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| 1. | Intangible assets with definite useful lives should be amortized:
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| 2. | Testing intangible assets with indefinite useful lives for impairment:
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| 3. | Which of the following statements best describes the accounting treatment of Intangible Assets with indefinite lives?
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| 4. | The rationale behind allocating goodwill across a subsidiary’s various cash-generating units is:
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| 5. | An impairment loss can be reversed when:
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| 6. | Under the Cost Method, which of the following statements is TRUE?
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| 7. | Under the Equity Method, which of the following statements is TRUE?
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| 8. | Consolidated Net Income would be:
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| 9. | Consolidated Net Income is equal to:
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Errant Inc. purchased 100% of the outstanding voting shares of Grub Inc. for $200,000 on January 1, 2018. On that date, Grub Inc. had common shares and retained earnings worth $100,000 and $60,000, respectively. Goodwill is tested annually for impairment. The balance sheets of both companies, as well as Grub’s fair market values on the date of acquisition are disclosed below:
The net incomes for Errant and Grub for the year ended December 31, 2018 were $160,000 and $90,000 respectively. Grub paid $9,000 in dividends to Errant during the year. There were no other inter-company transactions during the year. Moreover, an impairment test conducted on December 31, 2018 revealed that the Goodwill should actually have a value of $20,000. Both companies use a FIFO system, and most of Grub’s inventory on the date of acquisition was sold during the year. Errant did not declare any dividends during the year. Assume that Errant Inc. uses the Equity Method unless stated otherwise. |
| 10. | The amount of goodwill arising from this business combination is:
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| 11. | How much Goodwill will be carried on Grub’s balance sheet on December 31, 2018?
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| 12. | Which of the following journal entries would be required on December 31, 2018 to record the Impairment of the Goodwill?
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| 13. | What would be the journal entry to record the dividends received by Errant during the year?
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| 14. | Assuming that Errant uses the Cost Method, what would be the journal entry to record the dividends received by Errant during the year?
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| 15. | What would be Errant’s journal entry to record the amortization of the acquisition differential (excluding any goodwill impairment) on December 31, 2018? (Assume that any difference between the fair values and book values of the equipment, trademark and bonds payable would all be amortized over 10 years.)
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| 16. | What would be Errant’s journal entry to record Grub’s Net Income for 2018?
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| 17. | If Errant used the equity method to account for its investment in Grub and had net income of $160,000 from its own operations (before making any entries to reflect its investment in Grub), what consolidated net income would Errant report in its consolidated income statement for the year ended December 31, 2018?
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| 18. | The amount of Retained Earnings appearing on the consolidated balance sheet as at January 1, 2018 would be:
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| 19. | If Errant used the equity method to account for its investment in Grub and had net income of $160,000 from its own operations (before making any entries to reflect its investment in Grub) and paid no dividends in 2018, what amount of consolidated retained earnings would appear on Errant’s consolidated balance sheet as at December 31, 2018?
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| 20. | Consolidated Retained Earnings include:
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| 21. | Company A sells inventory to its subsidiary, Company B at a mark-up of 20% on cost. Of what significance is this transaction, should A wish to prepare consolidated financial statements? The inventory is still in B’s warehouse at year end.
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| 22. | Which of the following adjustments (if any) to Retained Earnings is necessary for the preparation of the consolidated balance sheet?
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| 23. | Any excess of fair value over book value attributable to land on the date of acquisition is to be:
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| 24. | Consolidated shareholders’ equity:
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| 25. | If the parent company used the equity method to account for its investment and the subsidiary company showed a profit for the past year, the consolidation elimination entry required to remove a subsidiary’s income from the parent’s books prior to the preparation of consolidated financial statements would be:
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| 26. | The consolidation elimination entry required to remove any dividends received from a subsidiary prior to the preparation of consolidated financial statements (assuming that the parent uses the cost method to record its investment in the sub) would be:
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| 27. | GNR Inc. owns 100% of NMX Inc. During the year, NMX Inc. earned a net income of $40,000 and paid dividends of $10,000. Assuming that GNR Inc. uses the Equity Method, what effect would the above information have on GNR’s investment in NMX account?
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| 28. | GNR Inc. owns 100% of NMX Inc. During the year, NMX Inc. earned a net income of $40,000 and paid dividends of $10,000. Assuming that GNR Inc. uses the Cost Method, what effect would the above information have on GNR’s investment in NMX account?
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| 29. | GNR Inc. owns 100% of NMX Inc. During the year, NMX Inc. earned a net income of $40,000 and paid dividends of $10,000. Assuming that GNR owned 80% of NXR instead of 100%, what would be the effect on GNR’s investment in NMX account under the Equity Method?
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| 30. | GNR Inc. owns 100% of NMX Inc. During the year, NMX Inc. earned a net income of $40,000 and paid dividends of $10,000. Assuming that GNR owned 80% of NMX instead of 100%, what would be the effect on GNR’s investment in NMX account under the Cost Method?
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| 31. | GNR Inc. owns 100% of NMX Inc. During the year, NMX Inc. earned a net income of $40,000 and paid dividends of $10,000. Assuming once again that GNR owned 80% of NXR instead of 100%, what would be the effect on GNR’s investment in NMX account under the cost method if GNR received $9,000 in dividends from NMX?
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| Big Guy Inc. purchased 80% of the outstanding voting shares of Humble Corp. for $360,000 on July 1, 2017. On that date, Humble Corp. had Common Shares and Retained Earnings worth $180,000 and $90,000, respectively. The Equipment had a remaining useful life of 5 years from the date of acquisition. Humble’s Bonds mature on July 1, 2027. Both companies use straight line amortization, and no salvage value is assumed for assets. The trademark is assumed to have an indefinite useful life.
Goodwill is tested annually for impairment. The balance sheets of both companies, as well as Humble’s fair market values on the date of acquisition are disclosed below:
The following are the Financial Statements for both companies for the fiscal year ended June 30, 2020: Income Statements:
Retained Earnings Statements
Balance Sheets
An impairment test conducted in September 2018 on Big Guy’s goodwill resulted in an impairment loss of $10,000 being recorded. Both companies use a FIFO system, and Humble’s entire inventory on the date of acquisition was sold during the following year. During 2020, Humble Inc. borrowed $20,000 in cash from Big Guy Inc. interest free to finance its operations. Big Guy uses the Equity Method to account for its investment in Humble Corp. Assume that the entity method applies. |
| 32. | The amount of Goodwill arising from this business combination is:
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| 33. | The amount of Non-Controlling Interest on Big Guy’s consolidated balance sheet on July 1, 2017 would be:
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| 34. | The amount of depreciation expense appearing on Big Guy’s June 30, 2020 consolidated income statement would be:
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| 35. | The amount of interest expense appearing on Big Guy’s June 30, 2020 consolidated income statement would be:
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| 36. | The amount of other expenses appearing on Big Guy’s June 30, 2020 consolidated income statement would be:
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| 37. | The amount of non-controlling interest appearing on Big Guy’s June 30, 2020 consolidated income statement would be:
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| 38. | The Net Income attributable to Big Guy appearing on Big Guy’s consolidated income statement on June 30, 2020 would be:
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| 39. | What amount of dividends would appear on Big Guy’s consolidated statement of retained earnings as at June 30, 2020?
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| 40. | Big Guy’s consolidated retained earnings as at June 30, 2020 would be:
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| 41. | The amount of non-controlling interest appearing on Big Guy’s consolidated balance sheet as at June 30, 2020 would be:
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| 42. | What amount would appear as Big Guy’s investment in Humble Corp. on its June 30, 2020 consolidated balance sheet?
