Chapter 03 Consolidations-Subsequent to the Date of

Acquisition
1. Which one of the following accounts would not appear in the consolidated financial
statements at the end of the first fiscal period of the combination?

A. Goodwil
l.
B. Equipmen
t.
C. Investment in
Subsidiary.
D. Common
Stock.
E. Additional Paid-In
Capital.
2. Which of the following internal record-keeping methods can a parent choose to
account for a subsidiary acquired in a business combination?

A. initial value or book

value.
B. initial value, lower-of-cost-or-market-value, or
equity.
C. initial value, equity, or partial
equity.
D. initial value, equity, or book
value.
E. initial value, lower-of-cost-or-market-value, or
partial equity.
3. Which one of the following varies between the equity, initial value, and partial
equity methods of accounting for an investment?

A. the amount of consolidated net

income.
B. total assets on the consolidated balance
sheet.
C. total liabilities on the consolidated balance
sheet.
D. the balance in the investment account on the
parent's books.
E. the amount of consolidated cost of
goods sold.
4. Under the partial equity method, the parent recognizes income when

A. dividends are received from the

investee.
B. dividends are declared by the
investee.
C. the related expense has been
incurred.
D. the related contract is signed by the
subsidiary.
E. it is earned by the
subsidiary.
5. Push-down accounting is concerned with the

A. impact of the purchase on the subsidiary's financial

statements.
B. recognition of goodwill by the
parent.
C. correct consolidation of the financial
statements.
D. impact of the purchase on the separate financial statements of
the parent.
E. recognition of dividends received from the
subsidiary.

6. Racer Corp. acquired all of the common stock of Tangiers Co. in 2011. Tangiers
maintained its incorporation. Which of Racer's account balances would vary
between the equity method and the initial value method?

A. Goodwill, Investment in Tangiers Co., and Retained

Earnings.
B. Expenses, Investment in Tangiers Co., and Equity in Subsidiary
Earnings.
C. Investment in Tangiers Co., Equity in Subsidiary Earnings, and Retained
Earnings.
D. Common Stock, Goodwill, and Investment in
Tangiers Co.
E. Expenses, Goodwill, and Investment in
Tangiers Co.

7. How does the partial equity method differ from the equity method?

A. In the total assets reported on the consolidated

balance sheet.
B. In the treatment of
dividends.
C. In the total liabilities reported on the consolidated
balance sheet.
D. Under the partial equity method, subsidiary income does not increase the
balance in the parent's investment account.
E. Under the partial equity method, the balance in the investment account is not
decreased by amortization on allocations made in the acquisition of the
subsidiary.

AACSB: Reflective thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 03-02 Identify and describe the various methods available to a parent company in order to
maintain its investment in subsidiary account in its internal records.
Learning Objective: 03-03a Prepare consolidated financial statements subsequent to acquisition when the
parent has aplied in its internal records: The equity method.
Learning Objective: 03-03c Prepare consolidated financial statements subsequent to acquisition when the
parent has aplied in its internal records: The partial equity method.
Topic: Investment Accounting By The Acquiring Company
Topic: Subsequent Consolidation - Investment Recorded By The Equity Method
Topic: Subsequent Consolidations - Investment Recorded Using Initial Value or Partial Equity Method
8. Jansen Inc. acquired all of the outstanding common stock of Merriam Co. on January
1, 2012, for $257,000. Annual amortization of $19,000 resulted from this
acquisition. Jansen reported net income of $70,000 in 2012 and $50,000 in 2013
and paid $22,000 in dividends each year. Merriam reported net income of $40,000
in 2012 and $47,000 in 2013 and paid $10,000 in dividends each year. What is the
Investment in Merriam Co. balance on Jansen's books as of December 31, 2013, if
the equity method has been applied?

A. $286,00
0.
B. $295,00
0.
C. $276,00
0.
D. $344,00
0.
E. $324,00
0.

$257,000 + $40,000 + $47,000 - $10,000 - $19,000 - $10,000 - $19,000 =

$286,000

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-02 Identify and describe the various methods available to a parent company in order to
maintain its investment in subsidiary account in its internal records.
Learning Objective: 03-03a Prepare consolidated financial statements subsequent to acquisition when the
parent has aplied in its internal records: The equity method.
Topic: Investment Accounting By The Acquiring Company
Topic: Subsequent Consolidation - Investment Recorded By The Equity Method

9. Velway Corp. acquired Joker Inc. on January 1, 2012. The parent paid more than the
fair value of the subsidiary's net assets. On that date, Velway had equipment with a
book value of $500,000 and a fair value of $640,000. Joker had equipment with a
book value of $400,000 and a fair value of $470,000. Joker decided to use push-
down accounting. Immediately after the acquisition, what Equipment amount would
appear on Joker's separate balance sheet and on Velway's consolidated balance
sheet, respectively?

A. $400,000 and
$900,000
B. $400,000 and
$970,000
C. $470,000 and
$900,000
D. $470,000 and
$970,000
E. $470,000 and
$1,040,000

FV of EQ = $470,000 for Joker B/S; Consolidated B/S = BV of Parent EQ $500,000 +

FV of Sub EQ $470,000 = $970,000

AACSB: Analytic
AICPA BB: Critical Thinking
 AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-08 Understand in general the requirements of push-down accounting and when its use is
appropriate.
Topic: Push-Down Accounting

10. Parrett Corp. acquired one hundred percent of Jones Inc. on January 1, 2011, at a
price in excess of the subsidiary's fair value. On that date, Parrett's equipment (ten-
year life) had a book value of $360,000 but a fair value of $480,000. Jones had
equipment (ten-year life) with a book value of $240,000 and a fair value of
$350,000. Parrett used the partial equity method to record its investment in Jones.
On December 31, 2013, Parrett had equipment with a book value of $250,000 and
a fair value of $400,000. Jones had equipment with a book value of $170,000 and a
fair value of $320,000. What is the consolidated balance for the Equipment account
as of December 31, 2013?

A. $387,00
0.
B. $497,00
0.
C. $508,00
0.
D. $537,00
0.
E. $570,00
0.

Excess of Sub's FV = $110,000 + Parent's BV $250,000 + Sub's BV $170,000 -

Excess Amortization ($11,000 × 3yrs) = $497,000

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 03-03c Prepare consolidated financial statements subsequent to acquisition when the
parent has aplied in its internal records: The partial equity method.
Topic: Subsequent Consolidations - Investment Recorded Using Initial Value or Partial Equity Method
11. On January 1, 2012, 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 on January 1, 2012:

Kaltop earned net income for 2012 of $126,000 and paid dividends of $48,000
during the year.

The 2012 total amortization of allocations is calculated to be

A. $4,00
0.
B. $6,40
0.
C. $(2,400
).
D. $(1,000
).
E. $3,80
0.

Building = FV $268,000 - BV $240,000 = $28,000/20 yrs = $1,400 Equipment = FV

$516,000 - BV $540,000 = ($24,000)/10 yrs = ($2,400)
($2,400) + $1,400 = ($1,000)

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-02 Identify and describe the various methods available to a parent company in order to
maintain its investment in subsidiary account in its internal records.
Learning Objective: 03-03a Prepare consolidated financial statements subsequent to acquisition when the
parent has aplied in its internal records: The equity method.
Topic: Investment Accounting By The Acquiring Company
Topic: Subsequent Consolidation - Investment Recorded By The Equity Method
12. On January 1, 2012, 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 on January 1, 2012:

Kaltop earned net income for 2012 of $126,000 and paid dividends of $48,000
during the year.

In Cale's accounting records, what amount would appear on December 31, 2012 for
equity in subsidiary earnings?

A. $77,00
0.
B. $79,00
0.
C. $125,00
0.
D. $127,00
0.
E. $81,80
0.

$126,000 + $1,000 = $127,000

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-02 Identify and describe the various methods available to a parent company in order to
maintain its investment in subsidiary account in its internal records.
Learning Objective: 03-03a Prepare consolidated financial statements subsequent to acquisition when the
parent has aplied in its internal records: The equity method.
Topic: Investment Accounting By The Acquiring Company
Topic: Subsequent Consolidation - Investment Recorded By The Equity Method
13. On January 1, 2012, 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 on January 1, 2012:

Kaltop earned net income for 2012 of $126,000 and paid dividends of $48,000
during the year.

What is the balance in Cale's investment in subsidiary account at the end of 2012?

A. $1,099,00
0.
B. $1,020,00
0.
C. $1,096,20
0.
D. $1,098,00
0.
E. $1,144,40
0.

$1,020,000 + ($126,000 + $1,000) - $48,000 = $1,099,000

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-02 Identify and describe the various methods available to a parent company in order to
maintain its investment in subsidiary account in its internal records.
Learning Objective: 03-03a Prepare consolidated financial statements subsequent to acquisition when the
parent has aplied in its internal records: The equity method.
Topic: Investment Accounting By The Acquiring Company
Topic: Subsequent Consolidation - Investment Recorded By The Equity Method
14. On January 1, 2012, 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 on January 1, 2012:

Kaltop earned net income for 2012 of $126,000 and paid dividends of $48,000
during the year.

At the end of 2012, the consolidation entry to eliminate Cale's accrual of Kaltop's
earnings would include a credit to Investment in Kaltop Co. for

A. $124,40
0.
B. $126,00
0.
C. $127,00
0.
D. $76,40
0.
E. $0
.

$126,000 + $1,000 = $127,000

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-03a Prepare consolidated financial statements subsequent to acquisition when the
parent has aplied in its internal records: The equity method.
Topic: Subsequent Consolidation - Investment Recorded By The Equity Method
15. On January 1, 2012, 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 on January 1, 2012:

Kaltop earned net income for 2012 of $126,000 and paid dividends of $48,000
during the year.

If Cale Corp. had net income of $444,000 in 2012, exclusive of the investment,
what is the amount of consolidated net income?

A. $569,00
0.
B. $570,00
0.
C. $571,00
0.
D. $566,40
0.
E. $444,00
0.

$444,000 + ($126,000 + $1,000) = $571,000

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-03a Prepare consolidated financial statements subsequent to acquisition when the
parent has aplied in its internal records: The equity method.
Topic: Subsequent Consolidation - Investment Recorded By The Equity Method
16. On January 1, 2012, Franel Co. acquired all of the common stock of Hurlem Corp.
For 2012, Hurlem earned net income of $360,000 and paid dividends of $190,000.
Amortization of the patent allocation that was included in the acquisition was
$6,000.

How much difference would there have been in Franel's income with regard to the
effect of the investment, between using the equity method or using the initial value
method of internal recordkeeping?

A. $190,00
0.
B. $360,00
0.
C. $164,00
0.
D. $354,00
0.
E. $150,00
0.

Initial Value Method = $0 Recognized from Sub Income (only dividend income)
Equity Method = $360,000 - $6,000 - $190,000 = $164,000 Sub Income Added in
Consolidation $164,000 - $0 = $164,000

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-02 Identify and describe the various methods available to a parent company in order to
maintain its investment in subsidiary account in its internal records.
Learning Objective: 03-03a Prepare consolidated financial statements subsequent to acquisition when the
parent has aplied in its internal records: The equity method.
Learning Objective: 03-03b Prepare consolidated financial statements subsequent to acquisition when the
parent has aplied in its internal records: The intial value method.
Topic: Investment Accounting By The Acquiring Company
Topic: Subsequent Consolidation - Investment Recorded By The Equity Method
Topic: Subsequent Consolidations - Investment Recorded Using Initial Value or Partial Equity Method
17. On January 1, 2012, Franel Co. acquired all of the common stock of Hurlem Corp.
For 2012, Hurlem earned net income of $360,000 and paid dividends of $190,000.
Amortization of the patent allocation that was included in the acquisition was
$6,000.

How much difference would there have been in Franel's income with regard to the
effect of the investment, between using the equity method or using the partial
equity method of internal recordkeeping?

