test bank ch 3

1

Chapter 3 Test Bank

AN INTRODUCTION TO CONSOLIDATED FINANCIAL STATEMENTS

Multiple Choice Questions LO11. What method must be used if FASB 94 prohibits full

consolidation of a 70% owned subsidiary?

LO1

a. The cost method.b. The Liquidation value.c. Market value. d. Equity method.

2. From the standpoint of accounting theory, which of the following statements is the best justification for the preparation of consolidated financial statements?

LO2

a. In substance the companies are separate, but in form the companies are one entity.

b. In substance the companies are one entity, but in form they are separate.

c. In substance and form the companies are one entity.d. In substance and form the companies are separate entities.

3. Penguin Corporation owns 90% of the outstanding voting stock of Crevice Company and Burrow Corporation owns the remaining 10% of Crevice’s voting stock. On the consolidated financial statements of Penguin Corporation and Subsidiary, Burrow is

a. an affiliate.b. a minority interest. c. an equity investee. d. a related party

LO24. A major motivation for FASB’s creation of Statement No. 94 was

a. temporary control was not being disclosed properly. b. the elimination off-balance sheet financingc. situations occurred where subsidiary control did not lie

with the parent company.d. the risk of subsidiary legal reorganization or bankruptcy

was not disclosed.

2

LO25. Muttonbird Inc. has 90% ownership of Beach Company, but should

exclude Beach under FASB 94 if

a. Beach is in a regulated industry.b. Muttonbird uses the equity method for Beach.c. Muttonbird expects to sell Beach within a year.d. Beach is in a foreign country and records its books in a

foreign currency.

LO26. Subsequent to an acquisition, the parent company and

consolidated financial statement amounts would not be the same for

a. investments in unconsolidated subsidiaries. b. investments in consolidated subsidiaries.c. capital stock.d. ending retained earnings.

LO37. On June 1, 2005, Gull Company acquired 100% of the stock of

Scrap Inc. On this date, Gull had Retained Earnings of $200,000 and Scrap had Retained Earnings of $100,000. On December 31,2005, Gull had Retained Earnings of $240,000 and Scrap had Retained Earnings of $120,000. The amount of Retained Earnings that appeared in the December 31, 2005 consolidated balance sheet was:

a. $240,000.b. $260,000.c. $300,000.d. $360,000.

LO38. Scrubwren Corporation acquired a 100% interest in Heath Company

for $1,780,000 when Heath had no liabilities. The book values and fair values of Heath's assets were

Book Value Fair Value Current assets $ 400,000 $ 700,000Equipment 200,000 400,000Land & buildings 600,000 800,000

3

Total assets $1,200,000 $1,900,000

Immediately following the acquisition, equipment will be included on the consolidated balance sheet at

a. $300,000.b. $340,000.c. $360,000.d. $400,000.

LO49. A newly acquired subsidiary had pre-existing goodwill on its

books. The parent company's consolidated balance sheet will

a. not show any value for the subsidiary's pre-existing goodwill.

b. treat the goodwill similarly to other intangible assets ofthe acquired company.

c. not show any value for the pre-existing goodwill unless all other assets of the subsidiary are stated at their full fair value.

d. always show the pre-existing goodwill of the subsidiary at its book value.

LO410. The unamortized excess account is

a. a contra-equity account.b. used in allocating the amounts paid for recorded balance

sheet accounts that are above or below their fair values.c. used in allocating the amounts paid for each asset and

liability that are above or below their book values, especially when numerous assets or liabilities are involved.

d. the excess purchase cost that is attributable to goodwill.

LO5

11.On January 1, 2005, Tern purchased 90% of Costal Corporation’s outstanding shares for $1,400,000 when the fair value of Costal’s assets were equal to the book values. The balance sheets of Tern and Costal Corporations at year-end 2004 are summarized as follows:

Tern CostalAssets $ 5,900,000 $ 1,450,000

4

Liabilities $ 700,000 $ 250,000Capital stock 3,600,000 1,000,000Retained earnings 1,600,000 200,000

If a consolidated balance sheet was prepared immediately after the business combination, the minority interest, would be

a. $100,000.b. $155,556.c. $140,000.d. $520,000.

