Advanced Financial Accounting Exam 1

A corporation using the equity method of accounting for its investment in a 40 percent-owned investee, which earned $20,000 and paid $5,000 in dividends, made the following entries: Investment in Investee 8,000 Income from Investee 8,000 Cash 2,000 Dividend Revenue 2,000 What effect will these entries have on the investor's statement of financial position? a. Investment in the investee will be overstated, retained earnings will be overstated. b. Financial position will be fairly stated. c. Investment in the investee will be overstated, retained earnings will be understated. d. Investment in the investee will be understated, retained earnings will be understated.

A

Consolidated statements are proper for Neely Inc., Randle Inc., and Walker Inc., if a. Neely owns 80 percent of the outstanding common stock of Randle and 40 percent of Walker; Randle owns 30 percent of Walker. b. Neely owns 80 percent of the outstanding common stock of Randle and 40 percent of Walker; Reeves Inc. owns 55 percent of Walker. c. Neely owns 100 percent of the outstanding common stock of Randle and Walker; Walker is in legal reorganization. d. Neely owns 100 percent of the outstanding common stock of Randle and 90 percent of Walker; Neely bought the Walker stock one month before the foreign country in which Walker is based imposed restrictions preventing Walker from remitting profits to Neely.

A

Mr. Cord owns four corporations. Combined financial statements are being prepared for these corporations, which have intercompany loans of $200,000 and intercompany profits of $500,000. What amount of these intercompany loans and profits should be included in the combined financial statements? Loans Profits a. $0 $0 b. $0 $500,000 c. $200,000 $500,000 d. $200,000 $0

A

What is the theoretically preferred method of presenting a noncontrolling interest in a consolidated balance sheet? a. As a separate item within the stockholders' equity section. b. By means of notes or footnotes to the balance sheet. c. As a separate item within the liability section. d. As a deduction from (contra to) goodwill from consolidation, if any.

A

When a company assigns goodwill to a reporting unit acquired in a business combination, it must record an impairment loss if a. The fair value of the reporting unit is less than its carrying value. b. The carrying value of the reporting unit is less than the fair value of the reporting unit. c. The fair value of the reporting unit decreases. d. The fair value of the net identifiable assets held by a reporting unit decreases.

A

When an existing company creates a new subsidiary and transfers a portion of its assets and liabilities to the new entity a. The new entity records both the assets and liabilities it received at the carrying values of the original company. b. The original company records a gain or loss on the difference between its carrying values and the fair values of the assets transferred to the new entity. c. The original company records the difference between the carrying values and the fair values of the assets transferred to the new entity as goodwill. d. The new entity records both the assets and liabilities it received at fair values.

A

Which of the following is the appropriate basis for valuing fixed assets acquired in a business combination carried out by exchanging cash for common stock? a. Fair value. b. Book value. c. Cost plus any excess of purchase price over book value of assets acquired. d. Historical cost.

A

2. Which of the following is not an appropriate reason for establishing a subsidiary? a. The parent wishes to reduce its taxes by establishing a subsidiary that focuses its operations in areas where special tax benefits are available. b. The parent wishes to be able to increase its reported sales by transferring products to the subsidiary at the end of the fiscal year. c. The parent wishes to protect existing operations by shifting new activities with greater risk to a newly created subsidiary. d. The parent wishes to avoid subjecting all of its operations to regulatory control by establishing a subsidiary that focuses its operations in regulated industries.

B

A corporation exercises significant influence over an affiliate in which it holds a 40 percent common stock interest. If its affiliate completed a fiscal year profitably but paid no dividends, how would this affect the investor corporation? a. Decrease book value per share. b. Result in increased earnings per share. c. Result in an increased current ratio. d. Increase asset turnover ratios.

B

An enterprise that will absorb a majority of a variable interest entity's expected losses is called the a. Critical management director. b. Primary beneficiary. c. Major facilitator. d. Qualified owner.

B

In determining whether or not a variable interest entity is to be consolidated, the FASB focused on a. Frequency of intercompany transfers. b. Share of profits and obligation to absorb losses. c. Legal control. d. Proportionate size of the two entities.

