CH 05

Package Title: Test Bank Questions
Course Title: Advanced Accounting, 6e

Chapter Number: 5
Question Type: Multiple Choice
1) When the implied value exceeds the aggregate fair values of identifiable net assets, the residual difference
is accounted for as:
a) excess of implied over fair value.

b) a deferred credit.
c) difference between implied and fair value.
d) goodwill.
Answer: d
Question Title: Test Bank (Multiple Choice) Question 01

Difficulty: Easy
Learning Objective: 1 Calculate the difference between implied and book values and allocate to the
subsidiary’s assets and liabilities.
Section Reference: 5-1
2) Under which set of circumstances would it not be appropriate to assume the value the noncontrolling
shares is the same as the controlling shares?
a) The acquisition is for less than 100% of the subsidiary.

b) The fair value of the noncontrolling shares can be inferred from the value implied by the acquisition
price.
c) Active market prices for shares not obtained by the acquirer imply a different value.
d) The amount of the “control premium” cannot be determined .
Answer: c

Difficulty: Medium
Learning Objective: 4 Describe how the allocation process differs if less than 100% of the subsidiary is
acquired.
Section Reference: 5.1
3) On January 1, 2016, Lester Company purchased 70% of Stork Corporation's $5 par common stock for
$600,000. The book value of Stork net assets was $640,000 at that time. The fair value of Stork's identifiable
net assets were the same as their book value except for equipment that was $40,000 in excess of the book
value. In the January 1, 2016, consolidated balance sheet, goodwill would be reported at:
a) $152,000.
b) $177,143.
c) $80,000.
d) $0.
Answer: b

Difficulty: Hard
acquired.
4) When the value implied by the purchase price of a subsidiary is in excess of the fair value of identifiable
net assets, the workpaper entry to allocate the difference between implied and book value includes a:
a) debit to Difference Between Implied and Book Value.

b) credit to Excess of Implied over Fair Value.
c) credit to Difference Between Implied and Book Value.
d) debit to Difference Between Implied and Book Value and credit to Excess of Implied over Fair Value.
Answer: c

Difficulty: Medium
acquired.
5) If the fair value of the subsidiary's identifiable net assets exceeds both the book value and the value
implied by the purchase price, the workpaper entry to eliminate the investment account:
a) debits Excess of Fair Value over Implied Value.

b) debits Difference Between Implied and Fair Value.
c) debits Difference Between Implied and Book Value.
d) credits Difference Between Implied and Book Value.
Answer: c

Difficulty: Medium
Learning Objective: 2 Describe FASB’s position on accounting for bargain acquisitions.; 6 Prepare
workpapers for the year of acquisition and the year(s) subsequent to the acquisition, assuming that the parent
accounts for the investment alternatively using the cost, the partial equity, and the complete equity methods.
6) The entry to amortize the amount of difference between implied and book value allocated to an
unspecified intangible is recorded:
a) on the subsidiary's books.

b) on the parent's books.
c) on the consolidated statements workpaper.
d) on the parent's books and on the consolidated statements workpaper.
Answer: c

Difficulty: Medium
Learning Objective: 3 Explain how goodwill is measured at the time of the acquisition.; 4 Describe how the
allocation process differs if less than 100% of the subsidiary is acquired.
7) The excess of fair value over implied value must be allocated to reduce proportionally the fair values
initially assigned to:
a) current assets.
b) noncurrent assets.
c) both current and noncurrent assets.
d) none of these
Answer: d

Difficulty: Easy
subsidiary’s assets and liabilities.; 2 Describe FASB’s position on accounting for bargain acquisitions.
8) The SEC requires the use of push down accounting when the ownership change is greater than:
a) 50%
b) 80%
c) 90%
d) 95%
Answer: d

Difficulty: Easy
Learning Objective: 10 Understand the concept of push down accounting.
9) Under push down accounting, the workpaper entry to eliminate the investment account includes a:
a) debit to Goodwill.
b) debit to Revaluation Capital.
c) credit to Revaluation Capital.
d) debit to Revaluation Assets.
Answer: b

Difficulty: Medium
10) In a business combination accounted for as an acquisition, how should the excess of fair value of
identifiable net assets acquired over implied value be treated?
a) Amortized as a credit to income over a period not to exceed forty years.

b) Amortized as a charge to expense over a period not to exceed forty years.
c) Amortized directly to retained earnings over a period not to exceed forty years.
d) Recognized as an ordinary gain in the year of acquisition.
Answer: d

