INDIRECT AND MUTUAL HOLDINGS

Multiple Choice Questions 1. Pallet Corporation owns 80% of Adelt Corporation and Adelt owns 60% of Bajo Inc. Which of the following is correct? a. Bajo should not be consolidated because minority interests hold 52%. b. Bajo should be consolidated because the 60% of Bajo stock is held in the affiliate structure. c. Pallet has 8% indirect ownership of Bajo. d. Pallet has 80% indirect ownership of Bajo. 2. Page Corporation acquired a 60% interest in Ace Corporation at a price $40,000 in excess of book value and fair value on January 1, 2005. On the same date, Ace acquired a 70% interest in Bader Corporation at a price $30,000 in excess of book value and fair value. The excess purchase cost paid by Page and Ace was attributed to goodwill. Separate incomes (excluding investment income) for the three affiliates for 2005 are as follows: Page, $500,000, Ace, $300,000, and Bader, $400,000. Pages net income for 2005 is a. b. c. d. $808,000. $848,000. $920,000. $960,000.

Use the following information in answering questions 3 and 4 Paint Corporation owns 82% of Achille corporation and Achille Corporation owns 80% of Badrack Corporation. For the current year, the separate incomes of Paint, Achille, and Badrack are $120,000, $100,000, and $50,000, respectively. 3. Noncontrolling interest expense from Badrack is a. b. c. d. 4. $9,000. $10,000. $20,000. $40,000.

Consolidated net income for Paint Corporation and Subsidiaries can be determined by the equation:

a. b. c. d. 5.

$234,000. $244,800. $260,000. $270,000.

Pabari Corporation owns an 80% interest in Alders Corporation and Alders owns a 60% interest in Babao Corporation. Both interests were acquired at book value equal to fair value. During 2005, Alders sells land to Babao at a profit of $12,000. Babao still holds the land at December 31, 2005. Profits and (losses) of the three companies for 2005 are: Pabari Corporation Alders Corporation Babao Corporation $180,000 72,000 (30,000)

Consolidated net income and noncontrolling interest (loss), respectively, for 2005 are a. $211,200 and ($1,200). b. $211,200 and ($3,600). c. $213,600 and ($1,200). d. $213,600 and ($3,600). 6. Pablo Corporation acquired 60% of Abagia Corporation on January 1, 2004, at a cost of $20,000 in excess of book value. Also, on July 1, 2004, Pablo acquired 60% of Babin Corporation at book value. On January 1, 2005, Abagia acquired a 20% interest in Babin at a cost of $10,000 in excess of book value. The excess purchase costs paid by Pablo and Abagia were attributed to goodwill. On July 1, 2005, Pablo sold land with a book value of $20,000 to Abagia for $40,000. The $20,000 unrealized gain is included in Pablos separate income. Separate incomes for the affiliated companies (excluding investment income) for 2005 are: Pablo Abagia Babin $250,000 70,000 100,000

Consolidated net income for the three affiliates is a. b. c. d. $304,000. $324,000. $344,000. $364,000.

Use the following information for Questions 7, and 8.

Paisley Corporation owns 90% of Ackers Company. Akers Company owns 60% of Baglin. Paisleys separate income for the current year is $540,000. Akerss separate income is $240,000. Baglins separate income is $150,000. 7. The formula for the consolidated noncontrolling interest is calculated as a. 10% X $240,000. b. (10% X $240,000) + (6% X $150,000). c. (10% X $240,000) + (40% X $150,000). d. (10% X $240,000) + (46% X $150,000). 8. The formula for consolidated net income is calculated as a. b. c. d. $930,000 ($240,000 X 10%) $930,000 ($240,000 X 10%) ($150,000 X 40%) $930,000 ($240,000 X 10%) ($150,000 X 46%) $930,000 ($240,000 X 10%) ($150,000 X 40%) ($150,000 X 10% X 50%)

