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Chapter 02 - Consolidation of Financial Information

Chapter 02

Consolidation of Financial Information

Multiple Choice Questions

1. At the date of an acquisition which is not a bargain purchase, the acquisition methodA.Consolidates the subsidiar!s assets at fair "alue and the liabilities at boo# "alue$.Consolidates all subsidiar assets and liabilities at boo# "alueC.Consolidates all subsidiar assets and liabilities at fair "alue%.Consolidates current assets and liabilities at boo# "alue, long-term assets and liabilities atfair "alue&.Consolidates the subsidiar!s assets at boo# "alue and the liabilities at fair "alue

Difficulty: Easy

2. In a purchase or acquisition where control is achie"ed, how would the land accounts of theparent and the land accounts of the subsidiar be combined'

A.&ntr AB.&ntr $C.&ntr C%.&ntr %&.&ntr &

Difficulty: Medium

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(. )isa Co. paid cash for all of the "oting common stoc# of *ictoria Corp. *ictoria willcontinue to e+ist as a separate corporation. &ntries for the consolidation of )isa and *ictoriawould be recorded inA.A wor#sheet

$.)isa!s general ournalC.*ictoria!s general ournal%.*ictoria!s secret consolidation ournal&.he general ournals of both companies

Difficulty: Easy

. /sing the purchase method, goodwill is generall defined asA.Cost of the in"estment less the subsidiar!s boo# "alue at the beginning of the ear

$.Cost of the in"estment less the subsidiar!s boo# "alue at the acquisition dateC.Cost of the in"estment less the subsidiar!s Fair *alue at the beginning of the earD.Cost of the in"estment less the subsidiar!s Fair *alue at acquisition date&.Is no longer allowed under federal law

Difficulty: Medium

. %irect combination costs and stoc# issuance costs are often incurred in the process of ma#inga controlling in"estment in another compan. ow should those costs be accounted for in a

3urchase transaction'

A.&ntr AB.&ntr $C.&ntr C%.&ntr %

&.&ntr &

Difficulty: Medium

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4. %irect combination costs and stoc# issuance costs are often incurred in the process of ma#inga controlling in"estment in another compan. ow should those costs be accounted for in anAcquisition transaction'

A.&ntr A$.&ntr $C.&ntr CD.&ntr %&.&ntr &

Difficulty: Medium

5. 6hat is theprimaryaccounting difference between accounting for when the subsidiar isdissol"ed and when the subsidiar retains its incorporation'A.If the subsidiar is dissol"ed, it will not be operated as a separate di"ision$.If the subsidiar is dissol"ed, assets and liabilities are consolidated at their boo# "aluesC.If the subsidiar retains its incorporation, there will be no goodwill associated with theacquisition%.If the subsidiar retains its incorporation, assets and liabilities are consolidated at their boo#

"aluesE.If the subsidiar retains its incorporation, the consolidation is not formall recorded in theaccounting records of the acquiring compan

Difficulty: Medium

7. According to 8FA8 9o. 11, the pooling of interest method for business combinationsA.Is preferred to the purchase method$.Is allowed for all new acquisitions

C.Is no longer allowed for business combinations after :une (0, 2001%.Is no longer allowed for business combinations after %ecember (1, 2001&.Is onl allowed for large corporate mergers li#e &++on and ;obil

Difficulty: Easy

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oodwill ma be recogni?ed

C.Consolidation is accomplished using the fair "alues of both companies%.he transactions ma in"ol"e the e+change of preferred stoc# or debt securities as well ascommon stoc#&.he transaction is properl regarded as an acquisition of one compan b another

Difficulty: Easy

10. A compan is not required to consolidate a subsidiar in which it holds more than 0@ ofthe "oting stoc# when

A.he subsidiar is located in a foreign countr$.he subsidiar in question is a finance subsidiarC.he compan holds more than 0@ but less than 40@ of the subsidiar!s "oting stoc#%.he compan holds less than 5@ of the subsidiar!s "oting stoc#E.he subsidiar is in ban#ruptc

Difficulty: Medium

11. 6hich one of the following is a characteristic of a business combination that should be

accounted for as an acquisition'A.he combination must in"ol"e the e+change of equit securities onlB.he transaction establishes an acquisition fair "alue basis for the compan being acquiredC.he two companies ma be about the same si?e and it is difficult to determine the acquiredcompan and the acquiring compan%.he transaction ma be considered to be the uniting of the ownership interests of thecompanies in"ol"ed&.he acquired subsidiar must be smaller in si?e than the acquiring parent

