Chapter02 TB

Advanced Financial Accounting, 12e (Christensen)
Chapter 2 Reporting Intercorporate Investments and Consolidation of Wholly Owned

Subsidiaries with No Differential
1) If Push Company owned 51 percent of the outstanding common stock of Shove Company,
which method would be appropriate for financial reporting purposes?
A) Cost method
B) Full consolidation method
C) Equity method
D) Fair value method
Answer: B
Difficulty: 1 Easy
Topic: Accounting for Investments in Common Stock
Learning Objective: 02-01 Understand and explain how ownership and control can influence
the accounting for investments in common stock.; 02-04 Understand and explain differences in
accounting for investments carried at fair value and investments accounted for using the equity
method.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA: FN Reporting
2) Usually, an investment of 20 to 50 percent in another company's voting stock is reported

under the:
A) cost method.
B) full consolidation method.
C) equity method.
D) fair value method.
Answer: C
Difficulty: 1 Easy
Topic: Accounting for Investments in Common Stock
Learning Objective: 02-01 Understand and explain how ownership and control can influence
the accounting for investments in common stock.; 02-04 Understand and explain differences in
accounting for investments carried at fair value and investments accounted for using the equity
method.
Bloom's: Remember
AICPA: FN Reporting
1
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
3) In the case of an investment in equity securities where the investor does not have significant
influence and the investment is carried at fair value, a dividend from the investee is:
A) A reduction of the carrying amount of the investment. Cash/dividends receivable
B) Income to the investor in the period of declaration. Dividend income
C) An expense to the investor in the period of declaration.

