FAR: Conceptual Framework: 2/20/2018

Question 1

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?

Minority Interest Foreign Operations Different Fiscal Periods
Different Different Different
Different Same Same
Same Same Different
Same Same Same

Answer 1

Same, Same, Same

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 2

On January 2 of the current year, Peace Co. paid $310,000 to purchase 75% of the voting shares of Surge Co. Peace reported retained earnings of $80,000, and Surge reported contributed capital of $300,000 and retained earnings of $100,000. The purchase differential was attributed to depreciable assets with a remaining useful life of 10 years. Peace used the equity method in accounting for its investment in Surge. Surge reported net income of $20,000 and paid dividends of $8,000 during the current year. Peace reported income, exclusive of its income from Surge, of $30,000 and paid dividends of $15,000 during the current year. What amount will Peace report as dividends declared and paid in its current year’s consolidated statement of retained earnings?

1) $8,000
2) $15,000
3) $21,000
4) $23,000

Answer 2

$15,000

This answer is correct. Peace will report only the dividend of the parent company in the consolidated financial statements. The dividends declared and paid by Surge will be eliminated in the consolidated worksheet entries. Therefore, this answer is correct because the dividends reported in the consolidated statement of retained earnings would be $15,000.

Question 3

The method used to determine what information to report for business segments is referred to as the

1) Segment approach.
2) Operating approach.
3) Enterprise approach.
4) Management approach.

Answer 3

Management approach

This answer is correct. Per ASC Topic 280, the method chosen for determining what information to report is referred to as the management approach.

Question 4

Which of the following is an appropriate cost approach for determining fair value measurements?

1) Using relevant information from recent transactions
2) Using present value techniques to discount cash flows
3) Using the current replacement cost of the asset
4) Using the undiscounted cash flows from the asset

Answer 4

Using the current replacement cost of the asset

This answer is correct. Current replacement cost adjusted for obsolescence can be used for determining fair value measurements under the cost approach.

Question 5

Which of the following is not an aspect of a firm’s operations necessitating disclosure of risks and uncertainties?

1) Principal markets
2) Products and services
3) Pension plan
4) Geographical location

Answer 5

Pension plan

This is an internal policy matter and is not listed as a specific attribute for disclosure in the standard.

Question 6

Under FASB U.S. GAAP, which of the following items would cause net earnings to differ from comprehensive income for an enterprise in an industry not having specialized accounting principles?

1) Unrealized loss on debt investments classified as available-for-sale
2) Unrealized loss on equity investments classified as current
3) Loss on exchange of similar assets.
4) Loss on exchange of dissimilar assets.

Answer 6

Unrealized loss on debt investments classified as available-for-sale

Unrealized gains and losses on debt securities available-for-sale are among the few items that appear in comprehensive income but not in earnings. Assuming the current equity securities are at fair value, then unrealized gains and losses are reported in earnings.

This is a change in owners’ equity that is not included in earnings and is not the result of a transaction with owners. It is an “other” comprehensive income item. “Other” refers to other than net income, which is the largest component of comprehensive income. The remaining items are recognized in income.