A. $170,00
0.
B. $354,00
0.
C. $164,00
0.
D. $6,00
0.
E. $174,00
0.

Equity Method = $360,000 - $6,000 - $190,000 = $164,000 Added in Consolidation

- Partial Equity Method = $360,000 - $190,000 = $170,000 Added in Consolidation
$170,000 - $164,000 = $6,000

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 03-02 Identify and describe the various methods available to a parent company in order to
maintain its investment in subsidiary account in its internal records.
Learning Objective: 03-03a Prepare consolidated financial statements subsequent to acquisition when the
parent has aplied in its internal records: The equity method.
Learning Objective: 03-03c Prepare consolidated financial statements subsequent to acquisition when the
parent has aplied in its internal records: The partial equity method.
Topic: Investment Accounting By The Acquiring Company
Topic: Subsequent Consolidation - Investment Recorded By The Equity Method
Topic: Subsequent Consolidations - Investment Recorded Using Initial Value or Partial Equity Method
18. Cashen Co. paid $2,400,000 to acquire all of the common stock of Janex Corp. on
January 1, 2012. Janex's reported earnings for 2012 totaled $432,000, and it paid
$120,000 in dividends during the year. The amortization of allocations related to
the investment was $24,000. Cashen's net income, not including the investment,
was $3,180,000, and it paid dividends of $900,000.

On the consolidated financial statements for 2012, what amount should have been
shown for Equity in Subsidiary Earnings?

A. $432,00
0.
B. $-
0-
C. $408,00
0.
D. $120,00
0.
E. $288,00
0.

$0; (Income is eliminated from the investment account)

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-01 Recognize the complexities in preparing consolidated financial reports that emerge
from the passage of time.
Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments
has no effect on the resulting consolidated financial statements.
Topic: Consolidation - The Effects Created By The Passage of Time
Topic: Subsequent Consolidation

19. Cashen Co. paid $2,400,000 to acquire all of the common stock of Janex Corp. on
January 1, 2012. Janex's reported earnings for 2012 totaled $432,000, and it paid
$120,000 in dividends during the year. The amortization of allocations related to
the investment was $24,000. Cashen's net income, not including the investment,
was $3,180,000, and it paid dividends of $900,000.

On the consolidated financial statements for 2012, what amount should have been
shown for consolidated dividends?

A. $900,00
0.
B. $1,020,00
0.
C. $876,00
0.
D. $996,00
0.
E. $948,00
0.

$900,000 Parent's Dividends Only

AACSB: Analytic
AICPA BB: Critical Thinking
 AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 03-01 Recognize the complexities in preparing consolidated financial reports that emerge
from the passage of time.
Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments
has no effect on the resulting consolidated financial statements.
Topic: Consolidation - The Effects Created By The Passage of Time
Topic: Subsequent Consolidation

20. Cashen Co. paid $2,400,000 to acquire all of the common stock of Janex Corp. on
January 1, 2012. Janex's reported earnings for 2012 totaled $432,000, and it paid
$120,000 in dividends during the year. The amortization of allocations related to
the investment was $24,000. Cashen's net income, not including the investment,
was $3,180,000, and it paid dividends of $900,000.

What is the amount of consolidated net income for the year 2012?

A. $3,180,00
0.
B. $3,612,00
0.
C. $3,300,00
0.
D. $3,588,00
0.
E. $3,420,00
0.

Parent Income $3,180,000 + Sub Income $432,000 - Amortization Allocations

$24,000 = Consolidated Net Income $3,588,000

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-01 Recognize the complexities in preparing consolidated financial reports that emerge
from the passage of time.
Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments
has no effect on the resulting consolidated financial statements.
Topic: Consolidation - The Effects Created By The Passage of Time
Topic: Subsequent Consolidation
21. Jans Inc. acquired all of the outstanding common stock of Tysk Corp. on January 1,
2011, for $372,000. Equipment with a ten-year life was undervalued on Tysk's
financial records by $46,000. Tysk also owned an unrecorded customer list with an
assessed fair value of $67,000 and an estimated remaining life of five years.
Tysk earned reported net income of $180,000 in 2011 and $216,000 in 2012.
Dividends of $70,000 were paid in each of these two years. Selected account
balances as of December 31, 2013, for the two companies follow.

If the partial equity method had been applied, what was 2013 consolidated net
income?

A. $840,00
0.
B. $768,40
0.
C. $822,00
0.
D. $240,00
0.
E. $600,00
0.

Parent $1,080,000 - $480,000 = $600,000; Sub $840,000 - $600,000 = $240,000

$600,000 + $240,000 = $840,000 - ($46,000/10) - ($67,000/5) = $822,000

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 03-03c Prepare consolidated financial statements subsequent to acquisition when the
parent has aplied in its internal records: The partial equity method.
Topic: Subsequent Consolidations - Investment Recorded Using Initial Value or Partial Equity Method
22. Jans Inc. acquired all of the outstanding common stock of Tysk Corp. on January 1,
2011, for $372,000. Equipment with a ten-year life was undervalued on Tysk's
financial records by $46,000. Tysk also owned an unrecorded customer list with an
assessed fair value of $67,000 and an estimated remaining life of five years.
Tysk earned reported net income of $180,000 in 2011 and $216,000 in 2012.
Dividends of $70,000 were paid in each of these two years. Selected account
balances as of December 31, 2013, for the two companies follow.

If the equity method had been applied, what would be the Investment in Tysk Corp.
account balance within the records of Jans at the end of 2013?

A. $612,10
0.
B. $744,00
0.
C. $774,15
0.
D. $372,00
0.
E. $844,15
0.

Initial Investment $372,000

2011 Entries: $180,000 - $70,000 - $18,000 = $92,000
2012 Entries: $216,000 - $70,000 - $18,000 = $128,000
2013 Entries: $240,000 - $70,000 - $18,000 = $152,000
$372,000 + $92,000 + $128,000 + $152,000 = $744,000

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-02 Identify and describe the various methods available to a parent company in order to
maintain its investment in subsidiary account in its internal records.
Learning Objective: 03-03a Prepare consolidated financial statements subsequent to acquisition when the
parent has aplied in its internal records: The equity method.
Topic: Investment Accounting By The Acquiring Company
Topic: Subsequent Consolidation - Investment Recorded By The Equity Method
23. Red Co. acquired 100% of Green, Inc. on January 1, 2012. On that date, Green had
inventory with a book value of $42,000 and a fair value of $52,000. This inventory
had not yet been sold at December 31, 2012. Also, on the date of acquisition,
Green had a building with a book value of $200,000 and a fair value of $390,000.
Green had equipment with a book value of $350,000 and a fair value of $280,000.
The building had a 10-year remaining useful life and the equipment had a 5-year
remaining useful life. How much total expense will be in the consolidated financial
statements for the year ended December 31, 2012 related to the acquisition
allocations of Green?

A. $43,00
0.
B. $33,00
0.
C. $5,00
0.
D. $15,00
0.
E. 0
.

Inventory Adjustment $10,000 + Building Adjustment ($190,000/10) $19,000 +

Equipment Adjustment ([$70,000]/5) [$14,000] = $15,000

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-01 Recognize the complexities in preparing consolidated financial reports that emerge
from the passage of time.
Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments
has no effect on the resulting consolidated financial statements.
Topic: Consolidation - The Effects Created By The Passage of Time
Topic: Subsequent Consolidation

24. All of the following are acceptable methods to account for a majority-owned
investment in subsidiary except

A. The equity
method.
B. The initial value
method.
C. The partial equity
method.
D. The fair-value
method.
E. Book value
method.

AACSB: Reflective thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 03-02 Identify and describe the various methods available to a parent company in order to
maintain its investment in subsidiary account in its internal records.
Topic: Investment Accounting By The Acquiring Company
25. Under the equity method of accounting for an investment,

A. The investment account remains at initial

value.
B. Dividends received are recorded as
revenue.
C. Goodwill is amortized over 20
years.
D. Income reported by the subsidiary increases the investment
account.
E. Dividends received increase the investment
account.

AACSB: Reflective thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 03-02 Identify and describe the various methods available to a parent company in order to
maintain its investment in subsidiary account in its internal records.
Topic: Investment Accounting By The Acquiring Company

26. Under the partial equity method of accounting for an investment,

A. The investment account remains at initial

value.
B. Dividends received are recorded as
revenue.
C. The allocations for excess fair value allocations over book value of net assets at
date of acquisition are applied over their useful lives to reduce the investment
account.
D. Amortization of the excess of fair value allocations over book value is ignored in
regard to the investment account.
E. Dividends received increase the investment
account.

AACSB: Reflective thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 03-02 Identify and describe the various methods available to a parent company in order to
maintain its investment in subsidiary account in its internal records.
Topic: Investment Accounting By The Acquiring Company

27. Under the initial value method, when accounting for an investment in a subsidiary,

A. Dividends received by the subsidiary decrease the investment

account.
B. The investment account is adjusted to fair value at
year-end.
C. Income reported by the subsidiary increases the investment
account.
D. The investment account remains at initial
value.
E. Dividends received are
ignored.

AACSB: Reflective thinking

 AICPA BB: Critical Thinking
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 03-02 Identify and describe the various methods available to a parent company in order to
maintain its investment in subsidiary account in its internal records.
Topic: Investment Accounting By The Acquiring Company

28. According to GAAP regarding amortization of goodwill and other intangible assets,
which of the following statements is true?

A. Goodwill recognized in consolidation must be amortized over

20 years.
B. Goodwill recognized in consolidation must be expensed in the period of
acquisition.
C. Goodwill recognized in consolidation will not be amortized but subject to an
annual test for impairment.
D. Goodwill recognized in consolidation can never be
written off.
E. Goodwill recognized in consolidation must be amortized over
40 years.

AACSB: Reflective thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 03-05 Discuss the rationale for the goodwill impairment testing approach.
Topic: Goodwill Impairment

29. When a company applies the initial method in accounting for its investment in a
subsidiary and the subsidiary reports income in excess of dividends paid, what
entry would be made for a consolidation worksheet?

A. A
above
B. B
above
C. C
above
D. D
above
E. E
above

AACSB: Analytic
AICPA BB: Critical Thinking
 AICPA FN: Measurement
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 03-03b Prepare consolidated financial statements subsequent to acquisition when the
parent has aplied in its internal records: The intial value method.
Topic: Subsequent Consolidations - Investment Recorded Using Initial Value or Partial Equity Method

30. When a company applies the initial value method in accounting for its investment
in a subsidiary and the subsidiary reports income less than dividends paid, what
entry would be made for a consolidation worksheet?

A. A
above
B. B
above
C. C
above
D. D
above
E. E
above

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 03-03b Prepare consolidated financial statements subsequent to acquisition when the
parent has aplied in its internal records: The intial value method.
Topic: Subsequent Consolidations - Investment Recorded Using Initial Value or Partial Equity Method
31. When a company applies the partial equity method in accounting for its investment
in a subsidiary and the subsidiary's equipment has a fair value greater than its
book value, what consolidation worksheet entry is made in a year subsequent to
the initial acquisition of the subsidiary?

A. A
above
B. B
above
C. C
above
D. D
above
E. E
above

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 03-03c Prepare consolidated financial statements subsequent to acquisition when the
parent has aplied in its internal records: The partial equity method.
Topic: Subsequent Consolidations - Investment Recorded Using Initial Value or Partial Equity Method
32. When a company applies the partial equity method in accounting for its investment
in a subsidiary and initial value, book values, and fair values of net assets acquired
are all equal, what consolidation worksheet entry would be made?

A. A
above
B. B
above
C. C
above
D. D
above
E. E
above

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 03-03c Prepare consolidated financial statements subsequent to acquisition when the
parent has aplied in its internal records: The partial equity method.
Topic: Subsequent Consolidations - Investment Recorded Using Initial Value or Partial Equity Method

33. When consolidating a subsidiary under the equity method, which of the following
statements is true?

A. Goodwill is never
recognized.
B. Goodwill required is amortized over 20
years.
C. Goodwill may be recorded on the parent company's
books.
D. The value of any goodwill should be tested annually for
impairment in value.
E. Goodwill should be expensed in the year of
acquisition.

