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Chapter 2 - Reporting Intercorporate Investments and
Consolidation of Wholly Owned Subsidiaries with No Differential 2-1 Chapter 2
Reporting Intercorporate Investments and Consolidation of Wholly Owned
Subsidiaries with No Differential Multiple Choice Questions 1. If Push Company
owned 51 percent of the outstanding common stock of Shove Company, which
reporting method would be appropriate? A. Cost method B. Consolidation C.
Equity method D. Merger method Answer: B Learning Objective: 02-01 Topic:
Accounting for Investments in Common Stock Blooms: Remember AACSB: Reflective
Thinking AICPA: FN Reporting Difficulty: 1 Easy 2. Usually, an investment of 20
to 50 percent in another company's voting stock is reported under the: A. Cost
method B. Equity method C. Full consolidation method D. Fair value method Answer:
B Learning Objective: 02-01 Topic: Accounting for Investments in Common Stock
Blooms: Remember AACSB: Reflective Thinking AICPA: FN Reporting Difficulty: 1
Easy Advanced Financial Accounting 11th Edition Christensen Test Bank Full
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site: testbanklive.com Chapter 2 - Reporting Intercorporate Investments and
Consolidation of Wholly Owned Subsidiaries with No Differential 2-2 3. From an
investor's point of view, a liquidating dividend from an investee is: A. A
dividend declared by the investee in excess of its earnings in the current
year. B. A dividend declared by the investee in excess of its earnings since
acquisition by the investor. C. Any dividend declared by the investee since
acquisition. D. A dividend declared by the investee in excess of the investee's
retained earnings. Answer: B Learning Objective: 02-02 Topic: The Cost Method
Blooms: Remember AACSB: Reflective Thinking AICPA: FN Decision Making
Difficulty: 1 Easy 4. Which of the following observations is NOT consistent
with the cost method of accounting? A. Investee dividends from earnings since
acquisition by investor are treated as a reduction of the investment. B.
Investments are carried by the investor at historical cost. C. No journal entry
is made regarding the earnings of the investee. D. It is consistent with the
treatment normally accorded noncurrent assets. Answer: A Learning Objective:
02-02 Topic: The Cost Method Blooms: Remember AACSB: Reflective Thinking AICPA:
FN Decision Making Difficulty: 1 Easy Chapter 2 - Reporting Intercorporate
Investments and Consolidation of Wholly Owned Subsidiaries with No Differential
2-3 5. On January 1, 20X9 Athlon Company acquired 30 percent of the common
stock of Opteron Corporation, at underlying book value. For the same year,
Opteron reported net income of $55,000, which includes an extraordinary gain of
40,000. It did not pay any dividends during the year. By what amount would
Athlon's investment in Opteron Corporation increase for the year, if Athlon
used the equity method? A. $0 B. $16,500 C. $4,500 D. $12,000 Answer: B
Learning Objective: 02-03 Learning Objective: Appendix 2A Topic: The Equity
Method Topic: Investor’s Share of Other Comprehensive Income Blooms: Understand
AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium The following data
applies to Questions 6 - 8: On January 1, 20X8, William Company acquired 30
percent of eGate Company's common stock, at underlying book value of $100,000.
eGate has 100,000 shares of $2 par value, 5 percent cumulative preferred stock
outstanding. No dividends are in arrears. eGate reported net income of $150,000
for 20X8 and paid total dividends of $72,000. William uses the equity method to
account for this investment. 6. Based on the preceding information, what amount
would William Company receive as dividends from eGate for the year? A. $62,000
B. $21,600 C. $18,600 D. $54,000 Answer: C Learning Objective: 02-03 Learning
Objective: Appendix 2A Topic: The Equity Method Topic: Additional Requirements
of ASC 323-10 Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3
Hard Chapter 2 - Reporting Intercorporate Investments and Consolidation of
Wholly Owned Subsidiaries with No Differential 2-4 7. Based on the preceding
information, what amount of investment income will William Company report from
its investment in eGate for the year? A. $45,000 B. $42,000 C. $62,000 D. $35,000
Answer: B Learning Objective: 02-03 Learning Objective: Appendix 2A Topic: The
Equity Method Topic: Additional Requirements of ASC 323-10 Blooms: Apply AACSB:
Analytic AICPA: FN Measurement Difficulty: 3 Hard 8. Based on the preceding
information, what amount would be reported by William Company as the balance in
its investment account on December 31, 20X8? A. $100,000 B. $123,400 C.
$120,400 D. $142,000 Answer: B Learning Objective: 02-03 Learning Objective:
Appendix 2A Topic: The Equity Method Topic: Additional Requirements of ASC
323-10 Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard
The following data applies to Questions 9 – 11: On January 1, 20X4, Timber
Company acquired 25% of Johnson Company’s common stock at underlying book value
of $200,000. Johnson has 80,000 shares of $10 par value, 6 percent cumulative
preferred stock outstanding. No dividends are in arrears. Johnson reported net
income of $270,000 for 20X4 and paid total dividends of $140,000. Timber uses
the equity method to account for this investment. 9. Based on the preceding
information, what amount would Timber Company receive as dividends from Johnson
for the year? A. $23,000 B. $35,000 C. $37,500 Chapter 2 - Reporting
Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with
No Differential 2-5 D. $92,000 Answer: A Learning Objective: 02-03 Learning
Objective: Appendix 2A Topic: The Equity Method Topic: Additional Requirements
of ASC 323-10 Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3
Hard 10. Based on the preceding information, what amount of investment income
will Timber Company report from its investment in Johnson for the year? A.
