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C2 – 1: Choice of Accounting MethodSlanted Building Supplies purchased 32 percent of the voting shares of Flat Flooring Company in March 20X3. On December 31, 20X3, the officers of Slanted Building Supplies indicated they needed advice on whether to use the equity method or cost method in reporting their ownership in Flat Flooring.Requireda. What factors should be considered in determining whether equity-method reporting is appropriate?b. Which of the two methods is likely to show the larger reported contribution to Slanted’s earnings in 20X4? Explain.c. Why might the use of the equity method become more appropriate as the percentage of ownership increases?E2 – 1 Use of Cost and equity MethodsMultiple-Choice Questions on Use of Cost and Equity Methods [AICPA Adapted]Select the correct answer for each of the following questions.1. Peel Company received a cash dividend from a common stock investment. Should Peel report an increase in the investment account if it uses the cost method or equity method of accounting?Cost Equitya. No Nob. Yes Yesc. Yes Nod. No Yes2. In 20X0, Neil Company held the following investments in common stock:? 25,000 shares of B&K Inc.’s 100,000 outstanding shares. Neil’s level of ownership gives it the ability to exercise significant influence over the financial and operating policies of B&K? 6,000 shares of Amal Corporation’s 309,000 outstanding shares.During 20X0, Neil received the following distributions from its common stock investments:November 6 $30,000 cash dividend from B&KNovember 11 $1,500 cash dividend from AmalDecember 26 3 percent common stock dividend from AmalThe closing price of this stock was $115 per share.What amount of dividend revenue should Neil report for 20X0?a. $1,500.b. $4,200.c. $31,500.d. $34,200.3. What is the most appropriate basis for recording the acquisition of 40 percent of the stock in another company if the acquisition was a noncash transaction?a. At the book value of the consideration given.b. At the par value of the stock acquired.c. At the book value of the stock acquired.d. At the fair value of the consideration given.4. An investor uses the equity method to account for investments in common stock. The purchase price implies a fair value of the investee’s depreciable assets in excess of the investee’s net asset carrying values. The investor’s amortization of the excess:a. Decreases the investment account.b. Decreases the goodwill account.c. Increases the investment revenue account.d. Does not affect the investment account.5. A corporation exercises significant influence over an affiliate in which it holds a 40 percent common stock interest. If its affiliate completed a fiscal year profitably but paid no dividends, how would this affect the investor corporation?a. Result in an increased current ratio.b. Result in increased earnings per share.c. Increase several turnover ratios.d. Decrease book value per share.6. An investor in common stock received dividends in excess of the investor’s share of investee’s earnings subsequent to the date of the investment. How will the investor’s investment account be affected by those dividends under each of the following methods?Cost Method Equity Methoda. No effect No effectb. Decrease No effectc. No effect Decreased. Decrease Decrease7. An investor uses the cost method to account for an investment in common stock. A portion of the dividends received this year was in excess of the investor’s share of investee’s earnings subsequent to the date of investment. The amount of dividend revenue that should be reported in the investor’s income statement for this year would be:a. Zero.b. The total amount of dividends received this year.c. The portion of the dividends received this year that was in excess of the investor’s share of investee’s earnings subsequent to the date of investment.d. The portion of the dividends received this year that was not in excess of the investor’s share of investee’s earnings subsequent to the date of investment.E1 – 2: Multiple-Choice Questions on Recording business CombinationsMultiple-Choice Questions on Recording BusinessCombinations [AICPA Adapted]Select the correct answer for each of the following questions.1. Goodwill represents the excess of the sum of the consideration given over the:a. Sum of the fair values assigned to identifiable assets acquired less liabilities assumed.b. Sum of the fair values assigned to