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APU ACG4201 Exam I (Chapters1, 2, 3, and 4)

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Question;ACG4201 Exam I(Chapters1, 2, 3, and 4)Answer the following Questions: [Only 55 Questions are required the remaining 5 questions are bonus questions] 1. Gaw Company owns 15% of the common stock of Trace Corporation and used the fair-value method to account for this investment. Trace reported net income of $110,000 for 2008 and paid dividends of $60,000 on October 1, 2008. How much income should Gaw recognize on this investment in 2008? A. $16,500 B. $9,000 C. $25,500 D. $7,500 E. $50,000 2. On January 1, 2008, Pacer Company paid $1,920,000 for 60,000 shares of Lennon Co.'s voting common stock which represents a 45% investment. No allocation to goodwill or other specific account was made. Significant influence over Lennon was achieved by this acquisition. Lennon distributed a dividend of $2.50 per share during 2008 and reported net income of $670,000. What was the balance in the Investment in Lennon Co. account found in the financial records of Pacer as of December 31, 2008? A. $2,040,500 B. $2,212,500 C. $2,260,500 D. $2,171,500 E. $2,071,500 3. A company should always use the equity method to account for an investment if A. It has the ability to exercise significant influence over the operating policies of the investee B. It owns 30% of another company's stock C. It has a controlling interest (more than 50%) of another company's stock D. The investment was made primarily to earn a return on excess cash E. It does not have the ability to exercise significant influence over the operating policies of the investee 4. On January 1, 2007, Jordan Inc. acquired 30% of Nico Corp. Jordan used the equity method to account for the investment. On January 1, 2008, Jordan sold 2/3 of its investment in Nico. It no longer had the ability to exercise significant influence over the operations of Nico. How should Jordan have accounted for this change? A. Jordan should continue to use the equity method to maintain consistency in its financial statements B. Jordan should restate the prior years' financial statements and change the balance in the investment account as if the fair-value method had been used since 2007 C. Jordan has the option of using either the equity method or the fair-value method for 2007 and future years D. Jordan should report the effect of the change from the equity to the fair-value method as a retrospective change in accounting principle E. Jordan should use the fair-value method for 2008 and future years but should not make a retrospective adjustment to the investment account Use the following to answer Questions 5 and 6: On January 3, 2008, Austin Corp. purchased 25% of the voting common stock of Gainsville Co., paying $2,500,000. Austin decided to use the equity method to account for this investment. At the time of the investment, Gainsville's total stockholders' equity was $8,000,000. Austin gathered the following information about Gainsville's assets and liabilities: For all other assets and liabilities, book value and fair value were equal. Any excess of cost over fair value was attributed to goodwill, which has not been impaired. 5. What is the amount of goodwill associated with the investment? A. $500,000 B. $200,000 C. $0 D. $300,000 E. $400,000 6. For 2008, what is the total amount of excess amortization for Austin's 25% investment in Gainsville? A. $27,500 B. $20,000 C. $30,000 D. $120,000 E. $70,000 7. Club Co. appropriately uses the equity method to account for its investment in Chip Corp. As of the end of 2008, Chip's common stock had suffered a significant decline in fair value, which is expected to be recovered over the next several months. How should Club account for the decline in value? A. Club should switch to the fair-value method B. No accounting because the decline in fair value is temporary C. Club should decrease the balance in the investment account to the current value and recognize a loss on the income statement D. Club should not record its share of Chip's 2008 earnings until the decline in the fair value of the stock has been recovered E. Club should decrease the balance in the investment account to the current value and recognize an unrealized loss on the balance sheet 8. In a situation where the investor exercises significant influence over the investee, which of the following entries is not actually posted to the books of the investor? 