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  1. On January 3, 2011, Haskins Corporation acquired 40 percent of the outstanding common stock of Clem Company for $990,000. This acquisition gave Haskins the ability to exercise significant influence over the investee. The book value of the acquired shares was $790,000. Any excess cost over the underlying book value was assigned to a patent that was undervalued on Clem’s balance sheet. This patent has a remaining useful life of 10 years. For the year ended December 31, 2011, Clem reported net income of $260,000 and paid cash dividends of $80,000.
    At December 31, 2011, what should Haskins report as its investment in Clem under the equity method? (Omit the "$" sign in your response.)
    Investment_________
    Investment=1,042,000
  2. On January 1, 2011, Ruark Corporation acquired a 40 percent interest in Batson, Inc., for $210,000. On that date, Batson’s balance sheet disclosed net assets of $360,000. During 2011, Batson reported net income of $80,000 and paid cash dividends of $25,000. Ruark sold inventory costing $30,000 to Batson during 2011 for $40,000. Batson used all of this merchandise in its operations during 2011.
    Prepare all of Ruark’s 2011 journal entries to apply the equity method to this investment. (Omit the "$" sign in your response.)
    General Journal------Debit ------credit (3 entries)
    • General Journal -----------------------Debit----------Credit
    • Investment in Batson Inc-------------210,000
    • Cash--------------------------------------------------- 210,000
    • Investment in Batson inc--------------32,000
    • Equity in investee income---------------------------32,000
    • Cash-------------------------------------10,000
    • Investment in Batson Inc----------------------------10,000
  3. In January 2010, Wilkinson, Inc., acquired 20 percent of the outstanding common stock of Bremm, Inc., for $700,000. This investment gave Wilkinson the ability to exercise significant influence over Bremm. Bremm’s assets on that date were recorded at $3,900,000 with liabilities of $900,000. Any excess of cost over book value of the investment was attributed to a patent having a remaining useful life of 10 years. In 2010, Bremm reported net income of $170,000. In 2011, Bremm reported net income of $210,000. Dividends of $70,000 were paid in each of these two years. What is the equity method balance of Wilkinson’s Investment in Bremm, Inc., at December 31, 2011?
    A. $748,000
    B. $756,000
    C. $728,000
    D. $776,000
    C.
    (this multiple choice question has been scrambled)
  4. Ace purchases 40 percent of Baskett Company on January 1 for $500,000. Although Ace did not use it, this acquisition gave Ace the ability to apply significant influence to Baskett’s operating and financing policies. Baskett reports assets on that date of $1,400,000 with liabilities of $500,000. One building with a seven-year life is undervalued on Baskett’s books by $140,000. Also, Baskett’s book value for its trademark (10-year life) is undervalued by $210,000. During the year, Baskett reports net income of $90,000 while paying dividends of $30,000. What is the Investment in Baskett Company balance (equity method) in Ace’s financial records as of December 31? A. $507,000
    B. $513,000
    C. $516,000
    D. $504,000
    A.
  5. Goldman Company reports net income of $140,000 each year and pays an annual cash dividend of $50,000. The company holds net assets of $1,200,000 on January 1, 2010. On that date, Wallace purchases 40 percent of the outstanding stock for $600,000, which gives it the ability to significantly influence Goldman. At the purchase date, the excess of Wallace’s cost over its proportionate share of Goldman’s book value was assigned to goodwill. What is the Investment in Goldman Company balance (equity method) in Wallace’s financial records on December 31, 2012?
    A. $690,000
    B. $600,000
    C. $708,000
    D. $660,000
    C.
    (this multiple choice question has been scrambled)
  6. Perez, Inc., applies the equity method for its 25 percent investment in Senior, Inc. During 2011, Perez sold goods with a 40 percent gross profit to Senior. Senior sold all of these goods in 2011. How should Perez report the effect of the intra-entity sale on its 2011 income statement?
    A. Sales and cost of goods sold should be reduced by the amount of intra-entity sales.
    B. Sales and cost of goods sold should be reduced by 25 percent of the amount of intra-entity sales.
    C. No adjustment is necessary.
    D. Investment income should be reduced by 25 percent of the gross profit on the amount of intra-entity sales.
    C.
    (this multiple choice question has been scrambled)
  7. Panner, Inc., owns 30 percent of Watkins and applies the equity method. During the current year, Panner buys inventory costing $54,000 and then sells it to Watkins for $90,000. At the end of the year, Watkins still holds only $20,000 of merchandise. What amount of unrealized gross profit must Panner defer in reporting this investment using the equity method?
