File: Chapter 04 - Consolidated Financial Statements and Outside Ownership

Multiple Choice:

[QUESTION]
1. For business combinations involving less than 100 percent ownership, the acquirer recognizes and
measures all of the following at the acquisition date except:
A) identifiable assets acquired, at fair value.
B) liabilities assumed, at book value.
C) non-controlling interest, at fair value.
D) goodwill or a gain from bargain purchase.
E) none of these choices is correct.
Answer: B
Learning Objective: 04-02
Difficulty: Medium
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

REFERENCE: 04-01
When Jolt Co. acquired 75% of the common stock of Yelts Corp., Yelts owned land with a book value of
$70,000 and a fair value of $100,000.

[QUESTION]
REFER TO: 04-01
2. What amount should have been reported for the land in a consolidated balance sheet at the acquisition
date?
A) $ 52,500.
B) $ 70,000.
C) $ 75,000.
D) $ 92,500.
E) $100,000.
Answer: E
Learning Objective: 04-01
Difficulty: Easy
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: $100,000 FV of Land at Acquisition

[QUESTION]
REFER TO: 04-01
3. What is the total amount of excess land allocation at the acquisition date?
A) $ 0.
B) $30,000.
C) $22,500.
D) $25,000.
E) $17,500.
Answer: B

Page 1
Learning Objective: 04-01
Learning Objective: 04-05
Difficulty: Easy
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: FV $100,000 – BV $70,000 = $30,000

[QUESTION]
REFER TO: 04-01
4. What is the amount of excess land allocation attributed to the controlling interest at the acquisition
date?
A) $ 0.
B) $30,000.
C) $22,500.
D) $25,000.
E) $17,500.
Answer: C
Learning Objective: 04-01
Learning Objective: 04-05
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: FV – BV ($30,000) X .75 = $22,500

[QUESTION]
REFER TO: 04-01
5. What is the amount of excess land allocation attributed to the non-controlling interest at the acquisition
date?
A) $ 0.
B) $30,000.
C) $22,500.
D) $ 7,500.
E) $17,500.
Answer: D
Learning Objective: 04-01
Learning Objective: 04-05
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: FV – BV ($30,000) X .25 = $7,500

[QUESTION]
REFER TO: 04-01
6. What amount should have been reported for the land in a consolidated balance sheet, assuming the
investment was obtained prior to the date the purchase method of accounting for new business

Page 2
combinations was discontinued?
A) $ 70,000.
B) $ 75,000.
C) $ 85,000.
D) $ 92,500.
E) $100,000.
Answer: D
Learning Objective: 04-01
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: BV $70,000 + FV Controlling Differential ($30,000 X .75) = $92,500

REFERENCE: 04-02
Perch Co. acquired 80% of the common stock of Float Corp. for $1,600,000. The fair value of Float's net
assets was $1,850,000, and the book value was $1,500,000. The non-controlling interest shares of Float
Corp. are not actively traded.

[QUESTION]
REFER TO: 04-02
7. What is the total amount of goodwill recognized at the date of acquisition?
A) $150,000.
B) $250,000.
C) $ 0.
D) $120,000.
E) $170,000.
Answer: A
Learning Objective: 04-03
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: FV $1,850,000 – FV of Stock at Purchase Price for 100% ($1,600,000 / .80) $2,000,000 =
($150,000) Goodwill

[QUESTION]
REFER TO: 04-02
8. What amount of goodwill should be attributed to Perch at the date of acquisition?
A) $150,000.
B) $250,000.
C) $ 0.
D) $120,000.
E) $170,000.
Answer: D
Learning Objective: 04-03
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic

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AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: (Purchase Price for 80%) $1,600,000 – (FV $1,850,000 X .80 = $1,480,000) = $120,000

[QUESTION]
REFER TO: 04-02
9. What amount of goodwill should be attributed to the non-controlling interest at the date of acquisition?
A) $ 0.
B) $ 20,000.
C) $ 30,000.
D) $100,000.
E) $120,000.
Answer: C
Learning Objective: 04-03
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: $150,000 Goodwill X .20 = $30,000 to Non-Controlling Interest

[QUESTION]
REFER TO: 04-02
10. What is the dollar amount of non-controlling interest that should appear in a consolidated balance
sheet prepared at the date of acquisition?
A) $350,000.
B) $300,000.
C) $400,000.
D) $370,000.
E) $0.
Answer: C
Learning Objective: 04-05
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: FV of Stock at Purchase Price for 100% ($1,600,000 / .80) $2,000,000 X .20 = $400,000

[QUESTION]
REFER TO: 04-02
11. What is the dollar amount of Float Corp.’s net assets that would be represented in a consolidated
balance sheet prepared at the date of acquisition?
A) $1,600,000.
B) $1,480,000.
C) $1,200,000.
D) $1,780,000.
E) $1,850,000.
Answer: E
Learning Objective: 04-01
Difficulty: Medium

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Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: FV of Assets Acquired = $1,850,000

[QUESTION]
REFER TO: 04-02
12. What is the dollar amount of fair value over book value differences attributed to Perch at the date of
acquisition?
A) $120,000.
B) $150,000.
C) $280,000.
D) $350,000.
E) $370,000.
Answer: C
Learning Objective: 04-01
Learning Objective: 04-05
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: FV $1,850,000 – BV $1,500,000 = $350,000 X .80 = $280,000

REFERENCE: 04-03
Femur Co. acquired 70% of the voting common stock of Harbor Corp. on January 1, 2014. During 2014,
Harbor had revenues of $2,500,000 and expenses of $2,000,000. The amortization of excess cost
allocations totaled $60,000 in 2014.

[QUESTION]
REFER TO: 04-03
13. The non-controlling interest's share of the earnings of Harbor Corp. is calculated to be
A) $132,000.
B) $150,000.
C) $168,000.
D) $160,000.
E) $0.
Answer: A
Learning Objective: 04-04
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Revenue $2,500,000 – Expenses $2,000,000 = $500,000 – $60,000 = $440,000 X .30 =
$132,000

[QUESTION]
REFER TO: 04-03
14. What is the effect of including Harbor in consolidated net income for 2014?

Page 5
A) $350,000.
B) $308,000.
C) $500,000.
D) $440,000.
E) $290,000.
Answer: D
Learning Objective: 04-04
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Revenue $2,500,000 – Expenses $2,000,000 = $500,000 – $60,000 = $440,000

REFERENCE: 04-04
Denber Co. acquired 60% of the common stock of Kailey Corp. on September 1, 2014. For 2014, Kailey
reported revenues of $810,000 and expenses of $630,000, all reflected evenly throughout the year. The
annual amount of amortization related to this acquisition was $15,000.

[QUESTION]
REFER TO: 04-04
15. In consolidation, the total amount of expenses related to Kailey, and to Denber’s acquisition of
Kailey, for 2014 is determined to be
A) $153,750.
B) $161,250.
C) $205,000.
D) $210,000.
E) $215,000.
Answer: E
Learning Objective: 04-08
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
REFER TO: 04-04
16. What is the effect of including Kailey in consolidated net income for 2014?
A) $31,000.
B) $33,000.
C) $55,000.
D) $60,000.
E) $39,000.
Answer: C
Learning Objective: 04-08
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

Page 6
Feedback: Revenue $810,000 – Expenses $630,000 = Income $180,000 X 4/12 = $60,000 – Annual
Amortization ($15,000 X 4/12) = $55,000

[QUESTION]
REFER TO: 04-04
17. What is the amount of net income to the controlling interest for 2014?
A) $31,000.
B) $33,000.
C) $55,000.
D) $60,000.
E) $39,000.
Answer: B
Learning Objective: 04-08
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Revenue $810,000 – Expenses $630,000 = Income $180,000 X 4/12 = $60,000 – Annual
Amortization ($15,000 X 4/12) = $55,000 X .60 = $33,000

[QUESTION]
REFER TO: 04-04
18. What is the amount of the non-controlling interest's share of Kailey’s income for 2014?
A) $22,000.
B) $24,000.
C) $48,000.
D) $66,000.
E) $72,000.
Answer: A
Learning Objective: 04-08
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Total Income for September-December = $55,000 – Controlling Interest Portion $33,000 =
$22,000

[QUESTION]
19. MacHeath Inc. bought 60% of the outstanding common stock of Nomes Inc. in an acquisition
business combination that resulted in the recognition of goodwill. Nomes owned a piece of land that cost
$250,000 but was worth $600,000 at the date of acquisition. What value would be attributed to this land
in a consolidated balance sheet at the date of acquisition?
A) $250,000.
B) $150,000.
C) $600,000.
D) $360,000.
E) $460,000.
Answer: C
Learning Objective: 04-01

