Multiple-choice questions. Select the best one that answers the question. Show your procedure and calculations. Partial credits will be given if you procedure is correct, but answers are not. Each question is 3 points. Total: 78 points.
a. Building, Decrease; Land, No Effect
b. Building, Decrease; Land, Decrease
c. Building, Increase; Land, Increase
d. Building, Increase; Land, No Effect
Equity Investment balance should Campbell report at December 31, 2020?
b. $ 500,000
What amount of goodwill will be reported on the December 31, 2020 balance sheet?
a. $ 50,000
The Equity Investment balance at December 31, 2020 is:
How much did Cracker pay for its 40% interest in Dallas?
The following three Questions are based on the following set of facts.
Lucky’s Company acquires Waterview, Inc., by issuing 40,000 shares of $1 par common stock with a market price of $25 per share on the acquisition date and paying $125,000 cash. The assets and liabilities on Waterview’s balance sheet were valued at fair values except equipment that was undervalued by $300,000. There was also an unrecorded patent valued at $40,000, as well as an unrecorded trademark valued at $75,000. In addition, the agreement provided for additional consideration, valued at $60,000, if certain earnings targets were met.
The pre-acquisition balance sheets for the two companies at acquisition date are presented below.
Lucky’s Company Waterview, Inc.
Cash $300,000 $260,000
Accounts receivable 250,000 135,000
Inventory 254,000 275,000
Property, plant, and equipment 2,300,000 356,500
Accounts payable $45,000 $37,500
Salaries and taxes payable 450,000 46,000
Notes payable 500,000 450,000
Common stock 250,000 60,000
Additional paid-in capital 950,000 106,500
Retained earnings 909,000 326,500
a. $ 582,500
b. $ 909,000
The following two questions are based on the following set of facts.
On January 1, 2021, Consolidated Company purchased 100% of the common stock Avergy Industries for $720,000. On that date, Avergy had common stock of $100,000 and retained earnings of $420,000. Equipment and land were each undervalued by $50,000 on Avergy’s books. There was a $40,000 overvaluation of Bonds Payable, as well a $60,000 undervaluation of inventory.
b. $ 50,000
c. $ 80,000
a. Land debit, $50,000
b. Inventory debit, $60,000
c. Bonds Payable credit, $40,000
d. Equipment debit, $50,000
The following information applies to the following 3 Questions:
On January 1, 2020, Coldspring Corp. paid $770,000 to acquire Whitt Co. Coldspring used the equity method to account for the investment. The following information is available for the assets, liabilities, and stockholders’ equity accounts of Whitt:
Book Value Fair Value
Current assets $95,000 $95,000
Land 95,000 120,000
Building (twenty year life) 255,000 310,000
Equipment (five year life) 185,000 190,000
Current liabilities 40,000 40,000
Long-term liabilities 65,000 65,000
Common stock 140,000
Additional paid-in capital 300,000
Retained earnings 210,000
Whitt earned net income for 2020 of $125,000 and paid dividends of $18,000 during the year.
a. $3,750 Debit
b. $1,750 Debit
c. $3,750 Credit
d. $1,750 Credit
What was the balance in Equity Investment at December 31, 2020?
What was consolidated cost of goods sold for 2021?
Clearwater Co. owned all of the voting common stock of Kelley, Inc. On January 2, 2020 Clearwater sold equipment to Kelley for $350,000. The equipment had cost Clearwater $425,000. At the time of the sale, the balance in accumulated depreciation was $125,000. The equipment had a remaining useful life of eight years and no salvage value.
On April 1, 2020, Republic Company sold equipment to its wholly owned subsidiary, Barre Corporation, for $40,000. At the time of the transfer, the asset had an original cost (to Republic) of $60,000 and accumulated depreciation of $25,000. The equipment has a five year estimated remaining life.
