ADV-MC_1-3

Growth in the complexity of the U.S. business environment

Which of the following is not an appropriate reason for establishing a subsidiary?

Which of the following actions is likely to result in recording goodwill on Randolph Company’s books?

When an existing company creates a new subsidiary and transfers a portion of its assets and liabilities to the new entity

Goodwill represents the excess of the sum of the fair value of the (1) consideration given, (2) shares already owned, and (3) the noncontrolling interest over the

In a business combination, costs of registering equity securities to be issued by the acquiring company are a(n)

Which of the following is the appropriate basis for valuing fixed assets acquired in a business combination carried out by exchanging cash for common stock?

In a business combination in which an acquiring company purchases 100 percent of the out- standing common stock of another company, if the fair value of the net identifiable assets acquired exceeds the fair value of the consideration given. The excess should be reported as a

AandBCompanieshavebeenoperatingseparatelyforfiveyears.Eachcompanyhasaminimal amount of liabilities and a simple capital structure consisting solely of voting common stock. In exchange for 40 percent of its voting stock A Company, acquires 80 percent of the common stock of B Company. This is a “tax-free” stock-for-stock exchange for tax purposes. B Com- pany’s identifiable assets have a total net fair market value of $800,000 and a total net book value of $580,000. The fair market value of the A stock used in the exchange is $700,000, and the fair value of the noncontrolling interest is $175,000. The goodwill reported following the acquisition would be

Topper Company established a subsidiary and transferred equipment with a fair value of $72,000 to the subsidiary. Topper had purchased the equipment with ten-year expected life of four years earlier for $100,000 and has used straight-line depreciation with no expected residual value. At the time of the transfer, the subsidiary should record

LeadCorporationestablishedanewsubsidiaryandtransferredtoitassetswithacostof$90,000 and a book value of $75,000. The assets had a fair value of $100,000 at the time of transfer. The transfer will result in

Tear Company, a newly established subsidiary of Stern Corporation, received assets with an original cost of $260,000, a fair value of $200,000, and a book value of $140,000 from the par- ent in exchange for 7,000 shares of Tear’s $8 par value common stock. Tear should record

n December 31, 20X3, Saxe Corporation was merged into Poe Corporation. In the business combination, Poe issued 200,000 shares of its $10 par common stock, with a market price of $18 a share, for all of Saxe’s common stock. The stockholders’ equity section of each com- pany’s balance sheet immediately before the combination was:

Common Stock 3,000,000 (POE) 3,000,000 (SAXE)
Additional Paid-In Capital 1,300,000 (POE) 150,000 (SAXE)
Retained Earnings 2,500,000 (POE) 850,000 (SAXE)

In the December 31, 20X3, consolidated balance sheet, additional paid-in capital should be
reported at

OnJanuary1,20X1,RolanCorporationissued10,000sharesofcommonstockinexchangefor all of Sandin Corporation’s outstanding stock. Condensed balance sheets of Rolan and Sandin immediately before the combination follow:

Total Assets $1,000,000 (Rolan) $500,00 (Sandin)
Liabilities $300,000 (Rolan) $150,00 (Sandin)
Common Stock ($10 par) $200,000 (Rolan) $100,00 (Sandin)
Retained Earnings $500,000 (Rolan) $250,00 (Sandin)
Total Liabilities and Equities $1,000,000 (Rolan) $500,00 (Sandin)

Rolan’s common stock had a market price of $60 per share on January 1, 20X1. The market price of Sandin’s stock was not readily determinable. The fair value of Sandin’s net identifiable assets was determined to be $570,000. Rolan’s investment in Sandin’s stock will be stated in Rolan’s balance sheet immediately after the combination in the amount of

On April 1, 20X2, Jack Company paid $800,000 for all of Ann Corporation’s issued and out- standing common stock. Ann’s recorded assets and liabilities on April 1, 20X2, were as follows:

Cash $80,000
Inventory $240,000
P&E $480,000
Liabilities ($180,000)

On April 1, 20X2, Ann’s inventory was determined to have a fair value of $190,000, and the property and equipment had a fair value of $560,000. What is the amount of goodwill resulting from the business combination?

Action Corporation issued nonvoting preferred stock with a fair market value of $4,000,000 in exchange for all the outstanding common stock of Master Corporation. On the date of the exchange, Master had tangible net assets with a book value of $2,000,000 and a fair value of $2,500,000. In addition, Action issued preferred stock valued at $400,000 to an individual as a finder’s fee in arrang- ing the transaction. As a result of this transaction, Action should record an increase in net assets of

Peel Company received a cash dividend from a common stock investment. Should Peel report an increase in the investment account if it uses the cost method or equity method of accounting?

