Question: Companies often acquire ownership in other

> 1. Which of the following is true about the seller of a put option? a They have the right to buy the underlying b They have the right to sell the underlying c They have the obligation to buy the underlying d They have the obligation to sell the underlyin

> 1. What is a characteristic of a forward contract? a Traded on an exchange b Negotiated with a counterparty c Covers a stream of future payments d Must be settled daily 2. What is a characteristic of a swap? a Traded on an exchange b Only interest rates

> ATV had two foreign currency transactions during December 2016, as follows: December 12 Purchased electronic parts on account from Tok of Japan at an invoice price of 50,000,000 yen when the spot rate for yen was $0.00750.

> Meo imports merchandise from some Canadian companies and exports its own products to other Canadian companies. The unadjusted accounts denominated in Canadian dollars at December 31, 2016, are as follows: Account receivable from the sale of merchandise

> Pug Corporation acquired a 70 percent interest in Sat Corporation for $238,000 on January 2, 2015, when Sat’s equity consisted of $200,000 capital stock and $50,000 retained earnings. The excess is due to a patent amortized over a 10-ye

> 1. On September 1, 2016, Ban received an order for equipment from a foreign customer for 300,000 euros, when the U.S. dollar equivalent was $400,000. Ban shipped the equipment on October 15, 2016, and billed the customer for 300,000 euros when the U.S. d

> Dot, a U.S. company, sold inventory items on account to Roa of Great Britain for £200,000 on May 1, 2016, when the spot rate was 0.7000 pounds. The invoice was paid by Roa on May 30, 2016, when the spot rate was 0.7050 pounds. REQUIRED: Prepare Dot’s jo

> On November 16, 2016, Wik of the United States sold inventory items to Can of Canada for 90,000 Canadian dollars, to be paid on February 14, 2017. Exchange rates for Canadian dollars on selected dates are as follows: November 16, 2016...................

> On December 16, 2016, Ava Corporation, a U.S. firm, purchased merchandise from Wig Company for 40,000 euros to be paid on January 15, 2017. Relevant exchange rates for euros are as follows: December 16, 2016..................... $1.20 December 31, 2016.

> Assume that Pop Corporation acquires 60 percent of the voting common stock of Son Corporation for $6,000,000 and that a consolidated balance sheet is prepared immediately after the acquisition. Would total consolidated assets be equal to their fair value

> To what extent does push-down accounting facilitate the consolidation process?

> If income from a subsidiary is measured under the equity method and the statements are consolidated under entity theory, will consolidated net income equal parent net income?

> Under the entity theory, a total valuation of the subsidiary is imputed on the basis of the price paid by the parent company for its controlling interest. Do you see any practical or conceptual problems with this approach?

> Compare the parent-company and entity theories of consolidated financial statements.

> What is a joint venture and how are joint ventures organized?

> Pet Corporation owns 90 percent of Sod Corporation’s common stock and Sod owns 15 percent of Pet, both acquired at fair value equal to book value. Separate incomes and dividends of the affiliates for 2016 are as follows: 1. If the tre

> What is a joint venture and how are joint ventures organized?

> Cite the conditions under which consolidated net income under parent-company theory would equal income to controlling stockholders under entity theory.

> What disclosures are required for a variable interest entity? Are the disclosures only required for VIEs that will be consolidated?

> This chapter noted that an acquired firm may elect push-down accounting. If the transaction results in recognition of goodwill, should that goodwill also be reflected on the acquiree’s financial statements?

