Any question in bold print has been either

replaced or edited in some manner.

These include:
Multiple Choice Questions 1 through 20.

Exercise Questions 1, 2, 4, 6 7.

Previous exercise # 5 was removed, since it was based on

information that was replaced. Exercises 6-10 were renumbered.
Chapter 3 Test Bank

AN INTRODUCTION TO CONSOLIDATED FINANCIAL STATEMENTS

Multiple Choice Questions

LO1
1. What method must be used if FASB 94 prohibits full
consolidation of a 70% owned subsidiary?

a. The cost method.

b. The Liquidation value.
c. Market value.
d. Equity method.
LO1
2. From the standpoint of accounting theory, which of the
following statements is the best justification for the
preparation of consolidated financial statements?

a. In substance the companies are separate, but in form the

companies are one entity.
b. In substance the companies are one entity, but in form they
are separate.
c. In substance and form the companies are one entity.
d. In substance and form the companies are separate entities.
LO2
3. Penguin Corporation owns 90% of the outstanding voting stock of
Crevice Company and Burrow Corporation owns the remaining 10%
of Crevice’s voting stock. On the consolidated financial
statements of Penguin Corporation and Subsidiary, Burrow is

a. an affiliate.
b. a minority interest.
c. an equity investee.
d. a related party
1
LO2
4. A major motivation for FASB’s creation of Statement No. 94 was

a. temporary control was not being disclosed properly.

b. the elimination off-balance sheet financing
c. situations occurred where subsidiary control did not lie
with the parent company.
d. the risk of subsidiary legal reorganization or bankruptcy
was not disclosed.

LO2
5. Muttonbird Inc. has 90% ownership of Beach Company, but should
exclude Beach under FASB 94 if

a. Beach is in a regulated industry.

b. Muttonbird uses the equity method for Beach.
c. Muttonbird expects to sell Beach within a year.
d. Beach is in a foreign country and records its books in a
foreign currency.

LO2
6. Subsequent to an acquisition, the parent company and
consolidated financial statement amounts would not be the same
for

a. investments in unconsolidated subsidiaries.

b. investments in consolidated subsidiaries.
c. capital stock.
d. ending retained earnings.

LO3
7. On June 1, 2005, Gull Company acquired 100% of the stock of
Scrap Inc. On this date, Gull had Retained Earnings of $200,000
and Scrap had Retained Earnings of $100,000. On December 31,
2005, Gull had Retained Earnings of $240,000 and Scrap had
Retained Earnings of $120,000. The amount of Retained Earnings
that appeared in the December 31, 2005 consolidated balance
sheet was:

a. $240,000.
b. $260,000.
c. $300,000.
d. $360,000.

2
LO3
8. Scrubwren Corporation acquired a 100% interest in Heath Company
for $1,780,000 when Heath had no liabilities. The book values and
fair values of Heath's assets were

Book Value Fair Value

Current assets $ 400,000 $ 700,000
Equipment 200,000 400,000
Land & buildings 600,000 800,000
Total assets $1,200,000 $1,900,000

Immediately following the acquisition, equipment will be

included on the consolidated balance sheet at

a. $300,000.
b. $340,000.
c. $360,000.
d. $400,000.

LO4
9. A newly acquired subsidiary had pre-existing goodwill on its
books. The parent company's consolidated balance sheet will

a. not show any value for the subsidiary's pre-existing

goodwill.
b. treat the goodwill similarly to other intangible assets of
the acquired company.
c. not show any value for the pre-existing goodwill unless all
other assets of the subsidiary are stated at their full
fair value.
d. always show the pre-existing goodwill of the subsidiary at
its book value.

LO4
10. The unamortized excess account is

a. a contra-equity account.
b. used in allocating the amounts paid for recorded balance
sheet accounts that are above or below their fair values.
c. used in allocating the amounts paid for each asset and
liability that are above or below their book values,
especially when numerous assets or liabilities are
involved.
d. the excess purchase cost that is attributable to goodwill.

