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Chapter 09 indirect and mutual holdings

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Chapter 9 Test Bank

INDIRECT AND MUTUAL HOLDINGS

Multiple Choice Questions

LO1
1. Pallet Corporation owns 80% of Adelt Corporation and Adelt owns
60% of Bajo Inc. Which of the following is correct?
a. Bajo should not be consolidated because minority interests
hold 52%.
b. Bajo should be consolidated because the 60% of Bajo stock
is held in the affiliate structure.
c. Pallet has 8% indirect ownership of Bajo.
d. Pallet has 80% indirect ownership of Bajo.
LO1

2. Page Corporation acquired a 60% interest in Ace Corporation at

a price $40,000 in excess of book value and fair value on
January 1, 2005. On the same date, Ace acquired a 70% interest
in Bader Corporation at a price $30,000 in excess of book value and
fair value. The excess purchase cost paid by Page and Ace was
attributed to goodwill. Separate incomes (excluding
investment income) for the three affiliates for 2005 are as
follows: Page, $500,000, Ace, $300,000, and Bader, $400,000.

Page’s net income for 2005 is

a. $808,000.
b. $848,000.
c. $920,000.
d. $960,000.

Use the following information in answering questions 3, 4, and 5.

Paint Corporation owns 82% of Achille corporation and Achille Corporation

owns 80% of Badrack Corporation. For the current year, the separate
incomes of Paint, Achille, and Badrack are $120,000,
$100,000, and $50,000, respectively.

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LO1
3. Noncontrolling interest expense from Badrack is

a. $9,000.
b. $10,000.
c. $20,000.
d. $40,000.

LO1
4. Noncontrolling interest from Achille is

a. $18,000.
b. $25,200.
c. $36,200.
LO1 d. $72,000.
5. Corporation and Subsidiaries
Consolidated net income for Paint
can be determined by the equation:

a. $234,000.
b. $244,800.
c. $260,000.
d. $270,000.
LO1
6. Pabari Corporation owns an 80% interest in Alders Corporation
and Alders owns a 60% interest in Babao Corporation. Both
interests were acquired at book value equal to fair value.
During 2005, Alders sells land to Babao at a profit of $12,000.
Babao still holds the land at December 31, 2005. Profits and
(losses) of the three companies for 2005 are:

Pabari Corporation $180,000

Alders Corporation 72,000
Babao Corporation (30,000)

Consolidated net income and noncontrolling interest (loss),

respectively, for 2005 are
a. $211,200 and ($1,200).
b. $211,200 and ($3,600).
c. $213,600 and ($1,200).
d. $213,600 and ($3,600).

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LO1
7. Pablo Corporation acquired 60% of Abagia Corporation on January
1, 2004, at a cost of $20,000 in excess of book value. Also, on
July 1, 2004, Pablo acquired 60% of Babin Corporation at book
value. On January 1, 2005, Abagia acquired a 20% interest in
Babin at a cost of $10,000 in excess of book value. The excess
purchase costs paid by Pablo and Abagia were attributed to
goodwill.

On July 1, 2005, Pablo sold land with a book value of $20,000

to Abagia for $40,000. The $20,000 unrealized gain is included
in Pablo’s separate income. Separate incomes for the affiliated
companies (excluding investment income) for 2005 are:

Pablo $250,000
Abagia 70,000
Babin 100,000

Consolidated net income for the three affiliates is

a. $304,000.
b. $324,000.
c. $344,000.
d. $364,000.

Use the following information for Questions 8, and 9.

Paisley Corporation owns 90% of Ackers Company. Akers Company owns

60% of Baglin. Paisley’s separate income for the current year is
$540,000. Akers’s separate income is $240,000. Baglin’s separate
income is $150,000.
LO1
8. The formula for the consolidated noncontrolling interest is
calculated as
a. 10% X $240,000.
b. (10% X $240,000) + (6% X $150,000).
c. (10% X $240,000) + (40% X $150,000).
d. (10% X $240,000) + (46% X $150,000).
LO1

9. The formula for consolidated net income is calculated as

a. $930,000 – ($240,000 X 10%)

b. $930,000 – ($240,000 X 10%) – ($150,000 X 40%)
c. $930,000 – ($240,000 X 10%) – ($150,000 X 46%)
d. $930,000 – ($240,000 X 10%) – ($150,000 X 40%)
– ($150,000 X 10% X 50%)

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LO1
10. Paglia Corporation owns 80% of Aburn Corporation and has
separate income of $200,000 for 2005. Aburn Corporation has
separate income of $100,000 and owns 70% of the outstanding
stock of Badley Corporation. Badley Corporation has separate
income of $80,000. The correct amount of consolidated net
income is

a. $324,800.
b. $328,800.
c. $344,800.
d. $344,800.

