Question 1
I: Multiple Choice 1. On January 1, 2009, Dermot Company purchased 15% of the voting common stock of Horne Corp. On January 1, 2011, Dermot purchased 28% of Horne's voting common stock. If Dermot achieves significant influence with this new investment, how must Dermot account for the change to the equity method? A. It must use the equity method for 2011 but should make no changes in its financial statements for 2010 and 2009. B. It should prepare consolidated financial statements for 2011. C. It must restate the financial statements for 2010 and 2009 as if the equity method had been used for those two years. D. It should record a prior period adjustment at the beginning of 2011 but should not restate the financial statements for 2010 and 2009. E. It must restate the financial statements for 2010 as if the equity method had been used then. 2. Which of the following results in a decrease in the investment account when applying the equity method? A. Dividends paid by the investor. B. Net income of the investee. C. Net income of the investor. D. Unrealized gain on intra-entity inventory transfers for the current year. E. Purchase of additional common stock by the investor during the current year. 3. How are stock issuance costs and direct combination costs treated in a business combination which is accounted for as an acquisition when the subsidiary will retain its incorporation? A. Stock issuance costs are a part of the acquisition costs, and the direct combination costs are expensed. B. Direct combination costs are a part of the acquisition costs, and the stock issuance costs are a reduction to additional paid-in capital. C. Direct combination costs are expensed and stock issuance costs are a reduction to additional paid-in capital. D. Both are treated as part of the acquisition consideration transferred. E. Both are treated as a reduction to additional paid-in capital. 4. On January 1, 2011, Race Corp. acquired 80% of the voting common stock of Gallow Inc. During the year, Race sold to Gallow for $450,000 goods which cost $330,000. Gallow still owned 15% of the goods at year-end. Gallow's reported net income was $204,000, and Race's net income was $806,000. Race decided to use the equity method to account for this investment. What was the noncontrolling interest's share of consolidated net income? A. $3,600. B. $22,800. C. $30,900. D. $32,900. E. $40,800. 5. Prince Corp. owned 80% of Kile Corp.'s common stock. During October 2011, Kile sold merchandise to Prince for $140,000. At December 31, 2011, 50% of this merchandise remained in Prince's inventory. For 2011, gross profit percentages were 30% of sales for Prince and 40% of sales for Kile. The amount of unrealized intercompany profit in ending inventory at December 31, 2011 that should be eliminated in the consolidation process is A. $28,000. B. $56,000. C. $22,400. D. $21,000. E. $42,000. Use for question 6 ? 10 Acker Inc. bought 40% of Howell Co. on January 1, 2010 for $576,000. The equity method of accounting was used. The book value and fair value of the net assets of Howell on that date were $1,440,000. Acker began supplying inventory to Howell as follows: Howell reported net income of $100,000 in 2010 and $120,000 in 2011 while paying $40,000 in dividends each year. 6. What is the amount of unrealized intra-entity inventory profit to be deferred on December 31, 2010? A. $1,600. B. $4,000. C. $8,000. D. $15,000. E. $20,000. 7. What is the amount of unrealized intra-entity inventory profit to be deferred on December 31, 2011? A. $1,600. B. $8,000. C. $15,000. D. $20,000. E. $40,000 8. What is the Equity in Howell Income that should be reported by Acker in 2010? A. $10,000. B. $24,000. C. $36,000. D. $38,400. E. $40,000. 9. What is the balance in Acker's Investment in Howell account at December 31, 2010? A. $576,000. B. $598,400. C. $614,400. D. $606,000. E. $616,000. 10. What is the Equity in Howell Income that should be reported by Acker in 2011? A. $32,000. B. $41,600. C. $48,000. D. $49,600. E. $50,600. 11. Renfroe, Inc. acquires 10% of Stanley Corporation on January 1, 2010, for $90,000 when the book value of Stanley was $1,000,000. During 2010, Stanley reported net income of $215,000 and paid dividends of $50,000. On January 1, 2011, Renfroe purchased an additional 30% of Stanley for $325,000. Any excess of cost over book value is attributable to goodwill with an indefinite life. During 2011, Renfroe reported net income of $320,000 and paid dividends of $50,000. How much is the adjustment to the Investment in Stanley Corporation for the change from the fair-value method to the equity method on January 1, 2011? A. A debit of $16,500. B. A debit of $21,500. C. A debit of $90,000. D. A debit of $165,000. E. There is no adjustment. ? 