Multiple-Choice Questions on Consolidation [AICPA Adapted]Select the correct answer for ea...

Multiple-Choice Questions on Consolidation [AICPA Adapted]

Select the correct answer for each of the following questions.

1. A 70 percent owned subsidiary company declares and pays a cash dividend. What effect does the dividend have on the retained earnings and minority interest balances in the parent company’s consolidated balance sheet?

a. No effect on either retained earnings or minority interest.

b. No effect on retained earnings and a decrease in minority interest.

c. Decreases in both retained earnings and minority interest.

d. A decrease in retained earnings and no effect on minority interest.

2. How is the portion of consolidated earnings to be assigned to the noncontrolling interest in consolidated financial statements determined?

a. The parent’s net income is subtracted from the subsidiary’s net income to determine the noncontrolling interest.

b. The subsidiary’s net income is extended to the noncontrolling interest.

c. The amount of the subsidiary’s earnings recognized for consolidation purposes is multiplied by the noncontrolling interest’s percentage of ownership.

d. The amount of consolidated earnings on the consolidated worksheets is multiplied by the noncontrolling interest percentage on the balance sheet date.

3. On January 1, 20X5, Post Company acquired an 80 percent investment in Stake Company. The acquisition cost was equal to Post’s equity in Stake’s net assets at that date. On January 1, 20X5, Post and Stake had retained earnings of $500,000 and $100,000, respectively. During 20X5, Post had net income of $200,000, which included its equity in Stake’s earnings, and declared dividends of $50,000; Stake had net income of $40,000 and declared dividends of $20,000. There were no other intercompany transactions between the parent and subsidiary. On December 31, 20X5, what should the consolidated retained earnings be?

a. $650,000.

b. $666,000.

c. $766,000.

d. $770,000.

Note: Items 4 and 5 are based on the following information:

On January 1, 20X8, Ritt Corporation acquired 80 percent of Shaw Corporation’s $10 par common stock for $956,000. On this date, the fair value of the noncontrolling interest was $239,000, and the carrying amount of Shaw’s net assets was $1,000,000. The fair values of Shaw’s identifiable assets and liabilities were the same as their carrying amounts except for plant assets (net) with a remaining life of 20 years, which were $100,000 in excess of the carrying amount. For the year ended December 31, 20X8, Shaw had net income of $190,000 and paid cash dividends totaling $125,000.

4. In the January 1, 20X8, consolidated balance sheet, the amount of goodwill reported should be

a. $0.

b. $76,000.

c. $95,000.

d. $156,000.

5. In the December 31, 20X8, consolidated balance sheet, the amount of noncontrolling interest reported should be

a. $200,000.

b. $239,000.

c. $251,000.

d. $252,000.