10.02 Flashcards
Which one of the following methods, if any, may a parent use on its books to carry an investment in a subsidiary that it will consolidate?
- Cost Method
- Equity Method
Cost Method-YES
Equity Method-YES
**A parent may use the cost method, the equity method, or any other method on its books to carry an investment in a subsidiary that it will consolidate. The method that is used on its books will affect the consolidating process, but the final consolidated financial statements will be the same regardless of the method the parent uses on its books.
The choice of methods that a parent uses on its books to account for its investment in a subsidiary will affect the:
- Consolidating Process
- Consolidated Financial Statements
Consolidating Process-YES
Consolidated Financial Statements-NO
**While the method a parent uses on its books to account for its investment in a subsidiary will affect the consolidating process, the choice of methods will not affect the final consolidated financial statements. The final consolidated financial statements will be the same regardless of the method used by the parent on its books; only the details of the process of developing those statements will be different. The primary difference will be in the nature of the investment eliminating entry on the worksheet.
Aceco has significant investments in three separate entities. These investments are:
- 40% ownership of the voting stock of Kapco.
- 60% ownership of the voting stock of Placo.
- 100% ownership of the voting stock of Simco
Which of Aceco’s investments would be consolidated with Aceco in its consolidated financial statements?
- Simco only.
- Placo and Simco.
- Kapco, Placo, and Simco.
- Kapco only.
Placo and Simco.
**Since Aceco owns controlling interest in Placo (60%) and in Simco (100%), each would be consolidated with Aceco. Kapco would not be consolidated, because Aceco does not have controlling interest in Kapco. In Aceco’s consolidated financial statements, Kapco would be shown as an investment.
The results of the consolidating process are recorded in the books of the:
Parent
Subsidiary
Parent-NO
Subsidiary-NO
The consolidating process takes place on worksheets and schedules, and the results are presented in the form of consolidated financial statements. Some of the worksheet and schedule data is carried forward from period end to period end to facilitate the recurring consolidating process.
Which one of the following kinds of eliminations, if any, will be required in every consolidating process?
- Intercompany Receivables/Payables
- Intercompany Investment
- Intercompany Revenues/Expenses
- Intercompany Receivables/Payables-NO
- Intercompany Investment-YES
- Intercompany Revenues/Expenses-NO
**An intercompany investment elimination will be required in every consolidating process (to eliminate the parent’s investment against the subsidiary’s shareholders’ equity). Intercompany receivables/payables and intercompany revenues/expenses eliminations will not be required in every consolidating process. Those kinds of eliminations will be required only if the affiliated companies have engaged in intercompany transactions that resulted in such balances.
Which one of the following is not necessarily a post-combination characteristic of a legal acquisition?
- The combining firms remain separate legal entities.
- A parent-subsidiary relationship exists.
- The acquiring firm owns 100% of the voting stock of the acquired firm.
- The combining firms are under common economic control.
The acquiring firm owns 100% of the voting stock of the acquired firm.
**The acquiring firm in a legal acquisition does not have to own 100% of the voting stock of the acquired firm. In a legal acquisition, the acquiring firm need only acquire greater than 50% (50% + 1 share) of the acquired firm to obtaining a controlling interest. Both firms continue to exist and operate as separate legal entities, the acquiring firm as the parent and the acquired firm as a subsidiary.
Which one of the following circumstances will not impact directly the adjustments, eliminations, or related amounts in the consolidating process?
- Whether the parent company is a manufacturing firm or a service firm.
- Whether the parent uses the cost or equity method to carry the investment in a subsidiary on its books.
- Whether the parent owns 100% or less than 100% of the subsidiary.
- Whether transactions between the affiliated entities originate with the parent or with a subsidiary.
Whether the parent company is a manufacturing firm or a service firm.
**Whether the parent company is a manufacturing firm or a service firm (or other type of firm) will not impact directly the adjustments, eliminations, or related amounts in the consolidating process. Whatever the type of firm, the same kinds of adjustments, eliminations, and amounts would have to be made in the consolidating process.
Which of the following statements, if any, concerning the preparation of consolidated financial statements is/are correct?
I. The consolidating process is carried out on the books of the parent entity.
II. The consolidated financial statements report two or more legal entities as though they are a single economic entity.
II only.
**The consolidated financial statements report two or more legal entities (a parent and its subsidiary/ies) as though they are a single economic entity. Because the entities are under the common economic control of the parent’s shareholders, GAAP requires that consolidated statements be the primary form of financial statement disclosure.
Which one of the following is not a characteristic of consolidated financial statements prepared following an operating period that occurred after the date of a business combination?
- A full set of consolidated financial statements will be required.
- The method used by the parent to carry on its books its investment in the subsidiary will affect the consolidating process.
- Intercompany transactions may have occurred since the business combination.
- The method used by the parent to carry on its books its investment in the subsidiary will affect the final consolidated financial statements.
The method used by the parent to carry on its books its investment in the subsidiary will affect the final consolidated financial statements.
