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.$