Cumulative Accounting True False

A bargain purchase gain is recorded as an extraordinary gain.

False

A corporation becomes a subsidiary when another corporation acquires a controlling interest in its issued voting stock.

False

A disadvantage of filing a consolidated return is intercompany dividends are included in taxable income.

False

Consolidation procedures for direct and indirect holdings are the same.

False

Firms should conduct an impairment test for goodwill at least quarterly.

False

For consolidated statements, indirect holding affiliation and mutual holding affiliation structures are treated the same.

False

For intangibles to be recognizable they must meet both a separability criterion and a contractual-legal criterion.

False

Gross profit on inventory items sold for use in the operations of an affiliate will be realized for consolidated statement purposes immediately.

False

If no redemption provision is provided on preferred stock, the equity allocation base is based on par value of the stock less any liquidation premium.

False

If the market rate of interest on bonds that are recorded increases, the market value of the liability increases.

False

If the price paid by an affiliate to acquire the debt of another is less than the book value of the debt, a constructive loss on retirement of debt occurs.

False

In an acquisition, if the fair value of identifiable assets acquired over liabilities assumed exceed the cost of the acquired company the gain is recognized as an extraordinary gain by the acquiror.

False

Income is assigned to noncumulative, nonparticipating preferred stock only if dividends are declared and paid.

False

Indirect holdings are investments that enable the investor to control or significantly influence the decisions of an investee not directly owned through an investee that is indirectly owned.

False

It is frequently more expensive for a firm to obtain needed facilities through combination than through development.

False

Parent stock that is held by the subsidiary is considered outstanding stock and should be reflected as such on the consolidated balance sheet.

False

Piecemeal acquisitions require the previously held investment to be measured at book value at the date control of the subsidiary is obtained.

False

Push-down accounting is the process of recording the effect of the acquisition price assignment directly on the books of the parent company.

False

The GAAP permits two methods for converting the foreign subsidiary's financial statements into US dollars: temporal method and the fixed rate method

False

The GAAP requires that all majority-owned subsidiaries be consolidated, except when control lies with the majority interest.

False

The GAAP requires the effective interest method of amortization on transactions between parent and subsidiary companies.

False

The acquisition of treasury stock by a subsidiary increases the subsidiary equity and share outstanding.

False

The consolidated entity must file a consolidated income tax return.

False

The consolidated financial statements are primarily for the benefit of managers of the parent company.

False

The elimination entry for unrealized profit is a debit to purchases and a credit to ending inventory.

False

The elimination entry under the perpetual inventory system for intercompany sales and purchases is a debit to sales and a credit to purchases.

False

The equity method is often called the dual-line consolidation.

False

The equity method requires recording investments at cost and adjustments are made for earnings and losses only.

False

The first step in recording an acquisition is to determine the fair values of all identifiable tangible and intangible assets acquired and actual value of liabilities assumed in the combination.

False

The investment in preferred stock of a subsidiary by the parent is accounted for under the equity method.

False

The reporting currency is the currency in which the consolidated financial statements and the subsidiary financial statements are prepared.

False

Under the temporal method monetary assets and liabilities are remeasured at historical rates and other assets and equities are remeasured at current exchange rates.

False

Unrealized inventory profits self-correct over any three accounting periods.

False

Upstream sales of depreciable assets from a subsidiary to a parent result in unrealized gains or losses in the subsidiary accounts in the year after the sale.

False

When a parent/investor sells an ownership interest, a gain or loss is recorded where the interest sold does not impact control by the parent company.

False

When the fiscal periods of the parent and its subsidiaries differ, we prepare consolidated statements for and as of the end of both the parent's and the subsidiary's fiscal period.

False

A consolidated income statement must clearly separate income attributable to the controlling and noncontrolling interests.

True

A constructive retirement of parent bonds occurs when an affiliate purchases outstanding bonds of the parent.

True

A downstream sale is a sale by a parent to a subsidiary.

True

A foreign subsidiary's foreign currency statements must conform with the US GAAP before translated into US dollars.