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| 43. | The amount of goodwill appearing on Big Guy’s consolidated balance sheet as at June 30, 2020 would be:
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| 44. | The net amount appearing on Big Guy’s consolidated balance sheet for Equipment as at June 30, 2020 would be:
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| 45. | The amount of Current Liabilities appearing on Big Guy’s consolidated balance sheet as at June 30, 2020 would be:
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| 46. | The amount of Accounts Receivable appearing on Big Guy’s consolidated balance sheet as at June 30, 2020 would be:
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| 47. | The amount of Cash on Big Guy’s consolidated balance sheet on June 30, 2020 would be:
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| 48. | The amount of Common Shares appearing on Big Guy’s consolidated balance sheet on June 30, 2020 would be:
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| 49. | The amount of Bonds Payable appearing on Big Guy’s consolidated balance sheet on June 30, 2020 would be:
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| 50. | Davis Inc. purchased a controlling interest in Martin Inc. on January 1, 2015, when Martin’s common shares and retained earnings were carried at $180,000 and $60,000 respectively. On that date, Martin’s book values approximated its fair values, with the exception of the company’s inventories and a Patent held by Martin. The patent, which had an estimated remaining useful life of ten years, had a fair value which was $20,000 higher than its book value. Martin’s Inventories on January 1, 2015 were estimated to have a fair value that was $16,000 higher than their book value. It was predicted that Martin’s goodwill impairment test, which was to be conducted on December 31, 2016, would result in a loss equal to 10% of the goodwill (regardless of the amount) at the date of acquisition being recorded. During 2015, Martin reported a net income of $60,000 and paid $12,000 in dividends. Martin’s 2016 net income and dividends were $72,000 and $15,000, respectively. Martin uses straight-line amortization for all of its assets. Assuming that Davis purchases 100% of Martin for $300,000, answer the following: Required: a) Prepare Davis’ Equity Method journal entries for 2015 and 2016. i. Investment in Martin Inc.
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| 51. | Davis Inc. purchased a controlling interest in Martin Inc. on January 1, 2015, when Martin’s common shares and retained earnings were carried at $180,000 and $60,000 respectively. On that date, Martin’s book values approximated its fair values, with the exception of the company’s inventories and a Patent held by Martin. The patent, which had an estimated remaining useful life of ten years, had a fair value which was $20,000 higher than its book value. Martin’s Inventories on January 1, 2015 were estimated to have a fair value that was $16,000 higher than their book value. It was predicted that Martin’s goodwill impairment test, which was to be conducted on December 31, 2016, would result in a loss equal to 10% of the goodwill (regardless of the amount) at the date of acquisition being recorded. During 2015, Martin reported a net income of $60,000 and paid $12,000 in dividends. Martin’s 2016 net income and dividends were $72,000 and $15,000, respectively. Martin uses straight-line amortization for all of its assets. Assuming that Davis purchases 80% of Martin for $300,000, answer the following: Required: Prepare Davis’ Equity-Method journal entries for 2015 and 2016. i. Investment in Martin Inc.
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| 52. | Linton Inc. purchased 75% of Marsh Inc. on January 1, 2015 for $1,000,000. Marsh’s common shares and retained earnings were worth $400,000 each on that date. The acquisition differential was allocated as follows:
The balance was allocated to goodwill. The trademark had an estimated remaining useful life of 10 years from the date of acquisition. Marsh Inc. uses straight line amortization. Required:
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| 53. | Selectron Inc. acquired 60% of Insor Inc. on January 1, 2016 for $180,000, when Insor’s Common Shares and Retained Earnings were worth $60,000 and $180,000 respectively. Insor’s fair values approximated their book values on that date. Selectron currently uses the Equity Method to account for its investment in Insor. During 2016, investment Income in the amount of $12,000 and Dividends in the amount of $1,200 were recorded in Selectron’s investment in Insor account. During 2017, investment income in the amount of $24,000 and Dividends in the amount of $2,400 were recorded in Selectron’s investment in Insor account. Typically, Insor declares dividends in the amount of 10% of its earnings. Required: a) Compute Insor’s net income for 2016 and 2017.
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| 54. | Brand X Inc. purchased a controlling interest in Brand Y Inc. on January 1, 2017. On that date, Brand Y Inc. had common shares and retained earnings worth $180,000 and $20,000, respectively. Goodwill is tested annually for impairment. At the date of acquisition, Brand Y’s assets and liabilities were assessed for fair value as follows:
The balance sheets of both companies, as at December 31, 2017 are disclosed below:
The net incomes for Brand X and Brand Y for the year ended December 31, 2017 were $1,000 and $50,000 respectively. An impairment test conducted on December 31, 2017 revealed that the Goodwill should actually have a value $2,000 lower than the amount calculated on the date of acquisition. Both companies use a FIFO system, and Brand Y’s inventory on the date of acquisition was sold during the year. Brand X did not declare any dividends during the year. However, Brand Y paid $51,000 in dividends to make up for several years in which the company had never paid any dividends. Brand Y’s equipment and patent have useful lives of 10 years and 6 years respectively from the date of acquisition. All bonds payable mature on January 1, 2022. Prepare Brand X’s consolidated balance sheet as at December 31, 2017, assuming that Brand X purchased 100% of Brand Y for $350,000 and accounts for its investment using the equity method.
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| 55. | Brand X Inc. purchased a controlling interest in Brand Y Inc. on January 1, 2017. On that date, Brand Y Inc. had common shares and retained earnings worth $180,000 and $20,000, respectively. Goodwill is tested annually for impairment. At the date of acquisition, Brand Y’s assets and liabilities were assessed for fair value as follows:
The balance sheets of both companies, as at December 31, 2017 are disclosed below:
The net incomes for Brand X and Brand Y for the year ended December 31, 2017 were $1,000 and $50,000 respectively. An impairment test conducted on December 31, 2017 revealed that the Goodwill should actually have a value $2,000 lower than the amount calculated on the date of acquisition. Both companies use a FIFO system, and Brand Y’s inventory on the date of acquisition was sold during the year. Brand X did not declare any dividends during the year. However, Brand Y paid $51,000 in dividends to make up for several years in which the company had never paid any dividends. Brand Y’s equipment and patent have useful lives of 10 years and 6 years respectively from the date of acquisition. All bonds payable mature on January 1, 2022. Prepare Brand X’s consolidated balance sheet as at December 31, 2017, assuming that Brand X purchased 80% of Brand Y for $350,000 and accounts for its investment using the equity method.
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| Par Inc. purchased 70% of the outstanding voting shares of Sub Inc. for $700,000 on July 1, 2015. On that date, Sub Inc. had common shares and retained earnings worth $410,000 and $170,000, respectively. The Equipment had a remaining useful life of 5 years from the date of acquisition. Sub’s bonds mature on July 1, 2020. The inventory was sold in the year following the acquisition. Both companies use straight line amortization, and no salvage value is assumed for assets. Par Inc. and Sub Inc. declared and paid $10,000 and $5,000 in dividends, respectively during the year.
The balance sheets of both companies, as well as Sub’s fair values immediately following the acquisition are shown below:
The following are the financial statements for both companies for the fiscal year ended June 30, 2016: Income Statements
Retained Earnings Statements
Balance Sheets
Both companies use a FIFO system, and Sub’s entire inventory on the date of acquisition was sold during the following year. During 2015, Sub Inc. borrowed $10,000 in cash from Par Inc. interest free to finance its operations. Par uses the Equity Method to account for its investment in Sub Inc. Corp. |
| 56. | Prepare Par’s consolidated balance sheet as at the date of acquisition.
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| 57. | Prepare Par’s consolidated income statement for the year ended June 30, 2016. Show the allocation of consolidated net income between the controlling and non-controlling interests.
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| 58. | Prepare Par’s statement of consolidated retained earnings for the year ended June 30, 2016.
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| 59. | Prepare a statement of changes in Non-Controlling Interest for the year ended June 30, 2016.
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| 60. | Prepare a consolidated balance sheet for Par Inc. as at June 30, 2016.
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| Remburn Inc. Inc. purchased 90% of the outstanding voting shares of Stanton Inc. for $90,000 on January 1, 2015. On that date, Stanton Inc. had common shares and retained earnings worth $30,000 and $20,000, respectively. The equipment had a remaining useful life of 10 years from the date of acquisition. Stanton’s trademark is estimated to have a remaining life of 5 years from the date of acquisition. Stanton’s bonds mature on January 1, 2035. The inventory was sold in the year following the acquisition. Both companies use straight line amortization, and no salvage value is assumed for assets. Remburn Inc. and Stanton Inc. declared and paid $12,000 and $4,000 in dividends, respectively during the year.
The balance sheets of both companies, as well as Stanton’s fair values on the date of acquisition are shown below:
The following are the financial statements for both companies for the fiscal year ended December 31, 2015: Income Statements
Retained Earnings Statements
Balance Sheets
Both companies use a FIFO system, and Stanton’s entire inventory on the date of acquisition was sold during the following year. During 2015, Stanton Inc. borrowed $20,000 in cash from Remburn Inc. interest free to finance its operations. Remburn uses the Cost Method to account for its investment in Stanton Inc. Moreover, Stanton sold all of its land during the year for $18,000. Goodwill impairment for 2015 was determined to be $7,000. Remburn has chosen to value the non-controlling interest in Stanton on the acquisition date at the fair value of the subsidiary’s identifiable net assets (parent company extension method). |
| 61. | Prepare Remburn’s consolidated income statement for the year ended December 31, 2015 and show the allocation of the consolidated net income between the controlling and non-controlling interests.
