Advanced Financial Chapter 3 Concepts

When the parent uses the equity method, Consolidation Entry I

removes the parent's recorded equity income.

Regardless of whether the parent accounts for its subsidiary investment using the partial equity, initial value or the equity method, consolidation worksheet entries bring the investment account to a ___________ balance

zero

A parent company controls a subsidiary company through ownership of 100% of the subsidiary's voting stock. How are cash dividends declared by the subsidiary on its voting stock treated in the parent's consolidated financial reports?

Not included having been eliminated in the consolidation process.

For goodwill testing purposes, operating units within a combined entity that report information about their earnings activities to upper management are designated as _________ units

reporting

True or false: Consolidation Entry I removes the Equity in Subsidiary Earnings which is then replaced by the inclusion of the subsidiary's individual revenue and expense accounts on the consolidated income statement.

True Reason: Rather than report a one-line amount for subsidiary earnings, consolidation requires the addition of the separate subsidiary revenue and expense accounts with those of the parent.

Three alternative methods of investment accounting available to the parent for its internal record-keeping are the equity method, the initial value method, and the partial equity method. Regardless of its choice, the investment accounting method has no effect on the ___________________________ financial statements.

consolidated

A parent has applied the partial equity method for multiple accounting periods and the subsidiary has reported profits (after subtracting excess acquisition-date fair value amortizations). In preparing a consolidated worksheet, Consolidation Entry asterisk C will include a debit to the parent's RE and a credit to the

parent's investment in subsidiary account.

When the parent applies the equity method to its investment in subsidiary account, Consolidation Entry D eliminates the effect of intra-entity subsidiary _________________ as part of the consolidation process.

dividends

Goodwill recognized in a business combination is considered to have an _____________ life and thus is not amortized.

indefinite

Goodwill is not amortized on the Exhibit 3.7 consolidation worksheet because it is considered a(n) __________________ lived asset

indefinite or perpetual

Consolidation Entry P

removes the balances from intra-entity receivables and payables.

Worksheet entries focus on the parent's beginning retained earnings as needed to partially adjust to the full-accrual basis. To complete the adjustment, we combine current year consolidated _________________ and ______________________ to arrive at full-accrual ending retained earnings.

revenue expenses

Consolidation Entry E recognizes amortization expenses related to

the subsidiary's acquisition-date differences between fair and book values.

Consolidation entries S and A are part of a sequence of worksheet adjustments that bring the Investment in Subsidiary account to a _____________ balance

zero

In conjunction with combining a subsidiary's revenues and expenses with those of the parent company, the income from subsidiary account accrued by a parent is brought to a _______ balance as part of the consolidation process.

zero

Regardless of whether the parent accounts for its subsidiary investment using the initial value or the equity method, consolidation worksheet entries bring the investment account to a __________ balance.

zero

A parent company, over time, will routinely make which of the following adjustments in applying the equity method to its investment in subsidiary account?

1. Income as it is earned and reported by the subsidiary. 2. Dividends from the subsidiary. 3. Excess acquisition-date fair over book value amortization.

When the parent applies the equity method on its internal records, what account balances are removed on the consolidated worksheet?

1. Investment in subsidiary 2. The parent's share of subsidiary dividends declared 3. Equity in subsidiary earnings

Which of the following best describes the income recognition basis reflected by the equity method?

Accrual basis

True or false: The balances reported in consolidated financial statements will differ depending on the parent's selection of an investment accounting method (e.g., equity, initial value, or partial equity).

False. Reason: The selection of a particular investment accounting method does not affect the consolidated totals. In all cases the parent's investment and subsidiary income accounts are brought to a zero balance

When a subsidiary's acquisition-date fair values exceed its book values for its limited-lived assets, the equity method records over time

a reduction in Equity in Subsidiary Earnings for amortization expense.

When the parent applies the equity method to its investment in subsidiary account, no worksheet entries are required to adjust the parent's retained earnings because the parent has routinely recognized income from the subsidiary on a full-______ basis

accrual

Consolidation worksheets are typically used in the process of preparing consolidated financial statements required by GAAP. Such worksheets utilize consolidation worksheet _______________ to develop financial statement totals to be reported by the consolidated entity.

adjustments

When a parent company uses the partial equity method to account for an investment in a subsidiary, Consolidation Entry asterisk C is needed to adjust beginning retained earnings for cumulative _____________ expense related to acquisition-date fair value adjustments to the subsidiary's assets and liabilities.

amortization

In Exhibit 3.7, Consolidation Entry S removes the balances from the subsidiary's common stock and additional paid-in capital accounts to ensure that only the parent's balances for these accounts appear in ____________ totals.

consolidated

True or false: Conducting goodwill impairment tests at the reporting unit level (rather than the combined entity level) helps capture goodwill impairment losses that may otherwise be offset by an increase in goodwill in another reporting unit.