True

A gain or loss on sales downstream from parent to subsidiary is initially included in parent income and must be 100% eliminated.

True

A merger occurs when one corporation takes over all the operations of another business entity, and that entity is dissolved.

True

A parent's income from subsidiary investments can be referred to investment income from subsidiary.

True

A parent's net income and the controlling share of the consolidated net income are equal under the equity method.

True

A stock split by a subsidiary increases the number of shares outstanding, but it does not affect the net assets of the subsidiary or the individual equity accounts.

True

A subsidiary can be excluded from consolidation when control does not rest with the majority owner.

True

A subsidiary realized income is its reported net income adjusted for intercompany profits from upstream sales.

True

All dividends in arrears on cumulative preferred stock are included in the equity allocated to preferred stockholders

True

An entry is necessary to eliminate the full amount of the gain on sale of land and to reduce the land to its cost basis to the consolidated entity whether the intercompany sale is upstream or downstream.

True

An intercompany gain or loss appears in the income statement of the selling affiliate in the year of the sale.

True

Consolidated financial statements eliminate unrealized gross profit by increasing consolidated cost of goods sold and reducing merchandise inventory to its cost basis to the consolidated entity.

True

Consolidated statements are appropriate when one corporation directly or indirectly owns a majority of the outstanding voting stock of another.

True

Constructive retirement means that bonds are retired for consolidated statement purposes because the bond investment and payable items of the parent and the subsidiary are reciprocals that must be eliminated in consolidation.

True

Direct holdings result from direct investments in the voting stock of one or more investees.

True

Equity investments at acquisitions require direct costs of registering equity securities be charged to additional paid-in capital.

True

Failure to obtain representation on the investee's board of directors is an indicator of an investor's inability to exercise significant influence.

True

For foreign subsidiaries who functional currency is not the parent's reporting currency the current rate method is used to translate assets and liabilities using the exchange rate on the balance sheet date.

True

For upstream sales the total amount of unrealized gains and losses are allocated between controlling and noncontrolling interest shares.

True

From the viewpoint of a consolidated entity, the parent's purchase of the outstanding subsidiary preferred stock results in the retirement of the stock purchased.

True

Functional currency is the currency of the primary economic environment in which it operates.

True

GAAP states that an acquirer purchases control of the assets and assumes the liabilities of a subsidiary at a price that reflects fair values at the combination date.

True

Gain on the sale of land between affiliates should not appear in the consolidated income statement.

True

Gains and losses from foreign currency transactions which are designated as economic hedges of a net investment in a foreign subsidiary are recorded as translation adjustments of a stockholder's equity.

True

Goodwill that has an indefinite useful life is not amortized.

True

If a subsidiary is 100 percent-owned affiliate and sells to the parent the parent defers 100 percent of any unrealized profit in the year of the intercompany sale.

True

If an acquisition by a parent of a subsidiary occurs during the accounting period, adjustments must be made for the income earned by a subsidiary prior to the acquisition date.

True

If an investor sells a portion of an equity investment and it reduces its interest below 20 percent the equity method of accounting is no longer appropriate.

True

In August 1999, the Financial Accounting Standard Board issued a report supporting its proposed decision to eliminate the pooling of interests method to account for business combinations.

True

Indirect holdings called connected affiliates involves a parent and two subsidiaries.

True

Intercompany transactions that produce receivable balances denominated in a currency other than the entity's functional currency are intercompany transactions.

True

Mutual holdings occur when affiliates hold ownership interests in each other.

True

Mutually held stock is subsidiaries holding the stock of each other.

True

Net income of an investee with preferred stock outstanding is first allocated to preferred stockholders based on the preferred stock contract.

True

Parent sales to its subsidiary increase parent sales, COGS and gross profit.

True

Piecemeal acquisitions occurs when a corporation acquires an interest in another corporation in a series of separate stock purchases over a period of time.

True

Pre acquisition dividends are dividends paid on stock by the subsidiary before the date of acquisition by the parent.

