Package Title: Test Bank Questions

Course Title: Advanced Accounting, 6e

Chapter Number: 4

Question Type: Multiple Choice

1) An investor adjusts the investment account for the amortization of any difference between cost
and book value under the:

a) cost method.
b) complete equity method.
c) partial equity method.
d) complete and partial equity methods.

Answer: b

Question Title: Test Bank (Multiple Choice) Question 01

Difficulty: Easy
Learning Objective: 1 Describe the accounting treatment required under current GAAP for varying
levels of influence or control by investors.
Section Reference: 4.1

2) Under the partial equity method, the entry to eliminate subsidiary income and dividends includes
a debit to:

a) Dividend Income.
b) Dividends Declared - S Company.
c) Equity in Subsidiary Income.
d) Retained Earnings - S Company.

Answer: c

Question Title: Test Bank (Multiple Choice) Question 02

Difficulty: Medium
Learning Objective: 5 Prepare the workpaper eliminating entries for the year of acquisition (and
subsequent years) for the cost and equity methods.
Section Reference: 4.3

3) On the consolidated statement of cash flows, the parent’s acquisition of additional shares of the
subsidiary’s stock directly from the subsidiary is reported as:

a) an investing activity.
b) a financing activity.
c) an operating activity.
d) none of these.

Answer: d

Question Title: Test Bank (Multiple Choice) Question 03

Difficulty: Medium
Learning Objective: 7 Explain how the consolidated statement of cash flows differs from a single
firm’s statement of cash flows.
Section Reference: 4.7

4) Under the cost method, the workpaper entry to establish reciprocity:

a) debits Retained Earnings - S Company.

b) credits Retained Earnings - S Company.
c) debits Retained Earnings - P Company.
d) credits Retained Earnings - P Company.

Answer: d

Question Title: Test Bank (Multiple Choice) Question 04

Difficulty: Medium
Learning Objective: 2 Prepare journal entries on the parent’s books to account for an investment
using the cost method, the partial equity method, and the complete equity method.
Section Reference: 4.2

5) Under the cost method, the investment account is reduced when:

a) there is a liquidating dividend.

b) the subsidiary declares a cash dividend.
c) the subsidiary incurs a net loss.
d) none of these.

Answer: a

Question Title: Test Bank (Multiple Choice) Question 05

Difficulty: Medium
Learning Objective: 2 Prepare journal entries on the parent’s books to account for an investment
using the cost method, the partial equity method, and the complete equity method.
Section Reference: 4.1
6) The parent company records its share of a subsidiary’s income by:

a) crediting Investment in S Company under the partial equity method.

b) crediting Equity in Subsidiary Income under both the cost and partial equity methods.
c) debiting Equity in Subsidiary Income under the cost method.
d) none of these.

Answer: d

Question Title: Test Bank (Multiple Choice) Question 06

Difficulty: Medium
Learning Objective: 1 Describe the accounting treatment required under current GAAP for varying
levels of influence or control by investors.
Section Reference: 4.1

7) In years subsequent to the year of acquisition, an entry to establish reciprocity is made under
the:

a) complete equity method.

b) cost method.
c) partial equity method.
d) complete and partial equity methods.

Answer: b

Question Title: Test Bank (Multiple Choice) Question 07

Difficulty: Easy
Learning Objective: 2 Prepare journal entries on the parent’s books to account for an investment
using the cost method, the partial equity method, and the complete equity method.
Section Reference: 4.2

8) A parent company received dividends in excess of the parent company’s share of the
subsidiary’s earnings subsequent to the date of the investment. How will the parent company’s
investment account be affected by those dividends under each of the following accounting
methods?

a) Cost Method, no effect; Partial Equity Method, no effect

b) Cost Method, decreased; Partial Equity Method, no effect
c) Cost Method, no effect; Partial Equity Method, decreased
d) Cost Method, decreased; Partial Equity Method, decreased

Answer: d

Question Title: Test Bank (Multiple Choice) Question 08

Difficulty: Hard
Learning Objective: 2 Prepare journal entries on the parent’s books to account for an investment
using the cost method, the partial equity method, and the complete equity method.
Section Reference: 4.2, 4.3

9) P Company purchased 80% of the outstanding common stock of S Company on May 1, 2017,
for a cash payment of $1,272,000. S Company’s December 31, 2016 balance sheet reported
common stock of $800,000 and retained earnings of $540,000. During the calendar year 2017, S
Company earned $840,000 evenly throughout the year and declared a dividend of $300,000 on
November 1. What is the amount needed to establish reciprocity under the cost method in the
preparation of a consolidated workpaper on December 31, 2018?

a) $208,000
b) $260,000
c) $248,000
d) $432,000

Answer: a

Question Title: Test Bank (Multiple Choice) Question 09

Difficulty: Hard
Learning Objective: 2 Prepare journal entries on the parent’s books to account for an investment
using the cost method, the partial equity method, and the complete equity method.
Section Reference: 4.2

10) P Company purchased 90% of the outstanding common stock of S Company on January 1,
2013 . S Company’s stockholders’ equity at various dates was:

1/1/13 1/1/17 12/31/17

Common stock $400,000 $400,000 $400,000
Retained earnings 120,000 380,000 460,000
Total $520,000 $780,000 $860,000

The workpaper entry to establish reciprocity under the cost method in the preparation of a
consolidated statements workpaper on December 31, 2017 should include a credit to P Company’s
retained earnings of:

a) $80,000.
b) $234,000.
c) $260,000.
d) $306,000.

