Horngren Ima16 Tif 17 GE

Introduction to Management Accounting, 16e, Global Edition (Horngren)
Chapter 17 Understanding and Analyzing Consolidated Financial Statements
17.1 Questions
1) An investor holds 5% of the outstanding stock of an investee. The investor plans to sell the stock in two
months. The investor reports the dividends received from the stock as ________.
A) an increase in the investment account
B) a decrease in the investment account
C) dividend revenue on the income statement
D) equity in earnings of the investee on the income statement
Answer: C
Diff: 2
LO: 17-1
AACSB: Reflective thinking skills
Learning Outcome: None
2) An investor holds 1% of the outstanding stock of an investee. The investor plans to hold the stock for a
long time. The investor reports the dividends received from the stock as ________.
A) an increase in the investment account
B) a decrease in the investment account
C) dividend revenue on the income statement
D) equity in earnings of the investee on the income statement
Answer: C
Diff: 2
LO: 17-1
3) An investor in trading securities has the following information available at December 31, 2012:
Market value of trading securities $8,000

Acquisition cost of trading securities $9,000
How does the investor report the change in market value on the trading securities at December 31, 2012?
A) unrealized loss of $1,000 on income statement
B) unrealized gain of $1,000 on income statement
C) $1,000 is added to other comprehensive income account on the balance sheet
D) $1,000 is subtracted from the other comprehensive income account on the balance sheet
Answer: A
Diff: 2
LO: 17-1
AACSB: Analytic skills
1
Copyright © 2014 Pearson Education
4) An investor in available-for-sale securities has the following information available at December 31,
2012:
Market value of available-for-sale securities $8,000

Acquisition cost of available-for-sale securities $9,000
How does the investor report the change in market value on the available-for-sale securities at December
31, 2012?
A) unrealized loss of $1,000 on income statement
C) $1,000 is added to accumulated other comprehensive income account on the balance sheet
D) $1,000 is subtracted from the accumulated other comprehensive income account on the balance sheet
Answer: D
Diff: 2
LO: 17-1
5) Arizona Company has 40,000 shares of its common stock outstanding. Mexico Company owns 5,000
shares of Arizona Company's stock. Which of the following methods should Mexico Company use to
account for its investment in Arizona Company?
A) market-value
B) equity
C) consolidated
D) available-for-sale
Answer: A
Diff: 1
LO: 17-1
6) California Company has 40,000 shares of its common stock outstanding. Utah Company owns 15,000
shares of California Company's stock. Which of the following methods should Utah Company use to
account for its investment in California Company?
A) market-value
B) equity
C) consolidated
D) available-for-sale
Answer: B
Diff: 1
LO: 17-1
2
7) Wyoming Company has 40,000 shares of its common stock outstanding. Dakota Company owns 35,000
shares of Wyoming Company's stock. Which of the following methods should Dakota Company use to
account for its investment in Wyoming Company?
A) market-value
B) equity
C) consolidated financial statements
D) cost
Answer: C
Diff: 1
LO: 17-1
8) An investor holds 5% of the outstanding stock of an investee. Securities that the investor company buys
only with the intent to resell them shortly are called ________.
A) available-for-sale securities
B) equity method securities
C) trading securities
D) options
Answer: C
Diff: 1
LO: 17-1
9) An investor holds 5% of the outstanding stock of an investee. Securities that the investor company does
not intend to sell in the near future are called ________.
A) trading securities
B) options
C) available-for-sale securities
D) equity method securities
Answer: C
Diff: 1
LO: 17-1
3
10) John Company purchased common stock in Garcia Company. John Company treats the investment as
available-for-sale securities. During the current year, Garcia Company earned $4,000,000 and paid
dividends of $1,000,000. Assume that John Company owns 10% of the outstanding shares of Garcia
Company. Garcia Company's net income will affect John Company in which of the following ways?
A) increasing cash and investments by $400,000
B) increasing stockholders' equity and investments by $400,000
C) increasing cash and stockholders' equity by $400,000
D) no effect
Answer: D
Diff: 1
LO: 17-1
11) Jerome Company purchased common stock in Gonzalez Company. Jerome Company treats the
investment as available-for-sale securities. During the current year, Gonzalez Company earned $4,000,000
and paid dividends of $1,000,000. Assume that Jerome Company owns 10% of the outstanding shares of
Gonzalez Company. Gonzalez Company's dividend will affect Jerome Company by ________.
A) increasing cash and investments by $100,000
B) increasing investments and investment revenue by $100,000
C) increasing cash and investment revenue by $100,000
D) increasing cash and decreasing investments by $100,000
Answer: C
Diff: 1
LO: 17-1
12) Martin Company purchased 10% of the outstanding shares of Winn Company. Martin Company
classifies the investments as trading securities. At the end of the year, the market value of the shares
increased from the prior year. The increase in market value of Winn Company's shares will affect Martin
Company by ________.
A) increasing cash and increasing investments
B) decreasing investments and increasing retained earnings
C) increasing investments and increasing retained earnings
D) increasing cash and increasing stockholders' equity
Answer: C
Diff: 1
LO: 17-1
4
13) Bart Company acquired 10 percent of the voting stock of Ernie Company for $10 million. Bart
Company plans to keep the investment for several years. At the end of Year 1, Ernie Company reports net
income of $15 million and pays cash dividends of $5 million. At the end of Year 1, the market value of
Bart Company's investment in Ernie Company is $11 million. What entry is necessary at the end of Year 1
to account for the change in market value of Bart Company's investment in Ernie Company?
A) No entry is needed.
B) Cash increases $11 million and Stockholders' equity increases $11 million.
C) Investments increase $11 million and Stockholders' equity increases $11 million.
D) Investments increase $1 million and Stockholders' equity increases $1 million.
Answer: D
Diff: 2
LO: 17-1
14) Vanessa Company purchased common stock in Gilmore Company. During the current year, Gilmore
Company earned $4,000,000 and paid dividends of $1,000,000. Assume that Vanessa Company owns 40
percent of the outstanding shares of Gilmore Company. Gilmore Company's net income will affect
Vanessa Company by ________.
A) increasing investments by $1,600,000
B) increasing investments and cash by $2,000,000
C) increasing cash and stockholders' equity by $400,000
D) increasing cash and decreasing investments by $1,600,000
Answer: A
Diff: 3
LO: 17-1
15) Van Dover Company purchased common stock in Sanchez Company. During the current year,
Sanchez Company earned $4,000,000 and paid dividends of $1,000,000. Assume that Van Dover Company
owns 30% of the outstanding shares of Sanchez Company. Sanchez Company's dividend will affect Van
Dover Company by ________.
A) increasing cash and stockholders' equity by $300,000
B) increasing investments and stockholders' equity by $300,000
C) increasing cash and decreasing investments by $300,000
D) increasing cash and increasing investments by $300,000
Answer: C
Diff: 2
LO: 17-1
5
16) Branson Company purchased 40% of the outstanding shares of Missouri Company as a long-term
investment. At the end of the year, the market value of the shares increased. The increase in market value
of Missouri Company's shares will affect Branson Company in which of the following ways?
A) increasing assets and increasing stockholders' equity
B) decreasing investments and increasing cash
C) increasing investments and increasing stockholders' equity
D) no effect
Answer: D
Diff: 2
LO: 17-1
17) Randy Company acquired 40% of the voting stock of Biel Company for $40 million. At the end of Year
1, Biel Company reports net income of $15 million and pays cash dividends of $5 million. At the end of
Year 1, the market value of Randy Company's investment in Biel Company is $44 million. The ________
method should be used by Randy Company to account for the investment.
A) market-value
B) consolidated
C) cost
D) equity
Answer: D
Diff: 2
LO: 17-1
18) Rambo Company acquired 40% of the voting stock of Boulder Company for $40 million. At the end of
Year 1, Boulder Company reports net income of $15 million and pays cash dividends of $5 million. At the
end of Year 1, the market value of Rambo Company's investment in Boulder Company is $44 million. At
the time of the acquisition, what accounts would be affected on the books of Rambo Company?
A) Cash decreases $40 million and Investments increase $40 million
B) Cash decreases $40 million and Stockholders' Equity increase $40 million
C) Investments increase $40 million and Accounts Payable increase $40 million
D) No entry
Answer: A
Diff: 2
LO: 17-1
6
19) Robert Company acquired 40% of the voting stock of Boulder Company for $40 million. At the end of
end of Year 1, the market value of Robert Company's investment in Boulder Company is $44 million.
What accounts on Robert Company's books would be affected by the net income of Boulder Company?
A) none
B) Investments increase $15 million and Investment Revenue increases $15 million
C) Cash increases $15 million and Investment Revenue increases $15 million
D) Investments increase $6 million and Investment Revenue increases $6 million
Answer: D
Diff: 2
LO: 17-1
20) Randall Company acquired 40% of the voting stock of Boulder Company for $40 million. At the end of
end of Year 1, the market value of Randall Company's investment in Boulder Company is $44 million.
What accounts on Randall Company's books would be affected by the dividends of Boulder Company?
A) none
B) Cash increase $2 million and Investment Revenue increases $2 million
C) Cash increase $5 million and Investment Revenue increases $5 million
D) Cash increase $2 million and Investments decrease $2 million
Answer: D
Diff: 2
LO: 17-1
21) Ramon Company acquired 40% of the voting stock of Boulder Company for $40 million. At the end of
end of Year 1, the market value of Ramon Company's investment in Boulder Company is $44 million.
What accounts will be affected on Ramon Company's books to account for the increase in market value of
the investment at the end of Year 1?
A) none
B) Cash increase $44 million and Stockholders' Equity increase $44 million
C) Investments increase $44 million and Stockholders' Equity increase $44 million
D) Investments increase $4 million and Stockholders' Equity increase $4 million
Answer: A
Diff: 2
LO: 17-1
7
22) Under the equity method of accounting for investments, the acquisition cost of an investment is
adjusted for ________.
A) dividends received only
B) investor's share of earnings or losses of investee after investment date only
C) changes in market value of investment
D) dividends received and investor's share of earnings or losses of investee after investment date
Answer: D
Diff: 2
LO: 17-1
23) Under the equity method of accounting for investments, the investor recognizes income for ________.
A) the investor's share of income earned by the investee company
B) dividends received from the investee company
C) the change in market value of the investee company's stock
D) the amortization of goodwill associated with the investee company
Answer: A
Diff: 2
LO: 17-1
24) An investor in securities accounted for by the equity method has the following information available
at December 31, 2012:
Market value of securities $10,000

