Chapter 3 Test Bank

AN INTRODUCTION TO CONSOLIDATED FINANCIAL STATEMENTS

Multiple Choice Questions
LO1
1.
What method must be used if FASB 94 prohibits full
consolidation of a 70% owned subsidiary?
a. The cost method.
b. The Liquidation value.
c. Market value.
d. Equity method.
LO1
2.
From the standpoint of accounting theory, which of the
following statements is the best justification for the
preparation of consolidated financial statements?
a. In substance the companies are separate, but in form the
companies are one entity.
b. In substance the companies are one entity, but in form they
are separate.
c. In substance and form the companies are one entity.
d. In substance and form the companies are separate entities.
LO2
3.
Penguin Corporation owns 90% of the outstanding voting stock of
Crevice Company and Burrow Corporation owns the remaining 10%
of Crevices voting stock. On the consolidated financial
statements of Penguin Corporation and Subsidiary, Burrow is
a.
b.
c.
d.

LO2
4.

an affiliate.
a minority interest.
an equity investee.
a related party

A major motivation for FASBs creation of Statement No. 94 was

a. temporary control was not being disclosed properly.
b. the elimination off-balance sheet financing
c. situations occurred where subsidiary control did not lie
with the parent company.
d. the risk of subsidiary legal reorganization or bankruptcy
was not disclosed.

LO2
5.

Muttonbird Inc. has 90% ownership of Beach Company, but should

exclude Beach under FASB 94 if
a.
b.
c.
d.

LO2
6.

Subsequent
to
an
acquisition,
the
parent
company
and
consolidated financial statement amounts would not be the same
for
a.
b.
c.
d.

LO3
7.

investments in unconsolidated subsidiaries.

investments in consolidated subsidiaries.
capital stock.
ending retained earnings.

On June 1, 2005, Gull Company acquired 100% of the stock of

Scrap Inc. On this date, Gull had Retained Earnings of $200,000
and Scrap had Retained Earnings of $100,000. On December 31,
2005, Gull had Retained Earnings of $240,000 and Scrap had
Retained Earnings of $120,000. The amount of Retained Earnings
that appeared in the December 31, 2005 consolidated balance
sheet was:
a.
b.
c.
d.

LO3
8.

Beach is in a regulated industry.

Muttonbird uses the equity method for Beach.
Muttonbird expects to sell Beach within a year.
Beach is in a foreign country and records its books in a
foreign currency.

$240,000.
$260,000.
$300,000.
$360,000.

Scrubwren Corporation acquired a 100% interest in Heath Company

for $1,780,000 when Heath had no liabilities. The book values and
fair values of Heath's assets were
Current assets
Equipment
Land & buildings

Book Value
$ 400,000
200,000
600,000

Fair Value
$ 700,000
400,000
800,000

Total assets

$1,200,000

$1,900,000

Immediately following the acquisition, equipment will be

included on the consolidated balance sheet at
a.
b.
c.
d.
LO4
9.

$300,000.
$340,000.
$360,000.
$400,000.

A newly acquired subsidiary had pre-existing goodwill on its

books. The parent company's consolidated balance sheet will
a. not show any value for the subsidiary's pre-existing
goodwill.
b. treat the goodwill similarly to other intangible assets of
the acquired company.
c. not show any value for the pre-existing goodwill unless all
other assets of the subsidiary are stated at their full
fair value.
d. always show the pre-existing goodwill of the subsidiary at
its book value.

LO4
10.

The unamortized excess account is

a. a contra-equity account.
b. used in allocating the amounts paid for recorded balance
sheet accounts that are above or below their fair values.
c. used in allocating the amounts paid for each asset and
liability that are above or below their book values,
especially when
numerous
assets
or
liabilities
are
involved.
d. the excess purchase cost that is attributable to goodwill.

LO5
11.

