Test bank advanced accounting 10e by beams chapter 08

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Chapter 8 Test Bank
CONSOLIDATIONS - CHANGES IN OWNERSHIP INTERESTS

Multiple Choice Questions
LO1
1.

Which of the following is correct?
The direct sale
additional shares to the parent company from a subsidiary
a. decreases the parent’s interest and decreases
noncontrolling shareholders’ interest.
b. decreases the parent’s interest and increases
noncontrolling shareholders’ interest.
c. increases the parent’s interest and increases
noncontrolling shareholders’ interest.
d. increases the parent’s interest and decreases
noncontrolling shareholders’ interest.

of

the
the
the
the

Use the following information in answering questions 2 and 3.
On December 31, 2006, Giant-Petrel Corporation’s Investment in
Penguin Corporation account had a balance of $525,000. The balance

consisted of 80% of Penguin’s $600,000 stockholders’ equity on that
date and $45,000 of goodwill. On January 2, 2007, Penguin increased
its outstanding common stock from 15,000 to 18,000 shares.

LO1
2.

Assume that Penguin sold the additional 3,000 shares directly
to Giant-Petrel for $150,000 on January 2, 2007. Giant-Petrel’s
percentage ownership in Penguin immediately after the purchase
of the additional stock is
a.
b.
c.
d.

66-2/3%.
80%.
83-1/3%.
86-2/3%

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LO1
3.

Assume that Penguin sold the additional 3,000 shares to outside
interests for $150,000 on January 2, 2007. Giant-Petrel’s
percentage ownership immediately after the sale of stock would
be
a.
b.
c.
d.

66-2/3%.
75%.
80%.
83-1/3%.

Use the following information in answering questions 4 and 5.
Bristlebird Corporation purchased an 80% interest in Underbrush
Corporation on July 1, 2005 at its book value, and on January 1, 2006
its Investment in Underbrush account was $300,000, equal to its book
value. Underbrush’s net income for 2006 was $99,000; no dividends
were declared. On March 1, 2006, Bristlebird reduced its interest in
Underbrush by selling a 20% interest, one-fourth of its investment,
for $84,000.
LO1
4.

If Bristlebird uses a “beginning-of-the-year” sale assumption,
its gain on sale and income from Underbrush for 2006 will be

a.
b.

c.
d.
LO1
5.

Gain on Sale
$5,700
$5,700
$9,000
$9,000

Income from Underbrush
$59,400.
$62,700.
$59,400.
$62,700.

If Bristlebird uses the “actual-sale-date” sales assumption,
its gain on the sale and income from Underbrush for 2006 will
be:

a.
b.
c.
d.

Gain on Sale
$21,360
$21,360
$26,640

$26,640

Income from Underbrush
$59,400
$62,700
$59,400
$62,700

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LO1
6.

On January 1, 2006, Finch Corporation owned a 90% interest in
Nest Corporation at which time the Investment in Nest account
had a balance of $350,000, which was 90% of Nest’s $370,000 in
stockholders’ equity and $17,000 of goodwill. During 2006, Nest
had income of $35,000 and paid dividends of $3,000 on June 1
and another $3,000 on November 1. On May 1, 2006, Finch sold
one-fifth of its interest in Nest for $92,000. If the
“beginning-of-the-period” sales assumption is used, the balance
in the Investment in Nest account on December 31, 2006 is
a.
b.
c.
d.

LO1
7.

$300,300.
$300,880.
$304,480.
$306,100.

On January 1, 2006, Finch Corporation owned a 90% interest in
Nest Corporation at which time the Investment in Nest account
had a balance of $350,000, which was 90% of Nest’s $370,000 in
stockholders’ equity and $17,000 of goodwill. During 2006, Nest
had income of $35,000 and paid dividends of $3,000 on June 1
and another $3,000 on November 1. What would be the balance in
the Investment in Nest account on December 31, 2006 if Finch
sold one-ninth of its interest in Nest on May 1, 2006 for
$47,000 and the “beginning-of-the-period” sales assumption is
used?
a.
b.
c.
d.

$333,333.
$334,311.
$336,333.
$336,711.

Use the following information for questions 8 and 9.