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| 62. | Prepare Remburn’s statement of consolidated retained earnings as at December 31, 2015.
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| 63. | Prepare a statement of changes in Non-Controlling Interest for the year ended December 31, 2015.
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| 64. | Prepare a consolidated balance sheet for Remburn Inc. as at December 31, 2015.
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| 65. | Assume that Stanton’s Equipment, Land and Trademark on the date of acquisition form part of a single asset group. Assume also that these assets are expected to generate future cash flows of $40,000. Does this mean that Stanton will have to recognize an impairment loss? Explain.
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| 66. | Assume that Stanton had other Intangible assets with indefinite lives on its books at the date of acquisition. How would the impairment test differ from that which would apply to its amortizable assets, if at all? A simple explanation is required. Please do not use any numbers to support your answer.
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| 67. | Assume that Stanton Inc.’s common shares had a fair market value of $51,000 on December 31, 2015. Assume also that the fair values of Stanton’s identifiable net assets amounted to $36,000. Assuming that Rembrandt’s fair values equaled its book values on the date of acquisition, has the consolidated Goodwill calculated above been impaired, and if so, by how much?
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| 1. | Intangible assets with definite useful lives should be amortized:
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| Accessibility: Keyboard Navigation Bloom’s: Knowledge Difficulty: Easy Gradable: automatic Hilton – Chapter 05 #1 Learning Objective: 05-01 Perform impairment tests on property, plant, equipment, intangible assets, and goodwill. Topic: 05-03 Testing Goodwill and Other Assets for Impairment Topic: 05-04 Property, Plant, Equipment, and Intangible Assets with Definite Useful Lives |
| 2. | Testing intangible assets with indefinite useful lives for impairment:
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| Accessibility: Keyboard Navigation Bloom’s: Application Difficulty: Easy Gradable: automatic Hilton – Chapter 05 #2 Learning Objective: 05-01 Perform impairment tests on property, plant, equipment, intangible assets, and goodwill. Topic: 05-03 Testing Goodwill and Other Assets for Impairment Topic: 05-05 Intangible Assets with Indefinite Useful Lives |
| 3. | Which of the following statements best describes the accounting treatment of Intangible Assets with indefinite lives?
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| Accessibility: Keyboard Navigation Bloom’s: Knowledge Difficulty: Easy Gradable: automatic Hilton – Chapter 05 #3 Learning Objective: 05-01 Perform impairment tests on property, plant, equipment, intangible assets, and goodwill. Topic: 05-03 Testing Goodwill and Other Assets for Impairment Topic: 05-06 Cash-Generating Units and Goodwill |
| 4. | The rationale behind allocating goodwill across a subsidiary’s various cash-generating units is:
|
| Accessibility: Keyboard Navigation Bloom’s: Application Difficulty: Moderate Gradable: automatic Hilton – Chapter 05 #4 Learning Objective: 05-01 Perform impairment tests on property, plant, equipment, intangible assets, and goodwill. Topic: 05-03 Testing Goodwill and Other Assets for Impairment Topic: 05-08 Disclosure Requirements |
| 5. | An impairment loss can be reversed when:
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| Accessibility: Keyboard Navigation Bloom’s: Application Difficulty: Moderate Gradable: automatic Hilton – Chapter 05 #5 Learning Objective: 05-01 Perform impairment tests on property, plant, equipment, intangible assets, and goodwill. Topic: 05-03 Testing Goodwill and Other Assets for Impairment Topic: 05-07 Reversing an Impairment Loss |
| 6. | Under the Cost Method, which of the following statements is TRUE?
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| Accessibility: Keyboard Navigation Bloom’s: Comprehension Difficulty: Moderate Gradable: automatic Hilton – Chapter 05 #6 Learning Objective: 05-01 Perform impairment tests on property, plant, equipment, intangible assets, and goodwill. Topic: 05-01 Methods of Accounting for an Investment in a Subsidiary |
| 7. | Under the Equity Method, which of the following statements is TRUE?
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| Accessibility: Keyboard Navigation Bloom’s: Knowledge Difficulty: Moderate Gradable: automatic Hilton – Chapter 05 #7 Learning Objective: 05-01 Perform impairment tests on property, plant, equipment, intangible assets, and goodwill. Topic: 05-01 Methods of Accounting for an Investment in a Subsidiary |
| 8. | Consolidated Net Income would be:
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| Accessibility: Keyboard Navigation Bloom’s: Comprehension Difficulty: Easy Gradable: automatic Hilton – Chapter 05 #8 Learning Objective: 05-01 Perform impairment tests on property, plant, equipment, intangible assets, and goodwill. Topic: 05-01 Methods of Accounting for an Investment in a Subsidiary |
| 9. | Consolidated Net Income is equal to:
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| Accessibility: Keyboard Navigation Bloom’s: Knowledge Difficulty: Easy Gradable: automatic Hilton – Chapter 05 #9 Learning Objective: 05-01 Perform impairment tests on property, plant, equipment, intangible assets, and goodwill. Topic: 05-02 Consolidated Income and Retained Earnings Statement |
Errant Inc. purchased 100% of the outstanding voting shares of Grub Inc. for $200,000 on January 1, 2018. On that date, Grub Inc. had common shares and retained earnings worth $100,000 and $60,000, respectively. Goodwill is tested annually for impairment. The balance sheets of both companies, as well as Grub’s fair market values on the date of acquisition are disclosed below:
The net incomes for Errant and Grub for the year ended December 31, 2018 were $160,000 and $90,000 respectively. Grub paid $9,000 in dividends to Errant during the year. There were no other inter-company transactions during the year. Moreover, an impairment test conducted on December 31, 2018 revealed that the Goodwill should actually have a value of $20,000. Both companies use a FIFO system, and most of Grub’s inventory on the date of acquisition was sold during the year. Errant did not declare any dividends during the year. Assume that Errant Inc. uses the Equity Method unless stated otherwise. |
| Hilton – Chapter 05 |
| 10. | The amount of goodwill arising from this business combination is:
Calculation and allocation of acquisition differential: |
| Bloom’s: Application Difficulty: Easy Gradable: automatic Hilton – Chapter 05 #10 Learning Objective: 05-02 Prepare schedules to allocate and amortize the acquisition differential on both an annual and a cumulative basis. Topic: 05-09 Consolidation of a 100%-Owned Subsidiary |
| 11. | How much Goodwill will be carried on Grub’s balance sheet on December 31, 2018?
On Grub’s separate entity financial statement balance sheet, there would be no goodwill (the goodwill is recorded on the consolidated balance sheet). |
| Accessibility: Keyboard Navigation Bloom’s: Comprehension Difficulty: Easy Gradable: automatic Hilton – Chapter 05 #11 Learning Objective: 05-05 Prepare journal entries and calculate balance in the investment account under the equity method. Topic: 05-20 Equity Method of Recording |
| 12. | Which of the following journal entries would be required on December 31, 2018 to record the Impairment of the Goodwill?
Impairment of goodwill = $24,000 carrying value – $20,000 recoverable amount = $4,000 impairment. |
| Bloom’s: Application Difficulty: Easy Gradable: automatic Hilton – Chapter 05 #12 Learning Objective: 05-05 Prepare journal entries and calculate balance in the investment account under the equity method. Topic: 05-20 Equity Method of Recording |
| 13. | What would be the journal entry to record the dividends received by Errant during the year?
Under the equity method, dividends received are a reduction to the Investment in Subsidiary account. |
| Bloom’s: Comprehension Difficulty: Easy Gradable: automatic Hilton – Chapter 05 #13 Learning Objective: 05-05 Prepare journal entries and calculate balance in the investment account under the equity method. Topic: 05-20 Equity Method of Recording |
| 14. | Assuming that Errant uses the Cost Method, what would be the journal entry to record the dividends received by Errant during the year?