D) A direct increase to retained earnings of the investor to offset the direct decrease to retained
earnings of the investee.
Answer: B
Difficulty: 1 Easy
Topic: Securities Carried at Fair Value
Learning Objective: 02-02 Prepare journal entries for investments carried at fair value.; 02-04
Understand and explain differences in accounting for investments carried at fair value and
investments accounted for using the equity method.
Bloom's: Remember
AICPA: FN Decision Making
4) Which of the following observations is NOT consistent with the accounting for investments in
equity securities where there is no significant influence?
A) Changes in the number of investment shares resulting from stock dividends, stock splits, or
reverse splits must be formally recorded by the investor.
B) Investments are carried by the investor at fair value.
C) The investor recognizes income from the investment as dividends are declared by the
investee.
D) When the securities are remeasured to fair value as of the end of each period, any resulting
difference is an unrealized gain or loss to be recognized in income.
Answer: A
Difficulty: 1 Easy
Bloom's: Remember
2
5) On January 1, 20X9 Pathlon Company acquired 30 percent of the common stock of Sopteron
Corporation, at underlying book value. For the same year, Sopteron reported net income of
$55,000, which includes a gain from discontinued operations of $40,000. It did not pay any
dividends during the year. By what amount would Pathlon's investment in Sopteron Corporation
increase for the year, if Pathlon used the equity method? ‫( تحققه الشركة املستثمر فيها راح تزيد لي‬income) ‫ اي ربح‬Equity method‫في الـ‬
A) $0 ‫قيمة االنفيستمنت باالضافة لالنكوم حقي بنفس النسبة اللي انا مستثمر فيها‬
Investment in Sopteron Co
B) $16,500 Income from Sopteron Co ‫ اللي تدفعه الشركة املستثمر فيها راح يتسبب بنقصان قيمة االنفيستمنت‬dividend‫والـ‬
‫حقي في هذه الشركة )السبب النه بيقلل االنكوم حق الشركة املستثمر فيها فاذا قل‬
C) $4,500 (‫االنكوم حقها بيقل قيمة االنفيستمنت‬
D) $12,000
Answer: B
Difficulty: 2 Medium
Topic: The Equity Method; Investor's Share of Other Comprehensive Income
Learning Objective: 02-03 Prepare journal entries for investments using the equity method.; 02-
04 Understand and explain differences in accounting for investments carried at fair value and
investments accounted for using the equity method.; Appendix 2A
Bloom's: Understand
AACSB: Analytical Thinking
AICPA: FN Measurement ‫ مع اني‬common stock‫خن اكون صادقة كنت حاذفته الن ماخذينا نفسه بالساليد بس ملا سالت املس قالت انه نفس ال‬
‫ تختلف‬net income ‫ و‬dividends‫وضحت لها ان طريقة حساب ال‬
On January 1, 20X8, Pullman Company acquired 30 percent of Skate Company's common stock,
at underlying book value of $100,000. Skate has 100,000 shares of $2 par value, 5 percent
cumulative preferred stock outstanding. No dividends are in arrears. Skate reported net income
of $150,000 for 20X8 and paid total dividends of $72,000. Pullman uses the equity method to
account for this investment.
6) Based on the preceding information, what amount would Pullman Company receive as
dividends from Skate for the year?
A) $62,000 Dividend x percentage of acquired - number of shares x percentage of acquired x percentage of preferred stock x par value
B) $21,600
C) $18,600
D) $54,000
Answer: C
Difficulty: 3 Hard
Topic: The Equity Method; Additional Requirements of ASC 323-10
Learning Objective: 02-03 Prepare journal entries for investments using the equity method.;
Appendix 2A
Bloom's: Apply
AICPA: FN Measurement
3
7) Based on the preceding information, what amount of investment income will Pullman
Company report from its investment in Skate for the year?
A) $45,000 Net income x percentage of acquired - number of shares x percentage of acquired x percentage of preferred stock x par value
B) $42,000
C) $62,000
D) $35,000
Answer: B
Difficulty: 3 Hard
Appendix 2A
Bloom's: Apply
8) Based on the preceding information, what amount would be reported by Pullman Company as
