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question Any in bold print has been either replaced or edited in some manner. These include: Multiple Choice Questions 1 through 20. Exercise Questions 1, 2, 4, 6 7. Previous exercise # 5 was removed, since it was based on information that was replaced. Exercises 6-10 were renumbered. Chapter 3 Test Bank AN INTRODUCTION TO CONSOLIDATED FINANCIAL STATEMENTS Multiple Choice Questions LO1 1. What method must be used if FASB consolidation of a 70% owned subsidiary? LO1 2. a. b. c. d. 94 prohibits full The cost method. The Liquidation value. Market value. Equity method. From the standpoint of accounting theory, which of following statements is the best justification for preparation of consolidated financial statements? the the 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. LO2 3. Penguin Corporation owns 90% of the outstanding voting stock of Crevice Company and Burrow Corporation owns the remaining 10% of Crevices voting stock. On the consolidated financial statements of Penguin Corporation and Subsidiary, Burrow is a. b. c. d. an affiliate. a minority interest. an equity investee. a related party 1 LO2 4. A major motivation for FASBs creation of Statement No. 94 was a. temporary control was not being disclosed properly. b. the elimination off-balance sheet financing c. situations occurred where subsidiary control did not lie with the parent company. d. the risk of subsidiary legal reorganization or bankruptcy was not disclosed. LO2 5. Muttonbird Inc. has 90% ownership of Beach Company, but should exclude Beach under FASB 94 if a. b. c. d. LO2 6. Subsequent to an acquisition, the parent company and consolidated financial statement amounts would not be the same for a. b. c. d. LO3 7. Beach is in a regulated industry. Muttonbird uses the equity method for Beach. Muttonbird expects to sell Beach within a year. Beach is in a foreign country and records its books in a foreign currency. investments in unconsolidated subsidiaries. investments in consolidated subsidiaries. capital stock. ending retained earnings. 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. b. c. d. $240,000. $260,000. $300,000. $360,000. 2 LO3 8. 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 $ 400,000 200,000 600,000 $1,200,000 Current assets Equipment Land & buildings Total assets Fair Value $ 700,000 400,000 800,000 $1,900,000 Immediately following the acquisition, equipment will be included on the consolidated balance sheet at a. b. c. d. LO4 9. $300,000. $340,000. $360,000. $400,000. 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 of the 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. LO4 10. 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. 3 LO5 11 . On January 1, 2005, Tern purchased 90% of Costal Corporations outstanding shares for $1,400,000 when the fair value of Costals assets were equal to the book values. The balance sheets of Tern and Costal Corporations at year-end 2004 are summarized as follows: Assets $ Liabilities Capital stock Retained earnings $ Tern 5,900,000 $ Costal 1,450,000 700,000 $ 3,600,000 1,600,000 250,000 1,000,000 200,000 If a consolidated balance sheet was prepared immediately after the business combination, the minority interest, would be a. b. c. d. LO5 12. On July 1, 2005, when Worm Companys total stockholders equity was $180,000, Bird Corporation purchased 7,000 shares of Worms 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 Worms 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. b. c. d. LO5 13. $100,000. $155,556. $140,000. $520,000. $30,000. $40,000. $50,000. $120,000. Bowerbird Inc acquired 60% of the outstanding stock of Mimicry Company in a business combination. The book values of Mimicrys net assets are equal to the fair values except for the building, whose net book value and fair value are $400,000 and 600,000, respectively. At what amount is the building reported on the consolidated balance sheet? a. b. c. d. $360,000. $400,000. $520,000. $600,000. 4 LO5 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. LO6 15. 