For questions 1 to 3, use the following balance sheets for the Seattle Company and the Washington Company as of Decem-ber 31, 19x1. During 19x1, the individual profit reported by the Seattle Company was $150,000 and the Washington Company's individual profit was $80,000. The Seattle Company acquired 90% of the Washington Company stock on January 1, 19x0.
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Seattle
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Washington
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Assets
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Company
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Company
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Other Current Assets
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$ 375,000
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$ 150,000
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Inventory
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225,000
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200,000
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Equipment
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3,000,000
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1,250,000
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Accumulated Depreciation -Equipment
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(1,000,000)
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(500,000)
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Buildings
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4,800,000
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3,000,000
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Accumulated Depreciation -Buildings
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(3,200,000)
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(1,400,000)
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Investment in Washington
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|
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Company Stock (90%)
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1,500,000
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Investment in Washington
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Company Bonds (par value $1,000)
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515,000
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$6,215,000
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$2,700,000
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Equities
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|
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Current Liabilities
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$ 180,000
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$ 100,000
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Bonds Payable (par value $1,000)
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1,000,000
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1,400,000
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Premium on Bonds
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100,000
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Capital Stock-Seattle
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3,000,000
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Capital Stock-
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Washington
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900,000
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Retained E arnings-
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Seattle
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1,935,000
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Retained E arnings-
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Washington
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300,000
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$6,215x000
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$2,700,000
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1. Assume that the Washington Company bonds bear interest at 6% payable annually on December 31; that the Seattle Company acquired its share of the bonds, $500,000, on January 1, 19x1; that the fair market value of the bonds was exactly equal to their carrying value at the date the Seattle Company acquired 90% of the Washington Com-pany stock. The bonds will mature on December 31, 19x3. Amortization of bond premium is based on the straight-line method. On the consolidated trial balance on Decem-ber 31, 19x1, the correct eliminating entry for the inter-company bonds and intercompany interest is:
A. Debit: Loss on Bond Retirement for $10,000, Bonds Payable for $500,000, and Interest Income for $30,000. Credit: Investment in Washington Company Bonds for $515,000 and Interest Expense for $25,000.
B. Debit: Loss on Bond Retirement for $15,000, Bonds Payable for $500,000, and Interest Income for $30,000. Credit: Investment in Washington Company Bonds for $515,000 and Interest Expense for $30,000.
C. Debit: Retained Earnings for $15,000, Bonds Payable for $500,000, and Interest Income for $30,000. Credit: Investment in Washington Company Bonds for $515,000 and Interest Expense for $30,000.
D. Debit: Loss on Bond Retirement for $20,000, Bonds Payable for $500,000, and Interest Income for $25,000. Credit: Investment in Washington Company Bonds for $515,000 and Interest Expense for $30,000.
2. Assume the same situation as in question 3 with respect to the bonds except that the consolidated balance sheet at the end of 19x2 is being prepared for the separate balance sheets. 'The correct eliminating entry would require a debit to Retained Earnings-Seattle for
A. 0. C. $10,000.
B. $5,000. D. $15,000.
3. Assume that the Washington Company assets and liabilities on January 1, 19x0, had fair market values exactly equal to book values and that the Seattle Company uses the cost method of accounting for its investment. The Washington Company earned $20,000 during 19x0 and paid no dividends. If goodwill is being amortized over the maximum period, and if there were no other intercompany transactions, the correct amount of consolidated net income for 19x1 would be
A. $209,250. C. $222,000.
B. $217,250. D. $230,000.
Questions 4 through 8 are based on the following data:
The following balance sheets are for the Denver Company and the Colorado Company as of January 1, 19x1. The statements are presented as they appeared immediately before the acqui-sition of Colorado Company stock by the Denver Company.
January 1, 19x1
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Assets
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Denver Colorado
Company Company
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Other Current Assets
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$ 2,000,000
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$ 100,000
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Inventory
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250,000
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130,000
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Equipment
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4,000,000
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2,400,000
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Accumulated Depreciation -Equipment
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(1,500,000)
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(1,600,000)
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Buildings
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6,000,000
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4,000,000
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Accumulated Depreciation -Buildings
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(3,(.100,000)
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(2,500,000)
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$7,750,000
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$2,530,000
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Equities
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|
|
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Current Liabilities
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$ 400,000
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$ 75,000
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Bonds Payable
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3,000,000
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1,500,000
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Premium on Bonds
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150,000
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Capital Stock-
D enver ($10 par)
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3,000,000
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Capital Stock-Colorado ($25 par)
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500,000
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Premium on Stock-Colorado
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100,000
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Retained Earnings--Denver
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1,350,000
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Retained Earnings---Colorado
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205,000
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$7,750,00()
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$2,530,000
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4. Assume that the Denver Company is to acquire all of the Colorado Company stock by issuing new shares of its own stock as consideration. Also assume that the market value of the Denver Company stock at the time of the ex-change is $30 per share and that the market value per share of the Colorado Company stock is $50 per share. Let the market value of each stock at the date of acquisition be the sole determinant. What is the number of shares which the Denver Company must issue to the Colorado Company shareholders?
A. 16,667 C. 33,333
B. 20,000 D. 50,000
5. Assume that the Denver Company issues 55,000 shares in exchange for all of the Colorado Company stock, and that there is no need to adjust the financial statements of either because of different accounting methods being em-ployed.
If all the requirements for using the pooling method are met, the amount of consolidated retained earnings on the consolidated balance sheet at date of acquisition would be
A. 0. C. $1,350,000.
B. $205,000. D. $1,555,000.
6. Assume that the purchase method is used and that the Denver Company debited its investment account for the fair market value of the stock given in exchange, and that the market value of the Colorado Company's equipment was $150,000 greater than the book value at date of ac-quisition. The amount of Excess of Acquisition Cost over Book Value of Acquired Subsidiary on the January 1, 19x1, consolidated balance sheet would be
A. $205,000. C. $45,000.
B. $195,000. D. 0.
For questions 7 and 8 assume that the Denver Company ac-quired on January 1, 19x1, 15,000 shares of Colorado Com-pany stock by paying $900,000 in cash plus broker's fees of $25;000.
7. Assuming that the legal method of valuing minority in-terest is used, the amount of Excess of Acquisition Cost Over Book Value of Acquired Subsidiary to be shown on the consolidated balance sheet on January 1, 19x1, should be
A. $321,250. C. $120,000.
B. $201,250. D. $95,000.
8. Assuming that the entity method of valuing minority in-terest is used, the amount to be shown for Minority Inter-est on the January 1, 19x1, consolidated balance sheet should be
A. $121,250 . C. $300,000.
B. $201,250. D. $308,333.