Expert Answer

Expert Answer

1. (TCO A) Which of the following results in an increase in the equity in investee income account when applying the equity method?
        Unrealized gain on intercompany inventory transfers for the prior year
        Amortizations of purchase price over book value on date of purchase for the prior year
        Amortizations of purchase price over book value on date of purchase
        Extraordinary gain of the investor
        Sale of a portion of the investment at a loss

Question 2.2. (TCO B) Which of the following is a characteristic of a business combination that should be accounted for as a purchase?
The combination must involve the exchange of equity securities only.
 The acquired subsidiary must be smaller in size than the acquiring parent.
   The two companies may be about the same size and it is difficult to determine the acquired company and the acquiring company.
    The transaction may be considered to be the uniting of the ownership interests of the companies involved.

        The transaction clearly establishes an acquisition price for the company being acquired.

Question 3.3. (TCO C) Under the equity method of accounting for an investment,

        the investment account remains at initial value.

        dividends received are recorded as revenue.

        income reported by the subsidiary increases the investment account.

        goodwill is amortized over 20 years.

        dividends received increase the investment account.


Question 4.4. (TCO C) Which of the following internal record-keeping methods can a parent choose to account for a subsidiary acquired in a business combination?

        Initial value or book value

        Initial value, equity, or partial equity

        Initial value, equity, or book value

        Initial value, lower-of-cost-or-market value, or equity

        Initial value, lower-of-cost-or-market value, or partial equity

Question 5.5. (TCO D) All of the following statements regarding the sale of subsidiary shares are true except which of the following?

        The use of specific identification based on serial number is acceptable.

        The use of the FIFO assumption is acceptable.

        The use of the specific LIFO assumption is acceptable.

        The use of the averaging assumption is acceptable.

        The parent company must determine whether consolidation is still appropriate for the remaining shares owned.

Question 6.6. (TCO D) When Timber Co. acquired 75% of the common stock of Woody Corp., Woody owned land with a book value of $70,000 and a fair value of $100,000. What amount of excess land allocation would be included for the calculation of noncontrolling interest, according to SFAS 141(R)?






Question 7.7. (TCO E) An intercompany sale took place whereby the transfer price exceeded the book value of a depreciable asset. Which statement is true for the year following the sale?

        A worksheet entry is made with a debit to gain for a downstream transfer.

        A worksheet entry is made with a debit to gain for an upstream transfer.

        A worksheet entry is made with a debit to retained earnings for a downstream transfer.

        A worksheet entry is made with a debit to investment in the subsidiary for a downstream transfer when the parent uses the equity method.

        No worksheet entry is necessary.

Question 8.8. (TCO F) A net asset balance sheet exposure exists and the foreign currency appreciates. Which of the following statements is true?

        There is a transaction gain.

        There is a transaction loss.

        There is no translation adjustment.

        There is a negative translation adjustment.

        There is a positive translation adjustment.

Question 9.9. (TCO G) Cline, Watters, and Nettles formed a partnership on January 1, 20X1, with investments of $100,000, $150,000, and $200,000, respectively. For division of income, they agreed to

(1) an interest of 10% of the beginning capital balance each year;

(2) an annual compensation of $10,000 to Watters; and

(3) sharing the remainder of the income or loss in a ratio of 20% for Cline and 40% each for Watters and Nettles.

Net income was $150,000 in 20X1 and $180,000 in 20X2. Each partner withdrew $1,000 for personal use every month during 20X1 and 20X2.

What was Cline's share of income for 20X1?






Question 10.10. (TCO G) The partnership of Jewel, Maggie, and Waters was insolvent and will be unable to pay $50,000 in liabilities currently due. What recourse is available to the partnership's creditors?

        They must present their claims to the three partners in the order of the partners' capital account balances.

        They must try to obtain a payment from the partner with the largest capital account balance.

        They may seek remuneration from any partner they choose.

        They cannot seek remuneration from the partners as individuals.

        They must present equal claims to the three partners as individuals.


1. (TCO A) How does the use of the equity method affect the investor's financial statements, specifcially the investment account?     

Question 2.2. (TCO B) For acquisition accounting, why are assets and liabilities of the subsidiary consolidated at fair value?     

Question 3.3. (TCO D) How is a noncontrolling interest in the net income of an entity reported in the income statement? 

Question 4.4. (TCO E) During 20X3, Edwards Co. sold inventory to its parent company, First Corp. First still owned the entire inventory purchased at the end of 20X3. Why must the gross profit on the sale be deferred when consolidated financial statements are prepared at the end of 20X3?

Question 5.5. (TCO F) What is the purpose of a remeasurement? What is the purpose of a transalation? Contrast the two.


Question 6.6. 

(TCO C) Assume that on January 1,20X3, investors form New Corp agrees to consolidate the operations of ABC Inc. and DEF Company in a deal valued at $2.2 billion. New Corp organizes each former entity as an operating segment. Additionally, ABC has two divisions—ABC Hot and ABC Cold—along with DEF that are treated as independent reporting units for internal performance evaluation and management reviews. New Corp recognizes $215 million as goodwill at the merger date of January 1, 20X3 and allocates this entire amount to its reporting units. That information and each reporting unit's acquisition-date fair values are as follows.