Button-quail Corporation owned a 70% interest in Savannah Corporation
on December 31, 2006, and Button-quail’s Investment in Savannah
account had a balance of $3,900,000. Savannah’s stockholders’ equity
on this date was as follows:
Capital stock, $10 par value
Retained Earnings
Total Stockholders’ Equity

$
$

3,000,000
2,400,000
5,400,000

On January 1, 2007, Savannah issues 80,000 new shares of common stock
to Button-quail for $16 each.
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LO1
8.

What is Button-quail’s percentage ownership in Savannah after
Savannah issues its stock to Button-quail?
a.
b.

c.
d.

LO1
9.

76.32%.
80.43%.
82.57%.
83.43%.

Assuming that Savannah has no fixed assets, what is the amount
of goodwill associated with the issuance of shares to Buttonquail?
a.
b.
c.
d.

$38,176.
$40,232.
$41,302.
$41,732.

Use the following information for questions 10, and 11.
Great Frigatebird Corporation acquired a 90% interest in Slipstream
Corporation at its $810,000 book value on December 31, 2005. A
summary of the stockholders’ equity for Slipstream at the end of 2005
and 2006 is as follows:
12/31/05
12/31/06

Capital stock, $10 par
$
600,000 $
600,000
Additional paid-in capital
30,000
30,000
Retained Earnings
270,000
420,000
Total stockholders’ equity
$
900,000 $ 1,050,000
On January 1, 2007, Slipstream sold 10,000 new shares of its $10 par
value common stock for $45 per share.
LO1
10.

If Slipstream sold the additional shares to the general public,
Great Frigatebird’s Investment in Slipstream account after the
sale would be
a.
b.
c.
d.

$945,000.
$1,157,100.
$1,225,000.
$1,245,000.

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LO1
11.

If Slipstream sold the additional shares directly to Great
Frigatebird, Great Frigatebird’s Investment in Slipstream
account after the sale would be
a.
b.
c.
d.

LO2
12.

$1,350,000.
$1,395,000.
$1,425,000.
$1,500,000.

Which of the following is correct about the treatment of
preacquisition earnings on consolidated financial statements?
I. Exclude the subsidiary sales and expenses
acquisition from consolidated sales and expenses.

prior

to

II. Include the subsidiary sales and expenses prior to
acquisition and deduct preacquisition income as a separate
item.
a.
b.
c.
d.
LO1
13.

I only.
II only.
I or II.
Neither I nor II.

If a parent company and outside investors purchase shares of a
subsidiary in relation to existing stock ownership (ratably)
a. there will be no adjustment to additional paid-in capital
regardless whether the stock is sold above or below book
value.
b. the transaction will requirement an investment account
adjustment.
c. the transaction will require the elimination of a gain if
it was conducted at economic arm's length.
d. the transaction will require the elimination of a loss if

it was conducted at economic arm's length.

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LO2
14.

Heron Corporation acquired 40% of WatersEdge Inc.’s common
stock for $400,000 book value on January 1, 2006 when
WatersEdge equity consisted of $500,000 capital stock and
$500,000 retained earnings. On September 1, 2006 Heron bought
an additional 30% interest in WatersEdge for $210,000. In both
cases, Watersedge book value equaled the fair value.
WatersEdge had income of $120,000 earned evenly through 2006
and paid dividends quarterly of $25,000.
The consolidated income statement of Heron Corporation and
Subsidiary for the year 2006 should show pre-acquisition income
of:
a.
b.
c.
d.

$ 5,333.
$ 8,000.
$32,000.

$56,000.

Use the following information to answer questions 15 through 18.
Bowerbird Corporation purchased a 70% interest in Stage Corporation
on June 1, 2006 at a purchase price of $390,400. On this date,
Stage’s book values were equal to its fair values except for an
unrecorded copyright, and its stockholders’ equity consisted of
$290,000 of Common Stock and $210,000 of Retained Earnings. All costbook differentials were attributed to the copyright, which had an
estimated economic life of ten years.
During 2006, Stage earned $120,000 of net income earned uniformly
throughout the year and paid $6,000 of dividends on March 1 and
another $6,000 on September 1.

LO2
15.

Minority interest income for 2006 is
a.
b.
c.
d.

$36,000.
$32,400.
$61,200.
$50,000.

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LO2
16.

Preacquisition income for 2006 is
a.
b.
c.
d.

LO2
17.

