[Topic 3] Chapter 2 and Chapter 3 Exam

Question 1

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

a. Fair value of the subsidiary’s net identifiable assets.
b. Fair value of the consideration given.
c. Underlying book value of the subsidiary’s net assets.
d. Fair value of the consideration given plus an estimated value of goodwill.

Answer 1

Fair value of the consideration given.

Question 2

Which of the following costs of a business combination can be included in the value charged to paid-in capital in excess of par?

a. Direct acquisition costs and stock issue costs if stock is issued as consideration.
b. Stock issue costs if stock is issued as consideration.
c. Direct acquisition costs.
d. Direct and indirect acquisition costs.

Answer 2

Stock issue costs if stock is issued as consideration.

Question 3

Partial equity is the same with equity method except that amortization of allocated excess is not recognized in the investment and income account.

Answer 3

TRUE

Question 4

The non-controlling shareholder’s claim of the subsidiary’s net assets is based on the book value of the subsidiary’s net assets.

Answer 4

FALSE

Question 5

The best theoretical justification for consolidated financial statements is that in form and substance the companies are one entity.

Answer 5

FALSE

Question 6

What is the method of presentation required by PFRS 10 of “non-controlling interest” on a consolidated balance sheet?

a. As a separate item between liabilities
and stockholders’ equity.
b. As
part of stockholders’ equity.

c. As a separate item within the
long-term liabilities section.
d. As a deduction from goodwill from
consolidation.

Answer 6

As part of stockholders’ equity.

Question 7

On the consolidated balance sheet,
consolidated stockholders’ equity is
a. Equal to the sum of the parent and subsidiary stockholders’ equity.
b. Equal to the parent’s stockholder equity.
c. Greater than the parent’s stockholder equity.
d. Less than the parent’s stockholders’ equity.

Answer 7

Equal to the parent’s stockholder equity.

Question 8

Under the cost method, the investment account is reduced when
a. There is a liquidating dividend.
b. The subsidiary declares a cash dividend.
c. The subsidiary incurs a net loss.
d. None of these.

Answer 8

None of these.

Question 9

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

Answer 9

TRUE

Question 10

The standard that requires goodwill to be reviewed annually for impairment loss.

Answer 10

PAS 36

Question 11

The appropriate accounting treatment for the value assigned in the research and development acquired in a business combination is to _________ such value.

Answer 11

CAPITALIZE

Question 12

Direct and indirect acquisition costs of a business combination are treated as a/an ________.

Answer 12

EXPENSE

Question 13

A standard that discusses separate financial statements.

Answer 13

PAS 27

Question 14

In a business combination accounted for as an acquisition, registration costs related to common stock issued by the parent company are treated as a/an _________.

Answer 14

DEDUCTION FROM PAID-IN CAPITAL IN EXCESS OF PAR

Question 15

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

Answer 15

FV OF CONSIDERATION GIVEN

Question 16

In years subsequent to the year of acquisition, an entry to establish reciprocity is made under the _______.

Answer 16

COST METHOD

Question 17

A standard that discusses consolidated financial statements.

Answer 17

PFRS 10

Question 18

The criterion for identifying a parent-subsidiary relationship and the basis for
consolidation.

Answer 18

CONTROL

Question 19

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

Answer 19

GOODWILL

Question 20

The parent company records its share of a subsidiary’s income by

a. Crediting Investment in S Company under the equity method.
b. Crediting Equity in Subsidiary Income/Investment Income under both the cost and equity methods.
c. Debiting Equity in Subsidiary Income/Investment Income under the cost method.
d. None of these.

Answer 20

None of these.

Question 21

In preparing consolidated working papers, beginning retained earnings of the parent
company will be adjusted in years subsequent to acquisition with an elimination entry
whenever

a. The complete equity method is in use.
b. It does not reflect the equity method.
c. A non-controlling interest exists.
d. The cost method has been used only.

Answer 21

It does not reflect the equity method.

Question 22

What is push-down accounting?

a. A requirement that a subsidiary must use the same accounting principles as a parent company.
b. Inventory transfers made from a parent company to a subsidiary.
c. The adjustments required for consolidation when a parent has applied the equity method of accounting for internal reporting purposes.
d. A subsidiary’s recording of the fair value allocations as well as subsequent
amortization.

Answer 22

A subsidiary’s recording of the fair value allocations as well as subsequent
amortization.

Question 23

Eliminating entries are made to cancel the effects of intercompany transactions and are
made on the

a. Books of both the parent company and the subsidiary.
b. Books of the parent company.
c. Work paper only.
d. Books of the subsidiary company.

Answer 23

Work paper only.

Question 24

In consolidated financial statements, it is expected that retained earnings equals the sum of the controlling interest’s separate retained earnings and the non-controlling interest’s separate retained earnings.

Answer 24

FALSE

Question 25

In the preparation of a consolidated statements workpaper, dividend income recognized by a parent company for dividends distributed by its subsidiary is included with parent company income from other sources to constitute consolidated net income.

Answer 25

FALSE

Question 26

Which of the following is not correct with regard to a parent’s ownership of 100 percent of a subsidiary’s stock subsequent to a book value acquisition?

a. Consolidated net income equals the parent’s net income
b. Consolidated Investment in Subsidiary balance equals the parent’s Investment in Subsidiary balance
c. Consolidated Retained Earnings equals the parent’s Retained Earnings
d. Consolidated dividends equal the parent’s dividends

Answer 26

Consolidated Investment in Subsidiary balance equals the parent’s Investment in Subsidiary balance

Question 27

Which of the following statements applying the use of the equity method versus the cost method is true?
a. If no dividends were paid by the subsidiary, the investment account would have the same balance under both methods.
b. An advantage of the equity method is that no amortization of excess adjustments needs to be made on the consolidated worksheet.
c. The equity method is required when one firm owns 20% or more of the common stock of another firm.
d. The method used has no significance to consolidated statements.

Answer 27

The method used has no significance to consolidated statements.