1. A new subsidiary is being formed. The parent company purchased 70% of the shares for $20 per shar

1.
A new subsidiary is being formed. The parent company
purchased 70% of the shares for $20 per share. The remaining shares were sold
to a variety of outside interests for an average of $22 per share. The
consolidated statements will show
a.
an extraordinary gain.
b.
an extraordinary loss.
c.
only cash and related equity.
d. goodwill.

2.
A new subsidiary is being formed. The parent company
purchased 70% of the shares for $20 per share. The remaining shares were sold
to a variety of outside interests for an average of $18 per share. The
consolidated statements will show
a.
an extraordinary gain.
b.
an extraordinary loss.
c.
only cash and related equity.
d. goodwill.

3.
When
a parent acquires a controlling interest in a subsidiary as a result of a
series of purchases of subsidiary stock, current practice in preparing
statements follows the
a.
economic entity concept.
b.
parent company concept.
c.
piecemeal acquisition concept.
d. proportionate consolidation
concept.

4.
When
control of a subsidiary is achieved with the initial investment in subsidiary
stock, when subsequent block of subsidiary’s stock is purchased
a.
the parent must change from the cost method to the
equity method.
b.
the parent must change from the equity method to the
cost method.
c.
no change in accounting methods is required.
d. none of the above.

Chapter 7

5.
Pine Company purchased a 55% interest in the Sent
Company on January 1, 20X1 for $350,000. On that date, the stockholders’ equity
of Sent Company was $450,000. Any excess cost was attributable to goodwill.
Pine purchased another 20% interest on January 1, 20X4 for $200,000. On January
1, 20X4, Sent Company’s stockholders’ equity was $700,000, the entire increase
due to retained earnings. Any excess cost was again attributed to goodwill. The
goodwill balance on the December 31, 20X4, balance sheet is __________.

a.
$102,500
b.
$60,000
c.
$0
d. $162,500

6.
Pine Company purchased a 55% interest in the Sent
Company on January 1, 20X1 for $350,000. On that date, the stockholders’ equity
of Sent Company was $450,000. Any excess cost was attributable to the fair
value increase of equipment with a 10-year life. Pine purchased another 20%
interest on January 1, 20X5 for $200,000. On January 1, 20X5, Sent Company’s
stockholders’ equity was $700,000, the entire increase due to retained
earnings. Any excess cost was again attributed to the fair value increase of
equipment with a 6-year life. The additional expense on the December 31, 20X5,
income statement is __________.

a.
$10,250
b.
$20,250
c.
$10,000
d. $16,250

7.
Prior to January 1, 20X4, Parts Inc. owned a 60%
controlling interest in Sorter Company. On July 1, 20X4, Parts Inc. purchased
an additional 20% interest in Sorter for $150,000. Sorter’s stockholders’
equity was $600,000 on January 1, 20X4. Any excess was attributed to goodwill.
On July 1, 20X4, there was intercompany inventory owned by Parts Inc. that had
been purchased from Sorter. Sorter’s profit on the inventory was $5,000. Parts
Inc. sold the inventory during the latter half of 20X4. Sorter’s net income for
20X4 was $60,000, earned evenly during the year. Goodwill arising from the second
acquisition is __________.

a.
$30,000
b.
$29,500
c.
$25,000
d. $23,500

7-2

Chapter 7

8.
Prior to January 1, 20X4, Parts Inc. owned a 60%
controlling interest in Sorter Company. On July 1, 20X4, Parts Inc. purchased
an additional 20% interest in Sorter for $150,000. Sorter’s stockholders’
equity was $600,000 on January 1, 20X4. Any excess was attributed to to the
fair value increase of a building with a 20-year life. On July 1, 20X4, there
was intercompany inventory owned by Parts Inc. that had been purchased from
Sorter. Sorter’s profit on the inventory was $5,000. Parts Inc. sold the
inventory during the latter half of 20X4. Sorter’s net income for 20X4 was
$60,000, earned evenly during the year. The noncontrolling interest share of
income for 20X4 is __________.

a.
$18,000
b.
$17,000
c.
$12,000
d. $11,000

9.
When a subsequent block of an existing subsidiary’s
stock is purchased, the determination and distribution of excess schedule

a.
is not independent of the appraisals made during
previous acquisitions.

b. is
completely independent of the appraisals made during previous acquisitions.

c.
must take into account all previous appraisals.
d. none of the above.