The value of the copyright that is included
Investment in Stage account on June 1, 2006 is
a.
b.
c.
d.

LO2
18.

$50,000.
$35,000.
$44,000.
$36,000.

in

Bowerbird’

$ 2,600.
$ 5,400.
$ 9,600.
$10,400.

The amortization expense recorded for the copyright in 2006 is:
a.
b.
c.
d.

$315.
$560.
$815.
$960.

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LO3
19.

The acquisition of treasury stock by a subsidiary above book

value
a. decreases
decreases
b. decreases
increases
c. increases
decreases
d. increases
increases

LO3
20.

the
the
the
the
the
the
the
the

parent’s share of
parent’s ownership
parent’s share of
parent’s ownership
parent’s share of
parent’s ownership
parent’s share of
parent’s ownership

subsidiary
percentage.
subsidiary
percentage.
subsidiary
percentage.
subsidiary
percentage.

book value and
book value and
book value and
book value and

A stock dividend by a subsidiary causes
a.
b.
c.
d.

the
the
the
any

parent company
parent company
parent company
noncontrolling

investment account
investment account
investment account
interest equity to

to decrease.
to remain the same.
to decrease.
increase.

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LO1
Exercise 1
At December 31, 2004, the stockholders’ equity of Goshawk Corporation
and its 80%-owned subsidiary, Treetop Corporation, are as follows:

Common stock, $10 par value
Retained earnings
Totals

$
$

Goshawk

20,000
8,000
28,000

$
$

Treetop
12,000
6,000
18,000

Goshawk’s investment in Treetop’s account balance is equal to the
Treetop book value. Treetop Corporation issued 225 additional shares
of common stock directly to Goshawk on January 1, 2005 at $18 per
share.

Required: Compute the following:
1. Compute the balance in Goshawk’s Investment in Treetop account
on January 1, 2005 after the new investment is recorded.
2. Determine the goodwill (if any) from Goshawk’s new investment in
the 225 Treetop shares.

LO1
Exercise 2
At the beginning of 2006, Starling Corporation held an 80% interest
in Twig Corporation. The investment account balance was $900,000,
consisting of 80% of Twig’s $1,095,000 of net assets and $24,000 of
goodwill.
During 2006, Twig uniformly earned $234,000 and paid dividends of

$37,500 on April 1 and again on October 1. On August 1, 2006,
Starling sold 30% of its investment in Twig for $262,500, thereby
reducing its interest in Twig to 56%.
Required: Compute
assumption:

the

following

using

the

actual

sales

1. Gain or loss on sale.
2. Income from Twig for 2006.
3. Noncontrolling interest for 2006.

LO1
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Exercise 3
At the beginning of 2006, Flycatcher Corporation held a 60% interest
in Lichen Corporation. The investment account balance was $2,100,000,
consisting of 60% of Lichen’s $3,226,666 of net assets and $164,000
of goodwill.
During 2006, Lichen earned $300,000 and paid dividends of $110,000 on
November 1. On October 1, 2006, Flycatcher sold 10% of its investment
in Lichen for $364,000, thereby reducing its interest in Lichen to
54%.
Required: Compute
assumption:

the

following

using

the

actual

sales

date

1. Gain or loss on sale.
2. Income from Lichen for 2006.
3. Noncontrolling interest expense for 2006.

LO1
Exercise 4
At December 31, 2005 year-end, Lapwing Corporation’s investment in
Openground Inc. was 200,000 consisting of 80% of Openground’s
$250,000 stockholders’ equity on that date.
On April 1, 2006,
Lapwing sold 20% interest (one-fourth of its holdings) in Openground
for $65,000.
During 2006, Openground had net income of $75,000 and
on July 1, 2006, Openground paid dividends of $40,000.
Required:
1. Record the journal entries before year-end 2006 assuming the
equity method.

