FAR 44 - Consolidating Process Flashcards Preview

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Flashcards in FAR 44 - Consolidating Process Deck (25):
1

T/F: The purpose of the reciprocity is to bring the investment account (on the worksheet) in balance with the subsidiary's retained earnings as of the beginning of the period being consolidated.

True

2

When a parent company uses the cost method on its books to carry its investment in a subsidiary, which one of the following will be recorded by the parent on its books?
A. Parent's share of subsidiary's net income/net loss.
B. Parent's amortization of goodwill resulting from excess investment cost over fair value of subsidiary's net assets.
C. Parent's share of subsidiary's cash dividends declared.
D. Parent's depreciation of excess investment cost over book values of subsidiary's net assets.

C. Under the cost method of carrying an investment in a subsidiary, the parent does recognize its share of the subsidiary's dividends declared and, ultimately, the cash received in payment of the dividend. The dividend income (CR.) so recognized by the parent would be eliminated in the consolidating process against the retained earnings decrease (DR.) recognized by the subsidiary.

3

On January 1, 20X1, Prim, Inc. acquired all the outstanding common shares of Scarp, Inc. for cash equal to the book value of the stock. The carrying amount of Scarp's assets and liabilities approximated their fair values, except that the carrying amount of its building was more than fair value. In preparing Prim's 20X1 consolidated income statement, which of the following adjustments would be made?
A. Depreciation expense would be decreased, and goodwill would be recognized.
B. Depreciation expense would be increased, and goodwill would be recognized.
C. Depreciation expense would be decreased, and no goodwill would be recognized.
D. Depreciation expense would be increased, and no goodwill would be recognized.

A. Although the cost of the investment was equal to book values, the cost of the investment was greater than the fair values, because the carrying amount of Scarp's building was more than its fair value. For consolidated statement purposes, the building would be written down to its lower fair value, and the excess of cost over fair values would be assigned to recognize goodwill. Since for consolidated purposes the building has a lower fair value than its carrying value, the depreciation expense taken on the carrying value would be greater than the depreciation expense for consolidated purposes. Thus, depreciation expense would be decreased in the consolidating process, and goodwill would be recognized.

4

T/F: If the fair value of a subsidiary's depreciable assets is greater than the book value of those assets, additional depreciation expense must be recognized on the consolidating worksheet.

True

5

T/F: If the fair value of a subsidiary's assets is less than the book value of those assets at the date of acquisition, those assets will be written down on the consolidating worksheet.

True

6

T/F: If goodwill is recognized on the consolidating worksheet, it must be amortized on the consolidating worksheet.

False.
Goodwill that results from a legal acquisition is recognized on the consolidating worksheet as a part of the investment eliminating entry.

7

T/F: If a parent carries an investment in a subsidiary using the equity method, the parent will recognize a cash dividend received from the subsidiary as a dividend income.

False.
If the parent uses the cost method to account for its investment in a subsidiary, the parent will recognize dividends received from the subsidiary as dividend income.

8

T/F: If a parent carries an investment in a subsidiary using the equity method, the parent will recognize its share of the subsidiary's net income as an increase in its (the parent's) investment in the subsidiary.

True

9

T/F: If on the consolidating worksheet an asset is written down to a fair value that is less than book value, an additional amount of depreciation expense will be recognized on the consolidating worksheet.

False.
If the asset is written UP to FV, then an additional amount of depreciation expense will be recognized.

10

T/F: If a subsidiary has been profitable for the five-year period since it was acquired by the parent, the reciprocity entry made on the consolidating worksheet will increase the parent's investment in the subsidiary as shown on the worksheet.

True

11

T/F: Depreciation expense as shown on the consolidating worksheet (and consolidated income statement) can be greater than the sum of the parent's depreciation expense plus the subsidiaries' depreciation expense.

True

12

On January 2 of the current year, Peace Co. paid $310,000 to purchase 75% of the voting shares of Surge Co. Peace reported retained earnings of $80,000, and Surge reported contributed capital of $300,000 and retained earnings of $100,000. The purchase differential was attributed to depreciable assets with a remaining useful life of 10 years. Peace used the equity method in accounting for its investment in Surge. Surge reported net income of $20,000 and paid dividends of $8,000 during the current year. Peace reported income, exclusive of its income from Surge, of $30,000 and paid dividends of $15,000 during the current year. What amount will Peace report as dividends declared and paid in its current year's consolidated statement of retained earnings?