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. b. c. d. LO6 16. Spinebill Corporation bought 80% of Nectar Companys common stock at its book value of $500,000 on January 1, 2005. During 2005, Nectar reported net income of $150,000 and paid dividends of $45,000. At what amount should Spinebills Investment in Nectar account be reported on December 31, 2005? a. b. c. d. LO6 `` LO7 investment in Salem account of $240,000. investment in Salem account of $218,000. goodwill of $33,333. dividends receivable of $3,000. $500,000 $548,000 $584,000 $605,000 Weebill Corporation bought 80% of Tree Companys 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 Weebills Investment in Tree account be reported on January 2, 2005? a. b. c. d. $640,000. $665,000. $700,000. $725,000. 5 18. 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. Bellbirds separate income statement and a consolidated income statement for Bellbird Corporation and Subsidiary as of December 31, 2005, are shown below. Sales revenue Income from Corporal Cost of sales Other expenses Noncontrolling interest income Net income Bellbird 150,000 11,600 ( 60,000 ) ( 20,000 ) $ Consolidated 234,750 $ 81,600 $ 100,000 ) 50,000 ) ( $ ( ( 3,150 ) 81,600 Honeys separate income statement must have reported net income of: a. b. c. d. LO7 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. b. c. d. LO8 20. $13,750. $14,750. $15,750. $15,250. $52,941 $38,250 $235,000 $300,000. 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. 6 Exercises LO4 Exercise 1 Alarm Bird Inc. acquired an 85% interest in Clock Corporation on January 2, 2005 for $38,000 cash when Clock had Capital Stock of $15,000 and Retained Earnings of $25,000. Clocks 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 Eliminations Alarm Bird ASSETS Cash Accounts Receivable-net $ Clock Debit 9,000 39,000 10,000 170,000 Plant assets-net Investment in Clock $ 4,000 75,000 Inventories 68,000 35,000 38,000 Total Assets $ 390,000 $58,000 EQUITIES Payables $ 120,000 $18,000 100,000 15,000 170,000 25,000 390,000 $58,000 Capital stock Retained Earnings Minority Interest TOTAL EQUITIES $ Required: 7 Credit Balance Sheet Complete the consolidation balance sheet working papers for Alarm Bird and subsidiary at January 1, 2005. LO4 Exercise 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 January 1, 2005 was selling at $70 per share. Just before the business combination, balance sheet information of the two corporations was as follows: Cash Inventories Other current assets Land Plant and equipment-net Myna Book Value 25,000 $ 55,000 110,000 100,000 660,000 950,000 $ $ Liabilities Capital stock, $10 par value Additional paid-in capital Retained earnings $ $ Berry Fair Value 12,000 36,000 110,000 90,000 375,000 623,000 220,000 $ 500,000 170,000 60,000 950,000 $ $ Berry Book Value 12,000 $ 32,000 90,000 30,000 250,000 414,000 $ 50,000 $ 100,000 40,000 224,000 414,000 50,000 Required: 1. Prepare the journal entry on Myna Corporations books to account for the business combination. 2. Prepare a consolidated balance sheet for Myna Corporation and Subsidiary immediately after the business combination. 8 LO5 Exercise 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 Subsidiary Consolidated Balance Sheet at December 31, 2005 Cash Accounts receivable-net Inventories Other current assets Plant assets-net Goodwill from consolidation $ $ Accounts payable Other liabilities Capital stock Retained earnings Minority interest Balances 19,000 70,000 110,000 85,000 290,000 39,000 613,000 $ 73,000 70,000 350,000 80,000 40,000 613,000 $ Treecreeper Corporation acquired its 90% interest in Ants Farm on January 1, 2005, when Ants Farm had $150,000 of Capital Stock and $70,000 of Retained Earnings. Ants Farms 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 Farmss stockholders' equity on December 31, 2005. 