Difficulty: Easy

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12. 6hich one of the following is a characteristic of a business combination that should beaccounted for as apurchase'A.he combination must in"ol"e the e+change of equit securities onlB.he transaction clearl establishes an acquisition price for the compan being acquired

C.he two companies ma be about the same si?e and it is difficult to determine the acquiredcompan and the acquiring compan%.he transaction ma be considered to be the uniting of the ownership interests of thecompanies in"ol"ed&.he acquired subsidiar must be smaller in si?e than the acquiring parent

Difficulty: Easy

1(. Astatutory mergeris anB

A.$usiness combination in which onl one of the two companies continues to e+ist as a legalcorporation$.$usiness combination in which both companies continues to e+istC.Acquisition of a competitor%.Acquisition of a supplier or a customer&.)egal proposal to acquire outstanding shares of the target!s stoc#

Difficulty: Medium

1. ow arestock issuance costsand direct combination coststreated in a business combinationwhich is accounted for as an acquisition when the subsidiar will retain its incorporation'A.8toc# issuance costs are a part of the acquisition costs and the direct combination costs aree+pensed$.%irect combination costs are a part of the acquisition costs and the stoc# issuance costs are areduction to additional paid-in capitalC.%irect combination costs are e+pensed and stoc# issuance costs are a reduction to additionalpaid-in capital%.$oth are treated as part of the acquisition price&.$oth are treated as a reduction to additional paid-in capital

Difficulty: Medium

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$ullen Inc. assumed 100@ control o"er *ic#er Inc. on :anuar 1, 201. he boo# "alue andfair "alue of *ic#er!s accounts on that date prior to creating the combinationB follow, alongwith the boo# "alue of $ullen!s accounts

1. Assume that $ullen issued 12,000 shares of common stoc# with a D par "alue and a D5fair "alue to obtain all of *ic#er!s outstanding stoc#. In this transaction which is not a poolingof interestsB, how much goodwill should be recogni?ed'A.D1,000B.D10,000C.D4,000%.D40,000&.D0

Difficulty: Medium

14. Assume that $ullen issued 12,000 shares of common stoc# with a D par "alue and a D2fair "alue for all of the outstanding stoc# of *ic#er. 6hat is the consolidated )and as a result ofthis transaction which is not a pooling of interestsB'A.D40,000$.D10,000C.D00,000

D.D20,000

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15. Assume that $ullen issued 12,000 shares of common stoc# with a D par "alue and a D2fair "alue for all of the outstanding shares of *ic#er. 6hat will be the consolidated Additional3aid-In Capital and =etained &arnings :anuar 1, 201 balancesB as a result of this transactionwhich is not a pooling of interestsB'

A.D20,000 and D140,000$.D20,000 and D240,000C.D(70,000 and D140,000D.D4,000 and D140,000&.D(70,000 and D240,000

Difficulty: Hard

17. Assume that $ullen issued preferred stoc# with a par "alue of D20,000 and a fair "alue of

D00,000 for all of the outstanding shares of *ic#er in a business combination which is not apooling of interestsB. 6hat will be the balance in the consolidated In"entor and )andaccounts'A.D0,000, D

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20. Assume that $ullen paid a total of D70,000 in cash for all of the shares of *ic#er. Inaddition, $ullen paid D(,000 to a group of attornes for their wor# in arranging thecombination to be accounted for as an acquisition. 6hat will be the balance in consolidatedgoodwill'

A.D0B.D20,000C.D(,000%.D,000

Difficulty: Medium

3rior to being united in a business combination, $ot#ins Inc. and *ol#erson Corp. had thefollowing stoc#holders! equit figures

$ot#ins issued 4,000 new shares of its common stoc# "alued at D(.2 per share for all of theoutstanding stoc# of *ol#erson.