On January 1, 2005, Tern purchased 90% of Costal Corporations

outstanding shares for $1,400,000 when the fair value of
Costals assets were equal to the book values.
The balance
sheets of Tern and Costal Corporations at year-end 2004 are
summarized as follows:
Assets

Tern
5,900,000 $

Costal
1,450,000

Liabilities
Capital stock
Retained earnings

700,000 $
3,600,000
1,600,000

250,000
1,000,000
200,000

If a consolidated balance sheet was prepared immediately after

the business combination, the minority interest, would be
a.
b.
c.
d.
LO5
12.

On July 1, 2005, when Worm Companys total stockholders equity

was $180,000, Bird Corporation purchased 7,000 shares of Worms
common stock at $30 per share. Worm Company had 10,000 shares
of common stock outstanding both before and after the purchase
by Bird, and the book value of Worms net assets on July 1,
2005 was equal to the fair value. On a consolidated balance
sheet prepared at July 1, 2005, goodwill would be
a.
b.
c.
d.

LO5
13.

LO5
14.

$100,000.
$155,556.
$140,000.
$520,000.

$30,000.
$40,000.
$50,000.
$120,000.

Bowerbird Inc acquired 60% of the outstanding stock of Mimicry

Company in a business combination. The book values of Mimicrys
net assets are equal to the fair values except for the
building, whose net book value and fair value are $400,000 and
600,000, respectively. At what amount is the building reported
on the consolidated balance sheet?
a. $360,000.
b. $400,000.
c. $520,000.
d. $600,000.
In the preparation of consolidated financial statements, which
of the following intercompany transactions must be eliminated
as part of the preparation of the consolidation working papers?
a. All revenues, expenses, gains, deductions, receivables, and
payables.
b. All revenues, expenses, gains, and deductions but not
receivables and payables.
c. Receivables and payables but not revenues, expenses, gains,
and deductions.
d. only sales revenue and cost of goods sold.

LO6
15.

Pardolate Corporation paid $200,000 for a 60% interest in

Arthropod Inc on January 1, 2005, when Arthropod had Capital
Stock of $200,000 and Retained Earnings of $100,000. Fair
values of identifiable net assets were the same as recorded
book values. During 2005, Arthropod had income of $30,000,
declared dividends of $10,000, and paid $5,000 of dividends.
On December 31, 2005, Pardolate will have
a.
b.
c.
d.

LO6
16.

Spinebill Corporation bought 80% of Nectar Companys common

stock at its book value of $500,000 on January 1, 2005. During
2005, Nectar reported net income of $150,000 and paid dividends
of $45,000. At what amount should Spinebills Investment in
Nectar account be reported on December 31, 2005?
a.
b.
c.
d.

LO6
``

$500,000
$548,000
$584,000
$605,000

Weebill Corporation bought 80% of Tree Companys common stock

at its book value of $800,000 on January 2, 2005 for $700,000.
The law firm of Dewey, Cheatam and Howe did $25,000 to
facilitate the purchase.
At what amount should Weebills
Investment in Tree account be reported on January 2, 2005?
a.
b.
c.
d.

LO7
18.

investment in Salem account of $240,000.

investment in Salem account of $218,000.
goodwill of $33,333.
dividends receivable of $3,000.

$640,000.
$665,000.
$700,000.
$725,000.

Bellbird Corporation acquired an 80% interest in Honey Inc for

$130,000 on January 1, 2005, when Honey had Capital Stock of
$125,000 and Retained Earnings of $25,000. Bellbirds separate
income statement and a consolidated income statement for
Bellbird Corporation and Subsidiary as of December 31, 2005,
are shown below.
ConsoliBellbird
dated
Sales revenue
$
150,000
$
234,750
Income from Corporal
11,600
Cost of sales
(
60,000 )
(
100,000 )

Other expenses
Noncontrolling
interest income
Net income

a.
b.
c.
d.
LO7
19.

20,000 )
81,600

50,000 )

3,150 )
81,600

Honeys separate income statement must have reported net

income of:
$13,750.
$14,750.
$15,750.
$15,250.

In the consolidated income statement of Wattlebird Corporation

and its 85% owned Forest subsidiary, the noncontrolling
interest income was reported at $45,000. What amount of net
income did the Forest have for the year?
a.
b.
c.
d.

LO8
20.

$52,941
$38,250
$235,000
$300,000.