**The method used by the parent to carry on its books its investment in the subsidiary will not affect the final consolidated financial statements. The method used by the parent (cost, equity, or other) will affect how the investment account has changed since the date of the investment and, therefore, the investment elimination process but not the final consolidated financial statements.
On November 30, 2004, Parlor, Inc. purchased for cash at $15 per share all 250,000 shares of the outstanding common stock of Shaw Co.
On November 30, 2004, Shaw’s balance sheet showed a carrying amount of net assets of $3,000,000. On that date, the fair value of Shaw’s property, plant, and equipment exceeded its carrying amount by $400,000.
In its November 30, 2004, consolidated balance sheet, what amount should Parlor report as goodwill?
$750,000
$400,000
$350,000
$0
$350,000
**Goodwill is the difference between the purchase price of $3,750,000 (250,000 × $15.00) and the fair value of the net assets ($3,000,000 + $400,000) or $350,000.
Penn Corp. paid $300,000 for the outstanding common stock of Star Co. At that time, Star had the following condensed balance sheet:
Carrying amounts Current assets- $40,000 Plant and equipment, net- 380,000 Liabilities- 200,000 Stockholders' equity - 220,000 The fair value of the plant and equipment was $60,000 more than its recorded carrying amount. The fair values and carrying amounts were equal for all other assets and liabilities. What amount of goodwill, related to Star's acquisition, should Penn report in its consolidated balance sheet?
$20,000
$40,000
$60,000
$80,000
$20,000
**In an acquisition business combination, all assets and liabilities are revalued to fair value. Any excess of investment value over fair value of the revalued identifiable net assets is assigned to goodwill.
Book value of net assets was $220,000. Plant and Equipment needed to be written up by $60,000, making fair value of net assets $280,000. Since Penn paid $300,000 for Star, that leaves $20,000 in goodwill ($300,000-$280,000). Thus, this is the correct response.
Under which of the following methods of carrying a subsidiary on its books, if any, will the carrying value of the investment normally change following a combination?
- Cost Method
- Equity Method
- Cost Method-NO
- Equity Method-YES
**If the parent uses the equity method to carry on its books the investment in a subsidiary, the carrying value of the investment will change as the equity of the subsidiary changes. However, if the parent uses the cost method, the carrying value on its books normally will not change.
This question has been adapted from the original AICPA released question.
On April 1, 2005, Dart Co. paid $620,000 for all the issued and outstanding common stock of Wall Corp. in a transaction properly accounted for as an acquisition.
The recorded assets and liabilities of Wall Corp.
on April 1, 2005 follow:
Cash $ 60,000
Inventory 180,000
Property and equipment (net of accumulated depreciation of $220,000) 320,000
Goodwill (net of accumulated amortization of $50,000) 100,000
Liabilities (120,000)
Net assets $540,000
========
On April 1, 2005, Wall’s inventory had a fair value of $150,000, and the property and equipment (net) had a fair value of $380,000. What is the amount of goodwill resulting from the business combination?
$150,000
$120,000
$50,000
$20,000
$150,000
**First the fair value of the identifiable net assets must be determined:
Cash $60,000 Inventory $150,000 P&E (net) $380,000 Liabilities ($120,000) Net Assets $470,000 Once this has been determined it is a simple matter of subtracting this amount from the purchase price to determine the goodwill. ($620,000 − $470,000 = $150,000 goodwill).
Which of the following financial statements, if any, prepared by a parent immediately after a business combination is likely to be different from financial statements it prepares immediately before the business combination?
- Balance Sheet
- Income Statement
- Balance Sheet-YES
- Income Statement-NO
**While a parent’s balance sheet prepared immediately after a business combination will be different from its balance sheet prepared immediately before the business combination, the parent’s income statement is not likely to be different than the consolidated income statement prepared immediately after the combination. As a result of the combination, the parent will have on its balance sheet an investment account (and probably other accounts/amounts) that it did not have before the combination, but the consolidated income statement prepared immediately after a business combination will likely be the same as the parent’s pre-combination income statement.
Which of the following financial statements, if any, prepared by a parent following an operating period that occurred after a business combination, is likely to be different from financial statements it prepares immediately before the business combination?
- Balance Sheet
- Income Statement
- Balance Sheet-YES
- Income Statement-YES
**Both a parent’s balance sheet and income statement prepared following an operating period that occurred after a business combination are likely to be different from financial statements it prepares immediately before the business combination. As a result of the combination, the parent will have on its balance sheet an investment account (and probably other accounts/amounts) that it did not have before the combination as well as the effects of post-combination transactions on the assets, liabilities, and equities of the parent and its subsidiaries. In addition, whereas the consolidated income statement prepared immediately before (or immediately after) the combination will consist of only the parent’s revenues and expenses, an income statement prepared after an operating period will include the subsidiaries’ revenues and expenses as well as the result of post-combination transactions on the revenues and expenses of the parent.
