Chapter 3-solution class - Chapter 3 Consolidations...

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Chapter 3 Consolidations – Subsequent to the Date of Acquisition Multiple Choice Questions Items 1 through 4 are based on the following information. On January 1, 2010, Parkway Corporation acquired all of the outstanding common stock of Shaw Company for $3,650,000 cash. On that date, Shaw’s net assets had a book value of $2,800,000. Equipment with a 10- year life was undervalued by $260,000 in Shaw’s financial records. Goodwill resulting from this combination equals $590,000. Shaw reported net income of $620,000 in 2010, $700,000 in 2011, and $630,000 in 2012. Dividends of $300,000 were declared and paid in each of the three years. Select account balances as of December 31, 2012 for the two companies are: Parkway Shaw Revenues 9,600,000 $ 2,630,000 $ Expenses 9,150,000 2,000,000 Equipment (net) 800,000 680,000 Retained Earnings, 1/1/12 720,000 182,000 Dividends Paid 800,000 300,000 1. For each of the three methods discussed in the chapter, what should be the Investment in Shaw Company account balance in the records of Parkway Corporation at December 31, 2012? Partial Initial Equity Equity Value Method Method Method A. $4,622,000 $3,650,000 $4,700,000 B. $4,318,000 $4,370,000 $3,650,000 C. $4,622,000 $4,700,000 $3,650,000 D. $4,700,000 $4,700,000 $3,650,000 E. $4,648,000 $4,700,000 $2,750,000 Study Guide – Chapter 3 41
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1. C Allocation of the fair value of consideration transferred as of January 1, 2010: Consideration transferred 3,650,000 BV of Shaw 2,800,000 Excess of fair value over book value 850,000 years amort. Equipment 260,000 10 26,000 Goodwill 590,000 - Annual Amortization Expense 26,000 Equity method: Consideration 3,650,000 300,000 2010 Dividend NI, 2010 620,000 300,000 2011 Dividend NI, 2011 700,000 300,000 2012 Dividend NI, 2012 630,000 26,000 2010 Amortization 26,000 2011 Amortization 26,000 2012 Amortization 4,622,000 Investment in Shaw Partial equity method: Consideration 3,650,000 300,000 2010 Dividend NI, 2010 620,000 300,000 2011 Dividend NI, 2011 700,000 300,000 2012 Dividend NI, 2012 630,000 4,700,000 Investment in Shaw Initial value method: No entries are made to reflect the income earned, amortization, or dividends received. Therefore, the investment account remains at its original value. Investment in Shaw Company — 12/31/2012 $3,650,000 42 Advanced Accounting – 10/e
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2. What is consolidated net income for 2012 if the parent company uses the partial equity method? 2. A Consolidated net income: Parkway Shaw Consolidated Net Income Revenues 9,600,000 $ + 2,630,000 $ = 12,230,000 $ Expenses 9,150,000 + 2,000,000 = (11,150,000) Amortization Exp. (26,000) 1,054,000 $ Study Guide – Chapter 3 43
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3. What is consolidated retained earnings at January 1, 2012 if the parent company is using the equity method? 3. E In a consolidation, the subsidiary’s earnings prior to the date of acquisition are not reflected in the consolidated totals. Consolidation Entry S eliminates all of the subsidiary’s retained earnings 44 Advanced Accounting – 10/e
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as of the beginning of the period (which represents the past net earnings of the company). Therefore, under the equity method, Parkway’s January 1, 2012 retained earnings balance of $720,000 also represents consolidated retained earnings. Study Guide – Chapter 3 45
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