> At December 31, 2016, when the fair values of Sun Corporation’s net assets were equal to their book values of $2,400,000, Pam Corporation acquired an 80 percent interest in Sun for $2,240,000. One year later, at December 31, 2017, the c

> Pop Corporation paid $1,190,000 cash for 70 percent of the outstanding voting stock of Son Corporation on January 2, 2017, when Son Corporation’s stockholders’ equity consisted of $1,000,000 of $10 par common stock and

> Pam Corporation acquires an 80 percent interest in Sun Company on January 3, 2016, for $640,000. On this date Sun’s stockholders’ equity consists of $400,000 capital stock and $280,000 retained earnings. The fair value

> The adjusted trial balances of Pop Corporation and its 80 percent–owned subsidiary, Son Corporation, at December 31, 2017, are as follows (in thousands): Pop acquired its interest in Son for $1,280,000 on January 1, 2016, when Son&aci

> Pop Corporation owns a 40 percent interest in Son Company, a joint venture that is organized as an undivided interest. In its separate financial statements, Pop accounts for Son under the equity method, but for reporting purposes, the proportionate conso

> Use the information and assumptions from Problem P 11-9 for this problem. The accompanying financial statements are for Pam and Sun Corporations, one year after the acquisition. Note that Sun’s statements are presented first under 90 pe

> Pin, Inc., owns 80 percent of the capital stock of Son Company and 70 percent of the capital stock of Tin, Inc. Son owns 15 percent of the capital stock of Tin. Tin owns 25 percent of the capital stock of Pin. These ownership interrelationships are illus

> Pam Corporation paid $180,000 cash for a 90 percent interest in Sun Corporation on January 1, 2017, when Sun’s stockholders’ equity consisted of $100,000 capital stock and $20,000 retained earnings. Sun Corporation&aci

> Pop Corporation paid $3,000,000 for an 80 percent interest in Son Corporation on January 1, 2016, when the book values and fair values of Son’s assets and liabilities were as follows (in thousands): REQUIRED: 1. Prepare a journal entr

> Pam Corporation paid $960,000 cash for a 100 percent interest in Sun Corporation on January 1, 2017, when Sun’s stockholders’ equity consisted of $400,000 capital stock and $160,000 retained earnings. Sunâ€&

> The individual and consolidated balance sheets and income statements of P and S Companies for the current year are presented in the accompanying table. The entity theory is used. ADDITIONAL INFO R MATION: 1. P Company purchased its interest in S Company

> Balance sheets for Pop Corporation and its 80 percent–owned subsidiary, Son Company, at December 31, 2017, are summarized as follows (in thousands): ADDITIONAL INFO R MATION: 1. Pop Corporation paid $256,000 for its 80 percent interes

> 1. Pet Company pays $1,440,000 for an 80 percent interest in Sit Corporation on December 31, 2016, when Sit’s net assets at book value and fair value are $1,600,000. Under entity theory, the noncontrolling interest at acquisition is: a $288,000 b $320,00

> 1. A joint venture would not be organized as a(an): a Corporation b Can participate in the overall management of the venture c Partnership d Undivided interest 2. Corporate joint ventures should be accounted for by the equity method, provided that the j

> 1. The classification of noncontrolling interest share as an expense and noncontrolling interest as a liability is preferred under: a Parent-company theory b Entity theory c Traditional theory d None of the above 2. Consolidated financial statement amou

> Pop Corporation and Son Company participate in a business classified as a VIE. Under terms of their contractual arrangement, Pop and Son share equally in expected residual returns of the VIE. However, expected losses are allocated 70 percent to Son and 3

> Pam, Inc., holds an interest in Sun Corporation. Pam has determined that Sun qualifies as a VIE and that Pam’s contractual position makes Pam the primary beneficiary. Den Corporation also holds a significant financial interest in Sun. What are the financ

> Intercompany investment percentages and 2016 earnings for three affiliates are as follows: REQUIRED: Compute controlling share of consolidated net income and noncontrolling interest share for 2016. Percentage Interest in Sad Percentage Interest in

> On January 1, 2016, Pop Corporation purchased a 60 percent interest in Son Corporation at book value (equal to fair value). At that time, Son owned a 60 percent interest in Tip Corporation (acquired at book value equal to fair value) and a 15 percent int

> What are the three parts of the consolidation worksheet, and what sequence is used in completing the worksheet parts?