Acquisition cost of securities $8,000
How does the investor report the change in market value on the securities at December 31, 2012?
A) adjustment to Investment account
C) adjustment to " other comprehensive income" account
D) not reported
Answer: D
Diff: 2
LO: 17-1
8
25) For trading securities, changes in the market value of the securities are included in ________. For
available-for-sale securities, changes in the market value of the securities are included in ________.
A) Other Comprehensive Income; Other Comprehensive Income
B) Other Comprehensive Income; Retained Earnings
C) Retained Earnings; Other Comprehensive Income
D) Retained Earnings; Retained Earnings
Answer: C
Diff: 3
LO: 17-1
26) Accountants require investors without significant influence over the decisions of an investee firm to
use the ________ method.
A) equity
B) cost
C) market value
D) lower of cost or market
Answer: C
Diff: 1
LO: 17-1
27) Accountants require investors with significant influence, but not control, over the decisions of an
investee firm to use the ________ method.
A) equity
B) cost
C) market value
Answer: A
Diff: 1
LO: 17-1
28) Accountants require investors that have control over the decisions of an investee firm to use the
________ method.
A) consolidated financial statements
B) cost
C) market value
Answer: A
Diff: 1
LO: 17-1
9
29) On January 1, 2014, Jeff Company purchased common stock in Garcia Company for $1,000,000. Jeff
Company treats the investment as available-for-sale securities. During 2014, Garcia Company earned
$4,000,000 and paid dividends of $1,000,000. Assume that Jeff Company owns 10% of the outstanding
shares of Garcia Company. The market value of the investment at December 31, 2014 is $1,100,000. What
is the balance in the Investment account at December 31, 2014?
A) $1,000,000
B) $1,100,000
C) $1,400,000
D) $1,500,000
Answer: B
Diff: 1
LO: 17-1
30) On January 1, 2014, Jonathon Company purchased common stock in Garcia Company for $1,000,000.
Jonathon Company treats the investment as trading securities. During 2014, Garcia Company earned
$4,000,000 and paid dividends of $1,000,000. Assume that Jonathon Company owns 10% of the
outstanding shares of Garcia Company. The market value of the investment at December 31, 2014 is
$1,100,000. What is the balance in the Investment account at December 31, 2014?
A) $1,000,000
B) $1,100,000
C) $1,400,000
D) $1,500,000
Answer: B
Diff: 1
LO: 17-1
31) On January 1, 2014, Liberty Company purchased common stock in Garcia Company for $1,000,000.
During 2014, Garcia Company earned $4,000,000 and paid dividends of $1,000,000. Assume that Liberty
Company owns 30% of the outstanding shares of Garcia Company. The market value of the investment at
December 31, 2014 is $1,100,000. What is the balance in the Investment account at December 31, 2014?
A) $1,000,000
B) $1,100,000
C) $1,900,000
D) $2,200,000
Answer: C
Diff: 1
LO: 17-1
10
32) When a company owns less than 20 percent of the common stock of another company, the market
value method of accounting for investments in equity securities is used.
Answer: TRUE
Diff: 2
LO: 17-1
33) Investments acquired with the intent to resell them in the near future are called trading securities.
Answer: TRUE
Diff: 1
LO: 17-1
34) If an investor uses the equity method to account for a long-term equity investment, then the investor
records income when the investee pays a dividend.
Answer: FALSE
Diff: 2
LO: 17-1
35) If an investor uses the equity method to account for a long-term equity investment, then the investor
records income when the investee reports net income.
Answer: TRUE
Diff: 2
LO: 17-1
11
36) Brankov Company purchased common stock in Ramona Company for $400,000. In the current year,
Ramona Company reported net income of $50,000 and paid a dividend of $32,000. At the end of the year,
the market value of the investment in Ramona Company was $410,000.
Required:
A) Assume Brankov Company owns 10% of the shares of Ramona Company. Brankov Company
considers the investment to be available-for-sale securities. Show the effects of the transactions above on
the accounts of Brankov Company using the balance sheet equation.
B) Assume Brankov Company owns 25% of the shares of Ramona Company. Show the effects of the
transactions above on the accounts of Brankov Company using the balance sheet equation.
Answer:
A)
Cash + Investments = Liabilities + Stockholders' Equity
$(400,000) +$400,000
+$3,200 +$3,200
+$10,000 +$10,000
B)
Cash + Investments = Liabilities + Stockholders' Equity
$(400,000) +$400,000
+$12,500 +$12,500
+$8,000 $(8,000)
Diff: 3
LO: 17-1
17.2 Questions
1) An investor that has effective control over an investee usually owns ________ of the investee's stock.
A) less than 20 percent
B) more than 20 percent
C) more than 40 percent
D) more than 50 percent
Answer: D
Diff: 1
LO: 17-2
12
2) The company that owns 100 percent of another company's stock is called the ________. The company
that is controlled by another company is called the ________.
A) majority interest; minority interest
B) controlling interest; noncontrolling interest
C) parent; subsidiary
D) subsidiary; segment
Answer: C
Diff: 1
LO: 17-2
3) Rainbow Company acquired 100 percent of the outstanding common stock of Ribbon Company. At the
date of acquisition, no goodwill was involved and the book value of the assets and liabilities of Ribbon
Company equal their fair values. Immediately after the acquisition, an elimination entry is prepared in
order to prepare consolidated financial statements. Which of the following accounts are affected by the
elimination entry?
A) Investment in Ribbon Company and Investment Revenue
B) Stockholders' Equity of Ribbon Company and Investment Revenue
C) Fixed Assets of Ribbon Company and Investment Revenue
D) Investment in Ribbon Company and Stockholders' Equity of Ribbon Company
Answer: D
Diff: 3
LO: 17-2
4) A parent company purchases 100 percent of the outstanding common stock in a subsidiary. What
happens to the subsidiary the day after the purchase? Which of the following statements is FALSE?
A) The purchase by the parent company does not affect the subsidiary's books.
B) The subsidiary ceases to exist.
C) The subsidiary continues as a separate legal entity.
D) The subsidiary has its own set of books.
Answer: B
Diff: 3
LO: 17-2
13
5) When preparing consolidated financial statements, eliminating entries are made to avoid double-
counting ________.
A) assets only
B) liabilities only
C) assets, liabilities and stockholders' equity
D) none of the above
Answer: C
Diff: 3
LO: 17-2
6) Presented below is the balance sheet of Holmes Company at January 1, 2015:
Cash $100
Net Fixed Assets 400
Total Assets $500
Accounts Payable $20