$140,000 B. $67,500 C. $55,500 D. $35,000 Answer: C Learning Objective: 02-03
Learning Objective: Appendix 2A Topic: The Equity Method Topic: Additional
Requirements of ASC 323-10 Blooms: Apply AACSB: Analytic AICPA: FN Measurement
Difficulty: 3 Hard 11. Based on the preceding information, what amount would be
reported by Timber Company as the balance in its investment account on December
31, 20X4? A. $200,000 B. $220,500 C. $232,500 D. $255,500 Answer: C Learning
Objective: 02-03 Learning Objective: Appendix 2A Topic: The Equity Method
Topic: Additional Requirements of ASC 323-10 Blooms: Apply AACSB: Analytic
AICPA: FN Measurement Difficulty: 3 Hard Chapter 2 - Reporting Intercorporate
Investments and Consolidation of Wholly Owned Subsidiaries with No Differential
2-6 The following data applies to Questions 12–16: On January 1, 20X7, Yang Corporation
acquired 25 percent of the outstanding shares of Spiel Corporation for $100,000
cash. Spiel Company reported net income of $75,000 and paid dividends of
$30,000 for both 20X7 and 20X8. The fair value of shares held by Yang was
$110,000 and $105,000 on December 31, 20X7 and 20X8 respectively. 12. Based on
the preceding information, what amount will be reported by Yang as income from
its investment in Spiel for 20X8, if it used the equity method of accounting?
A. $7,500 B. $11,250 C. $18,750 D. $26,250 Answer: C Learning Objective: 02-03
Topic: The Equity Method Blooms: Apply AACSB: Analytic AICPA: FN Measurement
Difficulty: 2 Medium Chapter 2 - Reporting Intercorporate Investments and
Consolidation of Wholly Owned Subsidiaries with No Differential 2-7 13. Based
on the preceding information, what amount will be reported by Yang as balance
in investment in Spiel on December 31, 20X8, if it used the equity method of
accounting? A. $108,250 B. $118,750 C. $100,000 D. $122,500 Answer: D Learning
Objective: 02-03 Topic: The Equity Method Blooms: Apply AACSB: Analytic AICPA:
FN Measurement Difficulty: 2 Medium 14. Based on the preceding information,
what amount will be reported by Yang as income from its investment in Spiel for
20X7 if it used the fair value option to account for its investment in Spiel?
A. $17,500 B. $12,500 C. $11,250 D. $7,500 Answer: A Learning Objective: 02-05
Topic: The Fair Value Option Blooms: Apply AACSB: Analytic AICPA: FN
Measurement Difficulty: 3 Hard Chapter 2 - Reporting Intercorporate Investments
and Consolidation of Wholly Owned Subsidiaries with No Differential 2-8 15.
Based on the preceding information, what amount will be reported by Yang as
income from its investment in Spiel for 20X8 if it used the fair value option
to account for its investment in Spiel? A. $11,250 B. $2,500 C. $6,250 D.
$7,500 Answer: B Learning Objective: 02-05 Topic: The Fair Value Option Blooms:
Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard Chapter 2 -
Reporting Intercorporate Investments and Consolidation of Wholly Owned
Subsidiaries with No Differential 2-9 16. Based on the preceding information,
what amount will be reported by Yang as balance in investment in Spiel on
December 31, 20X8, if it used the fair value option to account for its
investment in Spiel? A. $105,000 B. $118,750 C. $100,000 D. $122,500 Answer: A
Learning Objective: 02-05 Topic: The Fair Value Option Blooms: Apply AACSB:
Analytic AICPA: FN Measurement Difficulty: 2 Medium 17. A change from the cost
method to the equity method of accounting for an investment in common stock
resulting from an increase in the number of shares held by the investor
requires: A. only a footnote disclosure. B. that the cumulative amount of the
change be shown as a line item on the income statement, net of tax. C. that the
change be accounted for as an unrealized gain included in other comprehensive
income. D. retroactive restatement as if the investor always had used the
equity method. Answer: D Learning Objective: 02-03 Topic: Changes in the Number
of Shares Held Blooms: Remember AACSB: Reflective Thinking AICPA: FN Reporting
Difficulty: 1 Easy Chapter 2 - Reporting Intercorporate Investments and
Consolidation of Wholly Owned Subsidiaries with No Differential 2-10 18. Under
the equity method of accounting for a stock investment, the investment
initially should be recorded at: A. cost. B. cost minus any differential. C.
proportionate share of the fair value of the investee company's net assets. D.
proportionate share of the book value of the investee company's net assets.
Answer: A Learning Objective: 02-03 Topic: The Equity Method Blooms: Remember
AACSB: Reflective Thinking AICPA: FN Decision Making Difficulty: 1 Easy 19.