$15,000. This is the amount that Peace will report as dividends in its consolidated statement of retained earnings. Only Peace's (the parent's) dividends paid of $15,000 are shown on the Peace/Surge consolidated statement of retained earnings. The dividend paid by Surge to Peace ($8,000 x .75 = $6,000) will not show on the consolidated statement of retained earnings, because it will be eliminated as intercompany dividend (you can't pay a dividend to yourself!). The balance of Surge's dividend ($8,000 x .25 = $2,000) goes to the 25% minority shareholders in Surge and reduces their claim to Surge's retained earnings, not Peace's consolidated retained earnings.

13

If a parent uses the equity method on its books to carry its investment in a subsidiary, which one of the following current year entries (made by the parent) must be reversed on the consolidating worksheet?
Income from Subsidiary
Dividends from Subsidiary

Both. When a parent uses the equity method to account for its investment in a subsidiary, the parent will recognize on its books during the year its share of the subsidiary's income (or loss) and its share of dividends declared by the subsidiary. Therefore, in the consolidating process, those entries (and any other equity-based entries made by the parent) must be reversed so that the elements that make up those entries (revenues, expenses, etc.) can be individually recognized on the consolidating worksheet and the consolidated financial statements.

14

Assume that in acquiring a subsidiary, the parent determined that several depreciable assets had a fair value greater than book value. If the parent accounts for its investment in the subsidiary using the equity method, what effect will the amortization of the excess fair value over the book value of the subsidiary's assets have on the following parent's accounts?
Investment in Subsidiary
Equity Revenue from Subsidiary
Increase or Decrease

Decrease, decrease
When the fair value of a subsidiary's assets is greater than book value, it is as though the parent paid more for the assets than the subsidiary paid for those assets. Using the equity method of accounting for the investment, the parent must depreciate the excess of fair value over book value. That equity entry would be: DR: Equity Revenue - to reduce it by the amount of depreciation on the excess of fair value over book value, and CR: Investment in Subsidiary - to offset a portion of the net income (or increase the amount of net loss) recognized from the subsidiary. Thus, both accounts would be decreased.

15

Parco owns 100% of its subsidiary, Subco, which it acquired at book value. It carries its investment in Subco on its books using the equity method of accounting. At the beginning of its 2009 fiscal year, the investment in Subco account was $552,000. During 2009, Subco reported the following:

Net Income $42,000
Dividends Declared/Paid 12,000
There were no other transactions between the firms in 2009.

In preparing its 2009 fiscal year consolidated statements, which one of the following is the amount of the investment eliminating entry that Parco will make as a result of its ownership of Subco?

$52,000
The amount of an investment eliminating entry is the balance in the investment account as of the beginning of the period being consolidated. In this case, that was $552,000. If the parent uses the equity method to account for its investment in the subsidiary, the entries it makes during the year are reversed so that the investment account has its beginning of the year balance.

16

Parco owns 100% of its subsidiary, Subco, which it acquired at book value. It carries its investment in Subco on its books using the equity method of accounting. At the beginning of its 2009 fiscal year, the investment in Subco account was $552,000. During 2009, Subco reported the following:

Net Income $42,000
Dividends Declared/Paid 12,000
There were no other transactions between the firms in 2009.

In preparing its 2009 fiscal year consolidated statements, which one of the following is the amount of investment that Parco will have to reverse for 2009 as a result of its ownership of Subco?

$30,000
During 2009 Parco would recognize Subco's reported net income of $42,000 as equity revenue; the entry would be: DR: Investment in Subco and CR: Equity Revenue. The $12,000 dividends would not be recognized as equity revenue but rather as a liquidation of part of Parco's investment in Subco; the entry would be: DR: Dividends Receivable/Cash and CR: Investment in Subco. Therefore, the net amount of investment to be reversed would be $30,000, computed as +$42,000 - $12,000 = $30,000.

