MTE

Question 1

A home office ships merchandise to its branch at a transfer price greater than its cost. When this merchandise is resold by the branch to outside entities, the branch’s profit will be understated.

Answer 1

TRUE

Question 2

Eliminating entries for intercompany sales and unrealized profit in ending inventory depends on what method is being used by the parent company: cost model or equity method.

Answer 2

TRUE

Question 3

Recognition of income or loss on intercompany transaction is deferred until the profit/loss is confirmed by sales of the merchandise to non-affiliates or to outsiders

Answer 3

TRUE

Question 4

When inventory is received from the home office, a branch increases its home office account.

Answer 4

TRUE

Question 5

The intercompany profit in a downstream sale is to be recognized by the subsidiary and shared between the controlling and non-controlling stockholders of the subsidiary.

Answer 5

FALSE

Question 6

In preparing combined financial statements, branch income or loss and home office capital are eliminated and brought to zero in the combining process.

Answer 6

FALSE

Question 7

Failure to eliminate intercompany sales would result to an understatement of net income.

Answer 7

FALSE

Question 8

Under the equity method, consolidated retained earnings are identical to the parent’s reported retained earnings, hence, no adjustment is needed.

Answer 8

FALSE

Question 9

When a home office ships merchandise to its branch at a transfer price greater than cost and this merchandise is resold by the branch to outside entities, the branch profit will be overstated.

Answer 9

FALSE

Question 10

Goodwill impairment loss, if any, shall be allocated to the controlling interest and the non-controlling interest based on the percentage of total goodwill approach.

Answer 10

FALSE

Question 11

The worksheet eliminating entries include allocation of excess of cost over book value of identifiable assets with remainder to goodwill. For upstream sales, non-controlling interest in net assets of subsidiary on date of acquisition should be established by debiting the non-controlling interest account.

Answer 11

FALSE

Question 12

One reason a parent company may pay an amount less than the book value of the subsidiary’s stock acquired is:

Answer 12

the existence of unrecorded contingent liabilities

Question 13

Amongst the various reasons given for the internal transfer of merchandise inventory at a price above its cost in branch accounting are:

a. The equitable allocation of income amongst the various units of the business enterprise.
b. Efficiency in pricing inventories.
c. Concealment of the true profit margins from branch personnel.
d. All of the above are considered valid reasons

Answer 13

All of the above are considered valid reasons:

a. The equitable allocation of income amongst the various units of the business enterprise.
b. Efficiency in pricing inventories.
c. Concealment of the true profit margins from branch personnel.

Question 14

A parent company received dividends in excess of the parent company’s share ofthe subsidiary’s earnings subsequent to the date of the investment. How will the parent company’s investment account be affected by those dividends under each of the following accounting methods?

Answer 14

Cost model - No effect
FV model- No effect
Equity Model- Decrease

Question 15

How should negative goodwill be shown on the consolidated financial statements of the acquirer?

Answer 15

As a gain on the statement of comprehensive income

Question 16

Under PFRS 3, what value of the assets and liabilities is reflected in the financial statements on the acquisition date of a business combination?

Answer 16

FV

Question 17

In a business combination accounted for as an acquisition, how should the excess of fair value of net assets acquired over the consideration paid be treated?

Answer 17

Recorded as an ordinary gain

Question 18

When a company purchases another company that has existing goodwill and the transaction is accounted for as stock acquisition, the goodwill should be treated in the following manner:

Answer 18

Goodwill is not recorded until all assets are stated at full fair value

Question 19

Under the cost method, the workpaper entry to establish reciprocity include

Answer 19

credit to Retained Earnings – P Company

Question 20

Which of the following would explain why the Investment in Branch account is less than the Home Office Capital account?

Answer 20

A cash transfer to the home office is in transit

Question 21

Company B acquired the net assets of Company S in exchange for cash. The acquisition price exceeds the fair value of the net assets acquired. How should Company B determine the amounts to be reported for the plant and equipment and for long-term debt of the acquired Company S?

Answer 21

PPE and Long-term debt at FV

Question 22

A debit to the Income Summary ledger account and a credit to the Home Office account appear in:

Answer 22

The accounting records of the branch to record the net income of the branch

Question 23

A newly acquired subsidiary has pre-existing goodwill on its books. The parent company’s consolidated balance sheet will

Answer 23

Not show any value for the subsidiary’s pre-existing goodwill

Question 24

The goal of the consolidation process is for:

Answer 24

Asset acquisitions and 100% stock acquisitions to result in the same balance sheet

Question 25

Consolidated financial statements are designed to provide

Answer 25

The results of operations, cash flow, and the balance sheet as if the parent and subsidiary were a single entity

Question 26

When the implied value exceeds the aggregate fair values of identifiable net assets, the residual difference is accounted for as

Answer 26

Goodwill

Question 27

In consolidated financial statements, it is expected that

Answer 27

Net Income equals the sum of the income distributed to the controlling interest and the income distributed to the non-controlling interest

Question 28

A 70% owned subsidiary company declares and pays a cash dividend. What effect does the dividend have on the retained earnings and non-controlling interest balances in the parent company’s consolidated balance sheet?

Answer 28

No effect on retained earnings and a decrease in non-controlling interest

Question 29

Which of the following statement is correct?

Answer 29

Total assets reported by the parent generally will be less than total assets reported on the consolidated balance sheet.

Question 30

Under the acquisition method, indirect costs relating to acquisitions should be

Answer 30

expensed as incurred

Question 31

In preparing combined branch financial statements, which of the following accounts are eliminated (brought to a zero balance) in the combining process?

Branch Income or Loss-?
Purchases Sent to Branch-?

Answer 31

Branch Income or Loss-YES
Purchases Sent to Branch-NO

Question 32

The investment in a subsidiary should be recorded on the parent’s books at the

Answer 32

fair value of the consideration given

Question 33

Alpha purchased an 80% interest in Beta on June 30, 2020. Both Alpha’s and Beta’s reporting periods end December 31. Which of the following represents the controlling interest in consolidated net income for 2020?

Answer 33

100% of Alpha’s January 1-December 31 income plus 80% of Beta’s July 1-December 31 income.

Question 34

Under PFRS 3:

Answer 34

Both direct and indirect costs are to be expensed

Question 35

Dividends declared by a subsidiary are eliminated against dividend income recorded by the parent under the

Answer 35

cost method

Question 36

A statutory merger is a/an

Answer 36

Business combination in which only one of the two companies continues to exist as a legal corporation