Unit 5 : Week 5 - Midterm Exam
1. A statutory ______________ results when one company acquires all the net assets of another company and the acquired company ceases to exist as a separate legal entity. (Points : 8)
2. The defense tactic that involves purchasing shares held by the would-be acquiring company at a price substantially in excess of their fair value is called (Points : 8)
3. The objectives of FASB 141R (Business Combinations) and FASB 160 (NonControlling Interests in Consolidated Financial Statements) are as follows: (Points : 8)
to improve the relevance, comparibility, and transparency of financial information related to business combinations.
to eliminate the amortization of Goodwill.
to facilitate the convergence project of the FASB and the International Accounting Standards Board.
a and b only
4. A business combination in which the boards of directors of the potential combining companies negotiate mutually agreeable terms is a(n) (Points : 8)
5. Under SFAS 141R, what value of the assets and liabilities are reflected in the financial statements on the acquisition date of a business combination? (Points : 8)
6. With an acquisition, direct and indirect expenses are (Points : 8)
expensed in the period incurred.
capitalized and amortized over a discretionary period.
considered a part of the total cost of the acquired company.
charged to retained earnings when incurred.
7. In a business combination accounted for as an acquisition, how should the excess of fair value of net assets acquired over the consideration paid be treated? (Points : 8)
Amortized as a credit to income over a period not to exceed forty years.
Amortized as a charge to expense over a period not to exceed forty years.
Amortized directly to retained earnings over a period not to exceed forty years.
Recorded as an ordinary gain.
8. If an impairment loss is recorded on previously recognized goodwill due to the transitional goodwill impairment test, the loss should be treated as a(n): (Points : 8)
loss from a change in accounting principles.
loss from continuing operations.
loss from discontinuing operations.
9. When the acquisition price of an acquired firm is less than the fair value of the identifiable net assets, all of the following are recorded at fair value except (Points : 8)
Each of the above is recorded at fair value.
10. On the consolidated balance sheet, consolidated stockholders' equity is (Points : 8)
equal to the sum of the parent and subsidiary stockholders' equity.
greater than the parent's stockholders' equity.
less than the parent's stockholders' equity.
equal to the parent's stockholders' equity.
11. Reasons a parent company may pay more than book value for the subsidiary company's stock include all of the following except (Points : 8)
the fair value of one of the subsidiary's assets may exceed its recorded value because of appreciation.
the existence of unrecorded goodwill.
liabilities may be overvalued.
stockholders' equity may be undervalued.
12. Pine Corp. owns 60% of Sage Corp.'s outstanding common stock. On May 1, 2011, Pine advanced Sage $90,000 in cash, which was still outstanding at December 31, 2011. What portion of this advance should be eliminated in the preparation of the December 31, 2011 consolidated balance sheet? (Points : 8)
13. What is the method of presentation required by SFAS 160 of “non-controlling interest” on a consolidated balance sheet? (Points : 8)
As a deduction from goodwill from consolidation.
As a separate item within the long-term liabilities section.
As a part of stockholders' equity.
As a separate item between liabilities and stockholders' equity.
14. Hall, Inc., owns 40% of the outstanding stock of Gloom Company. During 2011, Hall received a $4,000 cash dividend from Gloom. What effect did this dividend have on Hall’s 2011 financial statements? (Points : 8)
Increased total assets.
Decreased total assets.
Decreased investment account.
15. Masters, Inc. owns 40% of Fields Corporation. During the year, Fields had net earnings of $200,000 and paid dividends of $50,000. Masters used the cost method of accounting. What effect would this have on the investment account, net earnings, and retained earnings, respectively? (Points : 8)
understate, overstate, overstate.
overstate, understate, understate
overstate, overstate, overstate
understate, understate, understate
16. In the preparation of a consolidated statements workpaper, dividend income recognized by a parent company for dividends distributed by its subsidiary is (Points : 8)
included with parent company income from other sources to constitute consolidated net income.
assigned as a component of the noncontrolling interest.
allocated proportionately to consolidated net income and the noncontrolling interest.
17. Under the cost method, the workpaper entry to establish reciprocity (Points : 8)
debits Retained Earnings - S Company.
credits Retained Earnings - S Company.
debits Retained Earnings - P Company.
credits Retained Earnings - P Company.