the balance in its investment account on December 31, 20X8?
A) $100,000 Beginning Investment + net income from investee - dividends
B) $123,400
C) $120,400
D) $142,000
Answer: B
Difficulty: 3 Hard
Appendix 2A
Bloom's: Apply
4
On January 1, 20X4, Pony Company acquired 25% of Stallion Company's common stock at
underlying book value of $200,000. Stallion has 80,000 shares of $10 par value, 6 percent
cumulative preferred stock outstanding. No dividends are in arrears. Stallion reported net income
of $270,000 for 20X4 and paid total dividends of $140,000. Pony uses the equity method to
account for this investment.
9) Based on the preceding information, what amount would Pony Company receive as dividends
from Stallion for the year? Dividend x percentage of acquired - number of shares x percentage of acquired x percentage of preferred stock x par value
A) $23,000
B) $35,000
C) $37,500
D) $92,000
Answer: A
Difficulty: 3 Hard
Appendix 2A
Bloom's: Apply
10) Based on the preceding information, what amount of investment income will Pony Company
report from its investment in Stallion for the year?
A) $140,000 Net income x percentage of acquired - number of shares x percentage of acquired x percentage of preferred stock x par value
B) $67,500
C) $55,500
D) $35,000
Answer: C
Difficulty: 3 Hard
Appendix 2A
Bloom's: Apply
5
11) Based on the preceding information, what amount would be reported by Pony Company as
the balance in its investment account on December 31, 20X4?
A) $200,000 Beginning Investment + net income from investee - dividends
B) $220,500
C) $232,500
D) $255,500
Answer: C
Difficulty: 3 Hard
Appendix 2A
Bloom's: Apply
On January 1, 20X7, Poke Corporation acquired 25 percent of the outstanding shares of Shove
Corporation for $100,000 cash. Shove Company reported net income of $75,000 and paid
dividends of $30,000 for both 20X7 and 20X8. The fair value of shares held by Poke was
$110,000 and $105,000 on December 31, 20X7 and 20X8 respectively.
12) Based on the preceding information, what amount will be reported by Poke as income from
its investment in Shove for 20X8, if it used the equity method of accounting?
A) $7,500
B) $11,250
C) $18,750
D) $26,250 Investment in Shove Co
Income from Shove Co
Answer: C
Topic: The Equity Method
Bloom's: Apply
6
13) Based on the preceding information, what amount will be reported by Poke as balance in
investment in Shove on December 31, 20X8, if it used the equity method of accounting?
A) $108,250 Beginning cost of investment +income from Shove - dividends
B) $118,750
C) $100,000
D) $122,500
Answer: D
Bloom's: Apply
Fair value method
14) If instead, Poke could not exercise significant influence over the investee, by what amount
will Poke's 20X7 income increase due to its investment in Shove?
A) $17,500
Divided income + Unrealized gain on increase in value of investment
B) $12,500
C) $11,250
D) $7,500
Answer: A
Difficulty: 3 Hard
Bloom's: Apply
7
Fair value method
15) If instead, Poke could not exercise significant influence over the investee, by what amount
will Poke's 20X8 income increase due to its investment in Shove?
A) $11,250
Divided income - Unrealized loss on decrease in value of investment
B) $2,500
C) $6,250
D) $7,500
Answer: B
Difficulty: 3 Hard
Bloom's: Apply
16) If instead, Poke could not exercise significant influence over the investee, what amount will
be reported by Poke as balance in investment in Shove on December 31, 20X8?
A) $105,000
٢٠١٨ ‫ناخذ الفير فاليو حق االنفيستمنت لسنة‬
B) $118,750
C) $100,000
D) $122,500
Answer: A
Bloom's: Apply
8
17) A change from carrying securities at fair value to the equity method of accounting for an
investment in common stock resulting from an increase in the number of shares held by the
investor requires:
A) only a footnote disclosure.
B) that the cumulative amount of the change be shown as a line item on the income statement,
net of tax.
C) retroactive restatement as if the investor always had used the equity method.