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Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: FV of the Land $600,000

[QUESTION]
20. Kordel Inc. acquired 75% of the outstanding common stock of Raxston Corp. Raxston currently
owes Kordel $500,000 for inventory acquired over the past few months. In preparing consolidated
financial statements, what amount of this debt should be eliminated?
A) $375,000
B) $125,000
C) $300,000
D) $500,000
E) $0.
Answer: D
Learning Objective: 04-05
Difficulty: Easy
Bloom’s: Understand
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: BV & FV of the Existing Receivable $500,000

REFERENCE: 04-05
Royce Co. acquired 60% of Park Co. for $420,000 on December 31, 2014 when Park's book value was
$560,000. The Royce stock was not actively traded. On the date of acquisition, Park had equipment
(with a ten-year life) that was undervalued in the financial records by $140,000. One year later, the
following selected figures were reported by the two companies. Additionally, no dividends have been
paid.
Royce Co. Park Co.
Book Book Fair
Value Value Value
Current assets $ 868,000 $ 420,000 $ 448,000
Equipment 364,000 280,000 400,000
Buildings 574,000 210,000 210,000
Liabilities ( 546,000) ( 168,000) ( 168,000)
Revenues ( 1,260,000) ( 560,000)
Expenses 700,000 420,000
Investment income Not Given

[QUESTION]
REFER TO: 04-05
21. What is consolidated net income for 2015 attributable to Royce’s controlling interest?
A) $686,000.
B) $560,000.
C) $644,000.
D) $635,600.

Page 8
E) $691,600.
Answer: D
Learning Objective: 04-04
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: [Parent’s Income ($1,260,000 - $700,000 = $560,000)] + [Sub’s Income ($560,000 - $420,000)
X .60 = $84,000] – [Excess Equipment Amortization for 2015 ($140,000 / 10) X .60 = $8,400] =
$635,600

[QUESTION]
REFER TO: 04-05
22. What is the non-controlling interest's share of the subsidiary's net income for the year ended
December 31, 2015 and what is the ending balance of the non-controlling interest in the subsidiary at
December 31, 2015?
A) $56,000 and $280,000.
B) $50,400 and $218,400.
C) $56,000 and $224,000.
D) $56,000 and $336,000.
E) $50,400 and $330,400.
Answer: E
Learning Objective: 04-04
Learning Objective: 04-05
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: [Sub’s Income ($560,000 - $420,000) X .40 = $56,000] - [Excess Equipment Amortization for
2015 ($140,000 / 10) X .40 = $5,600] = $50,400
[Non-Controlling Interest at Acquisition (FV $700,000 X .40) = $280,000] + [Non-Controlling Interest
2015 Income $56,000] – [Excess Equipment Amortization ($140,000 / 10) X .40] = $330,400

[QUESTION]
REFER TO: 04-05
23. What is the consolidated balance of the Equipment account at December 31, 2015?
A) $644,400.
B) $784,000.
C) $719,600.
D) $770,000.
E) $775,600.
Answer: D
Learning Objective: 04-05
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: [Parent’s Equipment $364,000] + [Sub’s Equipment $280,000] + [Excess Amortization

Page 9
Remaining $140,000 - $14,000] = $770,000

REFERENCE: 04-06
On January 1, 2014, Palk Corp. and Spraz Corp. had condensed balance sheets as follows:

Palk Corp. Spraz Corp.

Current assets $ 99,000 $ 28,000
Noncurrent assets $ 125,000 $ 56,000
Total assets $ 224,000 $ 84,000

Current liabilities $ 42,000 $ 14,000

Long-term debt $ 70,000 $ -
Stockholders' equity $ 112,000 $ 70,000
Total liabilities and stockholders' equity $ 224,000 $ 84,000

On January 2, 2014, Palk borrowed the entire $84,000 it needed to acquire 80% of the outstanding
common shares of Spraz. The loan was to be paid in ten equal annual principal payments, plus interest,
beginning December 31, 2014. The excess consideration transferred over the underlying book value of
the acquired net assets was allocated 60% to inventory and 40% to goodwill.

[QUESTION]
REFER TO: 04-06
24. What is consolidated current assets at January 2, 2014?
A) $127,000.
B) $129,800.
C) $143,800.
D) $148,000.
E) $135,400.
Answer: D
Learning Objective: 04-01
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: [Parent’s Current Assets $99,000] + [Sub’s Current Assets $28,000] + [Excess Consideration
to Inventory ($105,000 - $70,000 = $35,000 X .60) $21,000] = $148,000

[QUESTION]
REFER TO: 04-06
25. What is consolidated noncurrent assets at January 2, 2014?
A) $195,000.
B) $192,200.
C) $186,600.
D) $181,000.
E) $169,800.
Answer: A
Learning Objective: 04-01

Page 10
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: [Parent’s Non-Current Assets $125,000] + [Sub’s Non-Current Assets $56,000] + [Excess
Consideration to Goodwill ($105,000 - $70,000 = $35,000 X .40) $14,000] = $195,000

[QUESTION]
REFER TO: 04-06
26. What are the total consolidated current liabilities at January 2, 2014?
A) $53,200.
B) $56,000.
C) $64,400.
D) $42,000.
E) $70,000.
Answer: C
Learning Objective: 04-01
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: [Parent’s Current Liabilities $42,000] + [Sub’s Current Liabilities $14,000] + [Current Portion
of Acquisition Loan ($84,000 / 10) = $8,400] = $64,400

[QUESTION]
REFER TO: 04-06
27. What is consolidated stockholders’ equity at January 2, 2014?
A) $112,000.
B) $133,000.
C) $168,000.
D) $182,000.
E) $203,000.
Answer: B
Learning Objective: 04-06
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Parent’s Equity $112,000 + Non-Controlling Interest $21,000 = $133,000

[QUESTION]
28. In measuring non-controlling interest at the date of acquisition, which of the following would not be
indicative of the value attributed to the non-controlling interest?
A) Fair value based on stock trades of the acquired company.
B) Subsidiary cash flows discounted to present value.
C) Book value of subsidiary net assets.
D) Projections of residual income.
E) Consideration transferred by the parent company that implies a total subsidiary value.

Page 11
Answer: C
Learning Objective: 04-02
Difficulty: Medium
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
29. When a parent uses the equity method throughout the year to account for its investment in an
acquired subsidiary, which of the following statements is false before making adjustments on the
consolidated worksheet?
A) Parent company net income equals controlling interest in consolidated net income.
B) Parent company retained earnings equals consolidated retained earnings.
C) Parent company total assets equals consolidated total assets.
D) Parent company dividends equals consolidated dividends.
E) Goodwill will not be recorded on the parent’s books.
Answer: C
Learning Objective: 04-05
Difficulty: Medium
Bloom’s: Understand
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
30. When a parent uses the initial value method throughout the year to account for its investment in an
acquired subsidiary, which of the following statements is true before making adjustments on the
consolidated worksheet?
A) Parent company net income equals consolidated net income.
B) Parent company retained earnings equals consolidated retained earnings.
C) Parent company total assets equals consolidated total assets.
D) Parent company dividends equal consolidated dividends.
E) Goodwill needs to be recognized on the parent’s books.
Answer: D
Learning Objective: 04-05
Difficulty: Medium
Bloom’s: Understand
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
31. When a parent uses the partial equity method throughout the year to account for its investment in an
acquired subsidiary, which of the following statements is false before making adjustments on the
consolidated worksheet?
A) Parent company net income will equal controlling interest in consolidated net income when initial
value, book value, and fair value of the investment are equal.
B) Parent company net income will exceed controlling interest in consolidated net income when fair
value of depreciable assets acquired exceeds book value of depreciable assets.
C) Parent company net income will be less than controlling interest in consolidated net income when fair

Page 12
value of net assets acquired exceeds book value of net assets acquired.
D) Goodwill will be recognized if acquisition value exceeds fair value of net assets acquired.
E) Subsidiary net assets are valued at their book values before consolidating entries are made.
Answer: C
Learning Objective: 04-05
Difficulty: Medium
Bloom’s: Understand
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
32. In a step acquisition, which of the following statements is false?
A) The acquisition method views a step acquisition essentially the same as a single step acquisition.
B) Income from subsidiary is computed by applying a partial year for a new purchase acquired during the
year.
C) Income from subsidiary is computed for the entire year for a new purchase acquired during the year.
D) Obtaining control through a step acquisition is a significant remeasurement event.
E) Preacquisition earnings are not included in the consolidated income statement.
Answer: C
Learning Objective: 04-09
Difficulty: Medium
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
33. Which of the following statements is false regarding multiple acquisitions of a subsidiary's existing
common stock?
A) The parent recognizes a larger percent of subsidiary income.
B) A step acquisition resulting in control may result in a parent recognizing a gain on revaluation.
C) The book value of the subsidiary will increase.
D) The parent's percent ownership in subsidiary will increase.
E) Non-controlling interest in subsidiary's net income will decrease.
Answer: C
Learning Objective: 04-09
Difficulty: Medium
Bloom’s: Understand
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
34. When a subsidiary is acquired sometime after the first day of the fiscal year, which of the following
statements is true?
A) Income from subsidiary is not recognized until there is an entire year of consolidated operations.
B) Income from subsidiary is recognized from date of acquisition to year-end.
C) Excess cost over acquisition value is recognized at the beginning of the fiscal year.
D) No goodwill can be recognized.
E) Income from subsidiary is recognized for the entire year.