10. When
investment blocks are carried at cost, the conversion entry is based upon

a.
the difference in retained earnings at the beginning
of the current fiscal year and the retained earnings when the first block was
acquired.

b.
the difference in retained earnings at the beginning
of the current fiscal year and the retained earnings when the block giving a
controlling interest was acquired.

c.
the difference in retained earnings at the beginning
of the current fiscal year and the retained earnings of each block at its
acquisition.

d.
the difference in retained earnings at the beginning
of the current fiscal year and the retained earnings when the last block was
acquired.

7-3

Chapter 7

a.
Palto Inc. purchased a 10% interest in the Sauer
Company for $50,000 on January 1, 20X1. On that date, Sauer’s stockholders’
equity was $400,000. Any excess would have been considered goodwill. On January
1, 20X4, Palto purchased another 60% interest for $500,000 when Sauer’s
stockholders’ equity was $700,000. Again, any excess was viewed as goodwill.
The Sauer Company earned $50,000 during 20X4. The balance in the Investment in
Sauer account just prior to the 60% purchase should have been __________.

$47,000

$50,000

$77,000

$80,000

12.
Palto Inc. purchased a 10% interest in the Sauer
Company for $50,000 on January 1, 20X1. On that date, Sauer’s stockholders’
equity was $400,000. Any excess would have been attributed to a patent with a
10-year life. On January 1, 20X3, Palto purchased another 60% interest for
$500,000 when Sauer’s stockholders’ equity was $700,000. Again, any excess was
attributed to the patent with an 8-year life. The Sauer Company earned $50,000
during 20X3. The patent on the December 31, 20X3, consolidated balance sheet will
be __________.

a.
$90,000
b.
$77,000
c.
$80,000
d. $10,000

13. Company P
purchased the outstanding common stock of Company S as follows:

15%, January 1, 20X1

20%, June 1, 20X1
30%, August 1, 20X1

35%, September 30, 20X1

The fiscal year
of both firms ends on September 30. S’s stock was acquired by P at book value.
The controlling interest in consolidated net earnings for the fiscal year ended
September 30, 20X1, would include which of the following earnings of the
subsidiary?
D
100%, January-September 20X1
E
15%, January-May 20X1; 35%, June-July 20X1; and 65%,
August-September 20X1

F
15%, January-May 20X1; 20%, June-July 20X1; and 30%,
August-September 20X1

G 65%, January-September 20X1

7-4

Chapter 7

14. Company P
purchased the outstanding common stock of Company S as follows:

15%, January 1, 20X1

20%, June 1, 20X1
30%, August 1, 20X1

35%, September 30, 20X1

The fiscal
year of both firms ends on December 31. S’s stock was acquired by P at book
value. The controlling interest in consolidated net earnings for the fiscal
year ended December 31, 20X1, would include which of the following earnings of
the subsidiary?
a.
100%, January-December 20X1
b.
15%, January-May 20X1; 20%, June-July 20X1; and 30%,
August-September 20X1

c.
15%, January-May 20X1; 35%, June-July 20X1; 65%,
August-October 20X1; and 100%, September – December

d. 15%,
January-May 20X1; 35%, June-July 20X1; 65%, August-September 20X1; and 100%,
November – December

15. When a parent
sells part of its subsidiary interest, a gain or loss is recognized if the
parent

a.
sells its entire investment.
b.
loses control and significant influence.
c.
loses control only.
d. sells any portion on its
investment.