LO512. On July 1, 2005, when Worm Company’s total stockholders’ equity

was $180,000, Bird Corporation purchased 7,000 shares of Worm’s common stock at $30 per share. Worm Company had 10,000 shares of common stock outstanding both before and after the purchase by Bird, and the book value of Worm’s net assets on July 1,2005 was equal to the fair value. On a consolidated balance sheet prepared at July 1, 2005, goodwill would be

a. $30,000.b. $40,000.c. $50,000.d. $120,000.

LO513. Bowerbird Inc acquired 60% of the outstanding stock of Mimicry

Company in a business combination. The book values of Mimicry’s net assets are equal to the fair values except for the building, whose net book value and fair value are $400,000 and600,000, respectively. At what amount is the building reported on the consolidated balance sheet?

LO5

a. $360,000. b. $400,000. c. $520,000. d. $600,000.

14. In the preparation of consolidated financial statements, which of the following intercompany transactions must be eliminated as part of the preparation of the consolidation working papers?

a. All revenues, expenses, gains, deductions, receivables, and payables.

b. All revenues, expenses, gains, and deductions but not receivables and payables.

c. Receivables and payables but not revenues, expenses, gains, and deductions.

d. only sales revenue and cost of goods sold.

5

LO615. Pardolate Corporation paid $200,000 for a 60% interest in

Arthropod Inc on January 1, 2005, when Arthropod had Capital Stock of $200,000 and Retained Earnings of $100,000. Fair values of identifiable net assets were the same as recorded book values. During 2005, Arthropod had income of $30,000, declared dividends of $10,000, and paid $5,000 of dividends. On December 31, 2005, Pardolate will have

a. investment in Salem account of $240,000. b. investment in Salem account of $218,000. c. goodwill of $33,333.d. dividends receivable of $3,000.

LO616. Spinebill Corporation bought 80% of Nectar Company’s common

stock at its book value of $500,000 on January 1, 2005. During2005, Nectar reported net income of $150,000 and paid dividends of $45,000. At what amount should Spinebill’s Investment in Nectar account be reported on December 31, 2005?

a. $500,000b. $548,000c. $584,000d. $605,000

LO6`` Weebill Corporation bought 80% of Tree Company’s common stock

at its book value of $800,000 on January 2, 2005 for $700,000. The law firm of Dewey, Cheatam and Howe did $25,000 to facilitate the purchase. At what amount should Weebill’s Investment in Tree account be reported on January 2, 2005?

a. $640,000.b. $665,000.c. $700,000.d. $725,000.

LO718. Bellbird Corporation acquired an 80% interest in Honey Inc for

$130,000 on January 1, 2005, when Honey had Capital Stock of$125,000 and Retained Earnings of $25,000. Bellbird’s separate income statement and a consolidated income statement for Bellbird Corporation and Subsidiary as of December 31, 2005, are shown below.

BellbirdConsoli- dated

Sales revenue $ 150,000 $ 234,750Income from Corporal 11,600Cost of sales ( 60,000 ) ( 100,000 )

6

Other expenses ( 20,000 ) ( 50,000 ) Noncontrollinginterest income ( 3,150 )Net income $ 81,600 $ 81,600

Honey’s separate income statement must have reported netincome of:

LO7

a. $13,750. b. $14,750. c. $15,750. d. $15,250.

19. In the consolidated income statement of Wattlebird Corporation and its 85% owned Forest subsidiary, the noncontrolling interest income was reported at $45,000. What amount of net income did the Forest have for the year?

a. $52,941b. $38,250c. $235,000d. $300,000.

LO820. Push-down accounting

a. requires a subsidiary to use the same accounting principles as its parent company.

b. is required by the SEC if a subsidiary is wholly owned.c. is required when the parent company uses the cost method to

account for its investment in the subsidiary.d. results in a push-up residual account on the subsidiaries

books.

