Chapter 3

Consolidated Financial StatementsDate of Acquisition

Multiple Choice
1.

A majority-owned subsidiary that is in legal reorganization should normally be accounted for using
a. consolidated financial statements.
b. the equity method.
c. the market value method.
d. the cost method.

2.

Under the acquisition method, indirect costs relating to acquisitions should be

a. included in the investment cost.
b. expensed as incurred.
c. deducted from other contributed capital.
d. none of these.

3.

Eliminating entries are made to cancel the effects of intercompany transactions and are made on the
a. books of the parent company.
b. books of the subsidiary company.
c. workpaper only.
d. books of both the parent company and the subsidiary.

4.

One reason a parent company may pay an amount less than the book value of the subsidiary's stock
acquired is
a. an undervaluation of the subsidiary's assets.
b. the existence of unrecorded goodwill.
c. an overvaluation of the subsidiary's liabilities.
d the existence of unrecorded contingent liabilities.

5.

In a business combination accounted for as an acquisition, registration costs related to common

stock issued by the parent company are
a. expensed as incurred.
b. deducted from other contributed capital.
c. included in the investment cost.
d. deducted from the investment cost.

6.

On the consolidated balance sheet, consolidated stockholders' equity is

a. equal to the sum of the parent and subsidiary stockholders' equity.
b. greater than the parent's stockholders' equity.
c. less than the parent's stockholders' equity.
d. equal to the parent's stockholders' equity.

7.

Majority-owned subsidiaries should be excluded from the consolidated statements when

a. control does not rest with the majority owner.
b. the subsidiary operates under governmentally imposed uncertainty.
c. a foreign subsidiary is domiciled in a country with foreign exchange restrictions or controls.
d. any of these circumstances exist.

3-2

Test Bank to accompany Jeter and Chaney Advanced Accounting

8.

Under the economic entity concept, consolidated financial statements are intended primarily for the
benefit of the
a. stockholders of the parent company.
b. creditors of the parent company.
c. minority stockholders.
d. all of the above.

9.

Reasons a parent company may pay more than book value for the subsidiary company's stock
include all of the following except
a. the fair value of one of the subsidiary's assets may exceed its recorded value because of
appreciation.
b. the existence of unrecorded goodwill.
c. liabilities may be overvalued.
d. stockholders' equity may be undervalued.

10.

What is the method of presentation required by SFAS 160 of non-controlling interest on a

consolidated balance sheet?
a. As a deduction from goodwill from consolidation.
b. As a separate item within the long-term liabilities section.
c. As a part of stockholders' equity.
d. As a separate item between liabilities and stockholders' equity.

11.

Which of the following is a limitation of consolidated financial statements?

a. Consolidated statements provide no benefit for the stockholders and creditors of the parent
company.
b. Consolidated statements of highly diversified companies cannot be compared with
industry standards.
c. Consolidated statements are beneficial only when the consolidated companies operate within the
same industry.
d. Consolidated statements are beneficial only when the consolidated companies operate in
different industries.

12.

Pina Corp. owns 60% of Simon Corp.'s outstanding common stock. On May 1, 2013, Pina advanced
Simon $90,000 in cash, which was still outstanding at December 31, 2013. What portion of this
advance should be eliminated in the preparation of the December 31, 2013 consolidated balance
sheet?
a. $90,000.
b. $54,000.
c. $36,000.
d. $-0-.

Chapter 3 Consolidated Financial StatementsDate of Acquisition

3-3

Use the following information for questions 13-15.

On January 1, 2013, Pell Company and Sand Company had condensed balance sheets as follows:
Pell
Sand
Current assets
$ 280,000
$ 80,000
Noncurrent assets
_360,000
__160,000
Total assets
$ 640,000
$240,000
Current liabilities
$ 120,000
$ 40,000
Long-term debt
200,000
-0Stockholders' equity
__320,000
200,000
Total liabilities & stockholders' equity
$ 640,000
$240,000
On January 2, 2013 Pell borrowed $240,000 and used the proceeds to purchase 90% of the outstanding
common stock of Sand. This debt is payable in 10 equal annual principal payments, plus interest, starting
December 30, 2013. Any difference between book value and the value implied by the purchase price relates
to land.
On Pell's January 2, 2013 consolidated balance sheet,
13.