D) that the investor begins accruing income earned by the investee under the equity method at
the date of acquisition of the new shares.
Answer: D
Difficulty: 1 Easy
Topic: Changes in the Number of Shares Held
Learning Objective: 02-03 Prepare journal entries for investments using the equity method.
Bloom's: Remember
AICPA: FN Reporting
18) Under the equity method of accounting for a stock investment, the investment initially
should be recorded at:
A) cost.
B) cost minus any differential.
C) proportionate share of the fair value of the investee company's net assets.
D) proportionate share of the book value of the investee company's net assets.
Answer: A
Difficulty: 1 Easy
Bloom's: Remember
9
Equity method
19) On July 1, 20X4, Pillow Corp. obtained significant influence over Sleep Co. through the
purchase of 3,000 shares of Sleep's 10,000 outstanding shares of common stock for $20 per
share. On December 15, 20X4, Sleep paid $40,000 in dividends to its common stockholders.
Sleep's net income for the year ended December 31, 20X4, was $120,000, earned evenly
throughout the year. In its 20X4 income statement, what amount of income from this investment
should Pillow report?
A) $12,000 ‫انا كمستثمر في شركة لي الحق في دخل الشركة املستثمر فيها من تاريخ االستحواذ فما بعد اما الدخل اللي‬
‫حققته الشركة اللي انا مستثمره فيها قبل ما استثمر فيها او استحوذ عليها مالي اي حق فيه‬
B) $36,000
C) $18,000 ‫ من االسهم في جوالي وهو يعتبر نص السنة‬%30 ‫ففي السؤال بما أنه قال أن الشركة استحوذت او اشترت‬
‫فناخذ نص النيت انكوم‬
D) $6,000
Answer: C
Difficulty: 3 Hard
Bloom's: Apply
20) On January 2, 20X5, Park Co. purchased 10 percent of Sky, Inc.'s outstanding common
shares for $400,000. Park is the largest single shareholder in Sky, and Park's officers are a
majority on Sky's board of directors. As a result, Park is able to exercise significant influence Equity method
over Sky. Sky reported net income of $500,000 for 20X5, and paid dividends of $150,000. In its
December 31, 20X5, balance sheet, what amount should Park report as investment in Sky?
A) $385,000 Original cost of investment + income from investee (Sky) - dividends
B) $450,000
C) $400,000
D) $435,000
Answer: D
Appendix 2A
Bloom's: Apply
10
21) The Salmon Corporation (Salmon) reported net income for the current year of $200,000 and
paid cash dividends of $30,000. The Pond Company (Pond) holds 22 percent of the outstanding
voting stock of Salmon. However, another corporation holds the other 78 percent ownership and
Fair value method does not take Pond's input into consideration when making financing and operating decisions for
Salmon. What investment income should Pond recognize for the current year?
A) $6,600 ‫في الفير فاليو مالي دخل في النيت انكوم‬
‫حق الشركة املستثمر فيها‬
B) $0
C) $44,000 Cash
D) $50,600 Dividend income
Answer: A
Difficulty: 3 Hard
Appendix 2A
Bloom's: Apply
22) Slide Corporation reported net income for the current year of $370,000 and paid cash
dividends of $50,000. Power Company holds 40 percent of the outstanding voting stock of Slide.
However, another corporation holds the other 60 percent ownership and does not take Power's
Fair value method input into consideration when making financing and operating decisions for Slide. What
investment income should Power recognize for the current year?
A) $0
B) $20,000
C) $128,000 Cash
D) $148,000 Dividend income
Answer: B
Difficulty: 3 Hard
Appendix 2A
Bloom's: Apply
11
23) What account balances in the subsidiary stockholders' equity accounts should be eliminated
in preparing a consolidated balance sheet?
A) Common stock
B) Additional paid-in capital
C) Retained Earnings
D) All of these account balances are eliminated
Answer: D
Difficulty: 1 Easy
Topic: Overview of the Consolidation Process
Learning Objective: 02-05 Make calculations and prepare basic consolidation entries for a
simple consolidation.
Bloom's: Remember
24) The consolidation process consists of all the following except:

A) Combining the financial statements of two or more legally separate companies.
B) Eliminating intercompany transactions and holdings.
C) Closing the individual subsidiary's revenue and expense accounts into the parent's retained
earnings.
D) Combining the accounts of separate companies, creating a single set of financial statements.
Answer: C
Difficulty: 1 Easy
Bloom's: Remember
12
Prime Company acquired 100 percent of the voting common shares of Standard Video
Corporation, its bitter rival, by issuing bonds with a par value and fair value of $150,000.
Immediately prior to the acquisition, Prime reported total assets of $500,000, liabilities of
$280,000, and stockholders' equity of $220,000. At that date, Standard Video reported total
assets of $400,000, liabilities of $250,000, and stockholders' equity of $150,000. Included in
Standard's liabilities was an account payable to Prime in the amount of $20,000, which Prime
included in its accounts receivable. Must be eliminated
25) Based on the preceding information, what amount of total assets did Prime report in its
separate balance sheet immediately after the acquisition before any consolidation with Standard
Video?
A) $500,000 Total assets + investment in Standard Video Co
B) $650,000
C) $750,000
D) $900,000
Answer: B
Topic: Consolidation Worksheets
Learning Objective: 02-06 Prepare a consolidation worksheet.
Bloom's: Apply
26) Based on the preceding information, what amount of total assets was reported in the
consolidated balance sheet immediately after acquisition?
A) $650,000
‫ للشركة االم‬Account receivable ‫النه يعتبر‬
B) $880,000 Total assets of Prime + total assets of Standard Video - inter company liability
‫بتستلمه من شركة تابعة لها فالزم نشيله‬
C) $920,000
D) $750,000
Answer: B
Difficulty: 3 Hard
Bloom's: Apply
13
27) Based on the preceding information, what amount of total liabilities was reported in the
A) $500,000 Total liability of Prime + Bound issued + total liability of Standard Video- inter company liability ‫ للشركة‬Accounts PayPal ‫هنا يعتبر‬
B) $530,000 ‫التابعة التزام الزم تدفعه للشركة االم فيما‬
‫انه يعتبر ترانزاكشن بني شركتني عالقتهم‬
C) $280,000 ‫ فنشيله‬parent-subsidiary
D) $660,000
Answer: D
Difficulty: 3 Hard
Bloom's: Apply
28) Based on the preceding information, what amount of stockholders' equity was reported in the
A) $220,000 Eliminate equity accounts of Subsidiar when consolidate
B) $150,000
C) $370,000
D) $350,000
Answer: A
Difficulty: 3 Hard
Bloom's: Apply
14
Pickup Company acquired 100 percent of the voting common shares of Sedan Corporation by
issuing bonds with a par value and fair value of $200,000. Immediately prior to the acquisition,
Pickup reported total assets of $600,000, liabilities of $370,000, and stockholders' equity of
$230,000. At that date, Sedan reported total assets of $500,000, liabilities of $300,000, and
stockholders' equity of $200,000. Included in Sedan's liabilities was an account payable to
Pickup in the amount of $50,000, which Pickup included in its accounts receivable.
29) Based on the preceding information, what amount of total assets did Pickup report in its
balance sheet immediately after the acquisition?
A) $1,100,000 Total assets + investment in subsidiary
B) $1,000,000
C) $800,000
D) $1,600,000
Answer: C
Bloom's: Apply
30) Based on the preceding information, what amount of total assets was reported in the
A) $600,000 Total assets of pickup + total assets of Sedan - inter company liability
B) $800,000
C) $1,050,000
D) $1,150,000
Answer: C
Difficulty: 3 Hard
Bloom's: Apply
15
31) Based on the preceding information, what amount of total liabilities was reported in the
consolidated balance sheet immediately after the acquisition?
A) $370,000 Total liability of Pickup + Bound issued + total liability of Sedan - inter company liability
B) $670,000
C) $820,000
D) $870,000
Answer: C
Difficulty: 3 Hard
Bloom's: Apply
32) Based on the preceding information, what amount of stockholders' equity was reported in the
A) $200,000
Eliminate equity accounts of Subsidiar when consolidate
B) $230,000
C) $380,000
D) $430,000
Answer: B
Difficulty: 3 Hard
Bloom's: Apply
16
Parent Co. purchases 100 percent of Son Company on January 1, 20X1, when Parent's retained
earnings balance is $520,000 and Son's is $150,000. During 20X1, Son reports $15,000 of net
income and declares $6,000 of dividends. Parent reports $105,000 of separate operating earnings
plus $15,000 of equity-method income from its 100 percent interest in Son; Parent declares
dividends of $40,000.
33) Based on the preceding information, what is Parent's post-closing retained earnings balance
on December 31, 20X1?
A) $485,000 Beginning Retained Earnings + net income of parent - dividends
B) $505,000
C) $525,000
D) $600,000
Answer: D
Topic: Consolidation Subsequent to Acquisition
Bloom's: Understand
34) Based on the preceding information, what is Son's post-closing retained earnings balance on
December 31, 20X1? Beginning Retained Earnings + net income of Son’s - dividends
A) $141,000
B) $150,000
C) $159,000
D) $165,000
Answer: C
Difficulty: 1 Easy
Bloom's: Understand
17
35) Based on the preceding information, what is the consolidated retained earnings balance on
December 31, 20X1? Same of the parent retained earning
A) $470,000
B) $585,000
C) $600,000
D) $759,000
Answer: C
Bloom's: Understand
Phips Co. purchases 100 percent of Sips Company on January 1, 20X2, when Phips' retained
earnings balance is $320,000 and Sips' is $120,000. During 20X2, Sips reports $20,000 of net
income and declares $8,000 of dividends. Phips reports $125,000 of separate operating earnings
plus $20,000 of equity-method income from its 100 percent interest in Sips; Phips declares
dividends of $35,000.
36) Based on the preceding information, what is Phips' post-closing retained earnings balance on
December 31, 20X2? Beginning Retained Earnings + net income of Phips - dividends
A) $305,000
B) $410,000
C) $430,000
D) $465,000
Answer: C
Bloom's: Understand
18
37) Based on the preceding information, what is Sips' post-closing retained earnings balance on
December 31, 20X2?
Beginning Retained Earnings + net income of Sips - dividends
A) $108,000
B) $120,000
C) $132,000
D) $140,000
Answer: C
Difficulty: 1 Easy
Bloom's: Understand
38) Based on the preceding information, what is the consolidated retained earnings balance on
December 31, 20X2?
A) $402,000 Same of the Phips retained earning
B) $410,000
C) $430,000
D) $562,000
Answer: C
Bloom's: Understand
39) The main guidance on equity-method reporting, found in ASC 323 and 325 requires all of
the following except:
A) The investor's share of the investee's discontinued operations should be reported.
B) The investor's share of the investee's prior-period adjustments should be reported.
C) Continued use of the equity-method even if continued losses result in a zero or negative
balance in the investment account.
D) Preferred dividends of the investee should be deducted from net income before the investor
computes its share of investee earnings.
Answer: C
Difficulty: 1 Easy
Topic: Additional Requirements of ASC 323
Learning Objective: Appendix 2A
Bloom's: Remember
AICPA: FN Reporting
19
On January 1, 20X4, Plimsol Company acquired 100 percent of Shipping Corporation's voting
shares, at underlying book value. Plimsol accounts for its investment in Shipping at cost.
Shipping's retained earnings was $75,000 on the date of acquisition. On December 31, 20X4, the
trial balance data for the two companies are as follows:
Plimsol Co. Shipping Corp.