7

Exercises

LO4Exercise 1

Alarm Bird Inc. acquired an 85% interest in Clock Corporation onJanuary 2, 2005 for $38,000 cash when Clock had Capital Stock of$15,000 and Retained Earnings of $25,000. Clock’s assets and liabilities had book values equal to their fair values except for inventory that was undervalued by $2,000. Balance sheets for Alarm Bird and Clock on January 2, 2005, immediately after the business combination, are presented in the first two columns of the consolidated balance sheet working papers.

Alarm Bird Corporation and Subsidiary Consolidated Balance Sheet Working Papers

at January 2, 2005

AlarmBird Clock

EliminationsBalanceSheetDebit Credit

ASSETSCash $ 68,000 $ 4,000AccountsReceivable-net 75,000 9,000

Inventories 39,000 10,000

Plant assets-net 170,000 35,000Investment inClock 38,000

Total Assets $ 390,000 $58,000

EQUITIESPayables $ 120,000 $18,000

Capital stock 100,000 15,000RetainedEarnings 170,000 25,000MinorityInterest

TOTAL EQUITIES $ 390,000 $58,000

8

Required:

Complete the consolidation balance sheet working papers for Alarm Bird and subsidiary at January 1, 2005.

LO4Exercise 2

On January 1, 2005, Myna Corporation issued 10,000 shares of its own$10 par value common stock for 9,000 shares of the outstanding stock of Berry Corporation in an acquisition. Myna common stock at January1, 2005 was selling at $70 per share. Just before the business combination, balance sheet information of the two corporations was as follows:

Myna Book Value

Berry Book Value

Berry Fair Value

Cash $ 25,000 $ 12,000 $ 12,000Inventories 55,000 32,000 36,000Other current assets 110,000 90,000 110,000Land 100,000 30,000 90,000Plant and equipment-net 660,000 250,000 375,000

$ 950,000 $ 414,000 $ 623,000

Liabilities $ 220,000 $ 50,000 $ 50,000Capital stock, $10 par value 500,000 100,000Additional paid-in capital 170,000 40,000Retained earnings 60,000 224,000

$ 950,000 $ 414,000

Required:

1. Prepare the journal entry on Myna Corporation’s books to accountfor the business combination.

2. Prepare a consolidated balance sheet for Myna Corporation andSubsidiary immediately after the business combination.

9

LO5Exercise 3

The consolidated balance sheet of Treecreeper Corporation and Ants Farm, its 90% owned subsidiary, as of December 31, 2005, contains the following accounts and balances:

Treecreeper Corporation and SubsidiaryConsolidated Balance Sheet

at December 31, 2005

BalancesCash $ 19,000Accounts receivable-net 70,000Inventories 110,000Other current assets 85,000Plant assets-net 290,000Goodwill from consolidation 39,000

$ 613,000

Accounts payable $ 73,000Other liabilities 70,000Capital stock 350,000Retained earnings 80,000Minority interest 40,000

$ 613,000

Treecreeper Corporation acquired its 90% interest in Ants Farm onJanuary 1, 2005, when Ants Farm had $150,000 of Capital Stock and$70,000 of Retained Earnings. Ants Farm’s net assets had fair values equal to their book values when Treecreeper acquired its interest. No changes have occurred in the amount of outstanding stock since the date of the business combination. Treecreeper uses the equity method of accounting for its investment.