Which of the following observations is consistent with the equity method of
accounting? A. Dividends declared by the investee are treated as income by the
investor. B. It is used when the investor lacks the ability to exercise
significant influence over the investee. C. It may be used in place of
consolidation. D. Its primary use is in reporting nonsubsidiary investments.
Answer: D Learning Objective: 02-03 Topic: The Equity Method Blooms: Remember
AACSB: Reflective Thinking AICPA: FN Decision Making Difficulty: 1 Easy (Note:
This is a Kaplan CPA Review Question) 20. On July 1, 20X4, Denver Corp.
purchased 3,000 shares of Eagle Co.'s 10,000 outstanding shares of common stock
for $20 per share. On December 15, 20X4, Eagle paid $40,000 in dividends to its
common stockholders. Eagle's net income for the year ended December 31, 20X4,
was $120,000, earned evenly throughout the year. In its 20X4 income statement,
what amount of income from this investment should Denver report? A. $12,000 B.
$36,000 C. $18,000 D. $6,000 Answer: C Learning Objective: 02-03 Topic: The
Equity Method Blooms: Apply Chapter 2 - Reporting Intercorporate Investments
and Consolidation of Wholly Owned Subsidiaries with No Differential 2-11 AACSB:
Analytic AICPA: FN Measurement Difficulty: 3 Hard 21. On October 1, 20X7,
Chicago Corporation purchased 6,000 shares of Buffalo Company’s 15,000
outstanding share of common stock for $25 per share. On December 15, 20X7,
Buffalo paid $120,000 in dividends to its common stockholders. Buffalo’s net
income for the year ended December 31, 20X7 was $300,000, earned evenly throughout
the year. In its 20X7 income statement, what amount of income from this
investment should Chicago report? A. $12,000 B. $30,000 C. $48,000 D. $120,000
Answer: B Learning Objective: 02-03 Topic: The Equity Method Blooms: Apply
AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard (Note: This is a
Kaplan CPA Review Question) 22. On January 2, 20X5, Well Co. purchased 10
percent of Rea, Inc.'s outstanding common shares for $400,000. Well is the
largest single shareholder in Rea, and Well's officers are a majority on Rea's
board of directors. As a result, Well is able to exercise significant influence
over Rea. Rea reported net income of $500,000 for 20X5, and paid dividends of
$150,000. In its December 31, 20X5, balance sheet, what amount should Well report
as investment in Rea? A. $385,000 B. $450,000 C. $400,000 D. $435,000 Answer: D
Learning Objective: 02-03 Topic: The Equity Method Blooms: Apply AACSB:
Analytic AICPA: FN Measurement Difficulty: 2 Medium 23. On January 2, 20X1,
Pencil Co. purchased 15 percent of Eraser, Inc.’s outstanding common shares for
$500,000. Pencil is the largest single shareholder in Eraser and is able to
exercise significant influence over Eraser. Eraser reported net income of
$400,000 for 20X1 and paid Chapter 2 - Reporting Intercorporate Investments and
Consolidation of Wholly Owned Subsidiaries with No Differential 2-12 dividends
of $100,000. In its December 31, 20X1, balance sheet, what amount should Pencil
report as investment in Eraser? A. $485,000 B. $500,000 C. $545,000 D. $560,000
Answer: C Learning Objective: 02-03 Topic: The Equity Method Blooms: Apply
AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium (Note: This is a
Kaplan CPA Review Question) 24. The Jamestown Corporation (Jamestown) reported
net income for the current year of $200,000 and paid cash dividends of $30,000.
The Stadium Company (Stadium) holds 22 percent of the outstanding voting stock
of Jamestown. However, another corporation holds the other 78 percent ownership
and does not take Stadium’s wants and wishes into consideration when making
financing and operating decisions for Jamestown. What investment income should
Stadium recognize for the current year? A. $6,600 B. $0 C. $44,000 D. $50,600
Answer: A Learning Objective: 02-03 Topic: The Equity Method Blooms: Apply
AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard 25. Clocktower
Corporation reported net income for the current year of $370,000 and paid cash
dividends of $50,000. Slide Company holds 40 percent of the outstanding voting
stock of Clocktower. However, another corporation holds the other 60 percent
ownership and does not take Slide’s wants and wishes into consideration when
making financing and operating decisions for Clocktower. What investment income
should Slide recognize for the current year? A. $0 B. $20,000 C. $128,000 D.
$148,000 Chapter 2 - Reporting Intercorporate Investments and Consolidation of
Wholly Owned Subsidiaries with No Differential 2-13 Answer: B Learning
Objective: 02-03 Topic: The Equity Method Blooms: Apply AACSB: Analytic AICPA:
FN Measurement Difficulty: 3 Hard The following data applies to Questions
26-28: Grant, Inc. acquired 30 percent of South Co.'s voting stock for $200,000
on January 2, 20X4. Grant's 30 percent interest in South gave Grant the ability
to exercise significant influence over South's operating and financial
policies. During 20X4, South earned $80,000 and paid dividends of $50,000.