Item Debit Credit Debit Credit
Current Assets $ 100,000 $ 75,000
Depreciable Assets (net) 200,000 150,000
Investment in Shipping Corp. 125,000
Other Expenses 60,000 45,000
Depreciation Expense 20,000 15,000
Dividends Declared 25,000 15,000
Current Liabilities $ 40,000 $ 25,000
Long-Term Debt 75,000 50,000
Common Stock 100,000 50,000
Retained Earnings 150,000 75,000
Sales 150,000 100,000
Dividend Income, Shipping Corp. 15,000
$ 530,000 $ 530,000 $ 300,000 $ 300,000
40) Based on the information provided, what amount of net income will be reported in the
consolidated financial statements prepared on December 31, 20X4? Eliminate net income from subsidiary
A) $100,000
B) $85,000
C) $110,000
D) $125,000
Income
Income from
from
shipping
Shipping
Co
Answer: C
Topic: Consolidation When Parent Companies Choose to Carry at Cost Investments That Are
to Be Consolidated
Learning Objective: Appendix 2B
Bloom's: Understand
20
41) Based on the information provided, what amount of total assets will be reported in the
consolidated balance sheet prepared on December 31, 20X4?
A) $425,000
B) $525,000 Current assets
C) $650,000 Depreciable assets
D) $630,000
Answer: B
to Be Consolidated
Bloom's: Understand
42) Based on the information provided, what amount of retained earnings will be reported in the
A) $235,000
B) $210,000
C) $310,000
D) $225,000
Eliminate RE of subsidiary, the net income from subsidiary, and the dividends of subsidiary
Answer: A
Difficulty: 3 Hard
to Be Consolidated
Bloom's: Apply
21
43) Based on the information provided, what amount of total liabilities will be reported in the
A) $525,000
B) $115,000
C) $125,000
D) $190,000
Answer: D
to Be Consolidated
Bloom's: Understand
44) Based on the information provided, what amount of total stockholders' equity will be
reported in the consolidated balance sheet prepared on December 31, 20X4?
A) $190,000
B) $335,000
C) $460,000
D) $310,000
Answer: B
Difficulty: 3 Hard
to Be Consolidated
Bloom's: Apply
22
Parent Company purchased 100 percent of Son Inc. on January 1, 20X2 for $420,000. Son
reported earnings of $82,000 and declared dividends of $4,000 during 20X2.
45) Based on the preceding information and assuming Parent carries its investment in Son at
cost, what is the balance in Parent's Investment in Son account on December 31, 20X2, prior to
consolidation?
A) $416,000 Same as original cost of investment
B) $420,000
C) $424,000
D) $498,000
Answer: B
to Be Consolidated
Bloom's: Understand
46) Based on the preceding information and assuming Parent uses the equity method to account
for its investment in Son, what is the balance in Parent's Investment in Son account on December
31, 20X2, prior to consolidation?
A) $416,000 Beginning investment + net income of subsidiary- dividends of subsidiary
B) $420,000
C) $424,000
D) $498,000
Answer: D
to Be Consolidated
Bloom's: Understand
23
Pone Company purchased 100 percent of Sone Inc. on January 1, 20X9 for $625,000. Sone
reported earnings of $76,000 and declared dividends of $8,000 during 20X9.
47) Based on the preceding information and assuming Pone carries its investment in Sone at cost,
what is the balance in Pone's Investment in Sone account on December 31, 20X9, prior to
consolidation?
A) $617,000
B) $625,000
C) $633,000
D) $693,000
Answer: B
to Be Consolidated
Bloom's: Understand
48) Based on the preceding information and assuming Pone uses the equity method to account
for its investment in Sone, what is the balance in Pone's Investment in Sone account on
December 31, 20X9, prior to consolidation?
A) $617,000 Beginning investment + net income of subsidiary- dividends of subsidiary
B) $625,000
C) $633,000
D) $693,000
Answer: D
to Be Consolidated
Bloom's: Understand
24
49) Pocket Corporation acquired 100 percent of the voting shares of Sleeve Inc. by issuing
10,000 new shares of $5 par value common stock with a $30 market value.
Required:
1. Which company is the parent and which is the subsidiary?
2. Define a subsidiary corporation.
3. Define a parent corporation.
4. Which entity prepares the consolidated worksheet?
5. Why are consolidation entries used?
Answer:
1. Pocket is the parent and Sleeve is the subsidiary.
2. A subsidiary is an entity in which another entity, the parent company, holds a controlling
financial interest.
3. A parent company holds a controlling financial interest in another company.
4. The parent, Pocket, prepares the consolidated worksheet.
5. Consolidation entries are used to adjust the amounts reported by the parent and all of the
subsidiaries to reflect the amounts that would be reported if the separate legal entities were a
single company.
Difficulty: 1 Easy
Bloom's: Understand
25
50) On January 1, 20X9, Peery Company acquired 100 percent of Standard Company's common
shares at underlying book value. Peery uses the equity method in accounting for its ownership of
Standard. On December 31, 20X9, the trial balances of the two companies are as follows:
Peery Co. Standard Co.

