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Calculate Equity in net income
Course:- Accounting Basics
Reference No.:- EM132161252




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MULTIPLE CHOICE QUESTIONS: CHOOSE THE ALTERNATIVE THAT BEST COMPLETES THE STATEMENT OR ANSWERS THE QUESTION.

1. If the parent company uses the complete equity method when accounting for its wholly-owned subsidiary on its own books, consolidated net income equals

A) The parent's separately reported income.

B) The subsidiary's separately reported income, adjusted for revaluation write-offs.

C) The subsidiary's separately reported income.

D) The parent's separately reported income plus the subsidiary's ending retained earnings balance.

2. On consolidated financial statements, where does the parent's equity in the net income of the subsidiary account appear?

A) On the consolidated income statement, as an deduction from income

B) On the consolidated balance sheet, as an equity

C) On the consolidated income statement, as a revenue

D) Doesn't appear on the consolidated financial statements

3. When consolidating the accounts of a parent and subsidiary in subsequent years, eliminating entry (O) recognizes total write-offs of subsidiary revaluations:

A) As of the end of the current year.

B) As of the beginning of the current year.

C) As of the date of acquisition.

D) For the current year.

4. When consolidating the accounts of a parent and subsidiary in subsequent years, eliminating entry (R) recognizes revaluations of the subsidiary's assets and liabilities:

A) For the current year.

B) As of the beginning of the current year.

C) As of the end of the current year.

D) As of the date of acquisition.

5. Consolidation eliminating entries (C), (E), (R), and (O) fully eliminate the parent's Investment in Subsidiary account at what stage?

A) After eliminating entries (C), (E) and (R)

B) After eliminating entries (C), (E), (R) and (O)

C) After eliminating entries (C) and (E)

D) After eliminating entry (C)

6. Which statement is true concerning impairment testing of identifiable intangible assets, following U.S. GAAP?

A) For limited life intangibles, the impairment loss is the difference between the sum of undiscounted expected cash flows and book value.

B) If the sum of undiscounted expected cash flows is less than book value, the impairment loss calculation for limited life intangibles is the same as for indefinite life intangibles.

C) A qualitative test may be used for both limited life and indefinite life intangibles.

D) A qualitative test may be used for limited life intangibles but not indefinite life intangibles.

7. The U.S. GAAP option to use a qualitative assessment for impairment testing applies to:

A) Indefinite life intangibles and goodwill

B) Goodwill only

C) Limited life and indefinite life intangibles and goodwill

D) Limited life intangibles only

8. A U.S. company reports $11,600 in goodwill and decides to quantitatively test it for impairment at the end of the year. The following information is collected:


Division 1

Division 2

Division 3

Book value of goodwill

$5,000

$400

$6,200

Fair value of division

60,000

10,000

25,000

Book value of division

62,000

9,500

24,000

What is the amount of goodwill impairment loss for the year, following U.S. GAAP?

A) $3,400

B) $3,500

C) $2,000

D) $5,000

9. What is the preferred way to value the noncontrolling interest in a subsidiary at the date of acquisition, per U.S. GAAP?

A) The stock price of noncontrolling shares in an active market, discounted for lack of control.

B) The appraised market value of the noncontrolling interest's share of the subsidiary's assets less liabilities.

C) Level 3 measurement of the expected present value of future dividends paid to the noncontrolling interest.

D) The stock price of noncontrolling shares in an active market.

10. A company pays $70 million in cash to acquire 70% of the voting stock of another company. The fair value of the noncontrolling interest at the date of acquisition is $25 million, and the book value of the acquired company is $20 million. There are no revaluations of the acquired company's identifiable net assets.

Goodwill to the noncontrolling interest, following U.S. GAAP, is:

A) $0

B) $22.5 million

C) $19 million

D) $15 million

11. Pratt Company buys 65% of the voting stock of Sully Corporation at a 40% premium over the market price of Sully's stock.

Which statement is most likely to be true concerning the goodwill resulting from this acquisition?

A) Goodwill is allocated 65% to Pratt and 35% to the noncontrolling interest in Sully.

B) All goodwill is allocated to the noncontrolling interest in Sully.

C) Goodwill is allocated 60% to Pratt and 40% to the noncontrolling interest in Sully.