Required: Determine the following amounts:

1. The balance of Treecreeper's Capital Stock and Retained Earnings accounts at December 31, 2005.

2. Cost of Treecreeper's purchase of Ants Farm on January 1, 2005.

3. Ants Farms’s stockholders' equity on December 31, 2005.

4. Treecreeper’s Investment in Ants Farm account balance atDecember 31, 2005.

1

LO5Exercise 4

Monarch Corporation paid $180,000 for a 75% interest in Stem Co.’s outstanding Capital Stock on January 1, 2005, when Stem’s stockholders’ equity consisted of $150,000 of Capital Stock and$50,000 of Retained Earnings. Book values of Stem’s net assets were equal to their fair values on this date. The adjusted trial balances of Monarch and Stem on December 31, 2005 were as follows:

Packer StemCash $ 8,250 $ 35,000Dividends receivable 7,500Other current assets 40,000 50,000Land 50,000 30,000Plant assets-net 100,000 150,000Investment in Stem 195,000Cost of sales 225,000 125,000Other expenses 45,000 25,000Dividends 25,000 20,000

$ 695,750 $ 435,000

Accounts payable $ 40,750 $ 35,000Dividends payable 10,000Capital stock 150,000 150,000Retained earnings 75,000 50,000Sales revenue 400,000 190,000Income from Stem 30,000

$ 695,750 $ 435,000

Require d : Complete the partially prepared consolidated balance sheet working papers that appear below.

1

Monarch Corporation and Subsidiary Consolidated balance Sheet Working Papers


Monarch Stem


ASSETSCash $ 8,250 $ 35,000DividendsReceivable 7,500Other currentAssets 40,000 50,000

Land 50,000 30,000

Plant assets 100,000 150,000

Investment inStem

195,000

Total Assets $ 400,750 $285,000

EQUITIESAccounts payable $ 40,750 $ 35,000DividendsPayable 10,000

Capital stock 150,000 150,000RetainedEarnings 210,000 70,000

TOTAL EQUITIES $ 400,750 $285,000

1

LO5Exercise 5

Zoo Inc paid $268,000 to purchase 80% of the outstanding stock of Bird Corporation, on December 31, 2005. The following year-end information was available just before the purchase:

Zoo Book Value

Bird Book Value

Bird Fair Value

Cash $ 378,000 $ 40,000 $ 40,000Accounts Receivable 130,000 76,000 76,000Inventory 240,000 50,000 55,000Land 220,000 80,000 55,000Plant and equipment-net 660,000 200,000 215,000

$ 1,628,000 $ 446,000 $

Accounts Payable $ 440,000 $ 11,000 $ 11,000Bonds Payable 468,000 100,000 95,000Capital stock, $10Capital stock, $15

par valuepar value

200,000225,000

Additional paid-in capital 200,000 80,000Retained earnings 320,000 30,000

$ 1,628,000 $ 446,000

Required:

1. Prepare Zoo’s consolidated balance sheet on December 31, 2005.

1

LO5Exercise 6

On July 1, 2005, Magpie Corporation issued 23,000 shares of its own$2 par value common stock for 35,000 shares of the outstanding stockof Insect Inc. in an acquisition. Magpie common stock at July 1, 2005 was selling at $14 per share. Just before the business combination, balance sheet information of the two corporations was as follows:

Magpie Book Value

Insect Book Value

Insect Fair Value

Cash $ 25,000 $ 17,000 $ 17,000Inventories 55,000 42,000 47,000Other current assets 110,000 40,000 30,000Land 100,000 45,000 35,000Plant and equipment-net 660,000 220,000 280,000

$ 950,000 $ 364,000 $ 409,000

Liabilities $ 220,000 $ 70,000 $ 75,000Capital stock, $2 par value 500,000 100,000Additional paid-in capital 170,000 90,000Retained earnings 60,000 104,000

$ 950,000 $ 364,000

Required:

1. Prepare the journal entry on Magpie Corporation’s books toaccount for the business combination.

2. Prepare a consolidated balance sheet for Magpie Corporation andSubsidiary immediately after the business combination.

1

LO5Exercise 7

Manucode Corporation paid $279,000 for 70% of Trumpet Corporation’s$10 par common stock on December 31, 2005, when Trumpet Corporation’sstockholders’ equity was made up of $200,000 of Common Stock, $60,000Additional Paid-in Capital and $40,000 of Retained Earnings. Trumpet’s identifiable assets and liabilities reflected their fair values on December 31, 2005, except for Trumpet’s inventory which was undervalued by $50,000 and their land which was undervalued by$20,000. Balance sheets for Manucode and Trumpet immediately afterthe business combination are presented in the partially completed working papers.

