Chapter 3 Flashcards
T/F The balances reported in consolidated financial statements will differ depending on the parent’s selection of an investment accounting method (e.g., equity, initial value, or partial equity).
false
Subsequent to acquisition, consolidated depreciation expense is based upon
a. the acquisition-date fair values of the subsidiary’s depreciable assets
b. the book values of the subsidiary’s depreciable assets
c. the acquisition-date fair values of the parent’s depreciable assets
a. the acquisition-date fair values of the subsidiary’s depreciable assets
The values assigned to intangible assets with indefinite useful lives are
a. not subject to impairment testing
b. allocated over time to amortization expense
c. subject to periodic impairment testing
d. allocated over time to depreciation expense
c. subject to periodic impairment testing
Which of the following is not a reason why it is necessary to remove the subsidiary’s income figure each period as part of a consolidation?
a. the subsidiary’s revenues and expenses can be separately included when creating an income statement for the combined business entity
b. the subsidiary’s income no longer matters for reporting purposes
c. it is necessary to remove the subsidiary’s income to avoid double counting
b. the subsidiary’s income no longer matters for reporting purposes
In conjunction with combining a subsidiary’s revenues and expenses with those of the parent company, the income from the subsidiary account accrued by a parent is brought to a _____ balance as part of the consolidation process.
zero
When a parent includes equity method earnings with its own earnings, the parent’s net income equals consolidated net income. As a result, the equity method is often referred to as a single-line _____.
consolidation
When a particular asset acquired in a business combination which has a fair value in excess of its book value on acquisition-date, the asset’s carrying amounts from the subsidiary’s financial records
a. remains the same in consolidated financial statements as its current book value
b. must be increased in preparing consolidated financial statements
c. must be reduced in preparing consolidated financial statements
b. must be increased in preparing consolidated financial statements
As part of the consolidation statement preparation process for a parent and subsidiary, the subsidiary’s asset, liability, revenue, and expense balances are added to the _______ company balances after appropriate adjustments.
parent
One reason it is necessary to remove the subsidiary income figure each period as part of a consolidation is to avoid _____ counting the subsidiary’s income.
double
Consolidation Entry S credits the Investment in Subsidiary account in order to
a. remove the beginning of the year book value component of the investment account
b. allocate goodwill acquired in the business combination
c. completely eliminate the investment account
a. remove the beginning of the year book value component of the investment account
The label “S” in Consolidation Worksheet Entry S refers to the subsidiary’s _____ _____ accounts.
stockholders equity
Consolidation Entry A, in the first year subsequent to acquisition, adjusts the subsidiry’s asset and liability balances to acquisition-date _____ values
fair
T/F Consolidation Entry I removes the Equity in Subsidiary Earnings which is then replaced by the inclusion of the subsidiary’s individual revenue and expense accounts on the consolidated income statement
true
Consolidation entries S and A are part of a sequence of worksheet adjustments that bring the investment in subsidiary account to a _____ balance.
zero
Consolidation Entry D ddebits the “Investment in Subsidiary” account when
a. the parent employs the equity method in accounting for its investment and the subsidiary has declared a current period cash dividend
b. the parent company has declared a cash dividend for its shareholders
c. the parent employs the initial value method in accounting for its investment and the subsidiary has declared a current period cash dividend
a. the parent employs the equity method in accounting for its investment and the subsidiary has declared a current period cash dividend
Why does Consolidation Entry S remove the subsidiary’s stockholders’ equity accounts ?
a. subsidiary ownership accounts are not relevant, because consolidated statements are prepared for the parent company owners
b. because the subsidiary stockholders’ equity accounts are reported in consolidated statements as part of the investment in subsidiary account
c. because the subsidiary has been formally dissolved, its stockholders equity accounts no longer exist
a. subsidiary ownership accounts are not relevant, because consolidated statements are prepared for the parent company owners
T/F Consolidation Entry A may include an adjustment to recognize goodwill created by the business combination
true
When a subsidiary’s tangible asset has an excess acquisition-date book over fair value, Consolidation Entry E will show a _____ to depreciation expense
decrease
Consolidation Entry I
a. excludes excess acquisition-date fair over book value amortization
b. allows the inclusion of the “Equity in subsidiary earnings” account as a reported figure in the consolidated income statement
c. brings the “Equtiy in subsidiary earnings” accounts to a zero balance
d. results in the exclusion of individual subsidiary revenue and expense accounts from consolidated balances
c. brings the “Equity in Subsidiary Earnings” account to a zero balance
In Consolidation Entry D, the credit to the Dividends declared account
a. increases the parent’s retained earnings
b. increases cash
c. reduces the subsidiary’s dividends balance
d. decreases the investment in the subsidiary
c. reduces the subsidiary’s dividends balance
Consolidation Entry E recognizes amortization expenses related to
a. the subsidiary’s acquisition-date differences between fair and book values
b. current period amortization of indefinite-lived intangible assets
c. previous period’s depreciation expenses
d. the parent’s separate intangible assets as of the acquisition date
a. the subsidiary’s acquisition-date differences between fair and book values
When a parent company owns 100% of its subsidiary, what amounts for common stock and additional paid-in capital are included in consolidated stockholders’ equity totals?
