Reference no: EM1312803

Calculation of carrying amount of an Asset.

1.Water Company owns 80 percent of Fire Company's outstanding common stock. On December 31, 20x9, Fire sold equipment to Water at a price in excess of Fire's carrying amount, but less than its original cost. On a consolidated balance sheet at December 31, 20x9, the carrying amount of the equipment should be reported at:
a.Water's original cost
b.Fire's original cost
c.Water's original cost less Fire's recorded gain
d.Water's original cost less 80 percent of Fire's recorded gain

2.Port Inc. owns 100 percent of Salem Inc. On January 1, 20x2, Port sold delivery equipment to Salem at a gain. Port had owned the equipment for two years and used a five-year straight-line depreciation rate with no residual value. Salem is using a three-year straight-line depreciation rate with no residual value for the equipment. In the consolidated income statement, Salem's recorded depreciation expense on the equipment for 20x2 will be decreased by:
a.20 percent of the gain on the sale
b.33 1/3 percent of the gain on the sale
c.50 percent of the gain on the sale
d.100 percent of the gain on the sale

3.Middle Company holds 60 percent of Bottom Corporation's voting shares. Bottom has developed a new type of production equipment that appears to be quite marketable. It spent $40,000 in developing the equipment; however, Middle agreed to purchase the production rights for the machine for $100,000. If the intercompany sale occurred on January 1, 20x2, and the production rights are expected to have value for five years, at what amount should the rights be reported in the consolidated balance sheet for December 31, 20x2?
a.$0
b.$32,000
c.$80,000
d.$100,000

4.A 70 percent owned subsidiary company declares and pays a cash dividend. What effect does the dividend have on the retained earnings and minority interest balances in the parent company's consolidated balance sheet?
a.No effect on either retained earnings or minority interest
b.No effect on retained earnings and a decrease in minority interest
c.Decreases in both retained earnings and minority interest
d.A decrease in retained earnings and no effect on minority interest

5.On January 1, 20x1, Prim Inc. acquired all of Scrap Inc.'s outstanding common shares for cash equal to the stock's book value. The carrying amount of Scrap's assets and liabilities approximated their fair values, except that the carrying amount of its building was more than fair value. In preparing Prim's 20x2 consolidated income statement, which of the following adjustments would be made?
a.Decrease depreciation expense and recognize goodwill amortization
b.Increase depreciation expense and recognize goodwill amortization
c.Decrease depreciation expense and recognize no goodwill amortization
d.Increase depreciation expense and recognize no goodwill amortization

6.How is the portion of consolidated earnings to be assigned to the noncontrolling interest in consolidated financial statements determined?
a.The parent's net income is subtracted from the subsidiary's net income to determine the noncontrolling interest
b.The subsidiary's net income is extended to the noncontrolling interest
c.The amount of the subsidiary's earnings recognized for consolidation purposes is multiplied by the noncontrolling interest's percentage of ownership
d.The amount of consolidated earnings on the consolidated workpapers is multiplied by the noncontrolling interest percentage on the balance sheet date

7.On January 1, 20x5, Post Company purchased an 80 percent investment in Stake Company. The acquisition cost was equal to Post's equity in Stake's net assets at that date. On January 2, 20x5, Post and Stake had retained earnings of $500,000 and $100,000, respectively. During 20x5, Post had net income of $200,000, which included its equity in Stake's earnings, and declared dividends of $50,000; Stake had net income of $40,000 and declared dividends of $20,000; there were no other intercompany transactions between the parent and subsidiary. On December 31, 20x5, what should the consolidated retained earnings be?
a.$650,000
b.$666,000
c.$766,000
d.$770,000

Items 8 and 9 are based on the following information:
On January 1, 20x8, Ritt Corporation purchased 80 percent of Shaw Corporation's $10 par common stock for $975,000. On this date, the carrying amount of Shaw's net assets was $1,000,000. The fair value of Shaw's identifiable assets and liabilities were the same as their carrying amounts except for plant assets (net), which were $100,000 in excess of the carrying amount. For the year ended December 31, 20x8, Shaw had net income of $190,000 and paid cash dividends totaling $125,000.

8.In the January 1, 20x8, consolidated balance sheet, goodwill should be reported at:
a.$0
b.$75,000
c.$95,000
d.$175,000

9. In the December 31, 20x8 consolidated balance sheet, noncontrolling interest should be reported at:
a.$200,000
b.$213,000
c.$220,000
d.$233,000

10.Perez Inc. owns 80 percent of Senior Inc. During 20x2, Perez sold goods with a 40 percent gross profit to Senior. Senior sold all of these goods in 20x2. For 20x2 consolidated financial statements, how should the summation of Perez and Senior income statement items be adjusted?
a.Sales and cost of goods sold should be reduced by the intercompany sales
b.Sales and cost of goods sold should be reduced by 80 percent of the intercompany sales
c.Net income should be reduced by 80 percent of the gross profit on intercompany sales.
d.No adjustment is necessary