True Reason: If goodwill impairment testing was performed at the combined entity level, its possible that overall goodwill for the entity does not change, but goodwill may have decreased in some reporting units and increased in other reporting units.

When the parent applies the equity method for its 100% owned subsidiary, its Equity in Subsidiary Earnings account balance equals the effect of the subsidiary's income on ________ net income.

consolidated

As part of the consolidation statement preparation process for a parent and subsidiary, the subsidiary's asset, liability, revenue, and expense balances are added to the _________ company balances after appropriate adjustments.

parent

When the acquisition-date fair value of subsidiary long-term debt exceeds its carrying amount, the difference serves to reduce interest expense over the life of the debt, similar to amortizing a bond ____________.

premium

When the parent applies the initial value method for its investment accounting, Consolidation Entry I is needed to

remove the balance in the parent's Dividend Income and the subsidiary's Dividends Declared.

Consolidation Entry S credits the Investment in Subsidiary account in order to

remove the beginning of the year book value component of the investment account.

How do the consolidation worksheets compare across Exhibit 3.5 (parent uses the equity method) vs. Exhibit 3.9 (parent uses the initial value method) and Exhibit 3.10 (parent uses the partial equity method)?

1. Consolidation entries S, A, and E are the same across the three exhibits. 2. No differences in consolidation totals across the three exhibits.

Which of the following account balances are identical across the parent's records and consolidated totals when the parent applies the equity method for its Investment in Subsidiary account?

1. Retained earnings 2. Net income

Depending on the investment accounting method (equity, initial value, partial equity) chosen, which of the following accounts will vary on the parent's financial records.

1. The investment account. 2. Income from the subsidiary. 3. Retained earnings.

Which of the following are characteristics of the equity method of accounting for a parent company's investment in a subsidiary company?

1. The parent company accrues income as earned by the subsidiary. 2. Unrealized gains on intra-entity transactions are deferred from income. 3. The parent recognizes the income effect of amortizing excess subsidiary acquisition-date fair over book value.

When is Consolidation Entry asterisk C required?

1. in post-acquisition periods when the parent has used the partial equity method to account for its subsidiary investment. 2. in post-acquisition periods when the parent has used the initial value method to account for its subsidiary investment.

Which of the following represent procedures required in preparing consolidated financial statements for a parent company and its subsidiary?

1. intra-entity receivable and payables are eliminated. 2. subsidiary assets and liabilities are adjusted to reflect acquisition-date fair values net of post-acquisition amortization. 3. excess acquisition-date fair over book values for limited-life subsidiary assets must be amortized over time.

Consolidation Entry E

1. provides current period amortization expense for the acquisition-date fair-value adjustments. 2. increases expenses when excess fair over book value acquisition-date allocations are made to depreciable subsidiary assets.

True or false: Although the choice of an investment accounting method (e.g., equity, initial value, partial equity) produces differing balances on the parent's books, alternative sets of consolidation entries ensure that consolidated financial statement remain invariant to the investment accounting method chosen.

True Reason: See exhibits 3.5, 3.9, and 3.10 to see the same consolidated balances across the three investment accounting methods.

By recognizing subsidiary income as it is earned, rather than when cash is received through a dividend, the equity method embraces the _______ method of accounting.

accrual

If a subsidiary company has a debt payable to its parent company, the intra-entity payable and receivable (on the parent's books) is removed as part of the __________ process.

consolidation

When a subsidiary's tangible asset has an excess acquisition-date book over fair value, Consolidation Entry E will show a __________________ to depreciation expense

credit

Consolidation Entry P removes intra-entity payable and receivable balances because the parent and subsidiary companies are viewed as a single ___________________ for financial reporting purposes

entity

Consolidation Entry asterisk C relates to

income effects from previous periods

What effect does the parent's selection of the equity method vs. the initial value method have on consolidated financial statements?

no effect

In Consolidation Entry D, the credit to the Dividends Declared account

reduces the subsidiary's dividends balance.

