Ch.1-3 HW

Ch.2 Which of the following does not represent a primary motivation for business combinations? -Combinations are often a vehicle to accelerate growth and competitiveness. -Cost savings can be achieved through elimination of duplicate facilities and staff. -Larger firms are less likely to fail. -Synergies may be available through quick entry for new and existing products into markets.

-Larger firms are less likely to fail.

What is the appropriate accounting treatment for the value assigned to in-process research and development acquired in a business combination? -Expense if there is no alternative use for the assets used in the research and development and technological feasibility has yet to be reached. -Expense upon acquisition. -Expense until future economic benefits become certain and then capitalize as an asset. -Capitalize as an asset.

Capitalize as an asset.

Ch.1 Under fair-value accounting for an equity investment, which of the following affects the income the investor recognizes from its ownership of the investee? -Other comprehensive income reported by the investee. -The investee's reported income adjusted for excess cost over book value amortizations. -Intra-entity profits from upstream sales. -Changes in the fair value of the investor's ownership shares of the investee.

Changes in the fair value of the investor's ownership shares of the investee.

Consolidated financial statements are typically prepared when one company has -Accounted for its investment in another company by the equity method. -Dividend income from another company. -Significant influence over the operating and financial policies of another company. -Control over another company.

Control over another company.

Camille, Inc., bought all outstanding shares of Jordan Corporation on January 1, 2019, for $830,000 in cash. This portion of the consideration transferred results in a fair-value allocation of $41,700 to equipment and goodwill of $98,400. At the acquisition date, Camille also agrees to pay Jordan's previous owners an additional $139,000 on January 1, 2021, if Jordan earns a 10 percent return on the fair value of its assets in 2019 and 2020. Jordan's profits exceed this threshold in both years. Which of the following is true? The additional $139,000 payment is reported as an adjustment to the beginning balance of consolidated retained earnings. Consolidated goodwill as of January 1, 2021, increases by $139,000. The fair value of the expected contingent payment increases goodwill at the acquisition date. The $139,000 is recorded as a revaluation gain in 2021.

The fair value of the expected contingent payment increases goodwill at the acquisition date.

Ch.1 When an equity method investment account is reduced to a zero balance -The investor should discontinue using the equity method until the investee begins paying dividends. -The investor should establish a negative investment account balance for any future losses reported by the investee. -The investment retains a zero balance until subsequent investee profits eliminate all unrecognized losses. -Future losses are reported as unusual items in the investor's income statement.

The investment retains a zero balance until subsequent investee profits eliminate all unrecognized losses.

An acquired firm's financial records sometimes show goodwill from previous business combinations. How does a parent company account for the preexisting goodwill of its newly acquired subsidiary? The parent ignores preexisting subsidiary goodwill and allocates the subsidiary's fair value among the separately identifiable assets acquired and liabilities assumed. Preexisting goodwill is excluded from the identifiable assets acquired unless the subsidiary can demonstrate its continuing value. The parent tests the preexisting goodwill for impairment before recording the goodwill as part of the acquisition. The parent includes the preexisting goodwill as an identified intangible asset acquired.

The parent ignores preexisting subsidiary goodwill and allocates the subsidiary's fair value among the separately identifiable assets acquired and liabilities assumed.

Ch.2 What is a statutory merger? -A merger approved by the Securities and Exchange Commission -An acquisition involving the purchase of both stock and assets -A business combination in which only one company continues to exist as a legal entity -A takeover completed within one year of the initial tender offer

A business combination in which only one company continues to exist as a legal entity

Ch.1 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 stockholders' equity account, Dividends to Stockholders. -A deduction from the investor's share of the investee's profits. -A deduction from the investment account. -Dividend income.

A deduction from the investment account.