Difficulty: Easy
Learning Objective: 2 Describe FASB’s position on accounting for bargain acquisitions.
11) On November 30, 2016, Piani Incorporated purchased for cash of $25 per share all 400,000 shares of the
outstanding common stock of Surge Company. Surge 's balance sheet at November 30, 2016, showed a book
value of $8,000,000. Additionally, the fair value of Surge's property, plant, and equipment on November 30,
2016, was $1,200,000 in excess of its book value. What amount, if any, will be shown in the balance sheet
caption "Goodwill" in the November 30, 2016, consolidated balance sheet of Piani Incorporated, and its
wholly owned subsidiary, Surge Company?
a) $0.
b) $800,000.
c) $1,200,000.
d) $2,000,000.
Answer: b

Difficulty: Medium
12) Goodwill represents the excess of the implied value of an acquired company over the:
a) aggregate fair values of identifiable assets less liabilities assumed.

b) aggregate fair values of tangible assets less liabilities assumed.
c) aggregate fair values of intangible assets less liabilities assumed.
d) book value of an acquired company.
Answer: a

Difficulty: Easy
13) Simple Company, a 70%-owned subsidiary of Punter Corporation, reported net income of $240,000 and
paid dividends totaling $90,000 during Year 3. Year 3 amortization of differences between current fair
values and carrying amounts of Simple's identifiable net assets at the date of the business combination was
$45,000. The noncontrolling interest in net income of Simple for Year 3 was:
a) $58,500.
b) $13,500.
c) $27,000.
d) $72,000.
Answer: a

Difficulty: Hard
Learning Objective: 6 Prepare workpapers for the year of acquisition and the year(s) subsequent to the
acquisition, assuming that the parent accounts for the investment alternatively using
the cost, the partial equity, and the complete equity methods.
Section Reference: 5.2, 5.4, 5.6
14) Pinta Company acquired an 80% interest in Strummer Company on January 1, 2016, for $270,000 cash
when Strummer Company had common stock of $150,000 and retained earnings of $150,000. All excess
was attributable to plant assets with a 10-year life. Strummer Company made $30,000 in 2016 and paid no
dividends. Pinta Company’s separate income in 2016 was $375,000. Controlling interest in consolidated net
income for 2016 is:
a) $405,000.
b) $399,000.
c) $396,000.
d) $375,000.
Answer: c

Difficulty: Hard
15) In preparing consolidated working papers, beginning retained earnings of the parent company will be
adjusted in years subsequent to acquisition with an elimination entry whenever:
a) a noncontrolling interest exists.

b) it does not reflect the equity method.
c) the cost method has been used only.
d) the complete equity method is in use.
Answer: b

Difficulty: Medium
Section Reference: 5.2, 5.7
16) Dividends declared by a subsidiary are eliminated against dividend income recorded by the parent under
the:
a) partial equity method.

b) equity method.
c) cost method.
d) equity and partial equity methods.
Answer: c

Difficulty: Medium
Learning Objective: 5 Record the entries needed on the parent’s books to account for the investment under
the three methods: the cost, the partial equity, and the complete equity methods.
17) On January 1, 2016, Pamela Company purchased 75% of the common stock of Snicker Company.
Separate balance sheet data for the companies at the combination date are given below:
Snicker Co. Snicker Co.

Pamela Co. Book Values Fair Values
Cash $ 18,000 $155,000 $155,000
Accounts receivable 108,000 20,000 20,000
Inventory 99,000 26,000 45,000
Land 60,000 24,000 45,000
Plant assets 525,000 225,000 300,000
Acc. depreciation (180,000) (45,000)
Investment in Snicker Co 330,000
Total assets $960,000 $405,000 $565,000
Accounts payable $156,000 $105,000 $105,000

Capital stock 600,000 225,000
Retained earnings 204,000 75,000
Total liabilities & equities $960,000 $405,000
Determine below what the consolidated balance would be for each of the requested accounts on January 2,
2016.
What amount of inventory will be reported?
a) $125,000
b) $132,750
c) $139,250
d) $144,000
Answer: d

Difficulty: Easy
subsidiary’s assets and liabilities.; 5 Record the entries needed on the parent’s books to account for the
investment under the three methods: the cost, the partial equity, and the complete equity methods.; 6 Prepare

Cash $ 18,000 $155,000 $155,000
Inventory 99,000 26,000 45,000
Land 60,000 24,000 45,000
Plant assets 525,000 225,000 300,000
Total assets $960,000 $405,000 $565,000

