Ace purchases 40% of Baskett Company on January

#1. Ace purchases 40% of Baskett Company on January 1 for $500,000. Although not used, this acquisition gave Ace the ability to apply significant influence to the operating and financing policies of Baskett. Baskett reports assets on that date of $1,400,000 with liabilities of $500,000. Once building with a seven-year life is undervalued on Baskett’s books by $140,000. In addition, Baskett’s book value for equipment (10-year life) is undervalued by $212,000. During the year, Baskett reports net income of $90,000 while paying dividends of $30,000. What is the Investment in Baskett balance in Ace’s financial records as of December 31?

a. $504,000
b. $507,600
c. $513,900
d. $516,000

2. The foreign currency is the functional currency for a foreign subsidiary. At what exchange rate should each of the following accounts be translated:

a. Rent Expense: weighted average exchange rate
b. Dividends paid: weighted average exchange rate
c. Equipment: current exchange rate
d. Notes Payable: current exchange rate
e. Sales: current exchange rate
f. Depreciation Expense: weighted average exchange rate
g. Cash: current exchange rate
h. Accumulated Depreciation: current exchange rate
i. Common Stock: current exchange rate

#3. Principles for allocating the cost of a business combination provided in SFAS141, “Business Combinations”; When the fair value of a net assets acquired exceeds the total cost of the investment, the difference should be:

a. Applied pro rata to reduce, but not below zero, the amounts initially assigned to specific noncurrent assets of the acquired firm.
b. Treated as negative goodwill to be amortized over the period benefited, not to exceed 40 years.
c. Treated as goodwill and tested for impairment on an annual basis.
d. Allocated on a pro rata basis to the assets of the acquired firm.
4. On January 1, 2003, Turner Inc., reports net assets of $480,000 although a building (with a 10-year life) having a book value of $260,000 is now worth $310,000. Plaster Corporation pays $400,000 on that date for a 70 percent ownership in Turner. On December 31, 2005, Turner reports a Building account of $245,000 while Plaster reports a Building account of $510,000. What is the consolidated balance of the Building account?

a. $779,500
b. $783,500
c. $790,000
d. $805,000

5. Aedion Company owns control over Breedlove, Inc. Aedion reports sales of $300,000 during 2004 while Breedlove reports $200,000. Inventory costing $20,000 was transferred from Breedlove to Aedion (upstream) during the year for $40,000. Of this amount, 25 percent is still in ending inventory at year’s end. Total receivables on the consolidated balance sheet were $80,000 at the first of the year and $110.000 at year-end. No intercompany debt existed at the beginning or ending of the year. Using the direct approach, what is the consolidated amount of cash collected by the business combination from its customers?

a. $430,000
b. $460,000
c. $490,000
d. $510,000

6. Which of the following items of information must be disclosed with regard to a major customer?

a. The identity of the customer.
b. The percentage of total sales derived from the major customer.
c. The operating segment making the sale.
d. The geographic area from which the sale was made.

Problem 7 and 8 are based on the following information: Hampstead, Inc. has only three assets:
Book Value Fair Market Value
Inventory………………….. $110,000 $150,000
Land …………………………. 700,000 600,000
Buildings………………….. 700,000 900,000

Miller Corporation purchases Hampstead by issuing 100,000 shares of its $10 par value common stock.

#7. If Miller’s stock is worth $20 per share, at what value will the inventory, land and buildings be consolidated, respectively?

a. $110,000, $600,000, $900,000
b. $110,000, $700,000, $700,000
c. $150,000, $600,000, $900,000
d. $150,000, $700,000, $900,000

#8. If Miller’s stock is worth $15 per share, at what value will the inventory, land and building be consolidated, respectively?

a. $110,000, $695,000, $695,000
b. $150,000, $525,000, $825,000
c. $150,000, $540,000 $810,000
d. 6363, $545455, $818,182

Questions 9 through 12 refer to the following:
A Company owns 100 percent of Z Company’s outstanding common stock. A purchases land from an outside party for $20,000 (T1). A Company subsequently sells the land to Z for $30,000 (T2). Z later sells the land to another outside party for $40,000 (T3).