South reported earnings of $100,000 for the six months ended June 30, 20X5, and
$200,000 for the year ended December 31, 20X5. On July 1, 20X5, Grant sold half
of its stock in South for $150,000 cash. South paid dividends of $60,000 on
October 1, 20X5. (Note: This is a Kaplan CPA Review Questions) 26. What amount
should Grant include in its 20X4 income statement as a result of the
investment? A. $15,000 B. $24,000 C. $50,000 D. $80,000 Answer: B Learning
Objective: 02-03 Topic: The Equity Method Blooms: Apply AACSB: Analytic AICPA:
FN Measurement Difficulty: 2 Medium (Note: This is a Kaplan CPA Review Questions)
27. In Grant’s December 31, 20X4, balance sheet, what should be the carrying
amount of this investment? A. $224,000 B. $200,000 C. $234,000 D. $209,000
Answer: D Learning Objective: 02-03 Topic: The Equity Method Blooms: Apply
Chapter 2 - Reporting Intercorporate Investments and Consolidation of Wholly
Owned Subsidiaries with No Differential 2-14 AACSB: Analytic AICPA: FN
Measurement Difficulty: 2 Medium (Note: This is a Kaplan CPA Review Questions)
28. In its 20X5 income statement, what amount should Grant report as a gain
from the sale of half of its investment? A. $35,000 B. $24,500 C. $30,500 D.
$45,500 Answer: C Learning Objective: 02-03 Topic: The Equity Method Topic:
Changes in the Number of Shares Held Blooms: Apply AACSB: Analytic AICPA: FN
Measurement Difficulty: 3 Hard 29. What portion of the subsidiary stockholders'
equity account balances should be eliminated in preparing the consolidated
balance sheet? A. Common stock B. Additional paid-in capital C. Retained
Earnings D. All of the balances are eliminated Answer: D Learning Objective:
02-06 Topic: Overview of the Consolidation Process Blooms: Remember AACSB:
Reflective Thinking AICPA: FN Decision Making Difficulty: 1 Easy Chapter 2 -
Reporting Intercorporate Investments and Consolidation of Wholly Owned
Subsidiaries with No Differential 2-15 30. The consolidation process consists
of all the following except: A. Combining the financial statements of two or
more legally separate companies. B. Eliminating intercompany transactions and
holdings. C. Closing the individual subsidiary’s revenue and expense accounts
into the parent’s retained earnings. D. Combining the accounts of separate
companies, creating a single set of financial statements. Answer: C Learning
Objective: 02-06 Topic: Overview of the Consolidation Process Blooms: Remember
AACSB: Reflective Thinking AICPA: FN Decision Making Difficulty: 1 Easy The
following data applies to Questions 31 - 34: Beta Company acquired 100 percent
of the voting common shares of Standard Video Corporation, its bitter rival, by
issuing bonds with a par value and fair value of $150,000. Immediately prior to
the acquisition, Beta reported total assets of $500,000, liabilities of
$280,000, and stockholders' equity of $220,000. At that date, Standard Video
reported total assets of $400,000, liabilities of $250,000, and stockholders'
equity of $150,000. Included in Standard's liabilities was an account payable
to Beta in the amount of $20,000, which Beta included in its accounts
receivable. 31. Based on the preceding information, what amount of total assets
did Beta report in its balance sheet immediately after the acquisition? A.
$500,000 B. $650,000 C. $750,000 D. $900,000 Answer: B Learning Objective:
02-07 Topic: Consolidation Worksheets Blooms: Apply AACSB: Analytic AICPA: FN
Measurement Difficulty: 2 Medium Chapter 2 - Reporting Intercorporate
Investments and Consolidation of Wholly Owned Subsidiaries with No Differential
2-16 32. Based on the preceding information, what amount of total assets was
reported in the consolidated balance sheet immediately after acquisition? A.
$650,000 B. $880,000 C. $920,000 D. $750,000 Answer: B Learning Objective:
02-07 Topic: Consolidation Worksheets Blooms: Apply AACSB: Analytic AICPA: FN
Measurement Difficulty: 3 Hard 33. Based on the preceding information, what
amount of total liabilities was reported in the consolidated balance sheet
immediately after acquisition? A. $500,000 B. $530,000 C. $280,000 D. $660,000
Answer: D Learning Objective: 02-07 Topic: Consolidation Worksheets Blooms:
Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard 34. Based on the
preceding information, what amount of stockholders' equity was reported in the
consolidated balance sheet immediately after acquisition? A. $220,000 B.
$150,000 C. $370,000 D. $350,000 Answer: A Learning Objective: 02-07 Topic:
Consolidation Worksheets Blooms: Apply AACSB: Analytic AICPA: FN Measurement
Difficulty: 3 Hard The following data applies to Questions 35 – 38: Chapter 2 -
Reporting Intercorporate Investments and Consolidation of Wholly Owned
Subsidiaries with No Differential 2-17 Alpha Company acquired 100 percent of
the voting common shares of Gamma Corporation by issuing bonds with a par value
and fair value of $200,000. Immediately prior to the acquisition, Alpha
reported total assets of $600,000, liabilities of $370,000, and stockholders’
equity of $230,000. At that date, Gamma reported total assets of $500,000,
liabilities of $300,000, and stockholders’ equity of $200,000. Included in
Gamma’s liabilities was an account payable to Alpha in the amount of $50,000,
which Alpha included in its accounts receivable. 35. Based on the preceding
information, what amount of total assets did Alpha report in its balance sheet
immediately after the acquisition? A. $1,100,000 B. $1,000,000 C. $800,000 D.
