Multiple Choice Questions

1. Mittelstaedt Inc., buys 60 percent of the outstanding stock of Sherry, Inc. Sherry owns a piece of land that cost $212,000 but had a fair value of $549,000 at the acquisition date. What value should be attributed to this land in a consolidated balance sheet at the date of takeover?

a. $549,000.

b. $337,000.

c. $127,200.

d. $421,800.

2. 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.

3. On January 1, 2014, Brendan, Inc., reports net assets of $760,000 although equipment (with a 4-year remaining life) having a book value of $440,000 is worth $500,000 and an unrecorded patent is valued at $45,000. Hope Corporation pays $692,000 on that date for an 80 percent ownership in Brendan. If the patent is to be written off over a 10-year period, at what amount should it be reported on consolidated statements at December 31, 2015?

a. $28,800.

b. $32,400.

c. $36,000.

d. $40,500.

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. On January 1, 2014, Chamberlain Corporation pays $388,000 for a 60 percent ownership in Neville. Annual excess fair-value amortization of $15,000 results from the acquisition. On December 31, 2015, Neville reports revenues of $400,000 and expenses of $300,000 and Chamberlain reports revenues of $700,000 and expenses of $400,000. The parent figures contain no income from the subsidiary. What is consolidated net income attributable to Chamberlain Corporation?

a. $385,000.

b. $351,000.

c. $366,000.

d. $400,000.

6. Assuming that Pride, in its internal records, accounts for its investment in Star using the equity method, what is Pride’s share of consolidated retained earnings at January 1, 2015?

a. $250,000.

b. $286,000.

c. $315,000.

d. $360,000.

7. 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.

8. 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.