12. Bullen Inc. acquired 100% of the voting common stock of Vicker Inc. on January 1, 20X1. The book value and fair value of Vicker's accounts on that date (prior to creating the combination) follow, along with the book value of Bullen's accounts: Assume that Bullen issued 12,000 shares of common stock with a $5 par value and a $47 fair value to obtain all of Vicker's outstanding stock. In this acquisition transaction, how much goodwill should be recognized? A. $144,000. B. $104,000. C. $64,000. D. $60,000. E. $0. ? Use for Questions 13 -14. Carnes has the following account balances as of May 1, 2010 before an acquisition transaction takes place. The fair value of Carnes' Land and Buildings are $650,000 and $550,000, respectively. On May 1, 2010, Riley Company issues 30,000 shares of its $10 par value ($25 fair value) common stock in exchange for all of the shares of Carnes' common stock. Riley paid $10,000 for costs to issue the new shares of stock. Before the acquisition, Riley has $700,000 in its common stock account and $300,000 in its additional paid-in capital account. 13. On May 1, 2010, what value is assigned to Riley's investment account? A. $150,000. B. $300,000. C. $750,000. D. $760,000. E. $1,350,000. 14. At the date of acquisition, by how much does Riley's additional paid-in capital increase or decrease? A. $0. B. $440,000 increase. C. $450,000 increase. D. $640,000 increase. E. $650,000 decrease. II. Short Answers: 1. What is the primary objective of the equity method of accounting for an investment? 2. On January 3, 2011, Jenkins Corp. acquired 40% of the outstanding common stock of Bolivar Co for $1,200,000. This acquisition gave Jenkins the ability to exercise significant influence over the investee. The book value of the acquired shares was $950,000. Any excess cost over the underlying book value was assigned to a patent that was undervalued on Bolivar's balance sheet. This patent has a remaining useful life of ten years. For the year ended December 31, 2011, Bolivar reported net income of $312,000 and paid cash dividends of $96,000. Required: Prepare a schedule to show the balance Jenkins should report as its Investment in Bolivar Co. at December 31, 2011. 3. Tosco Co. paid $540,000 for 80% of the stock of Martz Co. when the book value of Martz's net assets was $600,000. For all of Martz's assets and liabilities, book value and fair value were approximately equal. Required: Using the acquisition method, what amount of goodwill should appear in a consolidated balance sheet prepared immediately after the combination? 4. Tara Company owns 80 percent of the common stock of Stodd Inc. In the current year, Tara reports sales of $5,000,000 and cost of goods sold of $3,500,000. For the same period, Stodd has sales of $500,000 and cost of goods sold of $400,000. During the year, Stodd sold merchandise to Tara for $40,000 at a price based on the normal markup. At the end of the year, Tara still possesses 20 percent of this inventory. Prepare the consolidation entry to defer the unrealized gain. 5. What is the basic objective of all consolidations? III: Problems 1. The following are preliminary financial statements for Black Co. and Blue Co. for the year ending December 31, 20X1 prior to Black's acquisition of Blue. On December 31, 20X1 (subsequent to the preceding statements), Black exchanged 10,000 shares of its $10 par value common stock for all of the outstanding shares of Blue. Black's stock on that date has a fair value of $60 per share. Black was willing to issue 10,000 shares of stock because Blue's land was appraised at $204,000. Black also paid $14,000 to several attorneys and accountants who assisted in creating this combination. Required: Assuming that these two companies retained their separate legal identities, prepare a consolidation worksheet as of December 31, 20X1 after the acquisition transaction is completed. 2. On January 1, 2009, Rand Corp. issued shares of its common stock to acquire all of the outstanding common stock of Spaulding Inc. Spaulding's book value was only $140,000 at the time, but Rand issued 12,000 shares having a par value of $1 per share and a fair value of $20 per share. Rand was willing to convey these shares because it felt that buildings (ten-year life) were undervalued on Spaulding's records by $60,000 while equipment (five-year life) was undervalued by $25,000. Any consideration transferred over fair value of identified net assets acquired is assigned to goodwill. Following are the individual financial records for these two companies for the year ended December 31, 2012. Required: Prepare a consolidation worksheet for this business combination. 3. On January 1, 2010, Cale Corp. paid $1,020,000 to acquire Kaltop Co. Kaltop maintained separate incorporation. Cale used the equity method to account for the investment. The following information is available for Kaltop's assets, liabilities, and stockholders' equity accounts: Kaltop earned net income for 2010 of $126,000 and paid dividends of $48,000 during the year. a. If the parent's net income reflected use of the equity method, what were the consolidated retained earnings on December 31, 2011? 8 b. If the parent's net income reflected use of the partial equity method, what were the consolidated retained earnings on December 31, 2011? 8 c. If the parent's net income reflected use of the initial value method, what were the consolidated retained earnings on December 31, 2011? 