2016.
What amount of goodwill will be reported?
a) ($20,000)
b) ($25,000)
c) $25,000
d) $0
Answer: d

Difficulty: Easy

Cash $ 18,000 $155,000 $155,000
Inventory 99,000 26,000 45,000
Land 60,000 24,000 45,000
Plant assets 525,000 225,000 300,000
Total assets $960,000 $405,000 $565,000

2016.
What is the amount of consolidated retained earnings?
a) $204,000
b) $209,250
c) $260,250
d) $279,000
Answer: a

Difficulty: Medium

Cash $ 18,000 $155,000 $155,000
Inventory 99,000 26,000 45,000
Land 60,000 24,000 45,000
Plant assets 525,000 225,000 300,000
Total assets $960,000 $405,000 $565,000

2016.
What is the amount of total assets?
a) $921,000
b) $1,185,000
c) $1,525,000
d) $1,195,000
Answer: d

Difficulty: Medium
21) Sleepy Company, a 70%-owned subsidiary of Pickle Corporation, reported net income of $600,000 and
paid dividends totaling $225,000 during Year 3. Year 3 amortization of differences between current fair
values and carrying amounts of Sleepy's identifiable net assets at the date of the business combination was
$112,500. The noncontrolling interest in consolidated net income of Sleepy for Year 3 was:
a) $146,250.
b) $33,750.
c) $67,500.
d) $180,000.
Answer: a

Difficulty: Hard
acquired.; 5 Record the entries needed on the parent’s books to account for the investment under the three
methods: the cost, the partial equity, and the complete equity methods.; 6 Prepare workpapers for the year of
acquisition and the year(s) subsequent to the acquisition, assuming that the parent accounts for the
investment alternatively using the cost, the partial equity, and the complete equity methods.
Section Reference: 5.5, 5.6
22) Primer Company acquired an 80% interest in SealCoat Company on January 1, 2016, for $450,000 cash
when SealCoat Company had common stock of $250,000 and retained earnings of $250,000. All excess was
attributable to plant assets with a 10-year life. SealCoat Company made $50,000 in 2016 and paid no
dividends. Primer Company’s separate income in 2016 was $625,000. The controlling interest in
consolidated net income for 2016 is:
a) $675,000.
b) $665,000.
c) $660,000.
d) $625,000.
Answer: c

Difficulty: Medium
acquisition, assuming that the parent accounts for the investment alternatively using the cost, the partial
equity, and the complete equity methods.
Section Reference: 5.2, 5.4, 5.6, 5.8
23) On January 1, 2016, Poole Company purchased 75% of the common stock of Swimmer Company.
Swimmer Co Swimmer Co.

Poole Co. Book Values Fair Values
Cash $ 24,000 $206,000 $206,000
Inventory 132,000 38,000 60,000
Land 78,000 32,000 60,000
Plant assets 700,000 300,000 350,000
Investment in Swimmer Co. 440,000
Total assets $1,278,000 $542,000 $702,000

Total liabilities & equities $1,278,000 $542,000
2016.
What amount of inventory will be reported?
a) $170,000.
b) $177,000.
c) $186,500.
d) $192,000.
Answer: d

Difficulty: Easy

Cash $ 24,000 $206,000 $206,000
Inventory 132,000 38,000 60,000
Land 78,000 32,000 60,000
Plant assets 700,000 300,000 350,000
Total assets $1,278,000 $542,000 $702,000

2016.
What amount of goodwill will be reported?
a) $26,667.
b) $20,000.
c) $42,000.
d) $86,667.
Answer: a

Difficulty: Easy

Cash $ 24,000 $206,000 $206,000
Inventory 132,000 38,000 60,000
Land 78,000 32,000 60,000
Plant assets 700,000 300,000 350,000
Total assets $1,278,000 $542,000 $702,000

2016.
What is the amount of total assets?
a) $1,626,667.
b) $1,566,667
c) $1,980,000.
d) $2,006,667.
Answer: b

Difficulty: Easy
Question Type: Essay
26) When the value implied by the acquisition price is below the fair value of the identifiable net assets the
residual amount will be negative (bargain acquisition). Explain the difference in accounting for bargain
acquisition between past accounting and proposed accounting requirements.
Answer: In the past, when a bargain acquisition occurred some of the acquired assets were reduced below
their fair values. Long-lived assets were recorded at fair market value less an adjustment for the bargain. In
addition, an extraordinary gain was recorded in certain instances.
Under proposed accounting requirements, no assets are reduced below fair value. Instead the credit
(negative) balance will be shown as an ordinary gain in the year of acquisition.
Question Title: Test Bank (Essay) Question 26