3
LO5
On January 1, 2005, Tern purchased 90% of Costal Corporation’s
11. outstanding shares for $1,400,000 when the fair value of
Costal’s assets were equal to the book values. The balance
sheets of Tern and Costal Corporations at year-end 2004 are
summarized as follows:

Tern Costal
Assets $ 5,900,000 $ 1,450,000

Liabilities $ 700,000 $ 250,000

Capital stock 3,600,000 1,000,000
Retained earnings 1,600,000 200,000

If a consolidated balance sheet was prepared immediately after

the business combination, the minority interest, would be

a. $100,000.
b. $155,556.
c. $140,000.
d. $520,000.

LO5
12. On July 1, 2005, when Worm Company’s total stockholders’ equity
was $180,000, Bird Corporation purchased 7,000 shares of Worm’s
common stock at $30 per share. Worm Company had 10,000 shares
of common stock outstanding both before and after the purchase
by Bird, and the book value of Worm’s net assets on July 1,
2005 was equal to the fair value. On a consolidated balance
sheet prepared at July 1, 2005, goodwill would be

a. $30,000.
b. $40,000.
c. $50,000.
d. $120,000.

LO5
13. Bowerbird Inc acquired 60% of the outstanding stock of Mimicry
Company in a business combination. The book values of Mimicry’s
net assets are equal to the fair values except for the
building, whose net book value and fair value are $400,000 and
600,000, respectively. At what amount is the building reported
on the consolidated balance sheet?

a. $360,000.
b. $400,000.
c. $520,000.
4
 d. $600,000.
LO5
14. In the preparation of consolidated financial statements, which
of the following intercompany transactions must be eliminated
as part of the preparation of the consolidation working papers?

a. All revenues, expenses, gains, deductions, receivables, and

payables.
b. All revenues, expenses, gains, and deductions but not
receivables and payables.
c. Receivables and payables but not revenues, expenses, gains,
and deductions.
d. only sales revenue and cost of goods sold.
LO6
15. Pardolate Corporation paid $200,000 for a 60% interest in
Arthropod Inc on January 1, 2005, when Arthropod had Capital
Stock of $200,000 and Retained Earnings of $100,000. Fair
values of identifiable net assets were the same as recorded
book values. During 2005, Arthropod had income of $30,000,
declared dividends of $10,000, and paid $5,000 of dividends.
On December 31, 2005, Pardolate will have

a. investment in Salem account of $240,000.

b. investment in Salem account of $218,000.
c. goodwill of $33,333.
d. dividends receivable of $3,000.

LO6
16. Spinebill Corporation bought 80% of Nectar Company’s common
stock at its book value of $500,000 on January 1, 2005. During
2005, Nectar reported net income of $150,000 and paid dividends
of $45,000. At what amount should Spinebill’s Investment in
Nectar account be reported on December 31, 2005?

a. $500,000
b. $548,000
c. $584,000
d. $605,000
LO6
`` Weebill Corporation bought 80% of Tree Company’s common stock
at its book value of $800,000 on January 2, 2005 for $700,000.
The law firm of Dewey, Cheatam and Howe did $25,000 to
facilitate the purchase. At what amount should Weebill’s
Investment in Tree account be reported on January 2, 2005?

a. $640,000.
b. $665,000.
c. $700,000.
d. $725,000.
5
LO7
18. Bellbird Corporation acquired an 80% interest in Honey Inc for
$130,000 on January 1, 2005, when Honey had Capital Stock of
$125,000 and Retained Earnings of $25,000. Bellbird’s separate
income statement and a consolidated income statement for
Bellbird Corporation and Subsidiary as of December 31, 2005,
are shown below.

Consoli-
Bellbird dated
Sales revenue $ 150,000 $ 234,750
Income from Corporal 11,600
Cost of sales ( 60,000 ) ( 100,000 )
Other expenses ( 20,000 ) ( 50,000 )
Noncontrolling
interest income ( 3,150 )
Net income $ 81,600 $ 81,600

Honey’s separate income statement must have reported net

income of:

a. $13,750.
b. $14,750.
c. $15,750.
d. $15,250.
LO7
19. In the consolidated income statement of Wattlebird Corporation
and its 85% owned Forest subsidiary, the noncontrolling
interest income was reported at $45,000. What amount of net
income did the Forest have for the year?

a. $52,941
b. $38,250
c. $235,000
d. $300,000.
LO8
20. Push-down accounting

a. requires a subsidiary to use the same accounting principles

as its parent company.
b. is required by the SEC if a subsidiary is wholly owned.
c. is required when the parent company uses the cost method to
account for its investment in the subsidiary.
d. results in a push-up residual account on the subsidiaries
books.

