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Chapter 9 Test Bank

INDIRECT AND MUTUAL HOLDINGS

Multiple Choice Questions

LO11. 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.

LO12. 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.

Page’s net income for 2005 is

a. $808,000.b. $848,000.c. $920,000.d. $960,000.

Use the following information in answering questions 3, 4, and 5.

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.

©2009 Pearson Education, Inc. publishing as Prentice Hall9-1

LO13. Noncontrolling interest expense from Badrack is

a. $9,000.b. $10,000.c. $20,000.d. $40,000.

LO14. Noncontrolling interest from Achille is

a. $18,000.b. $25,200.c. $36,200.d. $72,000.

LO15. Consolidated net income for Paint Corporation and Subsidiaries

can be determined by the equation:

a. $234,000.b. $244,800.c. $260,000.d. $270,000.

LO16. 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 $180,000 Alders Corporation 72,000 Babao Corporation (30,000)

Consolidated net income and noncontrolling interest (loss), respectively, for 2005 area. $211,200 and ($1,200).b. $211,200 and ($3,600).c. $213,600 and ($1,200).d. $213,600 and ($3,600).


LO17. 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 Pablo’s separate income. Separate incomes for the affiliated companies (excluding investment income) for 2005 are:

Pablo $250,000 Abagia 70,000 Babin 100,000

Consolidated net income for the three affiliates is

a. $304,000.b. $324,000.c. $344,000.d. $364,000.

Use the following information for Questions 8, and 9.

Paisley Corporation owns 90% of Ackers Company. Akers Company owns 60% of Baglin. Paisley’s separate income for the current year is $540,000. Akers’s separate income is $240,000. Baglin’s separate income is $150,000.LO18. 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).

LO19. The formula for consolidated net income is calculated as

a. $930,000 – ($240,000 X 10%)b. $930,000 – ($240,000 X 10%) – ($150,000 X 40%)c. $930,000 – ($240,000 X 10%) – ($150,000 X 46%)d. $930,000 – ($240,000 X 10%) – ($150,000 X 40%)

– ($150,000 X 10% X 50%)


LO110. Paglia Corporation owns 80% of Aburn Corporation and has

separate income of $200,000 for 2005. Aburn Corporation has separate income of $100,000 and owns 70% of the outstanding stock of Badley Corporation. Badley Corporation has separate income of $80,000. The correct amount of consolidated net income is

a. $324,800.b. $328,800.c. $344,800.d. $344,800.

Use the following information for Questions 11, 12, and 13.

Pace Corporation owns 70% of Abaza Corporation and 60% of Babon Corporation. Abaza Corporation owns 20% of Babon Corporation. Pace’s investment in Abaza was consummated in one transaction at a purchase price $20,000 in excess of the book value. Pace’s purchase of Babon was made in one transaction at a price $30,000 above book value. Abaza’s 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. Pace’s separate income for the current year is $100,000. Abaza’s separate income is $190,000, which includes a $10,000 unrealized loss on the sale of land to Pace. Babon’s separate income is $150,000.LO111. The amount of consolidated net income for Pace Corporation and

Abaza for the current year is

a. $341,000.b. $348,400.c. $351,000.d. $355,000.

LO112. The amount of noncontrolling interest expense for the current

year is

a. $69,000.b. $85,000.c. $95,000.d. $99,000.

LO113. The amount of goodwill in Pace’s consolidated balance sheet is

a. $50,000.b. $52,000.c. $58,000.d. $60,000.


Use the following information for Questions 14 through 18.

Pahm Corporation owns 80% of the outstanding voting common stock of Abussi Corporation, which was purchased for $60,000 over Abussi’s 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.LO114. Consolidated net income for the current year is

a. $504,800.b. $516,200.c. $545,200.d. $557,200.

LO115. The amount of income for the current year assigned to the

minority shareholders of Badock Corporation is

a. $100,000.b. $104,000.c. $120,000.d. $140,000.

LO116. The amount of income for the current year assigned to the

minority shareholders of Abussi Corporation is

a. $48,000.b. $53,200.c. $74,000.d. $79,200.

LO117. The amount of income assigned to the noncontrolling interest in

the current year’s consolidated income statement is

a. $142,800.b. $154,800.c. $183,200.d. $195,200.

LO118. The net income recorded on the books of Pahm Corporation for

the current year is

a. $504,800.b. $516,800.c. $545,200.d. $557,200.


Use the following information for Questions 19 and 20.

Paiva Corporation owns 80% of Ackroyd Corporation’s outstanding common stock and Ackroyd owns 80% of the outstanding common stock of Bailey Corporation. Bailey Corporation owns 10% of the outstanding common stock of Ackroyd Corporation. The separate incomes for the three affiliated companies for the year ended December 31, 2005 (excluding investment income) are as follows: Paiva Corporation, $100,000, Ackroyd Corporation, $50,000, and Bailey Corporation, $30,000.

