Quizzer with Answer Key - Allocation and Depreciation of Differences Between Implied and Book Value PDF

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This difference between fair value and book value is used first to adjust the individual assets and liabilities to their fair values on the date of acquisition. If implied value exceeds the aggregate fair values of identifiable net assets, the residual amount will be positive (a debit balance), prov...

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Chapter 5 Allocation and Depreciation of Differences Between Implied and Book Value Multiple Choice 1.

When the implied value exceeds the aggregate fair values of identifiable net assets, the residual difference is accounted for as a. excess of implied over fair value. b. a deferred credit. c. difference between implied and fair value. d. goodwill.

2.

Long-term debt and other obligations of an acquired company should be valued for consolidation purposes at their a. book value. b. carrying value. c. fair value. d. face value.

3.

On January 1, 2010, Lester Company purchased 70% of Stork Corporation's $5 par common stock for $600,000. The book value of Stork net assets was $640,000 at that time. The fair value of Stork's identifiable net assets were the same as their book value except for equipment that was $40,000 in excess of the book value. In the January 1, 2010, consolidated balance sheet, goodwill would be reported at a. $152,000. b. $177,143. c. $80,000. d. $0.

4.

When the value implied by the purchase price of a subsidiary is in excess of the fair value of identifiable net assets, the workpaper entry to allocate the difference between implied and book value includes a 1. debit to Difference Between Implied and Book Value. 2. credit to Excess of Implied over Fair Value. 3. credit to Difference Between Implied and Book Value. a. 1 b. 2 c. 3 d. Both 1 and 2

5.

If the fair value of the subsidiary's identifiable net assets exceeds both the book value and the value implied by the purchase price, the workpaper entry to eliminate the investment account a. debits Excess of Fair Value over Implied Value. b. debits Difference Between Implied and Fair Value. c. debits Difference Between Implied and Book Value. d. credits Difference Between Implied and Book Value.

5-2

Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition

6.

The entry to amortize the amount of difference between implied and book value allocated to an unspecified intangible is recorded 1. on the subsidiary's books. 2. on the parent's books. 3. on the consolidated statements workpaper. a. 1 b. 2 c. 3 d. Both 2 and 3

7.

The excess of fair value over implied value must be allocated to reduce proportionally the fair values initially assigned to a. current assets. b. noncurrent assets. c. both current and noncurrent assets. d. none of the above.

8.

The SEC requires the use of push down accounting when the ownership change is greater than a. 50% b. 80% c. 90% d. 95%

9.

Under push down accounting, the workpaper entry to eliminate the investment account includes a a. debit to Goodwill. b. debit to Revaluation Capital. c. credit to Revaluation Capital. d. debit to Revaluation Assets.

10.

In a business combination accounted for as an acquisition, how should the excess of fair value of identifiable net assets acquired over implied value be treated? a. Amortized as a credit to income over a period not to exceed forty years. b. Amortized as a charge to expense over a period not to exceed forty years. c. Amortized directly to retained earnings over a period not to exceed forty years. d. Recognized as an ordinary gain in the year of acquisition.

11.

On November 30, 2010, Pulse Incorporated purchased for cash of $25 per share all 400,000 shares of the outstanding common stock of Surge Company. Surge 's balance sheet at November 30, 2010, showed a book value of $8,000,000. Additionally, the fair value of Surge's property, plant, and equipment on November 30, 2010, was $1,200,000 in excess of its book value. What amount, if any, will be shown in the balance sheet caption "Goodwill" in the November 30, 2010, consolidated balance sheet of Pulse Incorporated, and its wholly owned subsidiary, Surge Company? a. $0. b. $800,000. c. $1,200,000. d. $2,000,000.

Chapter 5 Allocation and Depreciation of Differences Between Implied and Book Value

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12.

Goodwill represents the excess of the implied value of an acquired company over the a. aggregate fair values of identifiable assets less liabilities assumed. b. aggregate fair values of tangible assets less liabilities assumed. c. aggregate fair values of intangible assets less liabilities assumed. d. book value of an acquired company.

13.

Scooter Company, a 70%-owned subsidiary of Pusher Corporation, reported net income of $240,000 and paid dividends totaling $90,000 during Year 3. Year 3 amortization of differences between current fair values and carrying amounts of Scooter's identifiable net assets at the date of the business combination was $45,000. The noncontrolling interest in net income of Scooter for Year 3 was a. $58,500. b. $13,500. c. $27,000. d. $72,000.