    A. $8,000.
    B. $4,800.
    C. $10,800.
    D. $2,400.
    D.
    (this multiple choice question has been scrambled)
  8. Alex, Inc., buys 40 percent of Steinbart Company on January 1, 2010, for $530,000. The equity method of accounting is to be used. Steinbart’s net assets on that date were $1.2 million. Any excess of cost over book value is attributable to a trade name with a 20-year remaining life. Steinbart immediately begins supplying inventory to Alex as follows:
    Year---Cost to steinbart----transfer price-----amount help by alex at end yr (transfer price)
    2010-----$70,000-----------$100,000-----------------------$25,000
    2011-----$96,000-----------$150,000-----------------------$45,000
    Inventory held at the end of one year by Alex is sold at the beginning of the next. Steinbart reports net income of $80,000 in 2010 and $110,000 in 2011 while paying $30,000 in dividends each year. What is the equity income in Steinbart to be reported by Alex in 2011?
    A. 38,020
    B. $34,050
    C. 46,230
    D. 51,450
    A.
    (this multiple choice question has been scrambled)
  9. Tiberand, Inc., sold $150,000 in inventory to Schilling Company during 2010 for $225,000. Schilling resold $105,000 of this merchandise in 2010 with the remainder to be disposed of during 2011.
    Assuming that Tiberand owns 25 percent of Schilling and applies the equity method, what journal entry is recorded at the end of 2010 to defer the unrealized gross profit? (Do not round intermediate calculations. Omit the "$" sign in your response.)
    General Journal------------Debit -----------Credit (1entry)
    • General Journal--------------------Debit ----------Credit
    • Equity Income from Schiling----10,000
    • Investment in schilling-----------------------------10,000
  10. Anderson acquires 10 percent of the outstanding voting shares of Barringer on January 1, 2009, for $92,000 and categorizes the investment as an available-for-sale security. An additional 20 percent of the stock is purchased on January 1, 2010, for $210,000, which gives Anderson the ability to significantly influence Barringer. Barringer has a book value of $800,000 at January 1, 2009, and records net income of $180,000 for that year. Barringer paid dividends of $80,000 during 2009. The book values of Barringer’s asset and liability accounts are considered as equal to fair values except for a copyright whose value accounted for Anderson’s excess cost in each purchase. The copyright had a remaining life of 16 years at January 1, 2009.
    Barringer reported $210,000 of net income during 2010 and $230,000 in 2011. Dividends of $100,000 are paid in each of these years. Anderson uses the equity method.
    On comparative income statements issued in 2011 by Anderson for 2009 and 2010, what amounts of income would be reported in connection with the company’s investment in Barringer? (Omit the "$" sign in your response.)
    Equity income 2009???
    Equity Income 2010???
    • Equity income 2009-$17,250
    • Equity Income 2010-$60,250
  11. When an investor uses the equity method to account for investments in common stock, cash dividends received by the investor from the investee should be recorded as
    A. A deduction from the investor’s share of the investee’s profits.
    B. Dividend income.
    C. A deduction from the investment account.
    D. A deduction from the stockholders’ equity account, dividends to stockholders.
    C.
    (this multiple choice question has been scrambled)
  12. Which of the following does not indicate an investor company’s ability to significantly influence an investee? A. The investor owns 30 percent of the investee but another owner holds the remaining 70 percent.
    B. Technological dependency.
    C. Material intra-entity transactions.
    D. Interchange of managerial personnel
    A.
  13. Sisk Company has owned 10 percent of Maust, Inc., for the past several years. This ownership did not allow Sisk to have significant influence over Maust. Recently, Sisk acquired an additional 30 percent of Maust and now will use the equity method. How will the investor report this change?
    A. Sisk has the option to choose the method to show this change.
    B. A cumulative effect of an accounting change is shown in the current income statement.
    C. A retrospective adjustment is made to restate all prior years presented using the equity method.
    D. No change is recorded; the equity method is used from the date of the new acquisition.
    C.
    (this multiple choice question has been scrambled)
  14. On January 1, Puckett Company paid $1.6 million for 50,000 shares of Harrison’s voting common stock, which represents a 40 percent investment. No allocation to goodwill or other specific account was made. Significant influence over Harrison is achieved by this acquisition and so Puckett applies the equity method. Harrison distributed a dividend of $2 per share during the year and reported net income of $560,000. What is the balance in the Investment in Harrison account found in Puckett’s financial records as of December 31?
    A. $1,884,000.
    B. $1,784,000.
    C. $1,844,000.
    D. $1,724,000.
    D.