New Corp’s Acquisition-Date Fair Values

Reporting Units Goodwill January 1, 20X3

ABC Hot $ 22,000,000 $950,000,000

ABC Cold 155,000,000 748,000,000

DEF Company 38,000,000 502,000,000

In December, 20X3, News Corp, a newspaper company, performs an analysis for each of its three reporting units to assess potential goodwill impairment. News Corp examines the events that may affect the fair values of its reporting units. The analysis reveals that the fair value of each reporting unit likely exceeds its carrying amount except for ABC Cold. The goodwill impairment test then reveals that ABC Cold’s fair value has fallen to $60 million, well below its current carrying amount. News Corp compares the implied fair value of ABC Cold’s goodwill to its carrying amount. News Corp needs to determine the implied fair value of goodwill. The fair value of ABC Cold’s net assets as of December 31, 21X3 is shown below.

ABC Cold December 31, 20X3, fair value $60,000,000

Fair values of ABC Cold net assets at December 31, 20X3:

Current assets $ 5,000,000

Property 10,000,000

Equipment 5,000,000

Subscriber list 1,000,000

Patented technology 1,000,000

Current liabilities (4,000,000)

Long-term debt (10,000,000)


(1) What is the implied fair value of goodwill for ABC Cold?

(2) What is the carry value of the assets of ABC Cold before impairment?

(3) What is the impairment loss of ABC Cold? (Points : 25)
Question 7.7. (TCO A) Diehl Company owns 40% of the outstanding voting common stock of Rubins Corp. and has the ability to significantly influence the investee's operations. On January 3, 20X1, the balance in the Investment in Rubins Corp. account was $660,000. Amortization associated with this acquisition is $15,000 per year. During 20X1, Rubins earned a net income of $150,000 and paid cash dividends of $30,000. Previously in 20X0, Rubins had sold inventory costing $42,000 to Diehl for $60,000. All but 30% of that inventory had been sold to outsiders by Diehl during 20X0. Additional sales were made to Diehl in 20X1 at a transfer price of $85,000 that had cost Rubins $60,000. Only 16% of the 20X1 purchases had not been sold to outsiders by the end of 20X1.


(A) What amount of unrealized intra-entity inventory profit should be deferred by Diehl at December 31, 20X0?

(B) What amount of unrealized intra-entity profit should be deferred by Diehl at December 31, 20X1?

(C) What amount of equity income would Diehl have recognized in 20X1 from its ownership interest in Rubins?

(D) What was the balance in the Investment in Rubins Corp. account at December 31, 20X1? (Points : 25)

Question 8.8. (TCO E) Several years ago, Polar Inc. acquired an 80% interest in Icecap Co. The book values of Icecap's asset and liability accounts at that time were considered to be equal to their fair values. Polar's acquisition value corresponded to the underlying book value of Icecap so that no allocations or goodwill resulted from the transaction.

The following selected account balances were from the individual financial records of these two companies as of December 31, 20X1:

 Polar Inc. Icecap Co.

Sales $896,000 $504,000

Cost of goods sold 406,000 276,000

Operating expenses 210,000 147,000

Retained earnings, 1/1/11 1,036,000 252,000

Inventory 484,000 154,000

Buildings (net) 501,000 220,000

Investment income Not given

Assume that Icecap sold inventory to Polar at a markup equal to 25% of cost. Intra-entity transfers were $70,000 in 20X0 and $112,000 in 20X1. Of this inventory, $29,000 of the 20X0 transfers were retained and then sold by Polar in 20X1, whereas $49,000 of the 20X1 transfers were held until 20X2.


For the consolidated financial statements for 20X1, determine the balances that would appear for the following accounts.

(1) Cost of Goods Sold

(2) Inventory

(3) Noncontrolling Interest in Subsidiary's Net Income (Points : 25)

Question 9.9. (TCO F) Ginvold Co. began operating a subsidiary in a foreign country on January 1, 20X1 by acquiring all of the common stock for §50,000 stickles, the local currency. This subsidiary immediately borrowed §120,000 on a 5-year note with 10% interest payable annually beginning on January 1, 20X2. A building was then purchased for §170,000 on January 1, 20X1. This property had a 10-year anticipated life and no salvage value and was to be depreciated using the straight-line method. The building was immediately rented for 3 years to a group of local doctors for §6,000 per month. By year-end, payments totaling §60,000 had been received.

On October 1, §5,000 were paid for a repair made on that date and it was the only transaction of this kind for the year. A cash dividend of §6,000 was transferred back to Ginvold at December 31, 20X1.

The functional currency for the subsidiary was the stickle (§). Currency exchange rates were as follows:

January 1, 20X1 §1 = $2.40

October 1, 20X1 §1 = $2.22

December 31, 20X1 §1 = $2.16

Average for 20X1 §1 = $2.28


(A) Prepare an income statement for this subsidiary in stickles.

(B) Translate these amounts into U.S. dollars. (Points : 25)     

Question 10.10. (TCO G) The ABCD Partnership has the following balance sheet at January 1, 20X0, prior to the admission of new partner, E.

Cash and current assets $39,000 Liabilities $52,000

Land 234,000 A’s capital 26,000

Building and equipment 130,000 B’s capital 52,000

    C’s capital 117,000

    D’s capital 156,000

Total assets $403,000 Total liabilities and capital $403,000

E contributed $124,000 in cash to the business to receive a 20% interest in the partnership. Goodwill was to be recorded. The four original partners shared all profits and losses equally.


(A) Prepare the journal entries necessary to record goodwill.

(B) After goodwill has been recorded, what were the individual capital balances of the original partners?

(C) Prepare the journal entry necessary to record E's contribution.
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