Consolidated Financial Statements

Question 1

For the purpose of consolidating financial interests, a majority voting interest is deemed to be

Answer 1

Greater than 50% of the directly or indirectly owned outstanding voting shares of another.

Question 2

Sun Co. is a wholly owned subsidiary of Star Co. Both companies have separate general ledgers and prepare separate financial statements. Sun requires stand-alone financial statements. Which of the following statements is correct?

Answer 2

Consolidated statements should be prepared by Star, the parent, and not by Sun, the subsidiary. Star has an investment in and control of Sun, which is the basis for preparing consolidated statements; Sun does not have an investment in, or control of, Star. Thus, there is no basis for Sun to prepare consolidated statements.

Question 3

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?

Answer 3

Cost or equity, 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.

Question 4

The choice of methods that a parent uses on its books to account for its investment in a subsidiary will affect the:

Answer 4

The consolidating process but NOT the consolidated financial statements.

Question 5

An investor will report an investment in its financial statements using a different method than it uses to carry the investment on its books if its minimum ownership of the investee is:

Answer 5

50%+, If an investor owns 50+% (up to and including 100%) of an investee, it will normally carry the investment on its books using the cost method, the equity method, or some other method, but it will report the investment in its financial statements as a consolidated subsidiary. The method used on the investor’s books will be different than the method used to report the investment in financial statements.

Question 6

Which one of the following levels of voting ownership is normally assumed to convey significant influence over an investee?

Answer 6

20-50%

Question 7

Consolidated financial statements are based on the concept that:

Answer 7

In the preparation of financial statements, economic substance takes precedence over legal form.

Question 8

The results of the consolidating process are recorded in the books of the:

Answer 8

Neither parent or subsidiary, 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.

Question 9

Following a business combination accomplished through a legal acquisition, transactions between the affiliated entities can originate with the/a:

Answer 9

Parent or subsidiary, called intercompany transactions

Question 10

Consolidated financial statements are typically prepared when one company has a controlling financial interest in another unless:

Answer 10

Subsidiary is in bankruptcy. Currently, the only reasons allowable for not consolidating a majority-owned subsidiary is where control does not reside with the majority owner.

Question 11

A subsidiary, acquired for cash in a business combination, owned inventories with a market value different from the book value as of the date of combination. A consolidated balance sheet prepared immediately after the acquisition would include this difference as part of:

Answer 11

Inventories

Question 12

Which one of the following would be of concern in preparing consolidated financial statements at the end of the operating period following a business combination that would not be a concern in preparing financial statements immediately following a combination?

Answer 12

Whether the parent carries its investment in the subsidiary using the cost method or the equity method.

Question 13

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?

Answer 13

Equity method, 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.

Question 14

When a parent company uses the cost method on its books to carry its investment in a subsidiary, which one of the following will be recorded by the parent on its books?

Answer 14

Parent’s share of subsidiary’s cash dividends declared.

Under the cost method of carrying an investment in a subsidiary, the parent does recognize its share of the subsidiary’s dividends declared and, ultimately, the cash received in payment of the dividend. The dividend income (CR.) so recognized by the parent would be eliminated in the consolidating process against the retained earnings decrease (DR.) recognized by the subsidiary.

Question 15

If a parent uses the equity method on its books to carry its investment in a subsidiary, which one of the following current year entries (made by the parent) must be reversed on the consolidating worksheet?

Answer 15

Income and dividends from subsidiary

Question 16

What is the amount of investment eliminating entry?

Answer 16

The amount of an investment eliminating entry is the balance in the investment account as of the beginning of the period being consolidated

Question 17

Assume that in acquiring a subsidiary, the parent determined there were several depreciable assets of the subsidiary that had a fair value greater than book value. What effect will the excess fair value over book value of the subsidiary’s assets have on depreciation expense and depreciable assets?

Answer 17

Both will increase

Question 18

Noncontrolling interest amount on date of consolidation=

Answer 18

Noncontrolling interest proportionate share of total fair value at that date, including goodwill (top number)

Question 19

Which one of the following will occur on consolidated financial statements if an intercompany inventory transaction is not eliminated?

Answer 19

An overstatement of sales.

Sales would be overstated by the amount of the intercompany sales reported by the selling affiliate. All intercompany sales and related purchases must be eliminated, even if they do not result in a profit or loss.

Question 20

For consolidated purposes, what effect will the intercompany sale of a fixed asset at a profit or at a loss have on depreciation expense recognized by the buying affiliate?