21. Assume that $ot#ins acquired *ol#erson as a purchase combination. Immediatel

afterwards, what are consolidated Additional 3aid-In Capital and =etained &arnings,respecti"el'A.D1((,000 and D(40,000B.D2(4,000 and D(40,000C.D1(0,000 and D(40,000%.D2(4,000 and D

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22. Assume that $ot#ins and *ol#erson were being oined in a pooling of interests and thisoccurred on :anuar 1, 2000, using the same "alues gi"en. Immediatel afterwards, what isconsolidated Additional 3aid-In Capital'A.D1(7,000

$.D244,000C.D1(0,000%.D2(4,000E.D1((,000

Difficulty: Hard

2(. Chapel ill Compan had common stoc# of D(0,000 and retained earnings of D

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2. 6hich of the following statements is true regarding a statutor merger'A.he original companies dissol"e while remaining as separate di"isions of a newl createdcompan$.$oth companies remain in e+istence as legal corporations with one corporation now a

subsidiar of the acquiring companC.he acquired compan dissol"es as a separate corporation and becomes a di"ision of theacquiring compan%.he acquiring compan acquires the stoc# of the acquired compan as an in"estment&.A statutor merger is no longer a legal option

Difficulty: Medium

24. 6hich of the following statements is true regarding a statutor consolidation'

A.he original companies dissol"e while remaining as separate di"isions of a newl createdcompan$.$oth companies remain in e+istence as legal corporations with one corporation now asubsidiar of the acquiring companC.he acquired compan dissol"es as a separate corporation and becomes a di"ision of theacquiring compan%.he acquiring compan acquires the stoc# of the acquired compan as an in"estment&.A statutor consolidation is no longer a legal option

Difficulty: Medium

25. In a transaction accounted for using thepurchasemethod where cost e+ceeds boo# "alue,which statement is true for the acquiring compan with regard to its in"estment'A.9et assets of the acquired compan are re"alued to their fair "alues and an e+cess of costo"er fair "alue is allocated to goodwill$.9et assets of the acquired compan are maintained at boo# "alue and an e+cess of cost o"erboo# "alue is allocated to goodwillC.Assets are re"alued to their fair "alues. )iabilities are maintained at boo# "alues. An e+cessis allocated to goodwill%.)ong-term assets are re"alued to their fair "alues. An e+cess is allocated to goodwill

Difficulty: Medium

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27. In a transaction accounted for using thepurchasemethod where cost is less than fair "alue,which statement is true'A.9egati"e goodwill is recorded$.A deferred credit is recorded

C.)ong-term assets of the acquired compan are reduced in proportion to their fair "alues. Ane+cess is recorded as a deferred creditD.)ong-term assets of the acquired compan are reduced in proportion to their fair "alues. Ane+cess is recorded as an e+traordinar gain&.)ong-term assets and liabilities of the acquired compan are reduced in proportion to theirfair "alues. An e+cess is recorded as an e+traordinar gain

Difficulty: Hard

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he financial statements for >oodwin, Inc. and Corr Compan for the ear ended %ecember(1, 201, prior to >oodwin!s business combination transaction regarding Corr, follow inthousandsB

En %ecember (1, 201, >oodwin issued D400 in debt and (0 shares of its D10 par "alue

common stoc# to the owners of Corr to purchase all of the outstanding shares of that compan.>oodwin shares had a fair "alue of D0 per share.>oodwin paid D2 to a bro#er for arranging the transaction. >oodwin paid D( in stoc#issuance costs. Corr!s equipment was actuall worth D1,00 but its buildings were onl "aluedat D40.

(1. If the combination is accounted for as a purchase, at what amount is the in"estment recordedon >oodwin!s boo#s'A.D1,0

$.D1,700C.D1,740D.D1,72&.D1,42

Difficulty: Medium

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(2. If the combination is accounted for as an acquisition, at what amount is the in"estmentrecorded on >oodwin!s boo#s'A.D1,0B.D1,700

C.D1,740%.D1,72&.D1,42

Difficulty: Medium

((. Compute the consolidated re"enues for 201.A.D2,500$.D520

C.D

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(. Assuming the combination is accounted for as an acquisition, compute the consolidatede+penses for 201.A.D1,

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(

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(. Assuming the combination is accounted for as a purchase, compute the consolidatedretained earnings at %ecember (1, 201.A.D2,70$.D(,0

C.D2,00%.D2,700&.D2,710

Difficulty: Medium

. Assuming the combination is accounted for as an acquisition, compute the consolidatedretained earnings at %ecember (1, 201.A.D2,700