Answer: b
Question Title: Test Bank (Multiple Choice) Question 10
Difficulty: Hard
Learning Objective: 2 Prepare journal entries on the parent’s books to account for an investment
using the cost method, the partial equity method, and the complete equity method., 3 Understand
the use of the workpaper in preparing consolidated financial statements.
Section Reference: 4.2

11) Consolidated net income for a parent company and its partially owned subsidiary is best
defined as the parent company’s:

a) recorded net income.

b) recorded net income plus the subsidiary’s recorded net income.
c) recorded net income plus the its share of the subsidiary’s recorded net income.
d) income from independent operations plus subsidiary’s income resulting from transactions with
outside parties.

Answer: d

Question Title: Test Bank (Multiple Choice) Question 11

Difficulty: Easy
Learning Objective: 1 Describe the accounting treatment required under current GAAP for varying
levels of influence or control by investors.
Section Reference: 4.1

12) In the preparation of a consolidated statements workpaper, dividend income recognized by a

parent company for dividends distributed by its subsidiary is:

a) included with parent company income from other sources to constitute consolidated net income.
b) assigned as a component of the noncontrolling interest.
c) allocated proportionately to consolidated net income and the noncontrolling interest.
d) eliminated.

Answer: d

Question Title: Test Bank (Multiple Choice) Question 12

Difficulty: Easy
Learning Objective: 3 Understand the use of the workpaper in preparing consolidated financial
statements.
Section Reference: 4.2

13) In the preparation of a consolidated statement of cash flows using the indirect method of
presenting cash flows from operating activities, the amount of the noncontrolling interest in
consolidated income is:
a) combined with the controlling interest in consolidated net income.
b) deducted from the controlling interest in consolidated net income.
c) reported as a significant noncash investing and financing activity in the notes.
d) reported as a component of cash flows from financing activities.

Answer: a

Question Title: Test Bank (Multiple Choice) Question 13

Difficulty: Medium
Learning Objective: 7 Explain how the consolidated statement of cash flows differs from a single
firm’s statement of cash flows.
Section Reference: 4.6

14) On October 1, 2017, Perma Company acquired for cash all of the voting common stock of
Street Company. The purchase price of Street’s stock equaled the book value and fair value of
Street’s net assets. The separate net income for each company, excluding Perma’s share of income
from Street was as follows:

Perma Street
Twelve months ended $4,500,000 $2,700,000
Three months ended 495,000 450,000
12/31/17

During September, Street paid $150,000 in dividends to its stockholders. For the year ended
December 31, 2017, Perma issued parent company only financial statements. These statements are
not considered those of the primary reporting entity. Under the partial equity method, what is the
amount of net income reported in Perma’s income statement?

a) $7,200,000.
b) $4,650,000.
c) $4,950,000.
d) $1,800,000.

Answer: c

Question Title: Test Bank (Multiple Choice) Question 14

Difficulty: Medium
Learning Objective: 2 Prepare journal entries on the parent’s books to account for an investment
using the cost method, the partial equity method, and the complete equity method.
Section Reference: 4.1

15) A parent company uses the partial equity method to account for an investment in common
stock of its subsidiary. A portion of the dividends received this year were in excess of the parent
company’s share of the subsidiary’s earnings subsequent to the date of the investment. The amount
of dividend income that should be reported in the parent company’s separate income statement
should be:

a) zero.
b) the total amount of dividends received this year.
c) the portion of the dividends received this year that were in excess of the parent’s share of
subsidiary’s earnings subsequent to the date of investment.
d) the portion of the dividends received this year that were not in excess of the parent’s share of
subsidiary’s earnings subsequent to the date of investment.

Answer: a

Question Title: Test Bank (Multiple Choice) Question 15

Difficulty: Easy
Learning Objective: 2 Prepare journal entries on the parent’s books to account for an investment
using the cost method, the partial equity method, and the complete equity method.
Section Reference: 4.3

16) Pine, Inc. owns 40% of Supra Corporation. During the year, Supra had net earnings of
$200,000 and paid dividends of $50,000. Masters used the cost method of accounting. What effect
would this have on the investment account, net earnings, and retained earnings, respectively?

a) understate, overstate, overstate.

b) overstate, understate, understate
c) overstate, overstate, overstate
d) understate, understate, understate

Answer: d

Question Title: Test Bank (Multiple Choice) Question 16

Difficulty: Medium
Learning Objective: 1 Describe the accounting treatment required under current GAAP for varying
levels of influence or control by investors., 2 Prepare journal entries on the parent’s books to
account for an investment using the cost method, the partial equity method, and the complete
equity method.
Section Reference: 4.1, 4.2, 4.3

17) Prime Industries acquired a 70 percent interest in Suburbia Company by purchasing 14,000 of
its 20,000 outstanding shares of common stock at book value of $210,000 on January 1, 2016.
Suburbia reported net income in 2016 of $90,000 and in 2017 of $120,000 earned evenly
throughout the respective years. Prime received $24,000 dividends from Suburbia in 2016 and
$36,000 in 2017. Prime uses the equity method to record its investment.
Prime should record investment income from Suburbia during 2017 of:

a) $36,000
b) $120,000
c) $84,000
d) $48,000

Answer: c

Question Title: Test Bank (Multiple Choice) Question 17

Difficulty: Easy
Learning Objective: 2 Prepare journal entries on the parent’s books to account for an investment
using the cost method, the partial equity method, and the complete equity method.
Section Reference: 4.3

18) Prime Industries acquired a 70 percent interest in Suburbia Company by purchasing 14,000 of
its 20,000 outstanding shares of common stock at book value of $210,000 on January 1, 2016.
Suburbia reported net income in 2016 of $90,000 and in 2017 of $120,000 earned evenly
throughout the respective years. Prime received $24,000 dividends from Suburbia in 2016 and
$36,000 in 2017. Prime uses the equity method to record its investment.

