ACC 401 Week 4 Quiz

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ACC 401 Week 4 Quiz,
Chapter 4

Consolidated Financial Statements after Acquisition

1. An investor adjusts the investment account for the amortization of any difference between cost and book value under the

a. cost method.

b. complete equity method.

c. partial equity method.

d. complete and partial equity methods.

2. Under the partial equity method, the entry to eliminate subsidiary income and dividends includes a debit to

a. Dividend Income.

b. Dividends Declared – S Company.

c. Equity in Subsidiary Income.

d. Retained Earnings – S Company.

3. On the consolidated statement of cash flows, the parent’s acquisition of additional shares of the subsidiary’s stock directly from the subsidiary is reported as

a. an investing activity.

b. a financing activity.

c. an operating activity.

d. none of these.

4. Under the cost method, the workpaper entry to establish reciprocity

a. debits Retained Earnings – S Company.

b. credits Retained Earnings – S Company.

c. debits Retained Earnings – P Company.

d. credits Retained Earnings – P Company.

5. Under the cost method, the investment account is reduced when

a. there is a liquidating dividend.

b. the subsidiary declares a cash dividend.

c. the subsidiary incurs a net loss.

d. none of these.

6. The parent company records its share of a subsidiary’s income by

a. crediting Investment in S Company under the partial equity method.

b. crediting Equity in Subsidiary Income under both the cost and partial equity methods.

c. debiting Equity in Subsidiary Income under the cost method.

d. none of these.

7. In years subsequent to the year of acquisition, an entry to establish reciprocity is made under the

a. complete equity method.

b. cost method.

c. partial equity method.

d. complete and partial equity methods.

8. A parent company received dividends in excess of the parent company’s share of the subsidiary’s earnings subsequent to the date of the investment. How will the parent company’s investment account be affected by those dividends under each of the following accounting methods?

Cost Method Partial Equity Method

a. No effect No effect

b. Decrease No effect

c. No effect Decrease

d. Decrease Decrease

9. P Company purchased 80% of the outstanding common stock of S Company on May 1, 2011, for a cash payment of $1,272,000. S Company’s December 31, 2010 balance sheet reported common stock of $800,000 and retained earnings of $540,000. During the calendar year 2011, S Company earned $840,000 evenly throughout the year and declared a dividend of $300,000 on November 1. What is the amount needed to establish reciprocity under the cost method in the preparation of a consolidated workpaper on December 31, 2012?

a. $208,000

b. $260,000

c. $248,000

d. $432,000

10. P Company purchased 90% of the outstanding common stock of S Company on January 1, 1997. S Company’s stockholders’ equity at various dates was:

1/1/97 1/1/11 12/31/11

Common stock $400,000 $400,000 $400,000

Retained earnings 120,000 380,000 460,000

Total $520,000 $780,000 $860,000

The workpaper entry to establish reciprocity under the cost method in the preparation of a consolidated statements workpaper on December 31, 2011 should include a credit to P Company’s retained earnings of

a. $80,000.

b. $234,000.

c. $260,000.

d. $306,000.

11. Consolidated net income for a parent company and its partially owned subsidiary is best defined as the parent company’s

a. recorded net income.

b. recorded net income plus the subsidiary’s recorded net income.

c. recorded net income plus the its share of the subsidiary’s recorded net income.

d. income from independent operations plus subsidiary’s income resulting from transactions with outside parties.

12. In the preparation of a consolidated statements workpaper, dividend income recognized by a parent company for dividends distributed by its subsidiary is

a. included with parent company income from other sources to constitute consolidated net income.

b. assigned as a component of the noncontrolling interest.

c. allocated proportionately to consolidated net income and the noncontrolling interest.

d. eliminated.

13. In the preparation of a consolidated statement of cash flows using the indirect method of presenting cash flows from operating activities, the amount of the noncontrolling interest in consolidated income is

a. combined with the controlling interest in consolidated net income.

b. deducted from the controlling interest in consolidated net income.

c. reported as a significant noncash investing and financing activity in the notes.

d. reported as a component of cash flows from financing activities.

14. On October 1, 2011, Parr Company acquired for cash all of the voting common stock of Stein Company. The purchase price of Stein’s stock equaled the book value and fair value of Stein’s net assets. The separate net income for each company, excluding Parr’s share of income from Stein was as follows:

Parr Stein

Twelve months ended 12/31/11 $4,500,000 $2,700,000

Three months ended 12/31/11 495,000 450,000

During September, Stein paid $150,000 in dividends to its stockholders. For the year ended December 31, 2011, Parr issued parent company only financial statements. These statements are not considered those of the primary reporting entity. Under the partial equity method, what is the amount of net income reported in Parr’s income statement?

a. $7,200,000.

b. $4,650,000.

c. $4,950,000.

d. $1,800,000.

15. A parent company uses the partial equity method to account for an investment in common stock of its subsidiary. A portion of the dividends received this year were in excess of the parent company’s share of the subsidiary’s earnings subsequent to the date of the investment. The amount of dividend income that should be reported in the parent company’s separate income statement should be

a. zero.

b. the total amount of dividends received this year.

c. the portion of the dividends received this year that were in excess of the parent’s share of subsidiary’s earnings subsequent to the date of investment.

the portion of the dividends received this year that were NOT in excess of the parent’s share of subsidiary’s earnings subsequent to the date of investment.

16. Masters, Inc. owns 40% of Fields Corporation. During the year, Fields had net earnings of $200,000 and paid dividends of $50,000. Masters used the cost method of accounting. What effect would this have on the investment account, net earnings, and retained earnings, respectively?

understate, overstate, overstate.
overstate, understate, understate
overstate, overstate, overstate
understate, understate, understate

Use the following information in answering questions 17 and 18.

