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- 1. Open EndedOn January 3, 2018, Matteson Corporation acquired 40 percent of the outstanding common stock of O'Toole Company for $1,443,000. This acquisition gave Matteson the ability to exercise significant influence over the investee. The book value of the acquired shares was $852,000. Any excess cost over the underlying book value was assigned to a copyright that was undervalued on its balance sheet. This copyright has a remaining useful life of 10 years. For the year ended December 31, 2018, O'Toole reported net income of $262,000 and declared cash dividends of $50,000. At December 31, 2018, what should Matteson report as its investment in O'Toole under the equity method?
- 2. Open EndedOn January 1, 2018, Fisher Corporation paid $2,327,000 for 34 percent of the outstanding voting stock of Steel, Inc., and appropriately applies the equity method for its investment. Any excess of cost over Steel's book value was attributed to goodwill. During 2018, Steel reports $652,000 in net income and a $1,008,000 other comprehensive income loss. Steel also declares and pays $25,000 in dividends. What amount should Fisher report as its Investment in Steel on its December 31, 2018, balance sheet? What amount should Fisher report as Equity in Earnings of Steel on its 2018 income statement?
- 3. Open EndedOn January 1, 2017, Ridge Road Company acquired 20 percent of the voting shares of Sauk Trail, Inc., for $3,100,000 in cash. Both companies provide commercial Internet support services but serve markets in different industries. Ridge Road made the investment to gain access to Sauk Trail's board of directors and thus facilitate future cooperative agreements between the two firms. Ridge Road quickly obtained several seats on Sauk Trail's board which gave it the ability to significantly influence Sauk Trail's operating and investing activities. The January 1, 2017, carrying amounts and corresponding fair values for Sauk Trail's assets and liabilities follow: Cash and receivables $130,000 $130,000 Computing equipment 5,180,000 6,020,000 Patented technology 120,000 4,040,000 Trademark 170,000 2,040,000 Liabilities (205,000) (205,000) Also as of January 1, 2017, Sauk Trail's computing equipment had a seven-year remaining estimated useful life. The patented technology was estimated to have a four-year remaining useful life. The trademark's useful life was considered indefinite. Ridge Road attributed to goodwill any unidentified excess cost. During the next two years, Sauk Trail reported the following net income and dividends: 2017 $ 1,840,000 $ 170,000 2018 2,025,000 180,000 How much of Ridge Road's $3,100,000 payment for Sauk Trail is attributable to goodwill? What amount should Ridge Road report for its equity in Sauk Trail's earnings on its income statements for 2017 and 2018? What amount should Ridge Road report for its investment in Sauk Trail on its balance sheets at the end of 2017 and 2018?
- 4. Open EndedAllerton Company acquires all of Deluxe Company's assets and liabilities for cash on January 1, 2018, and subsequently formally dissolves Deluxe. At the acquisition date, the following book and fair values were available for the Deluxe Company accounts: Current assets $ 55,250 $55,250 Building 90,750 42,150 Land 14,250 30,350 Trademark 0 30,800 Goodwill 35,000 ? Liabilities (60,250) (60,250) Common stock (100,000) Retained earnings (35,000) Prepare Allerton's entry to record its acquisition of Deluxe in its accounting records assuming the following cash exchange amounts: $143,000 and $70,500
- 5. Open EndedOn January 1, 2018, Jay Company acquired all the outstanding ownership shares of Zee Company. In assessing Zee's acquisition-date fair values, Jay concluded that the carrying value of Zee's long-term debt (8-year remaining life) was less than its fair value by $24,800. At December 31, 2018, Zee Company's accounts show interest expense of $14,280 and long-term debt of $420,000. What amounts of interest expense and long-term debt should appear on the December 31, 2018, consolidated financial statements of Jay and its subsidiary Zee?