The balance of Prime’s Investment in Suburbia account at December 31, 2017 is:

a) $210,000
b) $285,000
c) $297,000
d) $315,000

Answer: c

Question Title: Test Bank (Multiple Choice) Question 18

Difficulty: Easy
Learning Objective: 2 Prepare journal entries on the parent’s books to account for an investment
using the cost method, the partial equity method, and the complete equity method.
Section Reference: 4.3

19) Park Company acquired a 90% interest in Southwestern Company on December 31, 2016, for
$320,000. During 2017 Southwestern had a net income of $22,000 and paid a cash dividend of
$7,000. Applying the cost method would give a debit balance in the Investment in Stock of
Southwestern Company account at the end of 2017 of:

a) $335,000
b) $333,500
c) $313,700
d) $320,000

Answer: d

Question Title: Test Bank (Multiple Choice) Question 19

Difficulty: Easy
Learning Objective: 2 Prepare journal entries on the parent’s books to account for an investment
using the cost method, the partial equity method, and the complete equity method.
Section Reference: 4.2

20) Pall, Inc, owns 40% of the outstanding stock of Sibil Company. During 2017, Pall received a
$4,000 cash dividend from Sibil. What effect did this dividend have on Pall’s 2017 financial
statements?

a) Increased total assets.

b) Decreased total assets.
c) Increased income.
d) Decreased investment account.

Answer: d
Question Title: Test Bank (Multiple Choice) Question 20
Difficulty: Easy
Learning Objective: 1 Describe the accounting treatment required under current GAAP for varying
levels of influence or control by investors., 2 Prepare journal entries on the parent’s books to
account for an investment using the cost method, the partial equity method, and the complete
equity method.
Section Reference: 4.1, 4.3

21) P Company purchased 80% of the outstanding common stock of S Company on May 1, 2017,
for a cash payment of $318,000. During the calendar year 2017, S Company earned $210,000
evenly throughout the year and declared a dividend of $75,000 on November 1. What is the
amount needed to establish reciprocity under the cost method in the preparation of a consolidated
workpaper on December 31, 2017?

a) $52,000
b) $65,000
c) $62,000
d) $108,000

Answer: a

Question Title: Test Bank (Multiple Choice) Question 21

Difficulty: Medium
Learning Objective: 5 Prepare the workpaper eliminating entries for the year of acquisition (and
subsequent years) for the cost and equity methods.
Section Reference: 4.2

22) P Company purchased 90% of the outstanding common stock of S Company on January 1,
2015. S Company’s stockholders’ equity at various dates was:

1/1/15 1/1/17 12/31/17

Common stock $200,000 $200,000 $200,000
Retained earnings 60,000 190,000 230,000
Total $260,000 $390,000 $430,000

The workpaper entry to establish reciprocity under the cost method in the preparation of a
consolidated statements workpaper on December 31, 2017 should include a credit to P Company’s
retained earnings of:

a) $40,000.
b) $117,000.
c) $130,000.
d) $153,000.

Answer: b

Question Title: Test Bank (Multiple Choice) Question 22

Difficulty: Medium
Learning Objective: 5 Prepare the workpaper eliminating entries for the year of acquisition (and
subsequent years) for the cost and equity methods.
Section Reference: 4.2

23) Prime Industries acquired an 80 percent interest in Sands Company by purchasing 24,000 of its
30,000 outstanding shares of common stock at book value of $105,000 on January 1, 2016. Sands
reported net income in 2016 of $45,000 and in 2017 of $60,000 earned evenly throughout the
respective years. Prime received $12,000 dividends from Sands in 2016 and $18,000 in 2017.
Prime uses the equity method to record its investment.

Prime should record investment income from Sands during 2017 of:

a) $18,000.
b) $60,000.
c) $48,000.
d) $33,600.

Answer: c
Question Title: Test Bank (Multiple Choice) Question 23
Difficulty: Easy
Learning Objective: 2 Prepare journal entries on the parent’s books to account for an investment
using the cost method, the partial equity method, and the complete equity method.
Section Reference: 4.3

24) Prime Industries acquired an 80 percent interest in Sands Company by purchasing 24,000 of its
30,000 outstanding shares of common stock at book value of $105,000 on January 1, 2016. Sands
reported net income in 2016 of $45,000 and in 2017 of $60,000 earned evenly throughout the
respective years. Prime received $12,000 dividends from Sands in 2016 and $18,000 in 2017.
Prime uses the equity method to record its investment.

The balance of Prime’s Investment in Sands account at December 31, 2017 is:

a) $105,000.
b) $138,600.
c) $159,000.
d) $165,000.

