29 Jun Question 1. A new subsidiary
Question
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
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