17. Prior Industries acquired a 70 percent interest in Stevenson Company by purchasing 14,000 of its 20,000 outstanding shares of common stock at book value of $210,000 on January 1, 2010. Stevenson reported net income in 2010 of $90,000 and in 2011 of $120,000 earned evenly throughout the respective years. Prior received $24,000 dividends from Stevenson in 2010 and $36,000 in 2011. Prior uses the equity method to record its investment.

Prior should record investment income from Stevenson during 2011 of:

$36,000
$120,000
$84,000
$48,000

18. The balance of Prior’s Investment in Stevenson account at December 31, 2011 is:

$210,000
$285,000
$297,000
$315,000

19. Parkview Company acquired a 90% interest in Sutherland Company on December 31, 2010, for $320,000. During 2011 Sutherland had a net income of $22,000 and paid a cash dividend of $7,000. Applying the cost method would give a debit balance in the Investment in Stock of Sutherland Company account at the end of 2011 of:

$335,000
$333,500
$313,700
$320,000

20. Hall, Inc., owns 40% of the outstanding stock of Gloom Company. During 2011, Hall received a $4,000 cash dividend from Gloom. What effect did this dividend have on Hall’s 2011 financial statements?

Increased total assets.
Decreased total assets.
Increased income.
Decreased investment account.

21. P Company purchased 80% of the outstanding common stock of S Company on May 1, 2011, for a cash payment of $318,000. S Company’s December 31, 2010 balance sheet reported common stock of $200,000 and retained earnings of $180,000. During the calendar year 2011, S Company earned $210,000 evenly throughout the year and declared a dividend of $75,000 on November 1. What is the amount needed to establish reciprocity under the cost method in the preparation of a consolidated workpaper on December 31, 2011?

a. $52,000

b. $65,000

c. $62,000

d. $108,000

22. P Company purchased 90% of the outstanding common stock of S Company on January 1, 1997. S Company’s stockholders’ equity at various dates was:

1/1/97 1/1/11 12/31/11

Common stock $200,000 $200,000 $200,000

Retained earnings 60,000 190,000 230,000

Total $260,000 $390,000 $430,000

The workpaper entry to establish reciprocity under the cost method in the preparation of a consolidated statements workpaper on December 31, 2011 should include a credit to P Company’s retained earnings of

a. $40,000.

b. $117,000.

c. $130,000.

d. $153,000.

Use the following information in answering questions 23 and 24.

23. Prior Industries acquired an 80 percent interest in Sanderson Company by purchasing 24,000 of its 30,000 outstanding shares of common stock at book value of $105,000 on January 1, 2010. Sanderson reported net income in 2010 of $45,000 and in 2011 of $60,000 earned evenly throughout the respective years. Prior received $12,000 dividends from Sanderson in 2010 and $18,000 in 2011. Prior uses the equity method to record its investment.

Prior should record investment income from Sanderson during 2011 of:

a. $18,000.

b. $60,000.

c. $48,000.

d. $33,600.

24. The balance of Prior’s Investment in Sanderson account at December 31, 2011 is:

a. $105,000.

b. $138,600.

c. $159,000.

d. $165,000.

25. Pendleton Company acquired a 70% interest in Sunflower Company on December 31, 2010, for $380,000. During 2011 Sunflower had a net income of $30,000 and paid a cash dividend of $10,000. Applying the cost method would give a debit balance in the Investment in Stock of Sunflower Company account at the end of 2011 of:

a. $400,000.

b. $394,000.

c. $373,000.

d. $380,000.

Use the following information to answer questions 26 and 27

On January 1, 2011, Rotor Corporation acquired 30 percent of Stator Company’s stock for $150,000. On the acquisition date, Stator reported net assets of $450,000 valued at historical cost and $500,000 stated at fair value. The difference was due to the increased value of buildings with a remaining life of 10 years. During 2011 Stator reported net income of $25,000 and paid dividends of $10,000. Rotor uses the equity method.

26. What will be the balance in the Investment account as of Dec 31, 2011?

a. $150,000
b. $157,500
c. $154,500
d. $153,000

27. What amount of investment income will be reported by Rotor for the year 2011?

a. $7,500
b. $6,000
c. $4,500
d. $25,000

28. On January 1, 2011, Potter Company purchased 25 % of Smith Company’s common stock; no goodwill resulted from the acquisition. Potter Company appropriately carries the investment using the equity method of accounting and the balance in Potter’s investment account was $190,000 on December 31, 2011. Smith reported net income of $120,000 for the year ended December 31, 2011 and paid dividends on its common stock totaling $48,000 during 2011. How much did Potter pay for its 25% interest in Smith?

a. $172,000
$202,000
$232,000
c. $208,000

Use the following information to answer questions 29 and 30.

29. On January 1, 2011, Paterson Company purchased 40% of Stratton Company’s 30,000 shares of voting common stock for a cash payment of $1,800,000 when 40% of the net book value of Stratton Company was $1,740,000. The payment in excess of the net book value was attributed to depreciable assets with a remaining useful life of six years. As a result of this transaction Paterson has the ability to exercise significant influence over Stratton Company’s operating and financial policies. Stratton’s net income for the ended December 31, 2011 was $600,000. During 2011, Stratton paid $325,000 in dividends to its shareholders. The income reported by Paterson for its investment in Stratton should be:

a. $120,000
b. $130,000
c. $230,000
d. $240,000

30. What is the ending balance in Paterson’s investment account as of December 31, 2011?

$1,800,000
$1,900,000
$1,910,000
$2,030,000

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