Push-down accounting
a. requires a subsidiary to use the same accounting principles
as its parent company.
b. is required by the SEC if a subsidiary is wholly owned.
c. is required when the parent company uses the cost method to
account for its investment in the subsidiary.
d. results in a push-up residual account on the subsidiaries
books.

Exercises
LO4
Exercise 1
Alarm Bird Inc. acquired an 85% interest in Clock Corporation on
January 2, 2005 for $38,000 cash when Clock had Capital Stock of
$15,000 and Retained Earnings of $25,000. Clocks assets and
liabilities had book values equal to their fair values except for
inventory that was undervalued by $2,000. Balance sheets for Alarm
Bird and Clock on January 2, 2005, immediately after the business
combination, are presented in the first two columns of the
consolidated balance sheet working papers.
Alarm Bird Corporation and Subsidiary
Consolidated Balance Sheet Working Papers
at January 2, 2005
Eliminations
Alarm
Bird
ASSETS
Cash
Accounts
Receivable-net

Inventories
Plant assets-net
Investment in
Clock

Clock

68,000

$ 4,000

75,000

9,000

39,000

10,000

170,000

35,000

38,000

Total Assets

390,000

$58,000

EQUITIES
Payables

120,000

$18,000

100,000

15,000

170,000

25,000

390,000

$58,000

Capital stock
Retained
Earnings
Minority
Interest
TOTAL EQUITIES

Debit

Credit

Balance
Sheet

Required:
Complete the consolidation balance sheet working papers for Alarm Bird
and subsidiary at January 1, 2005.
LO4
Exercise 2
On January 1, 2005, Myna Corporation issued 10,000 shares of its own
$10 par value common stock for 9,000 shares of the outstanding stock
of Berry Corporation in an acquisition. Myna common stock at January
1, 2005 was selling at $70 per share. Just before the business
combination, balance sheet information of the two corporations was as
follows:
Myna
Book
Value
Cash
Inventories
Other current assets
Land
Plant and equipment-net

$
Liabilities
Capital stock, $10 par value
Additional paid-in capital
Retained earnings

25,000 $
55,000
110,000
100,000
660,000
950,000 $

Berry
Book
Value
12,000 $
32,000
90,000
30,000
250,000
414,000 $

Berry
Fair
Value
12,000
36,000
110,000
90,000
375,000
623,000

220,000 $
500,000
170,000
60,000
950,000 $

50,000 $
100,000
40,000
224,000
414,000

50,000

Required:
1. Prepare the journal entry on Myna Corporations books to account
for the business combination.
2. Prepare a consolidated balance sheet for Myna Corporation and
Subsidiary immediately after the business combination.

LO5
Exercise 3
The consolidated balance sheet of Treecreeper Corporation and Ants
Farm, its 90% owned subsidiary, as of December 31, 2005, contains the
following accounts and balances:
Treecreeper Corporation and Subsidiary
Consolidated Balance Sheet
at December 31, 2005

Cash
Accounts receivable-net
Inventories
Other current assets
Plant assets-net
Goodwill from consolidation

$
Accounts payable
Other liabilities
Capital stock
Retained earnings
Minority interest

Balances
19,000
70,000
110,000
85,000
290,000
39,000
613,000

73,000
70,000
350,000
80,000
40,000
613,000

Treecreeper Corporation acquired its 90% interest in Ants Farm on

January 1, 2005, when Ants Farm had $150,000 of Capital Stock and
$70,000 of Retained Earnings. Ants Farms net assets had fair values
equal to their book values when Treecreeper acquired its interest. No
changes have occurred in the amount of outstanding stock since the
date of the business combination. Treecreeper uses the equity method
of accounting for its investment.
Required: Determine the following amounts:
1. The balance of Treecreeper's Capital Stock and Retained Earnings
accounts at December 31, 2005.
2. Cost of Treecreeper's purchase of Ants Farm on January 1, 2005.
3. Ants Farmss stockholders' equity on December 31, 2005.
4. Treecreepers Investment
December 31, 2005.

