Adv Acc Midterm
How has the SEC exercised its power with regard to the continuing evolution of accounting principles? Issuing Financial Reporting Releases (FRRs). Requiring additional disclosures in notes to financial statements. Declaring a moratorium on the use of specified accounting practices. Overruling the FASB.
1, 2, 3, and 4.
What information needs to be included in Form 10-Q? (1) Income statements for the most recent quarter and for the year to date as well as for the comparative periods in the previous year. (2) Income statements for the most recent quarter and for the year to date as well as for the comparative periods in the previous two years. (3) A statement of cash flows is necessary, but only for the year to date as well as for the corresponding period in the preceding year. (4) Two balance sheets: one for the end of the most recent quarter and one showing the company's financial position at the end of the previous fiscal year.
1, 3, and 4.
What is EDGAR?
A system designed by the SEC to allow electronic filings.
An investor sells inventory to its investee, at a profit. At year end, the investee has not disposed of this inventory. How should the investor account for the gross profit from this intra-entity inventory sale
Defer the investor's proportionate ownership share of the intra-entity gross profit
Which one of the following accounts would not appear in the consolidated financial statements at the end of the first fiscal period of the combination?
Investment in Subsidiary.
Filings with the SEC are divided generally into two broad categories:
Registration statements and periodic filings.
The Securities Exchange Act of 1934
Regulates the public trading of previously issued securities through brokers and exchanges.
What is the difference between Regulation S-K and Regulation S-X?
Regulation S-K establishes regulations for nonfinancial information filed with the SEC whereas Regulation S-X prescribes the form and content of financial statements included in SEC filings.
What is the purpose of the SEC's Regulation S-K?
Regulation S-K establishes requirements for nonfinancial information that is filed with the SEC.
What is a prospectus?
The first part of a registration statement that a company must furnish to all potential buyers of a new security.
Regulation S-X specifies:
The form and content of financial statements to be filed with the SEC.
Why does the equity method record investee dividends declared as reductions to the investment account
The investor's equity in the investee decreases when it becomes entitled to receive a dividend The investment account mirrors changes to the investee's equity section resulting from income and dividends
The ability to exercise significant influence over the operating and financial policies of an investee company is the sole criterion for application of the ____ method
equity
When an investor purchase an investment for an amount in excess of the investee's book value, how is the excess amount allocated
first to specifically identified assets and liabilities with any remainder allocated to goodwill
Under the equity method, the excess of the investment cost over the proportionately-owned acquisition- date fair value of the investee's net identifiable assets is allocated to the asset ____
goodwill
in preparing the journal entry to record a merger, the acquiring firm includes
the assets acquired and liabilities assumed at fair value
The recording of goodwill in a business combination may recognize that
the assets of the combining firms may act in concert to produce an expectation of enhanced profitability the acquiring firm has transferred consideration in excess of the acquired net identifiable assets the quality of the acquired firm's personnel may provide addition profitability
In financial reporting for a bargain purchase combination
the collective fair value of the identifiable net assets becomes the acquired firm's valuation a gain in reported on the acquiring firm's income statement no goodwill is reported as a result of the business combination
for a 100% business acquisition where dissolution of the acquired firm does not occur, the parent company records on its boks
the fair value of the acquired firm in an investment account
when an acquired firm's legal status is dissolved in a business combination, the acquiring firm entry to record the combination includes
the fair value of the consideration transferred the individual fair values of the assets acquired and liabilities assumed
Under the fair-value method of accounting for an investment in another firm's ownership shares, the investor recognizes income when
the fair value of the investor's shares increase the investee pays a dividend
Even though a business firm owns 25% of another company's voting shares, the equity method should not be applied if
the investor is unable to exercise significant influence over the investee after several tries, the investor is unable to gain a seat on the investee's board of directors the 75% of the investee make decisions without consulting the investor
When an investor sells a portion of an equity-method investment
the investor recognizes a gain or loss on the sale the investment account should reflect a balance current as of the date of sale the investor continues to apply the equity method if the investor continues to have the ability to exercise significant influence over the investee
In applying the equity method,
the investor recognizes its proportionate share of the investee's income
Jansen Inc. acquired all of the outstanding common stock of Merriam Co. on January 1, 2017, for $257,000. Annual amortization of $19,000 resulted from this acquisition. Jansen reported net income of $70,000 in 2017 and $50,000 in 2018 and paid $22,000 in dividends each year. Merriam reported net income of $40,000 in 2017 and $47,000 in 2018 and paid $10,000 in dividends each year. What is the Investment in Merriam Co. balance on Jansen's books as of December 31, 2018, if the equity method has been applied?