Answer 20

At a profit-overstate
At a loss-understate

An intercompany sale of a fixed asset at a profit will result in the buying affiliate overstating depreciation expense by the amount of depreciation taken on the intercompany profit, and an intercompany sale at a loss will result in an understatement of depreciation expense taken by the buying affiliate.

Question 21

Water Co. owns 80% of the outstanding common stock of Fire Co. On December 31, 2005, Fire sold equipment to Water at a price in excess of Fire’s carrying amount but less than its original cost. On a consolidated balance sheet on December 31, 2005, the carrying amount of the equipment should be reported at:

Answer 21

Water’s original cost less Fire’s recorded gain.

The gain that was recorded must therefore be eliminated on the consolidated books. The net result is that the asset will be on the books at Water’s original cost less Fire’s recorded gain.

Question 22

Assume that on January 2, Company P recognized a $3,000 gain on the sale of a depreciable fixed asset to its subsidiary, Company S. Company S will depreciate the asset using straight-line depreciation over the remaining three-year life of the asset. What amount of intercompany gain will be eliminated from P’s retained earnings at the end of the year following the year of the intercompany fixed asset transactions?

Answer 22

The amount of intercompany gain to be eliminated at the end of the year following the year of the intercompany fixed asset sale is $2,000. At the end of the year of the intercompany sale, depreciation taken by the buying affiliate on the $3,000 inter-company gain will be $1,000 ($3,000/3 years). As a consequence, $1,000 of the $3,000 intercompany gain will have been properly recognized, leaving only $2,000 to eliminate at the end of the second year. Depreciation expense taken on the intercompany gain for the second year will confirm another $1,000 of the intercompany gain, and depreciation expense taken on the intercompany gain for the third year will confirm the last $1,000 of the intercompany gain.

Question 23

Which one of the following is not a characteristic of intercompany bonds?

Answer 23

When bonds become intercompany, they are written off of the books of the issuing affiliate and the investing affiliate.

Question 24

Under IFRS the asset goodwill may be recognized

Answer 24

When it is acquired by purchase.

Question 25

Under IFRS, a parent may exclude a subsidiary from consolidation if all of the following conditions exist, except

Answer 25

It reports only one class of stock in its balance sheet.

This answer is correct because it is not one of the three conditions required to exclude a subsidiary from consolidation. The three required conditions are: (1) it is wholly or partially owned and its other owners do not object to nonconsolidation; (2) it does not have any debt or equity instruments publicly traded; and (3) its parent prepares consolidated financial statements that comply with IFRS.

Question 26

Which statement is true with respect to noncontrolling interest?

Answer 26

IFRS permits recording noncontrolling interests at either fair value or the proportionate share of the value of identifiable net assets of the acquiree.

Question 27

Combined statements may be used to present the results of operations of:

Answer 27

Unconsolidated subsidiaries
Companies under common management
Commonly controlled companies

Question 28

In the preparation of combined financial statements, would the following issues be treated in the same way as when preparing consolidated financial statements or in a different way?

Answer 28

According to ASC 810, if problems associated with minority interest, foreign operations, different fiscal periods, or income taxes occur in the preparation of combined financial statements, they should be treated in the same manner as in the preparation of consolidated financial statements. Therefore, all three items should be treated in the same manner as in consolidated statements.

Question 29

In which one of the following cases is the subsidiary most likely to be reported as an unconsolidated subsidiary?

Answer 29

The subsidiary is in legal bankruptcy.

Question 30

Which of the following legal forms of business combination will result in the need to prepare consolidated financial statements?

Answer 30

Only an acquisition form of business combination will require the preparation of consolidated financial statements. In the merger and consolidation forms of business combination, only one firm will remain after the combination. Therefore, there will not be two (or more) sets of financial statements to consolidate.

Question 31

Before income taxes, what amount should be reported in Carty’s income statement for the year ended December 31, 20X5, as the total income effect (loss) from discontinued operations?

Answer 31

The $600,000 total loss from discontinued operations is the sum of the operating loss ($120,000) and the loss on disposal ($480,000). The two amounts, $120,000 and $480,000, are disclosed separately but together comprise the total loss on the discontinued operation.

Question 32

Before income taxes, what amount should Munn report as a loss from discontinued operations in its Year 1 income statement?