in

Ants

Farm

account

balance

at

LO5
Exercise 4
Monarch Corporation paid $180,000 for a 75% interest in Stem Co.s
outstanding
Capital
Stock
on
January
1,
2005,
when
Stems
stockholders equity consisted of $150,000 of Capital Stock and
$50,000 of Retained Earnings. Book values of Stems net assets were
equal to their fair values on this date. The adjusted trial balances
of Monarch and Stem on December 31, 2005 were as follows:
Cash
Dividends receivable
Other current assets
Land
Plant assets-net
Investment in Stem
Cost of sales
Other expenses
Dividends

Accounts payable
Dividends payable
Capital stock
Retained earnings
Sales revenue
Income from Stem

Packer
8,250
7,500
40,000
50,000
100,000
195,000
225,000
45,000
25,000
695,750

40,750

150,000
75,000
400,000
30,000
695,750

35,000
10,000
150,000
50,000
190,000

435,000

Stem
35,000
50,000
30,000
150,000

125,000
25,000
20,000
435,000

Required: Complete the partially prepared consolidated balance sheet

working papers that appear below.

Monarch Corporation and Subsidiary

Consolidated balance Sheet Working Papers
at December 31, 2005
Eliminations
Monarch
ASSETS
Cash
Dividends
Receivable
Other current
Assets

Stem

8,250 $ 35,000
7,500
40,000

50,000

50,000

30,000

Plant assets

100,000

150,000

Investment in
Stem

195,000

Land

Total Assets

EQUITIES
Accounts payable $
Dividends
Payable
Capital stock
Retained
Earnings

TOTAL EQUITIES

400,750 $285,000

40,750 $ 35,000
10,000
150,000

150,000

210,000

70,000

400,750 $285,000

Debit

Credit

Balance
Sheet

LO5
Exercise 5
Zoo Inc paid $268,000 to purchase 80% of the outstanding stock of
Bird Corporation, on December 31, 2005. The following year-end
information was available just before the purchase:
Zoo
Book
Value
Cash
Accounts Receivable
Inventory
Land
Plant and equipment-net

$
Accounts Payable
Bonds Payable
Capital stock, $10 par value
Capital stock, $15 par value
Additional paid-in capital
Retained earnings

378,000 $
130,000
240,000
220,000
660,000
1,628,000 $
440,000 $
468,000
200,000
200,000
320,000
1,628,000 $

Bird
Book
Value
40,000 $
76,000
50,000
80,000
200,000
446,000 $

Bird
Fair
Value
40,000
76,000
55,000
55,000
215,000

11,000 $
100,000

11,000
95,000

225,000
80,000
30,000
446,000

Required:
1. Prepare Zoos consolidated balance sheet on December 31, 2005.

LO5
Exercise 6
On July 1, 2005, Magpie Corporation issued 23,000 shares of its own
$2 par value common stock for 35,000 shares of the outstanding stock
of Insect Inc. in an acquisition. Magpie common stock at July 1, 2005
was selling at $14 per share. Just before the business combination,
balance sheet information of the two corporations was as follows:
Magpie
Book
Value
Cash
Inventories
Other current assets
Land
Plant and equipment-net

$
Liabilities
Capital stock, $2 par value
Additional paid-in capital
Retained earnings

25,000 $
55,000
110,000
100,000
660,000
950,000 $

Insect
Book
Value
17,000 $
42,000
40,000
45,000
220,000
364,000 $

Insect
Fair
Value
17,000
47,000
30,000
35,000
280,000
409,000

220,000 $
500,000
170,000
60,000
950,000 $

70,000 $
100,000
90,000
104,000
364,000

75,000

Required:
1. Prepare the journal entry on Magpie
account for the business combination.

Corporations

books

to

2. Prepare a consolidated balance sheet for Magpie Corporation and

Subsidiary immediately after the business combination.

LO5
Exercise 7
Manucode Corporation paid $279,000 for 70% of Trumpet Corporations
$10 par common stock on December 31, 2005, when Trumpet Corporations
stockholders equity was made up of $200,000 of Common Stock, $60,000
Additional Paid-in Capital and $40,000 of Retained Earnings.
Trumpets identifiable assets and liabilities reflected their fair
values on December 31, 2005, except for Trumpets inventory which was
undervalued by $50,000 and their land which was undervalued by
$20,000. Balance sheets for Manucode and Trumpet immediately after
the business combination are presented in the partially completed
working papers.