1) Debit to the Investment account and a Credit to the Equity in Investee Income account. 2) Debit to Cash (for dividends received from the investee) and a Credit to Dividend Revenue. 3) Debit to Cash (for dividends received from the investee) and a Credit to the Investment account. A. Entries 1 and 2 B. Entries 2 and 3 C. Entry 1 only D. Entry 2 only E. Entry 3 only 9. All of the following statements regarding the investment account using the equity method are true except A. The investment is recorded at cost B. Dividends received are reported as revenue C. Net income of investee increases the investment account D. Dividends received reduce the investment account E. Amortization of fair value over cost reduces the investment account 10. A company has been using the equity method to account for its investment. The company sells shares and does not continue to have significant control. Which of the following statements is true? A. A cumulative effect change in accounting principle must occur B. A prospective change in accounting principle must occur C. A retrospective change in accounting principle must occur D. The investor will not receive future dividends from the investee E. Future dividends will continue to reduce the investment account 11. An investee company incurs an extraordinary loss during the period. The investor appropriately applies the equity method. Which of the following statements is true? A. Under the equity method, the investor only recognizes its share of investee's income from continuing operations B. The extraordinary loss would reduce the value of the investment C. The extraordinary loss should increase equity in investee income D. The extraordinary loss would not appear on the income statement but would be a component of comprehensive income E. The loss would be ignored but shown in the investor's notes to the financial statements Use the following to answer Questions 12 and 16: On January 1, 2008, Dawson, Incorporated, paid $100,000 for a 30% interest in Sacco Corporation. This investee had assets with a book value of $550,000 and liabilities of $300,000. A patent held by Sacco having a book value of $10,000 was actually worth $40,000 with a six year remaining life. Any goodwill associated with this acquisition is considered to have an indefinite life. During 2008, Sacco reported income of $50,000 and paid dividends of $20,000 while in 2009 it reported income of $75,000 and dividends of $30,000. Assume Dawson has the ability to significantly influence the operations of Sacco. 12. The amount allocated to goodwill at January 1, 2008 is A. $25,000 B. $13,000 C. $9,000 D. $16,000 E. $10,000 13. The equity in income of Sacco for 2008 is A. $9,000 B. $13,500 C. $15,000 D. $7,500 E. $50,000 14. The equity in income of Sacco for 2009 is A. $22,500 B. $21,000 C. $12,000 D. $13,500 E. $75,000 15. The balance in the investment in Sacco account at December 31, 2008 is A. $100,000 B. $112,000 C. $106,000 D. $107,500 E. 140,000 16. The balance in the investment in Sacco account at December 31, 2009 is A. $119,500 B. $125,500 C. $116,500 D. $118,000 E. $100,000 17. At the date of an acquisition which is not a bargain purchase, the acquisition method A. Consolidates the subsidiary's assets at fair value and the liabilities at book value B. Consolidates all subsidiary assets and liabilities at book value C. Consolidates all subsidiary assets and liabilities at fair value D. Consolidates current assets and liabilities at book value, long-term assets and liabilities at fair value E. Consolidates the subsidiary's assets at book value and the liabilities at fair value 18. In a purchase or acquisition where control is achieved, how would the land accounts of the parent and the land accounts of the subsidiary be combined? A. Entry A B. Entry B C. Entry C D. Entry D E. Entry E 19. Direct combination costs and stock issuance costs are often incurred in the process of making a controlling investment in another company. How should those costs be accounted for in an Acquisition transaction? A. Entry A B. Entry B C. Entry C D. Entry D E. Entry E 20. What is the primary accounting difference between accounting for when the subsidiary is dissolved and when the subsidiary retains its incorporation? A. If the subsidiary is dissolved, it will not be operated as a separate division B. If the subsidiary is dissolved, assets and liabilities are consolidated at their book values C. If the subsidiary retains its incorporation, there will be no goodwill associated with the acquisition