6
Exercises

LO4
Exercise 1

Alarm Bird Inc. acquired an 85% interest in Clock Corporation on

January 2, 2005 for $38,000 cash when Clock had Capital Stock of
$15,000 and Retained Earnings of $25,000. Clock’s assets and
liabilities had book values equal to their fair values except for
inventory that was undervalued by $2,000. Balance sheets for Alarm
Bird and Clock on January 2, 2005, immediately after the business
combination, are presented in the first two columns of the
consolidated balance sheet working papers.

Alarm Bird Corporation and Subsidiary

Consolidated Balance Sheet Working Papers
at January 2, 2005

Eliminations
Alarm Balance
Bird Clock Debit Credit Sheet
ASSETS
Cash $ 68,000 $ 4,000
Accounts
Receivable-net 75,000 9,000

Inventories 39,000 10,000

Plant assets-net 170,000 35,000

Investment in
Clock 38,000

Total Assets $ 390,000 $58,000

EQUITIES
Payables $ 120,000 $18,000

Capital stock 100,000 15,000

Retained
Earnings 170,000 25,000
Minority
Interest

TOTAL EQUITIES $ 390,000 $58,000

Required:
7
Complete the consolidation balance sheet working papers for Alarm Bird
and subsidiary at January 1, 2005.

LO4
Exercise 2

On January 1, 2005, Myna Corporation issued 10,000 shares of its own

$10 par value common stock for 9,000 shares of the outstanding stock
of Berry Corporation in an acquisition. Myna common stock at January
1, 2005 was selling at $70 per share. Just before the business
combination, balance sheet information of the two corporations was as
follows:

Myna Berry Berry

Book Book Fair
Value Value Value
Cash $ 25,000 $ 12,000 $ 12,000
Inventories 55,000 32,000 36,000
Other current assets 110,000 90,000 110,000
Land 100,000 30,000 90,000
Plant and equipment-net 660,000 250,000 375,000
$ 950,000 $ 414,000 $ 623,000

Liabilities $ 220,000 $ 50,000 $ 50,000

Capital stock, $10 par value 500,000 100,000
Additional paid-in capital 170,000 40,000
Retained earnings 60,000 224,000
$ 950,000 $ 414,000

Required:

1. Prepare the journal entry on Myna Corporation’s books to account

for the business combination.

2. Prepare a consolidated balance sheet for Myna Corporation and

Subsidiary immediately after the business combination.

8
LO5
Exercise 3

The consolidated balance sheet of Treecreeper Corporation and Ants

Farm, its 90% owned subsidiary, as of December 31, 2005, contains the
following accounts and balances:

Treecreeper Corporation and Subsidiary

Consolidated Balance Sheet
at December 31, 2005

Balances
Cash $ 19,000
Accounts receivable-net 70,000
Inventories 110,000
Other current assets 85,000
Plant assets-net 290,000
Goodwill from consolidation 39,000
$ 613,000

Accounts payable $ 73,000

Other liabilities 70,000
Capital stock 350,000
Retained earnings 80,000
Minority interest 40,000
$ 613,000

Treecreeper Corporation acquired its 90% interest in Ants Farm on

January 1, 2005, when Ants Farm had $150,000 of Capital Stock and
$70,000 of Retained Earnings. Ants Farm’s net assets had fair values
equal to their book values when Treecreeper acquired its interest. No
changes have occurred in the amount of outstanding stock since the
date of the business combination. Treecreeper uses the equity method
of accounting for its investment.

Required: Determine the following amounts:

1. The balance of Treecreeper's Capital Stock and Retained Earnings

accounts at December 31, 2005.

2. Cost of Treecreeper's purchase of Ants Farm on January 1, 2005.

3. Ants Farms’s stockholders' equity on December 31, 2005.

4. Treecreeper’s Investment in Ants Farm account balance at

December 31, 2005.