B.D2,72C.D2,70%.D(,2&.D(,0

Difficulty: Medium

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En :anuar 1, 201, the ;ood compan entered into a transaction for 100@ of theoutstanding common stoc# of Esorio Compan. o acquire these shares, ;ood issued D00 inlong-term liabilities and 0 shares of common stoc# ha"ing a par "alue of D1 per share but a fair"alue of D10 per share. ;ood paid D20 to lawers, accountants and bro#ers for assistance in

bringing about this purchase. Another D1 was paid in connection with stoc# issuance costs.3rior to these transactions, the balance sheets for the two companies were as follows

9ote 3arentheses indicate a credit balance.In ;ood!s appraisal of Esorio, three assets were deemed to be under"alued on the subsidiar!sboo#s In"entor b D10, )and b D0 and $uildings b D40.

. If the transaction is accounted for as a purchase, what amount was recorded as thein"estment in Esorio'A.D

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4. If the transaction is accounted for as an acquisition, what amount was recorded as thein"estment in Esorio'A.D

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0. Compute the amount of consolidated equipment at date of combination.A.D70$.D70C.Doodwill is often created or purchased, during a business combination. 6h doesn!t>oodwill show up on the 3arent compan!s trial balance as a separate account'

6hile the >oodwill does not show up on the 3arent compan!s boo#s, it is implied as part of the

account called In"estment in 8ubsidiar. %uring the consolidation process, the In"estmentaccount is bro#en down into its component parts. >oodwill, along with other items such assubsidiar fair "alue adustments is then shown separatel as part of the consolidated financialstatement balances.

Difficulty: Medium

10. 6hat are the three departures from 8FA8 11 according to 8FA8 11=B%usiness&ombinations'

he acquisition method embraces a fair "alue concept as measured b the fair "alue ofconsideration transferred as opposed to a cost-based measure. his requires three departures 1B%irect combination costs are e+pensed as incurred and not considered a part of the in"estmentcostBH 2B Contingent consideration obligations are recogni?ed as part of the purchase priceH and(B 6hen a bargain purchase occurs, the acquirer measures and recogni?es the fair "alues ofeach of the assets acquired and liabilities assumed at the date of the combination and as a resultno assets or liabilities are recorded at amounts below their assessed fair "alues as under 8FA811. A gain on the bargain purchase is recogni?ed at the acquisition date.

Difficulty: Medium

104. ow is contingent consideration accounted for according to 8FA8 11=B%usiness&ombinations'

he fair "alue approach of the acquisition method "iews contingent paments as part of theconsideration transferred. /nder this "iew, contingencies ha"e a "alue to those who recei"e theconsideration and represent measurable obligations of the acquirer. he amount of thecontingent consideration is measured as the e+pected present "alue of a potential pament andincreases the in"estment cost.

Difficulty: Medium

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105. ow are bargain purchases different between 8FA8 11 and 8FA8 11=B %usiness&ombinations'

/nder 8FA8 11 the purchase methodB, a bargain purchase reduces long-term assets,

e+cluding long-term in"estments, utili?ing the relati"e fair "alue method. hose reductions mareduce those assets to a "alue of ?ero and an remaining bargain is considered an e+traordinargain. /nder 8FA8 11=B,%usiness &ombinationsthe acquisition methodB, the assets andliabilities acquired are recorded at their fair "alues and a bargain purchase is recorded as a >ainon $argain 3urchase.

Difficulty: Medium

107. %escribe the accounting for direct costs, indirect costs and issuance costs under 1B he

pooling-of-interests methodH 2B he purchase methodH and (B he acquisition method.

1B All costs of the combination were e+pensed under the pooling-of-interests method. 2B%irect costs are considered an increase in the in"estment, indirect costs are e+pensed andissuance costs reduce the otherwise fair "alue of the securities issued additional paid-in capitalfor stoc# issued or debt for debt issuedB under the purchase method. (B %irect and indirectcombination costs are e+pensed and issuance costs reduce the otherwise fair "alue of theconsideration issued under the acquisition method.

Difficulty: Medium

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110. 6hat is the difference in consolidated results between a business combination whereb theacquired compan is dissol"ed and a business combination whereb separate incorporation ismaintained'

here is no difference in consolidated results.

