To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Consolidated Financial Statements—Date of Acquisition Multiple Choice 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 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 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 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 none of these 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 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 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 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 3-2 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 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 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 Pine Corp owns 60% of Sage Corp.'s outstanding common stock On May 1, 2011, Pine advanced Sage $90,000 in cash, which was still outstanding at December 31, 2011 What portion of this advance should be eliminated in the preparation of the December 31, 2011 consolidated balance sheet? a $90,000 b $54,000 c $36,000 d $-0- http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Consolidated Financial Statements—Date of Acquisition 3-3 Use the following information for questions 13-15 On January 1, 2011, Polk Company and Sigler Company had condensed balance sheets as follows: Polk Sigler 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 120,000 200,000 Total liabilities & stockholders' equity $ 640,000 $240,000 On January 2, 2011 Polk borrowed $240,000 and used the proceeds to purchase 90% of the outstanding common stock of Sigler This debt is payable in 10 equal annual principal payments, plus interest, starting December 30, 2011 Any difference between book value and the value implied by the purchase price relates to land On Polk's January 2, 2011 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 company’s 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 subsidiary’s pre-existing goodwill d an impairment test to see if any of it has been impaired 17 The Difference between Implied and Book Value account is: a an account necessary for the preparation of consolidated working papers 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 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 3-4 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 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 Princeton Company acquired 75 percent of the common stock of Sheffield Corporation on December 31, 2011 On the date of acquisition, Princeton held land with a book value of $150,000 and a fair value of $300,000; Sheffield 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 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Consolidated Financial Statements—Date of Acquisition 3-5 Use the following information to answer questions 21 - 23 On January 1, 2011, Pena Company and Shelby Company had condensed balanced sheets as follows: Pena 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 Shelby $ 60,000 120,000 $180,000 $ 30,000 -0150,000 $ 180,000 On January 2, 2011 Pena borrowed $180,000 and used the proceeds to purchase 90% of the outstanding common stock of Shelby This debt is payable in 10 equal annual principal payments, plus interest, starting December 30, 2011 Any difference between book value and the value implied by the purchase price relates to land On Pena's January 2, 2011 consolidated balance sheet, 21 Noncurrent assets should be a $390,000 b $402,000 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, 2011, Primer Corporation acquired 80 percent of Sutter Corporation's voting common stock Sutters'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 Sutter’s buildings and equipment will be reported in the consolidated statements ? a $350,000 b $340,000 c $280,000 d $300,000 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 3-6 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition Problems 3-1 On December 31, 2011, Page 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, 2011, 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, 2011, 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 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Consolidated Financial Statements—Date of Acquisition 3-7 Required: 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, 2011, 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, 2011 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, 2011, Potter Company acquired 90% of the outstanding common stock of Smiley 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 Potter $ 650,000 360,000 290,000 970,000 150,000 $2,420,000 Smiley $ 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 Smiley's assets and liabilities are equal to their book values with the exception of land http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 3-8 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition Required: A Prepare the journal entry necessary to record the purchase of Smiley'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 Corporation’s $10 par common stock on December 31, 2011, when S Corporation’s stockholders’ equity was made up of $300,000 of Common Stock, $90,000 of Other Contributed Capital and $60,000 of Retained Earnings S’s identifiable assets and liabilities reflected their fair values on December 31, 2011, except for S’s 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 S $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 3-6 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: http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Consolidated Financial Statements—Date of Acquisition 3-9 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, 2011, Pryor Company purchased a controlling interest in Shelby Company for $1,060,000 The consolidated balance sheet on December 31, 2011 reported noncontrolling interest in Shelby Company of $265,000 On the date of acquisition, the stockholders' equity section of Shelby 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, 2011 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, 2011, Primer 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 Swartz 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) Land Total Assets Accounts Payable Notes Payable Primer Swartz $ 73,000 95,000 58,000 95,000 26,000 $ 347,000 $13,000 19,000 25,000 43,000 20,000 $ 120,000 $ 66,000 82,000 16,000 21,000 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 3-10 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition Common Stock, $20 par value Other Contributed Capital Retained Earnings Total Liabilities and Equities 100,000 60,000 39,000 $ 347,000 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 Primer’s 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, 2011: Cash Land Common Stock Other Contributed Capital Short Answer There are several reasons why a company would acquire a subsidiary’s 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 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 What are the advantages of acquiring the majority of the voting stock of another company rather than acquiring all its voting stock? What is the justification for preparing consolidated financial statements when, in fact, it is ap-parent that the consolidated group is not a legal entity? 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? What aspects of control must exist before a subsidiary is consolidated? Why are consolidated work papers used in pre-paring consolidated financial statements? 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] http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Consolidated Financial Statements—Date of Acquisition 3-11 Give several reasons why a parent company would be willing to pay more than book value for subsidiary stock acquired What effect subsidiary treasury stock holdings have at the time the subsidiary is acquired? How should the treasury stock be treated on consolidated work papers? What effect does a noncontrolling interest have on the amount of intercompany receivables and payables eliminated on a consolidated balance sheet? 10 A.SFAS No 109and SFAS No 141R[ASC 740 and805] 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 year’s annual report The CFO stops by and asks you to reduce the reserve by enough to increase the current year’s EPS by cents a share The company’s policy has always been to use the previous year’s actual bad debt percentage adjusted for a specific economic index The CFO’s 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 you 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 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 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 3-12 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition ANSWER KEY Multiple Choice d b c d b d d Problems 3-1 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 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, 2011 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 10,000 10,000 600,000 80,000 320,000 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Consolidated Financial Statements—Date of Acquisition Difference Between Implied and Book Value Investment in S Company Noncontrolling Interest 50,000 950,000 100,000 Land 50,000 Difference Between Implied and Book Value 3-4 A Investment in Smiley Company Cash B 50,000 480,000 480,000 POTTER COMPANY AND SUBSIDIARY Consolidated Balance Sheet January 2, 2011 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 $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 * $480,000/.9 - ($170,000 + $50,000 + $240,000) http://downloadslide.blogspot.com 3-13 To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 3-14 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 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 S $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 http://downloadslide.blogspot.com 318,000 306,000 156,000 180,000 $1,530,000 To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Consolidated Financial Statements—Date of Acquisition 3-7 A 265,000/(1,060,000 +265,000) = 20% Noncontrolling interest B Common Stock – Shelby Other Contributed Capital – Shelby Retained Earnings – Shelby Difference between Implied and Book Values Investment in Shelby Company Noncontrolling Interest in Equity 520,000 380,000 280,000 145,000 Investment in Swartz 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- 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 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 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 3-16 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition 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) 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 affiliate’s legal existence provides a measure of protection of the parent’s assets from attachment by creditors of the subsidiary 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 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 (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 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 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com Chapter Consolidated Financial Statements—Date of Acquisition 3-17 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 parent’s share; and presenting it as a component of owners’ equity (the choice approved by FASB in its most recent exposure drafts) 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 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 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 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 http://downloadslide.blogspot.com To Todownload downloadmore moreslides, slides,ebook, ebook,solutions solutionsand andtest testbank, bank,visit visithttp://downloadslide.blogspot.com http://downloadslide.blogspot.com 3-18 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition unethical behavior Taking a stand in such a situation is a difficult and challenging test for an employee who reports to the CFO Part The tax laws permit individuals to minimize taxes by means that are within the law like using tax 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