9
LO5
Exercise 4

Monarch Corporation paid $180,000 for a 75% interest in Stem Co.’s

outstanding Capital Stock on January 1, 2005, when Stem’s
stockholders’ equity consisted of $150,000 of Capital Stock and
$50,000 of Retained Earnings. Book values of Stem’s net assets were
equal to their fair values on this date. The adjusted trial balances
of Monarch and Stem on December 31, 2005 were as follows:

Packer Stem
Cash $ 8,250 $ 35,000
Dividends receivable 7,500
Other current assets 40,000 50,000
Land 50,000 30,000
Plant assets-net 100,000 150,000
Investment in Stem 195,000
Cost of sales 225,000 125,000
Other expenses 45,000 25,000
Dividends 25,000 20,000
$ 695,750 $ 435,000

Accounts payable $ 40,750 $ 35,000

Dividends payable 10,000
Capital stock 150,000 150,000
Retained earnings 75,000 50,000
Sales revenue 400,000 190,000
Income from Stem 30,000
$ 695,750 $ 435,000

Required: Complete the partially prepared consolidated balance sheet

working papers that appear below.

10
 Monarch Corporation and Subsidiary
Consolidated balance Sheet Working Papers
at December 31, 2005

Eliminations
Balance
Monarch Stem Debit Credit Sheet
ASSETS
Cash $ 8,250 $ 35,000
Dividends
Receivable 7,500
Other current
Assets 40,000 50,000

Land 50,000 30,000

Plant assets 100,000 150,000

Investment in 195,000
Stem

Total Assets $ 400,750 $285,000

EQUITIES
Accounts payable $ 40,750 $ 35,000
Dividends
Payable 10,000

Capital stock 150,000 150,000

Retained
Earnings 210,000 70,000

TOTAL EQUITIES $ 400,750 $285,000

11
 LO5
Exercise 5

Zoo Inc paid $268,000 to purchase 80% of the outstanding stock of

Bird Corporation, on December 31, 2005. The following year-end
information was available just before the purchase:

Zoo Bird Bird

Book Book Fair
Value Value Value
Cash $ 378,000 $ 40,000 $ 40,000
Accounts Receivable 130,000 76,000 76,000
Inventory 240,000 50,000 55,000
Land 220,000 80,000 55,000
Plant and equipment-net 660,000 200,000 215,000
$ 1,628,000 $ 446,000 $

Accounts Payable $ 440,000 $ 11,000 $ 11,000

Bonds Payable 468,000 100,000 95,000
Capital stock, $10 par value 200,000
Capital stock, $15 par value 225,000
Additional paid-in capital 200,000 80,000
Retained earnings 320,000 30,000
$ 1,628,000 $ 446,000

Required:

1. Prepare Zoo’s consolidated balance sheet on December 31, 2005.

12
LO5
Exercise 6

On July 1, 2005, Magpie Corporation issued 23,000 shares of its own

$2 par value common stock for 35,000 shares of the outstanding stock
of Insect Inc. in an acquisition. Magpie common stock at July 1, 2005
was selling at $14 per share. Just before the business combination,
balance sheet information of the two corporations was as follows:

Magpie Insect Insect

Book Book Fair
Value Value Value
Cash $ 25,000 $ 17,000 $ 17,000
Inventories 55,000 42,000 47,000
Other current assets 110,000 40,000 30,000
Land 100,000 45,000 35,000
Plant and equipment-net 660,000 220,000 280,000
$ 950,000 $ 364,000 $ 409,000

Liabilities $ 220,000 $ 70,000 $ 75,000

Capital stock, $2 par value 500,000 100,000
Additional paid-in capital 170,000 90,000
Retained earnings 60,000 104,000
$ 950,000 $ 364,000

Required:

1. Prepare the journal entry on Magpie Corporation’s books to

account for the business combination.

2. Prepare a consolidated balance sheet for Magpie Corporation and

Subsidiary immediately after the business combination.

13
LO5
Exercise 7

Manucode Corporation paid $279,000 for 70% of Trumpet Corporation’s

$10 par common stock on December 31, 2005, when Trumpet Corporation’s
stockholders’ equity was made up of $200,000 of Common Stock, $60,000
Additional Paid-in Capital and $40,000 of Retained Earnings.
Trumpet’s identifiable assets and liabilities reflected their fair
values on December 31, 2005, except for Trumpet’s inventory which was
undervalued by $50,000 and their land which was undervalued by
$20,000. Balance sheets for Manucode and Trumpet immediately after
the business combination are presented in the partially completed
working papers.