Notations for question 19 are:P = Income of Paiva on a consolidated basisA = Income of Ackroyd on a consolidated basisB = Income of Bailey on a consolidated basis

LO219. The equation, in a set of simultaneous equations, that computes

Paiva Corporation is

a. P = $50,000 + .8B.b. P = $30,000 + .2A.c. P = $100,000 + .2A.d. P = $100,000 + .8A.

LO220. Ackroyd’s noncontrolling interest in the total consolidated

income for 2005 is

a. $ 7,609.b. $ 8,044.c. $15,652.d. $23,696.


LO1Exercise 1

Paice Corporation owns 80% of the voting common stock of Accardi Corporation and 60% of the voting common stock of Badger Corporation. Accardi owns 20% of the voting common stock of Badger. There are no cost-book differentials to consider. The separate incomes of these affiliated companies for 2005 are: Paice $300,000 Accardi 160,000 Badger 120,000

Required:

Calculate consolidated net income for Paice Corporation and Subsidiaries for 2005.


LO1Exercise 2

Pacini Corporation owns an 80% interest in Abdoo Corporation, acquired on January 1, 2004 for $700,000 when Abdoo’s 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:

Abdoo Bach CaboCapital Stock $ 600,000 $ 200,000 $ 250,000Retained Earnings 280,000 140,000 130,000Total stockholders’ equity $ 880,000 $ 340,000 $ 380,000

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 the equity method correctly. Determine the balances of the three investment accounts at December 31, 2005.


LO1Exercise 3

Paik Corporation owns 80% of Acdol Corporation and 60% of Ben Corporation. Acdol Corporation owns 10% of Ben Corporation. All subsidiary investments were acquired at book value equal to fair value. Separate incomes (excluding investment income) of the affiliated companies for 2005 are:

Paik: $600,000 which includes $60,000 unrealized losses on inventory items sold to Ben

Acdol: $360,000

Ben: $340,000 which includes $100,000 unrealized profit on land sold to Acdol

Required:

Determine consolidated net income and noncontrolling interest expense for Paik Corporation and Subsidiaries for 2005.

LO1Exercise 4 Packer Corporation owns 100% of Abel Corporation, Abel Corporation owns 95% of Bacon Corporation and Bacon Corporation owns 80% of Cab Corporation. The separate incomes of Packer, Abel, Bacon, and Cab are $300,000, $100,000, $200,000, and $300,000, respectively. All of the investments were made at times when the investee’s book values were equal to their fair values.

Required:

Determine the consolidated net income and noncontrolling interest expense for Packer Corporation and Subsidiaries for the current year.


LO1Exercise 5

On January 1, 2005 Paki Inc. bought 75% interest in Adam Corporation. At the time of purchase, Adam owned 80% of Baird Company and 10% of Castle Corporation. In all acquisitions the book value equals the fair value. Separate earnings for the three affiliates for 2005 are as follows:

Separate Earnings

Dividends

Paki Company $ $400,000 $150,000Adam Inc (50,000 ) 90,000Baird Company 100,000 35,000Castle Company 225,000 80,000

Required:

Compute consolidated net income and noncontrolling interest expense for Paki for 2005.

LO2Exercise 6

Paco Corporation owns 90% of Aber Corporation, Aber Corporation owns 85% of Back Corporation, and Back Corporation owns 5% of Aber Corporation. The separate incomes (excluding investment income), of Paco, Aber, and Back are $100,000, $40,000, and $55,000, respectively.

Required:

Calculate revised net incomes for Paco, Aber, and Back by including the correct amount of investment income for each company. Use the conventional method for your solution.


LO2Exercise 7

Paine Corporation owns 90% of Achan Corporation, Achan Corporation owns 85% of Badge Corporation, and Badge Corporation owns 5% of Achan Corporation. The separate incomes (excluding investment income), of Paine, Achan, and Badge are $400,000, $160,000, and $220,000, respectively.

Required:

Calculate the consolidated net income for Paine Corporation and its subsidiaries, Achan, and Badge. Use the treasury stock method for your solution.

LO2Exercise 8

Separate earnings and investment percentages for the three affiliates for 2005 are as follows:

Separate Earnings

Percentage Interest in

Acres

Percentage Interest in Bain

Palace Company $ 450,000 80%Acres Inc 200,000 70%Bain Corporation 160,000 10%

Required:

Compute consolidated net income for Palace for 2005.


LO2Exercise 9

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.

LO2Exercise 10

Padua Corporation owns 80% of Able Corporation, Able Corporation owns 60% of Baden Corporation, and Baden Corporation owns 10% of Padua Corporation. The separate incomes (excluding investment income), of Padua, Able, and Baden are $300,000, $100,000, and $80,000, respectively.

