ACCT 426 - Test 1

What is a statutory merger?

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

When an investee 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

Goodwill recognized in a business combination must be allocated among a firm's identified reporting units. If the FV of a particular reporting unit with recognized goodwill falls below its carrying amount, what is not true?

A goodwill impairment loss is recognized if the carrying amount for goodwill exceeds its implied value (FALSE)

Sisk company has owned 10 percent of Maust for the past several years. This ownership did not have significant influence over Maust. Sisk acquired an additional 30 percent of Maust and now will use the equity method. How will the investor report the change?

A retrospective adjustment is made to restate all prior years presented using the equity method

What is the basic premise of the acquisition method regarding accounting for a non controlling interest?

A subsidiary is an indivisible part of a business combination and should be included in its entirety regardless of the degree of ownership

What is push-down accounting?

A subsidiary's recording of the FV allocations as well as subsequent amortization

A parent buys 32% of a subsidiary in one year and then buys an additional 40% in the next year. In a step acquisition of this type, the original 32% should be

Adjusted to FV at the date of the second acquisition with a resulting gain or loss reaction

An acquired entity has a long-term operating lease for an office building used for central management. The terms of the lease are very favorable relative to current market rates. However, the lease prohibits subleasing or any other transfer of rights. In its financial statements, the acquiring firm should report the value assigned to the lease contract as

An intangible asset under the contractural-legal criterion

What is the appropriate accounting treatment for the value assigned to in-process research and development acquired in a business combination?

Capitalize as an asset

Under fair value accounting for an equity investment, what 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

Which of the following does not represent a primary motivation for business combinations? A. Combinations as a vehicle for achieving rapid growth and competitiveness B. Cost savings though elimination of duplicate facilities and staff C. Quick entry for new and existing products into markets D. Larger firms being less likely to fail

D. Larger firms being less likely to fail

Direct combination costs and stock issuance costs are often incurred in the process of making a controlling investment in another company. How should those costs be accounted for in a PRE 2009 purchase transaction?

Direct combination costs increase investment and stock issuance costs decrease paid-in capital

When should a consolidated entity recognize a goodwill impairment loss? What if they had applied the initial value method rather than the equity method?

If not the FV of a reporting unit and its associated implied goodwill fall below their respective carrying amounts The method the parent uses is for internal reporting and has no impact on consolidated totals

What is the primary accounting difference between accounting for when the subsidiary is dissolved and when the subsidiary retains its incorporation?

If the subsidiary is dissolved, it will not be operated as a separate division

What is the best theoretical justification for consolidated financial statements?

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

The non controlling interest represents an outside ownership in a subsidiary that is not attributable to the parent company. Where in the consolidated balance sheet is this outside ownership interest recognized?

In the owner's equity section

If no legal, regulatory, contractural, competitive, economic, or other factors limit the life of an intangible asset, the asset's assigned value is allocated to expense over

Indefinitely with an annual impairment review until its life becomes finite

Which of the following internal record keeping method can a parent choose to account for a subsidiary acquired in a business combination?

Initial, equity, or partial

Which account would not appear in the consolidated financial statements at the end of the first fiscal period of the combination?

Investment in subsidiary

According to GAAP, the pooling of interest method for business combinations

Is no longer allowed for business combinations after June 30, 2001

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?

It is a relatively easy method to apply

Perez applies the equity method for its 25 percent investment in Senior. During 2015, Perez sold goods with a 40 percent gross profit to Senior. Senior sold all of these goods in 2015. How should Perez report the effect of the intra-entity sale on its 2015 income statement?

No adjustment is necessary

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?

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

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

Unrealized intra-entity gross profit calculation (Intra-entity profit to postpone)

Remaining inventory x gross profit% x ownership%

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

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

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

When an equity method investment account is reduced to a zero balance

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 goodwill and allocates the subsidiary's fair value among the separately identifiable assets acquired and liabilities assumed

When does gain recognition accompany a business combination?

When a bargain purchase occurs

Gross profit percentage calculation

(Revenue-COGS)/Revenue