Long-term Bonds Payable 220
Stockholders' Equity 260
Total Liabilities and Stockholders' Equity $500
The balance sheet of Montvale Company at January 1, 2015 is below:
Cash $400
Total Assets $780

On January 1, 2015, Montvale Company acquired 100 percent of the outstanding common stock of
Holmes Company for $260 cash. The book value and fair value of Holmes' assets and liabilities were
equal. What is the balance in the Investment in Holmes Company account on the consolidated balance
sheet immediately after the acquisition of Holmes Company's stock? (Assume elimination entries are
completed.)
A) $0
B) $260
C) $380
D) $500
Answer: A
Diff: 3
LO: 17-2
14
7) Presented below is the balance sheet of Houser Company at January 1, 2015:
Cash $100
Total Assets $500

The balance sheet of Maury Company at January 1, 2015 is below:
Cash $400
Total Assets $780

On January 1, 2015, Maury Company acquired 100 percent of the outstanding common stock of Houser
Company for $260 cash. The book value and fair value of Houser's assets and liabilities were equal. What
is the amount of Total Assets on the consolidated balance sheet immediately after the acquisition of
Houser Company's stock? (Assume elimination entries are completed.)
A) $0
B) $780
C) $1,020
D) $1,280
Answer: C
Diff: 3
LO: 17-2
15
8) Presented below is the balance sheet of Hansen Company at January 1, 2015:
Cash $100
Total Assets $500