AACSB: Reflective thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 03-05 Discuss the rationale for the goodwill impairment testing approach.
Topic: Goodwill Impairment
34. When consolidating a subsidiary under the equity method, which of the following
statements is true with regard to the subsidiary subsequent to the year of
acquisition?

A. All net assets are revalued to fair value and must be amortized over their
useful lives.
B. Only net assets that had excess fair value over book value when acquired by the
parent must be amortized over their useful lives.
C. All depreciable net assets are revalued to fair value at date of acquisition and
must be amortized over their useful lives.
D. Only depreciable net assets that have excess fair value over book value must be
amortized over their useful lives.
E. Only assets that have excess fair value over book value must be amortized over
their useful lives.

AACSB: Reflective thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 03-02 Identify and describe the various methods available to a parent company in order to
maintain its investment in subsidiary account in its internal records.
Learning Objective: 03-03a Prepare consolidated financial statements subsequent to acquisition when the
parent has aplied in its internal records: The equity method.
Topic: Investment Accounting By The Acquiring Company
Topic: Subsequent Consolidation - Investment Recorded By The Equity Method

35. Which of the following statements is false regarding push-down accounting?

A. Push-down accounting simplifies the consolidation

process.
B. Fewer worksheet entries are necessary when push-down accounting
is applied.
C. Push-down accounting provides better information for internal
evaluation.
D. Push-down accounting must be applied for all business combinations under a
pooling of interests.
E. Push-down proponents argue that a change in ownership creates a new basis for
subsidiary assets and liabilities.

AACSB: Reflective thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 03-08 Understand in general the requirements of push-down accounting and when its use is
appropriate.
Topic: Push-Down Accounting
36. Which of the following is false regarding contingent consideration in business
combinations?

A. Contingent consideration payable in cash is reported under

liabilities.
B. Contingent consideration payable in stock shares is reported under
stockholders' equity.
C. Contingent consideration is recorded because of its substantial probability of
eventual payment.
D. The contingent consideration fair value is recognized as part of the acquisition
regardless of whether eventual payment is based on future performance of the
target firm or future stock price of the acquirer.
E. Contingent consideration is reflected in the acquirer's balance sheet at the
present value of the potential expected future payment.

AACSB: Reflective thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 03-07 Understand the accounting and reporting for contingent consideration subsequent to
a business acquisition.
Topic: Contingent Consideration

37. Factors that should be considered in determining the useful life of an intangible
asset include

A. Legal, regulatory, or contractual

provisions.
B. The residual value of the
asset.
C. The entity's expected use of the intangible
asset.
D. The effects of obsolescence, competition, and technological
change.
E. All of these choices are used in determining the useful life of an
intangible asset.

AACSB: Reflective thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 03-06 Describe the procedures for conducting a goodwill impairment test.
Topic: Qualitative Assessment Option
38. Consolidated net income using the equity method for an acquisition combination is
computed as follows:

A. Parent company's income from its own operations plus the equity from
subsidiary's income recorded by the parent.
B. Parent's reported net
income.
C. Combined revenues less combined expenses less equity in subsidiary's income
less amortization of fair-value allocations in excess of book value.
D. Parent's revenues less expenses for its own operations plus the equity from
subsidiary's income recorded by parent.
E. All of
these.

AACSB: Reflective thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 03-03a Prepare consolidated financial statements subsequent to acquisition when the
parent has aplied in its internal records: The equity method.
Topic: Subsequent Consolidation - Investment Recorded By The Equity Method
39. Perry Company acquires 100% of the stock of Hurley Corporation on January 1,
2012, for $3,800 cash. As of that date Hurley has the following trial balance;

Any excess of consideration transferred over fair value of net assets acquired is
considered goodwill with an indefinite life. FIFO inventory valuation method is used.

Compute the consideration transferred in excess of book value acquired at January

1, 2012.

A. $15
0.
B. $70
0.
C. $2,20
0.
D. $55
0.
E. $2,90
0.

Acquisition Price $3,800 - Total Equity at Acquisition $3,100 = $700

AACSB: Analytic
AICPA BB: Critical Thinking
 AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments
has no effect on the resulting consolidated financial statements.
Topic: Subsequent Consolidation
40. Perry Company acquires 100% of the stock of Hurley Corporation on January 1,
2012, for $3,800 cash. As of that date Hurley has the following trial balance;

Any excess of consideration transferred over fair value of net assets acquired is
considered goodwill with an indefinite life. FIFO inventory valuation method is used.

Compute goodwill, if any, at January 1, 2012.

A. $15
0.
B. $25
0.
C. $70
0.
D. $1,20
0.
E. $55
0.

Identified BVs $2,950 - Identified FVs $3,100 = $150 Excess Unidentified (Goodwill)

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
 Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments
has no effect on the resulting consolidated financial statements.
Topic: Subsequent Consolidation
41. Perry Company acquires 100% of the stock of Hurley Corporation on January 1,
2012, for $3,800 cash. As of that date Hurley has the following trial balance;

Any excess of consideration transferred over fair value of net assets acquired is
considered goodwill with an indefinite life. FIFO inventory valuation method is used.

Compute the amount of Hurley's inventory that would be reported in a January 1,

2012, consolidated balance sheet.

A. $80
0.
B. $10
0.
C. $90
0.
D. $15
0.
E. $0
.

Fair Value at Acquisition = $900

AACSB: Analytic
AICPA BB: Critical Thinking
 AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-01 Recognize the complexities in preparing consolidated financial reports that emerge
from the passage of time.
Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments
has no effect on the resulting consolidated financial statements.
Topic: Consolidation - The Effects Created By The Passage of Time
Topic: Subsequent Consolidation
42. Perry Company acquires 100% of the stock of Hurley Corporation on January 1,
2012, for $3,800 cash. As of that date Hurley has the following trial balance;

Any excess of consideration transferred over fair value of net assets acquired is
considered goodwill with an indefinite life. FIFO inventory valuation method is used.

Compute the amount of Hurley's buildings that would be reported in a December

31, 2012, consolidated balance sheet.

A. $1,56
0.
B. $1,26
0.
C. $1,44
0.
D. $1,16
0.
E. $1,14
0.

FV $1,200 + Excess Amortization ($300/5) $60 = $1,260

AACSB: Analytic
AICPA BB: Critical Thinking
 AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-01 Recognize the complexities in preparing consolidated financial reports that emerge
from the passage of time.
Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments
has no effect on the resulting consolidated financial statements.
Topic: Consolidation - The Effects Created By The Passage of Time
Topic: Subsequent Consolidation
43. Perry Company acquires 100% of the stock of Hurley Corporation on January 1,
2012, for $3,800 cash. As of that date Hurley has the following trial balance;

Any excess of consideration transferred over fair value of net assets acquired is
considered goodwill with an indefinite life. FIFO inventory valuation method is used.

Compute the amount of Hurley's equipment that would be reported in a December

31, 2012, consolidated balance sheet.

A. $1,00
0.
B. $1,25
0.
C. $87
5.
D. $1,12
5.
E. $75
0.

FV $1,250 - Excess Amortization ($250/2) $125 = $1,125

AACSB: Analytic
AICPA BB: Critical Thinking
 AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-01 Recognize the complexities in preparing consolidated financial reports that emerge
from the passage of time.
Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments
has no effect on the resulting consolidated financial statements.
Topic: Consolidation - The Effects Created By The Passage of Time
Topic: Subsequent Consolidation
44. Perry Company acquires 100% of the stock of Hurley Corporation on January 1,
2012, for $3,800 cash. As of that date Hurley has the following trial balance;

Any excess of consideration transferred over fair value of net assets acquired is
considered goodwill with an indefinite life. FIFO inventory valuation method is used.

Compute the amount of total expenses reported in an income statement for the
year ended December 31, 2012, in order to recognize acquisition-date allocations
of fair value and book value differences,

A. $14
0.
B. $19
0.
C. $26
0.
D. $28
5.
E. $31
0.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
 Difficulty: 2 Medium
Learning Objective: 03-01 Recognize the complexities in preparing consolidated financial reports that emerge
from the passage of time.
Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments
has no effect on the resulting consolidated financial statements.
Topic: Consolidation - The Effects Created By The Passage of Time
Topic: Subsequent Consolidation
45. Perry Company acquires 100% of the stock of Hurley Corporation on January 1,
2012, for $3,800 cash. As of that date Hurley has the following trial balance;

Any excess of consideration transferred over fair value of net assets acquired is
considered goodwill with an indefinite life. FIFO inventory valuation method is used.

Compute the amount of Hurley's long-term liabilities that would be reported in a

December 31, 2012, consolidated balance sheet.

A. $1,80
0.
B. $1,70
0.
C. $1,72
5.
D. $1,67
5.
E. $3,50
0.

FV $1,700 + Excess Amortization ($100/4) $25 = $1,725

AACSB: Analytic
AICPA BB: Critical Thinking
 AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 03-01 Recognize the complexities in preparing consolidated financial reports that emerge
from the passage of time.
Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments
has no effect on the resulting consolidated financial statements.
Topic: Consolidation - The Effects Created By The Passage of Time
Topic: Subsequent Consolidation
46. Perry Company acquires 100% of the stock of Hurley Corporation on January 1,
2012, for $3,800 cash. As of that date Hurley has the following trial balance;

Any excess of consideration transferred over fair value of net assets acquired is
considered goodwill with an indefinite life. FIFO inventory valuation method is used.

Compute the amount of Hurley's buildings that would be reported in a December

31, 2013, consolidated balance sheet.

A. $1,62
0.
B. $1,38
0.
C. $1,32
0.
D. $1,08
0.
E. $1,50
0.

FV $1,200 + Excess Amortization ($300/5) $60 × 2 = $1,320

AACSB: Analytic
AICPA BB: Critical Thinking
 AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-01 Recognize the complexities in preparing consolidated financial reports that emerge
from the passage of time.
Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments
has no effect on the resulting consolidated financial statements.
Topic: Consolidation - The Effects Created By The Passage of Time
Topic: Subsequent Consolidation
47. Perry Company acquires 100% of the stock of Hurley Corporation on January 1,
2012, for $3,800 cash. As of that date Hurley has the following trial balance;

Any excess of consideration transferred over fair value of net assets acquired is
considered goodwill with an indefinite life. FIFO inventory valuation method is used.

Compute the amount of Hurley's equipment that would be reported in a December

31, 2013, consolidated balance sheet.

A. $0
.
B. $1,00
0.
C. $1,25
0.
D. $1,12
5.
E. $1,20
0.

FV $1,250 - Excess Amortization ($250/2) $125 × 2 = $1,000

AACSB: Analytic
AICPA BB: Critical Thinking
 AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-01 Recognize the complexities in preparing consolidated financial reports that emerge
from the passage of time.
Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments
has no effect on the resulting consolidated financial statements.
Topic: Consolidation - The Effects Created By The Passage of Time
Topic: Subsequent Consolidation
48. Perry Company acquires 100% of the stock of Hurley Corporation on January 1,
2012, for $3,800 cash. As of that date Hurley has the following trial balance;

Any excess of consideration transferred over fair value of net assets acquired is
considered goodwill with an indefinite life. FIFO inventory valuation method is used.

Compute the amount of Hurley's land that would be reported in a December 31,
2013, consolidated balance sheet.

A. $90
0.
B. $1,30
0.
C. $40
0.
D. $1,45
0.
E. $2,20
0.

FV $1,300

AACSB: Analytic
AICPA BB: Critical Thinking
 AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-01 Recognize the complexities in preparing consolidated financial reports that emerge
from the passage of time.
Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments
has no effect on the resulting consolidated financial statements.
Topic: Consolidation - The Effects Created By The Passage of Time
Topic: Subsequent Consolidation
49. Perry Company acquires 100% of the stock of Hurley Corporation on January 1,
2012, for $3,800 cash. As of that date Hurley has the following trial balance;

Any excess of consideration transferred over fair value of net assets acquired is
considered goodwill with an indefinite life. FIFO inventory valuation method is used.

Compute the amount of Hurley's long-term liabilities that would be reported in a

December 31, 2013, consolidated balance sheet.