Page 13
Answer: B
Learning Objective: 04-08
Difficulty: Easy
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
35. When consolidating a subsidiary that was acquired on a date other than the first day of the fiscal year,
which of the following statements is true in the presentation of consolidated financial statements?
A) Preacquisition earnings are deducted from consolidated revenues and expenses.
B) Preacquisition earnings are added to consolidated revenues and expenses.
C) Preacquisition earnings are deducted from the beginning consolidated stockholders' equity.
D) Preacquisition earnings are added to the beginning consolidated stockholders' equity.
E) Preacquisition earnings are ignored in the consolidated income statement.
Answer: E
Learning Objective: 04-08
Difficulty: Medium
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
36. When a parent uses the acquisition method for business combinations and sells shares of its
subsidiary, which of the following statements is false?
A) If majority control is still maintained, consolidated financial statements are still required.
B) If majority control is not maintained but significant influence exists, the equity method to account for
the investment is still used but consolidated financial statements are not required.
C) If majority control is not maintained but significant influence exists, the equity method is still used to
account for the investment and consolidated financial statements are still required.
D) If majority control is not maintained and significant influence no longer exists, a prospective change
in accounting principle to the fair value method is required.
E) A gain or loss calculation must be prepared if control is lost.
Answer: C
Learning Objective: 04-10
Difficulty: Medium
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
37. All of the following statements regarding the sale of subsidiary shares are true except which of the
following?
A) The use of specific identification based on serial number is acceptable.
B) The use of the FIFO assumption is acceptable.
C) The use of the averaging assumption is acceptable.
D) The use of specific LIFO assumption is acceptable.
E) The parent company must determine whether consolidation is still appropriate for the remaining

Page 14
shares owned.
Answer: D
Learning Objective: 04-10
Difficulty: Medium
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
38. Which of the following statements is true regarding the sale of subsidiary shares when using the
acquisition method for accounting for business combinations?
A) If control continues, the difference between selling price and acquisition value is recorded as a
realized gain or loss.
B) If control continues, the difference between selling price and acquisition value is an unrealized gain or
loss.
C) If control continues, the difference between selling price and carrying value is recorded as an
adjustment to additional paid-in capital.
D) If control continues, the difference between selling price and carrying value is recorded as a realized
gain or loss.
E) If control continues, the difference between selling price and carrying value is recorded as an
adjustment to retained earnings.
Answer: C
Learning Objective: 04-10
Difficulty: Medium
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
39. Jax Company uses the acquisition method for accounting for its investment in Saxton Company. Jax
sells some of its shares of Saxton such that neither control nor significant influence exists. Which of the
following statements is true?
A) The difference between selling price and acquisition value is recorded as a realized gain or loss.
B) The difference between selling price and acquisition value is recorded as an unrealized gain or loss.
C) The difference between selling price and carrying value is recorded as a realized gain or loss.
D) The difference between selling price and carrying value is recorded as an unrealized gain or loss.
E) The difference between selling price and carrying value is recorded as an adjustment to retained
earnings.
Answer: C
Learning Objective: 04-10
Difficulty: Medium
Bloom’s: Understand
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
40. Keefe, Inc., a calendar-year corporation, acquires 70% of George Company on September 1, 2014,
and an additional 10% on January 1, 2015. Total annual amortization of $6,000 relates to the first

Page 15
acquisition. George reports the following figures for 2015:

Revenues $500,000
Expenses 400,000
Retained earnings, 1/1/15 300,000
Dividends paid 50,000
Common stock 200,000

Without regard for this investment, Keefe independently earns $300,000 in net income during 2015.
All net income is earned evenly throughout the year.
What is the controlling interest in consolidated net income for 2015?
A) $380,000.
B) $375,200.
C) $375,800.
D) $376,000.
E) $400,000.
Answer: B
Learning Objective: 04-08
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

REFERENCE: 04-07
McGuire Company acquired 90 percent of Hogan Company on January 1, 2014, for $234,000 cash. This
amount is reflective of Hogan’s total fair value. Hogan's stockholders' equity consisted of common stock
of $160,000 and retained earnings of $80,000. An analysis of Hogan's net assets revealed the following:

Book Value Fair Value

Buildings (10 - year life) $10,000 $ 8,000
Equipment (4-year life) 14,000 18,000
Land 5,000 12,000

Any excess consideration transferred over fair value is attributable to an unamortized patent with a useful
life of 5 years.

[QUESTION]
REFER TO: 04-07
41. The acquisition value attributable to the non-controlling interest at January 1, 2014 is:
A) $23,400.
B) $24,000.
C) $24,900.
D) $26,000.
E) $20,000.
Answer: D
Learning Objective: 04-02
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic

Page 16
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: $234,000 / .90 = $260,000 X .10 = $26,000

[QUESTION]
REFER TO: 04-07
42. In consolidation at January 1, 2014, what adjustment is necessary for Hogan's Buildings account?
A) $2,000 increase.
B) $2,000 decrease.
C) $1,800 increase.
D) $1,800 decrease.
E) No change.
Answer: B
Learning Objective: 04-01
Difficulty: Easy
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: FV $8,000 – BV $10,000 = <$2,000> Reduction

[QUESTION]
REFER TO: 04-07
43. In consolidation at December 31, 2014, what adjustment is necessary for Hogan's Buildings account?
A) $1,620 increase.
B) $1,620 decrease.
C) $1,800 increase.
D) $1,800 decrease.
E) No adjustment is necessary.
Answer: D
Learning Objective: 04-05
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: <$2,000> Reduction – 2014 Excess Amortization of <$200> = <$1,800> Reduction

[QUESTION]
REFER TO: 04-07
44. In consolidation at December 31, 2015, what adjustment is necessary for Hogan's Buildings account?
A) $1,440 increase.
B) $1,440 decrease.
C) $1,600 increase.
D) $1,600 decrease.
E) No adjustment is necessary.
Answer: D
Learning Objective: 04-05
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic

Page 17
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: <$1,800> 2014 BV – 2015 Excess Amortization of <$200> = <$1,600> Reduction

[QUESTION]
REFER TO: 04-07
45. In consolidation at January 1, 2014, what adjustment is necessary for Hogan's Equipment account?
A) $4,000 increase.
B) $4,000 decrease.
C) $3,600 increase.
D) $3,600 decrease.
E) No adjustment is necessary.
Answer: A
Learning Objective: 04-01
Difficulty: Easy
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: FV $18,000 – BV $14,000 = Increase $4,000

[QUESTION]
REFER TO: 04-07
46. In consolidation at December 31, 2014, what adjustment is necessary for Hogan's Equipment
account?
A) $3,000 increase.
B) $3,000 decrease.
C) $2,700 increase.
D) $2,700 decrease.
E) No adjustment is necessary.
Answer: A
Learning Objective: 04-05
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Fair Value Differential $4,000 – Amortization for 2014 $1,000 = $3,000 Increase

[QUESTION]
REFER TO: 04-07
47. In consolidation at December 31, 2015, what adjustment is necessary for Hogan's Equipment
account?
A) $2,000 increase.
B) $2,000 decrease.
C) $1,800 increase.
D) $1,800 decrease.
E) No adjustment is necessary.
Answer: A
Learning Objective: 04-05
Difficulty: Medium

Page 18
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Fair Value Differential $4,000 – Amortization for 2014 & 2015 $2,000 = $2,000 Increase