> What portion of the balances of subsidiary stockholders’ equity accounts is included in the consolidated balance sheet?

> How does a consolidation entry differ from an adjusting entry?

> What is the modified equity method? When might a company choose to use the modified equity method rather than the fully adjusted equity method?

> Explain the concept of a one-line consolidation.

> How does the fully adjusted equity method differ from the modified equity method?

> On January 2, 20X3, Kean Company purchased a 30 percent interest in Pod Company for $250,000. Pod reported net income of $100,000 for 20X3 and declared and paid a dividend of $10,000. Kean accounts for this investment using the equity method. In its Dece

> A corporation using the equity method of accounting for its investment in a 40 percent–owned investee, which earned $20,000 and paid $5,000 in dividends, made the following entries: What effect will these entries have on the investor&

> Investor Inc. owns 40 percent of Alimand Corporation. During the calendar year 20X5, Alimand had net earnings of $100,000 and paid dividends of $10,000. Investor mistakenly recorded these transactions using the cost method rather than the equity method o

> On January 1, 20X8, Mega Corporation acquired 10 percent of the outstanding voting stock of Penny Inc. On January 2, 20X9, Mega gained the ability to exercise significant influence over Penny’s financial and operating decisions by acqu

> The carrying amount of an investment in stock correctly accounted for under the equity method is equal to a. The original price paid to purchase the investment. b. The original price paid to purchase the investment plus cumulative net income plus cumulat

> A corporation exercises significant influence over an affiliate in which it holds a 40 percent common stock interest. If its affiliate completed a fiscal year profitably but paid no dividends, how would this affect the investor corporation? a. Result in

> How does the fair value method differ from the cost method and equity method in reporting income from non-subsidiary investments?

> An investor uses the equity method to account for an investment in common stock. Assume that (1) the investor owns more than 50 percent of the outstanding common stock of the investee, (2) the investee company reports net income and declares dividends du

> In 20X0, Neil Company held the following investments in common stock: • 25,000 shares of B&K Inc.’s 100,000 outstanding shares. Neil’s level of ownership gives it the ability to exercise significant influence over the financial and operating policies of

> Peel Company received a cash dividend from a common stock investment. Should Peel report an increase in the investment account if it uses the cost method or equity method of accounting? Cost Equity a. No…………………………No b. Yes……

> MCI WorldCom Inc. (later MCI), was known as a high-flying company, having had its roots in a small local company and rising to one of the world’s largest communications giants. The company’s spectacular growth was accomplished through a string of busines

> An investor uses the cost method to account for an investment in common stock. A portion of the dividends received this year was in excess of the investor’s share of the investee’s earnings subsequent to the date of investment. The amount of dividend rev

> An investor in common stock received dividends in excess of the investor’s share of investee’s earnings subsequent to the date of the investment. How will the investor’s investment account be affected by those dividends under each of the following method

> Slanted Building Supplies purchased 32 percent of the voting shares of Flat Flooring Company in March 20X3. On December 31, 20X3, the officers of Slanted Building Supplies indicated they needed advice on whether to use the equity method or cost method in

> How is the receipt of a dividend recorded under the equity method? Under the cost method?

> How is the amount reported as consolidated retained earnings determined?

> Give a definition of consolidated retained earnings.

> What effect does a liquidating dividend have on the balance in the investment account under the cost method and the equity method?

> How is consolidated net income computed in a consolidation worksheet?

> How are a subsidiary’s dividend declarations reported in the consolidated retained earnings statement?

> From the point of view of an investor in common stock, what is a liquidating dividend?

> Describe an investor’s treatment of an investee’s prior-period dividends and earnings when the investor acquires significant influence through a purchase of additional stock.

> When will the balance in the intercorporate investment account be the same under the cost method and the equity method?

> When is equity-method reporting considered inappropriate even though sufficient common shares are owned to allow the exercise of significant influence?

> How is the ability to significantly influence the operating and financial policies of a company normally demonstrated?