Answer: c

Question Title: Test Bank (Multiple Choice) Question 24

Difficulty: Easy
Learning Objective: 2 Prepare journal entries on the parent’s books to account for an investment
using the cost method, the partial equity method, and the complete equity method.,
Section Reference: 4.3

25) Pendleton Company acquired a 70% interest in Sunflower Company on December 31, 2016,
for $380,000. During 2017 Sunflower had a net income of $30,000 and paid a cash dividend of
$10,000. Applying the cost method would give a debit balance in the Investment in Stock of
Sunflower Company account at the end of 2017 of:

a) $400,000.
b) $394,000.
c) $373,000.
d) $380,000.

Answer: d

Question Title: Test Bank (Multiple Choice) Question 25

Difficulty: Easy
Learning Objective: 2 Prepare journal entries on the parent’s books to account for an investment
using the cost method, the partial equity method, and the complete equity method.
Section Reference: 4.2
26) On January 1, 2017, Puma Corporation acquired 30 percent of Slume Company's stock for
$150,000. On the acquisition date, Slume reported net assets of $450,000 valued at historical cost
and $500,000 stated at fair value. The difference was due to the increased value of buildings with a
remaining life of 10 years. During 2017 Slume reported net income of $25,000 and paid dividends
of $10,000. Puma uses the equity method.

What will be the balance in the Investment account as of Dec 31, 2017?

a) $150,000
b) $157,500
c) $154,500
d) $153,000

Answer: d

Question Title: Test Bank (Multiple Choice) Question 26

Difficulty: Easy
Learning Objective: 1 Describe the accounting treatment required under current GAAP for varying
levels of influence or control by investors., 2 Prepare journal entries on the parent’s books to
account for an investment using the cost method, the partial equity method, and the complete
equity method.
Section Reference: 4.1

27) On January 1, 2017, Puma Corporation acquired 30 percent of Slume Company's stock for
$150,000. On the acquisition date, Slume reported net assets of $450,000 valued at historical cost
and $500,000 stated at fair value. The difference was due to the increased value of buildings with a
remaining life of 10 years. During 2017 Slume reported net income of $25,000 and paid dividends
of $10,000. Puma uses the equity method.  

What amount of investment income will be reported by Puma for the year 2017? 
a) $7,500
b) $6,000
c) $4,500
d) $25,000

Answer: b

Question Title: Test Bank (Multiple Choice) Question 27

Difficulty: Medium
Learning Objective: 1 Describe the accounting treatment required under current GAAP for varying
levels of influence or control by investors., 2 Prepare journal entries on the parent’s books to
account for an investment using the cost method, the partial equity method, and the complete
equity method.
Section Reference: 4.1

28) On January 1, 2017, Panda Company purchased 25% of Skill Company’s common stock; no
goodwill resulted from the acquisition. Panda Company appropriately carries the investment using
the equity method of accounting and the balance in Panda’s investment account was $190,000 on
December 31, 2017. Skill reported net income of $120,000 for the year ended December 31, 2017
and paid dividends on its common stock totaling $48,000 during 2017. How much did Panda pay
for its 25% interest in Skill?

a) $172,000
b) $202,000
c) $208,000
d) $232,000

Answer: a

Question Title: Test Bank (Multiple Choice) Question 28

Difficulty: Medium
Learning Objective: 1 Describe the accounting treatment required under current GAAP for varying
levels of influence or control by investors., 2 Prepare journal entries on the parent’s books to
account for an investment using the cost method, the partial equity method, and the complete
equity method.
Section Reference: 4.1

29) On January 1, 2017, Pantera Company purchased 40% of Stratton Company’s 30,000 shares of
voting common stock for a cash payment of $1,800,000 when 40% of the net book value of
Stratton Company was $1,740,000. The payment in excess of the net book value was attributed to
depreciable assets with a remaining useful life of six years. As a result of this transaction Pantera
has the ability to exercise significant influence over Stratton Company’s operating and financial
policies. Stratton’s net income for the ended December 31, 2017 was $600,000. During 2017,
Stratton paid $325,000 in dividends to its shareholders. The income reported by Pantera for its
investment in Stratton should be:

a) $120,000
b) $130,000
c) $230,000
d) $240,000

Answer: c

Question Title: Test Bank (Multiple Choice) Question 29

Difficulty: Medium
Learning Objective: 1 Describe the accounting treatment required under current GAAP for varying
levels of influence or control by investors., 2 Prepare journal entries on the parent’s books to
account for an investment using the cost method, the partial equity method, and the complete
equity method.
Section Reference: 4.1

30) On January 1, 2017, Pantera Company purchased 40% of Stratton Company’s 30,000 shares of
voting common stock for a cash payment of $1,800,000 when 40% of the net book value of
Stratton Company was $1,740,000. The payment in excess of the net book value was attributed to
depreciable assets with a remaining useful life of six years. As a result of this transaction Pantera
has the ability to exercise significant influence over Stratton Company’s operating and financial
policies. Stratton’s net income for the ended December 31, 2017 was $600,000. During 2017,
Stratton paid $325,000 in dividends to its shareholders. The income reported by Pantera for its
investment in Stratton should be:

What is the ending balance in Pantera’s investment account as of December 31, 2017?

a) 1,800,000
b) 1,900,000
c) 1,910,000
d) 2,030,000

Answer: b

Question Title: Test Bank (Multiple Choice) Question 30

Difficulty: Hard
Learning Objective: 1 Describe the accounting treatment required under current GAAP for varying
levels of influence or control by investors., 2 Prepare journal entries on the parent’s books to
account for an investment using the cost method, the partial equity method, and the complete
equity method.
Section Reference: 4.1

