E$5-2/$E$5-3/$P$5-19$

E$5-2$

Multiple$-$Choice Questions on Consolidation $[$AICPA Adapted$]$ Select the correct answer for each of the following questions.

$1.$ A $70$ percent owned subsidiary company declares and pays a cash dividend. What effect does the dividend have on the retained earnings and noncontrolling interest balances in the parent company$$s consolidated balance sheet?

a$.$No effect on either retained earnings or noncontrolling interest.

b$.$ No effect on retained earnings and a decrease in noncontrolling interest.

c$.$ Decreases in both retained earnings and noncontrolling interest.

d$.$ A decrease in retained earnings and no effect on noncontrolling interest.

$2.$ 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 worksheets is multiplied by the non controlling interest percentage on the balance sheet date.

$3.$ On January $1,20$X$5,$ Post Company acquired an $80$ percent investment in Stake Com pany. The acquisition cost was equal to Post$$s equity in Stake$$s net assets at that date. On January $1,20$X$5,$ Post and Stake had retained earnings of $$500,000$ and $$100,000,$ respectively. During $20$X$5,$ 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 $31,20$X$5,$ what should the consolidated retained earnings be$?$

A$.$ $$650,000.$

b$.666,000$

c$.$ $$766,000.$

d$.$ $$770,000.$

Note: Items $4$ and $5$ are based on the following information: On January $1,20$X$8,$ Ritt Corporation acquired $80$ percent of Shaw Corporation$$s $$10$ par com mon stock for $$956,000.$ On this date, the fair value of the noncontrolling interest was $$239,000,$ and the carrying amount of Shaw$$s net assets was $$1,000,000.$ The fair values of Shaw$$s identifi able assets and liabilities were the same as their carrying amounts except for plant assets $($net$)$ with a remaining life of $20$ years, which were $$100,000$ in excess of the carrying amount. For the year ended December $31,20$X$8,$ Shaw had net income of $$190,000$ and paid cash dividends totaling $$125,000$

$4.$ In the January $1,20$X$8,$ consolidated balance sheet, the amount of goodwill reported should be

a$.$ $$0.$

b$.$ $$76,000.$

c$.95,000$

d$.$ $$156,000.$

$5.$ In the December $31,20$X$8,$ consolidated balance sheet, the amount of noncontrolling interest reported should be

a$.$ $$200,000.$

b$.$ $$239,000.$

c$.251,000$

d$.$ $$252,000.$

E$5-3$

Consolidation Entries with Differential

On June $10,20$X$8,$ Game Corporation acquired $60$ percent of Amber Company$$s common stock.

The fair value of the noncontrolling interest was $$32,800$ on that date. Summarized balance sheet

data for the two companies immediately after the stock purchase are as follows:

Game Corp. Amber Company

Item Book Value Book Value Fair Value

Cash $ $25,800$ $ $5,000$ $ $5,000$

Accounts Receivable $30,00010,00010,000$

Inventory $80,00020,00025,000$

Buildings & Equipment $($net$)120,00050,00070,000$

Investment in Amber Stock $49,200$

Total $$305,000$ $$85,000$ $$110,000$

Accounts Payable $ $25,000$ $ $3,000$ $ $3,000$

Bonds Payable $150,00025,00025,000$

Common Stock $55,00020,000$

Retained Earnings $75,00037,000$

Total $$305,000$ $$85,000$ $ $28,000$

Required

a$.$ Give the consolidation entries required to prepare a consolidated balance sheet immediately

after the purchase of Amber Company shares.

b$.$ Explain how consolidation e

p$5-19$

P$5-19$ Reported Balances Roof Corporation acquired $80$ percent of the stock of Gable Company by issuing shares of its com mon stock with a fair value of $$192,000.$ At that time, the fair value of the noncontrolling interest was estimated to be $$48,000,$ and the fair values of Gable$$s identifiable assets and liabilities were $$310,000$ and $$95,000,$ respectively. Gable$$s assets and liabilities had book values of $$220,000$ and $$95,000,$ respectively. Required Compute the following amounts to be reported immediately after the combination

a$.$ Investment in Gable reported by Roof. b$.$ Goodwill for the combined entity. c$.$ Noncontrolling interest reported in the consolidated balance sheet.