4. Treecreepers Investment December 31, 2005. in Ants 9 Farm account balance at LO5 Exercise 4 Monarch Corporation paid $180,000 for a 75% interest in Stem Co.s outstanding Capital Stock on January 1, 2005, when Stems stockholders equity consisted of $150,000 of Capital Stock and $50,000 of Retained Earnings. Book values of Stems 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: $ Accounts payable Dividends payable Capital stock Retained earnings Sales revenue Income from Stem Packer 8,250 7,500 40,000 50,000 100,000 195,000 225,000 45,000 25,000 695,750 $ 40,750 $ 150,000 75,000 400,000 30,000 695,750 35,000 10,000 150,000 50,000 190,000 $ Cash Dividends receivable Other current assets Land Plant assets-net Investment in Stem Cost of sales Other expenses Dividends $ 435,000 $ $ Stem 35,000 50,000 30,000 150,000 $ 125,000 25,000 20,000 435,000 Required: Complete the partially prepared consolidated balance sheet working papers that appear below. 10 Monarch Corporation and Subsidiary Consolidated balance Sheet Working Papers at December 31, 2005 Eliminations Monarch ASSETS Cash Dividends Receivable Other current Assets $ Stem Debit 8,250 $ 35,000 7,500 40,000 50,000 50,000 30,000 Plant assets 100,000 150,000 Investment in Stem 195,000 Land Total Assets $ EQUITIES Accounts payable $ Dividends Payable Capital stock Retained Earnings TOTAL EQUITIES 400,750 $285,000 40,750 $ 35,000 10,000 150,000 210,000 $ 150,000 70,000 400,750 $285,000 11 Credit Balance Sheet LO5 Exercise 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: Cash Accounts Receivable Inventory Land Plant and equipment-net $ $ Accounts Payable Bonds Payable Capital stock, $10 par value Capital stock, $15 par value Additional paid-in capital Retained earnings Zoo Book Value 378,000 $ 130,000 240,000 220,000 660,000 1,628,000 $ Bird Book Value 40,000 $ 76,000 50,000 80,000 200,000 446,000 $ Bird Fair Value 40,000 76,000 55,000 55,000 215,000 440,000 $ 468,000 200,000 11,000 $ 100,000 11,000 95,000 $ $ 200,000 320,000 1,628,000 $ 225,000 80,000 30,000 446,000 Required: 1. Prepare Zoos consolidated balance sheet on December 31, 2005. 12 LO5 Exercise 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 stock of 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: Cash Inventories Other current assets Land Plant and equipment-net $ $ Liabilities Capital stock, $2 par value Additional paid-in capital Retained earnings Magpie Book Value 25,000 $ Insect Book Value 17,000 $ 55,000 110,000 100,000 660,000 950,000 $ 42,000 40,000 45,000 220,000 364,000 $ Insect Fair Value 17,000 47,000 30,000 35,000 280,000 409,000 220,000 $ 500,000 170,000 60,000 950,000 $ 70,000 $ 100,000 90,000 104,000 364,000 75,000 $ $ Required: 1. Prepare the journal entry on Magpie account for the business combination. Corporations books to 2. Prepare a consolidated balance sheet for Magpie Corporation and Subsidiary immediately after the business combination. 13 LO5 Exercise 7 Manucode Corporation paid $279,000 for 70% of Trumpet Corporations $10 par common stock on December 31, 2005, when Trumpet Corporations stockholders equity was made up of $200,000 of Common Stock, $60,000 Additional Paid-in Capital and $40,000 of Retained Earnings. Trumpets identifiable assets and liabilities reflected their fair values on December 31, 2005, except for Trumpets inventory which was undervalued by $50,000 and their land which was undervalued by $20,000. Balance sheets for Manucode and Trumpet immediately after the business combination are presented in the partially completed working papers. 14 Manucode Corporation and Subsidiary Consolidated Balance Sheet Working Papers at December 31, 2005 Eliminations Manucode Trumpet ASSETS Cash Accounts receivable-net $ Credit Balance Sheet 26,000 $ 20,000 20,000 30,000 125,000 Inventories Debit 110,000 Land Plant assets net 30,000 80,000 320,000 160,000 Investment in Trumpet 279,000 Total Assets $ 800,000 $400,000 EQUITIES Current liabilities $ 110,000 $100,000 Capital stock Additional paidin capital Retained earnings TOTAL EQUITIES 400,000 100,000 60,000 190,000 $ 200,000 40,000 800,000 $400,000 Required: Complete the consolidated balance sheet working papers for Manucode Corporation and Subsidiary. 