Question 1: Haynes, Inc., obtains 100 percent of Turner Company’s common stock on January 1, 2002, by issuing 9,000 shares of $10 par value common tock. Haynes’s shares had a $15 per share fair market value. On that date, Turner reported a net book value of $100,000. However, its equipment (with a five-year remaining life) was undervalued by $5,000 in the company’s accounting records. In addition, Turner had developed a customer list with an assessed value of $30,000, although no value had been recorded on Turner’s books. The customer list had an estimated remaining useful life of 10 years. The following figures come from the individual accounting records of these two companies as of December 31, 2002:
Haynes Turner
Revenues $600,000 $230,000
Expenses 440,000 120,000
Investment income not given -0-
Dividends paid 80,000 50,000
The following figures come from the individual accounting records of these two companies as of December 31, 2003:
Haynes Turner
Revenues $700,000 $280,000
Expenses 460,000 150,000
Investment Income not given -0-
Dividends paid 90,000 40,000
Equipment 500,000 300,000
a. What balance does Haynes’s Investment in Turner account show on December 31, 2003, when the equity method is applied?
b. What is the consolidated net income for the year ending December 31, 2003?
c. What is the consolidated Equipment balance as of December 31, 2003? How would this answer be affected by the investment method applied by the parent?
d. If Haynes has applied the cost method to account for its investment, what adjustment is needed to beginning Retained Earnings on a December 31, 2003, consolidation worksheet? How would this answer change is the partial equity method had been in use? How would this answer change if the equity method had been in use?
Question 2: Acme Co., a consolidated enterprise, conducted an impairment review for each of its reporting units. One particular reporting unit, Martel, emerged as a candidate for possible goodwill impairment. Martel has recognized net assets of $780, including goodwill of $500. Martel’s fair value is assessed at $650 and includes two internally developed unrecognized intangible assets (a patent and a customer list with fair values of $150 and $50, respectively). The flowing table summarized current financial information for the Martel reporting unit:
Carrying Amount Fair Value
Tangibles assts, net $ 80 $110
Recognized intangible assets, net 200 230
Goodwill 500 ???
Unrecognized intangible assets N/A 200
Total $780 $650
a. Show the two steps to determine the amount of any goodwill impairment for Acme’s Martel reporting unit.
b. After recognition of any goodwill impairment loss, what are the reported book values for the following assets of Acme’s reporting unit Martel?
• Tangible assets, net
• Goodwill’
• Customer list
• Patent
Question 3: On January 1, 2004, Brendan, Inc., reports net assets of $760,000 although equipment (with a four-year life) having a book value of $440,000 is worth $500,000 and an unrecorded patent is valued at $45,000. Hope Corporation pays $692,000 on that date for an 80 percent ownership in Brendan. If the patent is to be written off over a 10-year period, at what amount should the patent be reported on consolidated statements at December 31, 2005?
a. $20,800
b. $28,800
c. $34,200
d. $67,200
Question 4: On January 1, 2003, Turner Inc., reports net assets of $480,000 although a building (with a 10-year life) having a book value of $260,000 is now worth $310,000. Plaster Corporation pays $400,000 on that date for a 70 percent ownership in Turner. On December 31, 2005, Turner reports a Building account of $245,000 while Plaster reports a Building account of $510,000. What is the consolidated balance of the Building account?
a. $779,500
b. $783,500
c. $790,000
d. $805,000