- 6. Open EndedPaar Corporation bought 100 percent of Kimmel, Inc., on January 1, 2015. On that date, Paar's equipment (10-year life) has a book value of $532,500 but a fair value of $644,500. Kimmel has equipment (10-year life) with a book value of $273,000 but a fair value of $392,000. Paar uses the equity method to record its investment in Kimmel. On December 31, 2017, Paar has equipment with a book value of $372,750 but a fair value of $517,950. Kimmel has equipment with a book value of $191,100 but a fair value of $364,200. What is the consolidated balance for the Equipment account as of December 31, 2017?
- 7. Open EndedDosmann, Inc., bought all outstanding shares of Lizzi Corporation on January 1, 2016, for $790,000 in cash. This portion of the consideration transferred results in a fair-value allocation of $48,900 to equipment and goodwill of $106,800. At the acquisition date, Dosmann also agrees to pay Lizzi's previous owners an additional $205,000 on January 1, 2018, if Lizzi earns a 10 percent return on the fair value of its assets in 2016 and 2017. Lizzi's profits exceed this threshold in both years. Which of the following is true?
- 8. Open EndedOn January 1, 2016, Phoenix Co. acquired 100 percent of the outstanding voting shares of Sedona Inc. for $776,000 cash. At January 1, 2016, Sedona's net assets had a total carrying amount of $543,200. Equipment (eight-year remaining life) was undervalued on Sedona's financial records by $126,000. Any remaining excess fair over book value was attributed to a customer list developed by Sedona (four-year remaining life), but not recorded on its books. Phoenix applies the equity method to account for its investment in Sedona. Each year since the acquisition, Sedona has declared a $46,000 dividend. Sedona recorded net income of $111,000 in 2016 and $125,600 in 2017. Selected account balances from the two companies' individual records were as follows: Phoenix Sedona 2018 Revenues $ 554,000 $ 349,400 2018 Expenses 362,000 251,000 2018 Income from Sedona 84,300 - Retained earnings 12/31/18 326,500 231,300
- 9. Open EndedOn January 1, 2016, Phoenix Co. acquired 100 percent of the outstanding voting shares of Sedona Inc. for $776,000 cash. At January 1, 2016, Sedona's net assets had a total carrying amount of $543,200. Equipment (eight-year remaining life) was undervalued on Sedona's financial records by $126,000. Any remaining excess fair over book value was attributed to a customer list developed by Sedona (four-year remaining life), but not recorded on its books. Phoenix applies the equity method to account for its investment in Sedona. Each year since the acquisition, Sedona has declared a $46,000 dividend. Sedona recorded net income of $111,000 in 2016 and $125,600 in 2017. Selected account balances from the two companies' individual records were as follows 2018 Revenues $ 554,000 $ 349,400 2018 Expenses 362,000 251,000 2018 Income from Sedona 84,300 - Retained earnings 12/31/18 326,500 231,300 What is Phoenix's consolidated retained earnings balance at December 31, 2018? On its December 31, 2018, consolidated balance sheet, what amount should Phoenix report for Sedona's customer list?
- 10. Open EndedHaynes, Inc., obtained 100 percent of Turner Company's common stock on January 1, 2017, by issuing 8,500 shares of $10 par value common stock. Haynes's shares had a $15 per share fair value. On that date, Turner reported a net book value of $88,750. However, its equipment (with a five-year remaining life) was undervalued by $7,250 in the company's accounting records. Also, Turner had developed a customer list with an assessed value of $31,500, although no value had been recorded on Turner's books. The customer list had an estimated remaining useful life of 10 years. The following balances come from the individual accounting records of these two companies as of December 31, 2017 Revenues $ (692,000 ) $ (275,000 ) Expenses 449,000 130,000 Investment income Not given 0 Dividends declared 120,000 70,000 The following balances come from the individual accounting records of these two companies as of December 31, 2018: Haynes Turner Revenues $ (886,000 ) $ (348,750 ) Expenses 471,200 163,100 Investment income Not given 0 Dividends declared 140,000 50,000 Equipment 532,000 373,000 a. What balance does Haynes's Investment in Turner account show on December 31, 2018, when the equity method is applied? b. What is the consolidated net income for the year ending December 31, 2018? c-1. What is the consolidated equipment balance as of December 31, 2018? c-2. Would this answer be affected by the investment method applied by the parent? d. Prepare entry *C for the beginning of the Retained Earnings account on a December 31, 2018 by using initial value, partial equity and equity method.