8 4. Pritchett Company recently acquired three businesses, recognizing goodwill in each acquisition. Destin has allocated its acquired goodwill to its three reporting units: Apple, Banana, and Carrot. Pritchett provides the following information in performing the 2011 annual review for impairment: a. Which of Pritchett's reporting units require both steps to test for goodwill impairment? b. How much goodwill impairment should Pritchett report for 2011? 5. On January 1, 2011, John Doe Enterprises (JDE) acquired a 55% interest in Bubba Manufacturing, Inc. (BMI). JDE paid for the transaction with $3 million cash and 500,000 shares of JDE common stock (par value $1.00 per share). At the time of the acquisition, BMI's book value was $16,970,000. On January 1, JDE stock had a market value of $14.90 per share and there was no control premium in this transaction. Any consideration transferred over book value is assigned to goodwill. BMI had the following balances on January 1, 2011. For internal reporting purposes, JDE employed the equity method to account for this investment. The following account balances are for the year ending December 31, 2011 for both companies. Required: Prepare a consolidation worksheet for this business combination. Assume goodwill has been reviewed and there is no goodwill impairment. I: Multiple Choice 1. On January 1, 2009, Dermot Company purchased 15% of the voting common stock of Horne Corp. On January 1, 2011, Dermot purchased 28% of Horne's voting common stock. If Dermot achieves significant influence with this new investment, how must Dermot account for the change to the equity method? A. It must use the equity method for 2011 but should make no changes in its financial statements for 2010 and 2009. B. It should prepare consolidated financial statements for 2011. C. It must restate the financial statements for 2010 and 2009 as if the equity method had been used for those two years. D. It should record a prior period adjustment at the beginning of 2011 but should not restate the financial statements for 2010 and 2009. E. It must restate the financial statements for 2010 as if the equity method had been used then. 2. Which of the following results in a decrease in the investment account when applying the equity method? A. Dividends paid by the investor. B. Net income of the investee. C. Net income of the investor. D. Unrealized gain on intra-entity inventory transfers for the current year. E. Purchase of additional common stock by the investor during the current year. 3. How are stock issuance costs and direct combination costs treated in a business combination which is accounted for as an acquisition when the subsidiary will retain its incorporation? A. Stock issuance costs are a part of the acquisition costs, and the direct combination costs are expensed. B. Direct combination costs are a part of the acquisition costs, and the stock issuance costs are a reduction to additional paid-in capital. C. Direct combination costs are expensed and stock issuance costs are a reduction to additional paid-in capital. D. Both are treated as part of the acquisition consideration transferred. E. Both are treated as a reduction to additional paid-in capital. 4. On January 1, 2011, Race Corp. acquired 80% of the voting common stock of Gallow Inc. During the year, Race sold to Gallow for $450,000 goods which cost $330,000. Gallow still owned 15% of the goods at year-end. Gallow's reported net income was $204,000, and Race's net income was $806,000. Race decided to use the equity method to account for this investment. What was the noncontrolling interest's share of consolidated net income? A. $3,600. B. $22,800. C. $30,900. D. $32,900. E. $40,800. 5. Prince Corp. owned 80% of Kile Corp.'s common stock. During October 2011, Kile sold merchandise to Prince for $140,000. At December 31, 2011, 50% of this merchandise remained in Prince's inventory. For 2011, gross profit percentages were 30% of sales for Prince and 40% of sales for Kile. The amount of unrealized intercompany profit in ending inventory at December 31, 2011 that should be eliminated in the consolidation process is A. $28,000. B. $56,000. C. $22,400. D. $21,000. E. $42,000. Use for question 6 ? 10 Acker Inc. bought 40% of Howell Co. on January 1, 2010 for $576,000. The equity method of accounting was used. The book value and fair value of the net assets of Howell on that date were $1,440,000. Acker began supplying inventory to Howell as follows: Howell reported net income of $100,000 in 2010 and $120,000 in 2011 while paying $40,000 in dividends each year. 6. What is the amount of unrealized intra-entity inventory profit to be deferred on December 31, 2010? A. $1,600. B. $4,000. C. $8,000. D. $15,000. E. $20,000. 7. What is the amount of unrealized intra-entity inventory profit to be deferred on December 31, 2011? A. $1,600. B. $8,000. C. $15,000. D. $20,000. E. $40,000 8. What is the Equity in Howell Income that should be reported by Acker in 2010? A. $10,000. B. $24,000. C. $36,000. D. $38,400. E. $40,000. 