Current Assets $ 238,000 $ 95,000
Depreciable
300,000 170,000
Assets
Investment in
100,000
Standard Co.
Other
90,000 70,000
Expenses
Depreciation
30,000 17,000
Expense
Dividends
32,000 10,000
Declared
Accumulated
$ 120,000 $ 85,000
Depreciation
Current
50,000 30,000
Liabilities
Long-Term
120,000 50,000
Debt
Common
100,000 50,000
Stock
Retained
175,000 35,000
Earnings
Sales 200,000 112,000
Income from
25,000
Standard Co.
$ 790,000 $ 790,000 $ 362,000 $ 362,000
Required:
1. Prepare the consolidation entries needed as of December 31, 20X9, to complete a
consolidation worksheet.
2. Prepare a three-part consolidation worksheet as of December 31, 20X9.
26
Answer:
1.
Book Value Calculations:
Total Book Common Retained

= +
Value Stock Earnings
Beginning Book Value 85,000 50,000 35,000
+ Net Income 25,000 25,000
- Dividends (10,000) (10,000)
Ending Book Value 100,000 50,000 50,000
Basic consolidation entry:

Common Stock 50,000
Retained Earnings 35,000
Income from Standard Co. 25,000
Dividends Declared 10,000
Investment in Standard Co. 100,000
Accumulated depreciation consolidation entry:

Accumulated Depreciation 68,000
Depreciable Assets 68,000
27
Peery Standard Consolidation
2. Co. Co. Entries
DR CR Consolidated
Income
Statement
Sales 200,000 112,000 312,000
Less: Other
(90,000 ) (70,000 ) (160,000 )
Expenses
Less:
Depreciation (30,000 ) (17,000 ) (47,000 )
Expense
Income from
25,000 0 25,000 0
Standard Co.
Net Income 105,000 25,000 25,000 0 105,000
Statement of
Retained
Earnings
Beginning
175,000 35,000 35,000 175,000
Balance
Net Income 105,000 25,000 25,000 0 105,000
Less:
Dividends (32,000 ) (10,000 ) 10,000 (32,000 )
Declared
Ending
248,000 50,000 60,000 10,000 248,000
Balance
Balance Sheet
Current Assets 238,000 95,000 333,000
Depreciable
300,000 170,000 68,000 402,000
Assets
Less:
Accumulated (120,000 ) (85,000 ) 68,000 (137,000 )
Depreciation
Investment in
100,000 100,000 0
Standard Co.
Total Assets 518,000 180,000 68,000 168,000 598,000
Current
50,000 30,000 80,000
Liabilities
Long-Term
120,000 50,000 170,000
Debt
Common
100,000 50,000 50,000 100,000
Stock
Retained
248,000 50,000 60,000 10,000 248,000
Earnings
Total
Liabilities & 518,000 180,000 110,000 10,000 598,000
Equity
Difficulty: 3 Hard
Bloom's: Apply
28
51) In the absence of other evidence, common stock ownership of between 20 and 50 percent is
viewed as indicating that the investor is able to exercise significant influence over the investee.
What are some of the other factors that could constitute evidence of the ability to exercise
significant influence?
Answer: APB stated that these include:
1. Representation on board of directors