$257,000 + $40,000 + $47,000 - $10,000 - $19,000 - $10,000 - $19,000 = $286,000
Consolidated financial statements are typically prepared when one company has
a controlling financial interest over another company
attorney fees paid for service provided related to a business combination are accounted for as
a current period expense
When the consideration transferred in a 100% acquisition is less than total net fair value of the identifiable net assets received, the excess is recognized as
a gain on bargain purchase
As opposed to the cash basis of accounting, the equity method follows the ___ basis for recognizing investment income
accrual
Because certain intangible assets are considered to have indefinite lives, they are not subject to ____
amortization
which of the following are included in the first two columns of the consolidated worksheet as of the acquisition date
any contingent performance liability that may have accompanied the combination an investment account in the parent's financial statement column
How does an investor record income from its investment in an equity-method investee
as a credit to "equity in investee income"
If an investor firm controls another firm through variable interests, the investor must include controlled firm's financial information is in its ___ financial statements
consolidated
In a business combination when each combining firm maintains its separate incorporation
consolidation worksheets are employed to generate financial reports for the combined economic entity the acquiring firm utilizes an investment account to record the acquisition each company maintains independent record keeping
Which of the following best describes control through ownership rights to variable interests in another firm
control is exercised trough contractual arrangements that entitle a primary beneficiary of another firm to residual profit rights
When an equity-method investment account balance is reduced to zero due to a current year investee loss, the investor should
discontinue the equity method and not establish a negative balance accrue no additional losses leave the investment account balance at zero until subsequent investee profits eliminate all unrecognized losses
an investor that accounts for an equity investment under the cost method records income from the investment based on its share of ___ declare from the investee
dividends
When one firm can significantly influence the decisions of another firm through its ownership of voting shares, transactions between two firms
do not provide an objective basis for financial reporting
EDGAR stands for:
Electronic Data Gathering, Analysis, and Retrieval System.
What account should an investor use to defer its proportional share of intra-entity gross profits remaining in ending inventory from sales to an investee
Equity in Investee Income
What is the purpose of Regulation S-X?
Establishes required disclosure of financial information with the SEC.
What is the purpose of Regulation S-K?
Establishes required disclosure of nonfinancial information with the SEC.
Regulation S-K:
Establishes requirements for nonfinancial information to be filed with the SEC.