9. What is the balance in Acker's Investment in Howell account at December 31, 2010? A. $576,000. B. $598,400. C. $614,400. D. $606,000. E. $616,000. 10. What is the Equity in Howell Income that should be reported by Acker in 2011? A. $32,000. B. $41,600. C. $48,000. D. $49,600. E. $50,600. 11. Renfroe, Inc. acquires 10% of Stanley Corporation on January 1, 2010, for $90,000 when the book value of Stanley was $1,000,000. During 2010, Stanley reported net income of $215,000 and paid dividends of $50,000. On January 1, 2011, Renfroe purchased an additional 30% of Stanley for $325,000. Any excess of cost over book value is attributable to goodwill with an indefinite life. During 2011, Renfroe reported net income of $320,000 and paid dividends of $50,000. How much is the adjustment to the Investment in Stanley Corporation for the change from the fair-value method to the equity method on January 1, 2011? A. A debit of $16,500. B. A debit of $21,500. C. A debit of $90,000. D. A debit of $165,000. E. There is no adjustment. ? 12. Bullen Inc. acquired 100% of the voting common stock of Vicker Inc. on January 1, 20X1. The book value and fair value of Vicker's accounts on that date (prior to creating the combination) follow, along with the book value of Bullen's accounts: Assume that Bullen issued 12,000 shares of common stock with a $5 par value and a $47 fair value to obtain all of Vicker's outstanding stock. In this acquisition transaction, how much goodwill should be recognized? A. $144,000. B. $104,000. C. $64,000. D. $60,000. E. $0. ? Use for Questions 13 -14. Carnes has the following account balances as of May 1, 2010 before an acquisition transaction takes place. The fair value of Carnes' Land and Buildings are $650,000 and $550,000, respectively. On May 1, 2010, Riley Company issues 30,000 shares of its $10 par value ($25 fair value) common stock in exchange for all of the shares of Carnes' common stock. Riley paid $10,000 for costs to issue the new shares of stock. Before the acquisition, Riley has $700,000 in its common stock account and $300,000 in its additional paid-in capital account. 13. On May 1, 2010, what value is assigned to Riley's investment account? A. $150,000. B. $300,000. C. $750,000. D. $760,000. E. $1,350,000. 14. At the date of acquisition, by how much does Riley's additional paid-in capital increase or decrease? A. $0. B. $440,000 increase. C. $450,000 increase. D. $640,000 increase. E. $650,000 decrease. II. Short Answers: 1. What is the primary objective of the equity method of accounting for an investment? 2. On January 3, 2011, Jenkins Corp. acquired 40% of the outstanding common stock of Bolivar Co for $1,200,000. This acquisition gave Jenkins the ability to exercise significant influence over the investee. The book value of the acquired shares was $950,000. Any excess cost over the underlying book value was assigned to a patent that was undervalued on Bolivar's balance sheet. This patent has a remaining useful life of ten years. For the year ended December 31, 2011, Bolivar reported net income of $312,000 and paid cash dividends of $96,000. Required: Prepare a schedule to show the balance Jenkins should report as its Investment in Bolivar Co. at December 31, 2011. 3. Tosco Co. paid $540,000 for 80% of the stock of Martz Co. when the book value of Martz's net assets was $600,000. For all of Martz's assets and liabilities, book value and fair value were approximately equal. Required: Using the acquisition method, what amount of goodwill should appear in a consolidated balance sheet prepared immediately after the combination? 4. Tara Company owns 80 percent of the common stock of Stodd Inc. In the current year, Tara reports sales of $5,000,000 and cost of goods sold of $3,500,000. For the same period, Stodd has sales of $500,000 and cost of goods sold of $400,000. During the year, Stodd sold merchandise to Tara for $40,000 at a price based on the normal markup. At the end of the year, Tara still possesses 20 percent of this inventory. Prepare the consolidation entry to defer the unrealized gain. 5. What is the basic objective of all consolidations? III: Problems 1. The following are preliminary financial statements for Black Co. and Blue Co. for the year ending December 31, 20X1 prior to Black's acquisition of Blue. On December 31, 20X1 (subsequent to the preceding statements), Black exchanged 10,000 shares of its $10 par value common stock for all of the outstanding shares of Blue. Black's stock on that date has a fair value of $60 per share. Black was willing to issue 10,000 shares of stock because Blue's land was appraised at $204,000. Black also paid $14,000 to several attorneys and accountants who assisted in creating this combination. Required: Assuming that these two companies retained their separate legal identities, prepare a consolidation worksheet as of December 31, 20X1 after the acquisition transaction is completed. 