The balance sheet of Monty Company at January 1, 2015 is below:
Cash $400
Total Assets $780

On January 1, 2015, Monty Company acquired 100 percent of the outstanding common stock of Hansen
Company for $260 cash. The book value and fair value of Hansen's assets and liabilities were equal.
What is the amount of Total Liabilities on the consolidated balance sheet immediately after the
acquisition of Hansen Company's stock? (Assume elimination entries are completed.)
A) $0
B) $380
C) $400
D) $640
Answer: D
Diff: 3
LO: 17-2
16
9) Presented below is the balance sheet of Harry Company at January 1, 2015:
Cash $100
Total Assets $500

The balance sheet of Marvelous Company at January 1, 2015 is below:
Cash $400
Total Assets $780

On January 1, 2015, Marvelous Company acquired 100 percent of the outstanding common stock of Harry
Company for $260 cash. The book value and fair value of Harry's assets and liabilities were equal.
What is the amount of Total Stockholders' Equity on the consolidated balance sheet immediately after the
acquisition of Harry Company's stock? (Assume elimination entries are completed.)
A) $0
B) $260
C) $380
D) $640
Answer: C
Diff: 3
LO: 17-2
17
10) Presented below is the balance sheet of Holman Company at January 1, 2015:
Cash $100
Total Assets $500

The balance sheet of Beck Company at January 1, 2015 is below:
Cash $400
Total Assets $780

On January 1, 2015, Beck Company acquired 100 percent of the outstanding common stock of Holman
Company for $260 cash. The book value and fair value of Holman's assets and liabilities were equal.
Holman Company generated net income of $30 during the year ended December 31, 2015. There were no
intercompany sales. What is the balance in the Investment in Holman Company account on December 31,
2015 before elimination entries are prepared?
A) $0
B) $30
C) $230
D) $290
Answer: D
Diff: 3
LO: 17-2
18
11) Presented below is the balance sheet of Hellman Company at January 1, 2015:
Cash $100
Total Assets $500

The balance sheet of Swenson Company at January 1, 2015 is below:
Cash $400
Total Assets $780

On January 1, 2015, Swenson Company acquired 100 percent of the outstanding common stock of
Hellman Company for $260 cash. The book value and fair value of Hellman's assets and liabilities were
equal. The net income for the year ending December 31, 2015 was $30 for Hellman Company. The net
income for the year ending December 31, 2015 was $40 for Swenson Company. There were no
intercompany sales. What is the net income on the consolidated income statement for the year ended
December 31, 2015?
A) $0
B) $30
C) $40
D) $70
Answer: D
Diff: 3
LO: 17-2
19
12) On January 1, 2014, a parent company purchased 100 percent of the stock in a subsidiary. On January
1, 2014, no goodwill was recorded and the book value of the subsidiary's assets equals the market value of
the subsidiary's assets. On December 31, 2014, the two companies report the following data:
Parent Company Net Income for Past Year $100 million

Subsidiary Company Net Income for Past Year $50 million
What is the consolidated net income for the year ended December 31, 2014?
A) $0
B) $50 million
C) $100 million
D) $150 million
Answer: D
Diff: 3
LO: 17-2
13) The account "Noncontrolling Interests" as reported on a balance sheet shows ________.
A) the parent company's interest in a subsidiary
B) the subsidiary's interest in a parent company
C) the outside stockholders' interest in a subsidiary
D) the outside stockholders' interest in a parent company
Answer: C
Diff: 3
LO: 17-2
14) On January 1, 2015, Bernie Company acquired 80 percent of the outstanding shares of Conner
Company for $120. At the time of the acquisition, Conner Company's total assets were $550 and total
liabilities were $400. The book value and fair value of Conner's assets and liabilities were equal. What is
the balance in the Investment in Conner Company account on the consolidated balance sheet
immediately after the acquisition of Conner Company's stock? (Assume elimination entries are
completed.)
A) $0
B) $120
C) $190
D) $440
Answer: A
Diff: 3
LO: 17-2
20
15) Barnard Company owns a 60 percent interest in Simon Company. For the year ended December 31,
2016, the net income of Barnard Company was $80 and the net income of Simon Company was $10. What
is the balance in the Noncontrolling Interests account on the consolidated income statement for the year
ending December 31, 2016?
A) $0
B) $4
C) $6
D) $48
Answer: B
Diff: 3
LO: 17-2
16) On January 1, 2014, a parent company purchased 90 percent of the stock in a subsidiary. On January 1,
2010, no goodwill was recorded and the book value of the subsidiary's assets equals the market value of
the subsidiary's assets. On December 31, 2014, the two companies report the following data:
Parent Company Net Income for Past Year $100 million

Subsidiary Company Net Income for Past Year $50 million
What is the consolidated net income for the year ended December 31, 2014?
A) $100 million
B) $135 million
C) $145 million
D) $150 million
Answer: C
Diff: 3
LO: 17-2
17) French Company acquired 80 percent of the outstanding shares of Godiva Company for $152 in cash.
(No goodwill was present at the time of acquisition.) The net income for the current year for French
Company is $100. The net income for the current year for Godiva Company is $20. There were no
intercompany sales. The book value and fair value of Godiva's assets and liabilities were equal at the
acquisition date. What is the net income on the consolidated income statement for the current year?
A) $80
B) $96
C) $100
D) $116
Answer: D
Diff: 3
LO: 17-2
21
18) The existence of a parent company and a subsidiary requires special accounting procedures.
Answer: TRUE
Diff: 3
LO: 17-2
19) A subsidiary is a company that owns more than 50 percent of another company's outstanding
common stock.
Answer: FALSE
Diff: 3
LO: 17-2
20) When an investing company owns less than 50 percent of another company, the companies must
prepare consolidated financial statements.
Answer: FALSE
Diff: 3
LO: 17-2
21) When a company acquires all of the common stock of a subsidiary, the books of the subsidiary are no
longer used.
Answer: FALSE
Diff: 3
LO: 17-2
22) Elimination entries avoid double-counting assets, liabilities and stockholders' equity on the
consolidated financial statements.
Answer: TRUE
Diff: 3
LO: 17-2
23) The Investment in Subsidiary account appears on a consolidated balance sheet.