Answer 32

There are two components for discontinued operations: (1) the operating income or loss for the period in which the decision is made to dispose, and (2) the disposal loss. Only actual operating income (or loss) is recognized, but estimated as well as actual disposal losses are recognized. The $350,000 estimated disposal loss is the difference between the $850,000 carrying value of the segment, and its $500,000 estimated selling price. The operating loss for the period ($195,000) plus the estimated disposal loss ($350,000) equals the $545,000 total loss to be recognized for discontinued operations for Year 1.

Question 33

Pride, Inc. owns 80% of Simba, Inc.’s outstanding common stock. Simba, in turn, owns 10% of Pride’s outstanding common stock.

What percentage of the common stock cash dividends declared by the individual companies should be reported as dividends declared in the consolidated financial statements?

Answer 33

90% of Pride and 0% of Simba

Question 34

If a parent uses the equity method on its books to carry its investment in a subsidiary, which one of the following current year entries (made by the parent) must be reversed on the consolidating worksheet?

Answer 34

When a parent uses the equity method to account for its investment in a subsidiary, the parent will recognize on its books during the year its share of the subsidiary’s income (or loss) and its share of dividends declared by the subsidiary. Therefore, in the consolidating process, the dividends recognized from the subsidiary as well as the income recognized from the subsidiary (and any other equity-based entries made by the parent) must be reversed so that the elements that make up those entries (revenues, expenses, etc.) can be individually recognized on the consolidating worksheet and the consolidated financial statements.

Question 35

The SEC is comprised of five commissioners, appointed by the President of the United States, and five divisions. Which of the following divisions is responsible for overseeing compliance with the securities acts?

Answer 35

Division of Corporate Finance.

Question 36

Even though the SEC delegates the creation of accounting standards to the private sector, the SEC frequently comments on accounting and auditing issues. The main pronouncements published by the SEC are:

Answer 36

Financial Reporting Releases (FRR).

Question 37

Which of the following is the annual report that is filed with the United States Securities and Exchange Commission (SEC)?

Answer 37

Form 10-K

Question 38

Which of the following is not a required component of the 10-K filing?

Answer 38

Product market share

What is required:
Description of the business.
Market price of common stock.
Executive compensation.

Question 39

Which regulation governs the form and content of financial statement disclosures?

Answer 39

Regulation S-X

Question 40

Which of the follow is required by Regulation S-K to be included in the Management’s Discussion and Analysis (MD&A) that is part of the 10-K?

Answer 40

The SEC requires that the MD&A provide a “discussion and analysis” on operating results, liquidity, and capital resources, trends, and risks and uncertainties. Where there are significant increases in sales, management must discuss the extent that price, volume, or new products contributed to the increase.

Question 41

A company that is a large accelerated filer must file its Form 10-Q with the United States Securities and Exchange Commission within how many days after the end of the period?

Answer 41

40 days (only nonaccelerated filers have 45 days)

Question 42

Wood Co.’s dividends on noncumulative preferred stock have been declared but not paid. Wood has not declared or paid dividends on its cumulative preferred stock in the current or the prior year and has reported a net loss in the current year. For the purpose of computing basic earnings per share, how should the income available to common stockholders be calculated?

Answer 42

The dividends on the noncumulative preferred stock and the current-year dividends on the cumulative preferred stock should be added to the net loss.

Question 43

What amounts should Strauch report as earnings per share in its Year 2 and Year 1 comparative income statements?

Answer 43

This answer does not retroactively adjust Year 1 shares outstanding for the stock split. The denominator of EPS for all periods presented is adjusted retroactively for stock splits and dividends to ensure that the “share” in earnings per share means the same thing for EPS in each period.

Question 44

Should Pack’s 2003 earnings per share (EPS) take into consideration the stock split, and should Young’s 2003 EPS take into consideration the stock dividend?

Answer 44

Yes to both, EPS is used primarily as an input to predictions of future earnings. The stock split and dividend cause the number of shares outstanding to increase, and thus affect the future earnings prospects on a per share basis. These events should be included in the computation of EPS even though they did not occur as of the balance sheet date. Financial statement users view the information as if it were current as of the date of publication.

Question 45

The treasury stock method of entering stock options into the calculation of diluted EPS:

Answer 45

Is called the treasury stock method because the proceeds from assumed exercise are assumed to be used to purchase treasury stock.

Question 46

Numerator effect of converting preferring stock=

Answer 46

Add back potential dividends paid since they will not be paid. BEPS subtracts these, have to add them back to DEPS if they are dilutive.