2. On January 1, 2009, Rand Corp. issued shares of its common stock to acquire all of the outstanding common stock of Spaulding Inc. Spaulding's book value was only $140,000 at the time, but Rand issued 12,000 shares having a par value of $1 per share and a fair value of $20 per share. Rand was willing to convey these shares because it felt that buildings (ten-year life) were undervalued on Spaulding's records by $60,000 while equipment (five-year life) was undervalued by $25,000. Any consideration transferred over fair value of identified net assets acquired is assigned to goodwill. Following are the individual financial records for these two companies for the year ended December 31, 2012. Required: Prepare a consolidation worksheet for this business combination. 3. On January 1, 2010, Cale Corp. paid $1,020,000 to acquire Kaltop Co. Kaltop maintained separate incorporation. Cale used the equity method to account for the investment. The following information is available for Kaltop's assets, liabilities, and stockholders' equity accounts: Kaltop earned net income for 2010 of $126,000 and paid dividends of $48,000 during the year. a. If the parent's net income reflected use of the equity method, what were the consolidated retained earnings on December 31, 2011? 8 b. If the parent's net income reflected use of the partial equity method, what were the consolidated retained earnings on December 31, 2011? 8 c. If the parent's net income reflected use of the initial value method, what were the consolidated retained earnings on December 31, 2011? 8 4. Pritchett Company recently acquired three businesses, recognizing goodwill in each acquisition. Destin has allocated its acquired goodwill to its three reporting units: Apple, Banana, and Carrot. Pritchett provides the following information in performing the 2011 annual review for impairment: a. Which of Pritchett's reporting units require both steps to test for goodwill impairment? b. How much goodwill impairment should Pritchett report for 2011? 5. On January 1, 2011, John Doe Enterprises (JDE) acquired a 55% interest in Bubba Manufacturing, Inc. (BMI). JDE paid for the transaction with $3 million cash and 500,000 shares of JDE common stock (par value $1.00 per share). At the time of the acquisition, BMI's book value was $16,970,000. On January 1, JDE stock had a market value of $14.90 per share and there was no control premium in this transaction. Any consideration transferred over book value is assigned to goodwill. BMI had the following balances on January 1, 2011. For internal reporting purposes, JDE employed the equity method to account for this investment. The following account balances are for the year ending December 31, 2011 for both companies. Required: Prepare a consolidation worksheet for this business combination. Assume goodwill has been reviewed and there is no goodwill impairment. I: Multiple Choice 1. On January 1, 2009, Dermot Company purchased 15% of the voting common stock of Horne Corp. On January 1, 2011, Dermot purchased 28% of Horne's voting common stock. If Dermot achieves significant influence with this new investment, how must Dermot account for the change to the equity method? A. It must use the equity method for 2011 but should make no changes in its financial statements for 2010 and 2009. B. It should prepare consolidated financial statements for 2011. C. It must restate the financial statements for 2010 and 2009 as if the equity method had been used for those two years. D. It should record a prior period adjustment at the beginning of 2011 but should not restate the financial statements for 2010 and 2009. E. It must restate the financial statements for 2010 as if the equity method had been used then. 2. Which of the following results in a decrease in the investment account when applying the equity method? A. Dividends paid by the investor. B. Net income of the investee. C. Net income of the investor. D. Unrealized gain on intra-entity inventory transfers for the current year. E. Purchase of additional common stock by the investor during the current year. 3. How are stock issuance costs and direct combination costs treated in a business combination which is accounted for as an acquisition when the subsidiary will retain its incorporation? A. Stock issuance costs are a part of the acquisition costs, and the direct combination costs are expensed. B. Direct combination costs are a part of the acquisition costs, and the stock issuance costs are a reduction to additional paid-in capital. C. Direct combination costs are expensed and stock issuance costs are a reduction to additional paid-in capital. D. Both are treated as part of the acquisition consideration transferred. E. Both are treated as a reduction to additional paid-in capital. 4. On January 1, 2011, Race Corp. acquired 80% of the voting common stock of Gallow Inc. During the year, Race sold to Gallow for $450,000 goods which cost $330,000. Gallow still owned 15% of the goods at year-end. Gallow's reported net income was $204,000, and Race's net income was $806,000. Race decided to use the equity method to account for this investment. What was the noncontrolling interest's share of consolidated net income? A. $3,600. B. $22,800. C. $30,900. D. $32,900. E. $40,800. 