18. On the consolidated statement of cash flows, the parent’s acquisition of additional shares of the subsidiary’s stock directly from the subsidiary is reported as (Points : 8)
an investing activity.
a financing activity.
an operating activity.
none of these.
19. On January 1, 2010, Lester Company purchased 70% of Stork Corporation's $5 par common stock for $600,000. The book value of Stork net assets was $640,000 at that time. The fair value of Stork's identifiable net assets were the same as their book value except for equipment that was $40,000 in excess of the book value. In the January 1, 2010, consolidated balance sheet, goodwill would be reported at (Points : 8)
20. Under push down accounting, the workpaper entry to eliminate the investment account includes a (Points : 8)
debit to Goodwill.
debit to Revaluation Capital.
credit to Revaluation Capital.
debit to Revaluation Assets.
21. Dividends declared by a subsidiary are eliminated against dividend income recorded by the parent under the (Points : 8)
partial equity method.
equity and partial equity methods.
22. In preparing consolidated working papers, beginning retained earnings of the parent company will be adjusted in years subsequent to acquisition with an elimination entry whenever: (Points : 8)
a noncontrolling interest exists.
it does not reflect the equity method.
the cost method has been used only.
the complete equity method is in use.
23. A parent company regularly sells merchandise to its 80%-owned subsidiary. Which of the following statements describes the computation of noncontrolling interest income? (Points : 8)
the subsidiary’s net income times 20%.
(the subsidiary’s net income x 20%) + unrealized profits in the beginning inventory – unrealized profits in the ending inventory.
(the subsidiary’s net income + unrealized profits in the beginning inventory – unrealized profits in the ending inventory) × 20%.
(the subsidiary’s net income + unrealized profits in the ending inventory – unrealized profits in the beginning inventory) × 20%.
24. Paige, Inc. owns 80% of Sigler, Inc. During 2011, Paige sold goods with a 40% gross profit to Sigler. Sigler sold all of these goods in 2011. For 2011 consolidated financial statements, how should the summation of Paige and Sigler income statement items be adjusted? (Points : 8)
Sales and cost of goods sold should be reduced by the intercompany sales.
Sales and cost of goods sold should be reduced by 80% of the intercompany sales.
Net income should be reduced by 80% of the gross profit on intercompany sales.
No adjustment is necessary.
25. The noncontrolling interest’s share of the selling affiliate’s profit on intercompany sales is considered to be realized under (Points : 8)
both total and 100% elimination.
26. P Corporation acquired a 60% interest in S Corporation on January 1, 2011, at book value equal to fair value. During 2011, P sold merchandise that cost $135,000 to S for $189,000. One-third of this merchandise remained in S’s inventory at December 31, 2011. S reported net income of $120,000 for 2011. P’s income from S for 2011 is: (Points : 8)
27. P Company purchased land from its 80% owned subsidiary at a cost of $100,000 greater than it subsidiary’s book value. Two years later P sold the land to an outside entity for $50,000 more than it’s cost. In its current year consolidated income statement P and its subsidiary should report a gain on the sale of land of: (Points : 8)
28. The amount of the adjustment to the noncontrolling interest in consolidated net assets is equal to the noncontrolling interest’s percentage of the (Points : 8)
unrealized intercompany gain at the beginning of the period.
unrealized intercompany gain at the end of the period.
realized intercompany gain at the beginning of the period.
realized intercompany gain at the end of the period.
29. In years subsequent to the upstream intercompany sale of nondepreciable assets, the necessary consolidated workpaper entry under the cost method is to debit the (Points : 8)
Noncontrolling interest and Retained Earnings (Parent) accounts, and credit the nondepreciable asset.
Retained Earnings (Parent) account and credit the nondepreciable asset.
Nondepreciable asset, and credit the Noncontrolling interest and Investment in Subsidiary accounts.
No entries are necessary.
30. When preparing consolidated financial statement workpapers, unrealized intercompany gains, as a result of equipment or inventory sales by affiliates, are allocated proportionately by percent of ownership between parent and subsidiary only when the selling affiliate is (Points : 8)
the parent and the subsidiary is less than wholly owned.
a wholly owned subsidiary.
the subsidiary and the subsidiary is less than wholly owned.
the parent of a wholly owned subsidiary.