Consolidated Financial Statements Flashcards
Which kind of accounts is least likely to be eliminated through an eliminating entry on the consolidating worksheet?
Goodwill
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.
True or False? Whether the parent carries its investment in the subsidiary using the cost method or the equity method would be of concern in preparing consolidated financial statements at the end of the operating period following a business combination but would not be of concern in preparing financial statements immediately following the combination.
True
True or False? The method used by the parent to carry on its books its investment in the subsidiary will not affect the final consolidated financial statements.
True
True or False? 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.
True
How is goodwill calculated?
Goodwill is the difference between the purchase price and the fair value of the net assets. Example: Parlor, Inc. purchased for cash at $15 per share all 250,000 shares of the outstanding common stock of Shaw Co., net assets of $3,000,000, property, plant, and equipment exceeded its carrying amount by $400,000 (250,000 x 15 = 3,750,000 and fair value of net assets is 3,000,000 + 400,000= 3,400,000 Goodwill= 3750000-3400000= 350,000
Under which method of carrying a subsidiary on its books, if any, will the carrying value of the investment normally change following a combination?
Equity method
Which 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, 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
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 or Income Statement?
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.
A subsidiary, acquired for cash in a business combination, owned equipment with a market value in excess of book value as of the date of combination. A consolidated balance sheet prepared immediately after the acquisition would treat this excess as:
Plant and Equipment. The excess of (fair) market value over book value of equipment would be recognized by writing up plant and equipment to fair value on the consolidated balance sheet.
If at the date the parent acquires a subsidiary the fair value of a subsidiary’s asset is less than its book value, the asset will be written down to the lower fair value as part of the investment eliminating entry. True or False?
True
If a parent carries an investment in a subsidiary using the equity method, the parent will recognize a cash dividend received from the subsidiary as a dividend income. True or false
False
If a subsidiary has been profitable for the five-year period since it was acquired by the parent, the reciprocity entry made on the consolidating worksheet will increase the parent’s investment in the subsidiary as shown on the worksheet. true or false?
True
If on the consolidating worksheet an asset is written down to a fair value that is less than book value, an additional amount of depreciation expense will be recognized on the consolidating worksheet.
False
If the parent uses the cost method to account for its investment in a subsidiary, the carrying value of the investment account on the parent’s books will reflect changes in the subsidiary’s shareholders’ equity. true or false?
False