D. If the subsidiary retains its incorporation, assets and liabilities are consolidated at their book values E. If the subsidiary retains its incorporation, the consolidation is not formally recorded in the accounting records of the acquiring company 21. A statutory merger is a(n) A. Business combination in which only one of the two companies continues to exist as a legal corporation B. Business combination in which both companies continues to exist C. Acquisition of a competitor D. Acquisition of a supplier or a customer E. Legal proposal to acquire outstanding shares of the target's stock Use the following to answer Questions 22 and 32: The financial statements for Goodwin, Inc. and Corr Company for the year ended December 31, 20X1, prior to Goodwin's business combination transaction regarding Corr, follow (in thousands): On December 31, 20X1, Goodwin issued $600 in debt and 30 shares of its $10 par value common stock to the owners of Corr to purchase all of the outstanding shares of that company. Goodwin shares had a fair value of $40 per share. Goodwin paid $25 to a broker for arranging the transaction. Goodwin paid $35 in stock issuance costs. Corr's equipment was actually worth $1,400 but its buildings were only valued at $560. 22. If the combination is accounted for as a purchase, at what amount is the investment recorded on Goodwin's books? A. $1,540 B. $1,800 C. $1,860 D. $1,825 E. $1,625 23. If the combination is accounted for as an acquisition, at what amount is the investment recorded on Goodwin's books? A. $1,540 B. $1,800 C. $1,860 D. $1,825 E. $1,625 24. Compute the consolidated revenues for 20X1. A. $2,700 B. $720 C. $920 D. $3,300 E. $1,540 25. Assuming the combination is accounted for as a purchase, compute the consolidated expenses for 20X1. A. $1,980 B. $2,380 C. $2,040 D. $2,015 E. $2,005 26. Assuming the combination is accounted for as an acquisition, compute the consolidated expenses for 20X1. A. $1,980 B. $2,380 C. $2,040 D. $2,015 E. $2,005 27. Compute the consolidated equipment (net) account at December 31, 20X1. A. $2,100 B. $3,500 C. $3,300 D. $3,000 E. $3,200 28. Assuming the combination is accounted for as a purchase, compute the consolidated goodwill account at December 31, 20X1. A. $0 B. $100 C. $125 D. $160 E. $45 29. Assuming the combination is accounted for as an acquisition, compute the consolidated goodwill account at December 31, 20X1. A. $0 B. $100 C. $125 D. $160 E. $45 30. Compute the consolidated common stock account at December 31, 20X1. A. $1,080 B. $1,480 C. $1,380 D. $2,280 E. $2,680 31. Assuming the combination is accounted for as a purchase, compute the consolidated retained earnings at December 31, 20X1. A. $2,850 B. $3,450 C. $2,400 D. $2,800 E. $2,810 32. Assuming the combination is accounted for as an acquisition, compute the consolidated retained earnings at December 31, 20X1. A. $2,800 B. $2,825 C. $2,850 D. $3,425 E. $3,450 33. Under the partial equity method of accounting for an investment, A. The investment account remains at initial value B. Dividends received are recorded as revenue C. Amortization of the excess of fair value allocations over book value of net assets is applied over their useful lives to reduce the investment account D. Amortization of the excess of fair value allocations over book value is ignored in regard to the investment account E. Dividends received increase the investment account 34. When a company applies the partial equity method in accounting for its investment in a subsidiary and the subsidiary's equipment has a fair value greater than its book value, what consolidation worksheet entry is made in a year subsequent to the initial acquisition of the subsidiary? A. A above B. B above C. C above D. D above E. E above 35. When a company applies the partial equity method in accounting for its investment in a subsidiary and initial value, book values and fair values of net assets are all equal, what consolidation worksheet entry would be made? A. A above B. B above C. C above D. D above E. E above 36. Hoyt Corporation agreed to the following terms in order to acquire the net assets of Brown Company on January 1, 2009: (1.) To issue 400 shares of common stock ($10 par) with a fair value of $45 per share. (2.) To assume Brown's liabilities which have a fair value of $1,500. On the date of acquisition, the consideration transferred for Hoyt's acquisition of Brown would be A. $18,000 B. $16,500 C. $20,000 D. $18,500 E. $19,500 37. Consolidated net income using the