    (this multiple choice question has been scrambled)
  15. On January 1, 2009, Monroe, Inc., purchased 10,000 shares of Brown Company for $250,000, giving Monroe 10 percent ownership of Brown. On January 1, 2010, Monroe purchased an additional 20,000 shares (20 percent) for $590,000. This latest purchase gave Monroe the ability to apply significant influence over Brown. The original 10 percent investment was categorized as an available for-sale security. Any excess of cost over book value acquired for either investment was attributed solely to goodwill. Brown reports net income and dividends as follows. These amounts are assumed to have occurred evenly throughout these years.
    ---------Net income----------cash dividends (pd quarterly)2009---$350,000-------------100,000
    2010-----480,000------------110,000
    2011------500,000-------------120,000
    On July 1, 2011, Monroe sells 2,000 shares of this investment for $46 per share, thus reducing its interest from 30 to 28 percent. However, the company retains the ability to significantly influence Brown.
    Using the equity method, what amounts appear in Monroe’s 2011 income statement? (Do not round intermediate calculations. Round your answers to the nearest dollar amount. Omit the "$" sign in your response.)
    Total income accrual????
    Gain on sale????
    • Total income accrual----$145,000
    • Gain on sale----23,133
  16. Which of the following does not represent a primary motivation for business combinations?
    A. Quick entry for new and existing products into markets.
    B. Combinations as a vehicle for achieving rapid growth and competitiveness.
    C. Larger firms being less likely to fail.
    D. Cost savings through elimination of duplicate facilities and staff.
    C.
    (this multiple choice question has been scrambled)
  17. When does gain recognition accompany a business combination?
    A. When a bargain purchase occurs.
    B. When the amount of a bargain purchase exceeds the value of the applicable noncurrent assets (other than certain exceptions) held by the acquired company.
    C. In an acquisition when the value of all assets and liabilities cannot be determined.
    D. In a combination created in the middle of a fiscal year.
    A.
    (this multiple choice question has been scrambled)
  18. Prior to being united in a business combination, Atkins, Inc., and Waterson Corporation had the following stockholders’ equity figures:
    ----------------------------Atkins------Watson
    Comm stk $1 par value-$180,000—45,000
    Add pd in capital--------90,000------20,000
    RE-----------------------300,000-----110,000
    Atkins issues 51,000 new shares of its common stock valued at $3 per share for all of the outstanding stock of Waterson. Assume that Atkins acquires Waterson. Immediately afterward, what are consolidated Additional Paid-In Capital and Retained Earnings, respectively?
    A. $192,000 and $300,000.
    B. $212,000 and $410,000.
    C. $110,000 and $410,000.
    D. $104,000 and $300,000.
    A.
    (this multiple choice question has been scrambled)
  19. The following book and fair values were available for Westmont Company as of March 1.
    -------------------------------BV--------------FV
    Inventory--------------$630,000---------600,000
    Land-------------------750,000------------990,000
    Buildings-----------1,700,000------------2,000,000
    Customer Relationship------0------------800,000
    A/P----------------------(80,000)----------(80,000
    Comm. Stk--------(2,000,000)
    Add pd in cap.--------(500,000)
    R/E--------------------(360,000)
    Revenues-------------(420,000)
    Expenses--------------280,000
    Arturo Company pays $4,000,000 cash and issues 20,000 shares of its $2 par value common stock (fair value of $50 per share) for all of Westmont’s common stock in a merger, after which Westmont will cease to exist as a separate entity. Stock issue costs amount to $25,000 and Arturo pays $42,000 for legal fees to complete the transaction.
    Prepare Arturo’s journal entry to record its acquisition of Westmont. (Omit the "$" sign in your response.)
    General journal ---------------Debit ------------------Credit
    Inventory---------------------?????
    Land-----------------------------???
    Buildings----------------------??
    Customer relationship------???
    Goodwill-----------------------???
    A/P----------------------------------------------------------???
    Comm. stk-----------------------------------------------­­­­---???
    Add. Pd in cap--------------------------------------------????
    Cash---------------------------------------------------------???
    Combination exp---------------???
    Cash-------------------------------------------------------????
    Add. Pd in cap-----------------??
    Cash--------------------------------------------------------???
    • General journal ---------------Debit ------------------Credit
    • Inventory---------------------$600,000
    • Land----------------------------990,000
    • Buildings----------------------2,000,000
    • Customer relationship------800,000
    • Goodwill----------------------690,000
    • A/P-------------------------------------------------------80,000
    • Comm. stk----------------------------------------------­­­­-40,000
    • Add. Pd in cap----------------------------------------960,000
    • Cash--------------------------------------------------4,000,000
    • Combination exp-------------42,000
    • Cash------------------------------------------------------42,000
    • Add. Pd in cap-----------------25,000
    • Cash-----------------------------------------------------25,000
  20. Following are preacquisition financial balances for Padre Company and Sol Company as of December 31. Also included are fair values for Sol Company accounts.