B

Investor Inc. owns 40 percent of Alimand Corporation. During the calendar year 20X5, Alimand had net earnings of $100,000 and paid dividends of $10,000. During 20X5, the market value of Alimand's stock remained unchanged. Investor mistakenly recorded these transactions by carrying the investment at fair value rather than using the equity method of accounting. What effect would this have on the investment account, net earnings, and retained earnings, respectively? a. Overstate, overstate, overstate. b. Understate, understate, understate. c. Overstate, understate, understate. d. Understate, overstate, overstate.

B

Penn Inc., a manufacturing company, owns 75 percent of the common stock of Sell Inc., an investment company. Sell owns 60 percent of the common stock of Vane Inc., an insurance company. In Penn's consolidated financial statements, should Sell and Vane be consolidated or reported as equity method investments (assuming there are no side agreements)? a. Consolidation used for Sell and equity method used for Vane. b. Consolidation used for both Sell and Vane. c. Equity method used for Sell and consolidation used for Vane. d. Equity method used for both Sell and Vane.

B

Which of the following is the best theoretical justification for consolidated financial statements? a. In form, the companies are one entity; in substance, they are separate. b. In form, the companies are separate; in substance, they are one entity. c. In form and substance, the companies are one entity. d. In form and substance, the companies are separate.

B

On January 2, 20X3, Kean Company purchased a 30 percent interest in Pod Company for $250,000. Pod reported net income of $100,000 for 20X3 and declared and paid a dividend of $10,000. Kean accounts for this investment using the equity method. In its December 31, 20X3, balance sheet, what amount should Kean report as its investment in Pod? a. $223,000 b. $277,000 c. $160,000 d. $340,000

B $250,000 + ($100,000 × 0.30) - ($10,000 × 0.30) = $277,000.

1. Growth in the complexity of the U.S. business environment a. Has encouraged companies to reduce the number of operating divisions and product lines so they may better control those they retain. b. Has had no particular impact on the organizational structures or the way in which companies are managed. c. Has led to increasingly complex organizational structures as management has attempted to achieve its business objectives. d. Has led to increased use of partnerships to avoid legal liability.

C

Consolidated financial statements are typically prepared when one company has a controlling interest in another unless a. The subsidiary is a finance company. b. The fiscal year-ends of the two companies are more than three months apart. c. Circumstances prevent the exercise of control. d. The two companies are in unrelated industries, such as real estate and manufacturing.

C

Goodwill represents the excess of the sum of the fair value of the (1) consideration given, (2) shares already owned, and (3) the non controlling interest over the a. Book value of an acquired company. b. Sum of the fair values assigned to tangible assets acquired less liabilities assumed. c. Sum of the fair values assigned to identifiable assets acquired less liabilities assumed. d. Sum of the fair values assigned to intangible assets acquired less liabilities assumed.

C

In a business combination in which an acquiring company purchases 100% of the outstanding common stock of another company, if the fair value of the net identifiable assets acquired exceeds the fair value of the consideration given. The excess should be reported as a a. Deferred credit. b. Reduction of the values assigned to current assets and a deferred credit for any unallocated portion. c. No answer listed is correct. d. Pro rata reduction of the values assigned to current and non current assets and a deferred credit for any unallocated portion.

C

In a business combination, costs of registering equity securities to be issued by the acquiring company are a(n) a. Direct addition to stockholders' equity of the combined company. b. Addition to goodwill. c. Reduction of the recorded value of the securities. d. Expense of the combined company for the period in which the costs were incurred.

C

On December 31, 20X3, Saxe Corporation was merged into Poe Corporation. In the business combination, Poe issued 200,000 shares of its $10 par common stock, with a market price of $18 a share, for all of Saxe's common stock. The stockholders' equity section of each company's balance sheet immediately before the combination was: Poe Saxe Common Stock $3,000,000 $1,500,000 Additional Paid-In Capital 1,300,000 150,000 Retained Earnings 2,500,000 850,000 $6,800,000 $2,500,000 In the December 31, 20X3, combined balance sheet, additional paid-in capital should be reported at a. $950,000. b. $1,450,000. c. $2,900,000. d. $1,300,000.