A. $1,70
0.
B. $1,80
0.
C. $1,65
0.
D. $1,75
0.
E. $3,50
0.

FV $1,700 + Excess Amortization ($100/4) $25 × 2 = $1,750

AACSB: Analytic
AICPA BB: Critical Thinking
 AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-01 Recognize the complexities in preparing consolidated financial reports that emerge
from the passage of time.
Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments
has no effect on the resulting consolidated financial statements.
Topic: Consolidation - The Effects Created By The Passage of Time
Topic: Subsequent Consolidation

50. Kaye Company acquired 100% of Fiore Company on January 1, 2013. Kaye paid
$1,000 excess consideration over book value which is being amortized at $20 per
year. Fiore reported net income of $400 in 2013 and paid dividends of $100.

Assume the equity method is applied. How much will Kaye's income increase or
decrease as a result of Fiore's operations?

A. $400
increase.
B. $300
increase.
C. $380
increase.
D. $280
increase.
E. $480
increase.

2013 Income $400 - Amortization $20 = $380 Increase

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-02 Identify and describe the various methods available to a parent company in order to
maintain its investment in subsidiary account in its internal records.
Topic: Investment Accounting By The Acquiring Company
51. Kaye Company acquired 100% of Fiore Company on January 1, 2013. Kaye paid
$1,000 excess consideration over book value which is being amortized at $20 per
year. Fiore reported net income of $400 in 2013 and paid dividends of $100.

Assume the partial equity method is applied. How much will Kaye's income increase
or decrease as a result of Fiore's operations?

A. $400
increase.
B. $300
increase.
C. $380
increase.
D. $280
increase.
E. $480
increase.

2013 Income = $400 Increase

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-02 Identify and describe the various methods available to a parent company in order to
maintain its investment in subsidiary account in its internal records.
Topic: Investment Accounting By The Acquiring Company

52. Kaye Company acquired 100% of Fiore Company on January 1, 2013. Kaye paid
$1,000 excess consideration over book value which is being amortized at $20 per
year. Fiore reported net income of $400 in 2013 and paid dividends of $100.

Assume the initial value method is applied. How much will Kaye's income increase
or decrease as a result of Fiore's operations?

A. $400
increase.
B. $300
increase.
C. $380
increase.
D. $100
increase.
E. $210
increase.

2013 Dividends = $100 Increase

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-02 Identify and describe the various methods available to a parent company in order to
maintain its investment in subsidiary account in its internal records.
Topic: Investment Accounting By The Acquiring Company
53. Kaye Company acquired 100% of Fiore Company on January 1, 2013. Kaye paid
$1,000 excess consideration over book value which is being amortized at $20 per
year. Fiore reported net income of $400 in 2013 and paid dividends of $100.

Assume the partial equity method is used. In the years following acquisition, what
additional worksheet entry must be made for consolidation purposes that is not
required for the equity method?

A. Entry
A.
B. Entry
B.
C. Entry
C.
D. Entry
D.
E. Entry
E.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 03-03c Prepare consolidated financial statements subsequent to acquisition when the
parent has aplied in its internal records: The partial equity method.
Topic: Subsequent Consolidations - Investment Recorded Using Initial Value or Partial Equity Method
54. Kaye Company acquired 100% of Fiore Company on January 1, 2013. Kaye paid
$1,000 excess consideration over book value which is being amortized at $20 per
year. Fiore reported net income of $400 in 2013 and paid dividends of $100.

Assume the initial value method is used. In the year subsequent to acquisition,
what additional worksheet entry must be made for consolidation purposes that is
not required for the equity method?

A. Entry
A.
B. Entry
B.
C. Entry
C.
D. Entry
D.
E. Entry
E.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 03-03b Prepare consolidated financial statements subsequent to acquisition when the
parent has aplied in its internal records: The intial value method.
Topic: Subsequent Consolidations - Investment Recorded Using Initial Value or Partial Equity Method
55. Hoyt Corporation agreed to the following terms in order to acquire the net assets of
Brown Company on January 1, 2013:

(1.) To issue 400 shares of common stock ($10 par) with a fair value of $45 per
share.
(2.) To assume Brown's liabilities which have a fair value of $1,500.

On the date of acquisition, the consideration transferred for Hoyt's acquisition of

Brown would be

A. $18,00
0.
B. $16,50
0.
C. $20,00
0.
D. $18,50
0.
E. $19,50
0.

Common Stock (400 shares × $45) $18,000 + Liabilities Assumed $1,500 =

$19,500

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 03-02 Identify and describe the various methods available to a parent company in order to
maintain its investment in subsidiary account in its internal records.
Topic: Investment Accounting By The Acquiring Company
56. Following are selected accounts for Green Corporation and Vega Company as of
December 31, 2015. Several of Green's accounts have been omitted.

Green acquired 100% of Vega on January 1, 2011, by issuing 10,500 shares of its
$10 par value common stock with a fair value of $95 per share. On January 1, 2011,
Vega's land was undervalued by $40,000, its buildings were overvalued by
$30,000, and equipment was undervalued by $80,000. The buildings have a 20-
year life and the equipment has a 10-year life. $50,000 was attributed to an
unrecorded trademark with a 16-year remaining life. There was no goodwill
associated with this investment.

Compute the book value of Vega at January 1, 2011.

A. $997,50
0.
B. $857,50
0.
C. $1,200,00
0.
D. $1,600,00
0.
E. $827,50
0.

Common Stock Fair Value $997,500 - Fair Value Asset Adjustment (Land $40,000 -
Building $30,000 + Equipment $80,000 + Unrecorded Trademark $50,000)
$140,000 = $857,500

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-02 Identify and describe the various methods available to a parent company in order to
maintain its investment in subsidiary account in its internal records.
Topic: Investment Accounting By The Acquiring Company
57. Following are selected accounts for Green Corporation and Vega Company as of
December 31, 2015. Several of Green's accounts have been omitted.

Green acquired 100% of Vega on January 1, 2011, by issuing 10,500 shares of its
$10 par value common stock with a fair value of $95 per share. On January 1, 2011,
Vega's land was undervalued by $40,000, its buildings were overvalued by
$30,000, and equipment was undervalued by $80,000. The buildings have a 20-
year life and the equipment has a 10-year life. $50,000 was attributed to an
unrecorded trademark with a 16-year remaining life. There was no goodwill
associated with this investment.

Compute the December 31, 2015, consolidated revenues.

A. $1,400,00
0.
B. $800,00
0.
C. $500,00
0.
D. $1,590,37
5.
E. $1,390,37
5.

$900,000 + $500,000 = $1,400,000

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 03-01 Recognize the complexities in preparing consolidated financial reports that emerge
from the passage of time.
Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments
has no effect on the resulting consolidated financial statements.
Topic: Consolidation - The Effects Created By The Passage of Time
Topic: Subsequent Consolidation
58. Following are selected accounts for Green Corporation and Vega Company as of
December 31, 2015. Several of Green's accounts have been omitted.

Green acquired 100% of Vega on January 1, 2011, by issuing 10,500 shares of its
$10 par value common stock with a fair value of $95 per share. On January 1, 2011,
Vega's land was undervalued by $40,000, its buildings were overvalued by
$30,000, and equipment was undervalued by $80,000. The buildings have a 20-
year life and the equipment has a 10-year life. $50,000 was attributed to an
unrecorded trademark with a 16-year remaining life. There was no goodwill
associated with this investment.

Compute the December 31, 2015, consolidated total expenses.

A. $620,00
0.
B. $280,00
0.
C. $900,00
0.
D. $909,62
5.
E. $299,62
5.

COGS ($360,000 + $200,000) + Depreciation ($140,000 + $40,000) + Other Exp

($100,000 + $60,000) + Excess FV Amortization (Blg [$1,500] + Equip $8,000 +
Trademark $3,125) = $909,625

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 03-01 Recognize the complexities in preparing consolidated financial reports that emerge
from the passage of time.
Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments
has no effect on the resulting consolidated financial statements.
Topic: Consolidation - The Effects Created By The Passage of Time
Topic: Subsequent Consolidation
59. Following are selected accounts for Green Corporation and Vega Company as of
December 31, 2015. Several of Green's accounts have been omitted.

Green acquired 100% of Vega on January 1, 2011, by issuing 10,500 shares of its
$10 par value common stock with a fair value of $95 per share. On January 1, 2011,
Vega's land was undervalued by $40,000, its buildings were overvalued by
$30,000, and equipment was undervalued by $80,000. The buildings have a 20-
year life and the equipment has a 10-year life. $50,000 was attributed to an
unrecorded trademark with a 16-year remaining life. There was no goodwill
associated with this investment.

Compute the December 31, 2015, consolidated buildings.

A. $1,037,50
0.
B. $1,007,50
0.
C. $1,000,00
0.
D. $1,022,50
0.
E. $1,012,50
0.

$750,000 + $280,000 - $30,000 = $1,000,000 + Amortization ($1,500 × 5) =

$1,007,500

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 03-01 Recognize the complexities in preparing consolidated financial reports that emerge
from the passage of time.
Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments
has no effect on the resulting consolidated financial statements.
Topic: Consolidation - The Effects Created By The Passage of Time
Topic: Subsequent Consolidation
60. Following are selected accounts for Green Corporation and Vega Company as of
December 31, 2015. Several of Green's accounts have been omitted.

Green acquired 100% of Vega on January 1, 2011, by issuing 10,500 shares of its
$10 par value common stock with a fair value of $95 per share. On January 1, 2011,
Vega's land was undervalued by $40,000, its buildings were overvalued by
$30,000, and equipment was undervalued by $80,000. The buildings have a 20-
year life and the equipment has a 10-year life. $50,000 was attributed to an
unrecorded trademark with a 16-year remaining life. There was no goodwill
associated with this investment.

Compute the December 31, 2015, consolidated equipment.

A. $800,00
0.
B. $808,00
0.
C. $840,00
0.
D. $760,00
0.
E. $848,00
0.

$300,000 + $580,000 = $880,000 - Amortization ($8,000 × 5) = $840,000

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-01 Recognize the complexities in preparing consolidated financial reports that emerge
from the passage of time.
Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments
has no effect on the resulting consolidated financial statements.
Topic: Consolidation - The Effects Created By The Passage of Time
Topic: Subsequent Consolidation
61. Following are selected accounts for Green Corporation and Vega Company as of
December 31, 2015. Several of Green's accounts have been omitted.

Green acquired 100% of Vega on January 1, 2011, by issuing 10,500 shares of its
$10 par value common stock with a fair value of $95 per share. On January 1, 2011,
Vega's land was undervalued by $40,000, its buildings were overvalued by
$30,000, and equipment was undervalued by $80,000. The buildings have a 20-
year life and the equipment has a 10-year life. $50,000 was attributed to an
unrecorded trademark with a 16-year remaining life. There was no goodwill
associated with this investment.

Compute the December 31, 2015, consolidated land.

A. $220,00
0.
B. $180,00
0.
C. $670,00
0.
D. $630,00
0.
E. $450,00
0.

$450,000 + $220,000 = $670,000

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-01 Recognize the complexities in preparing consolidated financial reports that emerge
from the passage of time.
Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments
has no effect on the resulting consolidated financial statements.
Topic: Consolidation - The Effects Created By The Passage of Time
Topic: Subsequent Consolidation
62. Following are selected accounts for Green Corporation and Vega Company as of
December 31, 2015. Several of Green's accounts have been omitted.

Green acquired 100% of Vega on January 1, 2011, by issuing 10,500 shares of its
$10 par value common stock with a fair value of $95 per share. On January 1, 2011,
Vega's land was undervalued by $40,000, its buildings were overvalued by
$30,000, and equipment was undervalued by $80,000. The buildings have a 20-
year life and the equipment has a 10-year life. $50,000 was attributed to an
unrecorded trademark with a 16-year remaining life. There was no goodwill
associated with this investment.

Compute the December 31, 2015, consolidated trademark.

