Accounting 1

Which method of accounting will generally be used when one company purchases between 20% and 50% of the outstanding stock of another company?

The equity method may be used

Which method of accounting will generally be used when one company purchases less than 20% of the outstanding stock of another company?

The fair value method may be used

Under the current GAAP, Goodwill arising from a business combination is

never amortized

On June 1, 2014, Puell Company acquired 100% of the stock of Sorrell Inc. On this date, Puell had retained earnings of $100,000 and Sorrell had retained earnings of $50,000. On December 31, 2014, Puell had retained earnings of $120,000 and Sorrell had retained earnings of $60,000. The amount of retained earnings that appeared in the December 31, 2014 consolidated balance sheet was

$120,000

Assume the parent and subsidiary company have different fiscal year ends. If the difference in fiscal periods is not in excess of ---- months, it usually is acceptable to use the subsidiary's statements for its fiscal year for consolidation purposes.

3

In a business combination, which of the following will occur?

All identifiable assets and liabilities are recorded at fair value at the date of acquisition

In the preparation of consolidated financial statements, which of the following intercompany transactions must be eliminated as part of the preparation of the consolidation working papers?

All revenues, expenses, gains, losses, receivables, and payables

Which one of the following items, originally recorded in the Investment in Falcon Co. account under the equity method, would not be systematically used to reduce investment income on a periodic basis?

Amortization expense of goodwill

What is the entry to record dividends on the investor's books using the fair value method?

Debit Cash and credit Dividend Income

Where is the noncontrolling interest account located on the financial statements?

Equity

Which method must be used if FASB Statement No. 94 prohibits full consideration of a 70% owned subsidiary?

Equity Method

Which of the following accounts are eliminated via a workpaper entry for the consolidated financial statements?

Intercompany payable and receivable accounts, investment in subsidiary accounts, the subsidiary's equity accounts

What is the difference between the fair value method and the equity method when recording the initial investment?

There is no difference

What is the entry to recognize earnings (net income of the investee company) on the investor's books using the fair value method?

There is no entry

A business merger differs from a business consolidation because

a merger dissolves all but one of the prior entities, but a consolidation dissolves all of the prior entities and forms a new corporation

Panini Corporation owns 85% of the outstanding voting stock of Strathmore Company and Malone Corporation owns the remaining 15% of Strathmore's voting stock. On the consolidated financial statements of Panini Corporation and Strathmore, Malone is

a noncontrolling interest

Picasso Co. issued 5,000 shares of its $1 par common stock, valued at $100,000, to acquire shares of Seurat Company in an all-stock transaction. Picasso paid the investment bankers $35,000 and will treat the investment banker fee as

a reduction to additional paid-in capital

On consolidation workpapers, consolidated ending retained earnings is determined by:

adding beginning consolidated retained earnings and the controlling share of consolidated net income and subtracting parent dividends

On consolidated working papers, a subsidiary's net income is

allocated between the noncontrolling interest share and the parent's share

Pitch Co., paid $50,000 in fees to its accountants and lawyers in acquiring Slope Company. Pitch will treat the $50,000 as

an expense for the current year

Under the acquisition method of accounting for business combinations, if the cost of the investment is less than the net fair value acquired then the excess is allocated to identifiable net assets and the remaining is recorded as:

bargain purchase

Consolidation workpaper entries normally:

do not affect the general ledger accounts of any of the affiliates

Under the acquisition method of accounting for business combinations, if the cost of the investment is greater than the net fair value acquired then the excess is allocated to identifiable net assets and the remaining is recorded as:

goodwill

Net income on consolidation workpapers is:

not an account balance and not subject to adjustment

Historically, much of the controversy concerning accounting requirements for business combinations involved the ------ method

pooling of interests