Manucode Corporation and Subsidiary

Consolidated Balance Sheet Working Papers
at December 31, 2005
Eliminations
Manucode Trumpet
ASSETS
Cash
Accounts
receivable-net

Inventories

20,000

30,000

125,000

110,000

30,000

80,000

320,000

160,000

Investment in
Trumpet

279,000

Total Assets

800,000 $400,000

EQUITIES
Current
liabilities

110,000 $100,000

TOTAL EQUITIES

Credit

Balance
Sheet

26,000 $ 20,000

Land
Plant assets
net

Capital stock
Additional paidin capital
Retained
earnings

Debit

400,000

200,000

100,000

60,000

190,000

40,000

800,000 $400,000

Required:
Complete the consolidated balance sheet working papers for Manucode
Corporation and Subsidiary.

LO6
Exercise 8
Bower Corporation paid $5,000 for a 60% interest in Fig Inc. on
January 1, 2005 when Figs stockholders equity consisted of $5,000
Capital Stock and $2,500 Retained Earnings. Figs assets and
liabilities were fairly valued on this date. Two years later, on
December 31, 2006, the balance sheets of Bower and Fig are summarized
as follows:
Bower Corporation and Subsidiary
Consolidated balance Sheet Working Papers
at December 31, 2006
Eliminations
Bower
ASSETS
Current assets

Fixed assets
Investment in
Fig

Fig

12,550

$ 4,000

21,550

6,500

Credit

Balance
Sheet

5,900

Total Assets

40,000

$10,500

EQUITIES
Liabilities

10,000

$ 1,500

20,000

5,000

10,000

4,000

40,000

$10,500

Capital stock
Retained
Earnings

TOTAL EQUITIES

Debit

Required:
Complete the consolidated balance sheet working
Corporation and Subsidiary at December 31, 2006.

papers

for

Bower

LO7&8
Exercise 9
Currawong Corporation paid $500,000 for 80% of the outstanding voting
common stock of Lizard Corporation on January 2, 2005 when the book
value of Lizards net assets was $460,000. The fair values of
Lizards identifiable net assets were equal to their book values
except as indicated below.
Lizard reported net income of $75,000 during
$35,000 were declared and paid during the year.
Book
Value
Inventories
Buildings-net
Note Payable

(sold in 2005)
(15-year life)
(paid in 2005)

80,000 $
200,000
20,000

2005;

dividends

of

Fair
Value
112,000
170,000
21,250

Required:
1. Prepare a schedule to allocate the cost/book differential to the
specific identifiable assets and liabilities.
2. Determine Currawongs income from Lizard for 2005.
3. Determine the correct balance
account as of December 31, 2005.

in

the

Investment

in

Lizard

SOLUTIONS
Multiple Choice Questions
1

The parents retained earnings

Purchase cost
Current asset fair value
Excess to non-current assets
Fair value of non-current assets
Allocation shortfall
Equipment share of shortfall:
$400,000/$1,200,000 X $120,000 =
Allocation to equipment:
$400,000 - $40,000 =

10

11

$1,400,000 / 90% =
$1,555,556. 10% of
$1,555,556 = $155,556

12

Birds cost
= 7,000 x $30
Implied fair value of Worm
($210,000 / 70%)
Less: Book value
Goodwill acquired

13

$
$
$

$
(
$

1,780,000
700,000
1,080,000
1,200,000
120,000
40,000
360,000

210,000
300,000
180,000 )
120,000

14

15

Pardolates cost

Implied fair value of Arthropod

($200,000 / 60%)
Less: Book value
Goodwill acquired

600,000

200,000
333,333

(
$

300,000 )
33,333

16

Investment cost + 80% (subsidiary

income) (80%)(subsidiary
dividends = $500,000 + $120,000
- $36,000 =

17

18

$3,150/0.20 = $15,750

19

$45,000/15% = $300,000

20

584,000

Exercise 1
Preliminary computations
$
$38,000
Fair value (purchase price) of 90% interest Eliminations
acquired
Alarm
Clock
Debit
Credit
January 2, 2005
Bird
ASSETS
Implied fair value of
Cash
$
Book value of Clocks
Accounts
Excess cost over book
Receivable-net