31) Which one of the following describes a difference in how the equity method is applied under
GAAP than under IFRS?

a) the equity method is generally applied to limited partnerships under IFRS for investments of
more than 3 to 5%, whereas GAAP adopts a “significant influence” principle.
b) IFRS requires uniform accounting policies, whereas GAAP does not.
c) significant influence is presumed if the investor has 20% or more of the voting rights in a
corporate investee under GAAP, whereas IFRS adopts a “facts and circumstances” approach that
looks beyond the voting rights percentage.
d) GAAP requires consideration of potential voting rights on currently exercisable of convertible
instruments, whereas IFRS does not.

Answer: b
Question Title: Test Bank (Multiple Choice) Question 31
Difficulty: Medium
Learning Objective: 9 Describe some of the differences between U.S. GAAP and IFRS in
accounting for equity investments.
Section Reference: 4.8

Question Type: Essay

32) There are three levels of influence or control by an investor over an investee which determine
the appropriate accounting treatment. Identify and briefly describe the three levels and their
accounting treatment.

Answer: The three levels of influence (control) over an investee are (1) no significant influence, (2)
significant influence, and (3) effective control. When an investor has no significant influence over
an investee, the investment is accounted for at fair value with year-end adjustment for market
changes (the cost method). If the investor has significant influence over the investee, the
investment is accounted for under the equity method. In the equity method, the investor adjusts the
investment account for changes in the investee's net assets.

Question Title: Test Bank (Essay) Question 32

Difficulty: Medium
Learning Objective: 1 Describe the accounting treatment required under current GAAP for varying
levels of influence or control by investors.
Section Reference: 4.1

33) Two methods are available to account for interim acquisitions of a subsidiary’s stock at the end
of the first year. Describe the two methods of accounting for interim acquisitions.

Answer: The two methods of accounting for interim acquisitions are the full-year reporting
alternative and the partial-year reporting alternative. The full-year method includes the subsidiary's
revenues and expenses in the consolidated income statement for the entire year and then makes a
deduction at the bottom of the income statement for the preacquisition earnings.

The partial-year method includes in the consolidated income statement only the subsidiary's
revenue and expense amounts for the period after acquisition. The full-year method is preferred.

Question Title: Test Bank (Essay) Question 33

Difficulty: Medium
Learning Objective: 6 Describe how to account for interim acquisitions of subsidiary stock at the
end of the first year.
Section Reference: 4.5
34) On January 1, 2017, Prince Company purchased an 80% interest in the common stock of Sivet
Company for $1,040,000, which was $60,000 greater than the book value of equity acquired. The
difference between implied and book value relates to the subsidiary’s land.

The following information is from the consolidated retained earnings section of the consolidated
statements workpaper for the year ended December 31, 2017:

SIVET CONSOLIDATED
COMPANY BALANCES
1/01/17 retained earnings $300,000 $1,400,000
Net income 220,000 680,000
Dividends declared (80,000) (140,000)
12/31/17 retained earnings $440,000 $1,940,000

Sivet’s stockholders’ equity includes only common stock and retained earnings.

Required:

A. Prepare the workpaper eliminating entries for a consolidated statements workpaper on

December 31, 2017. Prince uses the cost method.

B. Compute the total noncontrolling interest to be reported on the consolidated balance sheet on
December 31, 2017.

Answer:
A. Dividend Income (80,000 × .80) 64,000
Dividends Declared – Sivet 64,000

Common Stock – Sivet 925,000*

Retained Earnings, 1/1 – Sivet 300,000
Difference Between Implied and Book Value 75,000**
Investment in Sivet Company 1,040,000
Noncontrolling Interest in Equity 260,000

*[(1,040,000 – 60,000)/.8] – 300,000

**60,000/.8 = 75,000

Land 75,000
Difference Between Implied and Book Value 75,000

B. Noncontrolling Interest:
In 1/1/111/1/14 retained earnings 300,000 × .20 $60,000
In 2017 net income 220,000 × .20 44,000
In dividends declared 80,000 × .20 (16,000)
In common stock of Sivet 925,000 × .20 185,000
In difference between implied and book value 75,000 x .20 15,000
Total noncontrolling interest $288,000
Question Title: Test Bank (Problem) Question 4-1
Difficulty: Medium
Learning Objective: 2 Prepare journal entries on the parent’s books to account for an investment
using the cost method, the partial equity method, and the complete equity method., 4 Prepare a
schedule for the computation and allocation of the difference between implied and book values.
Section Reference: 4.2

35) On October 1, 2017, Pamela Company purchased 90% of the common stock of Shingle
Company for $290,000. Additional information for both companies for 2017 follows:

PAMELA SHINGLE
Common stock $300,000 $90,000
Other contributed capital 120,000 40,000
Retained Earnings, 1/1 240,000 50,000
Net Income 260,000 160,000
Dividends declared (10/31) 40,000 8,000

Any difference between implied and book value relates to Shingle’s land. Pamela uses the cost
method to record its investment in Shingle. Shingle Company’s income was earned evenly
throughout the year.

Required:

A. Prepare the workpaper entries that would be made on a consolidated statements workpaper on
December 31, 2017. Use the full year reporting alternative.