Noncurrent assets should be

a. $520,000.
b. $536,000.
c. $544,000.
d. $586,667.

14.

Current liabilities should be

a. $200,000.
b. $184,000.
c. $160,000.
d. $120,000.

15.

Noncurrent liabilities should be

a. $440,000.
b. $416,000.
c. $240,000.
d. $216,000.

16.

A newly acquired subsidiary has pre-existing goodwill on its books. The parent companys
consolidated balance sheet will:
a. treat the goodwill the same as other intangible assets of the acquired company.
b. will always show the pre-existing goodwill of the subsidiary at its book value.
c. not show any value for the subsidiarys pre-existing goodwill.
d. do an impairment test to see if any of it has been impaired.

17.
The Difference between Implied and Book Value account titles s/b in Caps, but not italics - you have
not done this consistentlyaccount is:
a. an asset or liability account reflected on the consolidated balance sheet.
b. used in allocating the amounts paid for recorded balance sheet accounts that are different
than
their fair values.
c. the excess implied value assigned to goodwill.
d. the unamortized excess that cannot be assigned to any related balance sheet accounts

3-4

Test Bank to accompany Jeter and Chaney Advanced Accounting

18.

The main evidence of control for purposes of consolidated financial statements involves
a. possessing majority ownership
b. having decision-making ability that is not shared with others.
c. being the sole shareholder
d. having the parent company and the subsidiary participating in the same industry.

19.

In which of the following cases would consolidation be inappropriate?

a. The subsidiary is in bankruptcy.
b. Subsidiary's operations are dissimilar from those of the parent.
c. The parent owns 90 percent of the subsidiary's common stock, but all of the subsidiary's
nonvoting preferred stock is held by a single investor.
d. Subsidiary is foreign.

20.

Price Company acquired 75 percent of the common stock of Shandie Corporation on December 31,
2013. On the date of acquisition, Price held land with a book value of $150,000 and a fair value of
$300,000; Shandie held land with a book value of $100,000 and fair value of $500,000. What
amount would land be reported in the consolidated balance sheet prepared immediately after the
combination?
a. $650,000
b. $500,000
c. $550,000
d. $375,000

Use the following information to answer questions 21 - 23.

On January 1, 2013, Pent Company and Shelter Company had condensed balanced sheets as follows:
Pent
Current assets
Noncurrent assets
Total assets

$ 210,000
270,000
$480,000

Current liabilities
Long-term debt
Stock holders' equity
Total liabilities & stockholders' equity

90,000
150,000
240,000
$ 480,000

Shelter
$ 60,000
120,000
$180,000
$ 30,000
-0150,000
$ 180,000

On January 2, 2013 Pent borrowed $180,000 and used the proceeds to purchase 90% of the outstanding
common stock of Shelter. This debt is payable in 10 equal annual principal payments, plus interest, starting
December 30, 2013. Any difference between book value and the value implied by the purchase price relates
to land.
On Pent's January 2, 2013 consolidated balance sheet,
21.

Noncurrent assets should be

a. $390,000.
b. $402,000.

Chapter 3 Consolidated Financial StatementsDate of Acquisition

3-5

c. $408,000.
d. $440,000.
22.

Current liabilities should be

a. $150,000.
b. $138,000.
c. $120,000.
d. $90,000.

23.

Noncurrent liabilities should be

a. $330,000.
b. $312,000.
c. $180,000.
d. $162,000.

24.

On January 1, 2013, Prima Corporation acquired 80 percent of Sunder Corporation's voting common stock.
Sunders's buildings and equipment had a book value of $300,000 and a fair value of $350,000 at the time of
acquisition. At what amount will Sunders buildings and equipment will be reported in the consolidated
statements ?
a. $350,000
b. $340,000
c. $280,000
d. $300,000

25.