Answer: FALSE
Diff: 3
LO: 17-2
22
24) Noncontrolling interests appear on a consolidated balance sheet when a parent company owns more
than 50 percent but less than 100 percent of a subsidiary's common stock.
Answer: TRUE
Diff: 3
LO: 17-2
25) Noncontrolling interests affect only the balance sheet of consolidated financial statements.
Answer: FALSE
Diff: 3
LO: 17-2
17.3 Questions
1) On January 1, 2012, a parent company acquired all of the stock of a subsidiary. The following data is
available:
Parent Company Subsidiary
Total assets $650 $400
Total liabilities $200 $190
Total stockholders' equity $450 $210
The acquisition by the parent company represents a 100 percent interest in the subsidiary. On January 1,
2012, the fair value of the subsidiary's assets and liabilities are equal to their book value. The parent
company paid $250 for the 100 percent interest in the subsidiary. What amount of goodwill is implied in
the purchase?
A) $0
B) $10
C) $40
D) $200
Answer: C
Diff: 3
LO: 17-3
23
2) On January 1, 2012, Parrot Company acquired all of the stock of a subsidiary. The following data is
available:
Parrot Company Subsidiary
The acquisition by the Parrot Company represents a 100 percent interest in the subsidiary. On January 1,
2012, the fair value of the subsidiary's assets and liabilities are equal to their book value. Parrot Company
paid $450 for the 100 percent interest in the subsidiary. What amount of goodwill is implied in the
purchase?
A) $0
B) $10
C) $200
D) $240
Answer: D
Diff: 3
LO: 17-3
3) On January 1, 2012, Preview Company acquired all of the stock of a subsidiary. The following data is
available:
Preview Company Subsidiary
The acquisition by the Preview Company represents a 100 percent interest in the subsidiary. On January
1, 2012, the fair value of the subsidiary's assets and liabilities are equal to the book value. Preview
Company paid $250 for the 100 percent interest in the subsidiary. On January 1, 2012, what are the total
assets on the consolidated balance sheet? (Assume elimination entries are completed.)
A) $650
B) $800
C) $840
D) $1,050
Answer: C
Diff: 3
LO: 17-3
24
4) On January 1, 2012, Remkus Company acquired all of the stock of a subsidiary. The following data is
available:
Remkus Company Subsidiary
The acquisition by Remkus Company represents a 100 percent interest in the subsidiary. On January 1,
2012, the fair value of the subsidiary's assets and liabilities are equal to the book value. Remkus Company
paid $250 for the 100 percent interest in the subsidiary. On January 1, 2012, what is the total stockholders'
equity on the consolidated balance sheet? (Assume elimination entries are completed.)
A) $390
B) $450
C) $800
D) $840
Answer: B
Diff: 3
LO: 17-3
5) Goodwill from the purchase of another company appears on the consolidated balance sheet as a
________.
A) stockholders' equity item
B) part of the Investment in subsidiary
C) separate intangible asset account
D) component of other comprehensive income
Answer: C
Diff: 3
LO: 17-3
6) Each year, goodwill on the consolidated balance sheet is ________.

A) amortized
B) depreciated
C) evaluated by management to determine if it is impaired
D) ignored
Answer: C
Diff: 3
LO: 17-3
25
7) At the date of acquisition by a parent company, the fair value of a subsidiary's fixed assets was larger
than their book value. When preparing consolidated financial statements, the fixed assets of the
subsidiary are ________ and depreciation expense is ________.
A) decreased to fair value; decreased
B) increased to fair value; increased
C) not adjusted; not adjusted
D) increased to fair value; not adjusted
Answer: B
Diff: 3
LO: 17-3
8) Naples Company acquired all of the shares of Tampa Company for $80 cash. At the time of the
acquisition, the fair values of Tampa Company's assets were $200. At the time of acquisition, the fair
values of Tampa Company's liabilities were $120. On the date of acquisition, what is the amount of
goodwill on the consolidated balance sheet?
A) $0
B) $20
C) $80
D) $100
Answer: A
Diff: 3
LO: 17-3
9) Goodwill is recognized when one company purchases another company and ________.
A) the purchase price of the acquired company exceeds the book value of the acquired company's assets
B) the purchase price of the acquired company exceeds the book value of the acquired company's assets
less liabilities
C) the purchase price of the acquired company exceeds the fair value of the acquired company's assets
D) the purchase price of the acquired company exceeds the fair value of the acquired company's assets
less liabilities
Answer: D
Diff: 3
LO: 17-3
26
10) A factor that contributes to recording goodwill when acquiring control of another company is
________.
A) outstanding management skills of parent company
B) unique product manufactured by parent company
C) established brand names by investee company
D) all of the above
Answer: C
Diff: 3
LO: 17-3
11) Goodwill can only be recognized when one company acquires another company.
Answer: TRUE
Diff: 3
LO: 17-3
12) Goodwill is amortized on the consolidated financial statements.

Answer: FALSE
Diff: 3
LO: 17-3
13) If the fair value of a subsidiary's assets exceeds their book value when the subsidiary is acquired, the
assets of the subsidiary are written up at the time consolidated financial statements are prepared.
Answer: TRUE
Diff: 3
LO: 17-3
17.4 Questions
1) To compare companies that differ in size, analysts use ________.