Use the following information for Questions 9, 10, and 11. Pace Corporation owns 70% of Abaza Corporation and 60% of Babon Corporation. Abaza Corporation owns 20% of Babon Corporation. Paces investment in Abaza was consummated in one transaction at a purchase price $20,000 in excess of the book value. Paces purchase of Babon was made in one transaction at a price $30,000 above book value. Abazas investment in Babon was completed in one transaction at a purchase price $10,000 in excess of the book value. The purchase price differential for all three investments was attributable to goodwill. Paces separate income for the current year is $100,000. Abazas separate income is $190,000, which includes a $10,000 unrealized loss on the sale of land to Pace. Babons separate income is $150,000. 9. The amount of consolidated net income for Pace Corporation and Abaza for the current year is a. b. c. d. 10. $341,000. $348,400. $351,000. $355,000.

The amount of noncontrolling interest expense for the current year is a. $69,000. b. $85,000.

c. $95,000. d. $99,000. 11. The amount of goodwill in Paces consolidated balance sheet is a. b. c. d. $50,000. $52,000. $58,000. $60,000.

Use the following information for Questions 12 through 15. Pahm Corporation owns 80% of the outstanding voting common stock of Abussi Corporation, which was purchased for $60,000 over Abussis book value. The excess purchase price was attributable to goodwill. Abussi Corporation owns 60% of the outstanding common stock of Badock Corporation, which was purchased at book value. The separate incomes of Pahm, Abussi, and Badock for the year are $200,000, $240,000, and $260,000, respectively. 12. Consolidated net income for the current year is a. b. c. d. 13. $504,800. $516,200. $545,200. $557,200.

The amount of income for the current year assigned to the minority shareholders of Badock Corporation is a. b. c. d. $100,000. $104,000. $120,000. $140,000.

14.

The amount of income for the current year assigned to the minority shareholders of Abussi Corporation is a. b. c. d. $48,000. $53,200. $74,000. $79,200.

15.

The amount of income assigned to the noncontrolling interest in the current years consolidated income statement is a. b. c. d. $142,800. $154,800. $183,200. $195,200.

Exercise 1 Pacini Corporation owns an 80% interest in Abdoo Corporation, acquired on January 1, 2004 for $700,000 when Abdoos stockholders equity consisted of $600,000 of Capital Stock and $200,000 of Retained Earnings. Abdoo Corporation acquired a 60% interest in Bach Corporation on July 1, 2004 for $180,000 when Bach had Capital Stock of $200,000 and Retained Earnings of $50,000. On January 1, 2005, Abdoo acquired a 70% interest in Cabo Corporation for $270,000 when Cabo had Capital Stock of $250,000 and Retained Earnings of $100,000. No change in outstanding stock of any of the affiliated companies has occurred since the investments were made. All cost-book differentials are goodwill. The stockholders equity section of the separate balance sheets of Abdoo, Bach, and Cabo at December 31, 2005 are as follows: Capital Stock Retained Earnings Total stockholders equity Required: 1. Compute the amount at which goodwill should be shown in the consolidated balance sheet of Pacini Corporation and Subsidiaries at December 31, 2005. 2. Pacini and Abdoo have applied Determine the balances of the December 31, 2005. the equity method correctly. three investment accounts at $ $ Abdoo 600,000 280,000 880,000 $ $ Bach 200,000 140,000 340,000 $ $ Cabo 250,000 130,000 380,000

Exercise 2 Separate earnings and investment percentages for the three affiliates for 2005 are as follows: Separate Earnings Palace Company Acres Inc Bain Corporation $ 450,000 200,000 160,000 Percentage Interest in Acres 80% 10% Percentage Interest in Bain 70%

Required: Compute consolidated net income for Palace for 2005. Exercise 3 Padhy Corporation owns 80% of Abrams Corporation, Abrams Corporation owns 60% of Bacud Corporation, and Bacud Corporation owns 10% of Padhy Corporation. The separate incomes (excluding investment income), of Padhy, Abrams, and Bacud are $300,000, $100,000, and $80,000, respectively. Required: Calculate the consolidated net income for Padhy Corporation and its subsidiaries, Abrams and Bacud. Use the conventional method for your solution.