The primary beneficiary of a variable interest entity (VIE) must consolidate the VIE into its financial
statements whenever
a. substantially all of the entitys activities are conducted on behalf of an investor who has
disproportionally few voting rights.
b. the voting rights are not proportional to the obligations to absorb the expected losses or receive expected
residual returns.
c. the total equity at risk is not sufficient to permit the entity to finance its activities without
additional subordinated financial support from other parties.
d. the holders of the equity investment at risk have the right to receive the residual returns of the legal
entity

26.

If an entity is not considered a VIE, the determination of consolidation is based on whether

a. the voting rights are proportional to the obligations to absorb expected losses or receive expected
residual returns.
b. the total equity at risk is sufficient to permit the entity to finance its activities without additional
subordinated financial support from other parties.
c. the equity investments or investments in subordinated debt are at risk.
d. one of the entities in the consolidated group directly or indirectly has a controlling financial
interest (usually ownership of a majority voting interest) in the other entities.

27.

IFRS defines control as

a. the direct or indirect ability to determine the direction of management and policies through ownership,
contract, or otherwise.
b. the power to govern the entitys financial and operating policies as to obtain benefits from its
activities.
c. the power to direct the activities that impact economic performance, the obligation to absorb expected
losses, and the right to receive expected residual returns.

3-6

Test Bank to accompany Jeter and Chaney Advanced Accounting

d. having a majority of the ownership interests entitled to elect management.

Problems
3-1

On December 31, 2013, Pinta Company purchased 80% of the outstanding common stock of Snead
Company for cash. At the time of acquisition, Snead Company's balance sheet was as follows:
Current assets
Plant and equipment
Land
Total assets

$ 1,680,000
1,580,000
280,000
$3,540,000

Liabilities
Common stock, $10 par value
Other contributed capital
Retained earnings
Total
Treasury stock at cost, 5,000 shares
Total equities

$ 1,320,000
1,440,000
700,000
240,000
$3,700,000
<160,000>
$3,540,000

Required:
Prepare the elimination entry(s) required for the preparation of a consolidated balance sheet
workpaper on December 31, 2013, assuming the purchase price of the stock was $1,670,000. Any
difference between the value implied by the purchase price of the investment and the book value of
net assets acquired relates to subsidiary land.
3-2

P Company purchased 80% of the outstanding common stock of S Company on January 2, 2013, for
$380,000. Balance sheets for P Company and S Company immediately after the stock acquisition
were as follows:
Current assets
Investment in S Company
Plant and equipment (net)
Land
Current liabilities
Long-term notes payable
Common stock
Other contributed capital
Retained earnings

P Company
$ 166,000
380,000
560,000
40,000
$1,146,000

S Company
$ 96,000
-0224,000
120,000
$440,000

$ 120,000
-0480,000
244,000
302,000
$1,146,000

$ 44,000
36,000
160,000
64,000
136,000
$440,000

S Company owed P Company $16,000 on open account on the date of acquisition.

Required:

Chapter 3 Consolidated Financial StatementsDate of Acquisition

3-7

Prepare a consolidated balance sheet for P and S Companies on the date of acquisition. Any
difference between the value implied by the purchase price of the investment and the book value of
net assets acquired relates to subsidiary land. The book values of S Company's other assets and
liabilities are equal to their fair values.
3-3

P Company acquired 54,000 shares of the common stock of S Company on January 1, 2013, for
$950,000 cash. The stockholders' equity section of S Company's balance sheet on that date was as
follows:
Common stock, $10 par value
Other contributed capital
Retained earnings
Total

$600,000
80,000
320,000
$1,000,000

On the date of acquisition, S Company owed P Company $10,000 on open account.

Required:
Present, in general journal form, the elimination entries for the preparation of a consolidated balance
sheet workpaper on January 1, 2013. The difference between the value implied by the purchase
price of the investment and the book value of the net assets acquired relates to subsidiary land.