tangible assets acquired less liabilities assumed.c. Sum of the fair values assigned to intangible assets acquired less liabilities assumed.d. Book value of an acquired company.2. In a business combination, costs of registering equity securities to be issued by the acquiring company are a(n):a. Expense of the combined company for the period in which the costs were incurred.b. Direct addition to stockholders’ equity of the combined company.c. Reduction of the otherwise determinable fair value of the securities.d. Addition to goodwill.3. Which of the following is the appropriate basis for valuing fixed assets acquired in a business combination carried out by exchanging cash for common stock?a. Historical cost.b. Book value.c. Cost plus any excess of purchase price over book value of assets acquired.d. Fair value.4. In a business combination, the fair value of the identifiable net assets acquired exceeds the fair value of the consideration given. The excess should be reported as a:a. Deferred credit.b. Reduction of the values assigned to current assets and a deferred credit for any unallocated portion.c. Pro rata reduction of the values assigned to current and noncurrent assets and a deferred credit for any unallocated portion.d. No answer listed is correct.5. A and B Companies have been operating separately for five years. Each company has a minimal amount of liabilities and a simple capital structure consisting solely of voting common stock. A Company, in exchange for 40 percent of its voting stock, acquires 80 percent of the common stock of B Company. This is a “tax-free” stock-for-stock (type B) exchange for tax purposes. B Company assets have a total net fair market value of $800,000 and a total net book value of $580,000. The fair market value of the A stock used in the exchange is $700,000 and the fair value of the noncontrolling interest is $175,000. The goodwill reported following the acquisition would be:a. Zero.b. $60,000.c. $75,000.d. $295,000.P1-31: Journal Entries to Record a Business CombinationOn January 1, 20X2, Frost Company acquired all of TKK Corporation’s assets and liabilities by issuing 24,000 shares of its $4 par value common stock. At that date, Frost shares were selling at $22 per share. Historical cost and fair value balance sheet data for TKK at the time of acquisition were as follows:Balance Sheet Item Historical CostFair ValueCash and Receivables $ 28,000 $ 28,000Inventory 94,000 122,000Buildings and Equipment 600,000 470,000Less: Accumulated Depreciation (240,000)Total Assets $482,000 $620,000Accounts Payable $ 41,000 $ 41,000Notes Payable 65,000 63,000Common Stock ($10 par value) 160,000Retained Earnings 216,000Total Liabilities and Equities $482,000Frost paid legal fees for the transfer of assets and liabilities of $14,000. Frost also paid audit fees of $21,000 and listing application fees of $7,000, both related to the issuance of new shares.RequiredPrepare the journal entries made by Frost to record the business combination.P12- 17: Translation, Journal Entries, Consolidated Comprehensive Income, andStockholders’ EquityOn January 1, 20X5, Taft Company acquired all of the outstanding stock of Vikix, Inc., a Norwegian company, at a cost of $151,200. Vikix’s net assets on the date of acquisition were 700,000 kroner (NKr). On January 1, 20X5, the book and fair values of the Norwegian subsidiary’s identifiable assets and liabilities approximated their fair values except for property, plant, and equipment and patents acquired. The fair value of Vikix’s property, plant, and equipment exceeded its book value by $18,000. The remaining useful life of Vikix’s equipment at January 1, 20X5 was 10 years.The remainder of the differential was attributable to a patent having an estimated useful life of 5 years. Vikix’s trial balance on December 31, 20X5, in kroner, follows:Debits CreditsCash NKr 150,000Accounts Receivable (net) 200,000Inventory 270,000Property, Plant, and Equipment 600,000Accumulated Depreciation NKr 150,000Accounts Payable 90,000Notes Payable 190,000Common Stock 450,000Retained Earnings 250,000Sales 690,000Cost of Goods Sold 410,000Operating Expenses 100,000Depreciation Expense 50,000Dividends Paid 40,000 Total NKr1,820,000 NKr 1,820,000Additional Information1. Vikix uses the FIFO method for its inventory. The beginning inventory was acquired onDecember 31, 20X4, and ending inventory was acquired on December 15, 20X5. Purchases of NKr420,000 were made