14.

Porter Company acquired an 80% interest in Strumble Company on January 1, 2010, for $270,000 cash when Strumble Company had common stock of $150,000 and retained earnings of $150,000. All excess was attributable to plant assets with a 10-year life. Strumble Company made $30,000 in 2010 and paid no dividends. Porter Company’s separate income in 2010 was $375,000. Controlling interest in consolidated net income for 2010 is: a. $405,000. b. $399,000. c. $396,000. d. $375,000.

15.

In preparing consolidated working papers, beginning retained earnings of the parent company will be adjusted in years subsequent to acquisition with an elimination entry whenever: a. a noncontrolling interest exists. b. it does not reflect the equity method. c. the cost method has been used only. d. the complete equity method is in use.

16.

Dividends declared by a subsidiary are eliminated against dividend income recorded by the parent under the a. partial equity method. b. equity method. c. cost method. d. equity and partial equity methods.

5-4

Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition

Use the following information to answer questions 17 through 20. On January 1, 2010, Pandora Company purchased 75% of the common stock of Saturn Company. Separate balance sheet data for the companies at the combination date are given below: Pandora Co.

Saturn Co. Book Values

Saturn Co. Fair Values

Cash Accounts receivable Inventory Land Plant assets Acc. depreciation Investment in Saturn Co. Total assets

$ 18,000 108,000 99,000 60,000 525,000 (180,000) 330,000 $960,000

$155,000 20,000 26,000 24,000 225,000 (45,000)

$155,000 20,000 45,000 45,000 300,000

$405,000

$565,000

Accounts payable Capital stock Retained earnings Total liabilities & equities

$156,000 600,000 204,000 $960,000

$105,000 225,000 75,000 $405,000

$105,000

Determine below what the consolidated balance would be for each of the requested accounts on January 2, 2010. 17.

What amount of inventory will be reported? a. $125,000 b. $132,750 c. $139,250 d. $144,000

18.

What amount of goodwill will be reported? a. ($20,000) b. ($25,000) c. $25,000 d. $0

19.

What is the amount of consolidated retained earnings? a. $204,000 b. $209,250 c. $260,250 d. $279,000

20.

What is the amount of total assets? a. $921,000 b. $1,185,000 c. $1,525,000 d. $1,195,000

Chapter 5 Allocation and Depreciation of Differences Between Implied and Book Value

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21.

Sensible Company, a 70%-owned subsidiary of Proper Corporation, reported net income of $600,000 and paid dividends totaling $225,000 during Year 3. Year 3 amortization of differences between current fair values and carrying amounts of Sensible's identifiable net assets at the date of the business combination was $112,500. The noncontrolling interest in consolidated net income of Sensible for Year 3 was a. $146,250. b. $33,750. c. $67,500. d. $180,000.

22.

Primer Company acquired an 80% interest in SealCoat Company on January 1, 2010, for $450,000 cash when SealCoat Company had common stock of $250,000 and retained earnings of $250,000. All excess was attributable to plant assets with a 10-year life. SealCoat Company made $50,000 in 2010 and paid no dividends. Primer Company’s separate income in 2010 was $625,000. The controlling interest in consolidated net income for 2010 is: a. $675,000. b. $665,000. c. $660,000. d. $625,000.

Use the following information to answer questions 23 through 25. On January 1, 2010, Poole Company purchased 75% of the common stock of Swimmer Company. Separate balance sheet data for the companies at the combination date are given below:

Cash Accounts receivable Inventory Land Plant assets Acc. depreciation Investment in Swimmer Co. Total assets

Poole Co. $ 24,000 144,000 132,000 78,000 700,000 (240,000) 440,000 $1,278,000

Accounts payable Capital stock Retained earnings Total liabilities & equities

$206,000 800,000 272,000 $1,278,000

Swimmer Co. Book Values $206,000 26,000 38,000 32,000 300,000 (60,000)

Swimmer Co. Fair Values $206,000 26,000 60,000 60,000 350,000

$542,000

$702,000

$142,000 300,000 100,000 $542,000

$142,000

Determine below what the consolidated balance would be for each of the requested accounts on January 2, 2010. 23.

What amount of inventory will be reported? a. $170,000. b. $177,000. c. $186,500. d. $192,000.

5-6

Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition

24.