    --------Padre Company--------Sol Company
    ------------------Book Values--Book Values--Fair Values
    ------------------------- 12/31------12/31-----12/31
    Cash-----------------$400,000--$120,000--$120,000
    Receivables---------220,000---300,000-----300,000
    Inventory-----------410,000----210,000-----260,000
    Land-----------------600,000---130,000-----110,000
    Build n equip (net)-600,000---270,000------330,000
    Fran agreements---220,000----190,000-----220,000
    Accounts payable--(300,000)--(120,000)---(120,000)
    Accrued expenses---(90,000)---(30,000)----(30,000)
    Long-term liabilities(900,000)--(510,000)--(510,000)
    Com stk—$20 par value-(660,000)
    Common stock—$5 par value------------(210,000)
    Additional paid-in capital(70,000)-------(90,000)
    Retained earnings, 1/1(390,000)---------(240,000)
    Revenues(960,000)---(330,000)
    Expenses920,000----310,000
    On December 31, Padre acquires Sol’s outstanding stock by paying $360,000 in cash and issuing 10,000 shares of its own common stock with a fair value of $40 per share. Padre paid legal and accounting fees of $20,000 as well as $5,000 in stock issuance costs.
    Determine the value that would be shown in Padre and Sol’s consolidated financial statements for each of the accounts listed. (Input all amounts as positive values. Omit the "$" sign in your response.)
    Accounts & Amounts
    Inventory$
    Land$
    Buildings and equipment $
    Franchise agreements$
    Goodwill$
    Revenues$
    Additional paid-in capital$
    Expenses$
    Retained earnings, 1/1$
    • Accounts & Amounts
    • Inventory 670,000
    • Land 710,000
    • Buildings and equipment $ 930,000
    • Franchise agreements$ 440,000
    • Goodwill$ Revenues$ 80,000
    • Additional paid-in capital$ 265,000
    • Expenses$ 940,000
    • Retained earnings, 1/1$ 390,000
  21. Allerton Company acquires all Deluxe Company’s assets and liabilities for cash on January 1, 2011, and subsequently formally dissolves Deluxe. At the acquisition date, the following book and fair values were available for the Deluxe Company accounts:
    --------------------------- Book Values----Fair Values
    Current assets------------$60,000 ----------$60,000
    Building-------------------90,000 ------------50,000
    Land-----------------------10,000 -------------20,000
    Trademark------------------0 ------------------30,000
    Goodwill------------------15,000 -----------------?
    Liabilities------------------(40,000) ---------(40,000)
    Common stock-----------(100,000)
    Retained earnings--------(35,000)
    Using the acquisition method, prepare Allerton’s entry to record its acquisition of Deluxe in its accounting records assuming the following cash exchange amounts (Omit the "$" sign in your response):
    (1)$145,000.
    General Journal---Debit-------Credit
    Current assets
    Building
    Land
    Trademark
    Goodwill
    Liabilities
    Cash
    (2)$110,000.
    General Journal---Debit--------Credit
    Current assets
    Building
    Land
    Trademark
    Gain on bargain purch.
    Liabilities
    Cash
    • 1)$145,000.
    • General Journal---Debit-------Credit
    • Current assets ---60,000
    • Building ---------50,000
    • Land -------------20,000
    • Trademark ------30,000
    • Goodwill --------25,000
    • Liabilities ----------------------40,000
    • Cash ---------------------------145,000
    • ( 2)$110,000.
    • General Journal---Debit--------Credit
    • Current assets ----60,000
    • Building ----------50,000
    • Land --------------20,000
    • Trademark -------30,000
    • Gain on bargain purch. --------10,000
    • Liabilities ------------------------40,000
    • Cash -----------------------------110,000
  22. Which of the following is the best theoretical justification for consolidated financial statements?
    A. In form and substance the companies are one entity.
    B. in form the companies are one entity: in sustance they are seperate
    C. In form and substance the companies are separate.
    D. In form the companies are separate; in substance they are one entity.
    D.
