fair
value of the assets and liabilities of S Company was equal to their book value
except for land that had a fair value of $1,500,000 and a book value of
$300,000.
At
what amount should the land of S Company be included in the consolidated
balance sheet?
At
what amount should the land of S Company be included in the consolidated
balance sheet if P Company acquired an80% interest in S Company rather than a
100%interest?
Business Ethics Question from the Textbook
Consider the
following: Many years ago, a student in a consolidated financial statements
class came to me and said that Grand Central (a multi-store grocery and variety
chain in Salt Lake City and surrounding towns and cities) was going to be
acquired and that I should try to buy the stock and make lots of money. I asked
him how he knew and he told me that he worked part-time for Grand Central and
heard that Fred Meyer was going to acquire it. I did not know whether the
student worked in the accounting department at Grand Central or was a custodian
at one of the stores. I thanked him for the information but did not buy the
stock. Within a few weeks, the announcement was made that Fred Meyer was
acquiring Grand Central and the stock price shot up, almost doubling. It was
clear that I had missed an opportunity to make a lot of money ... I don’t know
to this day whether or not that would have been insider trading. How-ever, I
have never gone home at night and asked my wife if the SEC called. From “Don’t
go to jail and other good advice for accountants,” by Ron Mano, Accounting Today, October 25, 1999.
Question: Do you
think this individual would have been guilty of insider trading if he had
purchased the stock in Grand Central based on this advice? Why or why not? Are
there ever instances where you think it would be wise to miss out on an
opportunity to reap benefits simply because the behavior necessitated would
have been in a gray ethical area, though not strictly illegal? Defend your
position.
No comments:
Post a Comment