Use the following information for Questions 11, 12, and 13.

Pace Corporation owns 70% of Abaza Corporation and 60% of Babon

Corporation. Abaza Corporation owns 20% of Babon Corporation. Pace’s
investment in Abaza was consummated in one transaction at a purchase price
$20,000 in excess of the book value. Pace’s purchase of Babon was
made in one transaction at a price $30,000 above book value. Abaza’s
investment in Babon was completed in one transaction at a purchase
price $10,000 in excess of the book value. The purchase price
differential for all three investments was attributable to goodwill.
Pace’s separate income for the current year is $100,000. Abaza’s
separate income is $190,000, which includes a $10,000 unrealized
loss on the sale of land to Pace. Babon’s separate income is $150,000.
LO1
11. The amount of consolidated net income for Pace Corporation and
Abaza for the current year is

a. $341,000.
b. $348,400.
c. $351,000.
d. $355,000.
LO1
12. The amount of noncontrolling interest expense for the current
year is

a. $69,000.
b. $85,000.
c. $95,000.
d. $99,000.
LO1
13. The amount of goodwill in Pace’s consolidated balance sheet is

a. $50,000.
b. $52,000.
c. $58,000.
d. $60,000.

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Use the following information for Questions 14 through 18.

Pahm Corporation owns 80% of the outstanding voting common stock of

Abussi Corporation, which was purchased for $60,000 over Abussi’s book
value. The excess purchase price was attributable to goodwill. Abussi
Corporation owns 60% of the outstanding common stock of Badock Corporation,
which was purchased at book value. The separate incomes of Pahm,
Abussi, and Badock for the year are $200,000, $240,000, and
$260,000, respectively.
LO1
14. Consolidated net income for the current year is
a. $504,800.
b. $516,200.
c. $545,200.
d. $557,200.
LO1

15. The amount of income for the current year assigned to the
minority shareholders of Badock Corporation is
a. $100,000.
b. $104,000.
c. $120,000.
d. $140,000.
LO1

16. The amount of income for the current year assigned to the
minority shareholders of Abussi Corporation is
a. $48,000.
b. $53,200.
c. $74,000.
d. $79,200.
LO1

17. The amount of income assigned to the noncontrolling interest in

the current year’s consolidated income statement is
a. $142,800.
b. $154,800.
c. $183,200.
d. $195,200.
LO1

18. The net income recorded on the books of Pahm Corporation for
the current year is

a. $504,800.
b. $516,800.
c. $545,200.
d. $557,200.

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Use the following information for Questions 19 and 20.

Paiva Corporation owns 80% of Ackroyd Corporation’s outstanding

common stock and Ackroyd owns 80% of the outstanding common stock of
Bailey Corporation. Bailey Corporation owns 10% of the outstanding
common stock of Ackroyd Corporation. The separate incomes for the
three affiliated companies for the year ended December 31, 2005 (excluding
investment income) are as follows: Paiva Corporation,
$100,000, Ackroyd Corporation, $50,000, and Bailey Corporation,
$30,000.

Notations for question 19 are:

P = Income of Paiva on a consolidated basis
A = Income of Ackroyd on a consolidated basis
B = Income of Bailey on a consolidated basis
LO2

19. The equation, in a set of simultaneous equations, that computes

Paiva Corporation is

a. P = $50,000 + .8B.
b. P = $30,000 + .2A.
c. P = $100,000 + .2A.
d. P = $100,000 + .8A.
LO2
20. Ackroyd’s noncontrolling interest in the total consolidated
income for 2005 is

a. $ 7,609.
b. $ 8,044.
c. $15,652.
d. $23,696.