1

Manucode Corporation and Subsidiary Consolidated Balance Sheet Working Papers


Manucode Trumpet


ASSETSCash $ 26,000 $ 20,000Accounts receivable-net 20,000 30,000

Inventories 125,000 110,000

Land 30,000 80,000Plant assets –net 320,000 160,000

Investment inTrumpet 279,000

Total Assets $ 800,000 $400,000

EQUITIES Currentliabilities $ 110,000 $100,000

Capital stock 400,000 200,000Additional paid- in capital 100,000 60,000Retained earnings 190,000 40,000

TOTAL EQUITIES $ 800,000 $400,000

Required:

Complete the consolidated balance sheet working papers for ManucodeCorporation and Subsidiary.

1

LO6Exercise 8

Bower Corporation paid $5,000 for a 60% interest in Fig Inc. onJanuary 1, 2005 when Fig’s stockholders’ equity consisted of $5,000Capital Stock and $2,500 Retained Earnings. Fig’s assets and liabilities were fairly valued on this date. Two years later, on December 31, 2006, the balance sheets of Bower and Fig are summarized as follows:

Bower Corporation and Subsidiary Consolidated balance Sheet Working Papers


Bower Fig


ASSETSCurrent assets $ 12,550 $ 4,000

Fixed assets 21,550 6,500Investment inFig 5,900

Total Assets $ 40,000 $10,500

EQUITIES Liabilities $ 10,000 $ 1,500

Capital stock 20,000 5,000RetainedEarnings 10,000 4,000

TOTAL EQUITIES $ 40,000 $10,500

Required:

Complete the consolidated balance sheet working papers for BowerCorporation and Subsidiary at December 31, 2006.

1

LO7&8Exercise 9

Currawong Corporation paid $500,000 for 80% of the outstanding voting common stock of Lizard Corporation on January 2, 2005 when the book value of Lizard’s net assets was $460,000. The fair values of Lizard’s identifiable net assets were equal to their book values except as indicated below.

Lizard reported net income of $75,000 during 2005; dividends of$35,000 were declared and paid during the year.

BookValue

FairValue

Inventories (sold in 2005) $ 80,000 $ 112,000Buildings-net (15-year life) 200,000 170,000Note Payable (paid in 2005) 20,000 21,250

Required:

1. Prepare a schedule to allocate the cost/book differential to the specific identifiable assets and liabilities.

2. Determine Currawong’s income from Lizard for 2005.

3. Determine the correct balance in the Investment in Lizardaccount as of December 31, 2005.

1

SOLUTIONS

Multiple Choice Questions

1 d

2 b

3 b

4 b

5 c

6 b

7 a The parent’s retained earnings

8 c Purchase cost $ 1,780,000Current asset fair value 700,000Excess to non-current assets 1,080,000Fair value of non-current assets 1,200,000Allocation shortfall $ 120,000Equipment share of shortfall:$400,000/$1,200,000 X $120,000 = $ 40,000Allocation to equipment:$400,000 - $40,000 =

$360,000

9 c

10 c

11 b $1,400,000 / 90% =$1,555,556. 10% of$1,555,556 = $155,556

12 d Bird’s cost = 7,000 x $30 $ 210,000Implied fair value of Worm($210,000 / 70%)

300,000

Less: Book value ( 180,000 ) Goodwill acquired $ 120,000

13 d

$ 600,000

14 a

15 c Pardolate’s cost $ 200,000

1

Implied fair value of Arthropod($200,000 / 60%)

333,333

Less: Book value ( 300,000 ) Goodwill acquired $ 33,333

16 c Investment cost + 80% (subsidiary income) – (80%)(subsidiary dividends = $500,000 + $120,000- $36,000 =