17

On January 1, 20x6, Ritt Corp. purchased 80% of Shaw Corp.'s $10 par common stock for $975,000. On this date, the carrying amount of Shaw's net assets was $1,000,000. The fair values of Shaw's identifiable assets and liabilities were the same as their carrying amounts except for plant assets (net), which were $100,000 in excess of the carrying amount. Those plant assets had a 10-year remaining life, depreciated on a straight-line basis. The original cost to the non-controlling investors for the 20% of Shaw's common stock not acquired by Ritt was $200,000. For the year ended December 31, 20x6, Shaw had a net income of $190,000 and paid cash dividends totaling $125,000. Which one of the following is the amount of non-controlling interest that should be reported in a consolidated balance sheet prepared December 31, 20x6?

$246,000
The non-controlling interest on December 31, 20x6, is the non-controlling interest (NCI) as of the acquisition date, plus the NCI share of Shaw's net income, less the NCI share of Shaw's dividends, less the NCI share of the depreciation of the plant asset revaluation. The consolidated net assets balance at January 1, 20x6 was 1,000,000 + 100,000 + goodwill of 75,000 = $1,175,000. During 20x6 the net operating results, $180,000 ($190,000 − $10,000 depreciation on FV > BV), and the dividend paid during the year ($125,000) would adjust the NCI for Shaw. Therefore, 1,175,000 + 180,000 - 125,000 = 1,230,000 x .2 = 246,000.

18

On January 1, 20x1 Ritt Corp. purchased 80% of Shaw Corp.'s $10 par common stock for $975,000. Ritt's cost reflects an appropriate fair value measure for all of Shaw's outstanding common stock. The original cost to the non-controlling investors for the 20% of Shaw's common stock not acquired by Ritt was $200,000. At the date of Ritt's purchase, the carrying amount of Shaw's net assets was $1,000,000. The fair values of Shaw's identifiable assets and liabilities were the same as their carrying amounts except for plant assets (net) which were $100,000 in excess of the carrying amount. Which one of the following is the amount of non-controlling interest that should be reported in a consolidated balance sheet prepared immediately following the business combination?

Non-controlling interest at the date of the business combination should be the non-controlling interest proportionate share of total fair value at that date, including goodwill. The total fair value of Shaw (including goodwill) at the date Ritt acquired 80% of Shaw's common stock would be $1,218,750 ($975,000/.80). The non-controlling interest would be .20 x $1,218,750 = $243,750, the correct answer. The investment eliminating entry made immediately following the business combination would be:
DR: (Various) Identifiable Net Assets $1,100,000
Goodwill 118,750
CR: Investment in Shaw $975,000
Non-controlling Interest
(in Shaw) 243,750

19

T/F: If goodwill is recognized as part of the investment eliminating entry, amortization expense for goodwill must be recognized on the consolidating worksheet.

False.
The amortization expense of goodwill is Not recognized in the investment eliminating entry.

20

T/F: If, on a consolidating worksheet, depreciation expense is taken on the excess of fair value over book value of a subsidiary's depreciable assets, the corresponding credit on the consolidating worksheet is to accumulated depreciation.

True

21

T/F:The fair value of the non-controlling interest at the date of a business combination enters into the determination of any goodwill.

True

22

T/F: If a parent carries an investment in a subsidiary on its books using the equity method, the investment account on the parent's books will be adjusted to reflect changes in the subsidiary's retained earnings for each fiscal period.

True

23

T/F: If Company P owns 90% of Company S voting stock and Company S has a trade account payable to Company P of $100,000, the amount to be eliminated is $90,000.

False.
The full amount of the trade account payable would be eliminated.

24

T/F: The non-controlling interest on a consolidated balance sheet prepared immediately after a business combination would be measured at the fair value of the non-controlling interest's percentage claim to the consolidated net assets attributable to the subsidiary.

True

25

T/F: Any difference between the fair value of a subsidiary's asset and the book value of that asset is recognized on the books of the parent.

False.
The sub's asset is recognized on the books of the sub and push down accounting would revalue the asset on the GL of the sub so that the revaluation isn't allocated during the consolidation process. The JE would be
Dr. Equipment (Asset)
Dr. Goodwill
Cr. Revaluation Capital (an equity account)
Upon consolidation the revaluation capital account would be eliminated.

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