Ch4

Student: ___________________________________________________________________________

Green Company purchased 100 percent of the common shares of White Company for $880,000. Selected
accounts from Green's balance sheet at the date of combination are as follows:

Selected accounts from the balance sheet of White at acquisition are as follows:

On the date of purchase, White inventory and buildings and equipment had fair values of $280,000 and
$860,000, respectively.
1. Based on the information given above, the amount to be reported for inventory in the consolidated balance
sheet immediately after the combination is:

A. $1,000,000.
B. $960,000.
C. $760,000.
D. $720,000.
2. Based on the information given above, the amount to be reported in the consolidated balance sheet for
buildings and equipment (net) immediately after the combination is:

A. $1,880,000.
B. $1,860,000.
C. $1,800,000.
D. $1,000,000.
3. Based on the information given above, the amount to be reported in the consolidated balance sheet for the
investment in White Company common stock is:

A. $0.
B. $350,000.
C. $740,000.
D. $880,000.
4. Based on the information given above, the balance to be reported as goodwill in the consolidated balance
sheet prepared immediately after the combination is:

A. $0.
B. $600,000.
C. $120,000.
D. $140,000.
5. Based on the information given above, the balance to be reported for common stock in the consolidated
balance sheet prepared immediately after the combination is:

A. $840,000.
B. $1,190,000.
C. $1,580,000.
D. $1,640,000.
6. Based on the information given above, the balance to be reported for retained earnings in the consolidated
balance sheet prepared immediately following the combination is:

A. $1,040,000.
B. $1,100,000.
C. $1,160,000.
D. $1,840,000.
7. Parent Company acquires 100 percent of the outstanding voting stock of Subsidiary company in a business
combination treated as a purchase. Acquisition cost exceeded the book value of Subsidiary's net assets. The
excess is attributable to equipment with a remaining life of five years. Parent uses the equity method of
accounting for its investment, and there have been no intercompany transactions. Consolidated net income
for the year following acquisition should equal

A. Parent's net operating income minus differential amortization.

B. Parent's net income plus Subsidiary's net income.
C. Parent's net income.
D. Parent's net operating income plus Subsidiary's net income.
8. Parent Company acquires 100 percent of the outstanding voting stock of Subsidiary Company in a business
combination treated as a purchase. Acquisition cost exceeded the book value of Subsidiary's net assets.
The excess is attributable to equipment with a remaining life of five years. Parent uses the equity method
of accounting for its investment, and there have been no intercompany transactions. Consolidated retained
earnings at the end of the first year following acquisition should equal

A. Parent's retained earnings.

B. Parent's retained earnings plus Subsidiary's retained earnings.
C. Parent's retained earnings minus Subsidiary's retained earnings.
D. Parent's retained earnings minus differential amortization.
9. Parent Company acquires 100 percent of the outstanding voting stock of Subsidiary company in a business
combination treated as a purchase. Acquisition cost exceeded the book value of Subsidiary's net assets. The
excess is attributable to equipment with a remaining life of five years. Parent uses the fully adjusted equity
method of accounting for its investment, and there have been no intercompany transactions. Consolidated
net income for the year following acquisition should equal

A. Parent's net operating income minus differential amortization.

B. Parent's net income plus Subsidiary's net income.
C. Parent's net income.
D. Parent's net operating income plus Subsidiary's net income.
10. Parent Company acquires 100 percent of the outstanding voting stock of Subsidiary Company in a business
combination treated as a purchase. Acquisition cost exceeded the book value of Subsidiary's net assets.
The excess is attributable to equipment with a remaining life of five years. Parent uses the cost method of
accounting for its investment, and there have been no intercompany transactions. Consolidated retained
earnings at the end of the first year following acquisition should equal

A. Parent's retained earnings.

B. Parent's retained earnings plus Subsidiary's retained earnings.
C. Parent's retained earnings minus Subsidiary's retained earnings.
D. Parent's retained earnings minus differential amortization.
11. All outstanding common shares of Duck Company were purchased by Laurel Company several years ago.
The balance of Laurel's investment in Duck's stock account was $1,300,000 at the end of the current year.
Duck's stockholders' equity at the beginning of the year was $1,040,000. Duck's net income for the year
was $192,000, and Duck declared dividends of $80,000. If all of Laurel's excess of investment cost over
book value is attributed to goodwill, then goodwill at the end-of-the-year consolidation will be:

A. $68,000.
B. $112,000.
C. $148,000.
D. $260,000.
12. Holly Corporation purchased all of Swiss Corporation's common stock for $970,000 on July 1, 2010. The
entire differential was attributed to equipment. At that date, Swiss had equipment with a book value of
$740,000 and a fair value of $880,000. The equipment is depreciated using the straight-line method over
a remaining life of 240 months. What amount should be included as equipment (net) on the December 31,
2010, consolidated balance sheet?