5. Prince Corp. owned 80% of Kile Corp.'s common stock. During October 2011, Kile sold merchandise to Prince for $140,000. At December 31, 2011, 50% of this merchandise remained in Prince's inventory. For 2011, gross profit percentages were 30% of sales for Prince and 40% of sales for Kile. The amount of unrealized intercompany profit in ending inventory at December 31, 2011 that should be eliminated in the consolidation process is A. $28,000. B. $56,000. C. $22,400. D. $21,000. E. $42,000. Use for question 6 ? 10 Acker Inc. bought 40% of Howell Co. on January 1, 2010 for $576,000. The equity method of accounting was used. The book value and fair value of the net assets of Howell on that date were $1,440,000. Acker began supplying inventory to Howell as follows: Howell reported net income of $100,000 in 2010 and $120,000 in 2011 while paying $40,000 in dividends each year. 6. What is the amount of unrealized intra-entity inventory profit to be deferred on December 31, 2010? A. $1,600. B. $4,000. C. $8,000. D. $15,000. E. $20,000. 7. What is the amount of unrealized intra-entity inventory profit to be deferred on December 31, 2011? A. $1,600. B. $8,000. C. $15,000. D. $20,000. E. $40,000 8. What is the Equity in Howell Income that should be reported by Acker in 2010? A. $10,000. B. $24,000. C. $36,000. D. $38,400. E. $40,000. 9. What is the balance in Acker's Investment in Howell account at December 31, 2010? A. $576,000. B. $598,400. C. $614,400. D. $606,000. E. $616,000. 10. What is the Equity in Howell Income that should be reported by Acker in 2011? A. $32,000. B. $41,600. C. $48,000. D. $49,600. E. $50,600. 11. Renfroe, Inc. acquires 10% of Stanley Corporation on January 1, 2010, for $90,000 when the book value of Stanley was $1,000,000. During 2010, Stanley reported net income of $215,000 and paid dividends of $50,000. On January 1, 2011, Renfroe purchased an additional 30% of Stanley for $325,000. Any excess of cost over book value is attributable to goodwill with an indefinite life. During 2011, Renfroe reported net income of $320,000 and paid dividends of $50,000. How much is the adjustment to the Investment in Stanley Corporation for the change from the fair-value method to the equity method on January 1, 2011? A. A debit of $16,500. B. A debit of $21,500. C. A debit of $90,000. D. A debit of $165,000. E. There is no adjustment. ? 12. Bullen Inc. acquired 100% of the voting common stock of Vicker Inc. on January 1, 20X1. The book value and fair value of Vicker's accounts on that date (prior to creating the combination) follow, along with the book value of Bullen's accounts: Assume that Bullen issued 12,000 shares of common stock with a $5 par value and a $47 fair value to obtain all of Vicker's outstanding stock. In this acquisition transaction, how much goodwill should be recognized? A. $144,000. B. $104,000. C. $64,000. D. $60,000. E. $0. ? Use for Questions 13 -14. Carnes has the following account balances as of May 1, 2010 before an acquisition transaction takes place. The fair value of Carnes' Land and Buildings are $650,000 and $550,000, respectively. On May 1, 2010, Riley Company issues 30,000 shares of its $10 par value ($25 fair value) common stock in exchange for all of the shares of Carnes' common stock. Riley paid $10,000 for costs to issue the new shares of stock. Before the acquisition, Riley has $700,000 in its common stock account and $300,000 in its additional paid-in capital account. 13. On May 1, 2010, what value is assigned to Riley's investment account? A. $150,000. B. $300,000. C. $750,000. D. $760,000. E. $1,350,000. 14. At the date of acquisition, by how much does Riley's additional paid-in capital increase or decrease? A. $0. B. $440,000 increase. C. $450,000 increase. D. $640,000 increase. E. $650,000 decrease. II. Short Answers: 1. What is the primary objective of the equity method of accounting for an investment? 2. On January 3, 2011, Jenkins Corp. acquired 40% of the outstanding common stock of Bolivar Co for $1,200,000. This acquisition gave Jenkins the ability to exercise significant influence over the investee. The book value of the acquired shares was $950,000. Any excess cost over the underlying book value was assigned to a patent that was undervalued on Bolivar's balance sheet. This patent has a remaining useful life of ten years. For the year ended December 31, 2011, Bolivar reported net income of $312,000 and paid cash dividends of $96,000. Required: Prepare a schedule to show the balance Jenkins should report as its Investment in Bolivar Co. at December 31, 2011. 3. Tosco Co. paid $540,000 for 80% of the stock of Martz Co. when the book value of Martz's net assets was $600,000. For all of Martz's assets and liabilities, book value and fair value were approximately equal. Required: Using the acquisition method, what amount of goodwill should appear in a consolidated balance sheet prepared immediately after the combination? 