14
 Manucode Corporation and Subsidiary
Consolidated Balance Sheet Working Papers
at December 31, 2005

Eliminations
Balance
Manucode Trumpet Debit Credit Sheet
ASSETS
Cash $ 26,000 $ 20,000
Accounts
receivable-net 20,000 30,000

Inventories 125,000 110,000

Land 30,000 80,000

Plant assets –
net 320,000 160,000

Investment in
Trumpet 279,000

Total Assets $ 800,000 $400,000

EQUITIES
Current
liabilities $ 110,000 $100,000

Capital stock 400,000 200,000

Additional paid-
in capital 100,000 60,000
Retained
earnings 190,000 40,000

TOTAL EQUITIES $ 800,000 $400,000

Required:

Complete the consolidated balance sheet working papers for Manucode

Corporation and Subsidiary.

15
LO6
Exercise 8

Bower Corporation paid $5,000 for a 60% interest in Fig Inc. on

January 1, 2005 when Fig’s stockholders’ equity consisted of $5,000
Capital Stock and $2,500 Retained Earnings. Fig’s assets and
liabilities were fairly valued on this date. Two years later, on
December 31, 2006, the balance sheets of Bower and Fig are summarized
as follows:

Bower Corporation and Subsidiary

Consolidated balance Sheet Working Papers
at December 31, 2006

Eliminations
Balance
Bower Fig Debit Credit Sheet
ASSETS
Current assets $ 12,550 $ 4,000

Fixed assets 21,550 6,500

Investment in
Fig 5,900

Total Assets $ 40,000 $10,500

EQUITIES
Liabilities $ 10,000 $ 1,500

Capital stock 20,000 5,000

Retained
Earnings 10,000 4,000

TOTAL EQUITIES $ 40,000 $10,500

Required:

Complete the consolidated balance sheet working papers for Bower

Corporation and Subsidiary at December 31, 2006.

16
LO7&8
Exercise 9

Currawong Corporation paid $500,000 for 80% of the outstanding voting

common stock of Lizard Corporation on January 2, 2005 when the book
value of Lizard’s net assets was $460,000. The fair values of
Lizard’s identifiable net assets were equal to their book values
except as indicated below.

Lizard reported net income of $75,000 during 2005; dividends of

$35,000 were declared and paid during the year.

Book Fair
Value Value
Inventories (sold in 2005) $ 80,000 $ 112,000
Buildings-net (15-year life) 200,000 170,000
Note Payable (paid in 2005) 20,000 21,250

Required:

1. Prepare a schedule to allocate the cost/book differential to the

specific identifiable assets and liabilities.

2. Determine Currawong’s income from Lizard for 2005.

3. Determine the correct balance in the Investment in Lizard

account as of December 31, 2005.

17
SOLUTIONS

Multiple Choice Questions

1 d

2 b

3 b

4 b

5 c

6 b

7 a The parent’s retained earnings

8 c Purchase cost $ 1,780,000

Current asset fair value 700,000
Excess to non-current assets 1,080,000
Fair value of non-current assets 1,200,000
Allocation shortfall $ 120,000
Equipment share of shortfall:
$400,000/$1,200,000 X $120,000 = $ 40,000
Allocation to equipment: $
$400,000 - $40,000 = 360,000

9 c

10 c

11 b $1,400,000 / 90% =
$1,555,556. 10% of
$1,555,556 = $155,556

12 d Bird’s cost = 7,000 x $30 $ 210,000

Implied fair value of Worm 300,000
($210,000 / 70%)
Less: Book value ( 180,000 )
Goodwill acquired $ 120,000

