Chapter 3 Examination

1.
What are the advantages of acquiring the majority of the voting stock of another company
rather than acquiring all its voting stock?
2. What is the justification for preparing consolidated financial statements when, in fact, it is
apparent that the consolidated group is not a legal entity?
3. Why is it often necessary to prepare separate financial statements for each legal entity in a
consolidated group even though consolidated statements provide a better economic picture of
the combined activities?
4. What aspects of control must exist before a subsidiary is consolidated?
5. Why are consolidated work papers used in pre-paring preparing consolidated financial
statements?
Case
1. P Company purchased 80% of the outstanding common stock of S Company on January 2,

2013, for $380,000. Balance sheets for P Company and S Company immediately after the
stock acquisition were as follows: (3-2)
P Company S Company
Current assets $ 166,000 $ 96,000
Investment in S Company 380,000 -0-
Plant and equipment (net) 560,000 224,000
Land 40,000 120,000
$1,146,000 $440,000
Current liabilities $ 120,000 $ 44,000

Long-term notes payable -0- 36,000
Common stock 480,000 160,000
Other contributed capital 244,000 64,000
Retained earnings 302,000 136,000
$1,146,000 $440,000
S Company owed P Company $16,000 on open account on the date of acquisition.
Required:
Prepare a consolidated balance sheet for P and S Companies on the date of acquisition.
Any difference between the value implied by the purchase price of the investment and the
book value of net assets acquired relates to subsidiary land. The book values of S
Company's other assets and liabilities are equal to their fair values.
2. P Company acquired 54,000 shares of the common stock of S Company on January 1,

2013, for $950,000 cash. The stockholders' equity section of S Company's balance sheet
on that date was as follows: (3-7)
Common stock, $10 par value $600,000

Other contributed capital 80,000
Retained earnings 320,000
Total $1,000,000
On the date of acquisition, S Company owed P Company $10,000 on open account.
Required:
Present, in general journal form, the elimination entries for the preparation of a
consolidated balance sheet workpaper on January 1, 2013. The difference between the
value implied by the purchase price of the investment and the book value of the net assets
acquired relates to subsidiary land.
3. On January 2, 2013, Pope Company acquired 90% of the outstanding common stock of
Smithwick Company for $480,000 cash. Just before the acquisition, the balance sheets of
the two companies were as follows: (3-4)
Pope Smithwick
Cash $ 650,000 $ 160,000
Accounts Receivable (net) 360,000 60,000
Inventory 290,000 140,000
Plant and Equipment (net) 970,000 240,000
Land 150,000 80,000
Total Assets $2,420,000 $680,000
Accounts Payable $ 260,000 $ 120,000

Mortgage Payable 180,000 100,000
Common Stock, $2 par value 1,000,000 170,000
Other Contributed Capital 520,000 50,000
Retained Earnings 460,000 240,000
Total Equities $2,420,000 $680,000
The fair values of Smithwick's assets and liabilities are equal to their book values
with the exception of land.
Required:
A. Prepare the journal entry necessary to record the purchase of Smithwick's common
stock.
B. Prepare a consolidated balance sheet at the date of acquisition.
4. On January 1, 2013, Prima Company issued 1,500 of its $20 par value common shares
with a fair value of $50 per share in exchange for 2,000 outstanding common shares of
Swatch Company in a purchase transaction. Registration costs amounted to $1,700 paid
in cash. Just prior to the acquisition, the balance sheets of the two companies were as
follows: e3-4
Prima Swatch
Cash $ 73,000 $13,000
Accounts Receivable (net) 95,000 19,000
Inventory 58,000 25,000
Plant and Equipment (net) 95,000 43,000
Land 26,000 20,000
22,000
Total Assets $ 347,000 $ 120,000
Accounts Payable $ 66,000 16,000
18,000
Notes Payable 82,000 21,000
Common Stock, $20 par value 100,000 40,000
Other Contributed Capital 60,000 24,000

Retained Earnings 39,000 19,000
Total Liabilities and Equities $ 347,000 $ 120,000
Any differences between the book value of equity and the value implied by the purchase price
relates to Land.
Required:
A. Prepare the journal entry on Prima’s books to record the exchange of stock.
B. Prepare a Computation and Allocation Schedule for the Difference between book value
and value implied by the purchase price.
C. Calculate the consolidated balance for each of the following accounts as of December 31,
2013:
1. Cash
2. Land
3. Common Stock
4. Other Contributed Capital

Chapter 3 Examination

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1.

4. What aspects of control must exist before a subsidiary is consolidated?

1. P Company purchased 80% of the outstanding common stock of S Company on January 2,

Current liabilities $ 120,000 $ 44,000

S Company owed P Company $16,000 on open account on the date of acquisition.

2. P Company acquired 54,000 shares of the common stock of S Company on January 1,

Common stock, $10 par value $600,000

On the date of acquisition, S Company owed P Company $10,000 on open account.

Accounts Payable $ 260,000 $ 120,000

Cash $ 73,000 $13,000

Accounts Receivable (net) 95,000 19,000

Inventory 58,000 25,000

Plant and Equipment (net) 95,000 43,000

Land 26,000 20,000

Total Assets $ 347,000 $ 120,000

Accounts Payable $ 66,000 16,000

Notes Payable 82,000 21,000

Common Stock, $20 par value 100,000 40,000

Other Contributed Capital 60,000 24,000

Total Liabilities and Equities $ 347,000 $ 120,000

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