- 11. Open EndedOn June 1, Cline Co. paid $969,000 cash for all of the issued and outstanding common stock of Renn Corp. The carrying amounts for Renn's assets and liabilities on June 1 follow: Cash $ 247,000 Accounts receivable 254,000 Capitalized software costs 330,000 Goodwill 116,000 Liabilities (215,000 ) Net assets $ 732,000 On June 1, Renn's accounts receivable had a fair value of $190,000. Additionally, Renn's in-process research and development was estimated to have a fair value of $258,000. All other items were stated at their fair values. On Cline's June 1 consolidated balance sheet, how much is reported for goodwill?
- 12. Open EndedOn May 1, Donovan Company reported the following account balances: Current assets $ 131,000 Buildings & equipment (net) 249,500 Total assets $ 380,500 Liabilities $ 122,500 Common stock 150,000 Retained earnings 108,000 Total liabilities and equities $ 380,500 On May 1, Beasley paid $422,000 in stock (fair value) for all of the assets and liabilities of Donovan, which will cease to exist as a separate entity. In connection with the merger, Beasley incurred $21,300 in accounts payable for legal and accounting fees. Beasley also agreed to pay $83,000 to the former owners of Donovan contingent on meeting certain revenue goals during the following year. Beasley estimated the present value of its probability adjusted expected payment for the contingency at $21,500. In determining its offer, Beasley noted the following: Donovan holds a building with a fair value $33,000 more than its book value. Donovan has developed unpatented technology appraised at $29,600, although is it not recorded in its financial records. Donovan has a research and development activity in process with an appraised fair value of $45,500. The project has not yet reached technological feasibility. Book values for Donovan's current assets and liabilities approximate fair values. What should Beasley record as total liabilities incurred or assumed in connection with the Donovan merger? How much should Beasley record as total assets acquired in the Donovan merger?
- 13. Open EndedPrior to being united in a business combination, Atkins, Inc., and Waterson Corporation had the following stockholders' equity figures: Atkins Waterson Common stock ($1 par value) $ 225,000 $ 36,000 Additional paid-in capital 112,500 15,500 Retained earnings 315,000 148,200 Atkins issues 60,750 new shares of its common stock valued at $3 per share for all of the outstanding stock of Waterson. Immediately afterward, what are consolidated Additional Paid-In Capital and Retained Earnings, respectively?
- 14. Open EndedThe separate condensed balance sheets of Patrick Corporation and its wholly owned subsidiary, Sean Corporation, are as follows: BALANCE SHEETS December 31, 2017 Patrick Sean Cash $ 76,000 $ 76,000 Accounts receivable (net) 136,000 26,000 Inventories 94,000 46,000 Plant and equipment (net) 640,000 270,000 Investment in Sean 454,000 - Total assets $ 1,400,000 $ 418,000 Accounts payable 168,000 82,000 Long-term debt 102,000 20,000 Common stock ($10 par) 306,000 40,000 Additional paid-in capital 14,000 Retained earnings 824,000 262,000 Total liabilities and shareholders' equity $ 1,400,000 $ 418,000 Additional Information: On December 31, 2017, Patrick acquired 100 percent of Sean's voting stock in exchange for $454,000. At the acquisition date, the fair values of Sean's assets and liabilities equaled their carrying amounts, respectively, except that the fair value of certain items in Sean's inventory were $20,000 more than their carrying amounts. In the December 31, 2017, consolidated balance sheet of Patrick and its subsidiary, what amount of total assets should be reported? In the December 31, 2017, consolidated balance sheet of Patrick and its subsidiary, what amount of total stockholders' equity should be reported?