13 d

$ 600,000

14 a

15 c Pardolate’s cost $ 200,000

18
 Implied fair value of Arthropod 333,333
($200,000 / 60%)
Less: Book value ( 300,000 )
Goodwill acquired $ 33,333

16 c Investment cost + 80% (subsidiary 584,000

income) – (80%)(subsidiary
dividends = $500,000 + $120,000
- $36,000 =
$

17 d

18 c $3,150/0.20 = $15,750

19 d $45,000/15% = $300,000

20 d

19
Exercise 1
Preliminary computations
Fair value (purchase price) of 90% interest acquired $ $38,000
January 2, 2005
Implied fair value of Clock ($38,000 / 90% $44,706
Book value of Clock’s net assets ( 40,000)
Excess cost over book value acquired = $ 4,706

Allocation of excess of cost over book value:

Inventory $ 2,000
Remainder to goodwill 2,706
Excess of fair value over book value $ 4,706

Alarm Bird Corporation and Subsidiary

Consolidated Balance Sheet Working Papers
at January 1, 2005
Eliminations Balance
Alarm Clock Debit Credit Sheet
Bird
ASSETS
Cash $ 68,000 $ 4,000 $72,000
Accounts
Receivable-net 75,000 9,000 84,000

Inventories 39,000 10,000 a $2,000 51,000

Plant assets-
Net 170,000 35,000 205,000
Investment in
Charlie 38,000 a $38,000

Goodwill a 2,706 2,706

Total
Assets $ 390,000 $58,000 $414,706

EQUITIES
Payables $ 120,000 $18,000 $138,000

Capital stock 100,000 15,000 a $15,000 100,000

Retained
Earnings 170,000 25,000 a 25,000 170,000
Minority
Interest a 6,706 6,706

Total equities $ 390,000 $58,000 $414,706

44,706 44,706

20
Exercise 2

Requirement 1:

Investment in Berry Co. 700,000

Common stock 100,000
Paid-in capital 600,000

Requirement 2:

Preliminary computations
Fair value (purchase price) of 90% interest acquired January $ $700,000
2, 2005
Implied fair value of Berry ($700,000 / 90% $777,778
Book value of Clock’s net assets ( 364,000)
Excess fair value over book value acquired = $ 413,778

Allocation of excess of cost over book value:

Inventory $ 4,000
Other current assets 20,000
Land 60,000
Plant assets 125,000
Remainder to goodwill 204,778
Excess of fair value over book value $ 413,778

Myna Corporation and Subsidiary

21
 Consolidated Balance Sheet Working Papers
at January 1, 2005

Eliminations Balance
Myna Berry Debit Credit Sheet
ASSETS
Cash $ 25,000 $ 12,000 $ 37,000

Inventories 55,000 32,000 b $ 4,000 91,000

Other current
Assets 110,000 90,000 b 20,000 220,000

Land 100,000 30,000 b 60,000 190,000

Plant assets 660,000 250,000 b 125,000 1,035,000

Goodwill b 204,778 204,778
Investment in b $413,778
Berry 700,000 a 286,222
Total
Assets $ 1,650,000 $414,000 $1,777,778

EQUITIES
Liabilities $ 220,000 $ 50,000 270,000

Capital stock 600,000 100,000 a 100,000 600,000

Additional paid-
in capital 770,000 40,000 a 40,000 770,000
Retained
earnings 60,000 224,000 a 224,000 60,000
Minority
Interest a77,778 77,778

Total equities $ 1,650,000 $414,000 $1,777,778

Exercise 3
22
Preliminary computations

Requirement 1:
On the consolidated balance sheet, the balance in the Capital Stock
and Retained Earnings accounts will be those of the parent, so the
Capital Stock balance is $350,000, and the Retained Earnings
balance is $80,000.

Requirement 2
(Ant Farm’s equity on January 1, 2005)x(90%) =
($220,000)x(90%) $ 198,000
Original goodwill = 39,000
Original acquisition cost = $ 237,000

Requirement 3

Ant Farm’s stockholders’ equity = (minority

interest) divided by (minority interest percentage)
=($40,000/10%) $ 400,000

Requirement 4
Treecreeper’s book value in 90% of Ants Farm at
December 31, 2005 = ($400,000 (from above)) x 90% $ 360,000
Plus: goodwill (from balance sheet) 39,000
Balance in Investment account at December 31, 2005 $ 399,000