Clock ($38,000 / 90%

68,000
$ 4,000
net assets
value acquired
75,000
9,000=

(
$

Balance
Sheet

$44,706
$72,000
40,000)
4,706
84,000

Inventories
39,000
10,000
$2,000
51,000
Allocation of excess of
cost over
book avalue:
Plant
assetsInventory
$
2,000
Net
35,000
205,000
Remainder to goodwill170,000
2,706
Investment
in
Excess of fair value over book value
$
4,706
Charlie
38,000
a
$38,000

Total
Assets

Alarm Bird Corporation

and
a
2,706
Subsidiary Consolidated Balance
Sheet Working Papers at January
1, 2005
390,000
$58,000
$

$414,706

EQUITIES
Payables

$138,000

Goodwill

Capital stock
Retained
Earnings
Minority
Interest
Total equities

120,000

2,706

$18,000

100,000

15,000 a

$15,000

100,000

170,000

25,000 a

25,000

170,000
a

390,000

6,706

$58,000

6,706
$414,706

44,706

44,706

Exercise 2
Requirement 1:
Investment in 0Berry Co.
Common stock
Paid-in capital

70 ,000

100,000
600,000

Requirement 2:

Preliminary computations
Fair value (purchase price) of 90% interest acquired January $
2, 2005

$700,000

Implied fair value of Berry ($700,000 / 90%

Book value of Clocks net assets
Excess fair value over book value acquired =

$777,778
364,000)
413,778

Allocation of excess of cost over book value:

Inventory
Other current assets
Land
Plant assets
Remainder to goodwill
Excess of fair value over book value

(
$

4,000
20,000
60,000
125,000
204,778

413,778

Myna Corporation and Subsidiary Consolidated Balance Sheet

Working Papers at January 1, 2005
Myna
ASSETS
Cash

25,000

Berry

Eliminations
Debit
Credit

$ 12,000

Balance
Sheet
$

37,000

Inventories
Other current
Assets

55,000

32,000 b

$ 4,000

91,000

110,000

90,000 b

20,000

220,000

Land

100,000

30,000 b

60,000

190,000

Plant assets
Goodwill
Investment in
Berry
Total
Assets

660,000

250,000 b
b

125,000
204,778

1,035,000
204,778

$ 1,650,000

$414,000

$1,777,778

EQUITIES
Liabilities

$ 50,000

270,000

Capital stock
Additional paidin capital
Retained
earnings
Minority
Interest
Total equities

b
a

700,000

220,000

$413,778
286,222

600,000

100,000 a

100,000

600,000

770,000

40,000 a

40,000

770,000

60,000

224,000 a

224,000

60,000
a77,778

$ 1,650,000

$414,000

77,778
$1,777,778

Exercise 3
Preliminary computations
Requirement 1:
On the consolidated balance sheet, the balance in the Capital Stock
and Retained Earnings accounts will be those of the parent, so the
Capital Stock balance is $350,000, and the Retained Earnings
balance is $80,000.
Requirement 2
(Ant Farms equity on January 1, 2005)x(90%) =
($220,000)x(90%)
Original goodwill =
Original acquisition cost =

$
$

198,000
39,000
237,000

Ant
Farms
stockholders
equity
=
(minority
interest) divided by (minority interest percentage)
=($40,000/10%)
$

400,000

Requirement 4
Treecreepers book value in 90% of Ants Farm at
December 31, 2005 = ($400,000 (from above)) x 90%
$
Plus: goodwill (from balance sheet)

360,000
39,000

Balance in Investment account at December 31, 2005

399,000

Requirement 3

Exercise 4
Preliminary computations
Fair value (purchase price) of 75% interest acquired $
on January 1, 2005
Implied fair value of Stem (($180,000 / 75%)
$
Book value of Stems net assets
$
Excess cost over book value acquired
$