Under the cost method, dividends received are recorded in the income statement as revenue. |
| Bloom’s: Comprehension Difficulty: Easy Gradable: automatic Hilton – Chapter 05 #14 Learning Objective: 05-02 Prepare schedules to allocate and amortize the acquisition differential on both an annual and a cumulative basis. Topic: 05-09 Consolidation of a 100%-Owned Subsidiary |
| 15. | What would be Errant’s journal entry to record the amortization of the acquisition differential (excluding any goodwill impairment) on December 31, 2018? (Assume that any difference between the fair values and book values of the equipment, trademark and bonds payable would all be amortized over 10 years.)
Schedule of amortization and impairment of acquisition differential: |
| Bloom’s: Application Difficulty: Moderate Gradable: automatic Hilton – Chapter 05 #15 Learning Objective: 05-02 Prepare schedules to allocate and amortize the acquisition differential on both an annual and a cumulative basis. Topic: 05-09 Consolidation of a 100%-Owned Subsidiary |
| 16. | What would be Errant’s journal entry to record Grub’s Net Income for 2018?
Under the equity method, the subsidiary’s net income is recorded as an increase to the investment asset account and as revenue in the income statement. |
| Bloom’s: Application Difficulty: Moderate Gradable: automatic Hilton – Chapter 05 #16 Learning Objective: 05-05 Prepare journal entries and calculate balance in the investment account under the equity method. Topic: 05-20 Equity Method of Recording |
| 17. | If Errant used the equity method to account for its investment in Grub and had net income of $160,000 from its own operations (before making any entries to reflect its investment in Grub), what consolidated net income would Errant report in its consolidated income statement for the year ended December 31, 2018?
Errant’s consolidated net income using the equity method (The parent’s separate-entity net income should be equal to consolidated net income attributable to shareholders of the parent): |
| Bloom’s: Application Difficulty: Moderate Gradable: automatic Hilton – Chapter 05 #17 Learning Objective: 05-05 Prepare journal entries and calculate balance in the investment account under the equity method. Topic: 05-20 Equity Method of Recording |
| 18. | The amount of Retained Earnings appearing on the consolidated balance sheet as at January 1, 2018 would be:
$70,000. The retained earnings on the consolidated financial statements is equal to the parent’s retained earnings on the date of acquisition. |
| Accessibility: Keyboard Navigation Bloom’s: Comprehension Difficulty: Easy Gradable: automatic Hilton – Chapter 05 #18 Learning Objective: 05-05 Prepare journal entries and calculate balance in the investment account under the equity method. Topic: 05-20 Equity Method of Recording |
| 19. | If Errant used the equity method to account for its investment in Grub and had net income of $160,000 from its own operations (before making any entries to reflect its investment in Grub) and paid no dividends in 2018, what amount of consolidated retained earnings would appear on Errant’s consolidated balance sheet as at December 31, 2018?
consolidated retained earnings = $300,000 = opening retained earnings of parent $70,000 + parent’s separate entity net income excluding any investment income from subsidiary $160,000 + subsidiary’s net income flowed to the parent $70,000 (= $90,000 net income – $16,000 amortization on inventory acquisition differential – $4,000 goodwill acquisition differential impairment loss). |
| Accessibility: Keyboard Navigation Bloom’s: Application Difficulty: Moderate Gradable: automatic Hilton – Chapter 05 #19 Learning Objective: 05-05 Prepare journal entries and calculate balance in the investment account under the equity method. Topic: 05-20 Equity Method of Recording |
| 20. | Consolidated Retained Earnings include:
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| Accessibility: Keyboard Navigation Bloom’s: Comprehension Difficulty: Moderate Gradable: automatic Hilton – Chapter 05 #20 Learning Objective: 05-03 Prepare consolidated financial statements using the entity theory subsequent to the date of acquisition. Topic: 05-12 Consolidation of an 80%-Owned SubsidiaryDirect Approach |
| 21. | Company A sells inventory to its subsidiary, Company B at a mark-up of 20% on cost. Of what significance is this transaction, should A wish to prepare consolidated financial statements? The inventory is still in B’s warehouse at year end.
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| Accessibility: Keyboard Navigation Bloom’s: Knowledge Difficulty: Easy Gradable: automatic Hilton – Chapter 05 #21 Learning Objective: 05-03 Prepare consolidated financial statements using the entity theory subsequent to the date of acquisition. Topic: 05-12 Consolidation of an 80%-Owned SubsidiaryDirect Approach |
| 22. | Which of the following adjustments (if any) to Retained Earnings is necessary for the preparation of the consolidated balance sheet?
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| Accessibility: Keyboard Navigation Bloom’s: Comprehension Difficulty: Easy Gradable: automatic Hilton – Chapter 05 #22 Learning Objective: 05-03 Prepare consolidated financial statements using the entity theory subsequent to the date of acquisition. Topic: 05-12 Consolidation of an 80%-Owned SubsidiaryDirect Approach |
| 23. | Any excess of fair value over book value attributable to land on the date of acquisition is to be:
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| Accessibility: Keyboard Navigation Bloom’s: Knowledge Difficulty: Easy Gradable: automatic Hilton – Chapter 05 #23 Learning Objective: 05-01 Perform impairment tests on property, plant, equipment, intangible assets, and goodwill. Topic: 05-02 Consolidated Income and Retained Earnings Statement |
| 24. | Consolidated shareholders’ equity:
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| Accessibility: Keyboard Navigation Bloom’s: Knowledge Difficulty: Easy Gradable: automatic Hilton – Chapter 05 #24 Learning Objective: 05-05 Prepare journal entries and calculate balance in the investment account under the equity method. Topic: 05-20 Equity Method of Recording |
| 25. | If the parent company used the equity method to account for its investment and the subsidiary company showed a profit for the past year, the consolidation elimination entry required to remove a subsidiary’s income from the parent’s books prior to the preparation of consolidated financial statements would be:
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| Bloom’s: Comprehension Difficulty: Moderate Gradable: automatic Hilton – Chapter 05 #25 Learning Objective: 05-08 (Appendix 5B) Prepare consolidated financial statements subsequent to date of acquisition using the working paper approach. Topic: 05-22 Year 1 Consolidated Financial Statement Working Paper |
| 26. | The consolidation elimination entry required to remove any dividends received from a subsidiary prior to the preparation of consolidated financial statements (assuming that the parent uses the cost method to record its investment in the sub) would be:
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| Bloom’s: Comprehension Difficulty: Moderate Gradable: automatic Hilton – Chapter 05 #26 Learning Objective: 05-08 (Appendix 5B) Prepare consolidated financial statements subsequent to date of acquisition using the working paper approach. Topic: 05-22 Year 1 Consolidated Financial Statement Working Paper |
| 27. | GNR Inc. owns 100% of NMX Inc. During the year, NMX Inc. earned a net income of $40,000 and paid dividends of $10,000. Assuming that GNR Inc. uses the Equity Method, what effect would the above information have on GNR’s investment in NMX account?
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| Accessibility: Keyboard Navigation Bloom’s: Application Difficulty: Easy Gradable: automatic Hilton – Chapter 05 #27 Learning Objective: 05-05 Prepare journal entries and calculate balance in the investment account under the equity method. Topic: 05-20 Equity Method of Recording |
| 28. | GNR Inc. owns 100% of NMX Inc. During the year, NMX Inc. earned a net income of $40,000 and paid dividends of $10,000. Assuming that GNR Inc. uses the Cost Method, what effect would the above information have on GNR’s investment in NMX account?
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| Accessibility: Keyboard Navigation Bloom’s: Comprehension Difficulty: Easy Gradable: automatic Hilton – Chapter 05 #28 Learning Objective: 05-05 Prepare journal entries and calculate balance in the investment account under the equity method. Topic: 05-20 Equity Method of Recording |
| 29. | GNR Inc. owns 100% of NMX Inc. During the year, NMX Inc. earned a net income of $40,000 and paid dividends of $10,000. Assuming that GNR owned 80% of NXR instead of 100%, what would be the effect on GNR’s investment in NMX account under the Equity Method?
|
| Accessibility: Keyboard Navigation Bloom’s: Application Difficulty: Moderate Gradable: automatic Hilton – Chapter 05 #29 Learning Objective: 05-05 Prepare journal entries and calculate balance in the investment account under the equity method. Topic: 05-20 Equity Method of Recording |
| 30. | GNR Inc. owns 100% of NMX Inc. During the year, NMX Inc. earned a net income of $40,000 and paid dividends of $10,000. Assuming that GNR owned 80% of NMX instead of 100%, what would be the effect on GNR’s investment in NMX account under the Cost Method?