a. parent company balances only
b. both parent and subsidiary balances
c. subsidiary company balances only
d. neither parent more subsidiary company balances
a. parent company balances only
Which of the following best describes the income recognition basis reflected by the equity method?
a. cash basis
b. fair value basis
c. accrual basis
c. accrual basis
When the parent applies the equity method to its investment insubsidiary account, consolidation Entry D eliminates the effect of intra-entity subsidiary _____ as part of the consolidation process
dividends
If a subsidiary company has a debt payable to its parent company, the intra-entity payable and receivable (on the parent’s book) is removed as part of the ______ process
consolidation
In Exhibit 3.7, Consolidation Entry S removes the balances from the subsidiary’s common stock and additional paid-in capital accounts to ensure that only the parent’s balances for these accounts appear in _____ totals.
consolidated
T/F Consolidated total include the unamortized subsidiary acquisition-date excess of fair over book value allocations
true
What effect does the parent’s selection of the equity method vs. the initial value method have on consolidated financial statements?
a. the investment in subsidiary account balance in the consolidated balance sheet will be lower under the initial value method
b. consolidated dividends will be higher under the initial value method
c. no effect
d. consolidated net income will be higher under the equity method
c. no effect
Regardless of whether the parent accounts for its subsidiary investment using the partial equity, initial value or the equity method, consolidation worksheet entries bring the investment account to a _____ balance.
zero
Under the initial value method, the parent records income when the subsidiary declares a _____.
dividend
When the parent applies the initial value method for its investment accounting, Consolidation Entry I is needed to
a. record the amortization of excess acquisition-date fair value adjustments
b. eliminate the parent’s dividend income against the subsidiary’s revenues and expenses
c. remove the balance in the parent’s dividend income and the subsidiary’s dividends declared
d. include the balance of subsidiary dividends declared in the consolidated totals.
c. remove the balance in the parent’s dividend income and the subsidiary’s dividends declared
When the parent employes either the initial value or the partial equity method, establishing an appropriate beginning _____ _____ balance for the parent is crucial to the preparation of consolidated financial statements.
retained earnings
Beyond recording the acquisition price, what periodic adjustments does the parent typically make to the investment account when the initial value method employed?
a. no periodic adjustments are typically made
b. the investment account is reduced for excess acquisition-date fair value adjustments
c. the investment account is increased for subsidiary dividends received
d. the investment account is increased as the subsidiary reports net income
a. no periodic adjustments are typically made
Under the inital value method, the parent records income when its subsidiary declares a dividend. Ovet time, the parent’s retained earnings fail to accrue any subsidiary income not distributed as a dividend. Therefore, worksheet entries are required to adjust the parent’s beginning retained earnings to a full- ______ basis.
accrual
When the acquisition-date fair value of subsidiary long-term debt exceeds its carrying amount, in period subsequent to the acquisition, worksheet entries are needed to ______ interest expense
decrease
Subsidiary dividends attributable to its parent are excluded from _____ totals because they represent an intra-entity transfer with no financial effect outside the reporting entity
consolidated
Worksheet entries focus on the parent’s beginning retained earnings as needed to partially adjust to the full-accrual basis. To complete the adjustment, we combine current year consolidated _____ and _____ to arrive at full-accrual ending retained earnings
revenues and expenses
Because goodwill has an indefinite life, rather than amortization the FASB utilizes an _____ approach to assessing the appropriateness of reported values of goodwill.
impairment
T/F Conducting goodwill impairment tests at the reporting unit level (rather than the combined entity level) helps capture goodwill impairment losses that may otherwise be offset by an increase in goodwill in another reporting unit.
true
Consolidated income statements report goodwill impairment losses as
a. amortization expenses
b. a component of non-operating income
c. an adjustment to a prior period’s retained earnings
d. a component of operating income
d. a component of operating income
Neither the inital value method nor the partial equity method represent full accrual accounting for the subsidiary’s income. Therefore over time the parent’s beginning _____ _____ becomes misstated and must be appropriately established.
retained earnings
Why does the FASB allow a firm the option to assess qualitative factors to determine whether further testing is required for detecting goodwill impairment?
a. fair value for many firm’s reporting units are unavailable
b. the determination of fair values for a reporting unit’s assets and liabilities is a costly period exercise
c. the qualitative test is considered a more rigorous threshold for firms to meet in testing goodwill impairment
b. the determination of fair values for reporting unit’s assets and liabilities is costly period exercise
In the quantitative test for goodwill impairment, if an individual reporting unit’s fair value exceeds its carrying amount, goodwill is not considered _____ and no further procedures are needed.
impaired
Contingent stock issued in connection with a business combination is typically recorded by the parent as a component of ____ _____.
stockholders equity