What amount of goodwill will be reported? a. $26,667. b. $20,000. c. $42,000. d. $86,667.

25.

What is the amount of total assets? a. $1,626,667. b. $1,566,667 c. $1,980,000. d. $2,006,667.

Chapter 5 Allocation and Depreciation of Differences Between Implied and Book Value

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Problems 5-1

Phillips Company purchased a 90% interest in Standards Corporation for $2,340,000 on January 1, 2010. Standards Corporation had $1,650,000 of common stock and $1,050,000 of retained earnings on that date. The following values were determined for Standards Corporation on the date of purchase: Inventory Land Equipment

Book Value $240,000 2,400,000 1,620,000

Fair Value $300,000 2,700,000 1,800,000

Required: A. Prepare a computation and allocation schedule for the difference between the implied and book value in the consolidated statements workpaper. B. Prepare the January 1, 2010, workpaper entries to eliminate the investment account and allocate the difference between implied and book value. 5-2

Pullman Corporation acquired a 90% interest in Sleeper Company for $6,500,000 on January 1 2010. At that time Sleeper Company had common stock of $4,500,000 and retained earnings of $1,800,000. The balance sheet information available for Sleeper Company on January 1, 2010, showed the following: Inventory (FIFO) Equipment (net) Land

Book Value $1,300,000 1,500,000 3,000,000

Fair Value $1,500,000 1,900,000 3,000,000

The equipment had a remaining useful life of ten years. Sleeper Company reported $240,000 of net income in 2010 and declared $60,000 of dividends during the year. Required: Prepare the workpaper entries assuming the cost method is used, to eliminate dividends, eliminate the investment account, and to allocate and depreciate the difference between implied and book value for 2010. 5-3

On January 1, 2010, Preston Corporation acquired an 80% interest in Spiegel Company for $2,400,000. At that time Spiegel Company had common stock of $1,800,000 and retained earnings of $800,000. The book values of Spiegel Company's assets and liabilities were equal to their fair values except for land and bonds payable. The land's fair value was $120,000 and its book value was $100,000. The outstanding bonds were issued on January 1, 2005, at 9% and mature on January 1, 2015. The bond principal is $600,000 and the current yield rate on similar bonds is 8%. Required: Prepare the workpaper entries necessary on December 31, 2010, to allocate, amortize, and depreciate the difference between implied and book value.

5-8

Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition

9%, 5 periods 8%, 5 periods 5-4

Present Value Present value of 1 of Annuity of 1 .64993 3.88965 .68058 3.99271

Pennington Corporation purchased 80% of the voting common stock of Stafford Corporation for $3,200,000 cash on January 1, 2010. On this date the book values and fair values of Stafford Corporation's assets and liabilities were as follows: Book Value Fair Value Cash $ 70,000 $ 70,000 Receivables 240,000 240,000 Inventories 600,000 700,000 Other Current Assets 340,000 405,000 Land 600,000 720,000 Buildings – net 1,050,000 1,920,000 Equipment – net 850,000 750,000 $3,750,000 $4,805,000 Accounts Payable Other Liabilities Capital Stock Retained Earnings

$ 250,000 740,000 2,400,000 360,000 $3,750,000

$250,000 670,000

Required: Prepare a schedule showing how the difference between Stafford Corporation's implied value and the book value of the net assets acquired should be allocated. 5-5

Perez Corporation acquired a 75% interest in Schmidt Company on January 1, 2010, for $2,000,000. The book value and fair value of the assets and liabilities of Schmidt Company on that date were as follows: Book Value Fair Value Current Assets $ 600,000 $ 600,000 Property & Equipment (net) 1,400,000 1,800,000 Land 700,000 900,000 Deferred Charge 300,000 300,000 Total Assets $3,000,000 $3,600,000 Less Liabilities 600,000 600,000 Net Assets $2,400,000 $3,000,000 The property and equipment had a remaining life of 6 years on January 1, 2010, and the deferred charge was being amortized over a period of 5 years from that date. Common stock was $1,500,000 and retained earnings was $900,000 on January 1, 2010. Perez Company records its investment in Schmidt Company using the cost method. Required: Prepare, in general journal form, the December 31, 2010, workpaper entries necessary to: A. Eliminate the investment account. B. Allocate and amortize the difference between implied and book value.

