Reference no: EM131106920

The Reporting Entity and Consolidation of Less-than-Wholly-Owned Subsidiaries with No Differentials

Multiple Choice Questions:

1. Consolidated financial statements tend to be most useful for:
A. Creditors of a consolidated subsidiary.
B. Investors and long-term creditors of the parent company.
C. Short-term creditors of the parent company.
D. Stockholders of a consolidated subsidiary.

2. Company Pea owns 90 percent of Company Essone which in turn owns 80 percent of Company Esstwo. Company Esstwo owns 100 percent of Company Essthree. Consolidated financial statements should be prepared to report the financial status and results of operations for:
A. Pea.
B. Pea plus Essone.
C. Pea plus Essone plus Esstwo.
D. Pea plus Essone plus Esstwo plus Essthree.

3. In which of the following cases would consolidation be inappropriate?
A. The subsidiary is in bankruptcy.
B. Subsidiary's operations are dissimilar from those of the parent.
C. The parent owns 90 percent of the subsidiary's common stock, but all of the subsidiary's nonvoting preferred stock is held by a single investor.
D. Subsidiary is foreign.

4. On January 1, 20X8, Zeta Company acquired 85 percent of Theta Company's common stock for $100,000 cash. The fair value of the noncontrolling interest was determined to be 15 percent of the book value of Theta at that date. What portion of the retained earnings reported in the consolidated balance sheet prepared immediately after the business combination is assigned to the noncontrolling interest?
A. None
B. 15 percent
C. 100 percent
D. Cannot be determined

The following data applies to Questions 5-7:

On January 3, 20X9, Redding Company acquired 80 percent of Frazer Corporation's common stock for $344,000 in cash. At the acquisition date, the book values and fair values of Frazer's assets and liabilities were equal, and the fair value of the noncontrolling interest was equal to 20 percent of the total book value of Frazer. The stockholders' equity accounts of the two companies at the acquisition date are:

	Redding	Frazer
Common Stock ($5 par value)	$500,000	$200,000
Additional Paid-In Capital	300,000	80,000
Retained Earnings	350,000	150,000
Total Stockholders' Equity	$1,150,000	$430,000

Noncontrolling interest was assigned income of $11,000 in Redding's consolidated income statement for 20X9.

5. Based on the preceding information, what amount will be assigned to the noncontrolling interest on January 3, 20X9, in the consolidated balance sheet?
A. $86,000 B. $44,000 C. $68,800 D. $50,000

6. Based on the preceding information, what is the total stockholders' equity in the consolidated balance sheet as of January 3, 20X9?
A. $1,580,000 B. $1,064,000 C. $1,150,000 D. $1,236,000

7. Based on the preceding information, what will be the amount of net income reported by Frazer Corporation in 20X9?
A. $44,000 B. $55,000 C. $66,000 D. $36,000

The following data applies to Questions 8 - 10:

On January 2, 20X2, Kentucky Company acquired 70% of Bluegrass Corporation's common stock for $420,000 cash. At the acquisition date, the book values and fair values of Bluegrass' assets and liabilities were equal, and the fair value of the noncontrolling interest was equal to 30% of the total book value of Bluegrass. The stockholders' equity accounts of the two companies at the acquisition date are as follows:

	Kentucky	Bluegrass
Common Stock ($10 par value)	$600,000	$350,000
Additional Paid-In Capital	450,000	50,000
Retained Earnings	250,000	200,000
Total Stockholders' Equity	$1,300,000	$600,000

Noncontrolling interest was assigned income of $15,000 in Kentucky's consolidated income statement for 20X2.