Barre reported net income of $250,000, $270,000 and $310,000 in 2020, 2021, and 2022, respectively. Republic received dividends from Barre of $90,000, $105,000 and $120,000 for 2020, 2021, and 2022, respectively.
b. $ 5,000 gain
c. $20,000 loss
d. $35,000 gain
a. $ 750
Renner Company sold land to Bethany Enterprises, its parent, on June 1, 2020. The sale price was $218,000. The land originally cost Renner $239,000. Renner reported net income of $400,000 and $496,000 for 2020 and 2021, respectively. Bethany sold the land it purchased from Renner for $228,000 in 2022.
a. $10,000 gain
b. $10,000 loss
c. $11,000 loss
d. $21,000 loss
The following information pertains to the following 2 Questions.
On January 1, 2021, Gooch Company acquires 80% of the outstanding common stock of House Inc., for a purchase price of $12,400,000. It was determined that the fair value of the noncontrolling interest in the subsidiary is $3,100,000. The book value of the House’s stockholders’ equity on the date of acquisition is $10,000,000 and its fair value of net assets is $11,000,000. The acquisition-date acquisition accounting premium (AAP) is allocated $600,000 to equipment with a remaining useful life of 10 years, and $250,000 to a patent with a remaining useful life of 5 years.
a. Equity investment, credit, $5,350,000
b. Noncontrolling interest, credit, $3,100,000
c. House’s retained earnings, debit, $2,00,000
d. Noncontrolling interest, credit, $1,070,000
The following information pertains to the following 2 Questions.
Assume the following facts relating to an 80% owned subsidiary company:
BOY Stockholders’ Equity $1,000,000
BOY unamortized AAP 125,000
Net income of subsidiary (not including AAP amortization) 210,000
AAP amortization expense 40,000
Dividends declared and paid to noncontrolling shareholders 10,000
The Parent is a calendar year company. Which one of the following statements is true?
a. The consolidated balance sheet at December 31, 2021 will report none of the debt, and the consolidated income statement for the year ended December 31, 2021 will not report any interest expense from the debt.
b. The consolidated balance sheet at December 31, 2021 will report none of the debt, and the consolidated income statement for the year ended December 31, 2021 will report a gain or loss from the constructive retirement of the debt and will report some interest expense from the debt.
c. The consolidated balance sheet at December 31, 2021 will report none of the debt, and the consolidated income statement for the year ended December 31, 2021 will report a gain or loss from the constructive retirement of the debt and will not report any interest expense from the debt.
d. The consolidated balance sheet at December 31, 2021 will report the debt, and the consolidated income statement for the year ended December 31, 2021 will report a gain or loss from the constructive retirement of the debt and will not report any interest expense from the debt.
What is consolidated net income for the year ended December 31, 2020?
a. Determine whether the cash flows of the SPE are used to repay the securities holders.
b. Determine whether the company is the primary beneficiary of the VIE.
c. Determine whether the business-related scope exception applies.
d. Determine whether the total equity investment at risk is not sufficient to permit the legal entity to finance its activities without additional subordinated financial support.
e. None of the above.
Calculation Problems. Select and do any two (2) out of the following three (3) problems. Show your procedures and calculations to obtain partial credits. Each question is 11 points. Total: 22 points.
C1. On January 1, 2020, Skyline Co. paid $200,000 for a 40% interest in Allen Industries. Allen Industries’ stockholders’ equity amounted to $300,000 on that date. The excess of purchase price over book values was due to an unrecorded patent valued at $200,000 with a 5-year life. During 2020, Allen Industries reported income of $80,000 and paid dividends of $18,000. During 2021, it reported income of $90,000 and dividends of $48,000.
Assume that Skyline Co. has significant influence over the operations of Allen Industries.
a. What is the amount of goodwill?
b. What is Equity Income for 2020?
c. What is the balance in the Equity Investment account at December 31, 2020?
d. What is Equity Income for 2021?
e. What is the balance in the Equity Investment account at December 31, 2021?
C2. Parent acquired Subsidiary on January 2, 2019 at a price $400,000 in excess of book value. Of that excess, $160,000 was allocated to an unrecorded Customer List with a 8-year life, with the remainder to Goodwill. The parent uses the equity method to account for its investment in its subsidiary.
On January2, 2022, Subsidiary sold equipment to Parent for $120,000. The equipment had a cost of $85,000 and accumulated depreciation of $40,000. The remaining life of the equipment was estimated at 8 years. Financial statements for the two companies for the year ended December 31, 2023 are presented below.
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