    (this multiple choice question has been scrambled)
  23. On June 1, Cline Co. paid $800,000 cash for all of the issued and outstanding common stock of Renn Corp. The carrying values for Renn’s assets and liabilities on June 1 follow:
    Cash--------------------------$150,000
    Accounts receivable---------180,000
    Capitalized software costs--320,000
    Goodwill ------------------- 100,000
    Liabilities ---------------------(130,000)
    Net assets ============ $620,000
    On June 1, Renn’s accounts receivable had a fair value of $140,000. Additionally, Renn’s in-process research and development was estimated to have a fair value of $200,000. All other items were stated at their fair values. On Cline’s June 1 consolidated balance sheet, how much is reported for goodwill?
    A. $80,000.
    B. $120,000.
    C. $20,000.
    D. $320,000.
    B.
    (this multiple choice question has been scrambled)
  24. A company acquires a subsidiary and will prepare consolidated financial statements for external reporting purposes. For internal reporting purposes, the company has decided to apply the initial value method. Why might the company have made this decision?
    A. It is a relatively easy method to apply.
    B. Consolidation is not required when the parent uses the initial value method.
    C. GAAP now requires the use of this particular method for internal reporting purposes.
    D. Operating results appearing on the parent’s financial records reflect consolidated totals.
    A.
    (this multiple choice question has been scrambled)
  25. A company acquires a subsidiary and will prepare consolidated financial statements for external reporting purposes. For internal reporting purposes, the company has decided to apply the equity method. Why might the company have made this decision?
    A. It is a relatively easy method to apply.
    B. GAAP now requires the use of this particular method for internal reporting purposes.
    C. Consolidation is not required when the parent uses the equity method.
    D. Operating results appearing on the parent’s financial records reflect consolidated totals.
    D.
    (this multiple choice question has been scrambled)
  26. When should a consolidated entity recognize a goodwill impairment loss?
    A. If a reporting unit’s market value falls below its original acquisition price.
    B. If both the market value of a reporting unit and its associated implied goodwill fall below their respective carrying values.
    C. Annually on a systematic and rational basis.
    D. Whenever the entity’s market value declines significantly.
    B.
    (this multiple choice question has been scrambled)
  27. Willkom Corporation bought 100 percent of Szabo, Inc., on January 1, 2010. On that date, Willkom’s equipment (10-year life) has a book value of $300,000 but a fair value of $400,000. Szabo has equipment (10-year life) with a book value of $200,000 but a fair value of $300,000. Willkom uses the equity method to record its investment in Szabo. On December 31, 2012, Willkom has equipment with a book value of $210,000 but a fair value of $330,000. Szabo has equipment with a book value of $140,000 but a fair value of $270,000. What is the consolidated balance for the Equipment account as of December 31, 2012?
    A. $490,000.
    B. $480,000.
    C. $600,000.
    D. $420,000.
    D.
    (this multiple choice question has been scrambled)
  28. Chapman Company obtains 100 percent of Abernethy Company’s stock on January 1, 2011. As of that date, Abernethy has the following trial balance:
    --------------------------------------------Debit---------Credit
    Accounts payable------------------------------------$50,000
    Accounts receivable------------------$40,000
    Additional paid-in capital----------------------------50,000
    Buildings (net) (4-year life)----------120,000
    Cash and short-term investments----60,000
    Common stock----------------------------------------250,000
    Equipment (net) (5-year life)--------200,000
    Inventory-------------------------------90,000
    Land------------------------------------80,000
    Long-term liabilities (mature 12/31/14)-----------150,000
    Retained earnings, 1/1/11---------------------------100,000
    Supplies--------------------------------10,000
    Totals-----------------------------------$600,000- $600,000

    During 2011, Abernethy reported income of $80,000 while paying dividends of $10,000. During 2012, Abernethy reported income of $110,000 while paying dividends of $30,000.
    Assume that Chapman Company acquired Abernethy’s common stock for $490,000 in cash. As of January 1, 2011, Abernethy’s land had a fair value of $90,000, its buildings were valued at $160,000, and its equipment was appraised at $180,000. Chapman uses the equity method for this investment.
    Required: Prepare consolidation worksheet entries for December 31, 2011, and December 31, 2012. (Omit the "$" sign in your response.)