8. Based on the preceding information, what amount will be assigned to noncontrolling interest on January 2, 20X2, in the consolidated balance sheet?
A. $120,000 B. $126,000 C. $180,000 D. $420,000

9. Based on the preceding information, what is the total stockholders' equity in the consolidated balance sheet as of January 2, 20X2?
A. $1,120,000 B. $1,300,000 C. $1,480,000 D. $1,900,000

10. Based on the preceding information, what will be the amount of net income reported by Bluegrass Corporation in 20X2?
A. $45,000 B. $50,000 C. $75,000 D. $105,000

The following data applies to Questions 11 - 12:

On January 3, 20X9, Jane Company acquired 75 percent of Miller Company's outstanding common stock for cash. The fair value of the noncontrolling interest was equal to a proportionate share of the book value of Miller Company's net assets at the date of acquisition. Selected balance sheet data at December 31, 20X9, are as follows:

	Jane	Miller
Total As sets	$504,000	$216,000
Liabilities	$144,000	$72,000
Common Stock	120,000	60,000
Retained Earnings	240 000	84,000
	$504,000	$216,000

11. Based on the preceding information, what amount should be reported as noncontrolling interest in net assets in Jane Company's December 31, 20X9, consolidated balance sheet? A. $90,000
B. $54,000 C. $36,000
D. $0

12. Based on the preceding information, what amount will Jane Company report as common stock outstanding in its consolidated balance sheet at December 31, 20X9?
A. $120,000 B. $180,000 C. $156,000 D. $264,000

The following data applies to Questions 13 - 14:

On January 1, 20X6, Joseph Company acquired 80% of Salt Company's outstanding stock for cash. The fair value of the noncontrolling interest was equal to a proportionate share of the book value of Salt Company's net assets at the date of acquisition. Selected balance sheet data at December 31, 20X6 are as follows:

	Joseph	Salt
Total Assets	$564,000	$241,000
Liabilities	$180,000	$65,000
Common Stock	150,000	80,000
Retained Earnings	234,000	96,000
	$564,000	5241,000

 

13. Based on the preceding information, what amount should be reported as noncontrolling interest in net assets in Joseph Company's December 31, 20X6, consolidated balance sheet?
A. $35,200 B. $48,200 C. $76,800 D. $112,800

14. Based on the preceding information, what amount will Joseph Company report as common stock outstanding in its consolidated balance sheet at December 31, 20X6?
A. $214,000 B. $150,000 C. $184,000 D. $230,000

15. Xing Corporation owns 80 percent of the voting common shares of Adams Corporation. Noncontrolling interest was assigned $24,000 of income in the 20X9 consolidated income statement. What amount of net income did Adams Corporation report for the year?
A. $150,000 B. $96,000 C. $120,000 D. $30,000

16. Orange Corporation owns 70 percent of the voting common shares of McNichols Corporation, purchased at book value. Noncontrolling interest was assigned $21,000 of income in the 20X0 consolidated income statement. What amount of net income did McNichols Corporation report for the year?
A. $70,000 B. $63,000 C. $30,000 D. $147,000

17. Zeta Corporation and its subsidiary reported consolidated net income of $320,000 for the year ended December 31, 20X8. Zeta owns 80 percent of the common shares of its subsidiary, acquired at book value. Noncontrolling interest was assigned income of $30,000 in the consolidated income statement for 20X8. What is the amount of separate operating income reported by Zeta for the year?
A. $170,000 B. $150,000 C. $120,000 D. $200,000

18. Maple Corporation and its subsidiary reported consolidated net income of $380,000 for the year ended December 31, 20X5. Maple owns 75% of the common shares of its subsidiary, acquired at book value. Noncontrolling interest was assigned income of $25,000 in the consolidated income statement for 20X5. What is the amount of separate operating income reported by Maple for the year?
A. $95,000 B. $100,000 C. $280,000 D. $285,000

The following data applies to Questions 19 - 24:

On January 1, 20X8, Wilhelm Corporation acquired 90 percent of Kaiser Company's voting stock, at underlying book value. The fair value of the noncontrolling interest was equal to 10 percent of the book value of Kaiser at that date. Wilhelm uses the equity method in accounting for its ownership of Kaiser. On December 31, 20X9, the trial balances of the two companies are as follows:

	Wilhelm Corporation		Kaiser Company
Item	Debit	Credit	Debit	Credit
Current Assets	$200,000		$140,000
Depreciable Assets	350,000		250,000
Investment in Kaiser Company Stock	162,000
Depreciation Expense	27,000		10,000
Other Expenses	95,000		60,000
Dividends Declared	20,000		10,000
Accumulated Depreciation		$118,000		$80,000
Current Liabilities		100,000		80,000
Long-Term Debt		100,000		50,000
Common Stock		100,000		50,000
Retained Earnings		150,000		100,000
Sales		250,000		110,000
Income from Subsidiary		36,000
	$854,000	$854,000	$470,000	$470,000

19. Based on the preceding information, what amount would be reported as total assets in the consolidated balance sheet at December 31, 20X9?