A. $718,000.
B. $762,000.
C. $855,750.
D. $858,000.
13. Ponderosa acquired 100% control of Sumac on January 1, 2009. The purchase differential included $30,000
attributable to undervaluation of Sumac's inventory. Both Ponderosa and Sumac account for inventory
using LIFO. Sumac's December 31, 2009 inventory was greater than the beginning balance. Consolidated
net income for 2009 will be:

A. $30,000 greater than if FIFO had been used.

B. $30,000 less than if FIFO had been used.
C. The same as if FIFO had been used.
D. Different under FIFO only if there had been a noncontrolling interest.
West, Inc. holds 100 percent of the common stock of Coast Company, an investment purchased for
$680,000. West's net assets have a book value of $1,150,000, and their fair values total $1,390,000. The
book value and the fair value of Coast's net assets on the date of combination are $400,000 and $550,000,
respectively. Immediately following the combination, a consolidated balance sheet is prepared.
14. Based on the information given above, at what amount is net assets reported in the consolidated balance
sheet?

A. $1,150,000.
B. $1,550,000.
C. $1,700,000.
D. $1,830,000.
15. Based on the information given above, goodwill will be reported in the consolidated balance sheet in the
amount of:

A. $280,000.
B. $150,000.
C. $1,300,000.
D. $ -0-.
16. Based on the information given above, total consolidated stockholders' equity (excluding the
noncontrolling interest) will be reported at what amount in the consolidated balance sheet?

A. $1,150,000.
B. $1,390,000.
C. $1,550,000.
D. $1,700,000.
17. Based on the information given above, West's investment in Coast stock will be reported in the
consolidated balance sheet at what amount?

A. $0.
B. $400,000.
C. $440,000.
D. $680,000.
On December 31, 2008, Reston Corporation held the following noncurrent assets: a building worth
$360,000 (the cost less accumulated depreciation equaled $300,000) and land worth $180,000 (the cost
totaled $140,000). The remaining net assets, all current assets, were worth $380,000; the book value of
those assets totaled $360,000. On this date, Columbia Company purchased all of Reston's common stock
for $880,000.
18. Based on the information given above, at what amounts will Reston's building and land be reported in the
consolidated balance sheet prepared at the date of combination?

A.
B.
C.
D.
19. Assume the information given above, except assume that the purchase price is $940,000. At what amounts
will the building and land be reported in the consolidated balance sheet immediately following the
combination?

A.
B.
C.
D.
20. Tanner Company, a subsidiary acquired for cash, owned equipment with a fair value higher than the
book value as of the date of combination. A consolidated balance sheet prepared immediately after the
acquisition would include this difference in:

A. Goodwill.
B. Retained earnings.
C. Deferred charges.
D. Equipment.
21. Ensign Company acquired 100 percent control of a subsidiary for cash at a price greater than the fair value
of the subsidiary's identifiable net assets. The subsidiary's inventory had a fair value greater than cost. All
other identifiable net assets had fair values that equaled book values. A consolidated balance sheet prepared
immediately following the acquisition would include fair value associated with Inventory or Goodwill from
the differential:

A.
B.
C.
D.
22. Payne Company acquired a subsidiary in a combination accounted for as a purchase. The appraisal value
of the identifiable net assets acquired exceeded the acquisition price. In the preparation of consolidated
financial statements the excess was assigned to the appropriate assets, reducing them to zero. Any
remaining excess should be recognized in the consolidated financial statements as:

A. a deferred credit.
B. negative goodwill.
C. an extraordinary gain.
D. a prior period adjustment.
23. Vernon Company purchased all the outstanding common stock of Dayton Company. The purchase price
exceeded the fair value of the net assets acquired. How should the following items of Dayton be reported
on the consolidated balance sheet?