Difficulty: Easy

111. Fine Co. issued its common stoc# in e+change for the common stoc# of %and Corp. in abusiness combination that was neither a pooling of interests nor a bargain purchase. At the dateof the combination, Fine had land with a boo# "alue of D70,000 and a fair "alue of D420,000.%and had land with a boo# "alue of D150,000 and a fair "alue of D1

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11(. :ernigan Corp. had the following account balances at 12(11

8e"eral of :ernigan!s accounts ha"e fair "alues that differ from boo# "alue )and J D70,000H$uilding J D520,000H In"entor J D((4,000H and )iabilities J D(

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8alem Co. had the following account balances as of Februar 1, 2007

$ellington Inc. paid D1.5 million in cash and issued 12,000 shares of its D(0 par "alue commonstoc# "alued at D

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11. Assume that $ellington paid cash of D2.7 million. 9o stoc# is issued. An additionalD0,000 is paid in direct combination costs.'equired:For >oodwill, determine what balance would be included in a Februar 1, 2007 consolidation.

Difficulty: Medium

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114. En :anuar 1, 2010, Chester Inc. acquires 100@ of Festus Corp.!s outstanding commonstoc# b e+changing (5,00 shares of Chester!s D2 par "alue common "oting stoc#. En :anuar1, 2010, Chester!s "oting common stoc# had a fair "alue of D0 per share. Festus! "otingcommon shares were selling for D4.0 per share. Festus! balances on the acquisition date, ust

prior to acquisition are listed below. Chester is accounting for the in"estment in Festus using theacquisition method.

=equiredCompute the "alue of the >oodwill account on the date of acquisition, 1110.

Difficulty: Medium

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he financial statements for :ode Inc. and )a#el Corp., ust prior to their combination, for theear ending %ecember (1, 200

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115. 3repare the ournal entries to record 1B the issuance of stoc# b :ode and 2B the pamentof the combination costs.

Entry )ne- o record the issuance of common stoc# b :ode to e+ecute the purchase

Entry #$o- o record the combination costs.

Difficulty: Medium

117.'equired:%etermine consolidated 9et Income for at %ecember (1, 200

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120. he following are preliminar financial statements for $lac# Co. and $lue Co. for the earending %ecember (1, 2007.

En %ecember (1, 2007 subsequent to the preceding statementsB, $lac# e+changed 10,000shares of its D10 par "alue common stoc# for all of the outstanding shares of $lue. $lac#!s stoc#on that date has a fair "alue of D40 per share. $lac# was willing to issue 10,000 shares of stoc#because $lue!s land was appraised at D20,000. $lac# also paid D1,000 to se"eral attornes

and accountants who assisted in creating this combination.'equired:Assuming that these two companies retained their separate legal identities, prepare aconsolidation wor#sheet as of %ecember (1, 2007 assuming the transaction is treated as apurchase combination.

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3urchase Consolidation 6or#sheet

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Difficulty: Hard

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121. he following are preliminar financial statements for $lac# Co. and $lue Co. for the earending %ecember (1, 200

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Acquisition Consolidation 6or#sheet

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Difficulty: Hard

122. ow are direct and indirect costs accounted for when appling the acquisition method'

A

Difficulty: Easy

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12(. For each of the following situations, select the best answer concerning accounting forcombinationsAB 3ooling-of-interests method onl.$B 3urchase method onl.

CB Acquisition method onl.%B 3ooling-of-interests method and purchase method, but not acquisition method.&B 3urchase method and acquisition method, but not pooling-of-interests method.FB 3ooling-of-interests method and acquisition method, but not purchase method.>B All methods pooling-of-interests, purchase and acquisition.BB 9one of the methods neither pooling-of-interests, purchase, nor acquisition.BKKKKK1. %irect costs are e+pensed.KKKKK2. Indirect costs are e+pensed.KKKKK(. %irect costs reduce the additional paid-in capital of the acquirer.KKKKK. $oth direct costs and indirect costs increase the in"estment account.KKKKK. %irect costs increase the in"estment account and stoc# issue costs reduce the acquirer!s

additional paid-in capital account.KKKKK4. Contingent consideration increases the in"estment account at date of acquisition.KKKKK5. Contingent consideration increases the in"estment account at a date subsequent to theacquisition date.KKKKK7. A bargain purchase reduces the fair "alue of long-term assets.KKKKKH (B H B H B $H 4B CH 5B $H 7B $H

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