A. $805,000 B. $712,000 C. $742,000 D. $1,102,000

20. Based on the preceding information, what amount would be reported as total liabilities in the consolidated balance sheet at December 31, 20X9?
A. $330,000 B. $712,000 C. $318,000 D. $130,000

21. Based on the preceding information, what amount would be reported as retained earnings in the consolidated balance sheet prepared at December 31, 20X9?
A. 314,000
B. 294,000
C. 150,000
D. 424,000

22. Based on the preceding information, what amount would be reported as noncontrolling interest in the consolidated balance sheet at December 31, 20X9?
A. $27,000 B. $4,000 C. $15,000 D. $18,000

23. Based on the preceding information, what amount would be reported as total stockholder's equity in the consolidated balance sheet at December 31, 20X9?
A. $412,000 B. $394,000 C. $542,000 D. $348,000

24. Based on the preceding information, what amount would be reported as income to controlling interest in the consolidated financial statements for 20X9?
A. $168,000 B. $138,000 C. $164,000 D. $150,000

25. Blue Company owns 80 percent of the common stock of White Corporation. During the year, Blue reported sales of $1,000,000, and White reported sales of $500,000, including sales to Blue of $80,000. The amount of sales that should be reported in the consolidated income statement for the year is:
A. $500,000. B. $1,300,000.
C. $1,420,000.
D. $1,500,000.

26. Silver Company owns 60 percent of the common stock of Gold Corporation. During the year, Silver reported sales of $500,000, and Gold reported sales of $200,000, including sales to Silver of $50,000. The amount of sales that should be reported in the consolidated income statement for the year is
A. $500,000 B. $650,000 C. $700,000 D. $750,000

(Note: This is a Kaplan CPA Review Question)

27. For which of the following reporting units is the preparation of combined financial statements most appropriate?
A. A corporation and a foreign subsidiary with nonintegrated homogeneous operations.
B. A corporation and a majority-owned subsidiary with nonhomogeneous operations.
C. Several corporations with related operations owned by one individual.
D. Several corporations with related operations with some common individual owners.

28. Which of the following usually does not represent a variable interest?
A. Common stock, with no special features or provisions
B. Senior debt
C. Subordinated debt
D. Loan or asset guarantees

29. All of the following statements accurately describe Special Purpose Entities (SPEs) except for:
A. SPEs are corporations, trust or partnerships created for a single specified purpose.
B. SPEs usually have no substantive operations and are used for financing operations.
C. SPEs are used for asset securitization, risk sharing and taking advantage of tax statues.
D. A variable interest entity (VIE) is a type of SPE with a limited number of equity investors.

30. On December 31, 20X9, Rudd Company acquired 80 percent of the common stock of Wilton Company. At the time, Rudd held land with a book value of $100,000 and a fair value of $260,000; Wilton held land with a book value of $50,000 and fair value of $600,000. Using the parent company theory, at what amount would land be reported in a consolidated balance sheet prepared immediately after the combination?
A. $550,000 B. $590,000 C. $700,000 D. $860,000

31. Princeton Company acquired 75 percent of the common stock of Sheffield Corporation on December 31, 20X9. On the date of acquisition, Princeton held land with a book value of $150,000 and a fair value of $300,000; Sheffield held land with a book value of $100,000 and fair value of $500,000. Using the entity theory, at what amount would land be reported in a consolidated balance sheet prepared immediately after the combination?
A. $650,000 B. $500,000 C. $550,000 D. $375,000

32. Pepper Company acquired 60 percent of the common stock of Safton Corporation on December 31, 20X9. On the date of acquisition, Pepper held land with a book value of $200,000 and a fair value of $350,000; Safton held land with a book value of $150,000 and fair value of $300,000. At what amount would land be reported in a consolidated balance sheet prepared immediately after the combination?
A. $290,000 B. $500,000 C. $590,000 D. $650,000

33. Under ASC 805, consolidation follows largely which theory approach?
A. Proprietary
B. Parent company
C. Entity
D. Variable

34. For a less-than-wholly-owned subsidiary, goodwill under the parent theory:
A. exceeds goodwill under the proprietary theory.
B. exceeds goodwill under the entity theory.
C. is less than goodwill under the entity theory.
D. is less than goodwill under the proprietary theory.