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LO1
Exercise 5
On April 1, 2006, Gouldian Corporation paid $120,000 for a 25%
interest in Termite Mound Corporation. On July 1, 2006, Gouldian
acquired an additional 45% (based on the January 1, 2006 number of
Termite Mound shares outstanding) for $236,400. Termite Mound’s
stockholders’ equity on January 1, 2006 consisted of $300,000 of $10
par value Common Stock and $100,000 of Retained Earnings. Termite
Mound’s net income for 2006 was $144,000 earned uniformly throughout

the year.
Required: Calculate each of the following amounts:
1. Gouldian’s income from Termite Mound for 2006.
2. The amount of minority interest income that will appear on the
consolidated income statement of Gouldian and Subsidiary for
2006.
LO2
Exercise 6
Catbird Corporation paid $240,000 on April 1, 2006 for all of the
common stock of Bug Corporation in a business acquisition. Bug’s
stockholders’ equity at April 1 consisted of the $195,000 January 1,
2006 stockholders’ equity of Bug plus first quarter income less
dividends. Dividends are paid quarterly. Any excess cost over book
value acquired is goodwill with a 10-year amortization period.
Additional information:
1. Catbird sold equipment with a 5-year remaining useful life to
Bug on July 1, 2006 for a gain of $10,000.
2. Bug’s accounts payable balance at December 31 includes $5,000
due to Catbird from the sale of equipment.
3. Catbird accounts for its investment in Bug using the equity
method as a one-line consolidation.
Required:
Complete the working papers to consolidate the financial statements
of Catbird and Bug Corporations for the year 2006.

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Catbird Corporation and Subsidiary
Consolidation Working Papers
for the year ended December 31, 2006
Eliminations
Catbird
Bug
Debit
Credit
INCOME STATEMENT
Net Sales
Income from
Bug
Gain on sale of
Equipment
Cost of sales
Depreciation
Other expenses
Preacquisition
Income
Net income
Retained
Earnings 1/1
Add: Net income
Dividends
Retained
Earnings 12/31
BALANCE SHEET
Cash
Receivables

Inventories
Equipment-net
Investment in
Bug
Goodwill
TOTAL ASSETS
LIAB. & EQUITY
Accounts and
notes payable
Capital stock
Paid-in capital
Retained
Earnings
Noncontrolling
Interest
TOTAL LIAB. &
EQUITY

$ 500,000

Noncntl

$170,000

21,000
10,000
(230,000) ( 90,000)
(113,000) ( 30,000)
( 30,000) ( 10,000)

158,000

40,000

75,000
50,000
158,000
40,000
( 30,000) ( 20,000)
$ 203,000

$70,000

47,000
80,000
120,000
80,000

30,000
50,000
90,000
80,000

246,000
$

573,000

$250,000

140,000
200,000
30,000

35,000
100,000
45,000

203,000

70,000

573,000

$250,000

$

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LO2
Exercise 7
Swallow
Corporation

paid
$62,000
to
acquire
100%
of
Gully
Corporation’s outstanding voting common stock at book value on May 1,
2006. The stockholders’ equity of Gully on January 1, 2006 consisted
of $40,000 Capital Stock and $20,000 Retained Earnings. Gully’s total
dividends for 2006 were $6,000, paid equally on April 1 and October
1. Gully’s net income was earned uniformly throughout 2006.
During 2006, Swallow made sales of $10,000 to Gully at a gross profit
of $3,000. One-half of this merchandise was inventoried by Gully at
year-end, and one-half of the 2006 intercompany sales were unpaid at
year-end 2006.
Swallow sold equipment with a ten-year remaining useful life to Gully
at a $2,000 gain on December 31, 2006. The straight-line depreciation
method is used.
Financial statements of Swallow and Gully Corporations
appear in the first two columns of the partially
consolidation working papers.

for 2006
completed

Required:
Complete the working papers for Swallow Corporation and Subsidiary
for the year 2006.

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Swallow Corporation and Subsidiary
Consolidation Working Papers
for the year ended December 31, 2006
Eliminations
Swallow
Gully
Debit
Credit

Noncontl

INCOME STATEMENT
Net Sales
$ 80,000
$40,000
Income from Gully
6,500
Gain on sale of
Equipment
2,000
Cost of sales
( 40,000) ( 15,000)
Depreciation
( 11,000) ( 4,000)

Other expenses
( 12,500) ( 6,000)
Preacquisition
Income
Net income
25,000
15,000
Retained
Earnings
60,000
20,000
Add: Net income
25,000
15,000
Dividends
( 10,000) ( 6,000)
Retained
Earnings 12/31
$ 75,000
$29,000
BALANCE SHEET
Receivables-net
19,000
16,000
Inventories
10,000
8,000
Other assets
10,500
14,000

