Chapter 3

Question 1

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).

Answer 1

false

Question 2

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

Answer 2

a. the acquisition-date fair values of the subsidiary’s depreciable assets

Question 3

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

Answer 3

c. subject to periodic impairment testing

Question 4

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

Answer 4

b. the subsidiary’s income no longer matters for reporting purposes

Question 5

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.

Answer 5

zero

Question 6

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 _____.

Answer 6

consolidation

Question 7

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

Answer 7

b. must be increased in preparing consolidated financial statements

Question 8

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.

Answer 8

parent

Question 9

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.

Answer 9

double

Question 10

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

Answer 10

a. remove the beginning of the year book value component of the investment account

Question 11

The label “S” in Consolidation Worksheet Entry S refers to the subsidiary’s _____ _____ accounts.

Answer 11

stockholders equity

Question 12

Consolidation Entry A, in the first year subsequent to acquisition, adjusts the subsidiry’s asset and liability balances to acquisition-date _____ values

Answer 12

fair

Question 13

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

Answer 13

true

Question 14

Consolidation entries S and A are part of a sequence of worksheet adjustments that bring the investment in subsidiary account to a _____ balance.

Answer 14

zero

Question 15

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

Answer 15

a. the parent employs the equity method in accounting for its investment and the subsidiary has declared a current period cash dividend

Question 16

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

Answer 16

a. subsidiary ownership accounts are not relevant, because consolidated statements are prepared for the parent company owners

Question 17

T/F Consolidation Entry A may include an adjustment to recognize goodwill created by the business combination

Answer 17

true

Question 18

When a subsidiary’s tangible asset has an excess acquisition-date book over fair value, Consolidation Entry E will show a _____ to depreciation expense

Answer 18

decrease

Question 19

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

Answer 19

c. brings the “Equity in Subsidiary Earnings” account to a zero balance

Question 20

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

Answer 20

c. reduces the subsidiary’s dividends balance

Question 21

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

Answer 21

a. the subsidiary’s acquisition-date differences between fair and book values

Question 22

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

Answer 22

a. parent company balances only

Question 23

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

Answer 23

c. accrual basis

Question 24

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

Answer 24

dividends

Question 25

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

Answer 25

consolidation

Question 26

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.

Answer 26

consolidated

Question 27

T/F Consolidated total include the unamortized subsidiary acquisition-date excess of fair over book value allocations

Answer 27

true

Question 28

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

Answer 28

c. no effect

Question 29

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.

Answer 29

zero

Question 30

Under the initial value method, the parent records income when the subsidiary declares a _____.

Answer 30

dividend

Question 31

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.

Answer 31

c. remove the balance in the parent’s dividend income and the subsidiary’s dividends declared

Question 32

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.

Answer 32

retained earnings

Question 33

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

Answer 33

a. no periodic adjustments are typically made

Question 34

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.

Answer 34

accrual

Question 35

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

Answer 35

decrease

Question 36

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

Answer 36

consolidated

Question 37

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

Answer 37

revenues and expenses

Question 38

Because goodwill has an indefinite life, rather than amortization the FASB utilizes an _____ approach to assessing the appropriateness of reported values of goodwill.

Answer 38

impairment

Question 39

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.

Answer 39

true

Question 40

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

Answer 40

d. a component of operating income

Question 41

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.

Answer 41

retained earnings

Question 42

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

Answer 42

b. the determination of fair values for reporting unit’s assets and liabilities is costly period exercise

Question 43

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.

Answer 43

impaired

Question 44

Contingent stock issued in connection with a business combination is typically recorded by the parent as a component of ____ _____.

Answer 44

stockholders equity