3-4

On January 2, 2013, Pope Company acquired 90% of the outstanding common stock of Smithwick
Company for $480,000 cash. Just before the acquisition, the balance sheets of the two companies
were as follows:
Cash
Accounts Receivable (net)
Inventory
Plant and Equipment (net)
Land
Total Assets

Pope
$ 650,000
360,000
290,000
970,000
150,000
$2,420,000

Smithwick
$ 160,000
60,000
140,000
240,000
80,000
$680,000

Accounts Payable
Mortgage Payable
Common Stock, $2 par value
Other Contributed Capital
Retained Earnings
Total Equities

$ 260,000
180,000
1,000,000
520,000
460,000
$2,420,000

$ 120,000
100,000
170,000
50,000
240,000
$680,000

The fair values of Smithwick's assets and liabilities are equal to their book values with the
exception of land.

Required:

3-8

Test Bank to accompany Jeter and Chaney Advanced Accounting

A. Prepare the journal entry necessary to record the purchase of Smithwick's common stock.
B. Prepare a consolidated balance sheet at the date of acquisition.
3-5

P Corporation paid $420,000 for 70% of S Corporations $10 par common stock on December 31,
2013, when S Corporations stockholders equity was made up of $300,000 of Common Stock,
$90,000 of Other Contributed Capital and $60,000 of Retained Earnings. Ss identifiable assets and
liabilities reflected their fair values on December 31, 2013, except for Ss inventory which was
undervalued by $60,000 and their land which was undervalued by $25,000. Balance sheets for P
and S immediately after the business combination are presented in the partially completed workpaper below.
P
ASSETS
Cash
Accounts
receivable-net
Inventories
Land
Plant assetsnet
Investment in
S Corp.
Difference
between implied
and book value
Goodwill
Total Assets
EQUITIES
Current
liabilities
Capital stock
Additional paidin capital
Retained
earnings
Noncontrolling
interest
Total Equities

$40,000

$30,000

30,000
185,000
45,000

45,000
165,000
120,000

480,000

240,000

Eliminations
Debit
Credit

Noncontrolling
Interest

Consolidated
Balances

420,000

$1,200,000

$600,000

$170,000
600,000

$150,000
300,000

150,000

90,000

280,000

60,000

$1,200,000

$600,000

Required:
Complete the consolidated balance sheet workpaper for P Corporation and Subsidiary.

Chapter 3 Consolidated Financial StatementsDate of Acquisition

3-6

3-9

Prepare in general journal form the workpaper entries to eliminate Porter Company's investment in
Sewell Company in the preparation of a consolidated balance sheet at the date of acquisition for
each of the following independent cases:
Sewell Company Equity Balances
Cash

Percent of
Stock Owned

Investment
Cost

Common
Stock

Other Contributed
Capital

Retained
Earnings

a.

90

$675,000

$450,000

$180,000

$75,000

b.

80

318,000

620,000

140,000

20,000

Any difference between book value of net assets acquired and the value implied by the purchase
price relates to subsidiary property, plant, and equipment except for case (b). In case (b) assume that
all book values and fair values are the same.
3-7

On December 31, 2013, Priestly Company purchased a controlling interest in Shelter Company for
$1,060,000. The consolidated balance sheet on December 31, 2013 reported noncontrolling interest
in Shelter Company of $265,000.
On the date of acquisition, the stockholders' equity section of Shelter Company's balance sheet was
as follows:
Common stock
Other contributed capital
Retained earnings
Total

$520,000
380,000
280,000
1,180,000

Required:
A. Compute the noncontrolling interest percentage on December 31, 2013.
B. Prepare the investment elimination entry made to prepare a consolidated balance sheet
workpaper. Any difference between book value and the value implied by the purchase price
relates to subsidiary land.
3-8

On January 1, 2013, Prima Company issued 1,500 of its $20 par value common shares with a fair
value of $50 per share in exchange for 2,000 outstanding common shares of Swatch Company in a
purchase transaction. Registration costs amounted to $1,700 paid in cash. Just prior to the
acquisition, the balance sheets of the two companies were as follows:

Cash
Accounts Receivable (net)
Inventory
Plant and Equipment (net)