equity method under a n acquisition combination is computed as follows: A. Parent company's income from its own operations plus the equity from subsidiary's income recorded by the parent B. Parent's reported net income C. Combined revenues less combined expenses less equity in subsidiary's income less amortization of fair value allocations in excess of book value D. Parent's revenues less expenses for its own operations plus the equity from subsidiary's income recorded by parent E. All of the above Use the following to answer Questions 38 and 48:Perry Company obtains 100% of the stock of Hurley Corporation on January 1, 2009, for $3,800 cash. As of that date Hurley has the following trial balance, Any excess of consideration transferred over fair value is considered goodwill with an indefinite life. FIFO inventory valuation method is used. 38. Compute the consideration transferred in excess of book value at January 1, 2009. A. $150 B. $700 C. $2,200 D. $550 E. $2,900 39. Compute goodwill, if any, at January 1, 2009. A. $150 B. $250 C. $700 D. $1,200 E. $550 40. Compute the amount of Hurley's inventory that would be reported on a January 1, 2009, consolidated balance sheet. A. $800 B. $100 C. $900 D. $150 E. $0 41. Compute the amount of Hurley's buildings that would be reported on a December 31, 2009, consolidated balance sheet. A. $1,560 B. $1,260 C. $1,440 D. $1,160 E. $1,140 42. Compute the amount of Hurley's equipment that would be reported on a December 31, 2009, consolidated balance sheet. A. $1,000 B. $1,250 C. $875 D. $1,125 E. $750 43. Compute the amount of Hurley's land that would be reported on a December 31, 2009, consolidated balance sheet. A. $900 B. $400 C. $1,300 D. $1,450 E. $2,200 44. Compute the amount of Hurley's long-term liabilities that would be reported on a December 31, 2009, consolidated balance sheet. A. $1,800 B. $1,700 C. $1,725 D. $1,675 E. $3,500 45. Compute the amount of Hurley's buildings that would be reported on a December 31, 2010, consolidated balance sheet. A. $1,620 B. $1,380 C. $1,320 D. $1,080 E. $1,500 46. Compute the amount of Hurley's equipment that would be reported on a December 31, 2010, consolidated balance sheet. A. $0 B. $1,000 C. $1,250 D. $1,125 E. $1,200 47. Compute the amount of Hurley's land that would be reported on a December 31, 2010, consolidated balance sheet. A. $900 B. $1,300 C. $400 D. $1,450 E. $2,200 48. Compute the amount of Hurley's long-term liabilities that would be reported on a December 31, 2010, consolidated balance sheet. A. $1,700 B. $1,800 C. $1,650 D. $1,750 E. $3,500 Use the following to answer Questions 49 and 60: Bell Company acquires 80% of Demers Company for $500,000 on January 1, 2009. Demers reported common stock of $300,000 and retained earnings of $200,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows: Assume the equity method is applied. 49. Compute Bell's investment in Demers at December 31, 2009. A. $580,000 B. $574,400 C. $548,000 D. $542,400 E. $541,000 50. Compute Bell's investment in Demers at December 31, 2010. A. $577,200 B. $664,800 C. $592,800 D. $580,000 E. $572,000 51. Compute Bell's investment in Demers at December 31, 2011. A. $639,000 B. $643,200 C. $763,200 D. $676,000 E. $620,000 52. Compute Bell's income from Demers for the year ended December 31, 2009. A. $74,400 B. $73,000 C. $42,400 D. $41,000 E. $80,000 53. Compute Bell's income from Demers for the year ended December 31, 2010. A. $90,400 B. $89,000 C. $50,400 D. $56,000 E. $96,000 54. Compute Bell's income from Demers for the year ended December 31, 2011. A. $50,400 B. $56,000 C. $98,400 D. $97,000 E. $104,000 55. Compute the non-controlling interest in the net income of Demers at December 31, 2009. A. $20,000 B. $12,000 C. $18,600 D. $10,600 E. $14,400 56. Compute the non-controlling interest in the net income of Demers at December 31, 2010. A. $18,400 B. $14,400 C. $22,600 D. $24,000 E. $12,600 57. Compute the non-controlling interest in the net income of Demers at December 31, 2011. A. $20,400 B. $26,000 C. $24,600 D. $14,000 E. $12,600 58. Compute the non-controlling interest of Demers at December 31, 2009. A. $135,600 B. $117,000 C. $112,000 D. $100,000 E. $110,600 59. Compute the non-controlling interest of Demers at December 31, 2010. A. $107,000 B. $126,000 C. $109,200 D. $149,600 E. $148,200 60. Compute the non-controlling interest of Demers at December 31, 2011. A. $107,800 B. $140,000 C. $165,200 D. $160,800 E. $146,800

 

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