Ch.2 What is goodwill? -An intangible asset representing the excess of consideration transferred over the collective fair values of the net identifiable assets acquired in a business combination -An expense that an acquiring firm recognizes for the excess of consideration transferred over the collective fair values of the net identifiable assets acquired in a business combination -A concept representing synergies resulting from a business combination but not recognized for financial reporting purposes -An internally developed intangible asset that is recognized on a business firm's balance sheet as the business generates profits in excess of a normal rate of return on its identifiable net assets

An intangible asset representing the excess of consideration transferred over the collective fair values of the net identifiable assets acquired in a business combination

Ch.1 The equity method tends to be most appropriate if -An investment represents 50 percent or more of the voting stock of an investee. -The investor is unable to obtain representation on the investee's board of directors. -Majority ownership of the investee is concentrated among a small group of shareholders who operate the investee without regard to the views of the investor. -An investment enables the investor to influence the operating and financial decisions of the investee.

An investment enables the investor to influence the operating and financial decisions of the investee.

Ch.2 Which of the following is the best theoretical justification for consolidated financial statements? -In form, the companies are one entity; in substance, they are separate. -In form and substance, the companies are one entity. -In form, the companies are separate; in substance, they are one entity. -In form and substance, the companies are separate.

In form, the companies are separate; in substance, they are one entity.

If no legal, regulatory, contractual, competitive, economic, or other factors limit the life of an intangible asset, the asset's assigned value is allocated to expense over which of the following? Indefinitely (no amortization) with an annual impairment review until its life becomes finite 20 years Infinitely 20 years with an annual impairment review

Indefinitely (no amortization) with an annual impairment review until its life becomes finite

A company acquires a subsidiary and will prepare consolidated financial statements for external reporting purposes. For internal reporting purposes, the company has decided to apply the initial value method. Why might the company have made this decision? Consolidation is not required when the parent uses the initial value method. It is a relatively easy method to apply. GAAP now requires the use of this particular method for internal reporting purposes. Operating results appearing on the parent's financial records reflect consolidated totals.

It is a relatively easy method to apply.

Ch.1 Perez, Inc., applies the equity method for its 25 percent investment in Senior, Inc. During 2021, Perez sold goods with a 40 percent gross profit to Senior, which sold all of these goods in 2021. How should Perez report the effect of the intra-entity sale on its 2021 income statement? -No adjustment is necessary. -Investment income should be reduced by 25 percent of the gross profit on the amount of intra-entity sales. -Sales and cost of goods sold should be reduced by 25 percent of the amount of intra-entity sales. -Sales and cost of goods sold should be reduced by the amount of intra-entity sales.

No adjustment is necessary.

Ch.1 Hawkins Company has owned 10 percent of Larker, Inc., for the past several years. This ownership did not allow Hawkins to have significant influence over Larker. Recently, Hawkins acquired an additional 30 percent of Larker and now will use the equity method. How will the investor report change? -No change is recorded; the equity method is used from the date of the new acquisition. -A retrospective adjustment is made to restate all prior years presented using the equity method. -A cumulative effect of an accounting change is shown in the current income statement. -Hawkins will report the change as a component of accumulated other comprehensive income.

No change is recorded; the equity method is used from the date of the new acquisition.

Paar Corporation bought 100 percent of Kimmel, Inc., on January 1, 2018. On that date, Paar's equipment (10-year remaining life) has a book value of $420,000 but a fair value of $520,000. Kimmel has equipment (10-year remaining life) with a book value of $272,000 but a fair value of $400,000. Paar uses the equity method to record its investment in Kimmel. On December 31, 2020, Paar has equipment with a book value of $294,000 but a fair value of $445,200. Kimmel has equipment with a book value of $190,400 but a fair value of $357,000. What would be the impact on consolidated balance for the Equipment account as of December 31, 2020 if the parent had applied the initial value method rather than the equity method? No effect: The method the parent uses is for internal reporting purposes only and has no impact on consolidated totals. The consolidated Equipment account would have a higher reported balance. The consolidated Equipment account would have a lower reported balance. The balance in the consolidated Equipment account cannot be determined for the initial value method using the information given.

No effect: The method the parent uses is for internal reporting purposes only and has no impact on consolidated totals.