2. Participation in policy making
3. Material intercompany transactions
4. Interchange of managerial personnel
5. Technological dependency
6. Size of investment in relation to concentration of other shareholdings
Difficulty: 1 Easy
Topic: Determination of Significant Influence
Learning Objective: Appendix 2A
Bloom's: Remember
AACSB: Communication
29
52) On January 1, 20X7, Plimsol Company acquired 100 percent of Shipping Corporation's
voting shares, at underlying book value. Plimsol uses the cost method in accounting for its
investment in Shipping. Shipping's reported retained earnings of $75,000 on the date of
acquisition. The trial balances for Plimsol Company and Shipping Corporation as of December
31, 20X8, follow:
Plimsol Co. Shipping Corp.

Current Assets $ 160,000 $ 115,000
Depreciable
180,000 135,000
Assets (net)
Investment in
Shipping 125,000
Corp.
Other
85,000 60,000
Expenses
Depreciation
20,000 15,000
Expense
Dividends
30,000 15,000
Declared
Current
$ 25,000 $ 20,000
Liabilities
Long-Term
75,000 50,000
Debt
Common
100,000 50,000
Stock
Retained
210,000 100,000
Earnings
Sales 175,000 120,000
Dividend
15,000
Income
$ 600,000 $ 600,000 $ 340,000 $ 340,000
Required:
1. Provide all consolidating entries required to prepare a full set of consolidated statements for
20X8.
2. Prepare a three-part consolidation worksheet in good form as of December 31, 20X8.
30
Answer:
1.
Basic consolidation entry:

Common Stock 50,000
Retained Earnings 75,000
Investment in Standard Co. 125,000
Dividend consolidation entry:

Dividend Income 15,000
Dividends Declared 15,000
31
2.
Plimsol Shipping Consolidation
Co. Corp. Entries
DR CR Consolidated
Income
Statement
Sales 175,000 120,000 295,000
Less: Other
(85,000 ) (60,000 ) (145,000 )
Expenses
Less:
Depreciation (20,000 ) (15,000 ) (35,000 )
Expense
Dividend
15,000 15,000 0
Income
Net Income 85,000 45,000 15,000 0 115,000
Statement of
Retained
Earnings
Beginning
210,000 100,000 75,000 235,000
Balance
Net Income 85,000 45,000 15,000 0 115,000
Less:
Dividends (30,000 ) (15,000 ) 15,000 (30,000 )
Declared
Ending
265,000 130,000 90,000 15,000 320,000
Balance
Balance Sheet
Current Assets 160,000 115,000 275,000
Depreciable
180,000 135,000 315,000
Assets (net)
Investment in
Shipping 125,000 125,000 0
Corp.
Total Assets 465,000 250,000 0 125,000 590,000
Current
25,000 20,000 45,000
Liabilities
Long-Term
75,000 50,000 125,000
Debt
Common
100,000 50,000 50,000 100,000
Stock
Retained
265,000 130,000 90,000 15,000 320,000
Earnings
Total
Liabilities & 465,000 250,000 140,000 15,000 590,000
Equity
Difficulty: 3 Hard
to Be Consolidated
Bloom's: Apply
32

Chapter02 TB

Uploaded by

Copyright:

Available Formats

Chapter02 TB

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chapter02 TB

Uploaded by

Copyright:

Available Formats

Advanced Financial Accounting, 12e (Christensen)

Chapter 2 Reporting Intercorporate Investments and Consolidation of Wholly Owned

2) Usually, an investment of 20 to 50 percent in another company's voting stock is reported

C) An expense to the investor in the period of declaration.

24) The consolidation process consists of all the following except:

Plimsol Co. Shipping Corp.

Peery Co. Standard Co.

Total Book Common Retained

Basic consolidation entry:

Accumulated depreciation consolidation entry:

Answer: APB stated that these include:

1. Representation on board of directors

Plimsol Co. Shipping Corp.

Basic consolidation entry:

Dividend consolidation entry:

You might also like