A) MD&A
B) 10-K filings with the Securities and Exchange Commission
C) common size financial statements
D) consolidated financial statements
Answer: C
Diff: 1
LO: 17-4
27
2) To prepare common size income statements, percentages for line items are usually based on ________.
To prepare common size balance sheets, percentages for line items are usually based on ________.
A) net income; total stockholders' equity
B) net operating profit; total stockholders' equity
C) sales; total assets
D) expenses; total liabilities
Answer: C
Diff: 1
LO: 17-4
3) The section of the annual report that explains major changes in the income statement, changes in
liquidity and capital resources and the impact of inflation is called the ________.
A) notes to the financial statements
B) appendix to the financial statements
C) internal control report
D) management's discussion and analysis
Answer: D
Diff: 1
LO: 17-4
28
4) Maureen Company has the following income statement for the year ending December 31, 2016:
Sales $1,562
Cost of goods sold 806
Gross profit 756
Operating expenses:
Wage expense 110
Depreciation expense 76
Rent expense 36
Miscellaneous expense 70
Total operating expenses 292
Operating income 464
Income tax expense 162
Net income $302
If Maureen Company prepares a common size income statement, what will they report for Wage
expense?
A) 7.0%
B) 10.2%
C) 34.4%
D) 66.1%
Answer: A
Diff: 1
LO: 17-4
29
5) Goller Company has the following income statement for the year ending December 31, 2016:
Sales $1,562
Gross profit 756
Operating expenses:
Wage expense 160
Rent expense 36
Net income $364
If Goller Company prepares a common size income statement, what will they report for Income tax
expense?
A) 6.4%
B) 11.0%
C) 12.4%
D) 39.9%
Answer: A
Diff: 1
LO: 17-4
30
6) Keller Company has the following income statement for the year ending December 31, 2016:
Sales $1,562
Gross profit 756
Operating expenses:
Wage expense 160
Rent expense 106
Net income $302
If Keller Company prepares a common size income statement, what will they report for Rent expense?
A) 2.3%
B) 4.3%
C) 4.4%
D) 6.8%
Answer: D
Diff: 1
LO: 17-4
31
7) The balance sheet for James Company is given below:
Cash $242
Accounts Receivable 200
Inventory 388
Prepaid Insurance 70
Fixed Assets 452
Accumulated Depreciation (228)
Total Assets $1,124
Accounts payable $152

Wages payable 32
Notes payable 420
Paid-in capital 160
Retained earnings 360
Total liabilities and stockholders' equity $1,124
If a common-size balance sheet was prepared, what would James Company report for accounts
receivable?
A) 13.5%
B) 17.3%
C) 17.8%
D) 86.3%
Answer: C
Diff: 2
LO: 17-4
32
8) The balance sheet for Ramon Company is given below:
Cash $242
Inventory 450
Fixed Assets 390
Total Assets $1,124

Wages payable 32
Notes payable 420
Paid-in capital 160
If a common-size balance sheet was prepared, what would Ramon Company report for inventory?
A) 13.5%
B) 25.2%
C) 34.5%
D) 40.0%
Answer: D
Diff: 2
LO: 17-4
33
9) The balance sheet for Jennifer Company is given below:
Cash $200
Inventory 388
Fixed Assets 452
Total Assets $1,124

Wages payable 32
Notes payable 420
Paid-in capital 160
If a common-size balance sheet was prepared, what would Jennifer Company report for Cash?
A) 17.8%
B) 21.5%
C) 25.2%
D) 62.3%
Answer: A
Diff: 2
LO: 17-4
17.5 Questions
1) Comparing a company's current ratio today with the same company's current ratio for the past ten
years is called a(n) ________.
A) cross-sectional comparison
B) benchmark comparison
C) industry comparison
D) time-series comparison
Answer: D
Diff: 1
LO: 17-5
34
2) The financial ratios for a company can be evaluated using ________.
A) time-series comparisons
B) benchmark comparisons
C) cross-sectional comparisons
D) all of the above
Answer: D
Diff: 1
LO: 17-5
3) Comparing a company's debt-to-equity ratio for 2014 to the debt-to-equity ratios for 2014 from other
companies in the same industry is called a(n) ________.
A) time-series comparison
B) benchmark comparison
C) cross-sectional comparison
D) efficient ratio analysis
Answer: C
Diff: 1
LO: 17-5
4) ________ are profitability ratios.

A) Price earnings ratio and current ratio
B) Dividend payout and rate of return on invested capital
C) Earnings per share and dividend yield
D) Gross profit rate and return on sales
Answer: D
Diff: 1
LO: 17-5
35
5) The following information is available for the Larry Company:
Net income for the year ended December 31, 2014 $127.4
Total stockholders' equity, December 31, 2014 500.0
Total stockholders' equity, December 31, 2013 400.0
Total liabilities, December 31, 2014 240.0
What is the debt-to-equity ratio at December 31, 2014?

A) 27%
B) 41%
C) 48%
D) 51%
Answer: C
Diff: 2
LO: 17-5
6) The following information is available for the Christian Company:
Retained earnings, December 31, 2014 150.0
$5 par Common stock, December 31, 2014 80.0
$5 par Common stock, December 31, 2013 80.0
What is the earnings per share for the year ended December 31, 2014?
A) $1.04
B) $1.56
C) $7.50
D) $7.96
Answer: D
Diff: 2
LO: 17-5
36
7) The following information is available for the Novin Company:
Sales for the year ended December 31, 2014 1,606.0
Total assets, December 31, 2014 470.0
What is the return on sales for the year ended December 31, 2014?
A) 2.9%
B) 7.9%
C) 11.0%
D) 33.9%
Answer: C
Diff: 2
LO: 17-5
8) The following information is available for the Platinum Company:

A) 0.29
B) 1.47
C) 1.90
D) 2.00
Answer: B
Diff: 2
LO: 17-5
37
9) The following information is available for the Gold Company:
What is the return on stockholders' equity for the year ended December 31, 2014?
A) 24.1%
B) 27.1%
C) 52.0%
D) 55.4%
Answer: C
Diff: 2
LO: 17-5
10) The following information is available for the Wetzel Company:
Credit sales for the year ended December 31, 2014 $1,606.0
Accounts Receivable, December 31, 2014 180.0
Accounts Receivable, December 31, 2013 144.0
What is the average collection period in days for the year ended December 31, 2014?
A) 5.0
B) 36.8
C) 40.9
D) 77.3
Answer: B
Diff: 2
LO: 17-5
38
11) The following information is available for Potter Company:
Total Current Assets $356,000

Total Current Liabilities $203,000
Total Assets $1,000,000
Total Liabilities $500,000
Cash $100,000
What is the current ratio?

A) 0.76
B) 1.75
C) 2.05
D) 2.51
Answer: B
Diff: 1
LO: 17-5
12) The Bombard Company reports the following information:
Sales for the year ended December 31, 2012 $106,950

Gross profit for the year ended December 31, 2012 $45,150
Net income for the year ended December 31, 2012 $10,300
Total Current Assets, December 31, 2012 $18,700
Total Current Liabilities, December 31, 2012 $7,600
Total Assets, December 31, 2012 $48,400
Total Liabilities, December 31, 2012 $20,850
Total common shares outstanding, December 31, 2012 1,000
Market price per share, December 31, 2012 $75.00
Dividends per share, for the year ended December 31, 2012 $5.00
What is the return on sales for the year ended December 31, 2012?
A) 6.8%
B) 9.6%
C) 25.8%
D) 42.2%
Answer: B
Diff: 2
LO: 17-5
39
13) The Collander Company reports the following information:

What is the current ratio at December 31, 2012?