Prima

Swatch

$ 73,000
95,000
58,000
95,000

$13,000
19,000
25,000
43,000

3-10 Test Bank to accompany Jeter and Chaney Advanced Accounting

Land
Total Assets

26,000
$ 347,000

20,000
$ 120,000

Accounts Payable
Notes Payable
Common Stock, $20 par value
Other Contributed Capital
Retained Earnings
Total Liabilities and Equities

$ 66,000
82,000
100,000
60,000
39,000
$ 347,000

16,000
21,000
40,000
24,000
19,000
$ 120,000

Any differences between the book value of equity and the value implied by the purchase price relates to
Land.
Required:
A. Prepare the journal entry on Primas books to record the exchange of stock.
B. Prepare a Computation and Allocation Schedule for the Difference between book value and value
implied by the purchase price.
C. Calculate the consolidated balance for each of the following accounts as of December 31, 2013:
1. Cash
2. Land
3. Common Stock
4. Other Contributed Capital

Short Answer
1. There are several reasons why a company would acquire a subsidiarys voting common stock rather than
its net assets. Identify at least two advantages to acquiring a controlling interest in the voting stock of
another company rather than its assets.
2. A useful first step in the consolidating process is to prepare a Computation and Allocation of Difference
(CAD) Schedule. Identify the steps involved in preparing the CAD schedule.
Short Answer Questions from the Textbook
1. What are the advantages of acquiring the majority of the voting stock of another company rather than

acquiring all its voting stock?

2. What is the justification for preparing consolidated financial statements when, in fact, it is apparent that

the consolidated group is not a legal entity?

3. Why is it often necessary to prepare separate financial statements for each legal entity in a consolidated

group even though consolidated statements provide a better economic picture of the combined
activities?
4. What aspects of control must exist before a subsidiary is consolidated?
5. Why are consolidated work papers used in pre-paring preparing consolidated financial statements?

Chapter 3 Consolidated Financial StatementsDate of Acquisition

3-11

6. Define noncontrolling (minority) interest. List three methods that might be used for reporting the

noncontrolling interest in a consolidated balance sheet, and state which is preferred under the SFAS No.
160[topic 810].
7. Give several reasons why a parent company would be willing to pay more than book value for

subsidiary stock acquired.

8. What effect do subsidiary treasury stock holdings have at the time the subsidiary is acquired? How

should the treasury stock be treated on consolidated work papers?

9. What effect does a noncontrolling interest have on the amount of intercompany receivables and payables

eliminated on a consolidated balance sheet?

10A SFAS No. 109and SFAS No. 141R [ASC 740 and 805] require that a deferred tax asset or liability be
recognized for likely differences between the reported values and tax bases of assets and liabilities
recognized in business combinations (for example, in exchanges that are nontaxable to the selling
shareholders). Does this decision change the amount of consolidated net income reported in years
subsequent to the business combination? Explain.
Business Ethics Question from the Textbook
Part I. You are working on the valuation of accounts receivable, and bad debt reserves for the current years
annual report. The CFO stops by and asks you to reduce the reserve by enough to increase the current years
EPS by 2 cents a share. The companys policy has always been to use the previous years actual bad debt
percentage adjusted for a specific economic index. The CFOs suggested change would still be within
acceptable GAAP. However, later, you learn that with the increased EPS, the CFO would qualify for a
significant bonus. What do you do and why?
Part II. Consider the following: Accounting firm KPMG created tax shelters called BLIPS, FLIP, OPIS, and
SOS that were based largely in the Cayman Islands and allowed wealthy clients (there were 186) to create
$5 billion in losses, which were then deducted from their income for IRS tax purposes. BLIPS (Bond Linked
Issue Premium Structures) had clients borrow from an offshore bank for purposes of purchasing currency.
The client would then sell the currency back to the lender for a loss. However, the IRS contends the losses
were phony and that there was never any risk to the client in the deals. The IRS has indicted eight former
KPMG partners and an outside lawyer alleging that the transactions were shams, illegal methods for
avoiding taxes. KPMG has agreed to pay a$456 million fine, no longer to do tax shelters, and to cooperate
with the government in its prosecution of the nine individuals involved in the tax shelter scheme. Many
argue that the courts have not always held that such tax avoidance schemes show criminal intent because the
tax laws permit individuals to minimize taxes. However, the IRS argues that these shelters evidence intent
because of the lack of risk.
Question
In this case, the IRS contends that the losses generated by the tax shelters were phony and that the clients
never incurred any risk. Do tax avoidance schemes indicate criminal intent if the tax laws permit individuals
to minimize taxes? Justify your answer.