- 15. Open EndedThe following book and fair values were available for Westmont Company as of March 1. Book Value Fair Value Inventory $ 296,000 $ 242,750 Land 766,500 1,034,250 Buildings 2,150,000 2,453,000 Customer relationships 0 846,750 Accounts payable (106,500 ) (106,500 ) Common stock (2,000,000 ) Additional paid-in capital (500,000 ) Retained earnings 1/1 (428,000 ) Revenues (467,000 ) Expenses 289,000 Arturo Company pays $3,400,000 cash and issues 25,400 shares of its $2 par value common stock (fair value of $50 per share) for all of Westmont's common stock in a merger, after which Westmont will cease to exist as a separate entity. Stock issue costs amount to $25,300 and Arturo pays $51,100 for legal fees to complete the transaction.
- 16. Open EndedFollowing are preacquisition financial balances for Padre Company and Sol Company as of December 31. Also included are fair values for Sol Company accounts. On December 31, Padre acquires Sol's outstanding stock by paying $253,500 in cash and issuing 14,700 shares of its own common stock with a fair value of $40 per share. Padre paid legal and accounting fees of $28,700 as well as $14,700 in stock issuance costs. Determine the value that would be shown in Padre's consolidated financial statements for each of the accounts listed.
- 17. Open EndedOn June 30, 2017, Wisconsin, Inc., issued $194,700 in debt and 20,800 new shares of its $10 par value stock to Badger Company owners in exchange for all of the outstanding shares of that company. Wisconsin shares had a fair value of $40 per share. Prior to the combination, the financial statements for Wisconsin and Badger for the six-month period ending June 30, 2017, were as follows: Wisconsin also paid $38,200 to a broker for arranging the transaction. In addition, Wisconsin paid $46,100 in stock issuance costs. Badger's equipment was actually worth $785,500, but its patented technology was valued at only $364,000.
- 18. Open EndedAllerton Company acquires all of Deluxe Company's assets and liabilities for cash on January 1, 2018, and subsequently formally dissolves Deluxe. At the acquisition date, the following book and fair values were available for the Deluxe Company accounts: Book Values Fair Values Current assets $ 50,000 $ 50,000 Building 94,250 53,050 Land 21,750 41,550 Trademark 0 35,800 Goodwill 22,000 ? Liabilities (53,000 ) (53,000 ) Common stock (100,000 ) Retained earnings (35,000 )
- 19. Open EndedOn June 30, 2018, Streeter Company reported the following account balances: Receivables $ 74,250 Current liabilities $ (13,400 ) Inventory 73,000 Long-term liabilities (55,250 ) Buildings (net) 85,300 Common stock (90,000 ) Equipment (net) 26,100 Retained earnings (100,000 ) Total assets $ 258,650 Total liabilities and equities $ (258,650 ) On June 30, 2018, Princeton Company paid $309,800 cash for all assets and liabilities of Streeter, which will cease to exist as a separate entity. In connection with the acquisition, Princeton paid $14,700 in legal fees. Princeton also agreed to pay $58,400 to the former owners of Streeter contingent on meeting certain revenue goals during 2019. Princeton estimated the present value of its probability adjusted expected payment for the contingency at $21,100. In determining its offer, Princeton noted the following pertaining to Streeter: It holds a building with a fair value $41,500 more than its book value. It has developed a customer list appraised at $30,100, although it is not recorded in its financial records. It has research and development activity in process with an appraised fair value of $34,300. However, the project has not yet reached technological feasibility and the assets used in the activity have no alternative future use. Book values for the receivables, inventory, equipment, and liabilities approximate fair values.