Difficulty: Medium
Learning Objective: 2 Describe FASB’s position on accounting for bargain acquisitions.
27) Push down accounting is an accounting method required for the subsidiary in some instances such as the
banking industry. Briefly explain the concept of push down accounting.
Answer: Push down accounting is the establishment of a new accounting and reporting basis for a subsidiary
company in its separate financial statements based on the purchase price paid by the Parent Company to
acquire a controlling interest in the outstanding voting stock of the subsidiary company. The valuation
implied by the price of the stock to the Parent Company is “pushed down” to the subsidiary and used to
restate its assets and liabilities in its separate financial statements. Under push down accounting, the Parent
Company’s cost of acquiring a subsidiary is used to establish a new accounting basis for the assets and
liabilities of the subsidiary in the subsidiary’s separate financial statements.
Question Title: Test Bank (Essay) Question 27

Difficulty: Medium
28) Phillips Company purchased a 90% interest in Standards Corporation for $2,340,000 on January 1,
2016. Standards Corporation had $1,650,000 of common stock and $1,050,000 of retained earnings on that
date.
The following values were determined for Standards Corporation on the date of purchase:
Book Value Fair Value
Inventory $240,000 $300,000
Land 2,400,000 2,700,000
Equipment 1,620,000 1,800,000
Required:
A. Prepare a computation and allocation schedule for the difference between the implied and book value in
the consolidated statements workpaper.
B. Prepare the January 1, 2016, workpaper entries to eliminate the investment account and allocate the
difference between implied and book value.
Answer:
A. Allocation of Difference Between Implied and Book Value
Non-
Parent Controlling Entire
Share Share Value
Purchase price and implied value $2,340,000 260,000 2,600,000
Less: Book value of equity acquired 2,430,000 270,000 2,700,000
Difference between implied and book value (90,000) (10,000) (100,000)
Inventory (54,000) (6,000) (60,000)
Land (270,000) (30,000) (300,000)
Equipment (162,000) (18,000) (180,000)
Balance (excess of FV over implied value) (576,000) (64,000) (640,000)
Gain 576,000
Increase Noncontrolling interest to fair value of assets 64,000
Total allocated bargain 640,000
Balance -0- -0- -0-
B. Common Stock – Standards 1,650,000

Beginning R/E – Standards 1,050,000
Investment in Standards Corp. 2,340,000
Difference Between Implied and Book Value 100,000
Noncontrolling Interest in Equity 260,000

Inventory 60,000
Land 300,000
Equipment 180,000
Gain on Acquisition 576,000
Noncontrolling Interest 64,000
Question Title: Test Bank (Problem) Question 5-1

Difficulty: Hard
29) Pullman Corporation acquired a 90% interest in Sleeter Company for $6,500,000 on January 1 2016. At
that time Sleeter Company had common stock of $4,500,000 and retained earnings of $1,800,000. The
balance sheet information available for Sleeter Company on January 1, 2016, showed the following:

Inventory (FIFO) $1,300,000 $1,500,000
Equipment (net) 1,500,000 1,900,000
Land 3,000,000 3,000,000
The equipment had a remaining useful life of ten years. Sleeter Company reported $240,000 of net income
in 2016 and declared $60,000 of dividends during the year.
Required:
Prepare the workpaper entries assuming the cost method is used, to eliminate dividends, eliminate the
investment account, and to allocate and depreciate the difference between implied and book value for 2016.
Answer:
Dividend Income (.90 × 60,000) 54,000
Dividends Declared 54,000
Beginning R/E – Sleeter 1,800,000

Common Stock – Sleeter 4,500,000
Difference Between Implied and Book Value 922,222*
Investment in Sleeter Company 6,500,000
*$6,500,000/.9 - $1,800,000 - $4,500,000 = $922,222
Allocated to: $922,222
Inventory (200,000)
Equipment (400,000)
Goodwill $ 322,222
Cost of Goods Sold 200,000

Depreciation Expense 400,000/10 40,000
Equipment 400,000– 40,000 360,000
Goodwill 322,222