Land
5,000
5,000
Buildings-net
20,000
15,000
Investment in
Gully
65,500
Equipment-net
TOTAL ASSETS
LIAB & EQUITY
Accounts payable
Other debt
Common stock
Retained
Earnings
Noncontrolling
Interest
TOTAL LIAB. &
EQUITY

40,000
$ 170,000

22,000
$80,000

16,000
19,000

60,000

10,000
1,000
40,000

75,000

29,000

170,000

$80,000

$

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LO2
Exercise 8
Swift Corporation paid $40,000 cash for an 80% interest in the voting
common stock of Weather Front Corporation on July 1, 2005, when
Weather Front’s stockholders’ equity consisted of $30,000 of $10 par
common stock and $15,000 retained earnings. The excess cost over the

book value of the investment was assigned $2,000 to undervalued
inventory items that were sold in 2005, with the remaining excess
being assigned to goodwill. During the last half of 2005, Weather
Front reported $4,000 net income and declared dividends of $2,000,
and Swift reported income from Weather Front of $1,100.
There were no intercompany sales during the last half of 2005, but
during 2006 Swift sold inventory items that cost $8,000 to Weather
Front for $12,000. Half of these inventory items were included in
Weather Front Corporation’s Inventory at December 31, 2006, with
$1,000 unpaid by Weather Front at December 31, 2006.
On January 5, 2006, Swift sold a plant asset with a book value of
$2,500 and a remaining useful life of 5 years to Weather Front for
$4,000. Weather Front Corporation owned the plant asset at year-end.

Swift Corporation uses the equity method to account for its
investment in Weather Front, and the changes in Swift’s Investment in
Weather Front account from
Acquisition until year-end 2006 are as follows:

Investment in Weather Front, July 1, 2005
$
Income from Weather Front July 1 – December 31, 2005
Less: Share of dividends received
(
Investment in Weather Front at December 31, 2005
Add: Income from Weather Front for 2006
Less: Dividends received
(
Investment in Weather Front at December 31, 2006
$

40,000
1,200
1,600 )
39,600
4,800
3,200 )
41,200

Required:
Complete the working papers at the end of the year December 31, 2006
that are given below.

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Swift Corporation and Subsidiary
Consolidation Working Papers
for the year ended December 31, 2006
Weather
Eliminations
Swift
Front
Debit
Credit

Noncntl

INCOME STATEMENT
Net Sales
$ 60,000
$34,000
Income from
4,800
Weather Front
Gain on sale of
Equipment
1,500
Cost of sales
( 27,000) ( 16,000)
Depreciation
( 5,000) ( 3,000)
Other expenses
( 12,100) ( 5,000)
Noncntl. expense
Net income
22,200
10,000
Retained
Earnings
10,100
17,000
Add: Net income
22,200
10,000
Dividends
( 12,000) ( 4,000)

Retained
Earnings 12/31
$ 20,300
$23,000
BALANCE SHEET
Cash
2,300
7,000
Net Receivables
7,000
5,000
Dividends Rec
800
Inventories
7,000
5,000
Plant assets-net
22,000
43,000
Investment in
Weather Front
41,200
TOTAL ASSETS
$
LIAB. & EQUITY
Accounts payable
Dividends
Payable
Common stock
Retained

Earnings
Noncontrolling
Interest
TOTAL LIAB. &
$
EQUITIES

80,300

$60,000

17,000

6,000

3,000
40,000

1,000
30,000

20,300

23,000

80,300

$60,000

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LO2
Exercise 9
On September 1, 2006, Warbler Corporation acquired an 80% interest in
Reed Corporation for $700,000. Reed’s stockholders’ equity at January
1, 2006 consisted of $200,000 of Common Stock and $600,000 of
Retained Earnings. The book values of its assets and liabilities were
equal to their respective fair values on this date. All excess
purchase cost was attributed to goodwill.
During 2006, Reed uniformly earned $78,000 and paid dividends of
$9,000 on each of four dates: February 1, June 1, August 1, and
December 1.
Required: Compute the following:
1. Warbler’s income from Reed for 2006.
2. Preacquisition income that will appear on the consolidated
income statement of Warbler Corporation and Subsidiary for 2006.
3. Minority interest income for 2006.
LO3
Exercise 10
At January 1, 2005, the stockholders’ equity of Raven Corporation and
its 60%-owned subsidiary, Trunk Corporation, are as follows:

Common stock, $10 par value
Retained earnings

Totals

$
$

Raven
700,000
800,000
1,500,000

$
$

Trunk
400,000
50,000
450,000

Trunk’s net income for 2005 was $40,000. Raven’s Investment in Trunk
account balance on December 31, 2005 was equal to its underlying
equity on December 31, 2005. Trunk Corporation issued 10,000
additional shares of common stock directly to Raven on January 1,
2006 at $12 per share.