C

Which of the following actions is likely to result in recording goodwill on Poker Company's books? a. Poker distributes ownership of a newly created subsidiary in a distribution considered to be a split-off. b. Poker distributes ownership of a newly created subsidiary in a distribution considered to be a spin-off. c. Poker acquires Spade Corporation in a business combination recorded as a merger. d. Poker acquires a majority of Spade's common stock in a business combination and continues to operate it as a subsidiary.

C

In 20X0, Neil Company held the following investments in common stock: 25,000 shares of B&K Inc.'s 100,000 outstanding shares. Neil's level of ownership gives it the ability to exercise significant influence over the financial and operating policies of B&K. 6,000 shares of Amal Corporation's 309,000 outstanding shares. During 20X0, Neil received the following distributions from its common stock investments: November 6: $30,000 cash dividend from B&K November 11: $1,500 cash dividend from Amal December 26: 3 percent common stock dividend from Amal The closing price of this stock was $115 per share. What amount of dividend revenue should Neil report for 20X0? a. $4,200 b. $31,500 c. $1,500 d. $34,200

C Because the ownership in Amal Corporation is less than 20%, the investment should be carried at fair value. Accordingly, the $1,500 dividend received from Amal is recorded as dividend revenue. ($4,200) Incorrect. Stock dividends are not recorded as income. ($31,500) Incorrect. The cash dividend received from B&K is not recorded as dividend revenue because it is accounted for under the equity method. ($34,200) Incorrect. The stock dividend and cash dividend from B&K are not recorded as dividend revenue.

A and B Companies have been operating separately for five years. Each company has a minimal amount of liabilities and a simple capital structure consisting solely of voting common stock. In exchange for 40 percent of its voting stock, A Company acquires 80 percent of the common stock of B Company. This is a "tax-free" stock-for-stock exchange for tax purposes. B Company's identifiable assets have a total net fair market value of $800,000 and a total net book value of $580,000. The fair market value of the A stock used in the exchange is $700,000, and the fair value of the non controlling interest is $175,000. The goodwill reported following the acquisition would be a. $295,000. b. Zero. c. $60,000. d. $75,000.

D

An investor uses the equity method to account for an investment in common stock. Assume that (1) the investor owns less than 50 percent of the outstanding common stock of the investee, (2) the investee company reports net income and declares dividends during the year, (3) the fair value of the investee's stock is unchanged during the year, and (4) the investee's net income is more than the dividends it declares. How would the investor's investment in the common stock of the investee company under the equity method differ at year-end from what it would have been if the investor had carried the investment at fair value? a. The balance under the equity method is higher than it would have been if the investment was carried at fair value, but only if the investee company actually paid the dividends before year-end. b. The balance under the equity method is lower than it would have been if the investment was carried at fair value. c. The balance under the equity method is lower than it would have been if the investment was carried at fair value, but only if the investee company actually paid the dividends before year-end. d. The balance under the equity method is higher than it would have been if the investment was carried at fair value.

D

Peel Company received a cash dividend from a common stock investment. Should Peel report an increase in the investment account if it carries the investment at fair value or if it uses the equity method of accounting? Fair Value Equity a. Yes No b. No Yes c. Yes Yes d. No No

D

Special-purpose entities generally a. Have relatively large amounts of preferred stock and convertible securities outstanding. b. Pay out a relatively high percentage of their earnings as dividends to facilitate the sale of additional shares. c. Have a much larger portion of assets financed by equity shareholders than do companies such as General Motors. d. Have a much smaller portion of their assets financed by equity shareholders than do companies such as General Motors.

D

Variable interest entities may be established as a. Corporations. b. Trusts. c. Partnerships. d. All of these answers are correct.

D

When a parent-subsidiary relationship exists, consolidated financial statements are prepared in recognition of the accounting concept of a. Materiality. b. Legal entity. c. Reliability. d. Economic entity.

D