Chapter 12 - Supplement A:

MULTIPLE CHOICE QUESTION

1.

Consolidated financial statements are required in which of the following situations?

a.

Only when a company acquires another company for vertical integration.

b.

Only when a company can exert significant influence over another company.

c.

Only when a company acquires goodwill in the purchase of another company.

d.

Only when a parent company can exercise control over its subsidiary.

EXERCISES

E12A-1

Interpreting Consolidation Policy

Toyota Motor Corporation produces passenger car brands Lexus, Toyota, and Scion.

A recent annual report

includes the statement that “The consolidated financial statements include the accounts of the parent company

and those of its majority-owned subsidiary companies.” It then suggests that “All significant intercompany

transactions and accounts have been eliminated.” In your own words, explain the meaning of this last statement.

Why is it necessary to eliminate all intercompany accounts and transactions in consolidation?

E12A-2

Analyzing Goodwill and Reporting the Consolidated Balance Sheet

On January 1, 2011, Acquire Co. purchased 100 percent of the outstanding voting shares of Sub Co. in the open

market for $85,000 cash. On that date, the separate balance sheets (summarized) of the two companies reported

the following book values:

Immediately after the Acquisition

January 1, 2011

Acquire Co.

Sub Co.

Cash

$ 11,500

$17,500

Investment in Sub Co. (at cost)

85,000

Property and equipment (net)

31,000

41,500

Total assets

$127,500

$59,000

Liabilities

$ 41,000

$ 13,000

Common stock:

Acquire Co. (no-par)

82,000

Sub Co. (par $10)

37,500

Retained earnings

4,500

8,500

Total liabilities and stockholders’ equity

$127,500

$59,000

It was determined on the date of acquisition that the fair value of the assets and liabilities of Sub Co. were equal

to their book values.

Required:

1.

Give the journal entry that Acquire made at date of acquisition to record the investment. If none is required,

explain why.

2.

Analyze the acquisition to determine the amount of goodwill purchased.

3.

Prepare a consolidated balance sheet immediately after acquisition.

12S-6

Toyota Motor

Corporation

ART:

International icon

Chapter 12 - Supplement A:

E12A-3

Determining Consolidated Net Income

Assume that O Company acquired I Company on January 1, 2011, for $100,000 cash. At the time, the net book

value of I Company was $86,000. The fair value was $93,000 with property and equipment having a fair value of

$6,000 over book value.

The property and equipment has a three-year remaining life and is depreciated straight-

line with no residual value. During 2011, the companies reported the following operating results:

O Company

I Company

Revenues related to their own operations

$460,000

$80,000

Expenses related to their own operations

 340,000

 60,000

Compute consolidated net income for the year ended December 31, 2011.

12S-7