Instead of applying the equity method when the investor has significant influence over an investee, the investor may elect a ___ value reporting option
fair
when an equity method investment suffers a permanent decline in value, the investor recognizes an impariment loss and writes down the investment account to ___ value
fair
as of the date the equity become applicable for an investment, the investor allocates its purchase price to its share of the investee's assets and liabilities based on their individual ___ ____ values
fair market
What is the measurement attribute in determining the consideration transferred in a business combination
fair value
Which of the following procedures are followed in applying the cost method of accounting for an investment in another firm's equity securities
in limited circumstances, a cost method investment may be increased when similar securities experience price increases the investor's share of the investee's dividend declarations is recorded as income the investment must be periodically assessed for impairment
rather than recording dividend revenue, under the equity method an investor records an investee dividend declaration as reduction in its ______ in subsidiary account
investment
In 2015, the Coca-Cola Company accounts for its investment in Monster Beverage Corporation using the equity method because
it possessed significant influence over Monster Beverage
Goodwill recognized in a business combination
may capture value derived from other intangible assets not otherwise eligible for recognition is an asset that represents future economic benefits may embody synergies the acquirer expects to achieve from the combination
The equity method in accounting for an equity investment is applied when the investor company:
participates in policy-making decisions of the investee has representation on the investee's board of directors
Under the equity method, the amount of gross profit deferred from an intra-entity sale is limited to the investor's _____ share of the investee
percentage
Although goodwill arising from a business combination is subject to periodic impairment reviews, goodwill implicit in an equity method investment is not. Equity method investments are tested in their entirety for ___ declines in value
permanent
If an increase in an investment now provides an investor with the ability to exercise significant influence over an investee, the change to the equity method of investment accounting is applied on a _____________ basis
prospective
When an equity-method investee company's activities require recognition of other comprehensive income (OCI), the investor company
records its proportionate share of the investee's OCI as AOCI on its financial records
When one firm controls the entire decision making process of another firm,
such control may result from majority voting stock ownership of contracts with a variable interest entity for reporting purposes the two companies are considered to be a single economic entity one set of financial statements are created for the combined assets, liabilities, revenues, and expenses of both firms
Which of the following may be included in the calculation of the consideration transferred for a new acquired firm
sum of the acquisiton-date fair values of the assets trasferred by the acquirer the liabilities incurred by the acquirer to former owners of the acquiree the equity interests issued by the acquirer in the combination
which of the following describes a fair value exchange price in an orderly transaction between market participants
the price that would be received from selling an asset the price that would be paid for transferring a liability
Consolidation entry S brings subsidiary stockholders' equity account balances to zero because
the represent ownership interests held by the parent are thus are not outstanding equity
When financial control occurs through contractual relationships feather than voting stock ownership, the controlled firm is called special purpose or ______ _____ _____
variable interest entity
When is an investor firm required to prepare consolidated financial statements
when the investor firm controls an investee's operations
Which of the following is the best theoretical justification for consolidated financial statements?
In form the companies are separate; in substance they are one entity.
Under the equity method of accounting for an investment:
Income reported by the subsidiary increases the investment account.
Which of the following internal record-keeping methods can a parent choose to account for a subsidiary acquired in a business combination?
Initial value, equity, or partial equity.
Why does the equity method consider investee dividends as an inappropriate measure of investment income to an investor
Investee dividends provide for a cash basis of income recognition, not an accrual basis Through its significant influence, an investor can influence the timing of investee dividends and thus manipulate income
Which one of the following requires the maintenance of accounting records and adequate internal accounting controls?
The Foreign Corrupt Practices Act of 1977.
Which one of the following requires the audit committee to be responsible for the appointment and compensation of the external auditor?
The Sarbanes-Oxley Act of 2002.
Which of the following statements is true?
The Securities Act of 1933 regulates the initial offering of securities by a company.
Which one of the following regulates the initial offering of securities by a company or underwriter?
The Securities Act of 1933.
When a business combination results in a bargain purchase gain, which of the following best describes the valuation basis of the acquired firm
The collective fair value of the net identifiable assets
What is goodwill associated with an equity method investment
The excess of the cost of the investment that cannot be attributed to a specific investee asset or liability
If an investment qualifies for the equity method following a series of purchases, what valuation basis should the investor employ in applying the equity method
The investment's total fair value as of the date the investment qualifies for the equity method
When consolidating parent and subsidiary financial statements, which of the following statements is true?
The value of any goodwill should be tested annually for impairment in value.
The SEC's role in the initial registration of securities to be publicly issued is:
To ensure that the content of the registration filing is in compliance with securities regulations.
When would a letter of comments be issued by the SEC?
To request clarification of a registration statement.