    Date---------General Journal----Debit----Credit
    Dec. 31, 2011
    Entry S:
    Common stock-Abernethy
    Additional paid in capital
    Retained earnings
    Investment in Abernethy
    Entry A:
    Land
    Buildings
    Goodwill
    Equipment
    Investment in Abernethy
    Entry I:
    Equity in subsidiary earnings
    Investment in Abernethy
    Entry D:
    Investment in Abernethy
    Dividends paid
    Entry E:
    Depreciation expense
    Equipment
    Buildings
    Dec. 31, 2012
    Entry S:
    Common stock-Abernethy
    Additional paid in capital
    Retained earnings
    Investment in Abernethy
    Entry A:
    Land
    Buildings
    Goodwill
    Equipment
    Investment in Abernethy
    Entry I:
    Equity in subsidiary earnings
    Investment in Abernethy
    Entry D:
    Investment in Abernethy
    Dividends paid
    Entry E:
    Depreciation expense
    Equipment
    Buildings
    • Date---------General Journal----Debit----Credit
    • Dec. 31, 2011
    • Entry S:
    • Common stock-Abernethy-----250,000
    • Additional paid in capital-------50,000
    • Retained earnings---------------100,000
    • Investment in Abernethy---------------------------400,000
    • Entry A:
    • Land -----------------------------10,000
    • Buildings -----------------------40,000
    • Goodwill ------------------------60,000
    • Equipment------------------------------------------20,000
    • Investment in Abernethy ------------------------90,000
    • Entry I:
    • Equity in subsidiary earnings---74,000
    • Investment in Abernethy ------------------------74,000
    • Entry D:
    • Investment in Abernethy-------10,000
    • Dividends paid -----------------------------------10,000
    • Entry E:
    • Depreciation expense -----------6,000
    • Equipment ------------------------4,000
    • Buildings -----------------------------------------10,000
    • Dec. 31, 2012
    • Entry S:
    • Common stock-Abernethy ---250,000
    • Additional paid in capital -----50,000
    • Retained earnings -------------170,000
    • Investment in Abernethy ------------------------470,000
    • Entry A:
    • Land -----------------------------10,000
    • Buildings -----------------------30,000
    • Goodwill -----------------------60,000
    • Equipment -------------------------------------------16,000
    • Investment in Abernethy --------------------------84,000
    • Entry I:
    • Equity in subsidiary earnings-104,000
    • Investment in Abernethy -------------------------104,000
    • Entry D:
    • Investment in Abernethy-------30,000
    • Dividends paid --------------------------------------30,00
    • Entry E:
    • Depreciation expense -----------6,000
    • Equipment -----------------------4,000
    • Buildings---------------------------------------------10,000
  29. Chapman Company obtains 100 percent of Abernethy Company’s stock on January 1, 2011. As of that date, Abernethy has the following trial balance:
    ----------------------------------------------Debit--------Credit
    Accounts payable-------------------------------------$50,000
    Accounts receivable--------------------$40,000
    Additional paid-in capital-----------------------------50,000
    Buildings (net) (4-year life)------------120,000
    Cash and short-term investments------60,000
    Common stock----------------------------------------250,000
    Equipment (net) (5-year life)----------200,000
    Inventory---------------------------------90,000
    Land---------------------------------------80,000
    Long-term liabilities (mature 12/31/14)-----------150,000
    Retained earnings, 1/1/11---------------------------100,000
    Supplies----------------------------------10,000
    Totals-----------------------------------$600,000---$600,000

    During 2011, Abernethy reported income of $80,000 while paying dividends of $10,000. During 2012, Abernethy reported income of $110,000 while paying dividends of $30,000.
    Assume that Chapman Company acquired Abernethy’s common stock for $500,000 in cash. Assume that the equipment and long-term liabilities had fair values of $220,000 and $120,000, respectively, on the acquisition date. Chapman uses the initial value method to account for its investment.
    Required: Prepare consolidation worksheet entries for December 31, 2011, and December 31, 2012. (Omit the "$" sign in your response.)
    Date---General Journal------------------Debit--------Credit
    Dec. 31, 2011
    Entry S:
    Common stock-Abernethy --------------???
    Additional paid in capital ---------------???
    Retained earnings ------------------------???
    Investment in Abernethy --------------------------------???
    Entry A:
    Equipment---------------------------------???
    Long-term liabilities --------------------???
    Goodwill ----------------------------------???
    Investment in Abernethy ---------------------------------???
    Entry I:
    Dividend income -------------------------???
    Dividends paid --------------------------------------------???
    Entry E:
    Depreciation expense --------------------???
    Interest expense ---------------------------???
    Equipment -------------------------------------------------???
    Long-term liabilities -------------------------------------???
    Dec. 31, 2012
    Entry *C
    Investment in Abernethy-----------------???
    Retained earnings -----------------------------------------???
    Entry S:
    Common stock-Abernethy -------------???
    Additional paid in capital --------------???
    Retained earnings -----------------------???
    Investment in Abernethy -------------------------------???
    Entry A:
    Equipment ------------------------------???
    Long-term liabilities ------------------???
    Goodwill -------------------------------???
    Investment in Abernethy --------------------------------???