A. $50,00
0.
B. $46,87
5.
C. $0
.
D. $34,37
5.
E. $37,50
0.

$50,000 - Amortization ($3,125 × 5) = $34,375

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-01 Recognize the complexities in preparing consolidated financial reports that emerge
from the passage of time.
Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments
has no effect on the resulting consolidated financial statements.
Topic: Consolidation - The Effects Created By The Passage of Time
Topic: Subsequent Consolidation
63. Following are selected accounts for Green Corporation and Vega Company as of
December 31, 2015. Several of Green's accounts have been omitted.

Green acquired 100% of Vega on January 1, 2011, by issuing 10,500 shares of its
$10 par value common stock with a fair value of $95 per share. On January 1, 2011,
Vega's land was undervalued by $40,000, its buildings were overvalued by
$30,000, and equipment was undervalued by $80,000. The buildings have a 20-
year life and the equipment has a 10-year life. $50,000 was attributed to an
unrecorded trademark with a 16-year remaining life. There was no goodwill
associated with this investment.

Compute the December 31, 2015, consolidated common stock.

A. $450,00
0.
B. $530,00
0.
C. $555,00
0.
D. $635,00
0.
E. $525,00
0.

$450,000 (Parent Only)

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 03-01 Recognize the complexities in preparing consolidated financial reports that emerge
from the passage of time.
Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments
has no effect on the resulting consolidated financial statements.
Topic: Consolidation - The Effects Created By The Passage of Time
Topic: Subsequent Consolidation
64. Following are selected accounts for Green Corporation and Vega Company as of
December 31, 2015. Several of Green's accounts have been omitted.

Green acquired 100% of Vega on January 1, 2011, by issuing 10,500 shares of its
$10 par value common stock with a fair value of $95 per share. On January 1, 2011,
Vega's land was undervalued by $40,000, its buildings were overvalued by
$30,000, and equipment was undervalued by $80,000. The buildings have a 20-
year life and the equipment has a 10-year life. $50,000 was attributed to an
unrecorded trademark with a 16-year remaining life. There was no goodwill
associated with this investment.

Compute the December 31, 2015, consolidated additional paid-in capital.

A. $210,00
0.
B. $75,00
0.
C. $1,102,50
0.
D. $942,50
0.
E. $525,00
0.

$75,000 (Parent Only)

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 03-01 Recognize the complexities in preparing consolidated financial reports that emerge
from the passage of time.
Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments
has no effect on the resulting consolidated financial statements.
Topic: Consolidation - The Effects Created By The Passage of Time
Topic: Subsequent Consolidation
65. Following are selected accounts for Green Corporation and Vega Company as of
December 31, 2015. Several of Green's accounts have been omitted.

Green acquired 100% of Vega on January 1, 2011, by issuing 10,500 shares of its
$10 par value common stock with a fair value of $95 per share. On January 1, 2011,
Vega's land was undervalued by $40,000, its buildings were overvalued by
$30,000, and equipment was undervalued by $80,000. The buildings have a 20-
year life and the equipment has a 10-year life. $50,000 was attributed to an
unrecorded trademark with a 16-year remaining life. There was no goodwill
associated with this investment.

Compute the December 31, 2015 consolidated retained earnings.

A. $1,645,37
5.
B. $1,350,00
0.
C. $1,565,37
5.
D. $1,840,37
5.
E. $1,265,37
5.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 03-01 Recognize the complexities in preparing consolidated financial reports that emerge
from the passage of time.
Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments
has no effect on the resulting consolidated financial statements.
Topic: Consolidation - The Effects Created By The Passage of Time
Topic: Subsequent Consolidation
66. Following are selected accounts for Green Corporation and Vega Company as of
December 31, 2015. Several of Green's accounts have been omitted.

Green acquired 100% of Vega on January 1, 2011, by issuing 10,500 shares of its
$10 par value common stock with a fair value of $95 per share. On January 1, 2011,
Vega's land was undervalued by $40,000, its buildings were overvalued by
$30,000, and equipment was undervalued by $80,000. The buildings have a 20-
year life and the equipment has a 10-year life. $50,000 was attributed to an
unrecorded trademark with a 16-year remaining life. There was no goodwill
associated with this investment.

Compute the equity in Vega's income to be included in Green's consolidated

income statement for 2015.

A. $500,00
0.
B. $300,00
0.
C. $190,37
5.
D. $200,00
0.
E. $290,37
5.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-01 Recognize the complexities in preparing consolidated financial reports that emerge
from the passage of time.
Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments
has no effect on the resulting consolidated financial statements.
Topic: Consolidation - The Effects Created By The Passage of Time
Topic: Subsequent Consolidation
67. One company acquires another company in a combination accounted for as an
acquisition. The acquiring company decides to apply the initial value method in
accounting for the combination. What is one reason the acquiring company might
have made this decision?

A. It is the only method allowed by the

SEC.
B. It is relatively easy to
apply.
C. It is the only internal reporting method allowed by generally accepted
accounting principles.
D. Operating results on the parent's financial records reflect
consolidated totals.
E. When the initial method is used, no worksheet entries are required in the
consolidation process.

AACSB: Reflective thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 03-02 Identify and describe the various methods available to a parent company in order to
maintain its investment in subsidiary account in its internal records.
Topic: Investment Accounting By The Acquiring Company

68. One company acquires another company in a combination accounted for as an

acquisition. The acquiring company decides to apply the equity method in
accounting for the combination. What is one reason the acquiring company might
have made this decision?

A. It is the only method allowed by the

SEC.
B. It is relatively easy to
apply.
C. It is the only internal reporting method allowed by generally accepted
accounting principles.
D. Operating results on the parent's financial records reflect
consolidated totals.
E. When the equity method is used, no worksheet entries are required in the
consolidation process.

AACSB: Reflective thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 03-02 Identify and describe the various methods available to a parent company in order to
maintain its investment in subsidiary account in its internal records.
Topic: Investment Accounting By The Acquiring Company
69. When is a goodwill impairment loss recognized?

A. Annually on a systematic and rational

basis.
B. Never
.
C. If both the fair value of a reporting unit and its associated implied goodwill fall
below their respective carrying values.
D. If the fair value of a reporting unit falls below its original
acquisition price.
E. Whenever the fair value of the entity declines
significantly.

AACSB: Reflective thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 03-05 Discuss the rationale for the goodwill impairment testing approach.
Topic: Goodwill Impairment

70. Which of the following will result in the recognition of an impairment loss on
goodwill?

A. Goodwill amortization is to be recognized annually on a systematic and

rational basis.
B. Both the fair value of a reporting unit and its associated implied goodwill fall
below their respective carrying values.
C. The fair value of the entity declines
significantly.
D. The fair value of a reporting unit falls below the original consideration
transferred for the acquisition.
E. The entity is investigated by the SEC and its reputation has been severely
damaged.

AACSB: Reflective thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 03-05 Discuss the rationale for the goodwill impairment testing approach.
Topic: Goodwill Impairment
71. Goehler, Inc. acquires all of the voting stock of Kenneth, Inc. on January 4, 2012, at
an amount in excess of Kenneth's fair value. On that date, Kenneth has equipment
with a book value of $90,000 and a fair value of $120,000 (10-year remaining life).
Goehler has equipment with a book value of $800,000 and a fair value of
$1,200,000 (10-year remaining life). On December 31, 2013, Goehler has
equipment with a book value of $975,000 but a fair value of $1,350,000 and
Kenneth has equipment with a book value of $105,000 but a fair value of $125,000.

If Goehler applies the equity method in accounting for Kenneth, what is the
consolidated balance for the Equipment account as of December 31, 2013?

A. $1,080,00
0.
B. $1,104,00
0.
C. $1,100,00
0.
D. $1,468,00
0.
E. $1,475,00
0.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-03a Prepare consolidated financial statements subsequent to acquisition when the
parent has aplied in its internal records: The equity method.
Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments
has no effect on the resulting consolidated financial statements.
Topic: Subsequent Consolidation
Topic: Subsequent Consolidation - Investment Recorded By The Equity Method

72. Goehler, Inc. acquires all of the voting stock of Kenneth, Inc. on January 4, 2012, at
an amount in excess of Kenneth's fair value. On that date, Kenneth has equipment
with a book value of $90,000 and a fair value of $120,000 (10-year remaining life).
Goehler has equipment with a book value of $800,000 and a fair value of
$1,200,000 (10-year remaining life). On December 31, 2013, Goehler has
equipment with a book value of $975,000 but a fair value of $1,350,000 and
Kenneth has equipment with a book value of $105,000 but a fair value of $125,000.

If Goehler applies the partial equity method in accounting for Kenneth, what is the
consolidated balance for the Equipment account as of December 31, 2013?

A. $1,080,00
0.
B. $1,104,00
0.
C. $1,100,00
0.
D. $1,468,00
0.
E. $1,475,00
0.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
 Difficulty: 2 Medium
Learning Objective: 03-03c Prepare consolidated financial statements subsequent to acquisition when the
parent has aplied in its internal records: The partial equity method.
Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments
has no effect on the resulting consolidated financial statements.
Topic: Subsequent Consolidation
Topic: Subsequent Consolidations - Investment Recorded Using Initial Value or Partial Equity Method

73. Goehler, Inc. acquires all of the voting stock of Kenneth, Inc. on January 4, 2012, at
an amount in excess of Kenneth's fair value. On that date, Kenneth has equipment
with a book value of $90,000 and a fair value of $120,000 (10-year remaining life).
Goehler has equipment with a book value of $800,000 and a fair value of
$1,200,000 (10-year remaining life). On December 31, 2013, Goehler has
equipment with a book value of $975,000 but a fair value of $1,350,000 and
Kenneth has equipment with a book value of $105,000 but a fair value of $125,000.

If Goehler applies the initial value method in accounting for Kenneth, what is the
consolidated balance for the Equipment account as of December 31, 2013?

A. $1,080,00
0.
B. $1,104,00
0.
C. $1,100,00
0.
D. $1,468,00
0.
E. $1,475,00
0.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-03b Prepare consolidated financial statements subsequent to acquisition when the
parent has aplied in its internal records: The intial value method.
Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments
has no effect on the resulting consolidated financial statements.
Topic: Subsequent Consolidation
Topic: Subsequent Consolidations - Investment Recorded Using Initial Value or Partial Equity Method

74. How is the fair value allocation of an intangible asset allocated to expense when
the asset has no legal, regulatory, contractual, competitive, economic, or other
factors that limit its life?

A. Equally over 20
years.
B. Equally over 40
years.
C. Equally over 20 years with an annual impairment
review.
D. No amortization, but annually reviewed for impairment and adjusted
accordingly.
E. No amortization over an indefinite
period time.

AACSB: Reflective thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
 Learning Objective: 03-06 Describe the procedures for conducting a goodwill impairment test.
Topic: Qualitative Assessment Option

75. Harrison, Inc. acquires 100% of the voting stock of Rhine Company on January 1,
2012 for $400,000 cash. A contingent payment of $16,500 will be paid on April 15,
2013 if Rhine generates cash flows from operations of $27,000 or more in the next
year. Harrison estimates that there is a 20% probability that Rhine will generate at
least $27,000 next year, and uses an interest rate of 5% to incorporate the time
value of money. The fair value of $16,500 at 5%, using a probability weighted
approach, is $3,142.

What will Harrison record as its Investment in Rhine on January 1, 2012?

A. $400,00
0.
B. $403,14
2.
C. $406,00
0.
D. $409,14
2.
E. $416,50
0.

Cash Payment $400,000 + Weighted Fair Value of Contingency $3,142 = $403,142

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-07 Understand the accounting and reporting for contingent consideration subsequent to
a business acquisition.
Topic: Contingent Consideration

76. Harrison, Inc. acquires 100% of the voting stock of Rhine Company on January 1,
2012 for $400,000 cash. A contingent payment of $16,500 will be paid on April 15,
2013 if Rhine generates cash flows from operations of $27,000 or more in the next
year. Harrison estimates that there is a 20% probability that Rhine will generate at
least $27,000 next year, and uses an interest rate of 5% to incorporate the time
value of money. The fair value of $16,500 at 5%, using a probability weighted
approach, is $3,142.

Assuming Rhine generates cash flow from operations of $27,200 in 2012, how will
Harrison record the $16,500 payment of cash on April 15, 2013 in satisfaction of its
contingent obligation?

