Multiple Choice
1. What is a basic premise of the acquisition method regarding accounting for a noncontrolling interest?
a. Consolidated financial statements should be primarily for the benefit of the parent company€™s stockholders.
b. Consolidated financial statements should be produced only if both the parent and the subsidiary are in the same basic industry.
c. A subsidiary is an indivisible part of a business combination and should be included in its entirety regardless of the degree of ownership.
d. Consolidated financial statements should not report a noncontrolling interest balance because these outside owners do not hold stock in the parent company.

2. Bailey, Inc., buys 60 percent of the outstanding stock of Luebs, Inc. Luebs owns a piece of land that cost $200,000 but was worth $500,000 at the acquisition date. What value should be attributed to this land in a consolidated balance sheet at the date of takeover?
a. $120,000.
b. $300,000.
c. $380,000.
d. $500,000.

3. Jordan, Inc., holds 75 percent of the outstanding stock of Paxson Corporation. Paxson currently owes Jordan $400,000 for inventory acquired over the past few months. In preparing consolidated financial statements, what amount of this debt should be eliminated?
a. -0-.
b. $100,000.
c. $300,000.
d. $400,000.

4. The noncontrolling interest represents an outside ownership in a subsidiary that is not attributable to the parent company. Where in the consolidated balance sheet is this outside ownership interest recognized?
a. In the liability section.
b. In a mezzanine section between liabilities and owners€™ equity.
c. In the owners€™ equity section.
d. The noncontrolling interest is not recognized in the consolidated balance sheet.

5. James Company acquired 85 percent of Mark-Right Company on April 1. On its December 31 consolidated income statement, how should James account for Mark-Right€™s revenues and expenses that occurred before April 1?
a. Include 100 percent of Mark-Right€™s revenues and expenses and deduct the preacquisition portion as noncontrolling interest in net income.
b. Exclude 100 percent of the preacquisition revenues and 100 percent of the preacquisition expenses from their respective consolidated totals.
c. Exclude 15 percent of the preacquisition revenues and 15 percent of the preacquisition expenses from consolidated expenses.
d. Deduct 15 percent of the net combined revenues and expenses relating to the preacquisition period from consolidated net income.

6. A parent buys 32 percent of a subsidiary in one year and then buys an additional 40 percent in the next year. In a step acquisition of this type, the original 32 percent acquisition should be
a. maintained at its initial value.
b. adjusted to its equity method balance at the date of the second acquisition.
c. adjusted to fair value at the date of the second acquisition with a resulting gain or loss recorded.
d. adjusted to fair value at the date of the second acquisition with a resulting adjustment to additional paid-in capital.

7. McKinley, Inc., owns 100 percent of Jackson Company€™s 45,000 voting shares. On June 30, McKinley€™s internal accounting records show a $192,000 equity method adjusted balance for its investment in Jackson. McKinley sells 15,000 of its Jackson shares on the open market for $80,000 on June 30.
How should McKinley record the excess of the sale proceeds over its carrying value for the shares?
a. Reduce goodwill by $64,000.
b. Recognize a gain on sale for $16,000.
c. Increase its additional paid-in capital by $16,000.
d. Recognize a revaluation gain on its remaining shares of $48,000.

Use the following information for Problems 8 and 9:
On January 1, Park Corporation and Strand Corporation had condensed balance sheets as follows:

On January 2, Park borrowed $60,000 and used the proceeds to obtain 80 percent of the outstanding common shares of Strand. The acquisition price was considered proportionate to Strand€™s total fair value. The $60,000 debt is payable in 10 equal annual principal payments, plus interest, beginning December 31. The excess fair value of the investment over the underlying book value of the acquired net assets is allocated to inventory (60 percent) and to goodwill (40 percent). On a consolidated balance sheet as of January 2, what should be the amount for each of the following?

8. Current liabilities:
a. $50,000.
b. $46,000.
c. $40,000.
d. $30,000.

9. Noncurrent liabilities:
a. $110,000.
b. $104,000.
c. $ 90,000.
d. $50,000.

Transcribed Image Text:

Park 70,000 90,000 $160,000 30,000 50,000 80,000 $160,000 Strand $20,000 40,000 $60,000 $10,000 Current assets Noncurrent assets Total assets Current liabilities Long-term debt Stockholders' equity 50,000 $60,000 Total liabilities and equities