A.
B.
C.
D.
24. The amount to be recognized as goodwill in the consolidated balance sheet prepared following a purchase
acquisition is the excess of cost over

A. the book value of the subsidiary's net assets.

B. the parent's interest in the book value of the subsidiary's net assets.
C. the fair value of the subsidiary's net assets.
D. the parent's interest in the fair value of the subsidiary's net assets.
25. Immediately following a parent's acquisition of 100 percent control of a subsidiary at a cost greater than the
fair value of the underlying net assets, total assets on the consolidated balance sheet should

A. equal the book value of the parent's assets plus the fair value of the subsidiary's assets.
B. be greater than the book value of the parent's assets plus the fair value of the subsidiary's assets.
C. equal the fair value of the parent's assets plus the fair value of the subsidiary's assets.
D. be greater than the fair value of the parent's assets plus the fair value of the subsidiary's assets.
26. Which of the following related to Consolidated Financial Statements is correct?
I. Consolidated financial statements will be the same regardless of whether the parent uses the cost method
or equity method of accounting for its investment in a subsidiary.
II. None of a purchase differential should be allocated to a subsidiary's previously unrecognized identifiable
intangible asset.
III. Use of push-down accounting is acceptable for a fully-owned subsidiary.
IV. Consolidating working papers are used instead of a separate set of books for a consolidated entity.

A. I, II, III
B. I, III, IV
C. II, III, IV
D. I, II, III, IV
27. Summit Corp. acquired a subsidiary that had no noncurrent assets. The excess of the fair value of the
subsidiary's net assets over the purchase price is recorded as:

A. Negative goodwill.
B. A deferred credit.
C. Part of additional paid-in capital.
D. An extraordinary gain.
28. Aim, Inc. purchased 100 percent of the outstanding common stock of Norton, Inc. by issuing 200,000
shares of its $5 par value common stock with a market value of $25 per share. The stockholders' equity
section of each company's balance sheet immediately before the acquisition was:

The consolidated balance sheet prepared at the date of acquisition should report additional paid-in capital
of:

A. $8,100,000.
B. $7,800,000.
C. $7,100,000.
D. $6,800,000.
On July 1, 2009, Shopton Company borrowed $320,000 to purchase 100 percent of the outstanding
common stock of Linden Company. This loan, carrying a 12 percent annual rate, is payable in 10 equal
annual installments beginning July 1, 2010. Summarized portions of Shopton's and Linden's balance sheets
as of June 30, 2009, are as follows:

The book values of Linden's assets and liabilities approximated market except for accounts payable,
which had a fair value that was $10,000 more than the book value. Any remaining excess is attributable to
goodwill.
29. Refer to the above information. The amount to be recorded on the consolidated balance sheet at July 1,
2009, for total assets is:

A. $2,190,000.
B. $2,200,000.
C. $2,230,000.
D. $2,240,000.
30. Considering the information given above, the amount to be recorded on the consolidated balance sheet for
total liabilities is:

A. $1,140,000.
B. $1,130,000.
C. $820,000.
D. $810,000.
31. Refer to the above information. The amount to be recorded on the consolidated balance sheet for total
stockholders' equity including the noncontrolling interest is:

A. $1,100,000.
B. $1,172,500.
C. $1,390,000.
D. $710,000.
32. Cypress Corporation purchased 100 percent of Fulton Corporation's voting common stock for $1,000,000
above the underlying book value of Fulton's stockholders' equity. Fulton owns:

The consolidated balance sheet of Cypress Corporation prepared immediately after the purchase should
show goodwill of:

A. $1,000,000.
B. $990,000.
C. $630,000.
D. $620,000.
33. Grant Corporation purchased 100 percent of Harris Corporation common stock for $970,000 when
Harris reported common stock of $470,000 and retained earnings of $420,000. The amount of purchase
differential reflected in a consolidation workpaper to prepare a consolidated balance sheet immediately
after the purchase is:

A. $0.
B. $90,000.
C. $500,000.
D. $550,000.
Scola acquired 100 percent of the outstanding stock of Kaper at a cost of $1,000,000. At the date of
acquisition Scola owed Kaper $50,000 on account. This amount is fully collectible by Kaper. Balance sheet
information for Kaper on the acquisition date is as follows:

34. Refer to the above information. At what amount should the following accounts of Kaper be reported in the
consolidated balance sheet prepared immediately following the acquisition?

A.
B.
C.
D.
35. Refer to the above information. The amount of purchase differential reflected in the cost of Scola's
acquisition of Kaper was

A. $0
B. $50,000
C. $100,000
D. $550,000
36. Refer to the above information. The amount that should be reported for noncontrolling interest in the
consolidated balance sheet prepared immediately following the acquisition is

A. $0
B. $200,000
C. $260,000
D. $1,000,000
37. Refer to the above information. At what amount should the following accounts of Kaper be reported in the
consolidated balance sheet prepared immediately following the acquisition?

A.
B.
C.
D.
Plum Pies gave 35,000 share of $5 par common stock when the market value was $20 in exchange for
100% of the equity of Sherry Crust. Financial Information at the time of the acquisition included:

38. Immediately upon completing the acquisition how much is the differential?

A. ($100,000).
B. $0.
C. $100,000.
D. $200,000.
39. If immediately upon completing the acquisition Plum Pies prepared consolidated financial statements, the
amount of Goodwill would be?