    Entry I:
    Dividend income ----------------------???
    Dividends paid --------------------------------------------???
    Entry E:
    Depreciation expense -----------------???
    Interest expense -----------------------???
    Equipment ------------------------------------------------???
    Long-term liabilities -----------------------------------???
    • Date---General Journal--------------Debit------------Credit Dec. 31, 2011
    • Entry S:
    • Common stock-Abernethy --------250,000
    • Additional paid in capital ----------50,000
    • Retained earnings ------------------100,000
    • Investment in Abernethy ----------------------------400,000
    • Entry A:
    • Equipment----------------------------20,000
    • Long-term liabilities ----------------30,000
    • Goodwill -----------------------------50,000
    • Investment in Abernethy ----------------------------100,000
    • Entry I:
    • Dividend income --------------------10,000
    • Dividends paid -----------------------------------------10,000
    • Entry E:
    • Depreciation expense ----------------4,000
    • Interest expense ----------------------7,500
    • Equipment -----------------------------------------------4,000
    • Long-term liabilities -----------------------------------7,500
    • Dec. 31, 2012
    • Entry *C
    • Investment in Abernethy------------58,000
    • Retained earnings -------------------------------------58,500
    • Entry S:
    • Common stock-Abernethy --------250,000
    • Additional paid in capital ----------50,000
    • Retained earnings ------------------170,000
    • Investment in Abernethy ----------------------------470,000
    • Entry A:
    • Equipment ---------------------------16,000
    • Long-term liabilities ----------------22,500
    • Goodwill -----------------------------50,000
    • Investment in Abernethy -----------------------------88,500
    • Entry I:
    • Dividend income --------------------30,000
    • Dividends paid ---------------------------------------30,000
    • Entry E:
    • Depreciation expense ----------------4,000
    • Interest expense -----------------------7,500
    • Equipment ----------------------------------------------4,000
    • Long-term liabilities -----------------------------------7,500
  30. Chapman Company obtains 100 percent of Abernethy Company’s stock on January 1, 2011. As of that date, Abernethy has the following trial balance:
    ------------------------------------------Debit----------Credit
    Accounts payable------------------------------------$50,000
    Accounts receivable---------------$40,000
    Additional paid-in capital----------------------------50,000
    Buildings (net) (4-year life)-------120,000
    Cash and short-term investments--60,000
    Common stock----------------------------------------250,000
    Equipment (net) (5-year life)-----200,000
    Inventory-----------------------------90,000
    Land----------------------------------80,000
    Long-term liabilities (mature 12/31/14)-----------150,000
    Retained earnings, 1/1/11---------------------------100,000
    Supplies-----------------------------10,000
    Totals---------------------------------$600,000----$600,000
    During 2011, Abernethy reported income of $80,000 while paying dividends of $10,000. During 2012, Abernethy reported income of $110,000 while paying dividends of $30,000.
    Assume that Chapman Company acquired Abernethy’s common stock by paying $520,000 in cash. All of Abernethy’s accounts are estimated to have a value approximately equal to present book values. Chapman uses the partial equity method to account for its investment.
    Required: Prepare the consolidation worksheet entries for December 31, 2011, and December 31, 2012. (In cases where no entry is required, please select the option "No journal entry required" for your answers to grade correctly. Leave no cells blank - be certain to enter "0" wherever required. Omit the "$" sign in your response.)
    General Journal---------------------Debit-----------Credit
    Dec. 31, 2011
    Entry S:
    Common stock-Abernethy ---------???
    Additional paid-in capital ---------???
    Retained earnings-Abernethy -----???
    Investment in Abernethy ------------------------------???
    Entry A:
    Goodwill ----------------------------???
    Investment in Abernethy -------------------------------???
    Entry I:
    Equity in earnings of subsidiary --??
    Investment in Abernethy -------------------------------???
    Entry D:
    Investment in Abernethy ----------???
    Dividends paid -------------------------------------------???
    Entry E:
    No journal entry required -----------???
    No journal entry required --------------------------------???
    Dec. 31, 2012
    Entry C:
    No journal entry required -----------???
    No journal entry required --------------------------------???
    Entry S:
    Common stock-Abernethy ----------???
    Additional paid-in capital -----------???
    Retained earnings-Abernethy ------???
    Investment in Abernethy ---------------------------------???
    Entry A:
    Goodwill ------------------------------???
    Investment in Abernethy ---------------------------------???
    Entry I:
    Equity in earnings of subsidiary ---???
    Investment in Abernethy ---------------------------------???
    Entry D:
    Investment in Abernethy -----------???