A company acquires a subsidiary and will prepare consolidated financial statements for external reporting purposes. For internal reporting purposes, the company has decided to apply the equity method. Why might the company have made this decision? Consolidation is not required when the parent uses the equity method. GAAP now requires the use of this particular method for internal reporting purposes. Operating results appearing on the parent's financial records reflect consolidated totals. It is a relatively easy method to apply.

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

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 -Treated as goodwill and tested for impairment on an annual basis. Recognized as an ordinary gain from a bargain purchase. -Recognized as an ordinary gain from a bargain purchase. -Applied pro rata to reduce, but not below zero, the amounts initially assigned to specific non-current assets of the acquired firm. -Treated as negative goodwill to be amortized over the period benefited, not to exceed 40 years

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. -Capitalized as part of the overall fair value acquired in the merger. -Included in recognized goodwill. -Written off over a five-year maximum useful life.

Recorded as an expense in the period the merger takes place.

When negotiating a business acquisition, buyers sometimes agree to pay extra amounts to sellers in the future if performance metrics are achieved over specified time horizons. How should buyers account for such contingent consideration in recording an acquisition? The fair value of the contingent consideration is included in the overall fair value of the consideration transferred, and a liability or additional owners' equity is recognized. The fair value of the contingent consideration is recorded as a reduction of the otherwise determinable fair value of the acquired firm. The fair value of the contingent consideration is expensed immediately at acquisition date. The amount ultimately paid under the contingent consideration agreement is added to goodwill when and if the performance metrics are met.

The fair value of the contingent consideration is included in the overall fair value of the consideration transferred, and a liability or additional owners' equity is recognized.

SK Corporation acquired Neptune, Inc., on January 1, 2020, by issuing 125,000 shares of common stock with a $5 per share par value and a $30 market value. This transaction resulted in recognizing $95,000 of goodwill. SK also agreed to compensate Neptune's former owners with an additional 20,000 shares of SK's common stock if Neptune's 2020 cash flow from operations exceeds $600,000. On February 1, 2021, SK issues the additional 20,000 shares to Neptune's former owners to honor the contingent consideration agreement. Which of the following is true? The additional shares are assumed to have been issued on January 1, 2020, so that a retrospective adjustment is required. The parent's additional paid-in capital from the contingent equity recorded at the acquisition date is reclassified as a regular common stock issue on February 1, 2021. All of the subsidiary's asset and liability accounts must be revalued for consolidation purposes based on their fair values as of February 1, 2021. The fair value of the number of shares issued for the contingency increases the Goodwill account on February 1, 2021.

The parent's additional paid-in capital from the contingent equity recorded at the acquisition date is reclassified as a regular common stock issue on February 1, 2021.

When does gain recognition accompany a business combination? -In a combination created in the middle of a fiscal year. -In an acquisition when the value of all assets and liabilities cannot be determined. -When a bargain purchase occurs. -When the amount of a bargain purchase exceeds the value of the applicable noncurrent assets (other than certain exceptions) held by the acquired company.

When a bargain purchase occurs.

Goodwill recognized in a business combination must be allocated across a firm's identified reporting units. For a consolidated entity with multiple reporting units, when is goodwill considered to be impaired? When any individual reporting unit's fair value exceeds its carrying amount When the sum of the carrying amounts of all reporting units within a business combination exceeds the sum of their respective fair values When the sum of the fair values of all reporting units within a business combination exceeds the sum of their respective carrying amounts When any individual reporting unit's carrying amount exceeds its fair value

When any individual reporting unit's carrying amount exceeds its fair value

When should a consolidated entity recognize a goodwill impairment loss? Annually on a systematic and rational basis When the fair value of a reporting unit with goodwill falls below its carrying amount When the fair value of a reporting unit exceeds its respective carrying amount Whenever the entity's fair value declines significantly

When the fair value of a reporting unit with goodwill falls below its carrying amount (aka CV exceeds FV)