D) The goodwill allocation to Pratt is more than 65% of the total goodwill.

12. Noncontrolling interest is reported on the consolidated balance sheet as:

A) An identifiable intangible asset account

B) A noncurrent liability account

C) An equity account

D) A noncurrent tangible asset account

13. Pontos Corporation buys 80% of the voting stock of Springfield Company on January 1, 2017. At the date of acquisition, it is determined that Springfield has a secret recipe for its famous cookies, not currently reported on its balance sheet, that has a fair value of $20,000. The secret cookie recipe meets ASC Topic 805 requirements for capitalization as an intangible asset, and has an estimated life of 5 years, straight-line.

On the consolidated balance sheet at December 31, 2020, at what value is the secret cookie recipe reported?

A) $3,200

B) $8,000

C) $4,000

D) $16,000

14. Penrose Corporation acquired 80% of the voting stock of Speedy Company several years ago. There were no revaluations of Speedy's identifiable net assets, and the excess of acquisition cost over Speedy's book value was attributed entirely to goodwill.

Some information for 2021:

1. Consolidated depreciation expense was $400, and the goodwill impairment loss was $30.

2. Plant assets with an original cost of $300 were sold for $20.

3. Penrose declared and paid $50 in cash dividends.

4. Speedy declared and paid $10 in cash dividends.

On the consolidated statement of cash flows for 2021, total cash dividends paid is:

A) $50

B) $52

C) $10

D) $40

15. Python acquires 80% of the voting stock of Slither on January 1, 2020 for $4,000. The fair value of the noncontrolling interest is $950. Slither's balance sheet at the date of acquisition is as follows:


Book Value Dr (Cr)

Fair Value Dr (Cr)

Tangible assets

$5,000

$6,500

Identifiable intangibles

-

2,000

Liabilities

(3,000)

(3,000)

Capital stock

(600)

-

Retained earnings

(1,400)

-

The gain on acquisition is:

A) $ 550

B) $1,500

C) $ 600

D) $ 750

16. A parent provides consulting services to its wholly-owned subsidiary during the year. The parent charged the subsidiary $300,000 for the services. The parent's cost of providing the services is $265,000. The companies use service revenue and service expense, as appropriate, to record this transaction on their own books.

The consolidation eliminating entry or entries related to the intercompany services include an adjustment to the parent's accounts as follows:

A) a debit to service revenue, $300,000.

B) a credit to service expense, $300,000.

C) a debit to service expense, $265,000.

D) a credit to service revenue, $265,000.

17. During the current year, a parent provides services costing it $100,000 to its wholly-owned subsidiary, charging $140,000 for the services. At year-end, the subsidiary still owes the parent $5,000 for these services.

How do these intercompany transactions affect the parent's equity in income for the year, assuming the parent uses the complete equity method to report its investment on its own books?

A) $5,000 is added

B) No effect

C) $40,000 is deducted

D) $140,000 is added

18. A parent has a 60% interest in its subsidiary. Ending inventory profits on downstream merchandise sales:

A) Only reduce equity in net income

B) Only increase equity in net income

C) Increase equity in net income and the noncontrolling interest in net income

D) Reduce equity in net income and the noncontrolling interest in net income

19. A parent owns 80% of its subsidiary and sells merchandise to its subsidiary at a 25% markup on cost. The subsidiary's ending inventory includes $825,000 purchased from the parent. The subsidiary's beginning inventory includes $750,000 purchased from the parent.

What is the effect of the above on the parent's equity in net income of the subsidiary for the current year?

A) $15,000 decrease

B) $12,000 increase

C) $12,000 decrease

D) No effect

20. A parent sells land costing $40,000 to a subsidiary in 2018 for $55,000. The subsidiary sells the land in 2020 to a third party for $65,000.

On the consolidated income statement for 2020, the gain on sale of land is:

A) $0

B) $10,000

C) $15,000

D) $25,000

21. For intercompany merchandise sales, how do the consolidation eliminating entries differ between upstream and downstream sales?

A) Unconfirmed intercompany profit on upstream ending inventory is debited to beginning retained earnings, while it is debited to investment in subsidiary for downstream sales.

