Phoenix applies the equity method to account for its investment in Sedona. Each year since the acquisition, Sedona has declared a $20,000 dividend. Sedona recorded net income of $70,000 in 2013 and $80,000 in 2014.
Selected account balances from the two companies’ individual records were as follows: 6. What is consolidated net income for Phoenix and Sedona for 2015? a. $148,000. b. $203,000. c. $228,000. d. $238,000. 7. What is Phoenix’s consolidated retained earnings balance at December 31, 2015? a. $250,000. b. $290,000. c. $330,000. d. $360,000. 8. On its December 31, 2015, consolidated balance sheet, what amount should Phoenix report for Sedona’s customer list? a. $10,000. b. $20,000. c. $25,000. d. $50,000. 9. Kaplan Corporation acquired Star, Inc., on January 1, 2014, by issuing 13,000 shares of common stock with a $10 per share par value and a $23 market value. This transaction resulted in recognizing $62,000 of goodwill. Kaplan also agreed to compensate Star’s former owners for any difference if Kaplan’s stock is worth less than $23 on January 1, 2015. On January 1, 2015, Kaplan issues an additional 3,000 shares to Star’s former owners to honor the contingent consideration agreement. Which of the following is true? a. The fair value of the number of shares issued for the contingency increases the Goodwill account at January 1, 2015. b. The parent’s additional paid-in capital from the contingent equity recorded at the acquisition date is reclassified as a regular common stock issue on January 1, 2015. c. All of the subsidiary’s asset and liability accounts must be revalued for consolidation purposes based on their fair values as of January 1, 2015. d. The additional shares are assumed to have been issued on January 1, 2014, so that a retrospective adjustment is required. 10. What is push-down accounting? a. A requirement that a subsidiary must use the same accounting principles as a parent company. b. Inventory transfers made from a parent company to a subsidiary. c. A subsidiary’s recording of the fair-value allocations as well as subsequent amortization. d. The adjustments required for consolidation when a parent has applied the equity method of accounting for internal reporting purposes. 11. Crawford Corporation acquires Nashville, Inc. The parent pays more for it than the fair value of the subsidiary’s net assets. On the acquisition date, Crawford has equipment with a book value of $430,000 and a fair value of $609,000. Nashville has equipment with a book value of $336,500 and a fair value of $441,500. Nashville is going to use push-down accounting. Immediately after the acquisition, what amounts in the Equipment account appear on Nashville’s separate balance sheet and on the consolidated balance sheet? a. $336,500 and $945,500. b. $336,500 and $766,500. c. $441,500 and $1,050,500. d. $441,500 and $871,500.
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