[QUESTION]
REFER TO: 04-07
48. In consolidation at January 1, 2014, what adjustment is necessary for Hogan's Land account?
A) $7,000 increase.
B) $7,000 decrease.
C) $6,300 increase.
D) $6,300 decrease.
E) No adjustment is necessary.
Answer: A
Learning Objective: 04-01
Difficulty: Easy
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Fair Value Differential at Acquisition $7,000 – No Amortization = $7,000 Increase

[QUESTION]
REFER TO: 04-07
49. In consolidation at December 31, 2014, what adjustment is necessary for Hogan's Land account?
A) $8,000 decrease .
B) $7,000 increase.
C) $6,300 increase.
D) $6,300 decrease.
E) No adjustment is necessary.
Answer: B
Learning Objective: 04-05
Difficulty: Easy
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Fair Value Differential at Acquisition $7,000 – No Amortization = $7,000 Increase

[QUESTION]
REFER TO: 04-07
50. In consolidation at December 31, 2015, what adjustment is necessary for Hogan's Land account?
A) $7,000 decrease.
B) $7,000 increase.
C) $6,300 increase.
D) $6,300 decrease.
E) No adjustment is necessary.
Answer: B
Learning Objective: 04-05
Difficulty: Easy

Page 19
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Fair Value Differential at Acquisition $7,000 – No Amortization = $7,000 Increase

[QUESTION]
REFER TO: 04-07
51. In consolidation at January 1, 2014, what adjustment is necessary for Hogan's Patent account?
A) $7,000.
B) $6,300.
C) $11,000.
D) $9,900.
E) No adjustment is necessary.
Answer: C
Learning Objective: 04-01
Difficulty: Easy
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: BV Equity $240,000 – Fair Value Equity at Acquisition $260,000 = $20,000 – Identified Net
FV Increase $9,000 (Blgs + Equipt + Land) = $11,000 Excess Attributed to Patent

[QUESTION]
REFER TO: 04-07
52. In consolidation at December 31, 2014, what net adjustment is necessary for Hogan's Patent account?
A) $5,600.
B) $8,800.
C) $7,000.
D) $7,700.
E) No adjustment is necessary.
Answer: B
Learning Objective: 04-05
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Attributed Fair Value Patent $11,000 – Amortization for 2014 $2,200 = $8,800

[QUESTION]
REFER TO: 04-07
53. In consolidation at December 31, 2015, what net adjustment is necessary for Hogan's Patent account?
A) $4,200.
B) $5,500.
C) $8,000.
D) $6,600.
E) No adjustment is necessary.
Answer: D
Learning Objective: 04-05

Page 20
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Attributed Fair Value Patent $11,000 – Amortization for 2014 & 2015 $4,400 = $6,600

REFERENCE: 04-08
Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2014. Demers reported
common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued
by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any
excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based
on an annual review, goodwill has not been impaired.
Demers earns income and pays dividends as follows:

2014 2015 2016

Net income $100,000 $120,000 $130,000
Dividends 40,000 50,000 60,000

Assume the EQUITY METHOD is applied.

[QUESTION]
REFER TO: 04-08
54. Compute Pell's investment account balance in Demers at December 31, 2014.
A) $580,000.
B) $574,400.
C) $548,000.
D) $542,400.
E) $541,000.
Answer: D
Learning Objective: 04-05
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Initial Investment $500,000 + Controlling Interest Income for 2014 ($100,000 X .80) –
Dividends for 2014 ($40,000 X .80) – Excess FV Annual Amortization ($7,000 X .80) = $542,400

[QUESTION]
REFER TO: 04-08
55. Compute Pell's investment account balance in Demers at December 31, 2015.
A) $577,200.
B) $604,000.
C) $592,800.
D) $632,800.
E) $572,000.
Answer: C
Learning Objective: 04-05
Difficulty: Medium

Page 21
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: December 2014 Investment Balance $542,400 + Controlling Interest Income for 2015
($120,000 X .80) – Dividends for 2015 ($50,000 X .80) – Excess FV Annual Amortization ($7,000 X .80)
= $592,800

[QUESTION]
REFER TO: 04-08
56. Compute Pell's investment account balance in Demers at December 31, 2016.
A) $639,000.
B) $643,200.
C) $763,200.
D) $676,000.
E) $620,000.
Answer: B
Learning Objective: 04-05
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: December 2015 Investment Balance $592,800 + Controlling Interest Income for 2016
($130,000 X .80) – Dividends for 2015 ($60,000 X .80) – Excess FV Annual Amortization ($7,000 X .80)
= $643,200

[QUESTION]
REFER TO: 04-08
57. Compute Pell's income from Demers for the year ended December 31, 2014.
A) $74,400.
B) $73,000.
C) $42,400.
D) $41,000.
E) $80,000.
Answer: A
Learning Objective: 04-04
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Controlling Interest Income for 2014 ($100,000 X .80) – Excess FV Annual Amortization
($7,000 X .80) = $74,400

[QUESTION]
REFER TO: 04-08
58. Compute Pell's income from Demers for the year ended December 31, 2015.
A) $90,400.
B) $89,000.
C) $50,400.

Page 22
D) $56,000.
E) $96,000.
Answer: A
Learning Objective: 04-04
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Controlling Interest Income for 2015 ($120,000 X .80) – Excess FV Annual Amortization
($7,000 X .80) = $90,400

[QUESTION]
REFER TO: 04-08
59. Compute Pell's income from Demers for the year ended December 31, 2016.
A) $50,400.
B) $56,000.
C) $98,400.
D) $97,000.
E) $104,000.
Answer: C
Learning Objective: 04-04
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Controlling Interest Income for 2016 ($130,000 X .80) – Excess FV Annual Amortization
($7,000 X .80) = $98,400

[QUESTION]
REFER TO: 04-08
60. Compute the non-controlling interest in the net income of Demers at December 31, 2014.
A) $20,000.
B) $12,000.
C) $18,600.
D) $10,600.
E) $14,400.
Answer: C
Learning Objective: 04-04
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Non-Controlling Interest Income for 2014 ($100,000 X .20) – Excess FV Annual Amortization
($7,000 X .20) = $18,600

[QUESTION]
REFER TO: 04-08
61. Compute the non-controlling interest in the net income of Demers at December 31, 2015.

Page 23
A) $18,400.
B) $14,400.
C) $22,600.
D) $24,000.
E) $12,600.
Answer: C
Learning Objective: 04-04
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Non-Controlling Interest Income for 2015 ($120,000 X .20) – Excess FV Annual Amortization
($7,000 X .20) = $22,600

[QUESTION]
REFER TO: 04-08
62. Compute the non-controlling interest in the net income of Demers at December 31, 2016.
A) $20,400.
B) $24,600.
C) $26,000.
D) $14,000.
E) $12,600.
Answer: B
Learning Objective: 04-04
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Non-Controlling Interest Income for 2016 ($130,000 X .20) – Excess FV Annual Amortization
($7,000 X .20) = $24,600

[QUESTION]
REFER TO: 04-08
63. Compute the non-controlling interest in Demers at December 31, 2014.
A) $135,600.
B) $137,000.
C) $112,000.
D) $100,000.
E) $118,600.
Answer: A
Learning Objective: 04-05
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Non-Controlling Interest at Acquisition $125,000 + Non-Controlling Interest Income for 2014
($100,000 X .20) – Non-Controlling Dividends for 2014 ($40,000 X .20) – Excess FV Annual
Amortization ($7,000 X .20) = $135,600

Page 24
[QUESTION]
REFER TO: 04-08
64. Compute the non-controlling interest in Demers at December 31, 2015.
A) $107,000.
B) $126,000.
C) $109,200.
D) $149,600.
E) $148,200.
Answer: E
Learning Objective: 04-05
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: December 2014 Investment Balance $135,600 + Non-Controlling Interest Income for 2015
($120,000 X .20) – Non-Controlling Dividends for 2015 ($50,000 X .20) – Excess FV Annual
Amortization ($7,000 X .20) = $148,200

[QUESTION]
REFER TO: 04-08
65. Compute the non-controlling interest in Demers at December 31, 2016.
A) $107,800.
B) $140,000.
C) $165,200.
D) $160,800.
E) $146,800.
Answer: D
Learning Objective: 04-05
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: December 2015 Investment Balance $148,200 + Non-Controlling Interest Income for 2016
($130,000 X .20) – Non-Controlling Dividends for 2016 ($60,000 X .20) – Excess FV Annual
Amortization ($7,000 X .20) = $160,800

REFERENCE: 04-09
Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2014. Demers reported
common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued
by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any
excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based
on an annual review, goodwill has not been impaired.
Demers earns income and pays dividends as follows:

Page 25
 2014 2015 2016
Net income $100,000 $120,000 $130,000
Dividends 40,000 50,000 60,000

Assume the INITIAL VALUE is applied.