A. Debit Contingent performance obligation $16,500, and Credit Cash

$16,500.
B. Debit Contingent performance obligation $3,142, debit Loss from revaluation of
contingent performance obligation $13,358, and Credit Cash $16,500.
C. Debit Investment in Subsidiary and Credit Cash
$16,500.
D. Debit Goodwill and Credit Cash
$16,500.
E. No
entry.

AACSB: Analytic
 AICPA BB: Critical Thinking
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 03-07 Understand the accounting and reporting for contingent consideration subsequent to
a business acquisition.
Topic: Contingent Consideration

77. Harrison, Inc. acquires 100% of the voting stock of Rhine Company on January 1,
2012 for $400,000 cash. A contingent payment of $16,500 will be paid on April 15,
2013 if Rhine generates cash flows from operations of $27,000 or more in the next
year. Harrison estimates that there is a 20% probability that Rhine will generate at
least $27,000 next year, and uses an interest rate of 5% to incorporate the time
value of money. The fair value of $16,500 at 5%, using a probability weighted
approach, is $3,142.

When recording consideration transferred for the acquisition of Rhine on January 1,

2012, Harrison will record a contingent performance obligation in the amount of:

A. $628.4
0
B. $2,671.6
0
C. $3,142.0
0
D. $13,358.
00
E. $16,500.
00

Weighted Fair Value of Contingency = $3,142

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-07 Understand the accounting and reporting for contingent consideration subsequent to
a business acquisition.
Topic: Contingent Consideration
78. Beatty, Inc. acquires 100% of the voting stock of Gataux Company on January 1,
2012 for $500,000 cash. A contingent payment of $12,000 will be paid on April 1,
2013 if Gataux generates cash flows from operations of $26,500 or more in the
next year. Beatty estimates that there is a 30% probability that Gataux will
generate at least $26,500 next year, and uses an interest rate of 4% to incorporate
the time value of money. The fair value of $12,000 at 4%, using a probability
weighted approach, is $3,461.

What will Beatty record as its Investment in Gataux on January 1, 2012?

A. $500,00
0.
B. $503,46
1.
C. $512,00
0.
D. $515,46
1.
E. $526,50
0.

Cash Payment $500,000 + Weighted Fair Value of Contingency $3,461 = $503,461

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-07 Understand the accounting and reporting for contingent consideration subsequent to
a business acquisition.
Topic: Contingent Consideration

79. Beatty, Inc. acquires 100% of the voting stock of Gataux Company on January 1,
2012 for $500,000 cash. A contingent payment of $12,000 will be paid on April 1,
2013 if Gataux generates cash flows from operations of $26,500 or more in the
next year. Beatty estimates that there is a 30% probability that Gataux will
generate at least $26,500 next year, and uses an interest rate of 4% to incorporate
the time value of money. The fair value of $12,000 at 4%, using a probability
weighted approach, is $3,461.

Assuming Gataux generates cash flow from operations of $27,200 in 2012, how will
Beatty record the $12,000 payment of cash on April 1, 2013 in satisfaction of its
contingent obligation?

A. Debit Contingent performance obligation $3,461, debit Goodwill $8,539, and

Credit Cash $12,000.
B. Debit Contingent performance obligation $3,461, debit Loss from revaluation of
contingent performance obligation $8,539, and Credit Cash $12,000.
C. Debit Goodwill and Credit Cash
$12,000.
D. Debit Goodwill $27,200, credit Contingent performance obligation $15,200, and
Credit Cash $12,000.
E. No
entry.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Accessibility: Keyboard Navigation
 Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 03-07 Understand the accounting and reporting for contingent consideration subsequent to
a business acquisition.
Topic: Contingent Consideration

80. Beatty, Inc. acquires 100% of the voting stock of Gataux Company on January 1,
2012 for $500,000 cash. A contingent payment of $12,000 will be paid on April 1,
2013 if Gataux generates cash flows from operations of $26,500 or more in the
next year. Beatty estimates that there is a 30% probability that Gataux will
generate at least $26,500 next year, and uses an interest rate of 4% to incorporate
the time value of money. The fair value of $12,000 at 4%, using a probability
weighted approach, is $3,461.

When recording consideration transferred for the acquisition of Gataux on January

1, 2012, Beatty will record a contingent performance obligation in the amount of:

A. $692.2
0
B. $3,040.0
0
C. $3,461.0
0
D. $12,000.
00
E. $15,200.
00

Weighted Fair Value of Contingency = $3,461

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-07 Understand the accounting and reporting for contingent consideration subsequent to
a business acquisition.
Topic: Contingent Consideration
81. Prince Company acquires Duchess, Inc. on January 1, 2011. The consideration
transferred exceeds the fair value of Duchess' net assets. On that date, Prince has
a building with a book value of $1,200,000 and a fair value of $1,500,000. Duchess
has a building with a book value of $400,000 and fair value of $500,000.

If push-down accounting is used, what amounts in the Building account appear in

Duchess' separate balance sheet and in the consolidated balance sheet
immediately after acquisition?

A. $400,000 and
$1,600,000.
B. $500,000 and
$1,700,000.
C. $400,000 and
$1,700,000.
D. $500,000 and
$2,000,000.
E. $500,000 and
$1,600,000.

Fair Value ($500,000) & Parent BV + Sub FV ($1,700,000)

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-08 Understand in general the requirements of push-down accounting and when its use is
appropriate.
Topic: Push-Down Accounting

82. Prince Company acquires Duchess, Inc. on January 1, 2011. The consideration
transferred exceeds the fair value of Duchess' net assets. On that date, Prince has
a building with a book value of $1,200,000 and a fair value of $1,500,000. Duchess
has a building with a book value of $400,000 and fair value of $500,000.

If push-down accounting is not used, what amounts in the Building account appear
on Duchess' separate balance sheet and on the consolidated balance sheet
immediately after acquisition?

A. $400,000 and
$1,600,000.
B. $500,000 and
$1,700,000.
C. $400,000 and
$1,700,000.
D. $500,000 and
$2,000,000.
E. $500,000 and
$1,600,000.

Book Value ($400,000) & Parent BV + Sub FV ($1,700,000)

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
 Difficulty: 2 Medium
Learning Objective: 03-08 Understand in general the requirements of push-down accounting and when its use is
appropriate.
Topic: Push-Down Accounting

83. Watkins, Inc. acquires all of the outstanding stock of Glen Corporation on January 1,
2012. At that date, Glen owns only three assets and has no liabilities:

If Watkins pays $450,000 in cash for Glen, what amount would be represented as
the subsidiary's Building in a consolidation at December 31, 2014, assuming the
book value of the building at that date is still $200,000?

A. $200,00
0.
B. $285,00
0.
C. $290,00
0.
D. $295,00
0.
E. $300,00
0.

Fair Value at Acquisition ($300,000) - Amortization [($100,000/20) × 3] = $285,000

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-01 Recognize the complexities in preparing consolidated financial reports that emerge
from the passage of time.
Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments
has no effect on the resulting consolidated financial statements.
Topic: Consolidation - The Effects Created By The Passage of Time
Topic: Subsequent Consolidation
84. Watkins, Inc. acquires all of the outstanding stock of Glen Corporation on January 1,
2012. At that date, Glen owns only three assets and has no liabilities:

If Watkins pays $400,000 in cash for Glen, what amount would be represented as
the subsidiary's Building in a consolidation at December 31, 2014, assuming the
book value of the building at that date is still $200,000?

A. $200,00
0.
B. $285,00
0.
C. $260,00
0.
D. $268,00
0.
E. $300,00
0.

Fair Value at Acquisition ($300,000) - Amortization [($100,000/20) × 3] = $285,000

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-01 Recognize the complexities in preparing consolidated financial reports that emerge
from the passage of time.
Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments
has no effect on the resulting consolidated financial statements.
Topic: Consolidation - The Effects Created By The Passage of Time
Topic: Subsequent Consolidation
85. Watkins, Inc. acquires all of the outstanding stock of Glen Corporation on January 1,
2012. At that date, Glen owns only three assets and has no liabilities:

If Watkins pays $450,000 in cash for Glen, what amount would be represented as
the subsidiary's Equipment in a consolidation at December 31, 2014, assuming the
book value of the equipment at that date is still $80,000?

A. $70,00
0.
B. $73,50
0.
C. $75,00
0.
D. $76,50
0.
E. $80,00
0.

Fair Value at Acquisition ($75,000) + Amortization [($5,000/10) × 3] = $76,500

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments
has no effect on the resulting consolidated financial statements.
Topic: Subsequent Consolidation
86. Watkins, Inc. acquires all of the outstanding stock of Glen Corporation on January 1,
2012. At that date, Glen owns only three assets and has no liabilities:

If Watkins pays $450,000 in cash for Glen, what acquisition-date fair value
allocation, net of amortization, should be attributed to the subsidiary's Equipment
in consolidation at December 31, 2014?

A. $(5,000
.)
B. $80,00
0.
C. $75,00
0.
D. $73,50
0.
E. $(3,500
.)

Fair Value Differential at Acquisition [$5,000] + Amortization ([$5000]/10 × 3) =

[$3,500]

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-01 Recognize the complexities in preparing consolidated financial reports that emerge
from the passage of time.
Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments
has no effect on the resulting consolidated financial statements.
Topic: Consolidation - The Effects Created By The Passage of Time
Topic: Subsequent Consolidation
87. Watkins, Inc. acquires all of the outstanding stock of Glen Corporation on January 1,
2012. At that date, Glen owns only three assets and has no liabilities:

If Watkins pays $300,000 in cash for Glen, at what amount would the subsidiary's
Building be represented in a January 2, 2012 consolidation?

A. $200,00
0.
B. $225,00
0.
C. $273,00
0.
D. $279,00
0.
E. $300,00
0.

Fair Value at Acquisition = $300,000

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-02 Identify and describe the various methods available to a parent company in order to
maintain its investment in subsidiary account in its internal records.
Topic: Investment Accounting By The Acquiring Company
88. Watkins, Inc. acquires all of the outstanding stock of Glen Corporation on January 1,
2012. At that date, Glen owns only three assets and has no liabilities:

If Watkins pays $450,000 in cash for Glen, at what amount would Glen's Inventory
acquired be represented in a December 31, 2012 consolidated balance sheet?

A. $40,00
0.
B. $50,00
0.
C. $0
.
D. $10,00
0.
E. $90,00
0.

Zero (Under FIFO all Inventory would go to COGS)

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments
has no effect on the resulting consolidated financial statements.
Topic: Subsequent Consolidation
89. Watkins, Inc. acquires all of the outstanding stock of Glen Corporation on January 1,
2012. At that date, Glen owns only three assets and has no liabilities:

If Watkins pays $450,000 in cash for Glen, and Glen earns $50,000 in net income
and pays $20,000 in dividends during 2012, what amount would be reflected in
consolidated net income for 2012 as a result of the acquisition?

A. $20,000 under the initial value

method.
B. $30,000 under the partial equity
method.
C. $50,000 under the partial equity
method.
D. $44,500 under the equity
method.
E. $45,500 regardless of the internal accounting
method used.

Sub Income $50,000 - Amortizations ([$5,000]/10) - ($100,000/20) = $45,500

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments
has no effect on the resulting consolidated financial statements.
Topic: Subsequent Consolidation

90. According to the FASB ASC regarding the testing procedures for Goodwill
Impairment, the proper procedure for conducting impairment testing is:

A. Goodwill recognized in consolidation may be amortized uniformly and only

tested if the amortization method originally chosen is changed.
B. Goodwill recognized in consolidation must only be impairment tested prior to
disposal of the consolidated unit to eliminate the impairment of goodwill from
the gain or loss on the sale of that specific entity.
C. Goodwill recognized in consolidation may be impairment tested in a two-step
approach, first by quantitative assessment of the possible impairment of the fair
value of the unit relative to the book value, and then a qualitative assessment
as to why the impairment, if any, occurred for disclosure.
D. Goodwill recognized in consolidation may be impairment tested in a two-step
approach, first by qualitative assessment of the possibility of impairment of the
unit fair value relative to the book value, and then quantitative assessments as
to how much impairment, if any, occurred for disclosure.
E. Goodwill recognized in consolidation may be impairment tested in a two-step
approach, first by qualitative assessment of the possibility of impairment of the
unit fair value relative to the book value, and then quantitative assessments as
to how much impairment, if any, occurred for asset write-down.

