Business Combinations/Consolidation

Question 1

Ignore important legal relationships and emphasize economic substance over form

Answer 1

Consolidated Financial statement

Question 2

Are an economic truth but a legal fiction

Answer 2

Consolidated Financial Statement

Question 3

Consolidate when

Answer 3

ALL majority-owned subsidiaries(over 50% of the voting interest is owned by parent company)to have one management and one economic entity

Question 4

Companies that have different year ends can be

Answer 4

Consolidated

Question 5

Significant transactions during the gap period require disclosure under

Answer 5

GAAP

Question 6

The subsidiary financial statements must be adjusted for signinficant transactions during the gap period under

Answer 6

IFRS

Question 7

The degree of control the investor has over the investee dictates how

Answer 7

the investor accounts for the investment in corporate equity securities

Question 8

Cost Method/Do Not Consolidate =

Answer 8

No significant influence(< 20%)

Question 9

Equity Method/Do Not Consolidate =

Answer 9

Significant influence but 50% or less ownership(20% - 50%)

Question 10

Consolidate =

Answer 10

Control(greater than 50% ownership)

Question 11

What are two reasons ratio analysis of consolidated data is NOT reliable

Answer 11

1. Poor income statement results of individual subsidiaries are hidden
2. Intercompany eliminations affect ratios

Question 12

In a vertical chain, where parent company owns more than 50% of a subsidiary company and the subsidiary owns more than 50% of a third company, consolidate:

Answer 12

Third company into subsidiary company

Subsidiary company now consolidated with 3rd company into parent company