> Which of the following is the appropriate basis for valuing fixed assets acquired in a business combination carried out by exchanging cash for common stock? a. Historical cost. b. Book value. c. Cost plus any excess of purchase price over book value of

> What types of investments in common stock normally are accounted for using (a) the equity method and (b) the cost method?

> Why is the beginning retained earnings balance for each company entered in the three-part consolidation worksheet rather than just the ending balance?

> A type of acquisition that was not discussed in the chapter is the leveraged buyout. Many experts argue that a leveraged buyout (LBO) is not a type of business combination but rather just a restructuring of ownership. Yet some would see an LBO as having

> Amazing Chemical Corporation’s president had always wanted his own yacht and crew and concluded that Amazing Chemical should diversify its investments by purchasing an existing boatyard and repair facility on the lakeshore near his summer home. He could

> Prime Company has been expanding rapidly and is now an extremely diversified company for its size. It currently owns three companies with manufacturing facilities, two companies primarily in retail sales, a consumer finance company, and two natural gas p

> At a recent staff meeting, the vice president of marketing appeared confused. The controller had assured him that the parent company and each of the subsidiary companies had properly accounted for all transactions during the year. After several other que

> Forth Company owned 85,000 of Brown Company’s 100,000 shares of common stock until January 1, 20X2, at which time it sold 70,000 of the shares to a group of seven investors, each of whom purchased 10,000 shares. On December 3, 20X2, Forth received a divi

> Most Company purchased 90 percent of the voting common stock of Port Company on January 1, 20X4, and 15 percent of the voting common stock of Adams Company on July 1, 20X4. In preparing the financial statements for Most Company at December 31, 20X4, you

> When does a noncontrolling interest arise in a business combination?

> Which of the costs incurred in completing a business combination are capitalized under the acquisition method?

> Arthur Levitt’s speech, “The Numbers Game,” is available on the SEC’s website at www.sec.gov/ news/speech/speecharchive/1998/spch220.txt . Read the speech, and then answer the following questions. a. Briefly explain what motivations Levitt discusses for

> How is the amount of additional paid-in capital determined when recording a business combination?

> What is the maximum balance in retained earnings that can be reported by the combined entity immediately following a business combination?

> When a business combination occurs after the beginning of the year, the income earned by the acquired company between the beginning of the year and the date of combination is excluded from the net income reported by the combined entity for the year. Why?

> What impact does the level of ownership have on the amount of goodwill reported under the acquisition method?

> How is the amount reported as goodwill determined under the acquisition method?

> Describe each of the three legal forms that a business combination might take.

> Why did companies such as Enron find the use of special-purpose entities to be advantageous?

> How would the decision to dispose of a segment of operations using a split-off rather than a spin-off impact the financial statements of the company making the distribution?

> What types of circumstances would encourage management to establish a complex organizational structure?

> P Company reports its 10,000 shares of S Company at $40 per share. P Company then purchases an additional 60,000 shares of S Company for $65 each and gains control of S Company. What must be done with respect to the valuation of the shares previously own

> Not all business combinations are successful, and many entail substantial risk. Acquiring another company may involve a number of different types of risk. Obtain a copy of the 10-K report for Google Inc. for the year ended December 31, 2006, available at

> Within the measurement period following a business combination, the acquisition-date fair value of buildings acquired is determined to be less than initially recorded. How is the reduction in value recognized?

> When does a bargain purchase occur?

> When is goodwill considered impaired following a business combination?

> Which of the costs incurred in completing a business combination should be treated as a reduction of additional paid-in capital?

> What is a differential?

> Deal Corporation issued 4,000 shares of its $10 par value stock with a market value of $85,000 to acquire 85 percent ownership of Mead Company on August 31, 20X3. Mead’s fair value was determined to be $100,000 on that date. Deal had earlier purchased 15

> Thumb Company created New Company as a wholly owned subsidiary by transferring assets and accounts payable to New in exchange for its common stock. New recorded the following entry when it received the assets and accounts payable: Required a. What was