Difficulty: Hard
subsidiary’s assets and liabilities.; 4 Describe how the allocation process differs if less than 100% of the
subsidiary is acquired; 5 Record the entries needed on the parent’s books to account for the investment
under the three methods: the cost, the partial equity, and the complete equity methods.
30) On January 1, 2016, Preston Corporation acquired an 80% interest in Spiegel Company for $2,400,000.
At that time Spiegel Company had common stock of $1,800,000 and retained earnings of $800,000. The
book values of Spiegel Company's assets and liabilities were equal to their fair values except for land and
bonds payable. The land's fair value was $120,000 and its book value was $100,000. The outstanding bonds
were issued on January 1, 2005, at 9% and mature on January 1, 2018. The bond principal is $600,000 and
the current yield rate on similar bonds is 8%.
Required:
Prepare the workpaper entries necessary on December 31, 2016, to allocate, amortize, and depreciate the
difference between implied and book value.
Present Value
Present value of 1 of Annuity of 1
9%, 5 periods .64993 3.88965
8%, 5 periods .68058 3.99271
Answer:
Non-
Share Share Value
Difference between implied and book value 320,000 80,000 400,000
Land ($120,000 – $100,000) (16,000) (4,000) (20,000)
Premium on Bonds Payable (623,954*– 600,000) 19,163 4,791 23,954
Balance 323,163 80,791 403,954
Goodwill (323,163) (80,791) (403,954)
Balance -0- -0- -0-
Present Value of 9% Bonds Payable discounted at 8% for 5 periods:

$600,000 × .68058 = $408,348
54,000 × 3.99271 = 215,606
$623,954*
Land 20,000
Goodwill 403,954
Interest Expense 4,084**
Unamortized Premium on Bonds Payable 19,870
(23,954 – 4,084)
**[54,000 – (623,954 × .08)]

Alternative Entries
Land 20,000
Goodwill 403,954
Premium on Bonds Payable 23,954
Premium on Bonds Payable 4,084

Interest Expense 4,084

Difficulty: Hard
under the three methods: the cost, the partial equity, and the complete equity methods.; 7 Understand the
allocation of the difference between implied and book values to long-term debt components.
31) Pennington Corporation purchased 80% of the voting common stock of Stafford Corporation for
$3,200,000 cash on January 1, 2016. On this date the book values and fair values of Stafford Corporation's
assets and liabilities were as follows:
Cash $ 70,000 $ 70,000
Receivables 240,000 240,000
Inventories 600,000 700,000
Other Current Assets 340,000 405,000
Land 600,000 720,000
Buildings – net 1,050,000 1,920,000
Equipment – net 850,000 750,000
$3,750,000 $4,805,000
Accounts Payable $ 250,000 $250,000

Other Liabilities 740,000 670,000
Capital Stock 2,400,000
Retained Earnings 360,000
$3,750,000
Required:
Prepare a schedule showing how the difference between Stafford Corporation's implied value and the book
value of the net assets acquired should be allocated.
Answer:
Non-
Share Share Value
Difference between implied and book value 992,000 248,000 1,240,000
Inventories (80,000) (20,000) (100,000)
Other Current assets (52,000) (13,000) (65,000)
Land (96,000) (24,000) (120,000)
Buildings (net) (696,000) (174,000) (870,000)
Other liabilities (56,000) (14,000) (70,000) *
Equipment (net) 80,000 20,000 100,000
Balance 92,000 23,000 115,000
Goodwill (92,000) (23,000) (115,000)
Balance -0- -0- -0-
*A debit to Other Liabilities is a reduction of their carrying value.

Difficulty: Hard
under the three methods: the cost, the partial equity, and the complete equity methods.; 8 Explain how to
allocate the difference between implied and book values when some assets have fair values below book
values.
32) Plain Corporation acquired a 75% interest in Swampy Company on January 1, 2016, for $2,000,000.
The book value and fair value of the assets and liabilities of Swampy Company on that date were as follows:
Current Assets $ 600,000 $ 600,000
Property & Equipment (net) 1,400,000 1,800,000
Land 700,000 900,000
Deferred Charge 300,000 300,000
Total Assets $3,000,000 $3,600,000
Less Liabilities 600,000 600,000
Net Assets $2,400,000 $3,000,000
The property and equipment had a remaining life of 6 years on January 1, 2016, and the deferred charge was
being amortized over a period of 5 years from that date. Common stock was $1,500,000 and retained
earnings was $900,000 on January 1, 2016. Plain Company records its investment in Swampy Company
using the cost method.
Required:
Prepare, in general journal form, the December 31, 2016, workpaper entries necessary to:
A. Eliminate the investment account.