Required:

Calculate the consolidated net income for Padua Corporation and its subsidiaries, Able and Baden. Use the treasury stock method for your solution.


SOLUTIONS

Multiple Choice Questions

1 b

2 b

Page Ace BaderSeparate incomes $ 500,000 $ 300,000 $ 400,000Allocate 70% of Bader to Ace

280,000 ( 280,000 )Allocate 60% of Ace to Page 348,000 ( 348,000 )Page’s net income $ 848,000Noncontrolling interest expense

$ 232,000 $ 120,000

3 b

From Badrack: .20 x $50,000 = $ 10,000

4 b

From Achille: (.18)x[$100,000 + (.80)x($50,000)] $ 25,200

5 a

Noncontrolling interest expense:From Badrack: .20 x $50,000 = $ 10,000

From Achille: (.18)x[$100,000 + (.80)x($50,000)] $ 25,200

Total minority income $ 36,200

Combined separate incomes $ 270,000Less: Noncontrolling interest expense ( 36,200 )Consolidated net income $ 234,800


6 d Noncontrolling interest net loss: $8,400 + ($12,000) = ($3,600)

Pabari Alders BabaoSeparate incomes $ 180,000 $ 72,000 $( 30,000 )Less: Unrealized profit on land ( 12,000 )Subtotal $ 180,000 $ 60,000 $( 30,000 )Allocate Babao’s net loss to Alders ($30,000) x 60% ( 18,000 ) 18,000Allocate 80% of Alders income to Pabari 33,600 ( 33,600 )Consolidated net income $ 213,600Noncontrolling interest expense

$ 8,400 $( (12,000 )

7 c

Pablo Abagia BabinSeparate incomes $ 250,000 $ 70,000 $ 100,000Less: Unrealized profit on land ( 20,000 )Separate realized incomes $ 230,000 $ 70,000 $ 100,000Allocate Babin’s income: 60% to Pablo 60,000 ( 60,000 ) 20% to Abagia 20,000 ( 20,000 )Allocate Abagia’s net income $90,000 x 60% 54,000 ( 54,000 )

Consolidated net income $ 344,000Noncontrolling interest expense

$ 36,000 $ 20,000

8 d

9 c


10 a

Paglia Aburn BadleySeparate incomes $ 200,000 $ 100,000 $ 80,000

Allocate Badley’s income: 70% to Aburn 56,000 ( 56,000 )Subtotal $ 200,000 $ 156,000 $ 24,000Allocate Aburn’s income: 80% to Paglia 124,800 ( 124,800 )Consolidated net income $ 324,800Noncontrolling interest expense

$ 32,200 $ 24,000

11 cPace Abaza Babon

Separate incomes $ 100,000 $ 190,000 $ 150,000Plus: Unrealized loss on land sale to Pace 10,000Separate realized incomes $ 100,000 $ 200,000 $ 150,000Allocate Babon’s income: 60% to Pace 90,000 ( 90,000 ) 20% to Abaza 30,000 ( 30,000 )Subtotal 190,000 230,000 30,000Allocate Abaza’s net income to Pace $230,000 x 70% 161,000 ( 161,000 )


$ 69,000 $ 30,000

12 d From Question 11: $69,000 + 30,000 = $99,000

13 d

14 b $200,000 + (80%)x[$240,000 + (60%)x(260,000)] = $516,200

15 b 40% x $260,000 = $104,000

16 d (20% x $240,000) + (20% x $156,000) = $79,200

17 c $79,200 + $104,000 = $183,200


Pahm Abussi BadockSeparate incomes $ 200,000 $ 240,000 $ 260,000Allocate Badock’s income: 60% to Abussi 156,000 ( 156,000 )Subtotal $ 200,000 $ 396,000 $ 104,000Allocate Abussi’s net income to Pahm $396,000 x 80% 316,800 ( 316,800 )


$ 79 ,200 $ 104,000

18 b Pahm’s separate net income is the same as the consolidated net income.

19 d

20 b

P = $100,000 + .8AA = $50,000 + .8BB = $30,000 + .1P

Computations:

A = $50,000 + .8 x ($30,000 + .1A)A = $50,000 + $24,000 + .08SA = $80,435 (rounded)

Noncontrolling interest expenseAckroyd: $80,435 x 10% outside interest $ 8,044


LO1Exercise 1

Paice Corporation and SubsidiariesIncome Allocation Schedule

For the year 2005

Paice Accardi BadgerSeparate earnings $ 300,000 $ 160,000 $ 120,000Allocate Badger’s income: 60% to Paice 72,000 ( 72,000 ) 20% to Accardi 24,000 ( 24,000 )Subtotal $ 372,000 $ 184,000 $ 24,000Allocate Accardi’s income: 80% to Paice 147,200 ( 147,200 )Consolidated net income $ 519,200Noncontrolling interest expense