Question 47

If everything else is held constant, earnings per share is increased by:

Answer 47

Purchasing treasury stock

Question 48

Why do preferred stock dividends appear in the calculation of earnings per share (EPS)?

Answer 48

Preferred stock dividends are subtracted from the earnings for the period in the calculation of earnings per share.

Earnings per share (EPS) is calculated on net income available to the common stockholders, divided by weighted average shares of common stock outstanding. The preferred dividends must be subtracted from the net income, as that amount is not available to the common stockholders.

Question 49

AB Company reported earnings per share of $10.50 on income before discontinued operations, ($2.00) on income (loss) attributed to discontinued operations, and $8.50 on net income. Which EPS figure is more relevant to a potential investor?

Answer 49

Potential investors and current investors are interested in the future earnings potential of the entity. Thus, they are interested in the earnings per share on continuing income, which would be the $10.50 per share. The EPS attributed to discontinued operations cannot be used in predicting future earnings, as they are one-time events.

Question 50

For which of the following income statement sections is earnings per share calculated?

Answer 50

Income from continuing operations
Discontinued operations
Net Income

Question 51

A public entity sells steel for use in construction. One of its customer’s accounts for 43% of sales, and another customer accounts for 40% of sales. What should the entity disclose in its annual financial statements about these two customers?

Answer 51

The amount of the entity’s revenue from each of the two customers.

The entity must disclose the amount of revenues received from a single customer that total 10% or more of total revenues.

Question 52

Which of the following types of entities are required to report on business segments?

Answer 52

Publicly traded enterprises

FAS No. 131 requires that a public business enterprise report financial and descriptive information about its reportable operating segments.

Question 53

In its 2004 financial statements, Grum should disclose major customer data if sales to any single customer amount to at least

Answer 53

Under FAS 131 (1997), if revenues from transactions with a single customer amount to 10% or more of a firm’s total revenue, that fact must be disclosed, along with the total revenues from each such customer.

Question 54

What information should a public company present about revenues from foreign operations?

Answer 54

Disclose separately the amount of sales to unaffiliated customers and the amount of intracompany sales between geographical areas.

Segment disclosure requires that companies disclose the amount of sales to unaffiliated customers by geographical region. They also require disclosure of intracompany sales between geographical areas. These cannot be aggregated but must be reported separately.

Question 55

Yellow Co. received a large worker’s compensation claim of $90,000 in the third quarter for an injuryoccurring in the third quarter. How should Yellow account for the transaction in its interim financial report?

Answer 55

Recognize $90,000 in the third quarter.

Question 56

How are discontinued operations that occur at midyear initially reported?

Answer 56

Included in net income and disclosed in the notes to interim financial statements.

Discontinued operations are not related to any other interim period. Therefore, it would be erroneous to allocate their financial statement effects to more than one interim period.

Question 57

Bard Co., a calendar-year corporation, reported income before income tax expense of $10,000 and income tax expense of $1,500 in its interim income statement for the first quarter of the year. Bard had income before income tax expense of $20,000 for the second quarter and an estimated effective annual rate of 25%. What amount should Bard report as income tax expense in its interim income statement for the second quarter?

Answer 57

Interim income tax expense equals the difference between (1) the total income tax through the end of the interim period at the estimated annual tax rate, and (2) the income tax expense recognized in previous interim periods of the same year. For the second quarter, income tax expense therefore is computed as ($10,000 + $20,000)(.25) − $1,500 = $6,000.

Question 58

An inventory loss from a permanent market decline of $360,000 occurred in May Year 1. Cox Co. appropriately recorded this loss in May Year 1 after its March 31, Year 1, quarterly report was issued.

What amount of inventory loss should be reported in Cox’s quarterly income statement for the three months ended June 30, Year 1?

Answer 58

$360,000

Unless temporary, declines in the market value of inventory should be recognized in full in the interim period in which they occur.

Question 59

On June 30, 20X5, Mill Corp. incurred a $100,000 net loss from disposal of a business segment. Also, on June 30, 20X5, Mill paid $40,000 for property taxes assessed for the calendar year 20X5.

What amount of the foregoing items should be included in the determination of Mill’s net income or loss for the six-month interim period ended June 30, 20X5?

Answer 59

$120,000

The disposal loss cannot be allocated to interim periods. It does not relate to any interim period other than the one in which it occurred. Thus, it is recognized completely in the earnings for the six month period ended June 30.

The property tax is allocated to interim periods based on time expired. The $40,000 tax relates to the entire year of 20X5. With half of the year elapsed at June 30, half of the tax should be recognized in expense. The sum of the amounts to be recognized at June 30 is $120,000 ($100,000 + $20,000).