Chapter 5 Allocation and Depreciation of Differences Between Implied and Book Value 5-6

5-9

On January 1, 2010, Page Company acquired an 80% interest in Schell Company for $3,600,000. On that date, Schell Company had retained earnings of $800,000 and common stock of $2,800,000. The book values of assets and liabilities were equal to fair values except for the following: Inventory Equipment (net) Land

Book Value $ 50,000 540,000 300,000

Fair Value $ 85,000 720,000 660,000

The equipment had an estimated remaining useful life of 8 years. One-half of the inventory was sold in 2010 and the remaining half was sold in 2011. Schell Company reported net income of $240,000 in 2010 and $300,000 in 2011. No dividends were declared or paid in either year. Page Company uses the cost method to record its investment in Schell Company. Required: Prepare, in general journal form, the workpaper eliminating entries necessary in the consolidated statements workpaper for the year ending December 31, 2011. 5-7

Paddock Company acquired 90% of the stock of Spector Company for $6,300,000 on January 1, 2010. On this date, the fair value of the assets and liabilities of Spector Company was equal to their book value except for the inventory and equipment accounts. The inventory had a fair value of $2,300,000 and a book value of $1,900,000. The equipment had a fair value of $3,300,000 and a book value of $2,800,000. The balances in Spector Company's capital stock and retained earnings accounts on the date of acquisition were $3,700,000 and $1,900,000, respectively. Required: In general journal form, prepare the entries on Spector Company's books to record the effect of the pushed down values implied by the acquisition of its stock by Paddock Company assuming that: A values are allocated on the basis of the fair value of Spector Company as a whole imputed from the transaction. B values are allocated on the basis of the proportional interest acquired by Paddock Company.

5-8

Pruitt Corporation acquired all of the voting stock of Soto Corporation on January 1, 2010, for $210,000 when Soto had common stock of $150,000 and retained earnings of $24,000. The excess of implied over book value was allocated $9,000 to inventories that were sold in 2010, $12,000 to equipment with a 4-year remaining useful life under the straight-line method, and the remainder to goodwill. Financial statements for Pruitt and Soto Corporations at the end of the fiscal year ended December 31, 2011 (two years after acquisition), appear in the first two columns of the partially completed consolidated statements workpaper. Pruitt Corp. has accounted for its investment in Soto using the partial equity method of accounting.

5-10 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition Required: Complete the consolidated statements workpaper for Pruitt Corporation and Soto Corporation for December 31, 2011. Pruitt Corporation and Soto Corporation Consolidated Statements Workpaper at December 31, 2011 Eliminations

INCOME STATEMENT Sales Equity from Subsidiary Income Cost of Sales Other Expenses Net Income to Ret. Earn.

Pruitt Corp.

Soto Corp.

618,000

180,000

36,000 (450,000)

(90,000)

(114,000)

(54,000)

90,000

36,000

Pruitt Retained Earnings 1/1

72,000

Soto Retained Earnings 1/1 Add: Net Income Less: Dividends Retained Earnings 12/31

3,000 90,000

36,000

(60,000)

(12,000)

102,000

54,000

42,000

21,000

63,000

45,000

33,000

18,000

192,000 240,000

165,000

570,000

249,000

168,000

45,000

300,000

150,000

102,000

54,000

570,000

249,000

BALANCE SHEET Cash Inventories Land Equipment and Buildings-net Investment in Soto Corp. Total Assets LIA & EQUITIES Liabilities Common Stock Retained Earnings Total Equities

Debit

Credit

Consolidated Balances

Chapter 5 Allocation and Depreciation of Differences Between Implied and Book Value 5-9

5-11

On January 1, 2010, Prescott Company acquired 80% of the outstanding capital stock of Sherlock Company for $570,000. On that date, the capital stock of Sherlock Company was $150,000 and its retained earnings were $450,000. On the date of acquisition, the assets of Sherlock Company had the following values: Book Value Inventories........................................................................ $ 90,000 Plant and equipment ............................................................. 150,000

Fair Market Value $165,000 180,000

All other assets and liabilities had book values approximately equal to their respective fair market values. The plant and equipment had a remaining useful life of 10 years from January 1, 2010, and Sherlock Company uses the FIFO inventory cost flow assumption. Sherlock Company earned $180,000 in 2010 and paid dividends in that year of $90,000. Prescott Company uses the complete equity method to account for its investment in S Company. Required: A. Prepare a...