$ 36,800 $ 24,000

LO1Exercise 2

Requirement 1:Pacini’s investment in Abdoo:Goodwill at acquisition $700,000 cost – ($800,000 x 80%) book value $ 60,000

Abdoo’s investment in Bach:Goodwill at acquisition: $180,000 cost –($250,000 x 60%) book value acquired 30,000

Abdoo’s investment in Cabo:Goodwill at acquisition: $270,000 cost –($350,000 x 70%) book value acquired 25,000Total goodwill on December 31, 2005 $ 115,000

Requirement 2:Pacini Abdoo’s booksEquityin

Abdoo

Equityin Bach

Equityin Cabo

Investment cost $ 700,000 $ 180,000 $ 270,000Investors’ share of equitysince acquisition: Abdoo: ($80,000 x 80%) 64,000 Bach: ($90,000 x 60%) 54,000 Cabo: ($30,000 x 70%) 21,000Investment account balance $ 764,000 $ 234,000 $ 291,000


LO1Exercise 3

Paik Acdol BenSeparate incomes $ 600,000 $ 360,000 $ 340,000Plus: Unrealized loss on inventory sales to Ben 60,000Less: Unrealized profits on land sold to Acdol ( 100,000 )Separate realized incomes 660,000 360,000 240,000Allocate Ben: 60% to Paik 144,000 ( 144,000 ) 10% to Acdol 24,000 ( 24,000 )Subtotal $ 804,000 $ 384,000 $ 72,000Allocate Acdol to Paik 307,200 ( 307,200 )Consolidated net income $ 1,111,200Noncontrolling interest expense

$ 76,800 $ 72,000

LO1Exercise 4

Packer Abel Bacon CabSeparate incomes $300,000 $100,000 $200,000 $300,000

Allocate Cab’s income: 80% to Bacon

240,000 (240,000)

Subtotal $440,000Allocate Bacon’s income: 95% to Abel

418,000 (418,000)

Subtotal 518,000Allocate Abel’s income: 100 to Packer

518,000 (518,000)

Consolidated net income $818,000

Noncontrolling interest $0 $22,000 $60,000


LO1Exercise 5

Castle is not consolidated because the ownership percentage is less than 20% and no evidence of control is given

Paki Adam BairdSeparate incomes $ 400,000 $ (50,000 ) $ 100,000Allocate Baird 80% 80,000 (80,000 )Subtotal $ 400,000 $ 30,000 $ 20,000Allocate Adam 22,500 ( 22,500 ) Consolidated netincome $ 422,500Minority income $ 7,500 $ 20,000

Noncontrolling interest in Baird $ 20,000Noncontrolling interest in Adam 7,500Noncontrolling interest expense $ 27,500


LO2Exercise 6

Equations:P = Income of Paco on a consolidated basisA = Income of Aber on a consolidated basisB = Income of Back on a consolidated basis

P = $100,000 + .90AA = $ 40,000 + .85BB = $ 55,000 + .05A

Computations:

A = $40,000 + (.85)x($55,000 + .05A)A = $40,000 + $46,750 + .0425AA = $90,601

B = $55,000 + (.05)x($90,601)B = $59,530

P = $100,000 + (.9)x($90,601)P = $100,000 + $81,541P = $181,541

LO2Exercise 7

Equations:P = Income of Paine on a consolidated basisA = Income of Achan on a consolidated basis

A = $160,000 + (.85) x ($220,000) A = $160,000 + $187,000 A = $347,000

P = $400,000 + (90/95) x ($347,000) P = $400,000 + $328,737 P = $728,737


LO2Exercise 8

Equations:P = Income of Palace on a consolidated basisA = Income of Acres on a consolidated basisB = Income of Bain on a consolidated basis

P = $450,000 + .8AA = $200,000 + .7BB = $160,000 + .1A

Computations:

A = $200,000 + (.7)x($160,000 + .1A)A = $200,000 + $112,000 + .07AA = $335,484P = $450,000 + (.8)x($335,484)P = $450,000 + $268,387P = $718,387

LO2Exercise 9

Equations:P = Income of Padhy on a consolidated basisA = Income of Abrams on a consolidated basisB = Income of Bacud on a consolidated basis

P = $300,000 + .8AA = $100,000 + .6BB = $ 80,000 + .1P

Computations:

P = $300,000 + (.8)x($100,000 + .6B)P = $300,000 + $80,000 + .48BP = $300,000 + $80,000 + (.48)x($80,000 + .1P)P = $380,000 + $38,400 + .048PP = $439,496


LO2Exercise 10

Equations:P = Income of Padua on a consolidated basisA = Income of Able on a consolidated basis

A = $100,000 + (.6) x ($80,000) A = $100,000 + $48,000 A = $148,000

P = $300,000 + (.8) x ($148,000)] P = $300,000 + $118,400 P = $418,400


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