A. $200,000.
B. $100,000.
C. $50,000.
D. $0.
40. If immediately upon completing the acquisition Plum Pies prepared consolidated financial statements, then
consolidated Common Stock would be?

A. $1,000,000.
B. $950,000.
C. $475,000.
D. $425,000
41. If immediately upon completing the acquisition Plum Pies prepared consolidated financial statements, then
consolidated Paid-In-Capital would be?

A. $925,000
B. $675,000
C. $400,000
D. $150,000
42. When companies employ push-down accounting:

A. The consolidated financial statements will appear exactly as if push-down accounting had not been used.
B. A special account called Revaluation Capital will appear in the consolidated balance sheet.
C. All consolidation elimination entries are made on the books of the subsidiary rather than in consolidated
workpapers.
D. Those subsidiaries may not be consolidated.
43. Boston acquired 100 percent of the outstanding stock of Fairfax at a cost of $1,050,000. Balance sheet
information for Fairfax on the acquisition date is as follows:

Required: Prepare the elimination entry or entries needed to prepare a consolidated balance sheet
immediately following the acquisition.
44. Saco Company purchased 100 percent of the stock of Garland Corp. on December 31, 2008. The equity
section of Garland's balance sheet at that date is as follows:

Saco financed the acquisition by using $880,000 cash and giving a note payable for $400,000. Book value
approximated fair value for all of Garland's assets and liabilities except for buildings, with a 10 year useful
life, which had a fair value $60,000 more than its book value. Any remaining differential was related to
goodwill. Saco has an account payable to Garland in the amount of $20,000.
Required:
1. Present all eliminating entries needed to prepare a consolidated balance sheet immediately following the
acquisition.
2. If all of he amounts are the same as of December 31, 2009 as on December 31, 2008 what elimination
entries are different on 12/31/09?
45. Thorn Corporation acquired 100 percent of the stock of Byrd Company for $1,000,000 cash. Summarized
balance sheet information for the two companies immediately preceding the acquisition is as follows:

At the time of acquisition, the book values and market values of Byrd's assets were approximately the same
except its land was worth $100,000 and its inventory was worth $510,000. Thorn's buildings and equipment
were worth $3,400,000. The fair value of Byrd's accounts and notes payable was $240,000.
Required: Compute the balances to be reported in a consolidated balance sheet prepared immediately
following the acquisition for:
(a.) Inventory
(b.) Land, Buildings and Equipment (net)
(c.) Cash
(d.) Goodwill
(e.) Accounts and Notes Payable
(f.) Stockholders' Equity
46. Crystal, Inc. purchased 100 percent of the outstanding stock of Pekin, Inc. on January 1, 2009 for $2.0
million. The acquisition was accomplished with $500,000 in cash and exchanging 25,000 shares of Crystal
common stock. On the date of the combination Crystal's common stock had a par value of $3 per share and
a market value of $40. Pekin's summarized balance sheet on January 1, 2009, contained the following:

At the date of acquisition the market value of Pekin's net assets and liabilities were equal to their book
values with the exception of three accounts. The buildings account was valued at $80,000 greater than book
value. The equipment account was valued at $35,000 less than book value. The notes payable account was
valued at $20,000 less than book value. The building has a 10 year useful life and the equipment 5 years.
As of 12/31/09 Pekin owed Crystal $10,000. During 2009 Pekin had income of $100,000 and paid
dividends of $10,000. The 12/31/09 balance in the Investment in Pekin account was $2,090,000. Prepare
the 12/31/09 elimination entries.
Required: Journalize the eliminating entries needed to prepare a consolidated balance sheet as of December
31, 2009.
47. Alpha acquired 100% of Beta's common stock for $400,000. On this date the Fair Market Value of some of
Beta's assets and liabilities were:

Prepare a consolidation workpaper at the date of acquisition based upon the following book values at the
date:
48. Allen Company acquired 100 percent of the common stock of Wilton Company by issuing 28,000 shares
of Allen $5 par value common stock on January 2, 2009. The market value of the stock on the date of
acquisition was $10 per share. Summarized trial balance data for 2009 is as follows:

Additional Information:
On the date of acquisition, Wilton had equipment with a five year useful life that had a fair value of
$20,000 in excess of the book value. The book value of all other assets approximated fair value. Also, on
December 31, 2009, Allen owed Wilton $16,000 on account.
Required: Compute consolidated amounts at December 31, 2009 for:
1. Current Assets
2. Plant & Equipment
3. Other Assets
4. Goodwill
5. Liabilities
6. Accumulated Depreciation
7. Net Income
49. On December 31, 2007, Spot Corporation and Waldo Company entered into a business combination in
which Spot acquired all of the common stock of Waldo for $1,700,000. At the date of combination, Waldo
had common stock outstanding with a par value of $340,000, additional paid-in capital of $600,000, and
retained earnings of $620,000. The fair values of all of Waldo's assets and liabilities were approximately
equal to the book values at the date of combination except for the following:

The buildings had a remaining life of 10 years, and all of the inventory held by Waldo at the date of
combination was sold during 2008. Push-down accounting was employed on the books of Waldo Company
in accounting for the business combination.
During 2008, Waldo earned net income of $160,000 and paid a dividend of $40,000.
Required:
(a.) Record the purchase of Waldo Company's stock on the books of Spot on December 31, 2007.
(b.) Record any entries that would be made December 31, 2007, on the books of Waldo Company related to
the business combination if push-down accounting is employed.
(c.) Present all eliminating entries that would appear in the workpaper to prepare a full set of consolidated
financial statements for the year 2008.

50. Pear Corp. acquired Sherry Inc. by issuing 10,000 new shares of $5 par value common stock with a $30
market value.
Required:
1. Which is the parent and which is the subsidiary?
2. Define a subsidiary corporation.
3. Define a parent corporation.
4. Which entity prepares consolidated workpapers?
5. Why are Elimination entries used?
 Ch4 Key
1. A

2. B

3. A

4. C

5. A

6. B

7. C

8. A

9. C

10. A

11. C

12. D

13. A

14. A

15. C

16. A

17. A

18. D

19. A

20. D

21. A

22. C

23. B

24. D

25. A

26. B

27. D

28. D

29. D

30. A

31. B

32. D
33. B

34. D

35. C

36. D

37. D

38. D

39. B

40. D

41. B

42. A

43.

44. 1.

2. As of December 31, 2009 there is a need for a Depreciation elimination entry.

45. (a.) Inventory = $550,000 [$40,000 + $510,000]

(b.) Land, Buildings and Equipment (net) = $2,920,000 [$2,460,000 + $220,000 + $120,000 + $120,000]
(c.) Cash = $610,000 [($1,200,000 $1,000,000) + (410,000)]
(d.) Goodwill = 0 [1,000,000 440,000 240,000 320,000 20,000 + 40,000 20,000]
(e.) Accounts and Notes Payable = $1,060,000 [$820,000 + $240,000]
(f.) Stockholders' Equity = $3,700,000 ($1,040,000 + $1,600,000 + $1,060,000)
46.

47.
48. 1. Current Assets $2,290,000 (1,830,000+460,000)
2. Plant & Equipment $706,000 (540,000+150,000+20,000-4,000)
3. Other Assets $280,000 (160,000+120,000)
4. Goodwill $30,000

5. Liabilities $730,000 (610,000 = 120,000)

6. Accumulated Depreciation $224,000 (180,000+40,000+4,000)
7. Net Income $1,446,000 (2,000,000+750,000-900,000-400,000-4,000)

49. (a.) Record purchase of Waldo stock on books of Spot:

(b.) Record revaluation of assets on books of Waldo Company at date of combination:

(c.) Eliminating entries in consolidation workpaper prepared December 31, 2003:

1. Current Assets $2,274,000 (1,830,000 + 460,000 16,000)

2. Plant & Equipment $710,000 (540,000 + 150,000 + 20,000)
3. Other Assets $280,000 (160,000 + 120,000)
4. Goodwill $30,000 (280,000 70,000 160,000 20,000)
5. Liabilities $714,000 (610,000 + 120,000 16,000)
6. Accumulated Depreciation $224,000 (180,000 + 40,000 + 4,000)
7. Net Income $1,446,000 (2,000,000 + 750,000 900,000 400,000 4,000)

50. 1. Pear is the parent and Sherry is the subsidiary.

2. A subsidiary is an entity in which another entity, the parent company, holds a controlling financial interest.
3. A parent company holds all or may hold less than all, but a controlling interest, of the subsidiary company's commons stock.
4. The parent, Pear, prepares the consolidated workpapers in preparation of the consolidated financial statements.
5. Elimination entries are used to adjust the individual accounts of the parent and all of the subsidiaries, as if all the separate legal entities are actually
a single company.
 Ch4 Summary
Category # of
Questions
AACSB: Analytic 40
AACSB: Communication 1
AACSB: Reflective Thinking 9
AICPA: Decision Making 2
AICPA: Measurement 36
AICPA: Reporting 12
Baker - Chapter 004 56