B. Allocate and amortize the difference between implied and book value.
Answer:
A. Beginning Retained Earnings (Swampy) 900,000
Capital Stock (Swampy) 1,500,000
Investment in Swampy 2,000,000
B. Depreciation Expense ($400,000/6) 66,667

Equipment (net) ($400,000 – $66,667) 333,333
Land ($900,000 - $700,000) 200,000
Gain on Acquisition ($200,000+$400,000-$266,667) × 0.75 250,000
Noncontrolling Interest ($200,000+$400,000-$266,667) × 0.25 83,333

Difficulty: Medium
33) On January 1, 2016, Pilsner Company acquired an 80% interest in Smalley Company for $3,600,000. On
that date, Smalley Company had retained earnings of $800,000 and common stock of $2,800,000. The book
values of assets and liabilities were equal to fair values except for the following:

Inventory $ 50,000 $ 85,000
Equipment (net) 540,000 720,000
Land 300,000 660,000
The equipment had an estimated remaining useful life of 8 years. One-half of the inventory was sold in 2016
and the remaining half was sold in 2017. Smalley Company reported net income of $240,000 in 2016 and
$300,000 in 2017. No dividends were declared or paid in either year. Pilsner Company uses the cost method
to record its investment in Smalley Company.
Required:
Prepare, in general journal form, the workpaper eliminating entries necessary in the consolidated statements
workpaper for the year ending December 31, 2017.
Answer:
Calculations
Cost of Investment and Implied Value ($3,600,000/0.8) $4,500,000
Book Value of Equity Acquired 3,600,000
Difference between Implied and Book Value $ 900,000
Annual Adjustment in
Determining Consolidated
Net Income
Difference Between
Implied and Book Value 2016 2017
Land $360,000 --- ---
Equipment (net) 180,000 $22,500 $22,500
Inventory 35,000 17,500 17,500
Goodwill 325,000 --- ---
$900,000 $40,000 $40,000
(1) Investment in Smalley 192,000

Beginning Retained Earnings (Pilsner) 192,000
(2) Beginning Retained Earnings (Smalley) 1,040,000

Difference between Implied and Book Value 900,000
Common Stock (Smalley) 2,800,000
Investment in Smalley ($3,600,000 +
$192,000) 3,792,000
(3) Beginning Retained Earnings – PilsnerSmalley 32,000

Depreciation Expense 22,500
Cost of Goods Sold (Beginning Inventory) 17,500
Goodwill 325,000
Land 360,000
Equipment (net)
($180,000 – $22,500 – $22,500) 135,000
Difference between Implied and Book Value 900,000

Difficulty: Hard
subsidiary’s assets and liabilities.; 3 Explain how goodwill is measured at the time of the acquisition.; 4
Describe how the allocation process differs if less than 100% of the subsidiary is acquired; 5 Record the
entries needed on the parent’s books to account for the investment under the three methods: the cost, the
partial equity, and the complete equity methods.
34) Pulman Company acquired 90% of the stock of Spectrum Company for $6,300,000 on January 1, 2016.
On this date, the fair value of the assets and liabilities of Spectrum Company was equal to their book value
except for the inventory and equipment accounts. The inventory had a fair value of $2,300,000 and a book
value of $1,900,000. The equipment had a fair value of $3,300,000 and a book value of $2,800,000.
The balances in Spectrum Company's capital stock and retained earnings accounts on the date of acquisition
were $3,700,000 and $1,900,000, respectively.
Required:
In general journal form, prepare the entries on Spectrum Company's books to record the effect of the pushed
down values implied by the acquisition of its stock by Pulman Company assuming that:
A values are allocated on the basis of the fair value of Spectrum Company as a whole imputed from the
transaction.
B values are allocated on the basis of the proportional interest acquired by Pulman Company.
Answer:
A Net Assets
Imputed Value ($6,300,000/.9) $7,000,000
Recorded Value ($1,900,000 + $3,700,000) 5,600,000
Unrecorded Values $1,400,000
Allocate to identifiable assets
Inventory ($2,300,000 – $1,900,000) $400,000
Equipment ($3,300,000 – $2,800,000) 500,000 900,000
Goodwill $ 500,000
Inventory 400,000
Equipment 500,000
Goodwill 500,000
Revaluation Capital 1,400,000
B
Unrecorded Value Imputed by Pulman Company's
Proportionate Interest (.9 × $1,400,000) $1,260,000
Allocate to
Inventory ($2,300,000 – $1,900,000) × .9 $360,000
Equipment ($3,300,000 – $2,800,000) × .9 450,000 810,000
Goodwill $ 450,000
Inventory 360,000
Equipment 450,000
Goodwill 450,000
Revaluation Capital 1,260,000