[QUESTION]
REFER TO: 04-09
66. Compute Pell's investment in Demers at December 31, 2014.
A) $500,000.
B) $574,400.
C) $625,000.
D) $542,400.
E) $532,000.
Answer: A
Learning Objective: 04-01
Learning Objective: 04-05
Difficulty: Easy
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Initial Investment = $500,000

[QUESTION]
REFER TO: 04-09
67. Compute Pell's investment in Demers at December 31, 2015.
A) $625,000.
B) $664,800.
C) $592,400.
D) $500,000.
E) $572,000.
Answer: D
Learning Objective: 04-01
Learning Objective: 04-05
Difficulty: Easy
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Initial Investment = $500,000

[QUESTION]
REFER TO: 04-09
68. Compute Pell's investment in Demers at December 31, 2016.
A) $592,400.
B) $500,000.
C) $625,000.
D) $676,000.
E) $620,000.

Page 26
Answer: B
Learning Objective: 04-01
Learning Objective: 04-05
Difficulty: Easy
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Initial Investment = $500,000

[QUESTION]
REFER TO: 04-09
69. How much does Pell record as Income from Demers for the year ended December 31, 2014?
A) $32,000.
B) $74,400.
C) $73,000.
D) $42,400.
E) $41,000.
Answer: A
Learning Objective: 04-01
Learning Objective: 04-04
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: 2014 Dividends $40,000 X .80 = $32,000

[QUESTION]
REFER TO: 04-09
70. How much does Pell record as Income from Demers for the year ended December 31, 2015?
A) $90,400.
B) $40,000.
C) $89,000.
D) $50,400.
E) $56,000.
Answer: B
Learning Objective: 04-01
Learning Objective: 04-04
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: 2015 Dividends $50,000 X .80 = $40,000

[QUESTION]
REFER TO: 04-09
71. How much does Pell record as Income from Demers for the year ended December 31, 2016?
A) $48,000.
B) $56,000.

Page 27
C) $98,400.
D) $97,000.
E) $50,400.
Answer: A
Learning Objective: 04-01
Learning Objective: 04-04
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: 2016 Dividends $60,000 X .80 = $48,000

[QUESTION]
REFER TO: 04-09
72. Compute the non-controlling interest in the net income of Demers at December 31, 2014.
A) $12,000.
B) $10,600.
C) $18,600.
D) $20,000.
E) $14,400.
Answer: C
Learning Objective: 04-04
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Non-Controlling Interest Income for 2014 ($100,000 X .20) – Excess FV Annual Amortization
($7,000 X .20) = $18,600

[QUESTION]
REFER TO: 04-09
73. Compute the non-controlling interest in the net income of Demers at December 31, 2015.
A) $18,400.
B) $14,000.
C) $22,600.
D) $24,000.
E) $12,600.
Answer: C
Learning Objective: 04-04
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Non-Controlling Interest Income for 2015 ($120,000 X .20) – Excess FV Annual Amortization
($7,000 X .20) = $22,600

[QUESTION]
REFER TO: 04-09

Page 28
74. Compute the non-controlling interest in the net income of Demers at December 31, 2016.
A) $24,600.
B) $14,000.
C) $26,000.
D) $20,400.
E) $12,600.
Answer: A
Learning Objective: 04-04
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Non-Controlling Interest Income for 2016 ($130,000 X .20) – Excess FV Annual Amortization
($7,000 X .20) = $24,600

[QUESTION]
REFER TO: 04-09
75. Compute the non-controlling interest in Demers at December 31, 2014.
A) $135,600.
B) $ 80,000.
C) $117,000.
D) $100,000.
E) $110,600.
Answer: A
Learning Objective: 04-05
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Non-Controlling Interest at Acquisition $125,000 + Non-Controlling Interest Income for 2014
($100,000 X .20) – Non-Controlling Dividends for 2014 ($40,000 X .20) – Excess FV Annual
Amortization ($7,000 X .20) = $135,600

[QUESTION]
REFER TO: 04-09
76. Compute the non-controlling interest in Demers at December 31, 2015.
A) $126,000.
B) $106,000.
C) $109,200.
D) $149,600.
E) $148,200.
Answer: E
Learning Objective: 04-05
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: December 2014 Investment Balance $135,600 + Non-Controlling Interest Income for 2015

Page 29
($120,000 X .20) – Non-Controlling Dividends for 2015 ($50,000 X .20) – Excess FV Annual
Amortization ($7,000 X .20) = $148,200

[QUESTION]
REFER TO: 04-09
77. Compute the non-controlling interest in Demers at December 31, 2016.
A) $107,800.
B) $140,000.
C) $ 80,000.
D) $ 50,000.
E) $160,800.
Answer: E
Learning Objective: 04-05
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: December 2015 Investment Balance $148,200 + Non-Controlling Interest Income for 2016
($130,000 X .20) – Non-Controlling Dividends for 2016 ($60,000 X .20) – Excess FV Annual
Amortization ($7,000 X .20) = $160,800

REFERENCE: 04-10
Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2014. Demers reported
common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued
by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any
excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based
on an annual review, goodwill has not been impaired.
Demers earns income and pays dividends as follows:

2014 2015 2016

Net income $100,000 $120,000 $130,000
Dividends 40,000 50,000 60,000

Assume the PARTIAL EQUITY method is applied.

[QUESTION]
REFER TO: 04-10
78. Compute Pell's investment in Demers at December 31, 2014.
A) $625,000.
B) $574,400.
C) $548,000.
D) $542,400.
E) $532,000.
Answer: C
Learning Objective: 04-01
Learning Objective: 04-05
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic

Page 30
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Initial Investment $500,000 + Controlling Interest Income for 2014 ($100,000 X .80) –
Dividends for 2014 ($40,000 X .80) = $548,000

[QUESTION]
REFER TO: 04-10
79. Compute Pell's investment in Demers at December 31, 2015.
A) $676,000.
B) $629,000.
C) $580,000.
D) $604,000.
E) $572,000.
Answer: D
Learning Objective: 04-01
Learning Objective: 04-05
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: December 2014 Investment Balance $548,000 + Controlling Interest Income for 2015
($120,000 X .80) – Dividends for 2015 ($50,000 X .80) = $604,000

[QUESTION]
REFER TO: 04-10
80. Compute Pell's investment in Demers at December 31, 2016.
A) $780,000.
B) $660,000.
C) $785,000.
D) $676,000.
E) $620,000.
Answer: B
Learning Objective: 04-01
Learning Objective: 04-05
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: December 2015 Investment Balance $604,000 + Controlling Interest Income for 2016
($130,000 X .80) – Dividends for 2015 ($60,000 X .80) = $660,000

[QUESTION]
REFER TO: 04-10
81. How much does Pell record as Income from Demers for the year ended December 31, 2014?
A) $80,000.
B) $74,400.
C) $73,000.
D) $42,400.
E) $41,000.

Page 31
Answer: A
Learning Objective: 04-01
Learning Objective: 04-04
Difficulty: Easy
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Controlling Interest Income for 2014 ($100,000 X .80) = $80,000

[QUESTION]
REFER TO: 04-10
82. How much does Pell record as income from Demers for the year ended December 31, 2015?
A) $90,400.
B) $89,000.
C) $50,400.
D) $96,000.
E) $56,000.
Answer: D
Learning Objective: 04-01
Learning Objective: 04-04
Difficulty: Easy
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Controlling Interest Income for 2015 ($120,000 X .80) = $96,000

[QUESTION]
REFER TO: 04-10
83. How much does Pell record as income from Demers for the year ended December 31, 2016?
A) $ 98,400.
B) $ 56,000.
C) $104,000.
D) $ 97,000.
E) $ 50,400.
Answer: C
Learning Objective: 04-01
Learning Objective: 04-04
Difficulty: Easy
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Controlling Interest Income for 2016 ($130,000 X .80) = $104,000

[QUESTION]
REFER TO: 04-10
84. Compute the non-controlling interest in the net income of Demers at December 31, 2014.
A) $20,000.
B) $12,000.