23
Exercise 4

Preliminary computations
Fair value (purchase price) of 75% interest acquired $ 180,000
on January 1, 2005
Implied fair value of Stem (($180,000 / 75%) $ 240,000
Book value of Stem’s net assets $ 200,000
Excess cost over book value acquired $ 40,000

Initial investment cost $ 180,000

Income from Stem: (75%)($40,000)= 30,000
Dividends ($20,000)(75%) = -15,000

Balance in Investment in Stem at December 31,2005 $ 195,000

Monarch Corporation and Subsidiary

Consolidated Balance Sheet Working Papers
at December 31, 2005

Eliminations Balance
Monarch Stem Debit Credit Sheet
ASSETS
Cash $ 8,250 $ 35,000 $ 43,250
Dividends
Receivable 7,500 b $ 7,500
Other current
Assets 40,000 50,000 90,000

Land 50,000 30,000 80,000

Plant assets 100,000 150,000 250,000

Investment in
Stem 195,000 a 195,000

Goodwill a $ 40,000 40,000

Total
Assets $ 400,750 $265,000 $503,250

EQUITIES
Accounts payable $ 40,750 $ 35,000 $75,750

24
Dividends
Payable 10,000 b 7,500 2,500

Capital stock 150,000 150,000 a 150,000 150,000

Retained
Earnings 210,000 70,000 a 70,000 210,000
Minority
Interest a 65,000 65,000

Total equities $ 400,750 $265,000

$503,250
267,500 267,500

Exercise 5

Requirement 1:

Preliminary computations
Fair value (purchase price) of 80% interest acquired $ 268,000
on December 31, 2005
Implied fair value of Bird (($268,000 / 80%) $ 335,000
Book value of Bird’s net assets $ 335,000
Excess cost over book value acquired $ 0

Zoo Corporation and Subsidiary

Consolidated Balance Sheet Working Papers
at December 31, 2005
25
 Eliminations Balance
Zoo Bird Debit Credit Sheet
ASSETS
Cash $ 110,000 40,000 $ 150,000

Accounts 130,000 76,000 206,000

Receivable
Inventory
240,000 50,000 b $ 5,000 295,000

b
Land 220,000 80,000 25,000 275,000

PP&E 660,000 200,000 b 15,000 875,000

Investment in
Bird 268,000 a 268,000
Total
Assets $ 1,628,000 $446,000 $1,801,000

EQUITIES
Accounts Payable $ 440,000 $11,000 $ 451,000
Bonds Payable 468,000 100,000 b 5,000 563,000

Capital stock 200,000 225,000 a 225,000 200,000

Additional paid-
in capital 200,000 80,000 a 80,000 200,000
Retained
earnings 320,000 30,000 a 30,000 320,000
Minority
Interest a 67,000 67,000

Total equities $ 1,628,000 $446,000 $1,801,000

360,000 360,000

Exercise 6

Requirement 1:

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 Investment in Insect Inc. 322,000
Common stock 46,000
Paid-in capital 276,000

Requirement 2:

Preliminary computations
Fair value (purchase price) of 70% interest acquired July 1, $ $322,000
2005
Implied fair value of Insect ($322,000 / 70% $460,000
Book value of Insect’s net assets ( 294,000)
Excess cost over book value acquired = $ 166,000

Allocation of excess of cost over book value:

Inventory $ 5,000
Other current assets ( 10,000)
Land ( 10,000)
Plant and Equipment 60,000
Liabilities ( 5,000)
Remainder to goodwill 126,000
Excess of fair value over book value $ 166,000

Magpie Corporation and Subsidiary

Consolidated Balance Sheet Working Papers
July 1, 2005

27
 Eliminations Balance
Magpie Insect Debit Credit Sheet
ASSETS
Cash $ 25,000 $ 17,000 $ 42,000

Inventories 55,000 42,000 b $ 5,000 102,000

Other current
Assets 110,000 40,000 b $ 10,000 140,000

Land 100,000 45,000 b 10,000 135,000

Plant assets 660,000 220,000 b 60,000 940,000

Goodwill b 126,000 126,000
Investment in b 166,000
Insect 322,000 a 156,000
Total
Assets $ 1,272,000 $364,000 $1,485,000

