Test Bank For Advanced Accounting 12 edition Paul M Fischer William J Taylor Rita H Cheng

1. The method of accounting for subsidiaries that better reflects the investment account on parent-only financial statements is the

  a.  ​cost method.

  b.  ​simple equity method.

  c.  ​investment method.

  d.  ​sophisticated equity method.

ANSWER:   d

RATIONALE:   Under the sophisticated equity method the subsidiary income, and therefore, the investment account, is adjusted for the amortizations of the excess fair value over book value of the net assets acquired.

DIFFICULTY:   E

LEARNING OBJECTIVES:   ADAC.FISC.3-1

2. The method of accounting for subsidiaries that is required for influential investments is the

  a.  ​cost method.

  b.  ​simple equity method.

  c.  ​investment method.

  d.  ​sophisticated equity method.

ANSWER:   d

RATIONALE:   The sophisticated equity method is required by GAAP for unconsolidated investments over which the investor has significant influence.

DIFFICULTY:   E

LEARNING OBJECTIVES:   ADAC.FISC.3-1

3. The method of accounting for subsidiaries where investment income is limited to dividends received is the

  a.  ​cost method.

  b.  ​simple equity method.

  c.  ​investment method.

  d.  ​sophisticated equity method.

ANSWER:   a

RATIONALE:   Under the cost method, dividends received from the subsidiary are recorded as income.

DIFFICULTY:   E

LEARNING OBJECTIVES:   ADAC.FISC.3-1

4. Which of the following statements applying to the use of the equity method versus the cost method is true?

  a.  ​A parent company may incur a delay in closing its books while waiting for a subsidiary that it accounts for using the cost method to determine its income.

  b.  ​If no dividends were paid by the subsidiary, the investment account would have the same balance under both methods.

  c.  ​The method used has no impact on consolidated financial statements.

  d.  ​An advantage of the equity method is that no amortization of excess adjustments needs to be made on the consolidated worksheet.

ANSWER:   c

RATIONALE:   Regardless of the method the parent uses to account for the subsidiary, the consolidated financial statements will have the same result.

DIFFICULTY:   E

LEARNING OBJECTIVES:   ADAC.FISC.3-1

5. On January 1, 2016, Rabb Corp. purchased 80% of Sunny Corp.’s $10 par common stock for $975,000. On this date, the carrying amount of Sunny’s net assets was $1,000,000. The fair values of Sunny’s identifiable assets and liabilities were the same as their carrying amounts except for plant assets (net), which were $100,000 in excess of the carrying amount.

​

In the January 1, 2016, consolidated balance sheet, goodwill should be reported at ____.

  a.  ​$0

  b.  ​$75,750

  c.  ​$95,000

  d.  ​$118,750

ANSWER:   d

RATIONALE:   Determination and Distribution of Excess Schedule:

​ Implied Fair Value Parent Price

80% NCI Value

20%

Fair value of subsidiary $1,218,750 $975,000 $243,750

Less book value of interest acquired 1,000,000 800,000 200,000

Excess of book value over fair value $ 218,750 $175,000 $ 43,750

​ ​ ​ ​

Adjustment of identifiable accounts ​ ​ ​

Plant assets $100,000 ​ ​

Goodwill 118,750 ​ ​

Total $218,750 ​ ​

DIFFICULTY:   M

LEARNING OBJECTIVES:   ADAC.FISC.3-1

6. On January 1, 2016, Promo, Inc. purchased 70% of Set Corporation for $469,000. On that date the book value of the net assets of Set totaled $500,000. Based on the appraisal done at the time of the purchase, all assets and liabilities had book values equal to their fair values except as follows:

​

​ Book Value Fair Value

Inventory $100,000 $120,000

Land 75,000 85,000

Equipment (useful life 4 years) 125,000 165,000

​

The remaining excess of cost over book value was allocated to a patent with a 10-year useful life.

​

During 2016 Promo reported net income of $200,000 and Set had net income of $100,000.

​

What income from subsidiary did Promo include in its net income if Promo uses the simple equity method?

  a.  ​$33,000

  b.  ​$42,000

  c.  ​$70,000

  d.  ​$100,000

ANSWER:   c

RATIONALE:   Promo’s subsidiary income under the simple equity method would be $70,000 ($100,000 x 70%)

DIFFICULTY:   M

LEARNING OBJECTIVES:   ADAC.FISC.3-1

7. Pete purchased 100% of the common stock of the Sanburn Company on January 1, 2016, for $500,000. On that date, the stockholders’ equity of Sanburn Company was $380,000. On the purchase date, inventory of Sanburn Company, which was sold during 2016, was understated by $20,000. Any remaining excess of cost over book value is attributable to patent with a 20-year life. The reported income and dividends paid by Sanburn Company were as follows:

​

​ 2016 2017

Net income $80,000 $90,000

Dividends paid 10,000 10,000

​

 Using the simple equity method, which of the following amounts are correct?

​

  Investment Income      Investment Account Balance

    2016                    December 31, 2016

  a.  ​$80,000                  $570,000

  b.  ​$70,000                  $570,000

  c.  ​$70,000                  $550,000

  d.  ​$80,000                  $550,000

ANSWER:   a

RATIONALE:   Investment in Sanburn 500,000 ​

      Cash ​ 500,000

​ ​ ​

Investment in Sanburn 80,000 ​

      Subsidiary Income ​ 80,000

​ ​ ​

Cash 10,000 ​

      Investment in Sanburn ​ 10,000

​ ​ ​

Investment Balance, December 31, 2016 ​ $570,000

​

DIFFICULTY:   M

LEARNING OBJECTIVES:   ADAC.FISC.3-1

8. Pete purchased 100% of the common stock of the Sanburn Company on January 1, 2016, for $500,000. On that date, the stockholders’ equity of Sanburn Company was $380,000. On the purchase date, inventory of Sanburn Company, which was sold during 2016, was understated by $20,000. Any remaining excess of cost over book value is attributable to patent with a 20-year life. The reported income and dividends paid by Sanburn Company were as follows:

​

​ 2016 2017

Net income $80,000 $90,000

Dividends paid 10,000 10,000

​

Using the sophisticated (full) equity method, which of the following amounts are correct?

​

  Investment Income      Investment Account Balance

    2016                    December 31, 2016

  a.  ​$55,000                   $555,000

  b.  ​$55,000                   $545,000

  c.  ​$75,000                   $565,000

  d.  $80,000                   $570,000

ANSWER:   b

RATIONALE:   Investment in Sanburn 500,000 ​

      Cash ​ 500,000

​ ​ ​

Investment in Sanburn 55,000 ​

      Subsidiary Income ($80,000 – $25,000**) ​ 55,000

​ ​ ​

Cash 10,000 ​

      Investment in Sanburn ​ 10,000

​ ​ ​

Investment Balance, December 31, 2016 ​ $545,000

​

**Determination and Distribution of Excess Schedule:

​ Implied Fair Value ​ ​

Fair value of subsidiary $500,000 ​ ​

Less book value of interest acquired 380,000 ​ ​

Excess of book value over fair value $120,000 ​ ​

​ ​ ​ ​

Adjustment of identifiable accounts ​ Amortization Life

Inventory $ 20,000 $20,000 FIFO

Patent 100,000 5,000 20 years

Total $120,000 $25,000 ​

​

DIFFICULTY:   M

LEARNING OBJECTIVES:   ADAC.FISC.3-1