9. If only T1 is completed during the current period, what is the gain reported by the consolidated entity for the current period?
a. $0
b. $10,000
c. $20,000
d. $40,000
e. None of the above

10. If all three transactions are completed during the current period, what is the gain reported by the consolidated entity for the period?
a. $-0-
b. $10,000
c. $20,000
d. $40,000
e. None of the above

11. Assume that T1 and T2 were completed in a prior period. If T3 is completed in the current period, what is the amount of gain reported by Z Company in its financial statements?
a. $-0-
b. $10,000
c. $20,000
d. $40,000
e. None of the above

12. Assume that only T1 and T2 are completed during the current period. What is the amount of gain reported by A Company in its financial statements?
a. $-0-
b. $10,000
c. $20,000
d. $40,000
e. None of the above

13. A Company sells inventory to C Corporation. Several months after the sale, C Corporation gains control of A Company in a purchase transaction. C still holds the inventory purchased from A. After examination of the transaction, it is determined that it was the result of arms’-length bargaining. For purposes of preparing consolidated statements, the transaction should be:
a. Eliminated from the consolidated entity’s balances
b. Eliminated from A’s reported balances but not from C’s
c. Eliminated from C’s reported balances but not from A’s
d. Viewed as an arms’-length transaction and not eliminated
e. None of the above

14. Which of the following is an adjustment to consolidated net income in computing diluted consolidated earnings per share (EPS)?
a. Shares of parent to be issued if dilutive securities are converted and options exercised
b. Shares held by parent times subsidiary diluted EPS
c. Weighted average of parent company shares outstanding
d. Percent ownership held by noncontrolling interest times income available to common shareholders of subsidiary
e. None of the above

15. Which of the following is NOT an adjustment to consolidated net income in arriving at net cash provided by operating activities under the indirect method?
a. Dividend payments to noncontrolling shareholders
b. Depreciation expense resulting from the write-off of a purchase differential
c. Income assigned to noncontrolling interest
d. Gain on sale of land to a nonaffiliated
e. None of the above

16. The official pronouncement which governs accounting for foreign currency-denominated transactions that require payment or receipt of foreign currency is which of the following?
a. FASB Statement No. 52
b. FASB Statement No. 133
c. FASB Statement No. 138
d. FASB Statement No. 149
e. None of the above

17. Which of the following is a reason that the retained earnings of each subsidiary is completely eliminated when the subsidiary is consolidated, assuming the parent uses the equity method on its books?
a. The parent’s share of the subsidiary’s income since acquisition is already included in the parent’s equity-method retained earnings
b. The noncontrolling interest’s share of the subsidiary’s retained earnings is not included in consolidated retained earnings
c. Retained earnings cannot be purchased, so subsidiary retained earnings at the date of a business combination cannot be included in the retained earnings of the combined company
d. All of the above
e. None of the above

18. DEF reports Retained Earnings of $130,000 as of the end of the year, and UVW reports $90,000. What is the amount of Retained Earnings to be reported on the consolidated balance sheet for DEF Company and Subsidiary as of the end of the year?
a. $128,500
b. $130,000
c. $220,000
d. $218,500
e. None of the Above

19. DEF reports Common Stock of $700,000 on its balance sheet as of the end of the year, and UVW reports Common Stock of $300,000. What is the amount of Common Stock to be reported on the consolidated balance sheet for DEF Company and Subsidiary as of the end of the year?
a. $1,000,000
b. $300,000
c. $700,000
d. $0
e. None of the Above

20. Whenever an unallocated credit differential exists as the result of a bargain purchase, the FASB requires that the resulting negative goodwill be treated as follows:
a. Recorded as an extraordinary gain in the period of combination
b. Allocated proportionately against the amounts that otherwise would be assigned to all of the acquired assets other than current assets, assets to be disposed of by sale, and deferred tax assets
c. Recorded as revenue in the period of combination
d. Recorded as a liability and amortized over future periods
e. None of the above