3-12 Test Bank to accompany Jeter and Chaney Advanced Accounting

ANSWER KEY
Multiple Choice
1. d
2. b
3. c
4. d
5. b
6. d
7. d
Problems
3-1

8.
9.
10.
11.
12.
13.
14.

d
d
c
b
a
d
b

15.
16.
17.
18.
19.
20.
21.

b
c
b
b
a
a
d

22. b
23. b
24. a
25. c
26. d
27. b

Common Stock Snead

Other Contributed Capital Snead
Retained Earnings Snead
Investment in Snead Company
Treasury Stock - Snead
Difference Between Implied and Book Value
Noncontrolling Interest

1,440,000
700,000
240,000
1,670,000
160,000
106,000
444,000

Difference Between Implied and Book Value

Land
3-2

3-3

106,000
106,000

P COMPANY AND SUBSIDIARY

Consolidated Balance Sheet
January 2, 2013
Current assets
Plant and equipment (net)
Land ($160,000 + $115,000 excess cost)
Total

$246,000
784,000
275,000
$1,305,000

Current liabilities
Long-term notes payable
Common stock
Noncontrolling interest
Other contributed capital
Retained earnings
Total

$ 148,000
36,000
480,000
95,000
244,000
302,000
$1,305,000

Accounts Payable (to P)

Accounts Receivable (from S)
Common Stock - S
Other Contributed Capital - S
Retained Earnings - S
Difference Between Implied and Book Value

10,000
10,000
600,000
80,000
320,000
50,000

Chapter 3 Consolidated Financial StatementsDate of Acquisition

Investment in S Company
Noncontrolling Interest

950,000
100,000

Land
50,000
Difference Between Implied and Book Value
3-4
A.

Investment in Smithwick Company

Cash
B.

50,000

480,000
480,000

POPE COMPANY AND SUBSIDIARY

Consolidated Balance Sheet
January 2, 2013
Assets
Cash (650,000 + 160,000 - $480,000)
Accounts Receivable
Inventory
Plant and Equipment (net)
Land ($150,000 + $80,000 + $73,333*)
Total Assets
Liabilities and Stockholders Equity
Accounts Payable
Mortgage Payable
Total liabilities
Noncontrolling Interest
($170,000 + $50,000 + $240,000 + 73,333) .10
Common Stock
$1,000,000
Other Contributed Capital
520,000
Retained Earnings
460,000
Total Stockholders Equity
Total Liabilities and Stockholders Equity
* $480,000/.9 - ($170,000 + $50,000 + $240,000)

$330,000
420,000
430,000
1,210,000
303,333
$2,693,333
$380,000
280,000
$660,000
$ 53,333

1,980,000
$2,693,333

3-13

3-14 Test Bank to accompany Jeter and Chaney Advanced Accounting

3.5
P
ASSETS
Cash
Accounts
receivable-net
Inventories
Land
Plant assetsnet
Investment in
S Corp.
Difference
between
implied and
book value
Goodwill
Total Assets
EQUITIES
Current
liabilities
Capital stock
Additional
paid-in capital
Retained
earnings
Noncontrolling
interest
Total Equities
3-6

A.

B.