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SOLUTIONS

Multiple Choice Questions

1 b

2 b

Page Ace Bader

Separate incomes $ 500,000 $ 300,000 $ 400,000
Allocate 70% of Bader to Ace
280,000 ( 280,000 )
Allocate 60% of Ace to Page 348,000 ( 348,000 )
Page’s net income $ 848,000
Noncontrolling interest $ 232,000 $ 120,000
expense

3 b

From Badrack: .20 x $50,000 = $ 10,000

4 b

From Achille: (.18)x[$100,000 + (.80)x($50,000)] $ 25,200

5 a

Noncontrolling interest expense:

From Badrack: .20 x $50,000 = $ 10,000

From Achille: (.18)x[$100,000 + (.80)x($50,000)] $ 25,200

Total minority income $ 36,200

Combined separate incomes $ 270,000

Less: Noncontrolling interest expense ( 36,200 )
Consolidated net income $ 234,800

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6 d Noncontrolling interest net loss: $8,400 + ($12,000) =

($3,600)

Pabari Alders Babao

Separate incomes $ 180,000 $ 72,000 $( 30,000 )
Less: Unrealized profit on
land ( 12,000 )
Subtotal $ 180,000 $ 60,000 $( 30,000 )
Allocate Babao’s net loss to
Alders ($30,000) x 60% ( 18,000 ) 18,000
Allocate 80% of Alders
income to Pabari 33,600 ( 33,600 )
Consolidated net income $ 213,600
Noncontrolling interest $ 8,400 $( (12,000 )
expense

7 c
Pablo Abagia Babin
Separate incomes $ 250,000 $ 70,000 $ 100,000
Less: Unrealized profit on
land ( 20,000 )
Separate realized incomes $ 230,000 $ 70,000 $ 100,000
Allocate Babin’s income:
60% to Pablo 60,000 ( 60,000 )
20% to Abagia 20,000 ( 20,000 )
Allocate Abagia’s net income
$90,000 x 60% 54,000 ( 54,000 )

Consolidated net income $ 344,000

Noncontrolling interest $ 36,000 $ 20,000
expense

8 d

9 c

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10 a

Paglia Aburn Badley

Separate incomes $ 200,000 $ 100,000 $ 80,000

Allocate Badley’s income:

70% to Aburn 56,000 ( 56,000 )
Subtotal $ 200,000 $ 156,000 $ 24,000
Allocate Aburn’s income:
80% to Paglia 124,800 ( 124,800 )
Consolidated net income $ 324,800
Noncontrolling interest $ 32,200 $ 24,000
expense

11 c
Pace Abaza Babon
Separate incomes $ 100,000 $ 190,000 $ 150,000
Plus: Unrealized loss on
land sale to Pace 10,000
Separate realized incomes $ 100,000 $ 200,000 $ 150,000
Allocate Babon’s income:
60% to Pace 90,000 ( 90,000 )
20% to Abaza 30,000 ( 30,000 )
Subtotal 190,000 230,000 30,000
Allocate Abaza’s net income
to Pace $230,000 x 70% 161,000 ( 161,000 )

Consolidated net income $ 351,000

Noncontrolling interest $ 69,000 $ 30,000
expense

12 d From Question 11: $69,000 + 30,000 = $99,000

13 d

14 b $200,000 + (80%)x[$240,000 + (60%)x(260,000)] =

$516,200

15 b 40% x $260,000 = $104,000

16 d (20% x $240,000) + (20% x $156,000) = $79,200

17 c $79,200 + $104,000 = $183,200

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Pahm Abussi Badock

Separate incomes $ 200,000 $ 240,000 $ 260,000
Allocate Badock’s income:
60% to Abussi 156,000 ( 156,000 )
Subtotal $ 200,000 $ 396,000 $ 104,000
Allocate Abussi’s net income
to Pahm $396,000 x 80% 316,800 ( 316,800 )

Consolidated net income $ 516,800

Noncontrolling interest $ 79 ,200 $ 104,000
expense

18 b Pahm’s separate net income is the same as the

consolidated net income.

19 d

20 b

P = $100,000 + .8A
A = $50,000 + .8B
B = $30,000 + .1P

Computations:

A = $50,000 + .8 x ($30,000 + .1A)

A = $50,000 + $24,000 + .08S
A = $80,435 (rounded)

Noncontrolling interest expense

Ackroyd: $80,435 x 10% outside interest $ 8,044

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