Page 32
C) $18,600.
D) $10,600.
E) $14,400.
Answer: C
Learning Objective: 04-04
Difficulty: Easy
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Non-Controlling Interest Income for 2014 ($100,000 X .20) – Excess FV Annual Amortization
($7,000 X .20) = $18,600

[QUESTION]
REFER TO: 04-10
85. Compute the non-controlling interest in the net income of Demers at December 31, 2015.
A) $18,400.
B) $14,000.
C) $22,600.
D) $24,000.
E) $12,600.
Answer: C
Learning Objective: 04-04
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Non-Controlling Interest Income for 2015 ($120,000 X .20) – Excess FV Annual Amortization
($7,000 X .20) = $22,600

[QUESTION]
REFER TO: 04-10
86. Compute the non-controlling interest in the net income of Demers at December 31, 2016.
A) $20,400.
B) $26,000.
C) $24,600.
D) $14,000.
E) $12,600.
Answer: C
Learning Objective: 04-04
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Non-Controlling Interest Income for 2016 ($130,000 X .20) – Excess FV Annual Amortization
($7,000 X .20) = $24,600

[QUESTION]
REFER TO: 04-10

Page 33
87. Compute the non-controlling interest in Demers at December 31, 2014.
A) $135,600.
B) $114,000.
C) $112,000.
D) $100,000.
E) $110,600.
Answer: A
Learning Objective: 04-05
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: Non-Controlling Interest at Acquisition $125,000 + Non-Controlling Interest Income for 2014
($100,000 X .20) – Non-Controlling Dividends for 2014 ($40,000 X .20) – Excess FV Annual
Amortization ($7,000 X .20) = $135,600

[QUESTION]
REFER TO: 04-10
88. Compute the non-controlling interest in Demers at December 31, 2015.
A) $124,000.
B) $126,000.
C) $109,200.
D) $149,600.
E) $ 148,200.
Answer: E
Learning Objective: 04-05
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: December 2014 Investment Balance $135,600 + Non-Controlling Interest Income for 2015
($120,000 X .20) – Non-Controlling Dividends for 2015 ($50,000 X .20) – Excess FV Annual
Amortization ($7,000 X .20) = $148,200

[QUESTION]
REFER TO: 04-10
89. Compute the non-controlling interest in Demers at December 31, 2016.
A) $107,800.
B) $140,000.
C) $ 80,000.
D) $160,800.
E) $146,800.
Answer: D
Learning Objective: 04-05
Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

Page 34
Feedback: December 2015 Investment Balance $148,200 + Non-Controlling Interest Income for 2016
($130,000 X .20) – Non-Controlling Dividends for 2016 ($60,000 X .20) – Excess FV Annual
Amortization ($7,000 X .20) = $160,800

REFERENCE: 04-11
Parsons Company acquired 90% of Roxy Company several years ago and recorded goodwill of $200,000
at that date. During 2015 an analysis of the fair value of Roxy's assets determined an impairment of
goodwill in the amount of $50,000.

[QUESTION]
REFER TO: 04-11
90. At what amount would consolidated goodwill be reported for 2015?
A) $150,000
B) $200,000.
C) $ 50,000.
D) $ 0.
E) $135,000.
Answer: A
Learning Objective: 04-05
Difficulty: Easy
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Feedback: (Recorded Goodwill $200,000) – (2015 Goodwill Impairment $50,000) = $150,000 Reported
Goodwill for 2015

[QUESTION]
REFER TO: 04-11
91. What journal entry would be made by Parsons regarding the impairment of goodwill?

A. Impairment Loss 50,000

Goodwill 50,000
B. Investment in Roxy 50,000
Goodwill 50,000
C. Impairment Loss 50,000
Investment in Roxy 50,000
D. Impairment Loss 45,000
Investment in Roxy 45,000
E. Impairment Loss 45,000
Goodwill 45,000

A) Journal entry A.
B) Journal entry B.
C) Journal entry C.
D) Journal entry D.
E) Journal entry E.
Answer: C
Learning Objective: 04-05
Difficulty: Easy
Bloom’s: Analyze

Page 35
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
92. In comparing U.S. GAAP and international financial reporting standards (IFRS) with regard to a
basis for measurement of a non-controlling interest, which of the following is true?
A) U.S. GAAP requires acquisition-date fair value measurement and IFRS requires the acquiree’s
identifiable net asset fair value measurement.
B) U.S. GAAP and IFRS both require acquisition-date fair value measurement.
C) U.S. GAAP and IFRS both require the acquiree’s identifiable net asset fair value measurement.
D) U.S. GAAP requires acquisition-date fair value measurement, but IFRS allows an option for
acquisition-date fair value measurement.
E) U.S. GAAP and IFRS both apportion goodwill to the parent only.
Answer: D
Learning Objective: 04-10
Difficulty: Medium
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

Essay:

[QUESTION]
93. Where should a non-controlling interest appear on a consolidated balance sheet?
Answer: The non-controlling interest should appear as a part of stockholders' equity where it would be
clearly identified, labeled and distinguished from the parent’s controlling interest in subsidiaries.
Learning Objective: 04-06
Difficulty: Easy
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
94. What is preacquisition income?
Answer: When a company acquires control of a subsidiary during a fiscal year, preacquisition income is
the income attributed to the previous owners of the shares of the common stock for the portion of the year
before the acquisition.
Learning Objective: 04-08
Difficulty: Easy
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
95. Beta Corp. owns less than one hundred percent of the voting common stock of Shedds Co. Under
what conditions will Beta be required to prepare consolidated financial statements?
Answer: Beta will be required to prepare consolidated financial statements if it has control of Shedds. If

Page 36
Beta has more than 50% of the voting common stock of Shedds, it has control and must prepare
consolidated financial statements. Occasionally, ownership of less than 50% of the voting common stock
can confer control. In this situation, an argument can be made that the company with control should
prepare consolidated financial statements, although such reporting is not currently required.
Learning Objective: 04-01
Difficulty: Medium
Bloom’s: Understand
AACSB: Reflective thinking
AICPA FN: Measurement

[QUESTION]
96. Where may a non-controlling interest be presented in a consolidated balance sheet?
Answer: A non-controlling interest must be shown in the balance sheet as part of stockholders' equity. It
may no longer be shown between liabilities and stockholders' equity or classified as neither.
Learning Objective: 04-06
Difficulty: Medium
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
97. How would you determine the amount of goodwill to be recognized at date of acquisition when there
is a non-controlling interest present?
Answer: The non-controlling interest fair value may be implied by the parent’s consideration transferred
or by a separate value calculation. The total acquisition fair value is then the sum of both parent and non-
controlling interest shares.
The fair value of the net assets acquired is apportioned to the parent and to the non-controlling interest.
Then, the difference between acquisition fair value and relative fair value of net assets acquired is
goodwill attributed respectively to the parent and to the non-controlling interest.
Learning Objective: 04-03
Difficulty: Medium
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
98. How is a non-controlling interest in the net income of an entity reported in the income statement?
Answer: The non-controlling interest would appear as a clearly identifiable portion of consolidated net
income such that the controlling portion plus the non-controlling portion equals the consolidated net
income presented.
Learning Objective: 04-04
Difficulty: Medium
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]

Page 37
99. One company buys a controlling interest in another company on April 1. How should the
preacquisition subsidiary revenues and expenses be handled in the consolidated balances for the year of
acquisition?
Answer: Only postacquisition revenues and expenses are included in consolidated totals. The non-
controlling interest is thereby viewed as beginning as of the acquisition date.
Learning Objective: 04-08
Difficulty: Medium
Bloom’s: Understand
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
100. Prevatt, Inc. owns 80% of Franklin Company. During the current year, a portion of the investment
in Franklin is sold. Prior to recording the sale, Prevatt adjusts the carrying value of its investment. What
is the purpose of the adjustment?
Answer: If control is maintained after the sale, then the difference between the sales proceeds and the
book value is an adjustment to the parent’s owners’ equity. If control is not maintained, then such
difference is a gain or loss on sale of investment. In either situation, the carrying value of the investment
should be on the equity method basis in order to calculate the proper entry for the sale. Therefore, if
Prevatt adjusts the carrying value of its investment, it is in order to bring an initial value method or partial
equity method investment basis to an equity method basis.
Learning Objective: 04-10
Difficulty: Medium
Bloom’s: Understand
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
101. How does a parent company account for the sale of a portion of an investment in a subsidiary?
Answer: If control is maintained after the sale, then the difference between the sales proceeds and the
book value is an adjustment to the parent’s owners’ equity (APIC). If control is not maintained, then such
difference is a gain or loss on sale of investment. In either situation, the book value of the investment
should be on the equity method basis in order to calculate the proper entry for the sale. Therefore, if the
investment has been kept under the initial value or the partial equity method, the investor adjusts the book
value of its investment in order to bring an initial value method or partial equity method investment basis
to an equity method basis.
Learning Objective: 04-10
Difficulty: Medium
Bloom’s: Remember
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

Problems:

[QUESTION]
102. Alonzo Co. acquired 60% of Beazley Corp. by paying $240,000 cash. There is no active trading
market for Beazley Corp. At the time of the acquisition, the book value of Beazley's net assets was

Page 38
$300,000.
Required:
What amount should have been assigned to the non-controlling interest immediately after the
combination?
Answer:
Implied value of Beazley Corp. ($240,000 ÷ 60%) $ 400,000
Non-controlling percentage x 40%
Non-controlling interest in Beazley Corp. $ 160,000

Learning Objective: 04-02

Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
103. Tosco Co. paid $540,000 for 80% of the stock of Martz Co. when the book value of Martz's net
assets was $600,000. For all of Martz's assets and liabilities, book value and fair value were
approximately equal.
Required:
Using the acquisition method, what amount of goodwill should appear in a consolidated balance sheet
prepared immediately after the combination?