$40,000

$30,000

30,000
185,000
45,000

45,000
165,000
120,000

480,000

240,000

Eliminations
Debit
Credit

Noncontrolling
Interest

Consolidated
Balances

$70,000
75,000
410,000
190,000

(b) 60,000
(b) 25,000

720,000

420,000

(a) 420,000

(a) 150,000
(b) 65,000

(b) 150,000

$1,200,000

$600,000

65,000
$1,530,000

$170,000
600,000

$150,000
300,000

(a) 300,000

$320,000
600,000

150,000

90,000

(a) 90,000

150,000

280,000

60,000

(a) 60,000

280,000

$1,200,000

$600,000

$750,000

(a) 180,000
$750,000

Common Stock Sewell

Other Contributed Capital Sewell
Difference between Implied and Book Values
Retained Earnings Sewell
Investment in Sewell
Noncontrolling Interest in Equity

450,000
180,000
45,000
75,000

Common Stock Sewell

Other Contributed Capital Sewell
Retained Earnings Sewell
Investment in Sewell
Gain on Purchase of Business - Porter
Noncontrolling Interest in Equity

620,000
140,000
20,000

180,000

675,000
75,000

318,000
306,000
156,000

180,000
$1,530,000

Chapter 3 Consolidated Financial StatementsDate of Acquisition

3-7

A.

265,000/(1,060,000 +265,000) = 20% Noncontrolling interest

B.

Common Stock Shelter

Other Contributed Capital Shelter
Retained Earnings Shelter
Difference between Implied and Book Values
Investment in Shelter Company
Noncontrolling Interest in Equity

520,000
380,000
280,000
145,000

Investment in Swatch Company ($50 1,500)

Common Stock ($20 1,500)
Other Contributed Capital ($30 1,500)

75,000

3-15

1,060,000
265,000

3-8
A.

Other Contributed Capital

Cash

30,000
45,000
1,700
1,700

B. Computation and Allocation of Difference

Purchase price and implied value

Less: Book value of equity acquired
Difference between implied and book value
Land
Balance
* $40,000 + $24,000 + $19,000 = $83,000

Parent
Share
$75,000
83,000*
7,000
(7,000)
-0-

NonControlling
Share
0
0
0
(0)
-0-

Entire
Value
75,000
83,000
7,000
(7,000)
-0-

C.
Cash balance: 73,000 + 13,000 1,700 = $84,300
Land balance: 26,000 + 20,000 + 7,000= $ 53,000
Common Stock balance: 100,000 + 30,000 = $130,000
Other Contributed Capital: 60,000 + 45,000 1,700 = $ 103,300
Short Answer
1. Reasons why a company would acquire a subsidiary rather than its net assets include the following:
a. Stock acquisition is relatively simple and avoids the often lengthy and difficult negotiations that
are required in a complete takeover.
b. Control of the subsidiary's operations can be accomplished with a much smaller investment.
c. The separate legal existence of the individual affiliates provides an element of protection of the
parent's assets from attachment by subsidiary creditors.

3-16 Test Bank to accompany Jeter and Chaney Advanced Accounting

2. Preparation of the Computation and Allocation of Difference Schedule involves the following
process:
a. Determine the percentage of stock acquired in the subsidiary.
b. Compute the implied value of the subsidiary by dividing the purchase price by the percentage
acquired.
c. Allocate any difference between the implied value and the book value of the subsidiary's equity
to adjust the underlying assets and/or liabilities of the acquired company.
Short Answer Questions from the Textbook Solutions

1. (1) Stock acquisition is greatly simplified by avoiding the lengthy negotiations required in an
exchange of stock for stock in a complete takeover.
(2) Effective control can be accomplished with more than 50% but less than all of the voting
stock of a subsidiary; thus the necessary investment is smaller.
(3) An individual affiliates legal existence provides a measure of protection of the parents
assets delete space
from attachment by creditors of the subsidiary.
2. The purpose of consolidated financial statements is to present, primarily for the benefit of the
shareholders and creditors of the parent company, the results of operations and the financial
position of a parent company and its subsidiaries essentially as if the group were a single
company with one or more branches or divisions. The presumption is that these consolidated
statements are more meaningful than separate statements and necessary for fair presentation.
Emphasis then is on substance rather than legal form, and the legal aspects of the separate
entities are therefore ignored in light of economic aspects.
3. Each legal entity must prepare financial statements for use by those who look to the legal entity
for analysis. Creditors of the subsidiary will use the separate statements in assessing the degree
of protection related to their claims. Noncontrolling shareholders, too, use these individual
statements in determining risk and the amounts available for dividends. Regulatory agencies are
concerned with the net resources and results of operations of the individual legal entities.
4. (1) Control should exist in fact, through ownership of more than 50% of the voting stock of the
subsidiary.
(2) The intent of control should be permanent. If there are current plans to dispose of a
subsidiary, then the entity should not be consolidated.
(3) Majority owners must have control. Such would not be the case if the subsidiary were in
bankruptcy or legal reorganization, or if the subsidiary were in a foreign country where
political forces were such that control by majority owners was significantly curtailed.
5. Consolidated workpapers are used as a tool to facilitate the preparation of consolidated
financial statements. Adjusting and eliminating entries are entered on the workpaper so that the
resulting consolidated data reflect the operations and financial position of two or more
companies under common control.