evenly throughout 20X5.2. Vikix acquired all of its property, plant, and equipment on July 1, 20X3, and uses straight-line depreciation.3. Vikix’s sales were made evenly throughout 20X5, and its operating expenses were incurred evenly throughout 20X5.4. The dividends were declared and paid on July 1, 20X5.5. Taft’s income from its own operations was $275,000 for 20X5, and its total stockholders’ equityon January 1, 20X5, was $3,500,000. Taft declared $100,000 of dividends during 20X5.6. Exchange rates were as follows:July 1, 20X3 NKr1 = $.15December 30, 20X4 NKr1 = $.18January 1, 20X5 NKr1 = $.18July 1, 20X5 NKr1 = $.19December 15, 20X5 NKr1 = $.205December 31, 20X5 NKr1 = $.21Average for 20X5 NKr1 = $.20Requireda. Prepare a schedule translating the trial balance from Norwegian kroner into U.S. dollars. Assume the kroner is the functional currency.b. Assume that Taft uses the basic equity method. Record all journal entries that relate to its investment in the Norwegian subsidiary during 20X5. Provide the necessary documentation and support for the amounts in the journal entries, including a schedule of the translation adjustment related to the differential.c. Prepare a schedule that determines Taft’s consolidated comprehensive income for 20X5.d. Compute Taft’s total consolidated stockholders’ equity at December 31, 20X5.Q4-1: How does an eliminating entry differ from an adjusting entry?Q4-3: What conditions must exist for a negative differential to occur?Q4-9: Explain why consolidated financial statements become increasingly important when the differential is very large.C4- 1: Need for Consolidation ProcessAt a recent staff meeting, the vice president of marketing appeared confused. The controller had assured him that the parent company and each of the subsidiary companies had properly accounted for all transactions during the year. After several other questions, he finally asked, “If it has been done properly, then why must you spend so much time and make so many changes to the amounts reported by the individual companies when you prepare the consolidated financial statements each month? You should be able to just add the reported balances together.”RequiredPrepare an appropriate response to help the controller answer the marketing vice president’s question.E3- 8: Subsidiary Acquired for CashFineline Pencil Company acquired 100 percent of Smudge Eraser Corporation’s stock on January2, 20X3, for $150,000 cash. Summarized balance sheet data for the companies on December 31,20X2, are as follows:Fineline PencilSmudge EraseCompany CorporationBook Value Fair Value Book Value Fair ValueCash $200,000 $200,000 $ 50,000$ 50,000Other Assets 400,000 650,000 120,000 180,000Total Debits $600,000 $170,000Current Liabilities $100,000 100,000 $ 80,000 80,000Common Stock 300,000 50,000Retained Earnings 200,000 40,000Total Credits $600,000 $170,000RequiredPrepare a consolidated balance sheet immediately following the acquisition.E5- 13: Consolidation after One Year of OwnershipPioneer Corporation purchased 80 percent of Lowe Corporation’s stock on January 1, 20X2. At that date Lowe reported retained earnings of $80,000 and had $120,000 of stock outstanding. The fair value of its buildings was $32,000 more than the book value.Pioneer paid $190,000 to acquire the Lowe shares. At that date, the noncontrolling interest had a fair value of $47,500. The remaining economic life for all Lowe’s depreciable assets was eight years on the date of combination. The amount of the differential assigned to goodwill is not impaired. Lowe reported net income of $40,000 in 20X2 and declared no dividends.Requireda. Give the eliminating entries needed to prepare a consolidated balance sheet immediately after Pioneer purchased Lowe stock.b. Give all eliminating entries needed to prepare a full set of consolidated financial statements for 20X2.P5-32: Consolidation Workpaper at End of First Year of OwnershipPower Corporation acquired 75 percent of Best Company’s ownership on January 1, 20X8, for $96,000. At that date, the fair value of the noncontrolling interest was $32,000. The book value of Best’s net assets at acquisition was $100,000. The book values and fair values of Best’s assets and liabilities were equal, except for Best’s buildings and equipment, which were worth $20,000 more than book value. Buildings and equipment are depreciated on a 10-year basis. Although goodwill is not amortized, the management of Power concluded