15 LO6 Exercise 8 Bower Corporation paid $5,000 for a 60% interest in Fig Inc. on January 1, 2005 when Figs stockholders equity consisted of $5,000 Capital Stock and $2,500 Retained Earnings. Figs 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 at December 31, 2006 Eliminations Bower ASSETS Current assets $ Fig Debit Balance Sheet $ 4,000 21,550 Fixed assets Investment in Fig 12,550 Credit 6,500 5,900 Total Assets $ 40,000 $10,500 EQUITIES Liabilities $ 10,000 $ 1,500 20,000 5,000 10,000 4,000 40,000 $10,500 Capital stock Retained Earnings TOTAL EQUITIES $ Required: Complete the consolidated balance sheet working Corporation and Subsidiary at December 31, 2006. 16 papers for Bower LO7&8 Exercise 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 Lizards net assets was $460,000. The fair values of Lizards identifiable net assets were equal to their book values except as indicated below. Lizard reported net income of $75,000 during $35,000 were declared and paid during the year. Inventories Buildings-net Note Payable (sold in 2005) (15-year life) (paid in 2005) $ Book Value 80,000 $ 200,000 20,000 2005; dividends of Fair Value 112,000 170,000 21,250 Required: 1. Prepare a schedule to allocate the cost/book differential to the specific identifiable assets and liabilities. 2. Determine Currawongs income from Lizard for 2005. 3. Determine the correct balance in account as of December 31, 2005. 17 the Investment in Lizard SOLUTIONS Multiple Choice Questions 1 d 2 b 3 b 4 b 5 c 6 b 7 a 8 c The parents retained earnings Purchase cost Current asset fair value Excess to non-current assets Fair value of non-current assets Allocation shortfall Equipment share of shortfall: $400,000/$1,200,000 X $120,000 = Allocation to equipment: $400,000 - $40,000 = 9 b d Birds cost = 7,000 x $30 Implied fair value of Worm ($210,000 / 70%) Less: Book value Goodwill acquired 40,000 360,000 $1,400,000 / 90% = $1,555,556. 10% of $1,555,556 = $155,556 12 $ $ c 11 $ 1,780,000 700,000 1,080,000 1,200,000 120,000 c 10 $ 13 $ ( $ 210,000 300,000 180,000 ) 120,000 d $ 14 c $ 200,000 a 15 600,000 Pardolates cost 18 Implied fair value of Arthropod ($200,000 / 60%) Less: Book value Goodwill acquired 16 c Investment cost + 80% (subsidiary income) (80%)(subsidiary dividends = $500,000 + $120,000 - $36,000 = 17 d 18 c $3,150/0.20 = $15,750 19 d $45,000/15% = $300,000 20 d 19 333,333 ( $ 300,000 ) 33,333 584,000 $ Exercise 1 Preliminary computations Fair value (purchase price) of 90% interest acquired $ January 2, 2005 Implied fair value of Clock ($38,000 / 90% Book value of Clocks net assets ( Excess cost over book value acquired = $ Allocation of excess of cost over book value: Inventory Remainder to goodwill Excess of fair value over book value $38,000 $44,706 40,000) 4,706 $ 2,000 2,706 4,706 $ Alarm Bird Corporation and Subsidiary Consolidated Balance Sheet Working Papers at January 1, 2005 Eliminations Alarm Clock Debit Credit Bird ASSETS Cash Accounts Receivable-net $ Balance Sheet $ 4,000 $72,000 75,000 Inventories Plant assetsNet Investment in Charlie 68,000 9,000 84,000 39,000 170,000 10,000 a $2,000 51,000 35,000 205,000 38,000 a Goodwill a $38,000 2,706 2,706 Total Assets $ 390,000 $58,000 $414,706 EQUITIES Payables $ 120,000 $18,000 $138,000 Capital stock Retained Earnings Minority Interest Total equities 100,000 15,000 a $15,000 100,000 170,000 25,000 a 25,000 170,000 a $ 390,000 6,706 $58,000 $414,706 44,706 Exercise 2 20 6,706 44,706 Requirement 1: Investment in Berry Co. Common stock Paid-in capital 700,000 100,000 600,000 Requirement 2: Preliminary computations Fair value (purchase price) of 90% interest acquired January $ 2, 2005 Implied fair value of Berry ($700,000 / 90% Book value of Clocks net assets ( Excess fair value over book value acquired = $ Allocation of excess of cost over book value: Inventory Other current assets Land Plant assets Remainder to goodwill Excess of fair value over book value Myna Corporation and Subsidiary Consolidated Balance Sheet Working Papers 21 $700,000 $777,778 364,000) 413,778 $ 4,000 20,000 60,000 125,000 204,778 $ 413,778 at January 1, 2005 Myna ASSETS Cash $ 25,000 Berry