Answer:
Implied fair value ($540,000/80%) $ 675,000
Book value (600,000)
Goodwill $ 75,000

Learning Objective: 04-03

Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
104. On January 1, 2015, Elva Corp. paid $750,000 for 80% of Fenton Co. when the book value of
Fenton's net assets was $800,000. Fenton owned a building with a fair value of $150,000 and a book
value of $120,000.
Required:
At what amount would the building appear on a consolidated balance sheet prepared immediately after
the combination, under the acquisition method of accounting for business combinations?
Answer:
Book value of building $ 120,000
Allocation of difference 30,000
Fenton’s building for consolidation $ 150,000

Learning Objective: 04-01

Difficulty: Easy

Page 39
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
105. Pennant Corp. owns 70% of the common stock of Scarvens Co. Scarvens' revenues for 2015 totaled
$200,000.
Required:
What amount of Scarvens' revenues would be included in the consolidated revenues under the acquisition
method of accounting for business combinations?
Answer:
Scarvens’ revenues $ 200,000
Scarvens’ portion of consolidated revenues $ 200,000

Learning Objective: 04-04

Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

REFERENCE: 04-12
Caldwell Inc. acquired 65% of Club Corp. for $2,600,000. Club owned a building and equipment with
ten-year useful lives. The book value of these assets was $830,000, and the fair value was $950,000. For
Club's other assets and liabilities, book value was equal to fair value. The total fair value of Club's net
assets was $3,500,000.

[QUESTION]
REFER TO: 04-12
106. Using the acquisition method, determine the amount of goodwill associated with Caldwell's
purchase of Club.
Answer:
Implied fair value of Club Corp. ($2,600,000 ÷ 65%) $ 4,000,000
Fair value of Club Corp.’s net assets (3,500,000)
Goodwill $ 500,000

Learning Objective: 04-03

Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
REFER TO: 04-12
107. Determine the amount of the non-controlling interest as of the date of the acquisition.

Page 40
Answer:

I m p lie d v a lu e o f C lu b C o r p . ( $ 2 ,6 0 0 ,0 0 0 ÷ 6 5 % ) $ 4 ,0 0 0 ,0 0 0
M in o rity p e rc e n ta g e X 35% Learning
N o n c o n tro llin g in te re s t in C lu b C o rp . $ 1 ,4 0 0 ,0 0 0 Objective: 04-03
Difficulty:
Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

REFERENCE: 04-13
On January 1, 2014, Glenville Co. acquired an 80% interest in Acron Corp. for $500,000. There is no
active trading market for Acron’s stock. The fair value of Acron's net assets was $600,000 and Glenville
accounts for its interest using the acquisition method.

[QUESTION]
REFER TO: 04-13
108. Determine the amount of goodwill to be recognized in this acquisition.
Answer:
Consideration transferred $500,000 for 80%
implies value for 100% ($500,000/80%) $ 625,000
Fair value net assets (600,000)
Goodwill $ 25,000

Learning Objective: 04-03

Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
REFER TO: 04-13
109. Determine the value assigned to the non-controlling interest as of the date of the acquisition.
Answer:
Implied value $625,000 x 20% $ 125,000

Learning Objective: 04-03

Difficulty: Easy
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

REFERENCE: 04-14
On January 1, 2014, Jannison Inc. acquired 90% of Techron Co. by paying $477,000 cash. There is no
active trading market for Techron stock. Techron Co. reported a Common Stock account balance of
$140,000 and Retained Earnings of $280,000 at that date. The fair value of Techron Co. was appraised at

Page 41
$530,000. The total annual amortization was $11,000 as a result of this transaction. The subsidiary
earned $98,000 in 2014 and $126,000 in 2015 with dividend payments of $42,000 each year. Without
regard for this investment, Jannison had income of $308,000 in 2014 and $364,000 in 2015. Use the
economic unit concept to account for this acquisition.

[QUESTION]
REFER TO: 04-14
110. Prepare a proper presentation of consolidated net income for 2014.
Answer:

Jannison’s income – 2014 $308,000

Techron’s income – 2014 98,000
Amortization expense (given) (11,000)
Consolidated net income $395,000
To non-controlling interest (10%) ($98,000-11,000) (8,700)
To controlling interest $386,300

Learning Objective: 04-04

Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
REFER TO: 04-14
111. Prepare a proper presentation of consolidated net income for 2015.

Answer:

Jannison’s income – 2015 $364,000

Techron’s income – 2015 126,000
Amortization expense (given) (11,000)
Consolidated net income $479,000
To non-controlling interest (10%) ($126,000- (11,500)
11,000)
To controlling interest $467,500

Learning Objective: 04-04

Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
REFER TO: 04-14
112. What is the non-controlling interest balance as of December 31, 2015?
Answer:

Page 42
 At January 1, 2014:
Common stock + Retained earnings $ 420,000
Fair value excess allocation $530,000-420,000 110,000 $ 530,000
Techron’s income - 2014 (98,000 - amort. 11,000) 87,000
Dividends paid ( 42,000) 45,000
Techron’s income - 2015 (126,000 - amort. 11,000) 115,000
Dividends paid ( 42,000) 73,000
Techron’s book value — December 31, 2015 $ 648,000
Non-controlling interest percentage x 10%
Non-controlling interest — December 31, 2015 $ 64,800

Learning Objective: 04-05

Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
113. On January 1, 2013, Vacker Co. acquired 70% of Carper Inc. by paying $650,000. This included a
$20,000 control premium. Carper reported common stock on that date of $420,000 with retained earnings
of $252,000. A building was undervalued in the company's financial records by $28,000. This building
had a ten-year remaining life. Copyrights of $80,000 were to be recognized and amortized over 20 years.
Carper earned income and paid cash dividends as follows:

Net Dividends
Income Paid
2013 $ 105,000 $ 54,600
2014 134,400 61,600
2015 154,000 84,000

On December 31, 2015, Vacker owed $30,800 to Carper. There have been no changes in Carper’s
common stock account since the acquisition.
Required:
If the equity method had been applied by Vacker for this acquisition, what were the consolidation entries
needed as of December 31, 2015?
Answer:
From the acquisition value, $28,000 was allocated based on the fair value of the building. With a ten-year
remaining life, amortization will be $2,800 per year of which $1,960 is attributed to the controlling
interest.
Copyright amortization would have been $4,000 per year of which $2,800 is attributed to the controlling
interest.

Entry S
Common Stock-Carper Inc. 420,000
Retained Earnings, 1/1/15- Carper Inc. 375,200

Page 43
 Investment in Carper Inc. (70%) 556,640
Non-controlling Interest in Carper Inc., 1/1/15 238,560

Entry A
Building (28,000 less 2 yrs. Deprn.) 22,400
Copyright (80,000 less 2 yrs. Amort.) 72,000
Goodwill 140,000
Investment in Carper Inc. 170,080
Non-controlling Interest 64,320

Entry I
Equity in Subsidiary Earnings 103,040
Investment in Carper Inc. 103,040

Entry D
Investment in Carper Inc. 58,800
Dividends Paid 58,800

Entry E
Depreciation Expense 2,800
Amortization Expense 4,000
Buildings 2,800
Copyright 4,000

Entry P
Accounts Payable 30,800
Accounts receivable 30,800

Non-controlling Interest items:

Dividends (25,200)
Income of Carper 44,160

Learning Objective: 04-07

Difficulty: Hard
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

REFERENCE: 04-15
On January 1, 2015, John Doe Enterprises (JDE) acquired a 55% interest in Bubba Manufacturing, Inc.
(BMI). JDE paid for the transaction with $3 million cash and 500,000 shares of JDE common stock (par
value $1.00 per share). At the time of the acquisition, BMI's book value was $16,970,000.
On January 1, JDE stock had a market value of $14.90 per share and there was no control premium in this
transaction . Any consideration transferred over book value is assigned to goodwill. BMI had the
following balances on January 1, 2015.
Book Fair
Value Value
Land $1,700,000 $2,550,000
Buildings (seven-year remaining life) 2,700,000 3,400,000

Page 44
Equipment (five-year remaining life) 3,700,000 3,300,000

For internal reporting purposes, JDE employed the equity method to account for this investment.