Question 60

An inventory loss from a market price decline occurred in the first quarter, and the decline was not expected to reverse during the fiscal year.

However, in the third quarter, the inventory’s market price recovery exceeded the market decline that occurred in the first quarter.

For interim financial reporting, the dollar amount of net inventory should:

Answer 60

When interim period inventory market value declines are not considered temporary (not expected to reverse), they are recognized in the quarter in which the decline occurs. Later recoveries are recognized as gains to the extent of previous losses only. The inventory may not be marked up above cost.

Question 61

Due to a decline in market price in the second quarter, Petal Co. incurred an inventory loss. The market price is expected to return to previous levels by the end of the year. At the end of the year, the decline had not reversed. When should the loss be reported in Petal’s interim income statements?

Answer 61

4th quarter only

Temporary declines in inventory value are not recognized in the interim period in which they occur. This decline was expected to be temporary, i.e. it was expected to reverse. Therefore, it is not recorded until the fourth quarter, at which time the normal annual LCM valuation is applied because the decline had not reversed. Had the decline in the second quarter been deemed permanent, it would have been recognized in the second quarter.

Question 62

For interim financial reporting, a company’s income tax provision for the second quarter of 20X4 should be determined using the:

Answer 62

Effective tax rate expected to be applicable for the full year of 2004 as estimated at the end of the second quarter of 20X4.

Question 63

A planned volume variance in the first quarter, which is expected to be absorbed by the end of the fiscal period, ordinarily should be deferred at the end of the first quarter if it is:

Answer 63

Favorable or unfavorable

Paragraph 14.d. of APB Opinion 28 states: “Purchase price variances or volume or capacity cost variances that are planned and expected to be absorbed by the end of the annual period, should ordinarily be deferred at interim reporting dates.”

Question 64

Which of the following statements, if any, concerning the modified cash basis of accounting is/are correct?

I. The modified cash basis of accounting employs some elements of accrual accounting.

II. To be acceptable, modifications to the cash basis of accounting must have substantial support in practice.

Answer 64

BOTH

Question 65

Alco, Inc., a small manufacturing company, prepares its financial statements using its income tax basis of accounting. In December, 2012, it determined that an error had been made in the amount of rent expense reported in its 2011 tax return. How should Alco account for the amount of the rental expense error in its 2012 financial statements?

Answer 65

As a prior period adjustment., an error made in prior period would be a prior period adjustment

Question 66

When a set of financial statements is prepared using the cash basis or the modified cash basis of accounting, which one of the following is least likely to be an appropriate financial statement title?

Answer 66

Income statement

When the cash basis or the modified cash basis of accounting is used, the title Income Statement, which is appropriate when the accrual basis of accounting is used, should be replaced by the title Statement of Cash Receipts and Cash Disbursements. This helps distinguish that the statement is not based on full accrual accounting consistent with U.S. GAAP.

Question 67

The Private Company Council has issued modified accounting for private companies for what aspect of Goodwill?

Answer 67

Goodwill amortization.

The PCC allows private companies to amortize goodwill over a period to not exceed 10 years.

Question 68

A private company decided to adopt one of the standards issued by the Private Company Council. What are the requirements upon adoption of the PCC standard?

Answer 68

Apply the new standard on a prospective basis.

Question 69

Should Pack’s 2003 earnings per share (EPS) take into consideration the stock split, and should Young’s 2003 EPS take into consideration the stock dividend that occur in 2004 but statements have not been issued?

Answer 69

Yes, EPS is used primarily as an input to predictions of future earnings. The stock split and dividend cause the number of shares outstanding to increase, and thus affect the future earnings prospects on a per share basis. These events should be included in the computation of EPS even though they did not occur as of the balance sheet date.

Question 70

If a company issues both a balance sheet and an income statement with comparative figures from last year, a statement of cash flows

Answer 70

Should be issued for each period for which an income statement is presented.

Question 71

In determining basic earnings per share, dividends on nonconvertible cumulative preferred stock should be

Answer 71

Deducted from net income whether declared or not.

Question 72

For purposes of computing the weighted-average number of shares outstanding during the year, a midyear event that must be treated as occurring at the beginning of the year is the

Answer 72

Declaration and payment of stock dividend.

Question 73

Which statement is true with respect to push-down accounting?

Answer 73

IFRS does not permit the use of push-down accounting.