Eliminations Debit Credit $ 12,000 Balance Sheet $ 37,000 Inventories Other current Assets 55,000 32,000 b $ 4,000 91,000 110,000 90,000 b 20,000 220,000 Land 100,000 30,000 b 60,000 190,000 Plant assets Goodwill Investment in Berry Total Assets 660,000 250,000 b b 125,000 204,778 1,035,000 204,778 $ 1,650,000 $414,000 $1,777,778 EQUITIES Liabilities $ $ 50,000 270,000 Capital stock Additional paidin capital Retained earnings Minority Interest Total equities b a 700,000 220,000 $413,778 286,222 600,000 100,000 a 100,000 600,000 770,000 40,000 a 40,000 770,000 60,000 224,000 a 224,000 60,000 a77,778 $ 1,650,000 $414,000 Exercise 3 22 77,778 $1,777,778 Preliminary computations Requirement 1: On the consolidated balance sheet, the balance in the Capital Stock and 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. Requirement 2 (Ant Farms equity on January 1, 2005)x(90%) = ($220,000)x(90%) Original goodwill = Original acquisition cost = $ $ 198,000 39,000 237,000 Ant Farms stockholders equity = (minority interest) divided by (minority interest percentage) =($40,000/10%) $ 400,000 Requirement 4 Treecreepers book value in 90% of Ants Farm at December 31, 2005 = ($400,000 (from above)) x 90% $ Plus: goodwill (from balance sheet) Balance in Investment account at December 31, 2005 $ 360,000 39,000 399,000 Requirement 3 23 Exercise 4 Preliminary computations Fair value (purchase price) of 75% interest acquired $ on January 1, 2005 Implied fair value of Stem (($180,000 / 75%) $ Book value of Stems net assets $ Excess cost over book value acquired $ 180,000 240,000 200,000 40,000 Initial investment cost Income from Stem: (75%)($40,000)= Dividends ($20,000)(75%) = $ 180,000 30,000 -15,000 Balance in Investment in Stem at December 31,2005 $ 195,000 Monarch Corporation and Subsidiary Consolidated Balance Sheet Working Papers at December 31, 2005 Monarch ASSETS Cash Dividends Receivable Other current Assets $ 8,250 $ 35,000 Balance Sheet $ 43,250 7,500 b $ 7,500 40,000 90,000 30,000 80,000 100,000 Plant assets Investment in Stem 50,000 50,000 Land 150,000 250,000 195,000 a Goodwill Total Assets Eliminations Debit Credit Stem a $ 40,000 195,000 40,000 $ 400,750 $265,000 $503,250 EQUITIES Accounts payable $ 40,750 $ 35,000 24 $75,750 Dividends Payable 10,000 b Total equities 2,500 150,000 150,000 a 150,000 150,000 210,000 Capital stock Retained Earnings Minority Interest 7,500 70,000 a 70,000 210,000 a $ 400,750 65,000 65,000 $265,000 $503,250 267,500 267,500 Exercise 5 Requirement 1: Preliminary computations Fair value (purchase price) of 80% interest acquired $ on December 31, 2005 Implied fair value of Bird (($268,000 / 80%) $ Book value of Birds net assets $ Excess cost over book value acquired $ 268,000 335,000 335,000 0 Zoo Corporation and Subsidiary Consolidated Balance Sheet Working Papers at December 31, 2005 25 Zoo ASSETS Cash $ Bird 40,000 130,000 50,000 b Land 220,000 PP&E Investment in Bird Total Assets 660,000 EQUITIES Accounts Payable $ Bonds Payable Capital stock Additional paidin capital Retained earnings Minority Interest Total equities Balance Sheet 76,000 240,000 Accounts Receivable Inventory 110,000 Eliminations Debit Credit $ 206,000 $ 5,000 25,000 275,000 15,000 268,000 $ 1,628,000 295,000 b 80,000 200,000 b 150,000 875,000 a 268,000 $446,000 $1,801,000 440,000 468,000 $11,000 100,000 b $ 5,000 451,000 563,000 200,000 225,000 a 225,000 200,000 200,000 80,000 a 80,000 200,000 320,000 30,000 a 30,000 320,000 a $ 1,628,000 67,000 $446,000 $1,801,000 360,000 Exercise 6 Requirement 1: 26 67,000 360,000 Investment in Insect Inc. Common stock Paid-in capital 322,000 46,000 276,000 Requirement 2: Preliminary computations Fair value (purchase price) of 70% interest acquired July 1, $ 2005 Implied fair value of Insect ($322,000 / 70% Book value of Insects net assets ( Excess cost over book value acquired = $ Allocation of excess of cost over book value: Inventory Other current assets Land Plant and Equipment Liabilities Remainder to goodwill Excess of fair value over book value Magpie Corporation and Subsidiary