Required: Compute the following:
1. Compute the balance in Raven’s Investment in Trunk account on
January 1, 2006 after its purchase of the additional Trunk
shares.
2. Calculate any positive or negative goodwill
Raven’s investment in the 10,000 Trunk shares.

stemming

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Solutions
Multiple Choice Questions
1

d

2

c

(15,000 shares/18,000 shares) =

83.33%

3

a

(12,000 shares/18,000 shares) =

66.67%

4

c

Selling price
Book value of interest sold
$300,000 x (20%/80%) =
Gain on sale
Income from Underbrush
$99,000 x (80% - 20%) =

5

b

Selling price
Book value of interest sold:
Beginning balance
Income for 2 months
$99,000 x 1/6 x 80% =
Adjusted book value
Percentage of interest sold
Book value applied
Gain on sale

Income from
Jan 1 – Mar

Mar 1 – Dec
Income from
6

b

$

$

84,000

$

75,000
9,000

$

59,400
84,000

$

62,640
21,360

300,000
13,200
313,200

20%
62,640

Underbrush:
1 $16,500 x 80% =
31 $82,500 x 60% =
Underbrush

$

Selling price
Book value of interest sold:
($350,000 x 20%)
Gain on sale
Finch’s share of Nest’s
Income: $35,000 x (90%-18%) =

Finch’s Investment account
balance at December 31, 2006:
Jan 1, 2006 balance

$

$

$

13,200
49,500
62,700

$

92,000

$

70,000
22,000

$

25,200

350,000

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Less: Book value of interest
sold
Plus: Income from Nest
Less: Dividends $6,000 x 72%
Investment account balance at
12/31/2006
7

b

(

70,000 )
25,200
4,320 )

(

Selling price
Book value of interest sold:
($350,000 x 1/9)
Gain on sale
Finch’s share of Nest’s
Income: $35,000 x (90%-10%) =

Finch’s Investment account
balance at December 31, 2006:
Jan 1, 2006 balance
Less: Book value of interest
sold
Plus: Income from Nest
Less: Dividends $6,000 x 80%
Investment account balance at
12/31/2006
8

9

a

a

$

$

47,000

$

38,889
8,111

$

28,000

38,889 )
28,000
4,800 )

(

Savannah’s equity after the
issuance of the new shares
($5,400,000 + $1,280,000)
Button-quail’s ownership
percentage

Button-quail’s share of
Savannah’s equity now
Button-quail’s previous share of
Savannah’s equity ($5,400,000 x
70%)
Savannah’s equity acquired in the
purchase
Amount spent to acquire stock
Goodwill purchased

300,880

350,000

(

(210,000 shares + 80,000
shares)/380,000 shares

$

$

=

76.32%

$

6,680,000

76.32%

$ 5,098,176

3,780,000
$
$

1,318,176
1,280,000
38,176

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10

11

b

b

Slipstream’s stockholders’ equity
prior to the stock issuance

Plus: Capital received from new
stock issued
New stockholders’ equity
Great Frigatebird’s ownership
percentage
Great Frigatebird’s adjusted
investment in Slipstream
Investment balance at 12/31/2006
($1,050,000 x 90%)
Additional investment (10,000
Shares x $45)
Investment account balance

$

1,050,000

$

450,000
1,500,000
77.14%

$

1,157,100

$

945,000

$

450,000
1,395,000

$

32,000

12

b

13

a

14

c

$120,000 net income x 2/3 year x
40%

15

a

$120,000 x 30% =

$

36,000

16

b

($120,000/12 months) x 5 months
x 70%

$

35,000

17

c

Cost of 70% interest
Book value of interest
Acquired:
January 1 balance
Add: 5 months of income
Less:
Dividends
paid
before June 1
Total book value at 6/1

