Question
1- Errant Inc. purchased 100% of the outstanding voting shares of Grub Inc. for $200,000 on January 1, 2019. On that date, Grub Inc. had
1- Errant Inc. purchased 100% of the outstanding voting shares of Grub Inc. for $200,000 on January 1, 2019. On that date, Grub Inc. had common shares and retained earnings worth $100,000 and $60,000, respectively. Goodwill is tested annually for impairment. The balance sheets of both companies, as well as Grub's fair market values on the date of acquisition are disclosed below:
Errant Inc. | Grub Inc. | Grub Inc. | |
(carrying value) | (carrying value) | (fair value) | |
Cash | $120,000 | $76,000 | $76,000 |
Accounts Receivable | $80,000 | $40,000 | $40,000 |
Inventory | $60,000 | $34,000 | $50,000 |
Equipment (net) | $400,000 | $80,000 | $70,000 |
Trademark | $70,000 | $84,000 | |
Total Assets | $660,000 | $300,000 | |
Current Liabilities | $180,000 | $80,000 | $80,000 |
Bonds Payable | $320,000 | $60,000 | $64,000 |
Common Shares | $90,000 | $100,000 | |
Retained Earnings | $70,000 | $60,000 | |
Total Liabilities and Equity | $660,000 | $300,000 |
The net incomes for Errant and Grub for the year ended December 31, 2019 were $160,000 and $90,000 respectively. Grub paid $9,000 in dividends to Errant during the year. There were no other inter-company transactions during the year. Moreover, an impairment test conducted on December 31, 2019 revealed that the Goodwill should actually have a value of $20,000. Both companies use a FIFO system, and most of Grub's inventory on the date of acquisition was sold during the year. Errant did not declare any dividends during the year. Assume that any difference between the fair values and book values of the equipment, trademark and bonds payable would all be amortized over 10 years. If Errant used the equity method to account for its investment in Grub and had net income of $160,000 from its own operations (before making any entries to reflect its investment in Grub), what consolidated net income would Errant report in its consolidated income statement for the year ended December 31, 2019?
Multiple Choice
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$160,000
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$90,000
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$230,000
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$250,000
2- If the parent company used the equity method to account for its investment and the subsidiary company showed a profit for the past year, the consolidation elimination entry required to remove a subsidiary's income from the parent's books prior to the preparation of consolidated financial statements would be:
Multiple Choice
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Debit Credit Equity method incomeParent $$$ Acquisition Differential $$$ -
Debit Credit Equity method incomeParent $$$ Investment in Subsidiary $$$ -
Debit Credit Equity method incomeParent $$$ Retained EarningsParent $$$ -
Debit Credit Investment IncomeSubsidiary $$$ Equity method incomeParent $$$
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