$1600,000 Answer: C Learning Objective: 02-07 Topic: Consolidation Worksheets
Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium 36.
Based on the preceding information, what amount of total assets was reported in
the consolidated balance sheet immediately after acquisition? A. $600,000 B.
$800,000 C. $1,050,000 D. $1,150,0000 Answer: C Learning Objective: 02-07
Topic: Consolidation Worksheets Blooms: Apply AACSB: Analytic AICPA: FN
Measurement Difficulty: 3 Hard 37. Based on the preceding information, what
amount of total liabilities was reported in the consolidated balance sheet
immediately after the acquisition? A. $370,000 B. $670,000 C. $820,000 D.
$870,000 Answer: C Learning Objective: 02-07 Chapter 2 - Reporting
Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with
No Differential 2-18 Topic: Consolidation Worksheets Blooms: Apply AACSB:
Analytic AICPA: FN Measurement Difficulty: 3 Hard 38. Based on the preceding
information, what amount of stockholders’ equity was reported in the
consolidated balance sheet immediately after acquisition? A. $200,000 B.
$230,000 C. $380,000 D. $430,000 Answer B Learning Objective: 02-07 Topic:
Consolidation Worksheets Blooms: Apply AACSB: Analytic AICPA: FN Measurement
Difficulty: 3 Hard The following data applies to Questions 39 - 41: Parent Co.
purchases 100 percent of Son Company on January 1, 20X1, when Parent’s retained
earnings balance is $520,000 and Son’s is $150,000. During 20X1, Son reports
$15,000 of net income and declares $6,000 of dividends. Parent reports $105,000
of separate operating earnings plus $15,000 of equity-method income from its
100 percent interest in Son; Parent declares dividends of $40,000. 39. Based on
the preceding information, what is Parent’s post-closing retained earnings
balance on December 31, 20X1? A. $485,000 B. $505,000 C. $525,000 D. $600,000
Answer: D Learning Objective: 02-07 Topic: Consolidation Subsequent to
Acquisition Blooms: Understand AACSB: Analytic AICPA: FN Measurement
Difficulty: 2 Medium Chapter 2 - Reporting Intercorporate Investments and
Consolidation of Wholly Owned Subsidiaries with No Differential 2-19 40. Based
on the preceding information, what is Son’s post-closing retained earnings balance
on December 31, 20X1: A. $141,000 B. $150,000 C. $159,000 D. $165,000 Answer: C
Learning Objective: 02-07 Topic: Consolidation Subsequent to Acquisition
Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 1 Easy 41.
Based on the preceding information, what is the consolidated retained earnings
balance on December 31, 20X1? A. $470,000 B. $585,000 C. $600,000 D. $759,000
Answer: C Learning Objective: 02-07 Topic: Consolidation Subsequent to
Acquisition Blooms: Understand AACSB: Analytic AICPA: FN Measurement
Difficulty: 2 Medium The following data applies to Questions 42 – 44: Phips Co.
purchases 100 percent of Sips Company on January 1, 20X2, when Phips’ retained
earnings balance is $320,000 and Sips’ is $120,000. During 20X2, Sips reports
$20,000 of net income and declares $8,000 of dividends. Phips reports $125,000
of separate operating earnings plus $20,000 of equity-method income from its
100 percent interest in Sips; Phips declares dividends of $35,000. 42. Based on
the preceding information, what is Phips’ post-closing retained earnings
balance on December 31, 20X2? A. $305,000 B. $410,000 C. $430,000 D. $465,000
Answer: C Learning Objective: 02-07 Chapter 2 - Reporting Intercorporate
Investments and Consolidation of Wholly Owned Subsidiaries with No Differential
2-20 Topic: Consolidation Subsequent to Acquisition Blooms: Understand AACSB:
Analytic AICPA: FN Measurement Difficulty: 2 Medium 43. Based on the preceding
information, what is Sips’ post-closing retained earnings balance on December
31, 20X2? A. $108,000 B. $120,000 C. $132,000 D. $140,000 Answer: C Learning
Objective: 02-07 Topic: Consolidation Subsequent to Acquisition Blooms:
Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 1 Easy 44. Based
on the preceding information, what is the consolidated retained earnings
balance on December 31, 20X2? A. $402,000 B. $410,000 C. $430,000 D. $562,000
Answer: C Learning Objective: 02-07 Topic: Consolidation Subsequent to
Acquisition Blooms: Understand AACSB: Analytic AICPA: FN Measurement
Difficulty: 2 Medium Chapter 2 - Reporting Intercorporate Investments and
Consolidation of Wholly Owned Subsidiaries with No Differential 2-21 45. The
main guidance on equity-method reporting, found in ASC 323 and 325 requires all
of the following except: A. The investor’s share of the investee’s
extraordinary items should be reported. B. The investor’s share of the
investee’s prior-period adjustments should be reported. C. Continued use of the