4. Tara Company owns 80 percent of the common stock of Stodd Inc. In the current year, Tara reports sales of $5,000,000 and cost of goods sold of $3,500,000. For the same period, Stodd has sales of $500,000 and cost of goods sold of $400,000. During the year, Stodd sold merchandise to Tara for $40,000 at a price based on the normal markup. At the end of the year, Tara still possesses 20 percent of this inventory. Prepare the consolidation entry to defer the unrealized gain. 5. What is the basic objective of all consolidations? III: Problems 1. The following are preliminary financial statements for Black Co. and Blue Co. for the year ending December 31, 20X1 prior to Black's acquisition of Blue. On December 31, 20X1 (subsequent to the preceding statements), Black exchanged 10,000 shares of its $10 par value common stock for all of the outstanding shares of Blue. Black's stock on that date has a fair value of $60 per share. Black was willing to issue 10,000 shares of stock because Blue's land was appraised at $204,000. Black also paid $14,000 to several attorneys and accountants who assisted in creating this combination. Required: Assuming that these two companies retained their separate legal identities, prepare a consolidation worksheet as of December 31, 20X1 after the acquisition transaction is completed. 2. On January 1, 2009, Rand Corp. issued shares of its common stock to acquire all of the outstanding common stock of Spaulding Inc. Spaulding's book value was only $140,000 at the time, but Rand issued 12,000 shares having a par value of $1 per share and a fair value of $20 per share. Rand was willing to convey these shares because it felt that buildings (ten-year life) were undervalued on Spaulding's records by $60,000 while equipment (five-year life) was undervalued by $25,000. Any consideration transferred over fair value of identified net assets acquired is assigned to goodwill. Following are the individual financial records for these two companies for the year ended December 31, 2012. Required: Prepare a consolidation worksheet for this business combination. 3. On January 1, 2010, Cale Corp. paid $1,020,000 to acquire Kaltop Co. Kaltop maintained separate incorporation. Cale used the equity method to
Question 4
Assumptions Balance Sheet Income Statement Assumptions: At the beginning of 2009, CanGo purchased the online gaming company. This purchase was for cash, paid for through the proceeds of the IPO and results in goodwill. 90% of the online book sales comes from JIT, the other 10% through the inventory which CanGo possesses. 100% of the CD/DVD/MP3 come through CanGo inventory. The result is that 80% of ALL sales is JIT and 20% is inventory. There is one warehouse for shipping of books and one plant for manufacturing. There are three divisions: a CD/DVD/MP3 division, an online gaming division and a books division. All manufacturing takes place in the CD/DVD/MP3 division. The IPO took place at the beginning of 2009. The CD/DVDs were customized beginning in 2008. The MP3 players were built beginning in the start of 2009. The online gaming company was purchased for $30,000,000 and both Elizabeth and Andrew initiated the process. The company began in 2006, has a VC infusion in 2007 and 2008. It showed a profit in 2008 and 2009. Its only profitable division is the online book sales division. It has some type of international operations, hence the need for a "translation gain or loss" in owner's equity. It has an extraordinary loss from fire and a sale of a segment of its business in 2009. -------------------------------------------------------------------------------- Balance Sheet ASSETS December 31, 2009 Cash $20,900,000 Marketable Securities $117,000,000 Accounts Receivable $33,000,000 Less: Allowance for Bad Debts $(880,000) Net Accounts Receivable $32,120,000 Inventory Raw Materials $2,000,000 Work-in-process $1,000,000 Finished Goods $5,000,000 Inventory Purchased for Resale $24,000,000 Total Inventory $32,000,000 Plant, Property and Equipment $6,700,000 Less: Accumulated Depreciation $(320,000) Net Plant, Property and Equipment $6,380,000 Prepaid Expenses $200,000 Goodwill and Other Purchased Intangibles $28,000,000 Less: Amortization $(700,000) Net Goodwill and Other Purchased Intangibles $27,300,000 Total Assets $235,900,000 LIABILITIES AND OWNERS' EQUITY Accounts Payable $22,000,000 Accrued Advertising $11,800,000 Other Liabilities and Accrued Expense $1,400,000 Current Portion of Long-Term Debt $2,300,000 Long Term Debt $57,400,000 Preferred Stock, $100 par value per share, 100,000 authorized, 0 shares issued and outstanding $0 Common Stock, $1 par value per share, 250,000,000 shares authorized, 13,000,000 shares issued, 12,900,000 outstanding $13,000,000 Additional Paid-in-Capital in excess of par value, Common Stock $117,000,000 Treasury Stock $(1,000,000) Retained Earnings (less Cash Dividends Paid) $12,000,000 $11,000,000 Total Liabilities and Owner's Equity $235,900,000 -------------------------------------------------------------------------------- Income Statement December 31, 2009 December 31, 2008 Sales Revenues $51,000,000 $10,300,000 Less: Sales Returns $(1,000,000) $(300,000) Net Sales Revenues $50,000,000 $10,000,000 Less: Cost of Goods Sold $(9,000,000) $(4,000,000) Gross Profit $41,000,000 $6,000,000 Operating Expenses: Advertising and Sales $(26,000,000) $(3,000,000) Depreciation $(160,000) Salaries and Wages $(1,700,000) $(1,400,000) Product Development $(4,000,000) $(1,200,000) Merger and Acquisition Related Costs, including Amortization of Goodwill and Other Intangibles $(700,000) $0 Total Operating Expenses $(32,560,000) Income from Continuing Operations Before Income Taxes $8,440,000 Less: Income Taxes at 35% $(2,954,000) Income from Continuing Operations $5,486,000 Discontinued Operations: Income from Operations of Discontinued Division (less applicable income taxes) $350,000 Loss on Disposal of Discontinued Division (less applicable income taxes) $(150,000) Total Gain from Discontinued Operations $200,000 Extraordinary Items: Loss from fire (less applicable income taxes) $(200,000) Net Income $5,486,000 Divisional Revenues Books $15,000,000 $7,000,000 Online gaming $25,000,000 Customized MP3/CD/DVD $10,000,000 $3,000,000 Customized MP3/CD/DVD Inventory at end of 2009 $8,000,000 CanGo, Inc. is a fictional Internet company that exists to support the Mastering Series project. 2002 by Prentice-Hall, Inc. 1. At the beginning of 2009, CanGo purchased the online gaming company. This purchase was for cash, paid for through the proceeds of the IPO and results in goodwill. 2. 90% of the online book sales comes from JIT, the other 10% through the inventory which CanGo possesses. 100% of the CD/DVD/MP3 come through CanGo inventory. The result is that 80% of ALL sales is JIT and 20% is inventory. 3. There is one warehouse for shipping of books and one plant for manufacturing. 4. There are three divisions: a CD/DVD/MP3 division, an online gaming division and a books division. All manufacturing takes place in the CD/DVD/MP3 division. 5. The IPO took place at the beginning of 2009. 6. The CD/DVDs were customized beginning in 2008. The MP3 players were built beginning in the start of 2009. 7. The online gaming company was purchased for $30,000,000 and both Elizabeth and Andrew initiated the process. 8. The company began in 2006, has a VC infusion in 2007 and 2008. It showed a profit in 2008 and 2009. Its only profitable division is the online book sales division. 9. It has some type of international operations, hence the need for a "translation gain or loss" in owner's equity. 10. It has an extraordinary loss from fire and a sale of a segment of its business in 2009. Balance Sheet ASSETS December 31, 2009 Cash $20,900,000 Marketable Securities $117,000,000 Accounts Receivable $33,000,000 Less: Allowance for Bad Debts $(880,000) Net Accounts Receivable $32,120,000 Inventory Raw Materials $2,000,000 Work-in-process $1,000,000 Finished Goods $5,000,000 Inventory Purchased for Resale $24,000,000 Total Inventory $32,000,000 Plant, Property and Equipment $6,700,000 Less: Accumulated Depreciation $(320,000) Net Plant, Property and Equipment $6,380,000 Prepaid Expenses $200,000 Goodwill and Other Purchased Intangibles $28,000,000 Less: Amortization $(700,000) Net Goodwill and Other Purchased Intangibles $27,300,000 Total Assets $235,900,000 LIABILITIES AND OWNERS' EQUITY Accounts Payable $22,000,000 Accrued Advertising $11,800,000 Other Liabilities and Accrued Expense $1,400,000 Current Portion of Long-Term Debt $2,300,000 Long Term Debt $57,400,000 Preferred Stock, $100 par value per share, 100,000 authorized, 0 shares issued and outstanding $0 Common Stock, $1 par value per share, 250,000,000 shares authorized, 13,000,000 shares issued, 12,900,000 outstanding $13,000,000 Additional Paid-in-Capital in excess of par value, Common Stock $117,000,000 Treasury Stock $(1,000,000) Retained Earnings (less Cash Dividends Paid) $12,000,000 $11,000,000 Total Liabilities and Owner's Equity $235,900,000 Income Statement December 31, 2009 December 31, 2008 Sales Revenues $51,000,000 $10,300,000 Less: Sales Returns $(1,000,000) $(300,000) Net Sales Revenues $50,000,000 $10,000,000 Less: Cost of Goods Sold $(9,000,000) $(4,000,000) Gross Profit $41,000,000 $6,000,000 Operating Expenses: Advertising and Sales $(26,000,000) $(3,000,000) Depreciation $(160,000) Salaries and Wages $(1,700,000) $(1,400,000) Product Development $(4,000,000) $(1,200,000) Merger and Acquisition Related Costs, including Amortization of Goodwill and Other Intangibles $(700,000) $0 Total Operating Expenses $(32,560,000) Income from Continuing Operations Before Income Taxes $8,440,000 Less: Income Taxes at 35% $(2,954,000) Income from Continuing Operations $5,486,000 Discontinued Operations: Income from Operations of Discontinued Division (less applicable income taxes) $350,000 Loss on Disposal of Discontinued Division (less applicable income taxes) $(150,000) Total Gain from Discontinued Operations $200,000 Extraordinary Items: Loss from fire (less applicable income taxes) $(200,000) Net Income $5,486,000 Divisional Revenues Books $15,000,000 $7,000,000 Online gaming $25,000,000 Customized MP3/CD/DVD $10,000,000 $3,000,000 Customized MP3/CD/DVD Inventory at end of 2009 $8,000,000 CanGo, Inc. is a fictional Internet company that exists to support the Mastering Series project.,When I open this file there is nothing inside the folder. Blank file