Aninvestorusestheequitymethodtoaccountforaninvestmentincommonstock.Assumethat (1) the investor owns more than 50 percent of the outstanding common stock of the investee, (2) the investee company reports net income and declares dividends during the year, and (3) the investee’s net income is more than the dividends it declares. How would the investor’s invest- ment in the common stock of the investee company under the equity method differ at year-end from what it would have been if the investor had accounted for the investment under the cost method?

A corporation exercises significant influence over an affiliate in which it holds a 40 percent common stock interest. If its affiliate completed a fiscal year profitably but paid no dividends, how would this affect the investor corporation?

Companies often acquire ownership in other companies using a variety of ownership arrange- ments. The investor should use equity-method reporting whenever

The carrying amount of an investment in stock correctly accounted for under the equity method is equal to

On January 2, 20X3, Kean Company purchased a 30 percent interest in Pod Company for
$250,000. Pod reported net income of $100,000 for 20X3 and declared and paid a dividend of $10,000. Kean accounts for this investment using the equity method. In its December 31, 20X3, balance sheet, what amount should Kean report as its investment in Pod?

Investor Inc. owns 40 percent of Alimand Corporation. During the calendar year 20X5,
Alimand had net earnings of $100,000 and paid dividends of $10,000. Investor mistakenly recorded these transactions using the cost method rather than the equity method of accounting. What effect would this have on the investment account, net earnings, and retained earnings, respectively?

A corporation using the equity method of accounting for its investment in a 40 percent–owned investee, which earned $20,000 and paid $5,000 in dividends, made the following entries:

Investment in Investee 8,000
Income from Investee 8,000

Cash 2,000
Dividend Revenue 2,000

What effect will these entries have on the investor’s statement of financial position?

When a parent–subsidiary relationship exists, consolidated financial statements are prepared in recognition of the accounting concept of

Consolidated financial statements are typically prepared when one company has a controlling interest in another unless

PennInc.,amanufacturingcompany,owns75percentofthecommonstockofSellInc.,aninvest- ment company. Sell owns 60 percent of the common stock of Vane Inc., an insurance company. In Penn’s consolidated financial statements, should Sell and Vane be consolidated or reported as equity method investments (assuming there are no side agreements)?

Which of the following is the best theoretical justification for consolidated financial statements?

An enterprise that will absorb a majority of a variable interest entity’s expected losses is called the

In determining whether or not a variable interest entity is to be consolidated, the FASB focused on

Consolidated financial statements are typically prepared when one company has

Aaron Inc. owns 80 percent of the outstanding stock of Belle Inc. Compare the total consoli- dated net earnings of Aaron and Belle (X) and Aaron’s operating earnings before consider- ing the income from Belle (Y). Assume that neither company incurs a net loss during the period.

On October 1, X Company acquired for cash all of Y Company’s outstanding common stock. Both companies have a December 31 year-end and have been in business for many years. Consolidated net income for the year ended December 31 should include net income of

Ownership of 51 percent of the outstanding voting stock of a company would usually result in

On January 2, 20X8, Pare Company acquired 75 percent of Kidd Company’s outstanding common stock at an amount equal to its underlying book value. Selected balance sheet data at December 31, 20X8, are as follows:

Totals Assets 420,000 (Pare) 180,000 (Kidd)
Liabilities 120,000 (Pare) 60,000 (Kidd)
Common Stock 100,000 (Pare) 50,000 (Kidd)
Retained Earnings 200,000 (Pare) 70,000 (Kidd)
420,000 (Pare) 180,000 (Kidd)

In Pare’s December 31, 20X8, consolidated balance sheet, what amount should be reported as minority interest in net assets?

On January 2, 20X8, Pare Company acquired 75 percent of Kidd Company’s outstanding common stock at an amount equal to its underlying book value. Selected balance sheet data at December 31, 20X8, are as follows:

Totals Assets 420,000 (Pare) 180,000 (Kidd)
Liabilities 120,000 (Pare) 60,000 (Kidd)
Common Stock 100,000 (Pare) 50,000 (Kidd)
Retained Earnings 200,000 (Pare) 70,000 (Kidd)
420,000 (Pare) 180,000 (Kidd)

n its consolidated balance sheet at December 31, 20X8, what amount should Pare report as common stock outstanding?

Consolidated statements are proper for Neely Inc., Randle Inc., and Walker Inc., if

What is the theoretically preferred method of presenting a noncontrolling interest in a consoli- dated balance sheet?