240,000
200,000
40,000

Initial investment cost

Income from Stem: (75%)($40,000)=
Dividends ($20,000)(75%) =

180,000
30,000
-15,000

Balance in Investment in Stem at December 31,2005

195,000

180,000

Monarch Corporation and Subsidiary

Consolidated Balance Sheet Working Papers
at December 31, 2005
Monarch
ASSETS
Cash
Dividends
Receivable
Other current
Assets

8,250

$ 35,000

Plant assets
Investment in
Stem

$ 7,500

40,000

50,000

90,000

50,000

30,000

80,000

100,000

150,000

250,000

195,000

Goodwill

Balance
Sheet
$ 43,250

7,500

Land

Total
Assets

Eliminations
Debit
Credit

Stem

400,750

$265,000

$ 40,000

195,000
40,000

$503,250

EQUITIES
Accounts payable $
Dividends
Payable
Capital stock
Retained
Earnings
Minority
Interest
Total equities

40,750

$ 35,000

$75,750

10,000 b

7,500

2,500

150,000

150,000 a

150,000

150,000

210,000

70,000 a

70,000

210,000
a

400,750

65,000

65,000

$265,000
$503,250
267,500

267,500

Exercise 5
Requirement 1:

Preliminary computations
Fair value (purchase price) of 80% interest acquired $
on December 31, 2005
Implied fair value of Bird (($268,000 / 80%)
$
Book value of Birds net assets
$
Excess cost over book value acquired
$

268,000
335,000
335,000
0

Zoo Corporation and Subsidiary Consolidated Balance Sheet

Working Papers at December 31, 2005
Zoo
ASSETS
Cash

Bird

110,000

40,000

130,000

76,000

240,000

50,000 b

Land

220,000

80,000

PP&E
Investment in
Bird
Total
Assets

660,000

Accounts
Receivable
Inventory

Eliminations
Debit
Credit

Balance
Sheet
$

150,000
206,000

5,000

295,000
b

EQUITIES
Accounts Payable $
Bonds Payable
Capital stock
Additional paidin capital
Retained
earnings
Minority
Interest
Total equities

200,000 b

25,000
15,000

268,000
$ 1,628,000

275,000
875,000

268,000

$446,000

$1,801,000

440,000
468,000

$11,000
100,000 b

$
5,000

451,000
563,000

200,000

225,000 a

225,000

200,000

200,000

80,000 a

80,000

200,000

320,000

30,000 a

30,000

320,000
a

$ 1,628,000

67,000

$446,000

67,000
$1,801,000

360,000

360,000

Exercise 6
Requirement 1:
Investment in Insect Inc.
Common stock
Paid-in capital

322,000

46,000
276,000

Requirement 2:
Preliminary computations
Fair value (purchase price) of 70% interest acquired July 1, $
2005

$322,000

Implied fair value of Insect ($322,000 / 70%

Book value of Insects net assets
Excess cost over book value acquired =

$460,000
294,000)
166,000

Allocation of excess of cost over book value:

Inventory
Other current assets
Land
Plant and Equipment
Liabilities
Remainder to goodwill
Excess of fair value over book value