Consolidated Balance Sheet Working Papers July 1, 2005 27 $ ( ( ( $ $322,000 $460,000 294,000) 166,000 5,000 10,000) 10,000) 60,000 5,000) 126,000 166,000 Magpie ASSETS Cash $ 25,000 Eliminations Debit Credit Insect $ 17,000 $ 110,000 40,000 b$ 10,000 140,000 Land 100,000 45,000 b 10,000 135,000 Plant assets Goodwill Investment in Insect Total Assets 660,000 $ 1,272,000 EQUITIES Liabilities $ Total equities 42,000 b 220,000 b b $ 5,000 42,000 Inventories Other current Assets Capital stock Additional paidin capital Retained Earnings Minority Interest 55,000 Balance Sheet 102,000 60,000 126,000 940,000 126,000 b a 322,000 166,000 156,000 $364,000 220,000 $ $1,485,000 70,000 b 5,000 $ 295,000 546,000 100,000 a 100,000 546,000 446,000 90,000 a 90,000 446,000 60,000 104,000 a 104,000 60,000 a 0 $ 1,272,000 138,00 $364,000 $1,485,000 $ 28 138,000 485,000 $ 485,000 Exercise 7 Preliminary computations Fair value (purchase price) of 70% interest acquired December 31, 2005 Implied fair value of Trumpet ($279,000 / 70%) Book value of Trumpets net assets Excess cost over book value acquired = Allocation of excess of cost over book value: Inventory Land Remainder to goodwill Excess of fair value over book value 29 $ ( $ $ $ $279,000 $398,571 300,000) 98,571 50,000 20,000 28,571 98,571 Manucode Corporation and Subsidiary Consolidated Balance Sheet Working Papers at December 31, 2005 Manucode ASSETS Cash $ Inventories 26,000 $ 20,000 $ 46,000 30,000 50,000 125,000 Plant assets net Investment in Trumpet 110,000 b 30,000 Land 80,000 b 320,000 $50,000 $ 130,000 160,000 480,000 a b b $ 285,000 20,000 279,000 EQUITIES Current $ liabilities Capital Stock Additional paidIn capital Retained earnings Minority Interest Total equities Balance Sheet 20,000 Receivables-net Goodwill Total Assets Eliminations Debit Credit Trumpet 180,429 98,571 28,571 28,571 800,000 $400,000 $1,019,571 110,000 $100,000 $210,000 400,000 200,000 a 200,000 400,000 100,000 60,000 a 60,000 100,000 190,000 40,000 a 40,000 190,000 a 800,000 119,571 $400,000 $1,019,571 398,571 30 119,571 398,571 Exercise 8 Preliminary computations Fair value (purchase price) of 60% interest acquired January $ 1, 2005 Implied fair value of Fig ($5,000 / 60% Book value of Figs net assets ( Excess cost over book value acquired = $ Allocation of excess of cost over book value: Remainder to goodwill Excess of fair value over book value $5,000 $8,333 7,500) 833 833 833 $ Bower Corporation and Subsidiary Consolidated Balance Sheet Working Papers at December 31, 2006 Bower ASSETS Current assets $ Eliminations Debit Credit Fig Balance Sheet $ 4,000 $16,550 21,550 Fixed assets Investment in Fig 12,550 6,500 28,050 5,900 a Goodwill a $ 5,900 $ 833 833 Total assets $ 40,000 $10,500 $45,433 EQUITIES Liabilities $ 10,000 $ 1,500 $11,500 Capital stock Retained earnings Minority Interest Total equities 20,000 5,000 a 5,000 20,000 10,000 4,000 a 4,000 10,000 a $ 40,000 3,933 $10,500 $45,433 9,833 31 3,933 9,833 Exercise 9 Preliminary computations Fair value (purchase price) of 80% interest acquired January $ 2, 2005 Implied fair value of Lizard ($500,000 / 80% Book value of Lizards net assets ( Excess cost over book value acquired = $ $500,000 $625,000 460,000) 165,000 Requirement 1 Allocation of excess of cost over book value: Inventory Buildings-net Note payable Remainder to goodwill Excess of fair value over book value $ ( ( $ Requirement 2 Currawongs share of Lizard income =(80%)x(75,000) = $ Less: Excess allocated in inventory which was sold in the current year Add: Depreciation adjustment on building = +($24,000/15 years) Add: Excess allocated to Note payable Net adjustment to investment account Currowongs share of Lizards income due to 60,000 (25,600) 1,600 1,000 $ 37,000 $ 500,000 $ 37,000 (28,000) 509,000 Requirement 3 Original cost of investment in Brazil Plus: Currawongs share of Lizards income (from Requirement 2 Less: Dividends received (80%)x(35,000) = Investment in Lizard account at December 31, 2005 32 32,000 30,000) 1,250) 164,250 165,000 ... 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