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| Accessibility: Keyboard Navigation Bloom’s: Application Difficulty: Moderate Gradable: automatic Hilton – Chapter 05 #30 Learning Objective: 05-05 Prepare journal entries and calculate balance in the investment account under the equity method. Topic: 05-20 Equity Method of Recording |
| 31. | GNR Inc. owns 100% of NMX Inc. During the year, NMX Inc. earned a net income of $40,000 and paid dividends of $10,000. Assuming once again that GNR owned 80% of NXR instead of 100%, what would be the effect on GNR’s investment in NMX account under the cost method if GNR received $9,000 in dividends from NMX?
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| Accessibility: Keyboard Navigation Bloom’s: Application Difficulty: Easy Gradable: automatic Hilton – Chapter 05 #31 Learning Objective: 05-02 Prepare schedules to allocate and amortize the acquisition differential on both an annual and a cumulative basis. Topic: 05-09 Consolidation of a 100%-Owned Subsidiary |
| Big Guy Inc. purchased 80% of the outstanding voting shares of Humble Corp. for $360,000 on July 1, 2017. On that date, Humble Corp. had Common Shares and Retained Earnings worth $180,000 and $90,000, respectively. The Equipment had a remaining useful life of 5 years from the date of acquisition. Humble’s Bonds mature on July 1, 2027. Both companies use straight line amortization, and no salvage value is assumed for assets. The trademark is assumed to have an indefinite useful life.
Goodwill is tested annually for impairment. The balance sheets of both companies, as well as Humble’s fair market values on the date of acquisition are disclosed below:
The following are the Financial Statements for both companies for the fiscal year ended June 30, 2020: Income Statements:
Retained Earnings Statements
Balance Sheets
An impairment test conducted in September 2018 on Big Guy’s goodwill resulted in an impairment loss of $10,000 being recorded. Both companies use a FIFO system, and Humble’s entire inventory on the date of acquisition was sold during the following year. During 2020, Humble Inc. borrowed $20,000 in cash from Big Guy Inc. interest free to finance its operations. Big Guy uses the Equity Method to account for its investment in Humble Corp. Assume that the entity method applies. |
| Hilton – Chapter 05 |
| 32. | The amount of Goodwill arising from this business combination is:
Calculation and allocation of acquisition differential: |
| Bloom’s: Application Difficulty: Moderate Gradable: automatic Hilton – Chapter 05 #32 Learning Objective: 05-03 Prepare consolidated financial statements using the entity theory subsequent to the date of acquisition. Topic: 05-12 Consolidation of an 80%-Owned SubsidiaryDirect Approach |
| 33. | The amount of Non-Controlling Interest on Big Guy’s consolidated balance sheet on July 1, 2017 would be:
Acquisition cost for 80% = $360,000.Implied acquisition cost for 100% = $450,000 = $360,000 / 0.80.NCI = $450,000 x 20% = $90,000. |
| Accessibility: Keyboard Navigation Bloom’s: Application Difficulty: Moderate Gradable: automatic Hilton – Chapter 05 #33 Learning Objective: 05-03 Prepare consolidated financial statements using the entity theory subsequent to the date of acquisition. Topic: 05-12 Consolidation of an 80%-Owned SubsidiaryDirect Approach |
| 34. | The amount of depreciation expense appearing on Big Guy’s June 30, 2020 consolidated income statement would be:
Depreciation expense on consolidated income statement = $113,400. |
| Bloom’s: Application Difficulty: Moderate Gradable: automatic Hilton – Chapter 05 #34 Learning Objective: 05-03 Prepare consolidated financial statements using the entity theory subsequent to the date of acquisition. Topic: 05-12 Consolidation of an 80%-Owned SubsidiaryDirect Approach |
| 35. | The amount of interest expense appearing on Big Guy’s June 30, 2020 consolidated income statement would be:
Interest expense on consolidated income statement = $63,000. |
| Bloom’s: Application Difficulty: Moderate Gradable: automatic Hilton – Chapter 05 #35 Learning Objective: 05-03 Prepare consolidated financial statements using the entity theory subsequent to the date of acquisition. Topic: 05-12 Consolidation of an 80%-Owned SubsidiaryDirect Approach |
| 36. | The amount of other expenses appearing on Big Guy’s June 30, 2020 consolidated income statement would be:
Other expenses on consolidated income statement = $13,000. |
| Bloom’s: Application Difficulty: Easy Gradable: automatic Hilton – Chapter 05 #36 Learning Objective: 05-03 Prepare consolidated financial statements using the entity theory subsequent to the date of acquisition. Topic: 05-12 Consolidation of an 80%-Owned SubsidiaryDirect Approach |
| 37. | The amount of non-controlling interest appearing on Big Guy’s June 30, 2020 consolidated income statement would be:
Calculation of consolidated net income: |
| Bloom’s: Application Difficulty: Moderate Gradable: automatic Hilton – Chapter 05 #37 Learning Objective: 05-03 Prepare consolidated financial statements using the entity theory subsequent to the date of acquisition. Topic: 05-12 Consolidation of an 80%-Owned SubsidiaryDirect Approach |
| 38. | The Net Income attributable to Big Guy appearing on Big Guy’s consolidated income statement on June 30, 2020 would be:
Calculation of consolidated net income: |
| Bloom’s: Comprehension Difficulty: Easy Gradable: automatic Hilton – Chapter 05 #38 Learning Objective: 05-03 Prepare consolidated financial statements using the entity theory subsequent to the date of acquisition. Topic: 05-12 Consolidation of an 80%-Owned SubsidiaryDirect Approach |
| 39. | What amount of dividends would appear on Big Guy’s consolidated statement of retained earnings as at June 30, 2020?
Dividends on consolidated retained earnings = dividends paid by Big Guy (parent) to parent’s shareholders = $20,000. |
| Accessibility: Keyboard Navigation Bloom’s: Comprehension Difficulty: Easy Gradable: automatic Hilton – Chapter 05 #39 Learning Objective: 05-03 Prepare consolidated financial statements using the entity theory subsequent to the date of acquisition. Topic: 05-12 Consolidation of an 80%-Owned SubsidiaryDirect Approach |
| 40. | Big Guy’s consolidated retained earnings as at June 30, 2020 would be:
Under the equity method, consolidated retained earnings are equal to the retained earnings of the parent = $1,169,040. |
| Accessibility: Keyboard Navigation Bloom’s: Comprehension Difficulty: Easy Gradable: automatic Hilton – Chapter 05 #40 Learning Objective: 05-03 Prepare consolidated financial statements using the entity theory subsequent to the date of acquisition. Topic: 05-12 Consolidation of an 80%-Owned SubsidiaryDirect Approach |
| 41. | The amount of non-controlling interest appearing on Big Guy’s consolidated balance sheet as at June 30, 2020 would be:
NCI on consolidated balance sheet = $79,760. |
| Bloom’s: Application Difficulty: Moderate Gradable: automatic Hilton – Chapter 05 #41 Learning Objective: 05-03 Prepare consolidated financial statements using the entity theory subsequent to the date of acquisition. Topic: 05-12 Consolidation of an 80%-Owned SubsidiaryDirect Approach |
| 42. | What amount would appear as Big Guy’s investment in Humble Corp. on its June 30, 2020 consolidated balance sheet?