Chapter 3 Consolidated Financial StatementsDate of Acquisition

3-17

6. Noncontrolling interest represents the equity in a partially owned subsidiary by those

shareholders who are not members in the affiliation and should be accounted and presented in
equity, separately from the parents shareholders equity. Alternative views have included:
presenting the noncontrolling interest as a liability from the perspective of the controlling
shareholders; presenting the noncontrolling interest between liabilities and shareholders equity
to acknowledge its hybrid status; presenting it as a contra-asset so that total assets reflect only
the parents share; and presenting it as a component of owners equity (the choice approved by
FASB in its most recent exposure drafts).
7. The fair, or current, value of one or more specific subsidiary assets may exceed its recorded
value, or specific liabilities may be overvalued. In either case, an acquiring company might be
willing to pay more than book value. Also, goodwill might exist in the form of above normal
earnings. Finally, the parent may be willing to pay a premium for the right to acquire control
and the related economic advantages gained.
8. The determination of the percentage interest acquired, as well as the total equity acquired, is
based on shares outstanding; thus, treasury shares must be excluded. The treasury stock account
should be eliminated by offsetting it against subsidiary stockholder equity accounts. The
accounts affected as well as the amounts involved will depend upon whether the cost or par
method is used to account for the treasury stock.
9. None. The full amount of all intercompany receivables and payables is eliminated without
regard to the percentage of control held by the parent.
10 A. The decision in SFAS No. 109 and SFAS No. 141R [topics 740 and 805] is primarily a
display issue and would only affect the calculation of consolidated net income if there were
changes in expected future tax rates that resulted in an adjustment to the balance of deferred tax
assets or deferred tax liabilities. Prior to SFAS No. 109 and SFAS No. 141R, purchased assets
and liabilities were displayed at their net of tax amounts and related figures for amortization
and depreciation were based on the net of tax amounts. With the adoption of SFAS No. 109 and
SFAS No. 141R, assets and liabilities are displayed at fair values and the tax consequences for
differences between their assigned values and their tax bases are displayed separately as
deferred tax assets or deferred tax liabilities. Although the amounts shown for depreciation,
amortization and income tax expense are different under SFAS No. 109 and SFAS No. 141R,
absent a change in expected future tax rates, the amount of consolidated net income will be the
same.
ANSWERS TO BUSINESS ETHICS CASE
Part 1
Even though the suggested changes by the CFO lie within GAAP, the proposed changes will
unfairly increase the EPS of the company, misleading the common investors and other users. It
is evident that the CFO is doing it for his or her personal gain rather than for the transparency
of financial reporting. Thus, manipulating the reserve in this case comes under the heading of

3-18 Test Bank to accompany Jeter and Chaney Advanced Accounting

unethical behavior. Taking a stand in such a situation is a difficult and challenging test for an
employee who reports to the CFO.
Part 2
The tax laws permit individuals to minimize taxes by means that are within the law like using
tax deductions, changing one's tax status through incorporation, or setting up a charitable trust
or foundation. In the given case the losses reported were phony and the whole scheme was
fabricated to illegally benefit certain individuals; hence there appears to be a criminal intent in
the scheme. Although there is no reason to pay more tax than necessary, the lack of risk in these
types of shelters makes participation in such schemes of questionable ethics, at the best.