at December 31, 20X8, that goodwill from its purchase of Best shares had been impaired and the correct carrying amount was $2,500. Goodwill and goodwill impairment were assigned proportionately to the controlling and noncontrolling shareholders. (Note that Power Company does not adjust its Income from Subsidiary for goodwill impairment under the basic equity method.)Trial balance data for Power and Best on December 31, 20X8, are as follows:Power CorporationBest CompanyItem Debit Credit Debit CreditCash $ 47,500 $21,000Accounts Receivable 70,000 12,000Inventory 90,000 25,000Land 30,000 15,000Buildings and Equipment 350,000 150,000Investment in Best Co. Stock 100,500Cost of Goods Sold 125,000 110,000Wage Expense 42,000 27,000Depreciation Expense 25,000 10,000Interest Expense 12,000 4,000Other Expenses 13,500 5,000Dividends Declared 30,000 16,000Accumulated Depreciation $145,000 $ 40,000Accounts Payable 45,000 16,000Wages Payable 17,000 9,000Notes Payable 150,000 50,000Common Stock 200,000 60,000Retained Earnings 102,000 40,000Sales 260,000 180,000Income from Subsidiary 16,500$935,500 $935,500 $395,000 $395,000Requireda. Give all eliminating entries needed to prepare a three-part consolidation work paper as ofDecember 31, 20X8.b. Prepare a three-part consolidation work paper for 20X8 in good form. C10-1: The Effect of Security Type on Earnings per ShareStage Corporation has both convertible preferred stock and convertible debentures outstanding at the end of 20X3. The annual cash payment to the preferred shareholders and to the bondholders is the same, and the two issues convert into the same number of common shares.Requireda. If both issues are dilutive and are converted into common stock, which issue will cause the larger reduction in basic earnings per share when converted? Why?b. If both issues are converted into common stock, which issue will cause the larger increase in consolidated net income when converted?c. If the preferred shares remain outstanding, what conditions must exist for them to be excluded entirely from the computation of basic earnings per share?d. Stage is a subsidiary of Prop Company. How will these securities affect the earnings per share reported for the consolidated enterprise?E10-5: Preparation of Statement of Cash FlowsThe accountant for Consolidated Enterprises Inc. has just finished preparing a consolidated balancesheet, income statement, and statement of changes in retained earnings for 20X3. The accountanthas asked for assistance in preparing a statement of cash flows for the consolidated entity.Consolidated Enterprises holds 80 percent of the stock of Separate Way Manufacturing. The following items are proposed for inclusion in the consolidated cash flow statement:Decrease in accounts receivable $ 23,000Increase in accounts payable 5,000Increase in inventory 15,000Increase in bonds payable 120,000Equipment purchased 380,000Common stock repurchased 35,000Depreciation reported for current period 73,000Gain recorded on sale of equipment 8,000Book value of equipment sold 37,000Goodwill impairment loss 3,000Sales 900,000Cost of goods sold 368,000Dividends paid by parent 60,000Dividends paid by subsidiary 30,000Consolidated net income for the year 464,000Income assigned to the noncontrolling interest 14,000RequiredPrepare in good form a statement of cash flows for Consolidated Enterprises Inc. using the indirect method of computing cash flows from operations.E10-6: Direct Method Cash Flow StatementUsing the data presented in E10-5, prepare a statement of cash flows for Consolidated EnterprisesInc. using the direct method of computing cash flows from operating activities.E6-11: Upstream Sale of Equipment in Prior PeriodBaywatch Industries has owned 80 percent of Tubberware Corporation for many years. On January 1,20X6, Baywatch paid Tubberware $270,000 to acquire equipment that Tubberware had purchasedon January 1, 20X3, for $300,000. The equipment is expected to have no scrap value and is depreciatedover a 15-year useful life.Baywatch reported operating earnings of $100,000 for 20X8 and paid dividends of $40,000.Tubberware reported net income of $40,000 and paid dividends of $20,000 in 20X8.Requireda. Compute the amount reported as consolidated net income for 20X8.b. By what amount would consolidated net income change if the equipment sale had been a downstreamsale rather than an upstream sale? ................
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