EQUITIES
Liabilities $ 220,000 $ 70,000 b 5,000 $ 295,000

Capital stock 546,000 100,000 a 100,000 546,000

Additional paid-
in capital 446,000 90,000 a 90,000 446,000
Retained
Earnings 60,000 104,000 a 104,000 60,000
Minority
Interest a 138,000
138,000

Total equities $ 1,272,000 $364,000 $1,485,000

$ 485,000 $ 485,000

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Exercise 7

Preliminary computations
Fair value (purchase price) of 70% interest acquired $ $279,000
December 31, 2005
Implied fair value of Trumpet ($279,000 / 70%) $398,571
Book value of Trumpet’s net assets ( 300,000)
Excess cost over book value acquired = $ 98,571

Allocation of excess of cost over book value:

Inventory $ 50,000
Land 20,000
Remainder to goodwill 28,571
Excess of fair value over book value $ 98,571

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 Manucode Corporation and Subsidiary

Consolidated Balance Sheet Working Papers

at December 31, 2005

Eliminations Balance
Manucode Trumpet Debit Credit Sheet
ASSETS
Cash $ 26,000 $ 20,000 $ 46,000

Receivables-net 20,000 30,000 50,000

Inventories 125,000 110,000 b $50,000 285,000

Land 30,000 80,000 b 20,000 130,000

Plant assets – 320,000 160,000 480,000

net
Investment in a 180,429
Trumpet 279,000 b 98,571

Goodwill b 28,571 28,571

Total
Assets $ 800,000 $400,000 $1,019,571

EQUITIES
Current $ 110,000 $100,000 $210,000
liabilities
Capital Stock 400,000 200,000 a 200,000 400,000
Additional paid-
In capital 100,000 60,000 a 60,000 100,000
Retained
earnings 190,000 40,000 a 40,000 190,000
Minority
Interest a 119,571 119,571

Total equities $ 800,000 $400,000 $1,019,571

398,571 398,571

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Exercise 8

Preliminary computations
Fair value (purchase price) of 60% interest acquired January $ $5,000
1, 2005
Implied fair value of Fig ($5,000 / 60% $8,333
Book value of Fig’s net assets ( 7,500)
Excess cost over book value acquired = $ 833

Allocation of excess of cost over book value:

Remainder to goodwill 833
Excess of fair value over book value $ 833

Bower Corporation and Subsidiary

Consolidated Balance Sheet Working Papers
at December 31, 2006

Eliminations Balance
Bower Fig Debit Credit Sheet
ASSETS
Current assets $ 12,550 $ 4,000 $16,550

Fixed assets 21,550 6,500 28,050

Investment in
Fig 5,900 a $ 5,900

Goodwill a $ 833 833

Total
assets $ 40,000 $10,500 $45,433

EQUITIES
Liabilities $ 10,000 $ 1,500 $11,500

Capital stock 20,000 5,000 a 5,000 20,000

Retained
earnings 10,000 4,000 a 4,000 10,000
Minority
Interest a 3,933 3,933

Total equities $ 40,000 $10,500 $45,433

9,833 9,833

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Exercise 9

Preliminary computations
Fair value (purchase price) of 80% interest acquired January $ $500,000
2, 2005
Implied fair value of Lizard ($500,000 / 80% $625,000
Book value of Lizard’s net assets ( 460,000)
Excess cost over book value acquired = $ 165,000

Requirement 1

Allocation of excess of cost over book value:

Inventory $ 32,000
Buildings-net ( 30,000)
Note payable ( 1,250)
Remainder to goodwill 164,250
Excess of fair value over book value $ 165,000

Requirement 2

Currawong’s share of Lizard income =(80%)x(75,000) = $ 60,000

Less: Excess allocated in inventory which was sold
in the current year (25,600)
Add: Depreciation adjustment on building =
+($24,000/15 years) 1,600
Add: Excess allocated to Note payable 1,000

Net adjustment to investment account due to

Currowong’s share of Lizard’s income $ 37,000

Requirement 3

Original cost of investment in Brazil $ 500,000

Plus: Currawong’s share of Lizard’s income (from
Requirement 2 37,000
Less: Dividends received (80%)x(35,000) = (28,000)
Investment in Lizard account at December 31, 2005 $ 509,000

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