$

584,000

17 d

18 c $3,150/0.20 = $15,750

19 d $45,000/15% = $300,000

20 d

AlarmBird

ClockEliminations Balance

SheetDebit Credit

ASSETS Cash $ 68,000 $ 4,000 $72,000AccountsReceivable-net 75,000 9,000 84,000

Inventories 39,000 10,000 a $2,000 51,000Plant assets- Net 170,000 35,000 205,000Investment inCharlie 38,000 a $38,000

Goodwill a 2,706 2,706

TotalAssets $ 390,000 $58,000 $414,706

EQUITIES Payables $ 120,000 $18,000 $138,000

Capital stock 100,000 15,000 a $15,000 100,000RetainedEarnings 170,000 25,000 a 25,000 170,000MinorityInterest a 6,706 6,706

Total equities $ 390,000 $58,000 $414,70644,706 44,706

2

Exercise 1 Preliminary computationsFair value (purchase price) of 90% interest acquiredJanuary 2, 2005

$ $38,000

Implied fair value of Clock ($38,000 / 90% $44,706Book value of Clock’s net assets ( 40,000)Excess cost over book value acquired = $ 4,706

Allocation of excess of cost over book value:Inventory $ 2,000Remainder to goodwill 2,706Excess of fair value over book value $ 4,706

Alarm Bird Corporation and Subsidiary Consolidated Balance Sheet Working Papers

at January 1, 2005

Investment in Berry

Co. 70 ,000Common stock 100,00

0Paid-in capital 600,000

Remainder to goodwill 204,778Excess of fair value over book value $

413,778

2

Exercise 2

Requirement 1:

0

Requirement 2:

Preliminary computationsFair value (purchase price) of 90% interest acquired January2, 2005

$ $700,000

Implied fair value of Berry ($700,000 / 90% $777,778Book value of Clock’s net assets ( 364,000)Excess fair value over book value acquired = $ 413,778

Allocation of excess of cost over book value:Inventory $ 4,000Other current assets 20,000Land 60,000Plant assets 125,000

2

Myna Corporation and Subsidiary Consolidated Balance Sheet Working Papers

at January 1, 2005

Myna BerryEliminations Balance

SheetDebit CreditASSETS Cash $ 25,000 $ 12,000 $ 37,000

Inventories 55,000 32,000 b $ 4,000 91,000Other currentAssets 110,000 90,000 b 20,000 220,000

Land 100,000 30,000 b 60,000 190,000

Plant assets 660,000 250,000 b 125,000 1,035,000Goodwill b 204,778 204,778Investment inBerry 700,000

b a

$413,778286,222

TotalAssets $ 1,650,000 $414,000 $1,777,778

EQUITIES Liabilities $ 220,000 $ 50,000 270,000

Capital stock 600,000 100,000 a 100,000 600,000Additional paid- in capital 770,000 40,000 a 40,000 770,000Retained earnings 60,000 224,000 a 224,000 60,000MinorityInterest a77,778 77,778

Total equities $ 1,650,000 $414,000 $1,777,778

=($40,000/10%)

Requirement 4

$ 400,000

Treecreeper’s book value in 90% of Ants FarmDecember 31, 2005 = ($400,000 (from above)) x 90%

at$ 360,000

Plus: goodwill (from balance sheet) 39,000Balance in Investment account at December 31, 2005

$ 399,000

2

Exercise 3

Preliminary computations

Requirement 1 :On the consolidated balance sheet, the balance in the Capital Stockand Retained Earnings accounts will be those of the parent, so the Capital Stock balance is $350,000, and the Retained Earnings balance is $80,000.