Difficulty: Hard
35) Pruin Corporation acquired all of the voting stock of Satto Corporation on January 1, 2016, for $210,000
when Satto had common stock of $150,000 and retained earnings of $24,000. The excess of implied over
book value was allocated $9,000 to inventories that were sold in 2016, $12,000 to equipment with a 4-year
remaining useful life under the straight-line method, and the remainder to goodwill.
Financial statements for Pruitt and Satto Corporations at the end of the fiscal year ended December 31, 2017
(two years after acquisition), appear in the first two columns of the partially completed consolidated
statements workpaper. Pruin Corp. has accounted for its investment in Satto using the partial equity method
of accounting.
Required:
Complete the consolidated statements workpaper for Pruin Corporation and Satto Corporation for December
31, 2017.
Pruin Corporation and Satto Corporation
Consolidated Statements Workpaper
at December 31, 2017
Eliminations
Pruin Satto Consolidated
Debit Credit
Corp. Corp. Balances
INCOME STATEMENT
Sales 618,000 180,000
Equity from Subsidiary
Income 36,000
Cost of Sales (450,000) (90,000)
(114,000
Other Expenses ) (54,000)
Net Income to Ret. Earn. 90,000 36,000
Pruin Retained Earnings
1/1 72,000
Soto Retained Earnings
1/1 3,000
Add: Net Income 90,000 36,000
Less: Dividends (60,000) (12,000)
Retained Earnings 12/31 102,000 54,000
BALANCE SHEET
Cash 42,000 21,000
Inventories 63,000 45,000
Land 33,000 18,000
Equipment and
Buildings-net 192,000 165,000
Investment in Satto Corp. 240,000
Total Assets 570,000 249,000
LIA & EQUITIES
Liabilities 168,000 45,000
Common Stock 300,000 150,000
Retained Earnings 102,000 54,000
Total Equities 570,000 249,000
Answer:
Pruin Corporation and Satto Corporation
Consolidated Statements Workpaper
at December 31, 2017
Eliminations
Pruin Satto Consolidated
Debit Credit
Corp. Corp. Balances
INCOME STATEMENT
Sales 618,000 180,000 798,000
Equity from Subsidiary
Income 36,000 (a) 36,000
Cost of Sales (450,000) (90,000) (540,000)
Other Expenses (114,000) (54,000) (c) 3,000 (171,000)
Net Income to Ret. Earn. 90,000 36,000 39,000 87,000
Pruin Retained Earnings (b) 9,000
1/1 72,000 (c) 3,000 60,000
Satto Retained Earnings
1/1 30,000 (b) 30,000
Add: Net Income 90,000 36,000 39,000 87,000
Less: Dividends (60,000) (12,000) (a) 12,000 (60,000)
Retained Earnings 12/31 102,000 54,000 81,000 12,000 87,000
BALANCE SHEET
Cash 42,000 21,000 63,000
Inventories 63,000 45,000 108,000
Land 33,000 18,000 51,000
Equipment and
Buildings-net 192,000 165,000 (b) 12,000 (c) 6,000 363,000
(a) 24,000
Investment in Satto Corp. 240,000 (b) 216,000
Goodwill (b) 15,000 15,000
Total Assets 570,000 249,000 600,000
LIA & EQUITIES
Liabilities 168,000 45,000 213,000
Common Stock 300,000 150,000 (b) 150,000 300,000
Retained Earnings 102,000 54,000 81,000 12,000 87,000
Total Equities 570,000 249,000 258,000 258,000 600,000
Difficulty: Hard
partial equity, and the complete equity methods.; 6 Prepare workpapers for the year of acquisition and the
year(s) subsequent to the acquisition, assuming that the parent accounts for the investment alternatively
using the cost, the partial equity, and the complete equity methods.
36) On January 1, 2016, Phoenix Company acquired 80% of the outstanding capital stock of Skyler
Company for $570,000. On that date, the capital stock of Skyler Company was $150,000 and its retained
earnings were $450,000.
On the date of acquisition, the assets of Skyler Company had the following values:
Fair Market
Book Value Value
Inventories.......................................................................$ 90,000 $165,000
Plant and equipment.............................................................150,000 180,000
All other assets and liabilities had book values approximately equal to their respective fair market values.
The plant and equipment had a remaining useful life of 10 years from January 1, 2016, and Skyler Company
uses the FIFO inventory cost flow assumption.
Skyler Company earned $180,000 in 2016 and paid dividends in that year of $90,000.
Phoenix Company uses the complete equity method to account for its investment in S Company.
Required:
A. Prepare a computation and allocation schedule.