- 20. Open EndedOn January 1, NewTune Company exchanges 17,632 shares of its common stock for all of the outstanding shares of On-the-Go, Inc. Each of NewTune's shares has a $4 par value and a $50 fair value. The fair value of the stock exchanged in the acquisition was considered equal to On-the-Go's fair value. NewTune also paid $29,550 in stock registration and issuance costs in connection with the merger. Several of On-the-Go's accounts' fair values differ from their book values on this date: Receivables $ 52,000 $ 49,600 Trademarks 114,000 309,750 Record music catalog 66,750 201,750 In-process research and development 0 226,500 Notes payable (57,750 ) (52,600 ) Cash $ 83,750 $ 35,250 Receivables 115,250 52,000 Trademarks 493,000 114,000 Record music catalog 879,000 66,750 Equipment (net) 356,000 126,000 Totals $ 1,927,000 $ 394,000 Accounts payable $ (136,000 ) $ (45,750 ) Notes payable (433,000 ) (57,750 ) Common stock (400,000 ) (50,000 ) Additional paid-in capital (30,000 ) (30,000 ) Retained earnings (928,000 ) (210,500 ) Totals $ (1,927,000 ) $ (114,000 )
- 21. Open EndedOn January 1, 2017, Ridge Road Company acquired 25 percent of the voting shares of Sauk Trail, Inc., for $3,500,000 in cash. Both companies provide commercial Internet support services but serve markets in different industries. Ridge Road made the investment to gain access to Sauk Trail's board of directors and thus facilitate future cooperative agreements between the two firms. Ridge Road quickly obtained several seats on Sauk Trail's board which gave it the ability to significantly influence Sauk Trail's operating and investing activities. The January 1, 2017, carrying amounts and corresponding fair values for Sauk Trail's assets and liabilities follow: Cash and receivables $ 150,000 $ 150,000 Computing equipment 5,360,000 6,340,000 Patented technology 140,000 4,080,000 Trademark 190,000 2,080,000 Liabilities (225,000 ) (225,000 ) Also as of January 1, 2017, Sauk Trail's computing equipment had a seven-year remaining estimated useful life. The patented technology was estimated to have a four-year remaining useful life. The trademark's useful life was considered indefinite. Ridge Road attributed to goodwill any unidentified excess cost. During the next two years, Sauk Trail reported the following net income and dividends: Net Income Dividends Declared 2017 $ 1,880,000 $ 190,000 2018 2,065,000 200,000
- 22. Open EndedMilani, Inc., acquired 10 percent of Seida Corporation on January 1, 2017, for $187,000 and appropriately accounted for the investment using the fair-value method. On January 1, 2018, Milani purchased an additional 30 percent of Seida for $653,000 which resulted in significant influence over Seida. On that date, the fair value of Seida's common stock was $2,100,000 in total. Seida's January 1, 2018 book value equaled $1,950,000, although land was undervalued by $135,000. Any additional excess fair value over Seida's book value was attributable to a trademark with an 8-year remaining life. During 2018, Seida reported income of $267,000 and declared and paid dividends of $120,000. Prepare the 2018 journal entries for Milani related to its investment in Seida.
- 23. Open EndedBuyCo, Inc. holds 21 percent of the outstanding shares of Marqueen company and appropriately applies the equity method of accounting. Excess cost amortization (related to a patent) associated with this investment amounts to $11,300 per year. For 2017, Marqueen reported earnings of $116,000 and declares cash dividends of $25,000. During that year, Marqueen acquired inventory for $42,000, which it then sold to BuyCo for $70,000. At the end of 2017, BuyCo continued to hold merchandise with a transfer price of $37,000. What Equity in Investee Income should BuyCo report for 2017? How will the intra-entity transfer affect BuyCo's reporting in 2018? If BuyCo had sold the inventory to Marqueen, how would the answers to (a) and (b) have changed?
- 24. Open EndedTiberend, Inc., sold $146,000 in inventory to Schilling Company during 2017 for $200,000. Schilling resold $93,000 of this merchandise in 2017 with the remainder to be disposed of during 2018. Assuming that Tiberend owns 30 percent of Schilling and applies the equity method, what journal entry is recorded at the end of 2017 to defer the intra-entity gross profit?
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