equity-method even if continued losses results in a zero or negative balance in
the investment account. D. Preferred dividends of the investee should be
deducted from net income before the investor computes its share of investee
earnings. Answer: C Learning Objective: Appendix 2A Topic: Additional Requirements
of ASC 323-10 Blooms: Remember AACSB: Reflective Thinking AICPA: FN Reporting
Difficulty: 1 Easy The following data applies to Questions 46 –50: On January
1, 20X4, Plimsol Company acquired 100 percent of Shipping Corporation's voting
shares, at underlying book value. Plimsol uses the cost method in accounting
for its investment in Shipping. Shipping's retained earnings was $75,000 on the
date of acquisition. On December 31, 20X4, the trial balance data for the two
companies are as follows: Plimsol Co. Shipping Corp. Item Debit Credit Debit
Credit Current Assets $100,000 $ 75,000 Depreciable Assets (net) 200,000
150,000 Investment in Shipping Corp. 125,000 Other Expenses 60,000 45,000
Depreciation Expense 20,000 15,000 Dividends Declared 25,000 15,000 Current
Liabilities $ 40,000 $ 25,000 Long-Term Debt 75,000 50,000 Common Stock 100,000
50,000 Retained Earnings 150,000 75,000 Sales 150,000 100,000 Dividend Income
15,000 $530,000 $530,000 $300,000 $300,000 Chapter 2 - Reporting Intercorporate
Investments and Consolidation of Wholly Owned Subsidiaries with No Differential
2-22 46. Based on the information provided, what amount of net income will be
reported in the consolidated financial statements prepared on December 31,
20X4? A. $100,000 B. $85,000 C. $110,000 D. $125,000 Answer: C Learning
Objective: Appendix 2B Topic: Consolidation and the Cost Method Blooms:
Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2 Medium 47. Based
on the information provided, what amount of total assets will be reported in
the consolidated balance sheet prepared on December 31, 20X4? A. $425,000 B.
$525,000 C. $650,000 D. $630,000 Answer: B Learning Objective: Appendix 2B
Topic: Consolidation and the Cost Method Blooms: Understand AACSB: Analytic
AICPA: FN Measurement Difficulty: 2 Medium 48. Based on the information
provided, what amount of retained earnings will be reported in the consolidated
balance sheet prepared on December 31, 20X4? A. $235,000 B. $210,000 C.
$310,000 D. $225,000 Answer: A Learning Objective: Appendix 2B Topic:
Consolidation and the Cost Method) Blooms: Apply AACSB: Analytic AICPA: FN
Measurement Difficulty: 3 Hard Chapter 2 - Reporting Intercorporate Investments
and Consolidation of Wholly Owned Subsidiaries with No Differential 2-23 49.
Based on the information provided, what amount of total liabilities will be
reported in the consolidated balance sheet prepared on December 31, 20X4? A.
$525,000 B. $115,000 C. $125,000 D. $190,000 Answer: D Learning Objective:
Appendix 2B Topic: Consolidation and the Cost Method Blooms: Understand AACSB:
Analytic AICPA: FN Measurement Difficulty: 2 Medium 50. Based on the
information provided, what amount of total stockholder's equity will be
reported in the consolidated balance sheet prepared on December 31, 20X4? A.
$190,000 B. $335,000 C. $460,000 D. $310,000 Answer: B Learning Objective:
Appendix 2B Topic: Consolidation and the Cost Method Blooms: Apply AACSB:
Analytic AICPA: FN Measurement Difficulty: 3 Hard The following data applies to
Questions 51 - 52: Parent Company purchased 100 percent of Son Inc. on January
1, 20X2 for $420,000. Son reported earnings of $82,000 and declared dividends
of $4,000 during 20X2. Chapter 2 - Reporting Intercorporate Investments and
Consolidation of Wholly Owned Subsidiaries with No Differential 2-24 51. Based
on the preceding information and assuming Parent uses the cost method to
account for its investment in Son, what is the balance in Parent’s Investment
in Son account on December 31, 20X2, prior to consolidation? A. $416,000 B.
$420,000 C. $424,000 D. $498,000 Answer: B Learning Objective: Appendix 2B
Topic: Consolidation and the Cost Method Blooms: Understand AACSB: Analytic
AICPA: FN Measurement Difficulty: 2 Medium 52. Based on the preceding
information and assuming Parent uses the equity method to account for its
investment in Son, what is the balance in Parent’s Investment in Son account on
December 31, 20X2, prior to consolidation? A. $416,000 B. $420,000 C. $424,000
D. $498,000 Answer: D Learning Objective: Appendix 2B Topic: Consolidation and
the Cost Method Blooms: Understand AACSB: Analytic AICPA: FN Measurement
Difficulty: 2 Medium The following data applies to Questions 53 – 54: Pone
Company purchased 100 percent of Sone Inc. on January 1, 20X9 for $625,000.
Sone reported earnings of $76,000 and declared dividends of $8,000 during 20X9.