AACSB: Reflective thinking

 AICPA BB: Critical Thinking
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 03-05 Discuss the rationale for the goodwill impairment testing approach.
Topic: Goodwill Impairment

91. When is a goodwill impairment loss recognized?

A. Only after both a quantitative and qualitative assessment of the fair value of
goodwill of a reporting unit.
B. After only definitive quantitative assessments of the fair value of goodwill is
completed.
C. After only definitive qualitative assessments of the fair value of goodwill is
completed.
D. If the fair value of a reporting unit falls to zero or below its original
acquisition price.
E. Never
.

AACSB: Reflective thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 03-05 Discuss the rationale for the goodwill impairment testing approach.
Topic: Goodwill Impairment

Essay Questions

92. For an acquisition when the subsidiary retains its incorporation, which method of
internal recordkeeping is the easiest for the parent to use?

The initial value method is the easiest to use.

AACSB: Reflective thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 03-02 Identify and describe the various methods available to a parent company in order to
maintain its investment in subsidiary account in its internal records.
Topic: Investment Accounting By The Acquiring Company

93. For an acquisition when the subsidiary retains its incorporation, which method of
internal recordkeeping gives the most accurate portrayal of the accounting results
for the entire business combination?

The equity method gives the most accurate portrayal of the results for the
combined entity.

AACSB: Reflective thinking

AICPA BB: Critical Thinking
 AICPA FN: Measurement
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 03-02 Identify and describe the various methods available to a parent company in order to
maintain its investment in subsidiary account in its internal records.
Topic: Investment Accounting By The Acquiring Company

94. For an acquisition when the subsidiary maintains its incorporation, under the partial
equity method, what adjustments are made to the balance of the investment
account?

The balance of the investment account is increased for the subsidiary's net income.
It is decreased for subsidiary dividends and losses. The amortization of excess fair
value allocations does not affect the account balance.

AACSB: Reflective thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 03-02 Identify and describe the various methods available to a parent company in order to
maintain its investment in subsidiary account in its internal records.
Topic: Investment Accounting By The Acquiring Company

95. From which methods can a parent choose for its internal recordkeeping related to
the operations of a subsidiary?

The parent can choose from among the initial value method, equity method, and
partial equity method.

AACSB: Reflective thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 03-02 Identify and describe the various methods available to a parent company in order to
maintain its investment in subsidiary account in its internal records.
Topic: Investment Accounting By The Acquiring Company

96. What accounting method requires a subsidiary to record acquisition fair value
allocations and the amortization of allocations in its internal accounting records?

The appropriate method is termed push-down accounting.

AACSB: Reflective thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 03-08 Understand in general the requirements of push-down accounting and when its use is
appropriate.
Topic: Push-Down Accounting
97. What is the partial equity method? How does it differ from the equity method?
What are its advantages and disadvantages compared to the equity method?

The partial equity method is a compromise between the initial value method and
the equity method. It provides some of the advantages of the equity method but is
easier to use. Under the partial equity method, the balance in the investment
account is increased by the accrual of the subsidiary's income and decreased when
the subsidiary pays dividends. The method is simpler than the equity method
because amortization of excess fair value allocations is not done.

AACSB: Reflective thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 03-02 Identify and describe the various methods available to a parent company in order to
maintain its investment in subsidiary account in its internal records.
Topic: Investment Accounting By The Acquiring Company

98. What advantages might push-down accounting offer for internal reporting?

Push-down accounting requires the subsidiary to record acquisition fair value

allocations and amortizations in its accounting records. One advantage that the
method offers to internal reporting is that it simplifies the consolidation process.
More important, it provides better information for internal evaluation.

AACSB: Reflective thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 03-08 Understand in general the requirements of push-down accounting and when its use is
appropriate.
Topic: Push-Down Accounting

99. What is the basic objective of all consolidations?

The basic objective of all consolidations is to combine asset, liability, revenue,

expense, and stockholders' equity accounts in a manner consistent with the
concepts of the acquisition method to reflect substance over form in financial
reporting for consolidations. When a parent has control (substance) over a
subsidiary and separate incorporation is maintained (form), the consolidated
financial statements will reflect results as if the multiple entities were one entity.

AACSB: Reflective thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 03-01 Recognize the complexities in preparing consolidated financial reports that emerge
from the passage of time.
Topic: Consolidation - The Effects Created By The Passage of Time
100. Yules Co. acquired Noel Co. in an acquisition transaction. Yules decided to use the
partial equity method to account for the investment. The current balance in the
investment account is $416,000. Describe in words how this balance was derived.

The initial balance in the investment account would be the acquisition value
implied by the fair value of consideration transferred. This would not include
consideration paid for costs to effect the combination. After the acquisition, the
balance in the account is increased by the parent's accrual of the subsidiary's
income and decreased by the dividends paid by the subsidiary.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 03-02 Identify and describe the various methods available to a parent company in order to
maintain its investment in subsidiary account in its internal records.
Topic: Investment Accounting By The Acquiring Company

101. Paperless Co. acquired Sheetless Co. and in effecting this business combination,
there was a cash-flow performance contingency to be paid in cash, and a market-
price performance contingency to be paid in additional shares of stock. In what
accounts and in what section(s) of a consolidated balance sheet are these
contingent consideration items shown?

A cash-flow performance contingency is shown as a contingent performance

obligation which is in the liability section of the consolidated balance sheet. A
market-price performance contingency to be paid in stock is shown as additional
paid-in capital - contingent equity outstanding which is in the stockholders' equity
section of the consolidated balance sheet.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 03-07 Understand the accounting and reporting for contingent consideration subsequent to
a business acquisition.
Topic: Contingent Consideration
102. Avery Company acquires Billings Company in a combination accounted for as an
acquisition and adopts the equity method to account for Investment in Billings. At
the end of four years, the Investment in Billings account on Avery's books is
$198,984. What items constitute this balance?

Since the equity method has been applied by Avery, the $198,984 is composed of
four items:

(a.) The acquisition value of consideration transferred by the parent;

(b.) The annual accruals made by Avery to recognize income as it is earned by the
subsidiary;
(c.) The reductions that are created by the subsidiary's payment of dividends;
(d.) The periodic amortization recognized by Avery in connection with the excess
fair value allocations identified with its acquisition.

AACSB: Reflective thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 03-02 Identify and describe the various methods available to a parent company in order to
maintain its investment in subsidiary account in its internal records.
Topic: Investment Accounting By The Acquiring Company

103. Dutch Co. has loaned $90,000 to its subsidiary, Hans Corp., which retains separate
incorporation. How would this loan be treated on a consolidated balance sheet?

The loan represents an intra-entity payable for Hans and receivable for Dutch, and
each receivable and payable would be eliminated in preparing a consolidated
balance sheet.

AACSB: Reflective thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 03-06 Describe the procedures for conducting a goodwill impairment test.
Topic: Qualitative Assessment Option

104. An acquisition transaction results in $90,000 of goodwill. Several years later a

worksheet is being produced to consolidate the two companies. Describe in words
at what amount goodwill will be reported at this date.

The $90,000 attributed to goodwill is reported at its original amount unless a

portion of goodwill is impaired or a unit of the business where goodwill resides is
sold.

AACSB: Reflective thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 03-05 Discuss the rationale for the goodwill impairment testing approach.
Topic: Goodwill Impairment
105. Why is push-down accounting a popular internal reporting technique?

Push-down accounting has become popular for the parent's internal reporting
purposes for two reasons. First, this method simplifies the consolidation process
each year. If acquisition value allocations and subsequent amortization are
recorded by the subsidiary, they do not need to be repeated each year on a
consolidation worksheet. Second, recording of amortization by the subsidiary
enables that company's information to provide a good representation of the impact
that the acquisition has on the earnings of the business combination. For example,
if the subsidiary earns $100,000 each year but annual amortization is $80,000, the
acquisition is only adding $20,000 to the income of the combination each year
rather than the $100,000 that is reported by the subsidiary unless push-down
accounting is used.

AACSB: Reflective thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 03-08 Understand in general the requirements of push-down accounting and when its use is
appropriate.
Topic: Push-Down Accounting

Short Answer Questions

106. On January 1, 2012, Jumper Co. acquired all of the common stock of Cable Corp. for
$540,000. Annual amortization associated with the purchase amounted to $1,800.
During 2012, Cable earned net income of $54,000 and paid dividends of $24,000.
Cable's net income and dividends for 2013 were $86,000 and $24,000,
respectively.

Required:

Assuming that Jumper decided to use the partial equity method, prepare a
schedule to show the balance in the investment account at the end of 2013.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-02 Identify and describe the various methods available to a parent company in order to
maintain its investment in subsidiary account in its internal records.
Learning Objective: 03-03c Prepare consolidated financial statements subsequent to acquisition when the
parent has aplied in its internal records: The partial equity method.
 Topic: Investment Accounting By The Acquiring Company
Topic: Subsequent Consolidations - Investment Recorded Using Initial Value or Partial Equity Method

107. Hanson Co. acquired all of the common stock of Roberts Inc. on January 1, 2012,
transferring consideration in an amount slightly more than the fair value of Roberts'
net assets. At that time, Roberts had buildings with a twenty-year useful life, a book
value of $600,000, and a fair value of $696,000. On December 31, 2013, Roberts
had buildings with a book value of $570,000 and a fair value of $648,000. On that
date, Hanson had buildings with a book value of $1,878,000 and a fair value of
$2,160,000.

Required:

What amount should be shown for buildings on the consolidated balance sheet
dated December 31, 2013?

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 03-01 Recognize the complexities in preparing consolidated financial reports that emerge
from the passage of time.
Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments
has no effect on the resulting consolidated financial statements.
Topic: Consolidation - The Effects Created By The Passage of Time
Topic: Subsequent Consolidation

108. Carnes Co. decided to use the partial equity method to account for its investment
in Domino Corp. An unamortized trademark associated with the acquisition was
$30,000, and Carnes decided to amortize the trademark over ten years. For 2013,
Carnes' Equity in Subsidiary Earnings was $78,000.

Required:

What balance would have been in the Equity in Subsidiary Earnings account if
Carnes had used the equity method?

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 03-02 Identify and describe the various methods available to a parent company in order to
 maintain its investment in subsidiary account in its internal records.
Learning Objective: 03-03a Prepare consolidated financial statements subsequent to acquisition when the
parent has aplied in its internal records: The equity method.
Learning Objective: 03-03c Prepare consolidated financial statements subsequent to acquisition when the
parent has aplied in its internal records: The partial equity method.
Topic: Investment Accounting By The Acquiring Company
Topic: Subsequent Consolidation - Investment Recorded By The Equity Method
Topic: Subsequent Consolidations - Investment Recorded Using Initial Value or Partial Equity Method

109. Fesler Inc. acquired all of the outstanding common stock of Pickett Company on
January 1, 2012. Annual amortization of $22,000 resulted from this transaction. On
the date of the acquisition, Fesler reported retained earnings of $520,000 while
Pickett reported a $240,000 balance for retained earnings. Fesler reported net
income of $100,000 in 2012 and $68,000 in 2013, and paid dividends of $25,000 in
dividends each year. Pickett reported net income of $24,000 in 2012 and $36,000
in 2013, and paid dividends of $10,000 in dividends each year.

Assume that Fesler's reported net income includes Equity in Subsidiary Income.

If the parent's net income reflected use of the equity method, what were the
consolidated retained earnings on December 31, 2013?