A) 0.90
B) 1.00
C) 2.32
D) 3.34
Answer: D
Diff: 2
LO: 17-5
14) The Corrao Company reports the following information:


A) 15.7%
B) 30.9%
C) 43.1%
D) 75.7%
Answer: B
Diff: 2
LO: 17-5
40
15) The Conner Company reports the following information:

What is the gross profit percentage for the year ended December 31, 2012?
A) 6.8%
B) 12.6%
C) 16.2%
D) 48.9%
Answer: D
Diff: 2
LO: 17-5
16) The Middleton Company reports the following information:

Average common shares outstanding in 2012 1,000
What is the earnings per share for the year ended December 31, 2012?
A) $0.26
B) $3.88
C) $7.30
D) $106.95
Answer: C
Diff: 2
LO: 17-5
41
17) The Vaclav Company reports the following information:

Average common shares outstanding in 2012 1,000
What is the price-earnings ratio at December 31, 2012?

A) 0.7
B) 10.3
C) 19.3
D) 75.0
Answer: B
Diff: 2
LO: 17-5
18) The Kaprelian Company reports the following information:

Average total common shares outstanding in 2012 1,000
What is the dividend yield at December 31, 2012?

A) 6.7%
B) 9.7%
C) 25.8%
D) 68.2%
Answer: A
Diff: 2
LO: 17-5
42
19) The Stelloh Company reports the following information:

What is the dividend payout for the year ended December 31, 2012?
A) 6.7%
B) 9.7%
C) 65.8%
D) 68.5%
Answer: D
Diff: 2
LO: 17-5
20) The debt-to-equity ratio is used to judge a company's ________.

A) return on investment
B) liquidity
C) risk of insolvency
D) marketability
Answer: C
Diff: 1
LO: 17-5
21) Fast growing companies tend to have ________ price-earnings ratios.

A) low
B) high
C) stable
D) erratic
Answer: B
Diff: 1
LO: 17-5
43
22) All other things equal, a higher current ratio indicates that ________.
A) a company has excess cash to pay liabilities
B) a short-term creditor is likely to be paid in full and on time
C) a company's long-term debt is coming due within the next year
D) a company's short-term debt is coming due within the next year
Answer: B
Diff: 1
LO: 17-5
23) In accordance with Generally Accepted Accounting Principles in the United States, the ________ must
be reported on the financial statements.
A) price-earnings ratio
B) dividend payout ratio
C) earnings per share
D) dividend yield ratio
Answer: C
Diff: 1
LO: 17-5
24) Zemrowski Company has the following data available:
Credit Sales for the year ended December 31, 2015 $500
Cash Sales for the year ended December 31, 2015 $400
Cost of Goods Sold for the year ended December 31, 2015 $290
Total Accounts Receivable, December 31, 2015 $200
Total Accounts Receivable, December 31, 2014 $100
Total Inventory, December 31, 2015 $200
Total Inventory, December 31, 2014 $250
What is the average collection period for the fiscal year ending December 31, 2015?
A) 110 days
B) 150 days
C) 220 days
D) 283 days
Answer: A
Diff: 2
LO: 17-5
44
25) Toto Company has the following data available:

Preferred dividends declared during 2012 $2,000
What are the earnings per share for the year ended December 31, 2012?
A) $2.00
B) $5.30
C) $6.30
D) $7.30
Answer: B
Diff: 2
LO: 17-5
26) Miley Company has the following data available:

Preferred dividends declared during 2012 $4,000
What are the earnings per share for the year ended December 31, 2012?
A) $3.30
B) $4.30
C) $7.30
D) none of the above
Answer: A
Diff: 2
LO: 17-5
45
27) Line items on common-size financial statements are expressed in percentages of some base such as
total assets.
Answer: TRUE
Diff: 1
LO: 17-5
28) The current ratio equals current assets divided by current liabilities.
Answer: TRUE
Diff: 1
LO: 17-5
29) Return on sales equals gross profit divided by sales.

Answer: FALSE
Diff: 2
LO: 17-5
30) Liquidity ratios focus on whether there are sufficient current assets to satisfy current liabilities as they
come due.
Answer: TRUE
Diff: 2
LO: 17-5
46
31) The income statement for Rozman Company for the year ended December 31, 2013 is given below:
Sales $1,600
Gross profit 728
Operating expenses 436
Net income $226
Required:
Prepare a common-size income statement.
Answer: Sales 100.00%
Cost of goods sold 54.50%
Gross profit 45.50%
Operating expenses 27.25%
Operating income 18.25%
Income tax expense 4.13%
Net income 14.13%
Diff: 1
LO: 17-5
47
32) The balance sheet for Orlando Company at December 31, 2009 is given below:
Current Assets:
Cash $78
Inventory 54
Total Current Assets $208
Long-term Assets:
Fixed Assets $322
Less: Accumulated Depreciation (136)
Net Fixed Assets $186
Total Assets $394

Current Liabilities:
Taxes Payable 14
Total Current Liabilities $58
Total Liabilities $118
Stockholders' Equity:
Paid-in Capital $100
Retained Earnings 176
Total Stockholders' Equity $276
Required:
Prepare a common-size balance sheet.
48
Answer: Current Assets:
Cash 19.8%
Accounts Receivable 19.3%
Inventory 13.7%
Total Current Assets 52.8%
Long-term Assets:
Fixed Assets 81.7%
Less: Accumulated Depreciation (34.5)%
Net Fixed Assets 47.2%
Total Assets 100.0%