Majority percentage
Book value of interest
Acquired
Copyright value

18

b

$

500,000
50,000

(

6,000 )
544,000
70%

$

390,400

$

380,800
9,600

From Question 17:

($9,600/120 months) x
7 months

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19

b

20

b

Exercise 1
Requirement 1
Cost of investment ($18,000 x 80%)
Plus: Purchase of 225 Treetop
shares at $18 on January 1, 2005
Investment account balance`

Requirement 2
Treetop’s stockholders’ equity at
January 1, 2005
Plus: Additional capital from the

shares issued
Total stockholders’ equity after
issuance of the new shares
Goshawk’s percentage
(960 + 225)/1425 =
Goshawk’s share of Treetop’s
equity after issuance
Goshawk’s share of Treetop’s
equity before stock issuance
Equity acquired in the purchase
Cost of interest acquired
Positive goodwill

$

14,400

$

4,050
17,450

$

18,000
4,050

$

22,050

83%

$

18,302

$

14,400
4,702
4,050
652

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Exercise 2
Preliminary computations
Investment balance, January 1
Income from Twig ($234,000 x 7/12
x 80%)
Less: April 1 dividends ($37,500 x
80%)
Book value at July 31, 2006

$

900,000
109,200
(

30,000 )

$

979,200

$

262,500

$ (

293,760
31,260 )

$

109,200

Requirement 1
Proceeds from sale
Book value of interest sold
($979,200 x 30%)
Loss on sale
Requirement 2
Income from Twig from Jan 1

through July 31 (from above)
$109,200
Income from August 1 – December 31
($234,000 x 5/12 x 56%)

54,600

Income from Twig for 2006

$

163,800

Requirement 3
Noncontrolling interest expense:
Jan 1 to Jul 31 ($234,000 x 7/12 x
20%)
Aug 1 to Dec 31 ($234,000 x 5/12 x
44%)
Noncontrolling interest expense

$

27,300

$

42,900
70,200

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Exercise 3
Preliminary computations
Investment balance, January 1
Income from Lichen ($300,000 x
9/12 x 60%)

Book value at September 30, 2006
Requirement 1
Proceeds from sale
Book value of interest sold
($1,965,000 x 10%)
Gain on sale

$

2,100,000
135,000

$

2,235,000

$

364,000

$

223,500
140,500

$

135,000

Requirement 2
Income from Lichen from Jan 1
through September 30 (from above)
Income from October 1–December 31
($300,000 x 3/12 x 54%)

40,500

Income from Lichen for 2006

$

175,500

Requirement 3
Noncontrolling interest expense:
Jan 1 to Sep 30 ($300,000 x 9/12 x
40%)
Oct 1 to Dec 31 ($300,000 x 3/12 x

46%)
Noncontrolling interest

$

90,000

$

34,500
124,500

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Exercise 4
Requirement
April 1
Investment in Openground
Income from Openground

Debit

Cash
Investment in Openground
Gain from sale of investment in
Openground

18,750
18,750
65,000
43,750
21,250

July 1
Cash
Investment in Openground

24,000

December 31
Investment in Openground
Income from Openground

33,750

Selling price
Book value of interest sold:
Beginning balance
Income for 3 months
$75,000 x 1/4 x 80% =
Adjusted book value
Percentage of interest sold
Book value applied
Gain on sale

Credit

24,000

33,750

$

$

65,000

$

43,750
21,250

200,000
18,750
218,750
20%
43,750

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Exercise 5
Preliminary computations:

Purchase 1:
Purchase price
Book value at April 1st:
Stockholders’ equity at January 1
Plus: Income through March
Total book value
Interest acquired
Book value of interest acquired

$
$

$

400,000
36,000
436,000
25%
109,000

Goodwill
Purchase 2:
Purchase price
Stockholders’ equity at January 1
Income through June 30
Total book value
Interest acquired
Book value of interest acquired

$

$

109,000
$ $

11,000

$ $

236,400

400,000
72,000
472,000
45%
212,400

Goodwill

212,400
$

Requirement 1
Gouldian’s income from Termite
Mound:
$144,000 x 9/12 x 25%
$144,000 x 6/12 x 45%

$

27,000
32,400

Income from Termite Mound

$

59,400

Requirement 2
Minority interest income:
$144,000 x 30% =

$

43,200

120,000

24,000

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