Neither the initial value method nor the partial equity method represent full accrual accounting for the subsidiary's income. Therefore, over time the parent's beginning _________________________ __________________ becomes misstated and must be appropriately established.

retained earnings

When the parent employs either the initial value or the partial equity method, establishing an appropriate beginning ___________ ___________ balance for the parent is crucial to the preparation of consolidated financial statements.

retained earnings

When the parent has applied the partial equity method for multiple accounting periods, Consolidation Entry asterisk C will include a debit to the parent's RE when

there was an acquisition-date fair value adjustment that increased the amounts of limited life assets.

Subsidiary dividends attributable to its parent are excluded from __________________totals because they represent an intra-entity transfer with no financial effect outside the reporting entity.

consolidated

When the parent applies the equity method, the retained earnings amounts on the parent's individual financial records equal the _________ totals

consolidated

The label "S" in Consolidation Worksheet Entry S refers to the subsidiary's ________________ ____________ accounts.

stockholder's equity

Beyond recording the acquisition price, what periodic adjustments does the parent typically make to the investment account when the initial value method is employed?

No periodic adjustments are typically made.

As compared to acquisition-date accounting for business combinations, subsequent to an acquisition the parent company must additionally report consolidated

1. Revenues 2. Net Income 3. Expenses

Among the most prominent internal record-keeping methods for accounting for an investment in a subsidiary are

1. The initial value method 2. The equity method 3. The partial equity method

Under the partial equity method the parent records income from it subsidiary as

1. An increase in the investment in subsidiary account 2. Equity in subsidiary earnings

A parent company's choice of investment accounting method (equity method, initial value method, or partial equity method) will affect which of the following balances on the parent's books?

1. Retained earnings 2. Investment in subsidiary 3. Income from subsidiary

In a post-acquisition consolidation worksheet, which rows are not summed across to derive consolidation totals?

1. Retained earnings (ending balance) 2. net income

Which of the following contribute to the full-accrual income recognition of subsidiary income on the parent's financial records under the equity method?

1. The recognition of subsidiary reported income. 2. The recognition of excess acquisition-date fair value adjustment amortizations to subsidiary income.

When the initial value method is used, the parent's separate net income on a consolidation worksheet will

1. differ from the consolidated net income amount. 2. be adjusted by Consolidation Entry I.

Consolidated income statements report goodwill impairment losses as

a component of operating income.

Under the partial equity method the parent records dividends from it subsidiary as

a reduction of the investment account

Consolidation Entry I

brings the "Equity in Subsidiary Earnings" account to a zero balance.

Under the initial value method, the parent records income when the subsidiary declares a ___________.

dividend

The values assigned to intangible assets with indefinite useful lives are

subject to periodic impairment testing.

The Consolidation Entry asterisk C is needed to

1. adjust the parent's beginning retained earnings to a full-accrual basis. 2. simulate the equity method in adjusting the parent's beginning retained earnings.

Using the equity method, which of the following affects the Investment in Subsidiary account on the parent's books?

1. decreases in subsidiary equity from subsidiary dividends 2. increases in subsidiary equity from subsidiary net income 3. the original consideration transferred for the investment

Which of the following accounts of both the parent and subsidiary are combined for consolidated financial reporting?

1. revenues and expenses 2. assets and liabilities

When a parent company uses the partial equity method to account for an investment in a subsidiary, Consolidation Entry asterisk C is needed to

1. update the parent's retained earnings for past years' amortizations acquisition-date fair value adjustments. 2. simulate the equity method for the parent's retained earnings in deriving consolidated totals.

Under the initial value method, the parent recognizes income when its subsidiary declares a dividend. Because of the brief time span between dividend declarations and cash payments, the initial value is said to reflect the ______ basis for income recognition.

Cash

Under the initial value method of accounting for an investment in a subsidiary company, the parent recognizes income when the subsidiary

Declares a dividend

Which of the following Exhibit 3.4 income statement accounts are eliminated for consolidated financial statement reporting?

Equity in subsidiary earnings

Consolidation Entry A, in the first year subsequent to acquisition, adjusts the subsidiary's asset and liability balances to acquisition-date ____ values.

Fair

Which of the following Exhibit 3.4 balance accounts are eliminated for consolidated financial statement reporting?

Investment in Sun Company

When a parent company owns 100% of its subsidiary, what amounts for common stock and additional paid-in capital are included in consolidated stockholders' equity totals?

Parent company balances only

Why does Consolidation Entry S remove the subsidiary's stockholders' equity accounts?

Subsidiary ownership accounts are not relevant, because consolidated statements are prepared for the parent company owners.

Which of the following is a characteristic of the partial equity method of accounting for a parent company's investment in a subsidiary company?

The parent company accrues income as reported by the subsidiary.