B. Calculate the controlling interest in consolidated net income for 2017.

Answer:
A. Dividend Income (8,000 × .90) 7,200
Dividends Declared – Shingle 7,200

Common Stock - Shingle 90,000

Other Contributed Capital – Shingle 40,000
Retained Earnings 1/1 – Shingle 50,000
Difference between Implied# and Book Value
(290,000/.9 – 300,000*) 22,222
Subsidiary Income Purchased
(160,000 × 9/12) 120,000
Investment in Shingle Company 290,000
Noncontrolling Interest in Equity (.10 x $322,222) 32,222

*BV=[90,000 + 40,000 + 50,000 + (160,000 × 9/12)] = $300,000

#Implied Value = Purchase Price/90% = $322,222

Land 22,222
Difference Between Implied and Book Value 22,222
 B. Controlling interest in Consolidated Net Income
Pamela’s reported net income $260,000
– dividend income from Shingle 7,200
Pamela’s income from independent operations 252,800
+ Pamela’s share of Shingle’s net income in 2017
since acquisition (.90 × 40,000) 36,000
Controlling Interest in Consolidated Net Income $288,800

Question Title: Test Bank (Problem) Question 4-2

Difficulty: Hard
Learning Objective: 2 Prepare journal entries on the parent’s books to account for an investment
using the cost method, the partial equity method, and the complete equity method., 3 Understand
the use of the workpaper in preparing consolidated financial statements., 4 Prepare a schedule for
the computation and allocation of the difference between implied and book values.
Section Reference: 4.3

36) On January 1, 2017, Pioneer Company purchased 80% of the common stock of Shipley
Company for $600,000. At that time, Shipley’s stockholders’ equity consisted of the following:

Common stock $220,000

Other contributed capital 90,000
Retained earnings 320,000

During 2017, Shipley distributed a dividend in the amount of $120,000 and at year-end reported a
$320,000 net income. Any difference between implied and book value relates to subsidiary
goodwill. Pioneer Company uses the equity method to record its investment. No impairment of
goodwill is observed in the first year.

Required:

A. Prepare on Pioneer Company’s books journal entries to record the investment related activities
for 2017.

B. Prepare the workpaper eliminating entries for a workpaper on December 31, 2017.

Answer:
A. Investment in Shipley Company 600,000
Cash 600,000

Investment in Shipley Company

(.80 × 320,000) 256,000
Equity in Subsidiary Income 256,000

Cash (.80 × 120,000) 96,000

 Investment in Shipley Company 96,000

B. Equity in Subsidiary Income 216,000

Dividends Declared – Shipley 96,000
Investment in Shipley Company 120,000

Common Stock – Shipley 220,000

Other Contributed Capital – Shipley 90,000
Retained Earnings 1/1 – Shipley 320,000
Difference Between Implied and Book Value 120,000
Investment in Shipley Company 600,000
Noncontrolling Interest in Equity 150,000

Goodwill 120,000
Difference Between Implied and Book Value 120,000

Question Title: Test Bank (Problem) Question 4-3

Difficulty: Hard
Learning Objective: 2 Prepare journal entries on the parent’s books to account for an investment
using the cost method, the partial equity method, and the complete equity method., 3 Understand
the use of the workpaper in preparing consolidated financial statements., 4 Prepare a schedule for
the computation and allocation of the difference between implied and book values.
Section Reference: 4.3

37) Prune Company purchased 80% of the outstanding common stock of Selma Company on
January 2, 2016, for $680,000. The composition of Selma Company’s stockholders’ equity on
January 2, 2016, and December 31, 2017, was:
1/2/16 12/31/17
Common stock $540,000 $540,000
Other contributed capital 325,000 325,000
Retained earnings (deficit) (60,000) 295,000
Total stockholders’ equity $805,000 $1,160,000

During 2017, Selma Company earned $210,000 net income and declared a $60,000 dividend. Any
difference between implied and book value relates to land. Prune Company uses the cost method to
record its investment in Selma Company.

Required:

A. Prepare any journal entries that Prune Company would make on its books during 2017 to record
the effects of its investment in Selma Company.

B. Prepare, in general journal form, all workpaper entries needed for the preparation of a
consolidated statements workpaper on December 31, 2017.

Answer:
A. Cash 48,000
 Dividend Income (.8 × $60,000) 48,000

B. To Establish Reciprocity
Investment in Selma Company 164,000
1/1 Retained Earnings - Prune Company 164,000

$295,000 – $210,000 + $60,000 = $145,000 Retained Earnings on 1/1/17

$145,000 + $60,000 (deficit on date of acquisition) = $205,000 increase in retained earnings
from date of acquisition to 1/1/17

Eliminating Entries
Dividend Income 48,000
Dividends Declared – Selma Company 48,000

Common Stock – Selma 540,000

Other Contributed Capital – Selma 325,000
1/1 Retained Earnings – Selma 145,000
Difference Between Implied and Book Value45,000*
Investment in Selma Company 844,000
Noncontrolling Interest in Equity 211,000

Implied Value = $680,000/.80 = $850,000. Diff = $850,000 – $805,000BV.

