Ch 3 MC

Consolidated net income using the equity method for an acquisition combination is computed as follows:

Combined revenues less combined expenses less equity in subsidiary's earnings less amortization of fair-value allocations in excess of book value.

Prince Company acquires Duchess, Inc. on January 1, 2016. At the date of acquisition, Duchess has long-term debt with a fair value of $1,500,000 and a carrying amount of $1,200,000.

Debit Long-Term Debt and Credit Interest Expense

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?

Equipment. Common Stock. Goodwill. **Investment in Subsidiary.** Additional Paid-In Capital.

According to the FASB ASC regarding the testing procedures for Goodwill Impairment, the proper procedure for conducting impairment testing is:

Goodwill recognized in consolidation may be impairment tested in a two-step approach, first by qualitative assessment of the possibility of impairment of the unit fair value relative to the book value, and then quantitative assessments as to how much impairment, if any, occurred for asset write-down.

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.

When a company applies the initial value method in accounting for its investment in a subsidiary, and the subsidiary reports income in excess of dividends paid, what entry would be made for a consolidation worksheet for the second year?

Invest in sub . . . RE

One company acquires another company in a combination accounted for under the acquisition method. The acquiring company decides to apply the initial value method in accounting for the combination. What is one reason the acquiring company might have made this decision?

It is relatively easy to apply.

Which of the following will result in the recognition of an impairment loss on goodwill?

Both the fair value of a reporting unit and its associated implied goodwill fall below their respective carrying values.

How is the fair value allocation of an intangible asset allocated to expense when the asset has no legal, regulatory, contractual, competitive, economic, or other factors that limit its life?

No amortization, but annually reviewed for impairment and adjusted accordingly.

Which one of the following varies between the equity, initial value, and partial equity methods of accounting for an investment?

The balance in the investment account on the parent's books.

An impairment model is used

To assess whether asset write-downs are appropriate for indefinite-lived assets.

With respect to the recognition of goodwill in a business combination, which of the following statements is true?

US GAAP standards require goodwill to be allocated to reporting units expected to benefit from the goodwill.

How does the partial equity method differ from the equity method?

Under the partial equity method, the balance in the investment account is not decreased by amortization on allocations made in the acquisition of the subsidiary.

Under the partial equity method of accounting for an investment,

Amortization of the excess of fair value allocations over book value is ignored in regard to the investment account.

Which of the following is not an example of an intangible asset? Lease agreement Customer list Database Trademark Broken equipment

Broken equipment

Which of the following is false regarding contingent consideration in business combinations? Contingent consideration payable in stock shares is reported under stockholders' equity. The contingent consideration fair value is recognized as part of the acquisition regardless of whether eventual payment is based on future performance of the target firm or future stock price of the acquirer. Contingent consideration is recorded because of its substantial probability of eventual payment. Contingent consideration is reflected in the acquirer's balance sheet at the present value of the potential expected future payment. Contingent consideration payable in cash is reported under liabilities.

Contingent consideration is recorded because of its substantial probability of eventual payment.

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.

Kaye Company acquired 100% of Fiore Company on January 1, 2018. Kaye paid $1,000 excess consideration over book value, which is being amortized at $20 per year. There was no goodwill in the combination. Fiore reported net income of $400 in 2018 and paid dividends of $100. Assume the initial value method is used. In the year subsequent to acquisition, what additional worksheet entry must be made for consolidation purposes that is not required for the equity method?

Invesment in Fiore 280 . . . . . RE 280

When consolidating a subsidiary under the equity method, which of the following statements is true with regard to the subsidiary subsequent to the year of acquisition?

Only net assets that had excess fair value over book value when acquired by the parent must be amortized over their useful lives.

One company acquires another company in a combination accounted for under the acquisition method. The acquiring company decides to apply the equity method in accounting for the combination. What is one reason the acquiring company might have made this decision?

Operating results on the parent's financial records reflect consolidated totals.

When a company applies the partial equity method in accounting for its investment in a subsidiary and the subsidiary's equipment has a fair value greater than its book value, what consolidation worksheet entry is made in a year subsequent to the initial acquisition of the subsidiary?

RE . . . Invest in Sub

When a company applies the initial value method in accounting for its investment in a subsidiary and the subsidiary reports income less than dividends paid, what entry would be made for a consolidation worksheet in the second year?

RE . . . Invest in sub

Kaye Company acquired 100% of Fiore Company on January 1, 2018. Kaye paid $1,000 excess consideration over book value, which is being amortized at $20 per year. There was no goodwill in the combination. Fiore reported net income of $400 in 2018 and paid dividends of $100. Assume the partial equity method is used. In the years following acquisition, what additional worksheet entry must be made for consolidation purposes, but is not required for the equity method?

RE 20 . . . invest in Fiore 20

Under the initial value method, when accounting for an investment in a subsidiary,

The investment account does not change from year to year.

Which of the following is not a factor to be considered when determining the useful life of an intangible asset?

The level of maintenance expenditures that will be required to obtain expected future benefits. **The fair value of the asset.** Legal, regulatory or contractual provisions. The expected use of the asset by the organization. The effects of obsolescence.

All of the following are acceptable methods to account for a majority-owned investment in subsidiary except

The partial equity method The equity method The book value method The initial value method ****The fair value 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.