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Chapter 4-Solution

# Chapter 4-Solution - Chapter 4 Consolidated Financial...

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Chapter 4 Consolidated Financial Statement and Outside Ownership Multiple Choice Questions Questions 1 through 5 are based on the following information. On January 1, 2012, Cobb Enterprises acquired 80% of Bob’s Bricks Inc.’s outstanding common shares. The acquisition price was considered proportionate to Bob Brick’s total fair value. In acquiring this interest, Cobb paid a total of \$3,000,000. Bob’s Bricks’ net assets had a book value of \$2,600,000 at the time. A building with a ten-year life and a book value of \$200,000 was worth \$350,000. Any other excess amount was attributed to goodwill. Cobb reports net income for 2012 of \$700,000 (without regard for its ownership in Bob’s Bricks), while Bob’s Bricks has \$350,000 in earnings. 1. On a consolidated balance sheet as of 12/31/2012, what is the amount of goodwill? A. \$1,030,000 B. \$1,000,000 C. \$1,550,000 D. \$ 800,000 E. \$1,150,000 1. B Book value of Bob’s Bricks = \$2,600,000 Fair value of Bob’s Bricks’ net assets* = \$2,750,000 Fair value of Bob’s Bricks company (\$3,000,000 ÷ 80%) = \$3,750,000 *includes the adjustment for the buildings. Study Guide – Chapter 4 67

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Fair Value of Bob's Bricks 3,750,000 \$ BV of Bob Bricks' net assets 2,600,000 Difference to be allocated 1,150,000 Allocated to Buildings 150,000 ÷ 10 = 15,000 Goodwill 1,000,000 \$ Total Amortization Expense 15,000 2. What is the amount of consolidated net income for the year ended 12/31/2012? 68 Advanced Accounting – 10/e
2. E Basic information derived from this item and the above solution follows: Cobb Enterprises Net Income 700,000 \$ Bob's Bricks Inc. Net Income 350,000 Amortization Expense (15,000) Consolidated Net Income 1,035,000 3. What is the amount of consolidated net income attributable to the controlling interest for the year ended 12/31/2012? 3. D Study Guide – Chapter 4 69

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4. What value should be attributed to the building in a consolidated balance sheet at the date of the business combination? 4 . E 70 Advanced Accounting – 10/e
Book value of building \$200,000 Allocation based on FMV 150,000 Consolidated Value \$350,000 5. What value should be attributed to the building in a consolidated balance sheet as of 12/31/2012? A. \$335,000 B. \$200,000 C. \$310,000 D. \$320,000 E. \$350,000 Study Guide – Chapter 4 71

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5. A \$335,000 – Initial consolidated value of \$350,000 less 1 year amortization of \$15,000. Items 6 and 7 are based on the following information: On January 1, 2008, Ashley Inc. acquires 60% of Mask Co.’s outstanding common stock by issuing common stock with a market value of \$180,000. Mask reported common stock on that date of \$150,000 with retained earnings of \$80,000. Equipment, which had a five-year remaining life, was undervalued in Mask’s financial records by \$20,000. Previously unrecorded franchise agreements valued at \$50,000 are to be amortized over 10 years. During 2008, Mask earns income of \$90,000 and pays cash dividends of \$30,000.
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