B. Prepare the balance sheet elimination entries as of December 31, 2016.
C. Compute the amount of equity in subsidiary income recorded on the books of Phoenix Company on
December 31, 2016.
D. Compute the balance in the investment account on December 31, 2016.
Answer:
A.
Phoenix Non- Entire
Share Controlling Value
Share
Purchase price and implied value $570,000 142,500 712,500
Less: Book value of equity acquired 480,000 120,000 600,000
Difference between implied and book value 90,000 22,500 112,500
Inventories (60,000) (15,000) (75,000)
Equipment (net) (24,000) (6,000) (30,000)
Balance 6,000 1,500 7,500
Goodwill (6,000) (1,500) (7,500)
Balance -0- -0- -0-
B. Common Stock – Skyler 150,000

Retained Earnings – Skyler 450,000
Investment in Skyler Company 570,000
Cost of Goods Sold 75,000

Depreciation Expense ($30,000/10 years) 3,000
Plant and Equipment ($30,000 – $3,000) 27,000
Goodwill 7,500
C. Skyler Company net income $180,000 × 80% = $144,000

Less: Inventory sold (60,000)
Plant & equipment depreciation ( 2,400)
Equity in subsidiary income $81,600
D. Investment balance 1/1/10 $570,000

+ Equity in subsidiary income 81,600
– Dividends ($90,000 × 80%) (72,000)
Investment balance 12/31/10 $579,600

Difficulty: Hard
partial equity, and the complete equity methods.; 6 Prepare workpapers for the year of acquisition and the
year(s) subsequent to the acquisition, assuming that the parent accounts for the investment alternatively
using the cost, the partial equity, and the complete equity methods.

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Package Title: Test Bank Questions

Course Title: Advanced Accounting, 6e

Question Type: Multiple Choice

a) excess of implied over fair value.

Question Title: Test Bank (Multiple Choice) Question 01

a) The acquisition is for less than 100% of the subsidiary.

Question Title: Test Bank (Multiple Choice) Question 02

Question Title: Test Bank (Multiple Choice) Question 03

a) debit to Difference Between Implied and Book Value.

Question Title: Test Bank (Multiple Choice) Question 04

a) debits Excess of Fair Value over Implied Value.

Question Title: Test Bank (Multiple Choice) Question 05

a) on the subsidiary's books.

Question Title: Test Bank (Multiple Choice) Question 06

Question Title: Test Bank (Multiple Choice) Question 07

Question Title: Test Bank (Multiple Choice) Question 08

Question Title: Test Bank (Multiple Choice) Question 09

a) Amortized as a credit to income over a period not to exceed forty years.

Question Title: Test Bank (Multiple Choice) Question 10

Question Title: Test Bank (Multiple Choice) Question 11

a) aggregate fair values of identifiable assets less liabilities assumed.

Question Title: Test Bank (Multiple Choice) Question 12

Question Title: Test Bank (Multiple Choice) Question 13

Question Title: Test Bank (Multiple Choice) Question 14

a) a noncontrolling interest exists.

Question Title: Test Bank (Multiple Choice) Question 15

a) partial equity method.

Question Title: Test Bank (Multiple Choice) Question 16

Snicker Co. Snicker Co.

Accounts payable $156,000 $105,000 $105,000

What amount of inventory will be reported?

Question Title: Test Bank (Multiple Choice) Question 17

Snicker Co. Snicker Co.

Accounts payable $156,000 $105,000 $105,000

What amount of goodwill will be reported?

Question Title: Test Bank (Multiple Choice) Question 18

Snicker Co. Snicker Co.

Accounts payable $156,000 $105,000 $105,000

What is the amount of consolidated retained earnings?

Question Title: Test Bank (Multiple Choice) Question 19

Snicker Co. Snicker Co.

Accounts payable $156,000 $105,000 $105,000

What is the amount of total assets?

Question Title: Test Bank (Multiple Choice) Question 20

Question Title: Test Bank (Multiple Choice) Question 21

Question Title: Test Bank (Multiple Choice) Question 22

Swimmer Co Swimmer Co.

Accounts payable $206,000 $142,000 $142,000

What amount of inventory will be reported?

Question Title: Test Bank (Multiple Choice) Question 23

Swimmer Co Swimmer Co.

Accounts payable $206,000 $142,000 $142,000

Question Title: Test Bank (Multiple Choice) Question 24

Swimmer Co Swimmer Co.

Accounts payable $206,000 $142,000 $142,000

What is the amount of total assets?

Question Title: Test Bank (Multiple Choice) Question 25