The following data applies to Questions 35 - 37:

Small-Town Retail owns 70 percent of Supplier Corporation's common stock. For the current financial year, Small-Town and Supplier reported sales of $450,000 and $300,000 and expenses of $290,000 and $240,000, respectively.

35. Based on the preceding information, what is the amount of net income to be reported in the consolidated income statement for the year under the parent company theory approach?
A. $220,000 B. $202,000 C. $160,000 D. $200,000

36. Based on the preceding information, what is the amount of net income to be reported in the consolidated income statement for the year under the proprietary theory approach?
A. $210,000 B. $202,000 C. $160,000 D. $200,000

37. Based on the preceding information, what is the amount of net income to be reported in the consolidated income statement for the year under the entity theory approach?
A. $210,000 B. $202,000 C. $160,000 D. $220,000

38. Quid Corporation acquired 75 percent of Pro Company's common stock on December 31, 20X6. Goodwill (attributable to Quid's acquisition of Pro shares) of $300,000 was reported in the consolidated financial statements at December 31, 20X6. Parent company approach was used in determining this amount. What is the amount of goodwill to be reported under proprietary theory approach?
A. $300,000 B. $400,000 C. $150,000 D. $100,000

39. Quid Corporation acquired 60 percent of Pro Company's common stock on December 31, 20X4. Goodwill (attributable to Quid's acquisition of Pro shares) of $150,000 was calculated under the proprietary theory approach. What is the amount of goodwill that should be reported under entity theory approach?
A. $150,000 B. $200,000 C. $250,000 D. $100,000

The following data applies to Questions 40 - 41:
On January 1, 20X9, Heathcliff Corporation acquired 80 percent of Garfield Corporation's voting common stock. Garfield's buildings and equipment had a book value of $300,000 and a fair value of $350,000 at the time of acquisition.

40. Based on the preceding information, what will be the amount at which Garfield's buildings and equipment will be reported in consolidated statements using the parent company approach? A. $350,000
B. $340,000 C. $280,000 D. $300,000

41. Based on the preceding information, what will be the amount at which Garfield's buildings and equipment will be reported in consolidated statements using the current accounting practice? A. $350,000
B. $340,000 C. $280,000 D. $300,000

42. Cosby Corporation acquired 60 percent of Huxtable Corporation's voting common stock. Huxtable's buildings and equipment had a book value of $200,000 and a fair value of $250,000 at the time of the acquisition. What will be the amount at which Huxtable's buildings and equipment will be reported in consolidated statements on the acquisition date?
A. $150,000 B. $200,000 C. $230,000 D. $250,000

43. On January 1, 20X9, Gold Rush Company acquires 80 percent ownership in California Corporation for $200,000. The fair value of the noncontrolling interest at that time is determined to be $50,000. It reports net assets with a book value of $200,000 and fair value of $230,000. Gold Rush Company reports net assets with a book value of $600,000 and a fair value of
$650,000 at that time, excluding its investment in California. What will be the amount of goodwill that would be reported immediately after the combination under current accounting practice?
A. $50,000 B. $30,000 C. $40,000 D. $20,000

44. On January 1, 20X5, Seaside Company acquires 90 percent ownership in Rainbow Corporation for $180,000. The fair value of the noncontrolling interest at that time is determined to be $20,000. Rainbow reports net assets with a book value of $160,000 and fair value of
$175,000. Seaside Company reports net assets with a book value of $480,000 and a fair value of
$525,000 at that time, excluding its investment in Rainbow. What will be the amount of goodwill that would be reported immediately after the combination?
A. $5,000 B. $20,000 C. $25,000 D. $40,000

Essay Questions:

45. Consolidated financial statements are required by GAAP in certain circumstances. This information can be very useful to stockholders and creditors. Yet, there are limitations to these financial statements for which the users must be aware. What are at least three (3) limitations of consolidated financial statements?