53. Based on the preceding information and assuming Pone uses the cost method
to account for its investment in Sone, what is the balance in Pone’s Investment
in Sone account on December 31, 20X9, prior to consolidation? A. $617,000 B.
$625,000 C. $633,000 D. $693,000 Answer: B Learning Objective: Appendix 2B
Chapter 2 - Reporting Intercorporate Investments and Consolidation of Wholly
Owned Subsidiaries with No Differential 2-25 Topic: Consolidation and the Cost
Method Blooms: Understand AACSB: Analytic AICPA: FN Measurement Difficulty: 2
Medium 54. Based on the preceding information and assuming Pone uses the equity
method to account for its investment in Sone, what is the balance in Pone’s
Investment in Sone account on December 31, 20X9, prior to consolidation? A.
$617,000 B. $625,000 C. $633,000 D. $693,000 Answer: D Learning Objective:
Appendix 2B Topic: Consolidation and the Cost Method Blooms: Understand AACSB:
Analytic AICPA: FN Measurement Difficulty: 2 Medium Chapter 2 - Reporting
Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with
No Differential 2-26 Essay Questions: 55. A cash dividend returns assets to the
stockholders while reducing corporate liquidity. Why are not all cash dividends
considered to be "liquidating dividends"? In your response include a
discussion of how an investor accounts for a liquidating dividend. Answer: A
dividend represents earnings of a company being returned to its shareholders. A
liquidating dividend occurs when an investee declares dividends in excess of
the earnings from the purchase date of the investment. An individual investor
must treat a liquidating dividend associated with its investment as a return of
capital and reduce the investment account accordingly. It is possible for
blocks of stock acquired at different times to have different amounts
associated with a potential liquidating dividend. Learning Objective: 02-02
Topic: The Cost Method Blooms: Understand AACSB: Communication AICPA: FN
Decision Making Difficulty: 2 Medium 56. Dear Corporation acquired 100 percent
of the voting shares of Therry Inc. by issuing 10,000 new shares of $5 par
value common stock with a $30 market value. Required: 1. Which company is the
parent and which is the subsidiary? 2. Define a subsidiary corporation. 3.
Define a parent corporation. 4. Which entity prepares consolidated worksheet?
5. Why are consolidation entries used? Answer: 1. Dear is the parent and Therry
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 a controlling financial interest in another company. 4. The parent, Dear,
prepares the consolidated worksheet. 5. Consolidation entries are used to
adjust the amounts reported by the parent and all of the subsidiaries to
reflect the amounts that would be reported if the separate legal entities were
a single company. Learning Objective: 02-06 Topic: Overview of the Consolidation
Process Blooms: Understand AACSB: Reflective Thinking AICPA: FN Decision Making
Chapter 2 - Reporting Intercorporate Investments and Consolidation of Wholly
Owned Subsidiaries with No Differential 2-27 Difficulty: 1 Easy 57. On January
1, 20X9, Zigma Company acquired 100 percent of Standard Company's common shares
at underlying book value. Zigma uses the equity method in accounting for its
ownership of Standard. On December 31, 20X9, the trial balances of the two
companies are as follows: Zigma Co. Standard Co. Item Debit Credit Debit Credit
Current Assets $238,000 $95,000 Depreciable Assets 300,000 170,000 Investment
in Standard Co. 100,000 Other Expenses 90,000 70,000 Depreciation Expense
30,000 17,000 Dividends Declared 32,000 10,000 Accumulated Depreciation
$120,000 $ 85,000 Current Liabilities 50,000 30,000 Long-Term Debt 120,000
50,000 Common Stock 100,000 50,000 Retained Earnings 175,000 35,000 Sales
200,000 112,000 Income from Standard Co. 25,000 $790,000 $790,000 $362,000
$362,000 Required: 1. Prepare the consolidation entries needed as of December
31, 20X9, to complete a consolidation worksheet. 2. Prepare a three-part
consolidation worksheet as of December 31, 20X9. Chapter 2 - Reporting
Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with
No Differential 2-28 Problem 57 (continued): Answer: 1. Book Value
Calculations: Total Book Value = Common Stock + Retained Earnings Beginning
Book Value 85,000 50,000 35,000 + Net Income 25,000 25,000 - Dividends (10,000)
(10,000) Ending Book Value 100,000 50,000 50,000 Basic consolidation entry:
Common Stock 50,000 Retained Earnings 35,000 Income from Standard Co. 25,000
Dividends Declared 10,000 Investment in Standard Co. 100,000 Optional
accumulated depreciation consolidation entry: Accumulated Depreciation 75,000
Depreciable Assets 75,000 (T-Accounts not required) Investment in Standard Co.