(
$

$
(
(
(
$

5,000
10,000)
10,000)
60,000
5,000)
126,000
166,000

Magpie Corporation and Subsidiary

Consolidated Balance Sheet Working Papers
July 1, 2005
Magpie
ASSETS
Cash

25,000

Eliminations
Debit
Credit

Insect
$ 17,000

110,000

40,000

b $

10,000

140,000

Land

100,000

45,000

10,000

135,000

Plant assets
Goodwill
Investment in
Insect
Total
Assets

660,000

$ 1,272,000

EQUITIES
Liabilities

Total equities

42,000 b

220,000 b
b

5,000

42,000

Inventories
Other current
Assets

Capital stock
Additional paidin capital
Retained
Earnings
Minority
Interest

55,000

Balance
Sheet

102,000

60,000
126,000

940,000
126,000
b
a

322,000

166,000
156,000

$364,000

220,000 $

$1,485,000

70,000

5,000

$ 295,000

546,000

100,000 a

100,000

546,000

446,000

90,000 a

90,000

446,000

60,000

104,000 a

104,000

60,000
a

$ 1,272,000

138,000

$364,000

138,000
$1,485,000

485,000 $

485,000

Exercise 7
Preliminary computations
Fair value (purchase price) of 70% interest acquired
December 31, 2005
Implied fair value of Trumpet ($279,000 / 70%)
Book value of Trumpets net assets
Excess cost over book value acquired =
Allocation of excess of cost over book value:
Inventory
Land
Remainder to goodwill
Excess of fair value over book value

(
$

$279,000
$398,571
300,000)
98,571

50,000
20,000
28,571
98,571

Manucode Corporation and Subsidiary

Consolidated Balance Sheet Working Papers
at December 31, 2005
Manucode
ASSETS
Cash

Receivables-net
Inventories
Land
Plant assets
net
Investment in
Trumpet
Goodwill
Total
Assets

Trumpet
$ 20,000

$ 46,000

20,000

30,000

50,000

125,000

110,000 b

30,000

80,000 b

$50,000

130,000

160,000

480,000
a
b
b

285,000

20,000

279,000

Balance
Sheet

26,000

320,000

EQUITIES
Current
$
liabilities
Capital Stock
Additional paidIn capital
Retained
earnings
Minority
Interest
Total equities

Eliminations
Debit
Credit

180,429
98,571
28,571

28,571

800,000

$400,000

$1,019,571

110,000

$100,000

$210,000

400,000

200,000 a

200,000

400,000

100,000

60,000 a

60,000

100,000

190,000

40,000 a

40,000

190,000
a

800,000

119,571

$400,000

119,571
$1,019,571

398,571

398,571

Exercise 8
Preliminary computations
Fair value (purchase price) of 60% interest acquired January $
1, 2005

$5,000

Implied fair value of Fig ($5,000 / 60%

Book value of Figs net assets
Excess cost over book value acquired =

$8,333
7,500)
833

(
$

Allocation of excess of cost over book value:

Remainder to goodwill
Excess of fair value over book value

833
833

Bower Corporation and Subsidiary

Consolidated Balance Sheet Working Papers
at December 31, 2006
Bower
ASSETS
Current assets

Fixed assets
Investment in
Fig

Eliminations
Debit
Credit

Fig

Balance
Sheet

12,550

$ 4,000

$16,550

21,550

6,500

28,050

5,900

Goodwill

$ 5,900

$ 833

833

Total
assets

40,000

$10,500

$45,433

EQUITIES
Liabilities

10,000

$ 1,500

$11,500

Capital stock
Retained
earnings
Minority
Interest
Total equities

20,000

5,000 a

5,000

20,000

10,000

4,000 a

4,000

10,000
a

40,000

3,933

$10,500

3,933
$45,433

9,833

9,833

Exercise 9
Preliminary computations
Fair value (purchase price) of 80% interest acquired January $
2, 2005

$500,000

Implied fair value of Lizard ($500,000 / 80%

Book value of Lizards net assets
Excess cost over book value acquired =

(
$

$625,000
460,000)
165,000

Requirement 1
Allocation of excess of cost over book value:
Inventory
Buildings-net
Note payable
Remainder to goodwill
Excess of fair value over book value

$
(
(
$

Requirement 2
Currawongs share of Lizard income =(80%)x(75,000) = $
Less: Excess allocated in inventory which was sold
in the current year
Add: Depreciation adjustment on building =
+($24,000/15 years)
Add: Excess allocated to Note payable
Net
adjustment
to
investment
account
Currowongs share of Lizards income

due

to

60,000
(25,600)
1,600
1,000

37,000

500,000

37,000
(28,000)
509,000

Requirement 3
Original cost of investment in Brazil
Plus: Currawongs share of Lizards income (from
Requirement 2
Less: Dividends received (80%)x(35,000) =
Investment in Lizard account at December 31, 2005

32,000
30,000)
1,250)
164,250
165,000