Land 45,000
Difference Between Implied and Book Value 45,000

Question Title: Test Bank (Problem) Question 4-4

Difficulty: Hard
Learning Objective: 2 Prepare journal entries on the parent’s books to account for an investment
using the cost method, the partial equity method, and the complete equity method., 3 Understand
the use of the workpaper in preparing consolidated financial statements., 4 Prepare a schedule for
the computation and allocation of the difference between implied and book values.
Section Reference: 4.3

38) P Company purchased 90% of the common stock of S Company on January 2, 2017 for
$900,000. On that date, S Company’s stockholders’ equity was as follows:

Common stock, $20 par value $400,000

Other contributed capital 100,000
Retained earnings 450,000

During 2017, S Company earned $200,000 and declared a $100,000 dividend. P Company uses the
partial equity method to record its investment in S Company. The difference between implied and
book value relates to land.

Required:
Prepared, in general journal form, all eliminating entries for the preparation of a consolidated
statements workpaper on December 31, 2017.

Answer:
Equity in Subsidiary Income 270,000
Dividends Declared - S Company 90,000
Investment in S Company 180,000

Common Stock – S 400,000

Other Contributed Capital – S 100,000
1/1 Retained Earnings – S 450,000
Difference Between Implied and Book Value 50,000
Investment in S Company 900,000
Noncontrolling Interest in Equity 100,000

Land 50,000
Difference Between Implied and Book Value 50,000

Question Title: Test Bank (Problem) Question 4-5

Difficulty: Hard
Learning Objective: 2 Prepare journal entries on the parent’s books to account for an investment
using the cost method, the partial equity method, and the complete equity method., 3 Understand
the use of the workpaper in preparing consolidated financial statements., 4 Prepare a schedule for
the computation and allocation of the difference between implied and book values.
Section Reference: 4.3

39) Pure Company acquired 80% of the outstanding common stock of Saxxon Company on
January 2, 2016 for $675,000. At that time, Saxxon’s total stockholders’ equity amounted to
$1,000,000. Saxxon Company reported net income and dividends for the last two years as follows:

2016 2017
Reported net income $45,000 $60,000
Dividends distributed 35,000 75,000

Required:

Prepare journal entries for Pure Company for 2016 and 2017 assuming Pure uses:
A. The cost method to record its investment

B. The complete equity method to record its investment. The difference between implied value and
the book value of equity acquired was attributed solely to a building, with a 20-year expected life.

Answer:
A. 2016
Investment in Saxxon Company 675,000
Cash 675,000
 Cash 28,000
Dividend Income (.8 × $35,000) 28,000

2017
Cash (.8 × $75,000) 60,000
Investment in Saxxon Company (.8 × $5,000) 4,000
Dividend Income 56,000

B. 2016
Investment in Saxxon Company 675,000
Cash 675,000

Cash 28,000
Investment in Saxxon Company 28,000

Investment in Saxxon Company 36,000

Equity in Subsidiary Income (.8 × $45,000) 36,000

Equity in Subsidiary Income ($75,000*/20) 3,750

Investment in Saxxon Company 3,750

* $675,000/.8 – $750,000 = $93,750 write-up of PPE; Parent’s share = 80%, or $75,000

2017
Cash 60,000
Investment in Saxxon Company 60,000

Investment in Saxxon Company 48,000

Equity in Subsidiary Income (.8 × $60,000) 48,000

Equity in Subsidiary Income 3,750

Investment in Saxxon Company 3,750

Question Title: Test Bank (Problem) Question 4-6

Difficulty: Hard
Learning Objective: 2 Prepare journal entries on the parent’s books to account for an investment
using the cost method, the partial equity method, and the complete equity method., 3 Understand
the use of the workpaper in preparing consolidated financial statements., 4 Prepare a schedule for
the computation and allocation of the difference between implied and book values.
Section Reference: 4.3

40) Pell Company purchased 90% of the stock of Salton Company on January 1, 2007, for
$1,860,000, an amount equal to $60,000 in excess of the book value of equity acquired. All book
values were equal to fair values at the time of purchase (i.e., any excess payment relates to
subsidiary goodwill). On the date of purchase, Salton Company’s retained earnings balance was
$200,000. The remainder of the stockholders’ equity consists of no-par common stock. During
2017, Salton Company declared dividends in the amount of $40,000, and reported net income of
$160,000. The retained earnings balance of Salton Company on December 31, 2016 was $640,000.
Pell Company uses the cost method to record its investment. No impairment of goodwill was
recognized between the date of acquisition and December 31, 2017.

Required:

Prepare in general journal form the workpaper entries that would be made in the preparation of a
consolidated statements workpaper on December 31, 2017.

Answer:
Workpaper entries 12/31/111/1/14
Investment in Salton Company 396,000
Retained Earnings 1/1 - Pell company 396,000
To establish reciprocity (.90 × ($640,000 – $200,000))

Dividend Income 36,000

Dividends Declared - Salton Company 36,000

Common Stock - Salton Company# 1,800,000

Retained Earnings 1/1/111/1/14 - Salton Company 640,000
Difference between Implied and Book Values 66,667
Investment in Salton Company ($1,860,000 + $396,000) 2,256,000
Noncontrolling Interest in Equity ($206,667 + $44,000##) 250,667
#$2,000,000– $200,000
##NCI share of change in R/E = .10($640,000 - $200,000)

Goodwill* 66,667
Difference between Implied and Book Values 66,667

*See computation of difference between implied and book values on following page.