46. In reading a set of consolidated financial statements you are surprised to see the term noncontrolling interest not reported under the Liability section of the Balance Sheet.

Required:
a. What is a non-controlling interest?
b. Why must it be reported in the financial statements as an element of equity rather than a liability?

47. Parent Company acquired 90% of Son Inc. on January 31, 20X2 in exchange for cash. The book value of Son's individual assets and liabilities approximated their acquisition-date fair values. On the date of acquisition, Son reported the following:

Cash	$ 350,000	Current Liabilities	$ 120,000
Inventory	100,000
Plant Assets (net)	320,000	Common Stock	100,000
Property	500.000	Retained Earnings	1.050.000
Total Asses	$1,270,000	Total Liabilities & Equity	$1.270.000

During the year Son Inc. reported $310,000 in net income and declared $15,000 in dividends. Parent Company reported $520,000 in net income and declared $25,000 in dividends. Parent accounts for their investment using the equity method.

Required:
1) What journal entry will Parent make on the date of acquisition to record the investment in Son Inc.?
2) If Parent were to prepare a consolidated balance sheet on the acquisition date (January 31, 20X2), what is the basic consolidation entry Parent would use in the consolidation worksheet?
3) What is Parent's balance in "Investment in Son Inc." prior to consolidation on December 31, 20X2?
4) What is the basic consolidation entry Parent would use in the consolidation worksheet on December 31, 20X2?

48. On January 1, 20X8, Gregory Corporation acquired 90 percent of Nova Company's voting stock, at underlying book value. The fair value of the noncontrolling interest was equal to 10 percent of the book value of Nova at that date. Gregory uses the equity method in accounting for its ownership of Nova. On December 31, 20X8, the trial balances of the two companies are as follows:

	Gregory Corp.		Nova Company
	Debit	Credit	Debit	Credit
Current Assets	$200,000		$120,000
Depreciable Assets	300,000		225,000
Investment in Nova Company Stock	139,500
Depreciation Expense	30,000		25,000
Other Expenses	100,000		60,000
Dividends Declared	30,000		10,000
Accumulated Depreciation		$120,000		$75,000
Current Liabilities		62,000		25,000
Long-Tenn Debt		75,000		90,000
Common Stock		100,000		75,000
Retained Earnings		120,000		65,000
Sales		300,000		110,000
Income from Subsidiary		22,500
	$799500	$799.500	s-I4i I.( it Hi	5440.000

Required:
1) Provide all consolidating entries required as of December 31, 20X8, to prepare consolidated financial statements.
2) Prepare a three-part consolidation worksheet.

49. On January 1, 20X8, Gregory Corporation acquired 90 percent of Nova Company's voting stock, at underlying book value. The fair value of the noncontrolling interest was equal to 10 percent of the book value of Nova at that date. Gregory uses the equity method in accounting for its ownership of Nova. On December 31, 20X9, the trial balances of the two companies are as follows:

	Gregory Corp.		Nova Company
	Debit	Credit	Debit	Credit
Current Assets	$225,500		$14000
Depreciable Assets	300,000		225,000
Investment in Nara Company Stock	144,000
Depreciation Expense	30,000		25,000
Other Expenses	180,033		85,000
Dividends Declared	40,000		10,000
Accumulated Depreciation		$150.000		$100.000
Current Liabilities		45,000		20,000
Long-Term Debt		75,000		90,000
Common Stock		100,000		75.000
Retained Earnings		282500		80.000
Sales		253.500		125.000
Income from Subsidiary		13.500
	$919,500	$919,500	$490,000	$490,000

Required:

1) Give all consolidating entries required on December 31, 20X8, to prepare consolidated financial statements.

2) Prepare a three-part consolidation worksheet as of December 31, 20X8.

50. ASC 805 is related to the Consolidation of Variable Interest Entities. Describe what a Variable Interest Entity is and discuss why the FASB has difficulty in prescribing when these entities are consolidated?