Req u irement 2 (Ant Farm’s equity on January 1, 2005)x(90%) =($220,000)x(90%) $ 198,000Original goodwill = 39,000Original acquisition cost = $ 237,000

Requirement 3

Ant Farm’s stockholders’ equity = (minorityinterest) divided by (minority interest percentage)

2

Exercise 4

Preliminary computationsFair value (purchase price) of 75% interest acquired $on January 1, 2005

180,000

Implied fair value of Stem (($180,000 / 75%) $ 240,000Book value of Stem’s net assets $ 200,000Excess cost over book value acquired $ 40,000

Initial investment cost $ 180,000Income from Stem: (75%)($40,000)= 30,000Dividends ($20,000)(75%) = -15,000

Balance in Investment in Stem at December 31,2005 $ 195,000

Monarch Corporation and Subsidiary Consolidated Balance Sheet Working Papers


Monarch StemEliminations Balance

SheetDebit CreditASSETS Cash $ 8,250 $ 35,000 $ 43,250DividendsReceivable 7,500 b $ 7,500Other currentAssets 40,000 50,000 90,000

Land 50,000 30,000 80,000

Plant assets 100,000 150,000 250,000Investment inStem 195,000 a 195,000

Goodwill a $ 40,000 40,000

TotalAssets $ 400,750 $265,000 $503,250

2

EQUITIESAccounts payable $ 40,750 $ 35,000 $75,750DividendsPayable 10,000 b 7,500 2,500

Capital stock 150,000 150,000 a 150,000 150,000RetainedEarnings 210,000 70,000 a 70,000 210,000MinorityInterest a 65,000 65,000

Total equities $ 400,750 $265,000$503,250

267,500 267,500

E xercise 5

Requirement 1:

Preliminary computationsFair value (purchase price) of 80% interest acquired $on December 31, 2005

268,000

Implied fair value of Bird (($268,000 / 80%) $ 335,000Book value of Bird’s net assets $ 335,000Excess cost over book value acquired $ 0

Zoo BirdEliminations Balance

SheetDebit CreditASSETS Cash $ 110,000 40,000 $ 150,000

AccountsReceivable

130,000 76,000 206,000

Inventory240,000 50,000 b $ 5,000 295,000

Land 220,000 80,000b

25,000 275,000

PP&E 660,000 200,000 b 15,000 875,000Investment inBird 268,000 a 268,000TotalAssets $ 1,628,000 $446,000 $1,801,000

EQUITIESAccounts Payable$ 440,000 $11,000 $ 451,000Bonds Payable 468,000 100,000 b 5,000 563,000

Capital stock 200,000 225,000 a 225,000 200,000Additional paid- in capital 200,000 80,000 a 80,000 200,000Retained earnings 320,000 30,000 a 30,000 320,000MinorityInterest a 67,000 67,000

Total equities $ 1,628,000 $446,000 $1,801,000

360,000 360,000

2

Zoo Corporation and Subsidiary Consolidated Balance Sheet Working Papers


2

Exercise 6

Requirement 1:

Investment in Insect Inc. 322 ,000Common stock 46,000Paid-in capital 276,000

Requirement 2:Preliminary computationsFair value (purchase price) of 70% interest acquired July 1,2005

$ $322,000

Implied fair value of Insect ($322,000 / 70% $460,000Book value of Insect’s net assets ( 294,000)Excess cost over book value acquired = $ 166,000

Allocation of excess of cost over book value:Inventory $ 5,000Other current assets ( 10,000) Land ( 10,000) Plant and Equipment 60,000Liabilities ( 5,000)Remainder to goodwill 126,000Excess of fair value over book value $ 166,000

2

Magpie Corporation and Subsidiary Consolidated Balance Sheet Working Papers

July 1, 2005

Magpie InsectEliminations Balance

SheetDebit CreditASSETS Cash $ 25,000 $ 17,000 $ 42,000

Inventories 55,000 42,000 b $ 5,000 102,000Other currentAssets 110,000 40,000 b $ 10,000 140,000

