1 Account Investor Investee Sales $500,000 300,000 Cost of Goods Sold 230,000 170,000 Gross Profit 270,000 $130,000 Selling & Admin. Expenses 120,000 100,000 Net Income $150,000 $30,000 Dividends paid 50,000 10,000 Assuming that the Investor owns 70% of Investee. What is the amount that will be recorded as Net Income for the Controlling Interest? a. $164,000 b. $180,000 $171,000 d. $178,000 'Correct Answer: C 2. Which of the following is true regarding methods of accounting for the investment in the subsidiary? a. Under the simple equity method, the balance of the investment account is always equal to the original cost of the investment on the date of acquisition. b. Under the cost method, the parent records its share of the subsidiary's dividends as dividend income. c. Bothofthese statements are true d. None of these statements is true Correct answer: B 3. Which of the following is true about the impairment of goodwill subsequent to the acquisition of the subsidiary? a. Testing for the impairment of goodwill has to be performed at least once a year. b. The parent's share of the goodwill impairment loss can be recorded either in the consolidation worksheet or in the parent's books. c. Both of these statements are true. d. None of these statements is true. 'Correct Answer: C What is the amount that will be recorded as Net Income for the Controlling Interest? Answer: The investor owns 70% of the investee. Hence investor has a 70% interest in the net income of the investee. Net income of investor 150,000 Net income of Investee $30,000 Hence, Investor share of net income from investee $30,000%70% Investor share of net income from investee = $30,000 x 70% = $21,000.00 Total amount recorded as net income for the controlling interest = $150,000 + $21,000 = $171,000 Total amount recorded as net income for the controlling interest = $171,000 Use the follow formation for the next 11 items On January 1, 2016, Paris Company acquired 80% of the voting common stock of Sun Co. for $600,000 cash. The two companies had the following balance sheets on date of acquisition (Book values). Paris Sun Current Assets $700,000 $175,000 Equipment {Net} 1,520,000 550,000 Total Assets 2,220,000 725,000 Current Liabilities $500,000 120,000 Common Stock 100,000 80,000 Additional Paid-in Capital 900,000 300,000 Retained Earnings 720,000 225,000 Total Liabilities and Equity 2,220,000 _ 725,000 On the date of acquisition, the fair values of Sun's assets and liabilities were equal to their book values except for equipment which had a fair value of $650,000. The equipment had a remaining useful life of 10 years and no salvage value. Any remaining excess is goodwill. Paris and Sun had the following information for 2016 and 2017. Paris Sun 2016 Net Income (Internally Generated) $170,000 560,000 Dividends 30,000 12,000 2017 Net Income (Internally Generated) 200,000 50,000 Dividends 23,000 14,000 Assume that Paris uses the simple equity method to account for its investment in Sun. What is the \"Subsidiary Income\" that Paris records in its books for 20167 a. $60,000 b. 548,000 $9,600 d. $12,000 e. $38,400 Correct Answer: B Assume that Paris uses the simple equity method to account for its investment in Sun. What is the balance of \"Investment in Subsidiary- Sun\" at the end of 2016 in Paris books? a. 648,000 b. $638,400 c $590,400 d. $609,600 e. $600,000 Correct Answer: B Use the following information for the next 11 items On January 1, 2016, Paris Company acquired 80% of the voting common stock of Sun Co. for $600,000 cash. The two companies had the following balance sheets on date of acquisition (Book values). Paris Sun Current Assets $700,000 $175,000 Equipment (Net) 1,520,000 550,000 Total Assets 2,220,000 725,000 Current Liabilities $500,000 120,000 Common Stock 100,000 80,000 Additional Paid-in Capital 900,000 300,000 Retained Earnings 720,000 225,000 Total Liabilities and Equity 2,220,000 _ 725,000 On the date of acquisition, the fair values of Sun's assets and liabilities were equal to their book values except for equipment which had a fair value of $650,000. The equipment had a remaining useful life of 10 years and no salvage value. Any remaining excess is goodwill. Paris and Sun had the following information for 2016 and 2017. Paris sun 2016 Net Income {Internally Generated) 170,000 $60,000 Dividends 30,000 12,000 2007 Net Income (Internally Generated) 200,000 50,000 Dividends 23,000 14,000 6. Assume that Paris uses the cost method to account for its investment in Sun. What is the balance of \"Investment in Subsidiary- Sun\" at the end of 2016 in Paris books? a. 5600000 b. 5648,000 . $638,400 d. $609,600 e $590,400 Correct Answer: A Assume that Paris uses the simple equity method to account for its investment in Sun. Which of the following entries is required to "date align\" the balance of the \"Investment in Subsidiary\" account in the 2016 consolidation worksheet? a. Debit Subsidiary Income - Sun $XXX, Credit Investment in Sun $XXX b. Debit Investment in Sun $XXX, Credit Dividends Declared c. Debit Investment in Sun $XXX, Credit Subsidiary Income - Sun $XXX d. Debit Dividends Receivable $XXX, Credit Investment in Sun SXXX e. Bothaandb. Correct Answer: E Assume that Paris uses the cost method to account for its investment in Sun. Which of the following entries is required to \"date align\" the balance of the \"Investment in Subsidiary\" account in the 2016 consolidation warksheet (end of first year after acquisition)? a. Debit Investment in Sun $XXX, Credit Retained Earnings Paris $XXX b. Debit Investment in Sun SXXX, Credit Retained Earnings = Sun $XXX No entry is required. d. Debit Retained Earnings - Paris $XXX, Credit Investment in Sun $XXX Debit Retained Earnings - Sun $XXX, Credit Investment in Sun $XXX Correct Answer: C Which of the following entries will be recorded as an Elimination Entry in the consolidation worksheet for 20162 a. Debit Common Stock Paris $80,000, Debit Additional Paid-in Capital - Paris $720,000, Debit Retained Earnings - Paris $576,000, Credit Investment in Sun $1,376,000. b. Debit Commen Stock Paris $100,000, Debit Additional Paid-in Capital ~ Paris $900,000, Debit Retained Earnings - Paris $720,000, Credit Investment in Sun $1,720,000. c. Debit Common Stock - Sun $80,000, Debit Additional Paid-in Capital - Sun $300,000, Debit Retained Earnings - Sun $225,000, Credit Investment in Sun $605,000. d. Debit Common Stock - Sun $64,000, Debit Additional Paid-in Capital - Sun $240,000, Debit Retained Earnings - Sun $180,000, Credit Investment in Sun $484,000. Correct Answer: D