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| Accessibility: Keyboard Navigation Bloom’s: Comprehension Difficulty: Easy Gradable: automatic Hilton – Chapter 05 #42 Learning Objective: 05-03 Prepare consolidated financial statements using the entity theory subsequent to the date of acquisition. Topic: 05-12 Consolidation of an 80%-Owned SubsidiaryDirect Approach |
| 43. | The amount of goodwill appearing on Big Guy’s consolidated balance sheet as at June 30, 2020 would be:
Consolidated goodwill = $40,000 = $50,000 goodwill on original business combination – $10,000 impairment loss. |
| Accessibility: Keyboard Navigation Bloom’s: Application Difficulty: Moderate Gradable: automatic Hilton – Chapter 05 #43 Learning Objective: 05-03 Prepare consolidated financial statements using the entity theory subsequent to the date of acquisition. Topic: 05-12 Consolidation of an 80%-Owned SubsidiaryDirect Approach |
| 44. | The net amount appearing on Big Guy’s consolidated balance sheet for Equipment as at June 30, 2020 would be:
Equipment (net) on consolidated balance sheet = $881,800. |
| Bloom’s: Application Difficulty: Moderate Gradable: automatic Hilton – Chapter 05 #44 Learning Objective: 05-03 Prepare consolidated financial statements using the entity theory subsequent to the date of acquisition. Topic: 05-12 Consolidation of an 80%-Owned SubsidiaryDirect Approach |
| 45. | The amount of Current Liabilities appearing on Big Guy’s consolidated balance sheet as at June 30, 2020 would be:
Current Liabilities on consolidated balance sheet = $662,000. |
| Bloom’s: Application Difficulty: Moderate Gradable: automatic Hilton – Chapter 05 #45 Learning Objective: 05-03 Prepare consolidated financial statements using the entity theory subsequent to the date of acquisition. Topic: 05-12 Consolidation of an 80%-Owned SubsidiaryDirect Approach |
| 46. | The amount of Accounts Receivable appearing on Big Guy’s consolidated balance sheet as at June 30, 2020 would be:
Accounts Receivable on consolidated balance sheet = $305,000. |
| Bloom’s: Application Difficulty: Moderate Gradable: automatic Hilton – Chapter 05 #46 Learning Objective: 05-03 Prepare consolidated financial statements using the entity theory subsequent to the date of acquisition. Topic: 05-12 Consolidation of an 80%-Owned SubsidiaryDirect Approach |
| 47. | The amount of Cash on Big Guy’s consolidated balance sheet on June 30, 2020 would be:
Cash on consolidated balance sheet = $1,565,000. |
| Bloom’s: Application Difficulty: Easy Gradable: automatic Hilton – Chapter 05 #47 Learning Objective: 05-03 Prepare consolidated financial statements using the entity theory subsequent to the date of acquisition. Topic: 05-12 Consolidation of an 80%-Owned SubsidiaryDirect Approach |
| 48. | The amount of Common Shares appearing on Big Guy’s consolidated balance sheet on June 30, 2020 would be:
Common Shares on consolidated balance sheet = Common Shares on Big Guy (parent) balance sheet = $900,000. |
| Accessibility: Keyboard Navigation Bloom’s: Comprehension Difficulty: Easy Gradable: automatic Hilton – Chapter 05 #48 Learning Objective: 05-03 Prepare consolidated financial statements using the entity theory subsequent to the date of acquisition. Topic: 05-12 Consolidation of an 80%-Owned SubsidiaryDirect Approach |
| 49. | The amount of Bonds Payable appearing on Big Guy’s consolidated balance sheet on June 30, 2020 would be:
Bonds Payable on consolidated balance sheet = $309,000. |
| Bloom’s: Application Difficulty: Moderate Gradable: automatic Hilton – Chapter 05 #49 Learning Objective: 05-03 Prepare consolidated financial statements using the entity theory subsequent to the date of acquisition. Topic: 05-12 Consolidation of an 80%-Owned SubsidiaryDirect Approach |
| 50. | Davis Inc. purchased a controlling interest in Martin Inc. on January 1, 2015, when Martin’s common shares and retained earnings were carried at $180,000 and $60,000 respectively. On that date, Martin’s book values approximated its fair values, with the exception of the company’s inventories and a Patent held by Martin. The patent, which had an estimated remaining useful life of ten years, had a fair value which was $20,000 higher than its book value. Martin’s Inventories on January 1, 2015 were estimated to have a fair value that was $16,000 higher than their book value. It was predicted that Martin’s goodwill impairment test, which was to be conducted on December 31, 2016, would result in a loss equal to 10% of the goodwill (regardless of the amount) at the date of acquisition being recorded. During 2015, Martin reported a net income of $60,000 and paid $12,000 in dividends. Martin’s 2016 net income and dividends were $72,000 and $15,000, respectively. Martin uses straight-line amortization for all of its assets. Assuming that Davis purchases 100% of Martin for $300,000, answer the following: Required: a) Prepare Davis’ Equity Method journal entries for 2015 and 2016. i. Investment in Martin Inc. a) Equity Method Journal Entries
b) i) Investment in Martin Inc.:
ii) Goodwill:
iii) The only unamortized acquisition differential remaining would be 8/10 of the excess fair value of the patent, which would be $16,000 plus the goodwill of $21,600 for a total of $37,600. |
| Bloom’s: Application Difficulty: Moderate Gradable: manual Hilton – Chapter 05 #50 Learning Objective: 05-03 Prepare consolidated financial statements using the entity theory subsequent to the date of acquisition. Learning Objective: 05-05 Prepare journal entries and calculate balance in the investment account under the equity method. Topic: 05-12 Consolidation of an 80%-Owned SubsidiaryDirect Approach Topic: 05-20 Equity Method of Recording |
| 51. | Davis Inc. purchased a controlling interest in Martin Inc. on January 1, 2015, when Martin’s common shares and retained earnings were carried at $180,000 and $60,000 respectively. On that date, Martin’s book values approximated its fair values, with the exception of the company’s inventories and a Patent held by Martin. The patent, which had an estimated remaining useful life of ten years, had a fair value which was $20,000 higher than its book value. Martin’s Inventories on January 1, 2015 were estimated to have a fair value that was $16,000 higher than their book value. It was predicted that Martin’s goodwill impairment test, which was to be conducted on December 31, 2016, would result in a loss equal to 10% of the goodwill (regardless of the amount) at the date of acquisition being recorded. During 2015, Martin reported a net income of $60,000 and paid $12,000 in dividends. Martin’s 2016 net income and dividends were $72,000 and $15,000, respectively. Martin uses straight-line amortization for all of its assets. Assuming that Davis purchases 80% of Martin for $300,000, answer the following: Required: Prepare Davis’ Equity-Method journal entries for 2015 and 2016. i. Investment in Martin Inc. a) Equity Method Journal Entries
b) i) Investment in Martin Inc.:
ii) Goodwill
iii) The only unamortized acquisition differential remaining would be 8/10 of the excess fair value of the patent, which would be $16,000 plus the goodwill of $89,100 for a total of $105,100. |
| Bloom’s: Application Difficulty: Moderate Gradable: manual Hilton – Chapter 05 #51 Learning Objective: 05-03 Prepare consolidated financial statements using the entity theory subsequent to the date of acquisition. Learning Objective: 05-05 Prepare journal entries and calculate balance in the investment account under the equity method. Topic: 05-12 Consolidation of an 80%-Owned SubsidiaryDirect Approach Topic: 05-20 Equity Method of Recording |
| 52. | Linton Inc. purchased 75% of Marsh Inc. on January 1, 2015 for $1,000,000. Marsh’s common shares and retained earnings were worth $400,000 each on that date. The acquisition differential was allocated as follows:
The balance was allocated to goodwill. The trademark had an estimated remaining useful life of 10 years from the date of acquisition. Marsh Inc. uses straight line amortization. Required: a) Equity Method Journal Entries
b) Trademark: $15,000 – ($1,500 x 2) = $12,000 c) Changes in Non-Controlling Interest:
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| Bloom’s: Application Difficulty: Moderate Gradable: manual Hilton – Chapter 05 #52 Learning Objective: 05-02 Prepare schedules to allocate and amortize the acquisition differential on both an annual and a cumulative basis. Learning Objective: 05-05 Prepare journal entries and calculate balance in the investment account under the equity method. Topic: 05-09 Consolidation of a 100%-Owned Subsidiary Topic: 05-20 Equity Method of Recording |
| 53. | Selectron Inc. acquired 60% of Insor Inc. on January 1, 2016 for $180,000, when Insor’s Common Shares and Retained Earnings were worth $60,000 and $180,000 respectively. Insor’s fair values approximated their book values on that date. Selectron currently uses the Equity Method to account for its investment in Insor. During 2016, investment Income in the amount of $12,000 and Dividends in the amount of $1,200 were recorded in Selectron’s investment in Insor account. During 2017, investment income in the amount of $24,000 and Dividends in the amount of $2,400 were recorded in Selectron’s investment in Insor account. Typically, Insor declares dividends in the amount of 10% of its earnings. Required: a) Compute Insor’s net income for 2016 and 2017. a) Insor’s Net Income for 2016 and 2017 had to be $20,000 and $40,000 respectively. b) Dividends, 2016 = $20,000 x 10 % = $2,000 (or $1,200/60%) Dividends, 2017 = $4,000. c) Non-Controlling Interest:
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| Bloom’s: Application Difficulty: Moderate Gradable: manual Hilton – Chapter 05 #53 Learning Objective: 05-03 Prepare consolidated financial statements using the entity theory subsequent to the date of acquisition. Learning Objective: 05-05 Prepare journal entries and calculate balance in the investment account under the equity method. Topic: 05-12 Consolidation of an 80%-Owned SubsidiaryDirect Approach Topic: 05-20 Equity Method of Recording |
| 54. | Brand X Inc. purchased a controlling interest in Brand Y Inc. on January 1, 2017. On that date, Brand Y Inc. had common shares and retained earnings worth $180,000 and $20,000, respectively. Goodwill is tested annually for impairment. At the date of acquisition, Brand Y’s assets and liabilities were assessed for fair value as follows:
The balance sheets of both companies, as at December 31, 2017 are disclosed below:
The net incomes for Brand X and Brand Y for the year ended December 31, 2017 were $1,000 and $50,000 respectively. An impairment test conducted on December 31, 2017 revealed that the Goodwill should actually have a value $2,000 lower than the amount calculated on the date of acquisition. Both companies use a FIFO system, and Brand Y’s inventory on the date of acquisition was sold during the year. Brand X did not declare any dividends during the year. However, Brand Y paid $51,000 in dividends to make up for several years in which the company had never paid any dividends. Brand Y’s equipment and patent have useful lives of 10 years and 6 years respectively from the date of acquisition. All bonds payable mature on January 1, 2022. Prepare Brand X’s consolidated balance sheet as at December 31, 2017, assuming that Brand X purchased 100% of Brand Y for $350,000 and accounts for its investment using the equity method. Brand X Inc.