Land 100,000 45,000 b 10,000 135,000

Plant assets 660,000 220,000 b 60,000 940,000Goodwill b 126,000 126,000Investment inInsect 322,000

b a

166,000156,000

TotalAssets $ 1,272,000 $364,000 $1,485,000

EQUITIES Liabilities $ 220,000 $ 70,000 b 5,000 $ 295,000

Capital stock 546,000 100,000 a 100,000 546,000Additional paid- in capital 446,000 90,000 a 90,000 446,000RetainedEarnings 60,000 104,000 a 104,000 60,000MinorityInterest a

138,000138,000

Total equities $ 1,272,000 $364,000 $1,485,000$ 485,000 $ 485,000

Remainder to goodwill 28,571Excess of fair value over book value $

98,571

2

Exercise 7

Preliminary computationsFair value (purchase price) of 70% interest acquiredDecember 31, 2005

$ $279,000

Implied fair value of Trumpet ($279,000 / 70%) $398,571Book value of Trumpet’s net assets ( 300,000)Excess cost over book value acquired = $ 98,571

Allocation of excess of cost over book value:Inventory $ 50,000Land 20,000

3

Manucode Corporation and Subsidiary Consolidated Balance Sheet Working Papers


Manucode TrumpetEliminations Balance

SheetDebit CreditASSETSCash $ 26,000 $ 20,000 $ 46,000

Receivables-net 20,000 30,000 50,000

Inventories 125,000 110,000 b $50,000 285,000

Land 30,000 80,000 b 20,000 130,000

Plant assets –net

320,000 160,000 480,000

Investment inTrumpet 279,000

ab

180,42998,571

Goodwill b 28,571 28,571TotalAssets $ 800,000 $400,000 $1,019,571

EQUITIESCurrent liabilities

$ 110,000 $100,000 $210,000

Capital Stock 400,000 200,000 a 200,000 400,000Additional paid-In capital 100,000 60,000 a 60,000 100,000Retainedearnings 190,000 40,000 a 40,000 190,000MinorityInterest a 119,571 119,571

Total equities $ 800,000 $400,000 $1,019,571398,571 398,571

3

Exercise 8


$ $5,000

Implied fair value of Fig ($5,000 / 60% $8,333Book value of Fig’s net assets ( 7,500)Excess cost over book value acquired = $ 833

Allocation of excess of cost over book value:Remainder to goodwill 833Excess of fair value over book value $ 833

Bower Corporation and Subsidiary Consolidated Balance Sheet Working Papers


Bower FigEliminations Balance

SheetDebit CreditASSETSCurrent assets $ 12,550 $ 4,000 $16,550

Fixed assets 21,550 6,500 28,050Investment inFig 5,900 a $ 5,900

Goodwill a $ 833 833

Total assets $ 40,000 $10,500 $45,433

EQUITIES Liabilities $ 10,000 $ 1,500 $11,500

Capital stock 20,000 5,000 a 5,000 20,000Retained earnings 10,000 4,000 a 4,000 10,000MinorityInterest a 3,933 3,933

Total equities $ 40,000 $10,500 $45,433

9,833 9,833

3

Exercise 9


$ $500,000

Implied fair value of Lizard ($500,000 / 80% $625,000Book value of Lizard’s net assets ( 460,000)Excess cost over book value acquired = $ 165,000

Requirement 1

Allocation of excess of cost over book value:Inventory $ 32,000Buildings-net ( 30,000) Note payable ( 1,250) Remainder to goodwill 164,250Excess of fair value over book value $ 165,000

Requirement 2

Currawong’s share of Lizard income =(80%)x(75,000) = $ 60,000Less: Excess allocated in inventory which was soldin the current year (25,600) Add: Depreciation adjustment on building =+($24,000/15 years) 1,600

Add: Excess allocated to Note payable 1,000

Net adjustment to investment account due toCurrowong’s share of Lizard’s income $ 37,000

Requirement 3

Original cost of investment in Brazil $ 500,000Plus: Currawong’s share of Lizard’s income (fromRequirement 2 37,000

Less: Dividends received (80%)x(35,000) = (28,000)Investment in Lizard account at December 31, 2005 $ 509,000

test bank ch 3

Documents