Current Liabilities:
Accounts Payable 11.2%
Taxes Payable 3.6%
Total Current Liabilities 14.7%
Long-term Bonds Payable 15.2%
Total Liabilities 29.9%
Stockholders' Equity:
Paid-in Capital 25.4%
Retained Earnings 44.7%
Total Stockholders' Equity 70.1%
Total Liabilities and Stockholders' Equity 100.0%
Diff: 1
LO: 17-5
49
33) The following information is available for Ward Company:
Sales $189,400
Gross profit $56,400
Net income $25,800
Total current assets $32,400
Total current liabilities $34,400
Total stockholders' equity, last year $192,000
Total stockholders' equity, current year $280,000
Required:
Compute the following ratios:
A) Current ratio
B) Gross profit rate
C) Return on sales
D) Return on stockholders' equity
Answer: A) 0.94
B) 29.8%
C) 13.6%
D) 10.9%
Diff: 2
LO: 17-5
50
34) The following data is available for Everest Company:
Credit Sales $1,702

Net Income $112
Total Current Assets $366
Total Current Liabilities $226
Accounts Receivable, current year $160
Accounts Receivable, prior year $156
Total Stockholders' Equity, current year $550
Total Stockholders' Equity, prior year $500
Retained Earnings, current year $366
Retained Earnings, prior year $346
Market price per share $50
Average Number of Common Shares Outstanding during year 46
Required:
Compute the following ratios:
A) current ratio
B) average collection period in days
C) return on stockholders' equity
D) price-earnings ratio
E) dividend yield
Answer: A) 1.62 = 366/226
B) 33.9 = (158 × 365)/1702
C) 21.33% = 112/525
D) 20.58 = 50/(112/46)
E) 4% = (92/46)/50
Diff: 2
LO: 17-5
17.6 Questions
1) In an efficient capital market, the market prices of securities ________.

A) fully reflect all the information available to the public
B) fully reflect all the information available to insiders
C) reflect some of the information available to the public
D) reflect most of the information available to the public
Answer: A
Diff: 1
LO: 17-6
51
2) In an efficient capital market, searching for ________.
A) overpriced securities is fruitless
B) underpriced securities is fruitless
C) securities with high dividend yields is fruitless
D) low risk securities is fruitless
Answer: B
Diff: 1
LO: 17-6
3) In an efficient capital market, the appropriate investment strategy for most investors is the ________.
A) daily trading and high volume approach
B) inactive portfolio approach
C) active portfolio approach
D) buy low and sell high approach
Answer: B
Diff: 1
LO: 17-6
4) In an efficient capital market, the appropriate investment strategy is risk control, ________ and
________.
A) low diversification; high turnover of securities
B) low diversification; low turnover of securities
C) high diversification; high turnover of securities
D) high diversification; low turnover of securities
Answer: D
Diff: 2
LO: 17-6
5) In an efficient capital market, the role of accounting information is to ________.

A) help investors find underpriced securities
B) help investors find overpriced securities
C) help investors find low risk securities
D) help investors identify the different degrees of risk among different securities
Answer: D
Diff: 2
LO: 17-6
52
6) Besides financial statements, alternative sources of financial information about a company is(are)
________.
A) company press releases
B) trade association publications
C) brokerage house analyses
D) all of the above
Answer: D
Diff: 1
LO: 17-6
7) An efficient capital market is one in which an order to trade can be placed and executed in a short
period of time.
Answer: FALSE
Diff: 2
LO: 17-6
8) Research suggests that investors are not fooled by companies that choose the least conservative
accounting policies to increase net income.
Answer: TRUE
Diff: 2
LO: 17-6
53

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Introduction to Management Accounting, 16e, Global Edition (Horngren)

Chapter 17 Understanding and Analyzing Consolidated Financial Statements

Market value of trading securities $8,000

Market value of available-for-sale securities $8,000

Market value of securities $10,000

6) Presented below is the balance sheet of Holmes Company at January 1, 2015:

Accounts Payable $20

The balance sheet of Montvale Company at January 1, 2015 is below:

Accounts Payable $120

Accounts Payable $20

The balance sheet of Maury Company at January 1, 2015 is below:

Accounts Payable $120

Accounts Payable $20

The balance sheet of Monty Company at January 1, 2015 is below:

Accounts Payable $120

Accounts Payable $20

The balance sheet of Marvelous Company at January 1, 2015 is below:

Accounts Payable $120

Accounts Payable $20

The balance sheet of Beck Company at January 1, 2015 is below:

Accounts Payable $120

Accounts Payable $20

The balance sheet of Swenson Company at January 1, 2015 is below:

Accounts Payable $120

Parent Company Net Income for Past Year $100 million

Parent Company Net Income for Past Year $100 million

23) The Investment in Subsidiary account appears on a consolidated balance sheet.

6) Each year, goodwill on the consolidated balance sheet is ________.

12) Goodwill is amortized on the consolidated financial statements.

1) To compare companies that differ in size, analysts use ________.

Accounts payable $152

Accounts payable $152

Accounts payable $152

4) ________ are profitability ratios.

What is the debt-to-equity ratio at December 31, 2014?

6) The following information is available for the Christian Company:

8) The following information is available for the Platinum Company:

What is the debt-to-equity ratio at December 31, 2014?

10) The following information is available for the Wetzel Company:

Total Current Assets $356,000

What is the current ratio?

12) The Bombard Company reports the following information:

Sales for the year ended December 31, 2012 $106,950

Sales for the year ended December 31, 2012 $106,950

What is the current ratio at December 31, 2012?

14) The Corrao Company reports the following information:

Sales for the year ended December 31, 2012 $106,950

What is the debt-to-equity ratio at December 31, 2012?

Sales for the year ended December 31, 2012 $106,950

16) The Middleton Company reports the following information:

Sales for the year ended December 31, 2012 $106,950

Sales for the year ended December 31, 2012 $106,950

What is the price-earnings ratio at December 31, 2012?

18) The Kaprelian Company reports the following information:

Sales for the year ended December 31, 2012 $106,950

What is the dividend yield at December 31, 2012?

Sales for the year ended December 31, 2012 $106,950

20) The debt-to-equity ratio is used to judge a company's ________.

21) Fast growing companies tend to have ________ price-earnings ratios.

24) Zemrowski Company has the following data available:

Sales for the year ended December 31, 2012 $106,950

26) Miley Company has the following data available:

Sales for the year ended December 31, 2012 $106,950

29) Return on sales equals gross profit divided by sales.