The following explanation may help students understand how some of these figures were derived: Goodwill:
Consolidated Retained Earnings:
Note: Consolidated Net Income under the Equity Method would be Brand X’s net income. |
| Bloom’s: Application Difficulty: Moderate Gradable: manual Hilton – Chapter 05 #54 Learning Objective: 05-02 Prepare schedules to allocate and amortize the acquisition differential on both an annual and a cumulative basis. Learning Objective: 05-05 Prepare journal entries and calculate balance in the investment account under the equity method. Topic: 05-09 Consolidation of a 100%-Owned Subsidiary Topic: 05-20 Equity Method of Recording |
| 55. | Brand X Inc. purchased a controlling interest in Brand Y Inc. on January 1, 2017. On that date, Brand Y Inc. had common shares and retained earnings worth $180,000 and $20,000, respectively. Goodwill is tested annually for impairment. At the date of acquisition, Brand Y’s assets and liabilities were assessed for fair value as follows:
The balance sheets of both companies, as at December 31, 2017 are disclosed below:
The net incomes for Brand X and Brand Y for the year ended December 31, 2017 were $1,000 and $50,000 respectively. An impairment test conducted on December 31, 2017 revealed that the Goodwill should actually have a value $2,000 lower than the amount calculated on the date of acquisition. Both companies use a FIFO system, and Brand Y’s inventory on the date of acquisition was sold during the year. Brand X did not declare any dividends during the year. However, Brand Y paid $51,000 in dividends to make up for several years in which the company had never paid any dividends. Brand Y’s equipment and patent have useful lives of 10 years and 6 years respectively from the date of acquisition. All bonds payable mature on January 1, 2022. Prepare Brand X’s consolidated balance sheet as at December 31, 2017, assuming that Brand X purchased 80% of Brand Y for $350,000 and accounts for its investment using the equity method. Brand X Inc.
The following explanations may help students understand how some of the figures were derived: Non-Controlling Interest:
Goodwill:
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| Bloom’s: Application Difficulty: Moderate Gradable: manual Hilton – Chapter 05 #55 Learning Objective: 05-02 Prepare schedules to allocate and amortize the acquisition differential on both an annual and a cumulative basis. Learning Objective: 05-05 Prepare journal entries and calculate balance in the investment account under the equity method. Topic: 05-09 Consolidation of a 100%-Owned Subsidiary Topic: 05-20 Equity Method of Recording |
| Par Inc. purchased 70% of the outstanding voting shares of Sub Inc. for $700,000 on July 1, 2015. On that date, Sub Inc. had common shares and retained earnings worth $410,000 and $170,000, respectively. The Equipment had a remaining useful life of 5 years from the date of acquisition. Sub’s bonds mature on July 1, 2020. The inventory was sold in the year following the acquisition. Both companies use straight line amortization, and no salvage value is assumed for assets. Par Inc. and Sub Inc. declared and paid $10,000 and $5,000 in dividends, respectively during the year.
The balance sheets of both companies, as well as Sub’s fair values immediately following the acquisition are shown below:
The following are the financial statements for both companies for the fiscal year ended June 30, 2016: Income Statements
Retained Earnings Statements
Balance Sheets
Both companies use a FIFO system, and Sub’s entire inventory on the date of acquisition was sold during the following year. During 2015, Sub Inc. borrowed $10,000 in cash from Par Inc. interest free to finance its operations. Par uses the Equity Method to account for its investment in Sub Inc. Corp. |
| Hilton – Chapter 05 |
| 56. | Prepare Par’s consolidated balance sheet as at the date of acquisition. Par Inc.
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| Bloom’s: Application Difficulty: Moderate Gradable: manual Hilton – Chapter 05 #56 Learning Objective: 05-02 Prepare schedules to allocate and amortize the acquisition differential on both an annual and a cumulative basis. Learning Objective: 05-03 Prepare consolidated financial statements using the entity theory subsequent to the date of acquisition. Topic: 05-09 Consolidation of a 100%-Owned Subsidiary Topic: 05-12 Consolidation of an 80%-Owned SubsidiaryDirect Approach |
| 57. | Prepare Par’s consolidated income statement for the year ended June 30, 2016. Show the allocation of consolidated net income between the controlling and non-controlling interests. Par Inc.
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| Bloom’s: Application Difficulty: Moderate Gradable: manual Hilton – Chapter 05 #57 Learning Objective: 05-02 Prepare schedules to allocate and amortize the acquisition differential on both an annual and a cumulative basis. Learning Objective: 05-05 Prepare journal entries and calculate balance in the investment account under the equity method. Topic: 05-09 Consolidation of a 100%-Owned Subsidiary Topic: 05-20 Equity Method of Recording |
| 58. | Prepare Par’s statement of consolidated retained earnings for the year ended June 30, 2016. Par Inc.
|
| Bloom’s: Application Difficulty: Moderate Gradable: manual Hilton – Chapter 05 #58 Learning Objective: 05-02 Prepare schedules to allocate and amortize the acquisition differential on both an annual and a cumulative basis. Learning Objective: 05-05 Prepare journal entries and calculate balance in the investment account under the equity method. Topic: 05-09 Consolidation of a 100%-Owned Subsidiary Topic: 05-20 Equity Method of Recording |
| 59. | Prepare a statement of changes in Non-Controlling Interest for the year ended June 30, 2016. Par Inc.
|
| Bloom’s: Application Difficulty: Moderate Gradable: manual Hilton – Chapter 05 #59 Learning Objective: 05-02 Prepare schedules to allocate and amortize the acquisition differential on both an annual and a cumulative basis. Topic: 05-09 Consolidation of a 100%-Owned Subsidiary |
| 60. | Prepare a consolidated balance sheet for Par Inc. as at June 30, 2016. Par Inc.
|
| Bloom’s: Application Difficulty: Moderate Gradable: manual Hilton – Chapter 05 #60 Learning Objective: 05-02 Prepare schedules to allocate and amortize the acquisition differential on both an annual and a cumulative basis. Learning Objective: 05-05 Prepare journal entries and calculate balance in the investment account under the equity method. Topic: 05-19 Subsidiary Acquired During the Year Topic: 05-20 Equity Method of Recording |
| Remburn Inc. Inc. purchased 90% of the outstanding voting shares of Stanton Inc. for $90,000 on January 1, 2015. On that date, Stanton Inc. had common shares and retained earnings worth $30,000 and $20,000, respectively. The equipment had a remaining useful life of 10 years from the date of acquisition. Stanton’s trademark is estimated to have a remaining life of 5 years from the date of acquisition. Stanton’s bonds mature on January 1, 2035. The inventory was sold in the year following the acquisition. Both companies use straight line amortization, and no salvage value is assumed for assets. Remburn Inc. and Stanton Inc. declared and paid $12,000 and $4,000 in dividends, respectively during the year.