Computation and Allocation of Difference between Implied and Book Value

Parent Non- Entire

Share Controlling Value
Share
Purchase price and implied value $1,860,000 206,667 2,066,667
Equity at book value 1,800,000* 200,000 2,000,000**
Difference between Implied value and bv 60,000 6,667 66,667
Allocated to undervalued land (60,000) (6,667) (66,667)
Balance -0- -0- -0-
* $1,860,000 – $60,000
** $1,800,000/.9

Question Title: Test Bank (Problem) Question 4-7

Difficulty: Hard
Learning Objective: 2 Prepare journal entries on the parent’s books to account for an investment
using the cost method, the partial equity method, and the complete equity method., 3 Understand
the use of the workpaper in preparing consolidated financial statements., 4 Prepare a schedule for
the computation and allocation of the difference between implied and book values.
Section Reference: 4.2

41) On January 1, 2017, Pruit Company purchased 85% of the outstanding common stock of Salty
Company for $525,000. On that date, Salty Company’s stockholders’ equity consisted of common
stock, $150,000; other contributed capital, $60,000; and retained earnings, $210,000. Pruit
Company paid more than the book value of net assets acquired because the recorded cost of Salty
Company’s land was significantly less than its fair value.

During 2017 Salty Company earned $222,000 and declared and paid a $75,000 dividend. Pruit
Company used the partial equity method to record its investment in Salty Company.

Required:

A. Prepare the investment related entries on Pruit Company’s books for 2017.

B. Prepare the workpaper eliminating entries for a workpaper on December 31, 2017.

Answer:
A. Investment in Salty 525,000
Cash 525,000

Investment in Salty ($222,000)(.85) 188,700

Equity in Subsidiary Income 188,700

Cash ($75,000)(.85) 63,750

Investment in Salty 63,750

B. Equity in Subsidiary Income 188,700

Dividends Declared - Salty 63,750
Investment in Salty 124,950

Common Stock - Salty 150,000

Other Contributed Capital - Salty 60,000
Retained Earnings 1/1 - Salty 210,000
Difference between Implied and Book Value 197,647
Investment in Salty 525,000
Noncontrolling Interest in Equity 92,647

Land 197,647
Difference between Implied and Book Value 197,647
 Computation and Allocation of Difference between Implied and Book Value
Parent Non- Entire
Share controlling value
share
Purchase price and implied value $ 525,000 92,647 617,647
Book Value of Equity Acquired 357,000 63,000 420,000
Difference between Implied and Book Value 168,000 29,647 197,647
Adjust Land Upward (168,000) (29,647) (197,647)
Balance -0- -0- -0-

Question Title: Test Bank (Problem) Question 4-8

Difficulty: Hard
Learning Objective: 2 Prepare journal entries on the parent’s books to account for an investment
using the cost method, the partial equity method, and the complete equity method., 3 Understand
the use of the workpaper in preparing consolidated financial statements., 4 Prepare a schedule for
the computation and allocation of the difference between implied and book values.
Section Reference: 4.3

42) Pinta Company purchased 40% of Snuggie Corporation on January 1, 2017 for $150,000.
Snuggie Corporation’s balance sheet at the time of acquisition was as follows:

Cash $30,000 Current Liabilities $40,000

Accounts Receivable 120,000 Bonds Payable 200,000
Inventory 80,000 Common Stock 200,000
Land 150,000 Additional Paid in Capital 40,000
Buildings & 300,000 Retained Earnings 80,000
Equipment
Less: Acc. (120,000)
Depreciation

Total Assets $560,000 Total Liabilities and $560,000

Equities

During 2017, Snuggie Corporation reported net income of $30,000 and paid dividends of $9,000.
The fair values of Snuggie’s assets and liabilities were equal to their book values at the date of
acquisition, with the exception of Building and Equipment, which had a fair value of $35,000
above book value. All buildings and equipment had a remaining useful life of five years at the time
of the acquisition. The amount attributed to goodwill as a result of the acquisition in not impaired.

Required:

A. What amount of investment income will Pinta record during 2017 under the equity method of
accounting?
B. What amount of income will Pinta record during 2017 under the cost method of accounting?

C. What will be the balance in the investment account on December 31, 2017 under the cost and
equity method of accounting?

Answer:
A. Pinta Company 2017 equity-method income:

Proportionate share of reported income ($30,000 x .40) $ 12,000

Amortization of differential assigned to:
Buildings and equipment [($35,000 x .40) / 5 years] (2,800)
Goodwill ($8,000: not impaired) -0-
Investment Income $ 9,200

Assignment of differential

Purchase price $150,000

Proportionate share of book value of
net assets ($320,000 x .40) (128,000)
Proportionate share of fair value increase in buildings
and equipment ($35,000 x .40) (14,000)
Goodwill $ 8,000

B. Dividend income, 2017 ($9,000 x .40) $ 3,600

C. Cost-method account balance (unchanged): $150,000

Equity-method account balance:

Balance, January 1, 2017 $150,000
Investment income 9,200
Dividends received (3,600)
Balance, December 31, 2017 $155,600

Question Title: Test Bank (Problem) Question 4-9

Difficulty: Medium
Learning Objective: 2 Prepare journal entries on the parent’s books to account for an investment
using the cost method, the partial equity method, and the complete equity method., 3 Understand
the use of the workpaper in preparing consolidated financial statements., 4 Prepare a schedule for
the computation and allocation of the difference between implied and book values.
Section Reference: 4.2, 4.3