    Dividends paid --------------------------------------------???
    Entry E:
    No journal entry required-----------???
    No journal entry required -------------------------------???
    • General Journal---------------------Debit-----------Credit Dec. 31, 2011
    • Entry S:
    • Common stock-Abernethy -------250,000
    • Additional paid-in capital -------50,000
    • Retained earnings-Abernethy ----100,000
    • Investment in Abernethy ----------------------------400,000
    • Entry A:
    • Goodwill ---------------------------120,000
    • Investment in Abernethy ----------------------------120,000
    • Entry I:
    • Equity in earnings of subsidiary -80,000
    • Investment in Abernethy -----------------------------80,000
    • Entry D:
    • Investment in Abernethy ---------10,000
    • Dividends paid -----------------------------------------10,000
    • Entry E:
    • No journal entry required -----------0
    • No journal -----------------------------------------------0
    • Entry C:
    • No journal entry required -----------0
    • No journal entry required -------------------------------0
    • Entry S:
    • Common stock-Abernethy --------250,000
    • Additional paid-in capital ---------50,000
    • Retained earnings-Abernethy -----170,000
    • Investment in Abernethy ----------------------------470,000
    • Entry A:
    • Goodwill -----------------------------120,000
    • Investment in Abernethy ----------------------------120,000
    • Entry I:
    • Equity in earnings of subsidiary --110,000
    • Investment in Abernethy ----------------------------110,000
    • Entry D:
    • Investment in Abernethy ----------30,000
    • Dividends paid -----------------------------------------30,000 Entry E:
    • No journal entry required-----------0
    • No journal entry required -------------------------------0
  31. Foxx Corporation acquired all of Greenburg Company’s outstanding stock on January 1, 2011, for $600,000 cash. Greenburg’s accounting records showed net assets on that date of $470,000, although equipment with a 10-year life was undervalued on the records by $90,000. Any recognized goodwill is considered to have an indefinite life. Greenburg reports net income in 2011 of $90,000 and $100,000 in 2012. The subsidiary paid dividends of $20,000 in each of these two years.
    Financial figures for the year ending December 31, 2013, follow. Credit balances are indicated by parentheses.
    -------------------------------------------Foxx------Greenburg
    Revenues----------------------------$(800,000)- $(600,000)
    Cost of goods sold--------------------100,000 ----150,000
    Depreciation expense-----------------300,000 ----350,000
    Investment income--------------------(20,000)-------- 0
    Net income===============$(420,000)= $(100,000)

    Retained earnings, 1/1/13-------$(1,100,000)-$(320,000)
    Net income--------------------------(420,000) ----(100,000)
    Dividends paid----------------------120,000 -------20,000
    RE, 12/31/13============$(1,400,000)= $(400,000)
    Current assets----------------------$300,000----- $100,000
    Investment in subsidiary-----------600,000 ----------0
    Equipment (net)---------------------900,000 -------600,000
    Buildings (net)----------------------800,000 -------400,000
    Land----------------------------------600,000 --------100,000
    Total assets==============$3,200,000==$1,200,000
    Liabilities------------------------- $(900,000)--- $(500,000)
    Common stock---------------------(900,000)---- (300,000)
    Retained earnings----------------(1,400,000)---- (400,000)
    Total liabilities and equity==$(3,200,000) =$(1,200,000)
    Required: (A)Determine the December 31, 2013, consolidated balance for each of the following accounts (Omit the "$" sign in your response and input credit balances as positive value):
    -------------------------------Consolidated Balances --
    Depreciation Expense$
    Dividends Paid$
    Revenues$
    Equipment$
    Buildings$
    Goodwill$
    Common Stock$
    (C)Which method of accounting for this subsidiary is the parent actually using for internal reporting purposes?
    (e)What would be Foxx’s balance for retained earnings as of January 1, 2013, if each of the following methods had been in use? (Omit the "$" sign in your response.
    ---------------------------------Retained Earnings -
    Initial value method$
    Partial equity method$
    Equity method$
    • A.
    • -------------------------------Consolidated Balances -- Depreciation Expense-------$ 659,000
    • Dividends Paid---------------$ 120,000
    • Revenues--------------------$ 1,400,000
    • Equipment------------------$ 1,563,000
    • Buildings--------------------$ 1,200,000
    • Goodwill------------------------$ 40,000
    • Common Stock---------------$ 900,000
    • C. Initial value method
    • E. ---------------------------------Retained Earnings - Initial value method-------------$ 1,100,000
    • Partial equity method-----------$ 1,250,000
    • Equity method-------------------$ 1,232,000

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