[QUESTION]
REFER TO: 04-15
114. Prepare a schedule to determine goodwill, and the amortization and allocation amounts.
Answer:

Annual Controlling Non-

controlling
Life Amortization Interest Interest
share Share
Consideration transferred for Bubba $10,450,000
Mfg.
Implied fair value $10,450,000/55% $19,000,000
Book value (16,970, 000)
Fair value in excess of book value $ 2,030,000
Excess cost assigned to specific
accounts based on fair values
Land 850,000
Buildings 700,000 7 years $100,000 $55,000 $45,000
Equipment (400,000) 5 years (80,000) ( 44,000) (36,000)
Goodwill $ 880,000
Total $20,000 $11,000 $9,000

Learning Objective: 04-05

Difficulty: Medium
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
REFER TO: 04-15
115. The following account balances are for the year ending December 31, 2015 for both companies.

John Doe Bubba

Enterprises Manufacturing
Revenues $(298,000,000) $(103,750,000)
Expenses 271,000,000 95,800,000
Equity in income of Bubba Manufacturing ( 4,361,500) 0
Net income $( 31,361,500) $( 7,950,000)

Retained earnings, January 1, 2015 $( 2,500,000) $( 100,000)

Net income (above) ( 31,361,500) ( 7,950,000)
Dividends paid 5,000,000 3,000,000
Retained earnings, December 31, 2015 $( 28,861,500) $( 5,050,000)

Current Assets $ 30,500,000 $ 20,800,000

Investment in Bubba Manufacturing 13,161,500

Page 45
Land 1,500,000 1,700,000
Buildings 5,600,000 2,360,000
Equipment (net) 3,100,000 2,960,000
Total assets $ 53,861,500 $ 27,820,000

Accounts payable $( 3,100,000) $ (4,900,000)

Notes payable ( 1,000,000)
Common stock ( 2,900,000) ( 6,000,000)
Additional paid-in capital ( 19,000,000) ( 10,870,000)
Retained earnings, Dec. 31, 2015 (above) ( 28,861,500) ( 5,050,000)
Total liabilities and stockholders’ equity $ (53,861,500) $( 27,820,000)

Required:
Prepare a consolidation worksheet for this business combination. Assume goodwill has been reviewed
and there is no goodwill impairment.
Answer:
Consolidation Worksheet for John Doe Enterprises and Bubba Manufacturing at 12/31/15.
CONSOLIDATED WORKSHEET Acquisition
For the year ended 12/31/2015

Non-
John Doe Bubba Consolidation Entries controlling Consolidated
Account Ent. MFG. DR CR Interest Balance
Revenues (298,000,000) (103,750,000) (401,750,000)
Expenses 271,000,000 95,800,000 (E) 20,000 366,820,000
Equity in Sub Income (4,361,500) - (I) 4,361,500
Separate Net Income (31,361,500) (7,950,000)
Consolidated Net (34,930,000)
Income
Non-controlling
Interest __________ ___________ (3,568,500) 3,568,500
in Bubba’s Income
Net income to
controlling interest (31,361,500)

R/E, 1/1/15 (2,500,000) (100,000) (S) (2,500,000)

100,000
Net Income (31,361,500) (7,950,000) (31,361,500)
Dividends 5,000,000 3,000,000 (D) 1,650,000 1,350,000 5,000,000
R/E, 12/31/15 (28,861,500) (5,050,000) (28,861,500)

Current assets 30,500,000 20,800,000 51,300,000

Investment in Bubba
Mfg. 13,161,500 (D) 1,650,000 (S) 9,333,500
(A) 1,116,500
(I) 4,361,500
Land 1,500,000 1,700,000 (A) 850,000 4,050,000
Building (net) 5,600,000 2,360,000 (A) 700,000 (E) 100,000 8,560,000
Equipment (net) 3,100,000 2,960,000 (E) 80,000 (A) 400,000 5,740,000
Goodwill ___________ ___________ (A) 880,000 880,000
Total Assets 53,861,500 27,820,000 70,530,000

Liabilities (3,100,000) (4,900,000) (8,000,000)

Notes Payable (1,000,000) (1,000,000)
Non-controlling
Interest 1/1/15 (S) (8,550,000)
7,636,500
(A) 913,500

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Non-controlling
Interest 12/31/15 (10,768,500) (10,768,500)
Common Stock (2,900,000) (6,000,000) (S) 6,000,000 (2,900,000)
Additional Paid-in
Capital (19,000,000) (10,870,000) (S) (19,000,000)
10,870,000
R/E, 12/31/15 (28,861,500) (5,050,000) ____________ ___________ (28,861,500)
Total liabilities&
Stockholders’ Equity (53,861,500) (27,820,000) 25,511,500 25,511,500 (70,530,000)

Learning Objective: 04-05

Difficulty: Hard
Bloom’s: Apply
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
116. McLaughlin, Inc. acquires 70 percent of Ellis Corporation on September 1, 2014, and an additional
10 percent on November 1, 2015. Annual amortization of $8,400 attributed to the controlling interest
relates to the first acquisition. Ellis reports the following figures for 2015:

Revenues $500,000
Expenses 350,000
Retained earnings, 1/1/15 3,500,000
Dividends paid 40,000
Common stock 400,000

Without regard for this investment, McLaughlin earns $480,000 in net income ($840,000 revenues less
$360,000 expenses; incurred evenly through the year) during 2015.
Required: Prepare a schedule of consolidated net income and apportionment to non-controlling and
controlling interests for 2015.
Answer:

Revenues ($840,000+500,000) $1,340,000

Expenses ($360,000+350,000+amort.12,000) * 722,000
Consolidated net income $ 618,000
To non-controlling interest ** (39,100)
To controlling interest $ 578,900

Non-controlling interest: **
Revenues $ 500,000
Expenses ($350,000+amort.12,000) 362,000
Net income $ 138,000
30%x10/12 (for months) x 138,000 = $34,500
20%x 2/12 (for months) x 138,000 = 4,600 $ 39,100
* Amortization of $12,000 = original $8,400 for 70% grossed up to the 100% amount of $12,000.

Learning Objective: 04-09

Difficulty: Medium
Bloom’s: Apply

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AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement

[QUESTION]
117. Select True (T) or False (F) for each of the following statements:

_____ 1. A parent will recognize a gain or loss if it sells a portion of its investment in a subsidiary amd
maintains control after the sale.
_____ 2. A parent sells a portion of its investment in a subsidiary and no longer maintains control. This
sale of shares represents a remeasurement event for the investee.
_____ 3. International financial reporting standards (IFRS) allow an option to value the non-controlling
interest with goodwill or to value the non-controlling interest without goodwill.
_____ 4. Consolidated net income represents the combined net income of the parent and subsidiary after
subtracting the non-controlling interest in the net income of the subsidiary.
_____ 5. The total acquisition-date fair value of an acquired firm is the sum of the fair value of the
controlling interest and the fair value of the non-controlling interest.
_____ 6. When control of a subsidiary is acquired on a date other than the first day of a fiscal year, excess
amortization expenses are pro-rated to include only the post-acquisition period.
_____ 7. For a mid-year acquisition following an equity method investment of the same company, the
consolidated income statement will report consolidated revenues and expenses for the entire year.
_____ 8. In a step acquisition where the parent previously held a non-controlling interest in the acquired
firm, the parent remeasures the prior interest to fair value.
_____ 9. When a parent has control over a subsidiary with less than 100 percent ownership, and thereafter
increases its ownership, the parent remeasures the prior interest to fair value.
Answer: (1) F; (2) F; (3) T; (4) F; (5) T; (6) T; (7) F; (8) T; (9) F
Learning Objective: 04-02
Learning Objective: 04-04
Learning Objective: 04-08
Learning Objective: 04-10
Difficulty: Medium
Bloom’s: Understand
AACSB: Reflective thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement

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