Ch02 - CHAPTER 2 UNDERSTANDING THE ISSUES 1 a Johnson has a passive level of ownership and in future periods will record dividend in come of only

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Unformatted text preview: CHAPTER 2 UNDERSTANDING THE ISSUES 1. a. Johnson has a passive level of ownership and in future periods will record dividend in- come of only 10% of Bickler’s declared di- vidends. b. Johnson has an influential level of owner- ship and in future periods will record invest- ment income of 30% of Bickler’s net in- come. c. Johnson has a controlling level of owner- ship and in future periods will add 100% of Bickler’s net income to its own net income. Bickler’s nominal account balances will be added to Johnson’s nominal account bal- ances, which results in consolidated net in- come. d. Johnson has a controlling level of owner- ship and in future periods will add 80% of Bickler’s net income to its own net income. Bickler’s nominal account balances will be added to Johnson’s nominal account bal- ances. This will result in consolidated net income with a distribution to the non-con- trolling interest equal to 20% of Bickler’s in- come. 2. Corporation: The parent must have the right to appoint or elect a majority of the board members. Aside from majority ownership, the parent could gain control by holding securities that can be converted into common stock. Also, if the parent holds a large noncontrolling interest that is three times larger than any other owner or group, the parent is deemed to have control. Finally, the corporate charter, bylaws, or some other agreement may grant control to the parent. Partnership: Two things must be true: (1) The parent is the only general partner in a limited part- nership or has the unilateral right to assume this role. (2) No other partner or group of partners has the power to dissolve the partnership or remove the general partner. 3. The elimination process serves to make the consolidated financial statements appear as though the parent had purchased the net assets of the sub- sidiary. The investment account and the subsidiary equity accounts are eliminated and replaced by the subsidiary’s net assets. 4. a. Net Assets – marked up $200,000 ($600,000 – $400,000) Goodwill – $300,000 ($900,000 – $600,000) b. Net Assets – marked up $160,000 [($600,000 – $400,000) × 80%] Goodwill – $240,000 [$720,000 – (80% × $600,000)] 5. Zone Analysis Group Total Cumulative Total Priority $ 50,000 $ 50,000 Nonpriority 800,000 850,000 a. $1,000,000 – $350,000 = $650,000 excess Current Assets................................................... $ 50,000 Fixed assets....................................................... 450,000 Goodwill............................................................. 150,000 $650,000 b. $500,000 – $350,000 = $150,000 excess Current Assets.......................................................... $ 50,000 Fixed assets............................................................. 100,000 $150,000 2–1 Ch. 2—Understanding the Issues 5. (Concluded) c. $30,000 – $350,000 = ($320,000) shortage Current Assets................................................... $ 50,000 Fixed Assets.......................................................Fixed Assets....
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This note was uploaded on 04/07/2008 for the course ACCT. 3533 taught by Professor Jahanian during the Spring '08 term at Temple.

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Ch02 - CHAPTER 2 UNDERSTANDING THE ISSUES 1 a Johnson has a passive level of ownership and in future periods will record dividend in come of only

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