For each of the following situations, identify the type of form to be filed with the SEC for disclosure purposes: (A) Form 10-K (B) Form 10-Q (C) Form 8-K (D) Not required 1. A unique or significant happening. 2. Annual information required by Regulation S-X. 3. Changes in control of the registrant. 4. Interim financial statements. 5. Fourth quarter income statement. 6. Bankruptcy. 7. Annual information required by Regulation S-K. 8. Income statement for the current quarter, year-to-date, and comparative periods in the previous year. 9. Changes in bookkeeping staff. 10. Changes in the registrant's independent auditor.
(1) C (2) A (3) C (4) B (5) D (6) C (7) A (8) B (9) D (10) C
What is a statutory merger?
A business combination in which only one company continues to exist as a legal entity.
When an investor uses the equity method to account for investments in common stock, the investor's share of cash dividends from the investee should be recorded as
A deduction from the investment account.
What is a letter of comments?
A letter the SEC sends to a company indicating needed changes or clarifications in a registration statement.
What is shelf registration?
A procedure that allows large companies to register securities with the SEC and then sell them over a period of two years without registering again within that period.
Which of the following must be provided to every potential buyer of a new security?
A prospectus.
What is a registration statement?
A statement that must be filed with the SEC before a company can begin an initial offering of securities to the public.
The SEC has usually restricted its role in establishing accounting principles to
Determining required disclosures.
When is a goodwill impairment loss recognized?
After only definitive quantitative assessments of the fair value of goodwill is completed.
A wraparound filing:
Allows a company to simplify its periodic filing by attaching its annual report to Form 10-K.
What is Form 10-K?
An annual report filed with the SEC.
Under fair-value accounting for an equity investment, which of the following affects the income the investor recognizes from its ownership of the investee?
Changes in the fair value of the investor's ownership shares of the investee.
Hoyt Corporation agreed to the following terms in order to acquire the net assets of Brown Company on January 1, 2018: To issue 400 shares of common stock ($10 par) with a fair value of $45 per share. To assume Brown's liabilities which have a book value of $1,600 and a fair value of $1,500. On the date of acquisition, the consideration transferred for Hoyt's acquisition of Brown would be:
Common Stock (400 shares × $45) $18,000 + Liabilities Assumed $1,500 = $19,500
What does the term incorporation by reference mean?
Filing information with the SEC by indicating that the information is already available in another document.
According to GAAP regarding amortization of goodwill, which of the following statements is true?
Goodwill recognized in consolidation will not be amortized but subject to an annual test for impairment.
Which of the following represent potential conditions where one firm has the ability to control the operations of another
One firm has contractual arrangements that provided decision-making power over another firm One firm ones more than 50% of the voting stock of another firm
To provide consistency in application, what is the FASB's general quantitative guideline for the application of the equity method
Ownership of 20-50% of the voting stock of an invested
Which of the following accounting approaches is used when an investment share is increased and the investment now qualifies for the equity method
Prospective approach
FASB ASC 805, Business Combinations, provides principles for allocating the fair value of an acquired business. When the collective fair values of the separately identified assets acquired and liabilities assumed exceed the fair value of the consideration transferred, the difference should be:
Recognized as an ordinary gain from a bargain purchase.
According to the acquisition method of accounting for business combinations, costs paid to attorneys and accountants for services in arranging a merger should be
Recorded as an expense in the period the merger takes place.
Audited financial statements in an annual report of an issuer that is subject to SEC regulation must include:
Two balance sheets, three income statements, and three statements of cash flows.
When is a goodwill impairment loss recognized?
When both the fair value of a reporting unit and its associated implied goodwill fall below their respective carrying values.
When does a company like Coca-Cola account for its investment using the equity method
When the investment provides the company with the ability to exercise significant influence over the decisions of the investee
When an equity method investee declares a dividend, how should the investor company record the event
as a credit to the investment account