Income from Standard Co. Beginning Balance 85,000 100% Net Income 25,000 25,000
100% Net Income 10,000 100% Dividends Ending Balance 100,000 25,000 Ending
Balance 100,000 Basic 25,000 0 0 Chapter 2 - Reporting Intercorporate
Investments and Consolidation of Wholly Owned Subsidiaries with No Differential
2-29 Problem 57 (continued): 2. Zigma Co. Standard Co. Consolidation Entries DR
CR Consolidated Income Statement Sales 200,000 112,000 312,000 Less: Other
Expenses (90,000) (70,000) (160,000) Less: Depreciation Expense (30,000)
(17,000) (47,000) Income from Standard Co. 25,000 0 25,000 0 Net Income 105,000
25,000 25,000 0 105,000 Statement of Retained Earnings Beginning Balance
175,000 35,000 35,000 175,000 Net Income 105,000 25,000 25,000 0 105,000 Less:
Dividends Declared (32,000) (10,000) 10,000 (32,000) Ending Balance 248,000
50,000 60,000 10,000 248,000 Balance Sheet Current Assets 238,000 95,000
333,000 Depreciable Assets 300,000 170,000 75,000 395,000 Less: Accumulated
Depreciation (120,000) (85,000) 75,000 (130,000) Investment in Standard Co.
100,000 100,000 0 Total Assets 518,000 180,000 75,000 175,000 598,000 Current
Liabilities 50,000 30,000 80,000 Long-Term Debt 120,000 50,000 170,000 Common
Stock 100,000 50,000 50,000 100,000 Retained Earnings 248,000 50,000 60,000
10,000 248,000 Total Liabilities & Equity 518,000 180,000 110,000 10,000
598,000 Learning Objective: 02-07 Topic: Consolidation Worksheets Blooms: Apply
AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard Chapter 2 - Reporting
Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with
No Differential 2-30 58. In the absence of other evidence, common stock
ownership of between 20 and 50 percent is viewed as indicating that the
investor is able to exercise significant influence over the investee. What are
some of the other factors that could constitute evidence of the ability to
exercise significant influence? Answer: APB stated that these include: 1.
Representation on board of directors 2. Participation in policy making 3.
Material intercompany transactions 4. Interchange of managerial personnel 5.
Technological dependency 6. Size of investment in relation to concentration of
other shareholdings Learning Objective: Appendix 2A Topic: Determination of
Significant Influence Blooms: Remember AACSB: Communication AICPA: FN Decision
Making Difficulty: 1 Easy Chapter 2 - Reporting Intercorporate Investments and
Consolidation of Wholly Owned Subsidiaries with No Differential 2-31 59. On
January 1, 20X7, Plimsol Company acquired 100 percent of Shipping Corporation's
voting shares, at underlying book value. Plimsol uses the cost method in
accounting for its investment in Shipping. Shipping's reported retained
earnings of $75,000 on the date of acquisition. The trial balances for Plimsol
Company and Shipping Corporation as of December 31, 20X8, follow: Plimsol Co.
Shipping Corp. Item Debit Credit Debit Credit Current Assets $160,000 $115,000
Depreciable Assets (net) 180,000 135,000 Investment in Shipping Corp. 125,000
Other Expenses 85,000 60,000 Depreciation Expense 20,000 15,000 Dividends
Declared 30,000 15,000 Current Liabilities $ 25,000 $ 20,000 Long-Term Debt
75,000 50,000 Common Stock 100,000 50,000 Retained Earnings 210,000 100,000
Sales 175,000 120,000 Dividend Income 15,000 $600,000 $600,000 $340,000
$340,000 Required: 1. Provide all consolidating entries required to prepare a
full set of consolidated statements for 20X8. 2. Prepare a three-part
consolidation worksheet in good form as of December 31, 20X8. Chapter 2 -
Reporting Intercorporate Investments and Consolidation of Wholly Owned
Subsidiaries with No Differential 2-32 Problem 59 (continued): Answer: 1. Basic
consolidation entry: Common Stock 50,000 Retained Earnings 75,000 Investment in
Standard Co. 125,000 Dividend consolidation entry: Dividend Income 15,000
Dividends Declared 15,000 2. Plimsol Co. Shipping Corp. Consolidation Entries
DR CR Consolidated Income Statement Sales 175,000 120,000 295,000 Less: Other
Expenses (85,000) (60,000) (145,000) Less: Depreciation Expense (20,000)
(15,000) (35,000) Dividend Income 15,000 15,000 0 Net Income 85,000 45,000
15,000 0 115,000 Statement of Retained Earnings Beginning Balance 210,000
100,000 75,000 235,000 Net Income 85,000 45,000 15,000 0 115,000 Less:
Dividends Declared (30,000) (15,000) 15,000 (30,000) Ending Balance 265,000
130,000 90,000 15,000 320,000 Balance Sheet Current Assets 160,000 115,000 275,000
Depreciable Assets (net) 180,000 135,000 315,000 Investment in Shipping Corp.
125,000 125,000 0 Total Assets 465,000 250,000 0 125,000 590,000 Current
Liabilities 25,000 20,000 45,000 Long-Term Debt 75,000 50,000 125,000 Common
Stock 100,000 50,000 50,000 100,000 Retained Earnings 265,000 130,000 90,000
15,000 320,000 Total Liabilities & Equity 465,000 250,000 140,000 15,000
590,000 Learning Objective: Appendix 2B Topic: Consolidation and the Cost
Method Blooms: Apply AACSB: Analytic AICPA: FN Measurement Difficulty: 3 Hard
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