The balance sheets of both companies, as well as Stanton’s fair values on the date of acquisition are shown below:
The following are the financial statements for both companies for the fiscal year ended December 31, 2015: Income Statements
Retained Earnings Statements
Balance Sheets
Both companies use a FIFO system, and Stanton’s entire inventory on the date of acquisition was sold during the following year. During 2015, Stanton Inc. borrowed $20,000 in cash from Remburn Inc. interest free to finance its operations. Remburn uses the Cost Method to account for its investment in Stanton Inc. Moreover, Stanton sold all of its land during the year for $18,000. Goodwill impairment for 2015 was determined to be $7,000. Remburn has chosen to value the non-controlling interest in Stanton on the acquisition date at the fair value of the subsidiary’s identifiable net assets (parent company extension method). |
| Hilton – Chapter 05 |
| 61. | Prepare Remburn’s consolidated income statement for the year ended December 31, 2015 and show the allocation of the consolidated net income between the controlling and non-controlling interests. Remburn Inc.
|
| Bloom’s: Application Difficulty: Moderate Gradable: manual Hilton – Chapter 05 #61 Learning Objective: 05-04 Prepare consolidated financial statements using parent company extension theory subsequent to the date of acquisition. Topic: 05-16 Parent Company Extension Theory |
| 62. | Prepare Remburn’s statement of consolidated retained earnings as at December 31, 2015. Remburn Inc.
|
| Bloom’s: Application Difficulty: Moderate Gradable: manual Hilton – Chapter 05 #62 Learning Objective: 05-05 Prepare journal entries and calculate balance in the investment account under the equity method. Topic: 05-20 Equity Method of Recording |
| 63. | Prepare a statement of changes in Non-Controlling Interest for the year ended December 31, 2015. Remburn Inc.
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| Bloom’s: Application Difficulty: Moderate Gradable: manual Hilton – Chapter 05 #63 Learning Objective: 05-04 Prepare consolidated financial statements using parent company extension theory subsequent to the date of acquisition. Topic: 05-16 Parent Company Extension Theory Topic: 05-17 Acquisition Differential Assigned to Liabilities Topic: 05-18 Intercompany Receivables and Payables Topic: 05-19 Subsidiary Acquired During the Year |
| 64. | Prepare a consolidated balance sheet for Remburn Inc. as at December 31, 2015. Remburn Inc.
Amortization/impairment of acquisition differential:
|
| Bloom’s: Application Difficulty: Difficult Gradable: manual Hilton – Chapter 05 #64 Learning Objective: 05-04 Prepare consolidated financial statements using parent company extension theory subsequent to the date of acquisition. Topic: 05-16 Parent Company Extension Theory Topic: 05-17 Acquisition Differential Assigned to Liabilities Topic: 05-18 Intercompany Receivables and Payables Topic: 05-19 Subsidiary Acquired During the Year |
| 65. | Assume that Stanton’s Equipment, Land and Trademark on the date of acquisition form part of a single asset group. Assume also that these assets are expected to generate future cash flows of $40,000. Does this mean that Stanton will have to recognize an impairment loss? Explain. Not necessarily. Given the above information, Stanton has “failed” the first part of the required two-part impairment test required for long-lived assets since the expected future cash flows of this asset group of $40,000 falls well short of the carrying values of the assets within the group, which total $55,000. Given this information, the second part of the two-part impairment test must be applied. The second part of the impairment test requires that an impairment loss be recognized if Stanton fails the first part of the impairment test and the fair values of the assets within the group are less than their total carrying values. However, since the fair values of the assets are higher than their carrying values ($65,000 vs. $55,000 respectively), there would be no impairment loss in this case. |
| Bloom’s: Application Bloom’s: Comprehension Difficulty: Moderate Gradable: manual Hilton – Chapter 05 #65 Learning Objective: 05-01 Perform impairment tests on property, plant, equipment, intangible assets, and goodwill. Topic: 05-03 Testing Goodwill and Other Assets for Impairment Topic: 05-06 Cash-Generating Units and Goodwill |
| 66. | Assume that Stanton had other Intangible assets with indefinite lives on its books at the date of acquisition. How would the impairment test differ from that which would apply to its amortizable assets, if at all? A simple explanation is required. Please do not use any numbers to support your answer. Only the second part of the two-part impairment test would be required. Thus, an impairment loss would have to be recognized only if the fair value of the relevant asset group were less than their carrying values. |
| Bloom’s: Application Bloom’s: Comprehension Difficulty: Moderate Gradable: manual Hilton – Chapter 05 #66 Learning Objective: 05-01 Perform impairment tests on property, plant, equipment, intangible assets, and goodwill. Topic: 05-03 Testing Goodwill and Other Assets for Impairment Topic: 05-04 Property, Plant, Equipment, and Intangible Assets with Definite Useful Lives |
| 67. | Assume that Stanton Inc.’s common shares had a fair market value of $51,000 on December 31, 2015. Assume also that the fair values of Stanton’s identifiable net assets amounted to $36,000. Assuming that Rembrandt’s fair values equaled its book values on the date of acquisition, has the consolidated Goodwill calculated above been impaired, and if so, by how much? Yes, goodwill has been impaired. Stanton’s net assets had a carrying value of $81,000, $30,000 more than their fair values, which indicates that the second part of the two step impairment test for goodwill must be performed. This is essentially a recalculation of the consolidated goodwill, which in this case would amount to $15,000 ($51,000 – $36,000). Since consolidated goodwill is currently $20,000, an impairment loss of $5,000 will have to be recognized. |
| Bloom’s: Application Bloom’s: Comprehension Difficulty: Moderate Gradable: manual Hilton – Chapter 05 #67 Learning Objective: 05-01 Perform impairment tests on property, plant, equipment, intangible assets, and goodwill. Topic: 05-03 Testing Goodwill and Other Assets for Impairment Topic: 05-04 Property, Plant, Equipment, and Intangible Assets with Definite Useful Lives |
c5 Summary
| Category | # of Questions |
| Accessibility: Keyboard Navigation | 28 |
| Bloom’s: Application | 44 |
| Bloom’s: Comprehension | 19 |
| Bloom’s: Knowledge | 7 |
| Difficulty: Difficult | 1 |
| Difficulty: Easy | 25 |
| Difficulty: Moderate | 41 |
| Gradable: automatic | 49 |
| Gradable: manual | 18 |
| Hilton – Chapter 05 | 71 |
| Learning Objective: 05-01 Perform impairment tests on property, plant, equipment, intangible assets, and goodwill. | 13 |
| Learning Objective: 05-02 Prepare schedules to allocate and amortize the acquisition differential on both an annual and a cumulative basis. | 12 |
| Learning Objective: 05-03 Prepare consolidated financial statements using the entity theory subsequent to the date of acquisition. | 25 |
| Learning Objective: 05-04 Prepare consolidated financial statements using parent company extension theory subsequent to the date of acquisition. | 3 |
| Learning Objective: 05-05 Prepare journal entries and calculate balance in the investment account under the equity method. | 22 |
| Learning Objective: 05-08 (Appendix 5B) Prepare consolidated financial statements subsequent to date of acquisition using the working paper approach. | 2 |
| Topic: 05-01 Methods of Accounting for an Investment in a Subsidiary | 3 |
| Topic: 05-02 Consolidated Income and Retained Earnings Statement | 2 |
| Topic: 05-03 Testing Goodwill and Other Assets for Impairment | 8 |
| Topic: 05-04 Property, Plant, Equipment, and Intangible Assets with Definite Useful Lives | 3 |
| Topic: 05-05 Intangible Assets with Indefinite Useful Lives | 1 |
| Topic: 05-06 Cash-Generating Units and Goodwill | 2 |
| Topic: 05-07 Reversing an Impairment Loss | 1 |
| Topic: 05-08 Disclosure Requirements | 1 |
| Topic: 05-09 Consolidation of a 100%-Owned Subsidiary | 11 |
| Topic: 05-12 Consolidation of an 80%-Owned SubsidiaryDirect Approach | 25 |
| Topic: 05-16 Parent Company Extension Theory | 3 |
| Topic: 05-17 Acquisition Differential Assigned to Liabilities | 2 |
| Topic: 05-18 Intercompany Receivables and Payables | 2 |
| Topic: 05-19 Subsidiary Acquired During the Year | 3 |
| Topic: 05-20 Equity Method of Recording | 22 |
| Topic: 05-22 Year 1 Consolidated Financial Statement Working Paper | 2 |
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