True

Revenue is recognized when it is earned; therefore revenue earned for a consolidated entity occurs when there is a sale to outside entities.

True

Sales by a subsidiary to its parent affects the operating income of the parent when the merchandise is resold.

True

The GAAP defines the accounting concept of a business combination as a transaction or other event in which an acquirer obtains control of one or more businesses.

True

The GAAP requires a noncontrolling interest in a subsidiary be displayed and labeled in the consolidated balance sheet as a separate component of equity.

True

The GAAP requires that corporations report both basic and diluted earnings per share.

True

The GAAP requires that the parent corporation account for the effect of a decreased ownership percentage as an equity transaction.

True

The GAAP requires the recording of common stock acquisitions in the investor record at cost.

True

The GAAP stipulates that transactions of an investee of a capital nature that affect the investor's share of stockholders' equity of the investee should be accounted for as if the investee were a consolidated subsidiary if accounting for an equity investment under a one-line consolidation.

True

The US Department of Justice and the Federal Trade Commission have primary responsibility for enforcing federal antitrust laws.

True

The acquisitions method for consolidation requires that all assets and liabilities of the subsidiary are reported using 100% of fair values at the combination date.

True

The calculation of parent EPS and consolidated basic EPS are identical.

True

The call of redemption price of preferred stock is used to allocate the investee's equity to preferred stockholders.

True

The constructive retirement of subsidiary preferred stock through the purchase by the parent is reported as an actual retirement in the consolidated statements.

True

The conventional approach for eliminating parent stock treats the investment as constructively retired.

True

The conventional approach is appropriate for recording mutually held stock by subsidiaries.

True

The difference between the book value of a bond liability and the purchase price of the bond investment is a gain or loss for consolidated statement purposes.

True

The effect of mutually held parent stock is eliminated from consolidated financial statements by either the treasury stock approach or the conventional approach.

True

The ending inventory of the purchasing affiliate reflects the intercompany transfer price.

True

The excess of fair value over book value in a Parent-Subsidiary is assigned to goodwill assuming identifiable assets and liabilities are equal.

True

The fair value option for liabilities permits recognition of gains and losses due to changes in the market values

True

The gain or loss on an after-tax basis from the hedging operations that can be considered a translation adjustment is limited in amount to the current translation adjustment from the equity investment.

True

The loss on the retirement of bonds only appears in the consolidated income statement in the year in which we constructively retire the bonds.

True

The parent affiliate recognizes a gain on the sale of land to a subsidiary only after the subsidiary sells it to an outside entity.

True

The parent company's retained earning are reduced when additional paid-in-capital is insufficient to absorb an excess of purchase price over book value of the subsidiary's preferred stock.

True

The parent, which controls all debt retirement for the consolidated entity can use its available resources to purchase and retire its own bonds if they choose not to use the fair value option.

True

The transfer of nondepreciable plant assets between affiliates at a price other than book value gives rise to unrealized profit or loss to the consolidated entity.

True

The treasury stock approach to account for parent stock held by a subsidiary accounts for the stock as treasury stock for the consolidated entity.

True

Under the acquisition method a combination is recorded using the fair-value principle.

True

Unrealized profits or losses on plant assets affect the financial statements until the assets are sold outside the consolidated entity.

True

When a company issues bonds, the bond liability will reflect the current market rate of interest.

True

When a parent acquires 100% of a subsidiary at book value the consolidated balance sheet eliminates reciprocal accounts and combines nonreciprocal accounts.

True

When a parent/investor sells an ownership interest, a gain or loss is recorded where the interest sold leads to deconsolidation of a former subsidiary.

True

When all elements of the financial statements are translated using a current exchange rate, it is referred to as the current rate method.

True

When an investor can significantly influence of control the operations of the investee, including dividend declarations the equity method must be used.

True

When the functional currency of a foreign entity is the US dollar, the foreign entity's accounts are remeasured into its US dollar functional currency.

True

Whenever a parent ceases to have a controlling interest, the subsidiary should be deconsolidated and recorded as either an equity method or cost method investment.

True