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-03a Prepare consolidated financial statements subsequent to acquisition when the
parent has aplied in its internal records: The equity method.
Topic: Subsequent Consolidation - Investment Recorded By The Equity Method
110. Fesler Inc. acquired all of the outstanding common stock of Pickett Company on
January 1, 2012. Annual amortization of $22,000 resulted from this transaction. On
the date of the acquisition, Fesler reported retained earnings of $520,000 while
Pickett reported a $240,000 balance for retained earnings. Fesler reported net
income of $100,000 in 2012 and $68,000 in 2013, and paid dividends of $25,000 in
dividends each year. Pickett reported net income of $24,000 in 2012 and $36,000
in 2013, and paid dividends of $10,000 in dividends each year.

Assume that Fesler's reported net income includes Equity in Subsidiary Income.

If the parent's net income reflected use of the partial equity method, what were the
consolidated retained earnings on December 31, 2013?

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-03c Prepare consolidated financial statements subsequent to acquisition when the
parent has aplied in its internal records: The partial equity method.
Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments
has no effect on the resulting consolidated financial statements.
Topic: Subsequent Consolidation
Topic: Subsequent Consolidations - Investment Recorded Using Initial Value or Partial Equity Method
111. Fesler Inc. acquired all of the outstanding common stock of Pickett Company on
January 1, 2012. Annual amortization of $22,000 resulted from this transaction. On
the date of the acquisition, Fesler reported retained earnings of $520,000 while
Pickett reported a $240,000 balance for retained earnings. Fesler reported net
income of $100,000 in 2012 and $68,000 in 2013, and paid dividends of $25,000 in
dividends each year. Pickett reported net income of $24,000 in 2012 and $36,000
in 2013, and paid dividends of $10,000 in dividends each year.

Assume that Fesler's reported net income includes Equity in Subsidiary Income.

If the parent's net income reflected use of the initial value method, what were the
consolidated retained earnings on December 31, 2013?

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-03b Prepare consolidated financial statements subsequent to acquisition when the
parent has aplied in its internal records: The intial value method.
Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments
has no effect on the resulting consolidated financial statements.
Topic: Subsequent Consolidation
Topic: Subsequent Consolidations - Investment Recorded Using Initial Value or Partial Equity Method
112. Jaynes Inc. acquired all of Aaron Co.'s common stock on January 1, 2012, by issuing
11,000 shares of $1 par value common stock. Jaynes' shares had a $17 per share
fair value. On that date, Aaron reported a net book value of $120,000. However, its
equipment (with a five-year remaining life) was undervalued by $6,000 in the
company's accounting records. Any excess of consideration transferred over fair
value of assets and liabilities is assigned to an unrecorded patent to be amortized
over ten years.

What balance would Jaynes' Investment in Aaron Co. account have shown on
December 31, 2012, when the equity method was applied for this acquisition?

An allocation of the acquisition value (based on the fair value of the shares issued)
must first be made.

AACSB: Analytic
 AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-02 Identify and describe the various methods available to a parent company in order to
maintain its investment in subsidiary account in its internal records.
Learning Objective: 03-03a Prepare consolidated financial statements subsequent to acquisition when the
parent has aplied in its internal records: The equity method.
Topic: Investment Accounting By The Acquiring Company
Topic: Subsequent Consolidation - Investment Recorded By The Equity Method

113. Jaynes Inc. acquired all of Aaron Co.'s common stock on January 1, 2012, by issuing
11,000 shares of $1 par value common stock. Jaynes' shares had a $17 per share
fair value. On that date, Aaron reported a net book value of $120,000. However, its
equipment (with a five-year remaining life) was undervalued by $6,000 in the
company's accounting records. Any excess of consideration transferred over fair
value of assets and liabilities is assigned to an unrecorded patent to be amortized
over ten years.

What was consolidated net income for the year ended December 31, 2013?

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-01 Recognize the complexities in preparing consolidated financial reports that emerge
from the passage of time.
Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments
has no effect on the resulting consolidated financial statements.
Topic: Consolidation - The Effects Created By The Passage of Time
Topic: Subsequent Consolidation
114. Jaynes Inc. acquired all of Aaron Co.'s common stock on January 1, 2012, by issuing
11,000 shares of $1 par value common stock. Jaynes' shares had a $17 per share
fair value. On that date, Aaron reported a net book value of $120,000. However, its
equipment (with a five-year remaining life) was undervalued by $6,000 in the
company's accounting records. Any excess of consideration transferred over fair
value of assets and liabilities is assigned to an unrecorded patent to be amortized
over ten years.

What was consolidated equipment as of December 31, 2013?

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-01 Recognize the complexities in preparing consolidated financial reports that emerge
from the passage of time.
Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments
has no effect on the resulting consolidated financial statements.
Topic: Consolidation - The Effects Created By The Passage of Time
Topic: Subsequent Consolidation
115. Jaynes Inc. acquired all of Aaron Co.'s common stock on January 1, 2012, by issuing
11,000 shares of $1 par value common stock. Jaynes' shares had a $17 per share
fair value. On that date, Aaron reported a net book value of $120,000. However, its
equipment (with a five-year remaining life) was undervalued by $6,000 in the
company's accounting records. Any excess of consideration transferred over fair
value of assets and liabilities is assigned to an unrecorded patent to be amortized
over ten years.

What was the total for consolidated patents as of December 31, 2013?

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-01 Recognize the complexities in preparing consolidated financial reports that emerge
from the passage of time.
Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments
has no effect on the resulting consolidated financial statements.
Topic: Consolidation - The Effects Created By The Passage of Time
Topic: Subsequent Consolidation
116. Utah Inc. acquired all of the outstanding common stock of Trimmer Corp. on
January 1, 2011. At that date, Trimmer owned only three assets and had no
liabilities:

If Utah paid $300,000 in cash for Trimmer, what allocation should have been
assigned to the subsidiary's Building account and its Equipment account in a
December 31, 2013 consolidation?

Since Utah paid more than the $288,000 fair value of Trimmer's net assets, all
allocations are based on fair value with the excess $12,000 assigned to goodwill.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-01 Recognize the complexities in preparing consolidated financial reports that emerge
from the passage of time.
Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments
has no effect on the resulting consolidated financial statements.
Topic: Consolidation - The Effects Created By The Passage of Time
Topic: Subsequent Consolidation
117. Matthews Co. acquired all of the common stock of Jackson Co. on January 1, 2012.
As of that date, Jackson had the following trial balance:

During 2012, Jackson reported net income of $96,000 while paying dividends of
$12,000. During 2013, Jackson reported net income of $132,000 while paying
dividends of $36,000.

Assume that Matthews Co. acquired the common stock of Jackson Co. for $588,000
in cash. As of January 1, 2012, Jackson's land had a fair value of $102,000, its
buildings were valued at $188,000, and its equipment was appraised at $216,000.
Any excess of consideration transferred over fair value of assets and liabilities
acquired is due to an unamortized patent to be amortized over 10 years.
Matthews decided to use the equity method for this investment.

Required:

(A.) Prepare consolidation worksheet entries for December 31, 2012.

(B.) Prepare consolidation worksheet entries for December 31, 2013.
 AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 03-03a Prepare consolidated financial statements subsequent to acquisition when the
parent has aplied in its internal records: The equity method.
Topic: Subsequent Consolidation - Investment Recorded By The Equity Method
118. On January 1, 2011, 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, 2014.

Required:

Prepare a consolidation worksheet for this business combination.

Consolidation Worksheet for Rand and Spaulding:

 AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 03-03a Prepare consolidated financial statements subsequent to acquisition when the
parent has aplied in its internal records: The equity method.
Topic: Subsequent Consolidation - Investment Recorded By The Equity Method
119. 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 2013 annual review for impairment:

Which of Pritchett's reporting units require both steps to test for goodwill
impairment?

Goodwill Impairment Test—Step 1

Therefore, the Apple and the Carrot reporting units require both steps to
test for goodwill impairment.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-06 Describe the procedures for conducting a goodwill impairment test.
Topic: Qualitative Assessment Option
120. 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 2013 annual review for impairment:

How much goodwill impairment should Pritchett report for 2013?

Goodwill Impairment Test—Step 2 (Apple and Carrot only)

Total impairment loss $5,000 + $75,000 = $80,000

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 03-06 Describe the procedures for conducting a goodwill impairment test.
 Topic: Qualitative Assessment Option

121. On 4/1/11, Sey Mold Corporation acquired 100% of DotDot.Com for $2,000,000
cash. On the date of acquisition, DotDot's net book value was $900,000. DotDot's
assets included land that was undervalued by $300,000, a building that was
undervalued by $400,000, and equipment that was overvalued by $50,000. The
building had a remaining useful life of 8 years and the equipment had a remaining
useful life of 4 years. Any excess fair value over consideration transferred is
allocated to an undervalued patent and is amortized over 5 years.

Determine the amortization expense related to the combination at the year-end

date of 12/31/11.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-01 Recognize the complexities in preparing consolidated financial reports that emerge
from the passage of time.
Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments
has no effect on the resulting consolidated financial statements.
Topic: Consolidation - The Effects Created By The Passage of Time
Topic: Subsequent Consolidation
122. On 4/1/11, Sey Mold Corporation acquired 100% of DotDot.Com for $2,000,000
cash. On the date of acquisition, DotDot's net book value was $900,000. DotDot's
assets included land that was undervalued by $300,000, a building that was
undervalued by $400,000, and equipment that was overvalued by $50,000. The
building had a remaining useful life of 8 years and the equipment had a remaining
useful life of 4 years. Any excess fair value over consideration transferred is
allocated to an undervalued patent and is amortized over 5 years.

Determine the amortization expense related to the combination at the year-end

date of 12/31/15.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-01 Recognize the complexities in preparing consolidated financial reports that emerge
from the passage of time.
Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments
has no effect on the resulting consolidated financial statements.
Topic: Consolidation - The Effects Created By The Passage of Time
Topic: Subsequent Consolidation

123. On 4/1/11, Sey Mold Corporation acquired 100% of DotDot.Com for $2,000,000
cash. On the date of acquisition, DotDot's net book value was $900,000. DotDot's
assets included land that was undervalued by $300,000, a building that was
undervalued by $400,000, and equipment that was overvalued by $50,000. The
building had a remaining useful life of 8 years and the equipment had a remaining
useful life of 4 years. Any excess fair value over consideration transferred is
allocated to an undervalued patent and is amortized over 5 years.

Determine the amortization expense related to the consolidation at the year-end

date of 12/31/19.

By 2019, all of the fair value adjustments and the patent will have been fully
amortized. The amortization expense for 2019 related to the combination will be
$0.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 03-01 Recognize the complexities in preparing consolidated financial reports that emerge
from the passage of time.
Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments
has no effect on the resulting consolidated financial statements.
Topic: Consolidation - The Effects Created By The Passage of Time
Topic: Subsequent Consolidation
124. For each of the following situations, select the best answer that applies to
consolidating financial information subsequent to the acquisition date:
(A) Initial value method.
(B) Partial equity method.
(C) Equity method.
(D) Initial value method and partial equity method but not equity method.
(E) Partial equity method and equity method but not initial value method.
(F) Initial value method, partial equity method, and equity method.
_____1. Method(s) available to the parent for internal record-keeping.
_____2. Easiest internal record-keeping method to apply.
_____3. Income of the subsidiary is recorded by the parent when earned.
_____4. Designed to create a parallel between the parent's investment accounts
and changes in the underlying equity of the acquired company.
_____5. For years subsequent to acquisition, requires the *C entry.
_____6. Uses the cash basis for income recognition.
_____7. Investment account remains at initially recorded amount.
_____8. Dividends received by the parent from the subsidiary reduce the parent's
investment account.
_____9. Often referred to in accounting as a single-line consolidation.
_____10. Increases the investment account for subsidiary earnings, but does not
decrease the subsidiary account for equity adjustments such as amortizations.

(1) F; (2) A; (3) E; (4) C; (5) D; (6) A; (7) A; (8) E; (9) C; (10) B

AACSB: Reflective thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Understand
Difficulty: 3 Hard
Learning Objective: 03-02 Identify and describe the various methods available to a parent company in order to
maintain its investment in subsidiary account in its internal records.
Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments
has no effect on the resulting consolidated financial statements.
Topic: Investment Accounting By The Acquiring Company
Topic: Subsequent Consolidation