Exam 3: Consolidations-Subsequent to the Date of Acquisition

On January 1, 2012, Cale Corp. paid $1,020,000 to acquire Kaltop Co. Kaltop maintained separate incorporation. Cale used the equity method to account for the investment. The following information is available for Kaltop's assets, liabilities, and stockholders' equity accounts on January 1, 2012: Book Fair Value Value Current assets \ 120,000 \ 120,000 Land 72,000 192,000 Building (twenty year life) 240,000 268,000 Equipment (ten year life) 540,000 516,000 Current liabilities 24,000 24,000 Long -term liabilities 120,000 120,000 Common stock 228,000 Additional paid -in capital 384,000 Retained earnings 216,000 Kaltop earned net income for 2012 of $126,000 and paid dividends of $48,000 during the year. If Cale Corp. had net income of $444,000 in 2012, exclusive of the investment, what is the amount of consolidated net income?

For an acquisition when the subsidiary retains its incorporation, which method of internal recordkeeping is the easiest for the parent to use?

Under the partial equity method of accounting for an investment,

Kaye Company acquired 100% of Fiore Company on January 1, 2013. Kaye paid $1,000 excess consideration over book value which is being amortized at $20 per year. Fiore reported net income of $400 in 2013 and paid dividends of $100. Assume the partial equity method is applied. How much will Kaye's income increase or decrease as a result of Fiore's operations?

Jaynes Inc. acquired all of Aaron Co.'s common stock on January 1, 2012, by issuing 11,000 shares of $1 par value common stock. Jaynes' shares had a $17 per share fair value. On that date, Aaron reported a net book value of $120,000. However, its equipment (with a five-year remaining life) was undervalued by $6,000 in the company's accounting records. Any excess of consideration transferred over fair value of assets and liabilities is assigned to an unrecorded patent to be amortized over ten years. The following figures came from the individual accounting records of these two companies as of December 31,2012: Jaynes Inc. Aaron Co. Revenues 720,000 \ 276,000 Expenses 528,000 144,000 Investment income Not given - Dividends paid 100,000 60,000 The following figures came from the individual accounting records of these two companies as of December 31,2013: Jaynes Inc. Aaron Co. Revenues 840,000 336,000 Expenses 552,000 180,000 Investment income Not given - Dividends paid 110,000 50,000 Equipment 600,000 360,000 Retained earnings, 12/31/13 balance 960,000 216,000 What was consolidated net income for the year ended December 31, 2013?

From which methods can a parent choose for its internal recordkeeping related to the operations of a subsidiary?

Which one of the following accounts would not appear in the consolidated financial statements at the end of the first fiscal period of the combination?

Yules Co. acquired Noel Co. in an acquisition transaction. Yules decided to use the partial equity method to account for the investment. The current balance in the investment account is $416,000. Describe in words how this balance was derived.

One company acquires another company in a combination accounted for as an acquisition. The acquiring company decides to apply the equity method in accounting for the combination. What is one reason the acquiring company might have made this decision?

What accounting method requires a subsidiary to record acquisition fair value allocations and the amortization of allocations in its internal accounting records?

Fesler Inc. acquired all of the outstanding common stock of Pickett Company on January 1, 2012. Annual amortization of $22,000 resulted from this transaction. On the date of the acquisition, Fesler reported retained earnings of $520,000 while Pickett reported a $240,000 balance for retained earnings. Fesler reported net income of $100,000 in 2012 and $68,000 in 2013, and paid dividends of $25,000 in dividends each year. Pickett reported net income of $24,000 in 2012 and $36,000 in 2013, and paid dividends of $10,000 in dividends each year. Assume that Fesler's reported net income includes Equity in Subsidiary Income. If the parent's net income reflected use of the equity method, what were the consolidated retained earnings on December 31, 2013?

Racer Corp. acquired all of the common stock of Tangiers Co. in 2011. Tangiers maintained its incorporation. Which of Racer's account balances would vary between the equity method and the initial value method?

All of the following are acceptable methods to account for a majority-owned investment in subsidiary except

Matthews Co. acquired all of the common stock of Jackson Co. on January 1, 2012. As of that date, Jackson had the following trial balance: During 2012, Jackson reported net income of $96,000 while paying dividends of $12,000. During 2013, Jackson reported net income of $132,000 while paying dividends of $36,000. Assume that Matthews Co. acquired the common stock of Jackson Co. for $588,000 in cash. As of January 1, 2012, Jackson's land had a fair value of $102,000, its buildings were valued at $188,000, and its equipment was appraised at $216,000. Any excess of consideration transferred over fair value of assets and liabilities acquired is due to an unamortized patent to be amortized over 10 years. Matthews decided to use the equity method for this investment. Required: (A.) Prepare consolidation worksheet entries for December 31, 2012. (B.) Prepare consolidation worksheet entries for December 31, 2013.

Which of the following is false regarding contingent consideration in business combinations?

For an acquisition when the subsidiary maintains its incorporation, under the partial equity method, what adjustments are made to the balance of the investment account?

Perry Company acquires 100% of the stock of Hurley Corporation on January 1, 2012, for $3,800 cash. As of that date Hurley has the following trial balance; Debit Credit Cash \ 500 Accounts receivable 600 Inventory 800 Buildings (net) (5 year life) 1,500 Equipment (net) (2 year life) 1,000 Land 900 Accounts payable \ 400 Long -term liabilities (due 12/31/15) 1,800 Common stock 1,000 Additional paid -in capital 600 Retained earnings 1,500 Total \5 ,300 \5 ,300 $\text { Net income and dividends reported by Hurley for } 2012 \text { and } 2013 \text { follow }$ Net income \ 120 Dividends 30 40 $\text { The fair value of Hurley's net assets that differ from their book values }$$\text { are listed below: }$ Fair Value Inventory \ 900 Buildings 1,200 Equipment 1,250 Land 1,300 Long -term liabilities 1,700 Any excess of consideration transferred over fair value of net assets acquired is considered goodwill with an indefinite life. FIFO inventory valuation method is used. Compute the amount of Hurley's equipment that would be reported in a December 31, 2012, consolidated balance sheet.

Under the initial value method, when accounting for an investment in a subsidiary,

Kaye Company acquired 100% of Fiore Company on January 1, 2013. Kaye paid $1,000 excess consideration over book value which is being amortized at $20 per year. Fiore reported net income of $400 in 2013 and paid dividends of $100. Assume the initial value method is applied. How much will Kaye's income increase or decrease as a result of Fiore's operations?

Harrison, Inc. acquires 100% of the voting stock of Rhine Company on January 1, 2012 for $400,000 cash. A contingent payment of $16,500 will be paid on April 15, 2013 if Rhine generates cash flows from operations of $27,000 or more in the next year. Harrison estimates that there is a 20% probability that Rhine will generate at least $27,000 next year, and uses an interest rate of 5% to incorporate the time value of money. The fair value of $16,500 at 5%, using a probability weighted approach, is $3,142. What will Harrison record as its Investment in Rhine on January 1, 2012?