Why does an increase to the fair value of acquisition-date subsidiary debt result in a decrease to interest expense on the consolidated worksheet?

The parent has essentially borrowed the fair value of the debt, but only will repay the lesser contractual maturity value.

Which of the following represent components of subsidiary income recognized when the parent applies the partial equity method?

The parent's share of the subsidiary's reported income.

True or false: The consolidated entry to record goodwill is not accompanied by another consolidation entry to amortize goodwill.

True Reason: Goodwill is periodically tested for impairment but not amortized.

True or false: Consolidation Entry E is identical for worksheets regardless of whether the parent uses the initial value method or the equity method.

True Reason: Compare Exhibits 3.5 and 3.7. In each case, Consolidation Entry E is the same.

True or false: In the presence of acquisition-date excess fair over book values for subsidiary assets, both consolidation entries A and E are needed to adjust subsidiary assets to their end-of-the-year proper consolidated balances.

True Reason: Consolidation entry A brings the subsidiary asset to its beginning-of-the-year balance. The consolidation entry E completes the adjustment for the current year.

When the acquisition-date fair value of subsidiary long-term debt exceeds its carrying amount, in periods subsequent to the acquisition, worksheet entries are needed to ____________________ interest expense

decrease

Exhibit 3.4 shows Parrot Company's net income equal to $693,000. Consolidated net income is also equal to $693,000 because the parent company, in its internal financial records, employs the _______________ method to account for its investment in the subsidiary.

equity

Subsidiary dividends are excluded from consolidated retained earnings because they are attributable to the parent company and not to an ___________ party

external

Consolidation Entry A adjusts subsidiary balances for acquisition-date related excess ___________________ value adjustments as part of the consolidation process.

fair

When the acquisition-date fair value of subsidiary long-term debt exceeds its carrying amount, in periods subsequent to the acquisition, consolidation worksheet entries are needed to _______ long-term debt.

increase

When the carrying amount of acquisition-date subsidiary long-term debt exceeds its fair value, a consolidation worksheet entry is required to __________ the amount of interest expense for consolidated financial reporting

increase

Impairment testing (as opposed to amortization) is considered appropriate for measuring a decline in goodwill because goodwill is considered to have an _________ life

indefinite

When a particular asset acquired in a business combination has an acquisition-date book value in excess of its fair value, the asset's carrying amount from the subsidiary's financial records

must be reduced in preparing consolidated financial statements.

Goodwill recognized in a business combination must be assigned to reporting units of the consolidated entity in order to

properly subject goodwill to impairment assessment.

Within the consolidated entity, goodwill impairment tests are conducted at the ___________________ ________ level.

reporting unit

Subsequent to acquisition, consolidated depreciation expense is based upon

the acquisition-date fair values of the subsidiary's depreciable assets. Reason: The parent does not adjust its assets to fair value at the acquisition date of a subsidiary. Reason: the book values of subsidiary assets comprise only a portion of consolidated depreciation expense which must also include an acquisition-date fair value adjustments.

Under the initial value method, the parent records income when its subsidiary declares a dividend. Over time, the parent's retained earnings fail to accrue any subsidiary income not distributed as a dividend. Therefore, worksheet entries are required to adjust the parent's beginning retained earnings to a full-____________ basis

accrual

Consolidation Entry D debits the "Investment in Subsidiary" account when

the parent employs the equity method in accounting for its investment and the subsidiary has declared a current period cash dividend.

When the parent has applied the equity method in accounting for the earnings of its subsidiary, consolidated retained earnings will equal

the parent's retained earnings balance

Consolidation Entry A adjusts the subsidiary's assets to their unamortized acquisition-date fair value as of what date?

Beginning of the current reporting period Reason: Consolidation Entry A adjusts the subsidiary's assets to unamortized fair value as of the beginning of the current period. Then Consolidation Entry E finishes the update to the end of the current period.

True or false: Consolidated totals include the unamortized subsidiary acquisition-date excess of fair over book value allocations.

True Reason: The valuation basis for an acquired subsidiary's assets is acquisition-date fair value after amortization.

True or false: Consolidation Entry A may include an adjustment to recognize goodwill created by the business combination.

True Reason: Goodwill is often recognized as an asset created in a business combination. Consolidation Entry A allocates the portion of the investment account represented by goodwill.

True or false: Worksheet consolidation entries are not posted to the books of either the parent or the subsidiary.

True Reason: Consolidation entries are only used to adjust the parent and subsidiary balances on a worksheet to help prepare consolidated financial statements.