B) Confirmed intercompany profit on downstream beginning inventory is debited to investment in subsidiary, while it is debited to beginning retained earnings for upstream beginning inventory.

C) Sales revenue from upstream sales are eliminated but sales revenue from downstream sales are not.

D) The difference between intercompany profit on ending inventory and beginning inventory is an adjustment to investment in subsidiary for downstream sales but it is an adjustment to retained earnings for upstream sales.

Problem 1 - Investment accounts post acquisition

A subsidiary is acquired on January 1, 2019 at an acquisition cost of $100 million. The subsidiary's book value at the date of acquisition was $25 million, consisting of these accounts:

Capital stock

$8,000,000

Retained earnings

18,000,000

Accumulated other comprehensive loss

(1,000,000)

Following is revaluation information for the subsidiary's identifiable net assets at the date of acquisition:


Fair Value

Book Value


Plant assets, net

$25,000,000

$40,000,000

Straight-line, 5 years

Identifiable intangible assets

60,000,000

0

Straight-line, 6 years

It is now December 31, 2021, three years since the acquisition. The subsidiary reported the following amounts during the period 2019 - 2021:


2019

2020

2021

Net income

$12,000,000

$10,000,000

$15,000,000

Other comprehensive income (loss)

300,000

(160,000)

125,000

The subsidiary did not declare any dividends during this period. Goodwill for this acquisition is not impaired as of the end of 2021. The parent uses the complete equity method to report its investment on its own books.

Required:

a. Calculate Equity in net income, reported on the parent's books, for 2021.

b. Calculate Equity in OCI, reported on the parent's books, for 2021.

c. What is the December 31, 2021 balance in the investment account, reported on the parent's books?

Problem 2 - Noncontrolling Interest

Pacer Hotels bought 80% of Southern Resorts' voting stock on January 1, 2020 for $35,000. The fair value of the noncontrolling interest in Southern was $7,000 at the date of acquisition. Fair value information on Southern's assets and liabilities at the date of acquisition is as follows:

  • Property and equipment is overvalued by $7,000. P&E has a 10-year remaining life, straight-line.
  • Previously unreported identifiable intangibles are valued at $8,000. These intangibles have indefinite lives but testing reveals impairment of $2,000 in 2020.
  • Goodwill reported for this acquisition is not impaired in 2020.

The December 31, 2020 trial balances for Pacer and Southern are as follows:


Pacer Dr (Cr)

Southern Dr (Cr)

Current assets

$   21,900

$   10,000

Property & equipment, net

90,000

60,000

Investment in Southern

37,560

-

Liabilities

(74,500)

(57,500)

Capital stock

(40,000)

(5,000)

Retained earnings, Jan. 1

(30,000)

(3,100)

Treasury stock

2,000

100

Dividends

-

500

Sales revenue

(84,000)

(50,000)

Equity in NI of Southern

(2,960)

-

Cost of goods sold

55,000

30,000

Operating expenses

25,000

15,000

Total

$           0

$           0

Pacer uses the complete equity method to account for its investment in Southern on its own books.

Required:

a. Prepare a schedule calculating the initial value of goodwill for this acquisition, and its allocation to the parent and to the noncontrolling interest.

b. Calculate Pacer's equity in net income of Southern for 2020, reported on Pacer's books, and the noncontrolling interest in consolidated net income for 2020, shown on the 2020 consolidated income statement.

c. Prepare the consolidation journal entries on December 31, 2020 on the work sheet.

Problem 3 - Intercompany Merchandise Transactions

The following information is available concerning transactions between a parent and its wholly-owned subsidiary for the current year.

The parent sells merchandise to the subsidiary at a markup of 25% on cost.

The subsidiary's beginning inventory includes $30,000 purchased from the parent, and its ending inventory includes $42,000 purchased from the parent.

Total sales from the parent to the subsidiary were $800,000.

Required:

a. Prepare the consolidation journal entries related to the intercompany transactions at the end of the year.

b. Assume the subsidiary sold merchandise acquired from the parent for $900,000 during the current year. What amounts appear on the separate books of the parent and the subsidiary, for sales revenue and cost of goods sold?

c. Following part b, what amounts appear on the consolidated income statement for the year, for sales revenue and cost of goods sold?




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