ADVANCED TEST 2

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

Declares a dividend

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.

Entries

Which of the following Exhibit 3.4 income statement accounts are eliminated for consolidated financial statement reporting? Amortization expense Equity in subsidiary earnings Cost of goods sold Depreciation expense

Equity in subsidiary earnings

When the parent applies the equity method on its internal records, what account balances are removed on the consolidated worksheet? Equity in subsidiary earnings The parent's share of subsidiary dividends declared The parent's common stock Investment in subsidiary

Equity in subsidiary earnings The parent's share of subsidiary dividends declared Investment in subsidiary

A parent company, over time, will routinely make which of the following adjustments in applying the equity method to its investment in subsidiary account? Excess acquisition-date fair over book value amortization. Income as it is earned and reported by the subsidiary. Dividends from the subsidiary. Post-acquisition changes in the fair value of the subsidiary.

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

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.

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

Outside

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? Amortization expense Retained earnings Net income Sales revenue

Retained earnings Net income

Consolidation Entry E recognizes excess acquisition-date fair over book value __________ expense as part of the consolidation process.

amortization

Regardless of the parent's internal accounting method choice, the initial amount typically recorded in an investment in subsidiary account is the fair value of the _________ ___________ by the parent.

consideration payment

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

consolidation

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

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

Consolidation Entry P includes the balances from intra-entity receivables and payables. eliminates any intra-entity receivables but leaves any intra-entity payables intact. removes the balances from intra-entity receivables and payables. eliminates any intra-entity payables but leaves any intra-entity receivables intact.

removes the balances from intra-entity receivables and payables.

The values assigned to intangible assets with indefinite useful lives are

subject to periodic impairment testing

Consolidation Entry E recognizes amortization expenses related to current period amortizations of indefinite-lived intangible assets. the parent's separate intangible assets as of the acquisition date. the subsidiary's acquisition-date differences between fair and book values. previous period's depreciation expenses.

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

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.

Consolidation Entry E recognizes excess acquisition-date fair over book value ___________ expense as part of the consolidation process.

amortization

When the parent has applied the equity method in accounting for the earnings of its subsidiary, consolidated retained earnings will equal the excess of the parent's retained earnings over the subsidiary's retained earnings balances. the parent's retained earnings balance the sum of the parent's and the subsidiary's retained earnings balances

the parent's retained earnings balance

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

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

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

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.

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

When the parent uses the equity method, Consolidation Entry D includes all subsidiary dividends declared in consolidated totals. removes the dividends declared by the parent company. eliminates the intra-entity subsidiary dividends attributable to the parent company.

eliminates the intra-entity subsidiary dividends attributable to the parent company.

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

fair

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

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

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

must be increased in preparing consolidated financial statements.

When a particular asset acquired in a business combination has an acquisition-date fair value in excess of its acquisition-date book value, the asset's carrying amount from the subsidiary's financial records remains the same in consolidated financial statements as its current book value. must be increased in preparing consolidated financial statements. must be reduced in preparing consolidated financial statements.

must be increased in preparing consolidated financial statements.

In Consolidation Entry D, the credit to the Dividends Declared account increases cash. decreases the investment in the subsidiary. increases the parent's retained earnings. reduces the subsidiary's dividends balance.

reduces the subsidiary's dividends balance.

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. completely eliminate the investment account. allocate goodwill acquired in the business combination.

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

Which of the following accounts of both the parent and subsidiary are combined for consolidated financial reporting? revenues and expenses. assets and liabilities. dividends declared. common stock.

revenues and expenses. assets and liabilities.

The values assigned to intangible assets with indefinite useful lives are allocated over time to amortization expense. not subject to impairment testing. allocated over time to depreciation expense. subject to periodic impairment testing.

subject to periodic impairment testing.

The consolidated amount for trademarks exceeds the sum of the amounts shown by the parent and subsidiary companies in Exhibit 3.4. The extra amount is attributable to the acquisition-date excess fair over book value for the trademarks of the _________ company.

subsidiary

Subsequent to acquisition, consolidated depreciation expense is based upon

the acquisition-date fair values of the subsidiary's depreciable assets.

Using the equity method, which of the following affects the Investment in Subsidiary account on the parent's books? the original consideration transferred for the investment decreases in subsidiary equity from subsidiary dividends increases in subsidiary equity from subsidiary net income decreases in the parent's equity from dividends paid by the parent

the original consideration transferred for the investment decreases in subsidiary equity from subsidiary dividends increases in subsidiary equity from subsidiary net income

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. the parent company has declared a cash dividend for its shareholders. the parent employs the initial value method in accounting for its investment and the subsidiary has declared a current period cash dividend.

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

In conjunction with combining a subsidiary's assets and liabilities with those of the parent company, the investment in subsidiary account is brought to a __________ balance as part of the consolidation process.

Zero

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 a subsidiary's acquisition-date fair values exceed its book values for its limited-lived assets, the equity method records over time no effect on Equity in Subsidiary Earnings over time. an increase in Equity in Subsidiary Earnings for amortization expense. a reduction in Equity in Subsidiary Earnings for amortization expense.

a reduction in Equity in Subsidiary Earnings for amortization expense.

Consolidation Entry I results in the exclusion of individual subsidiary revenue and expense accounts from consolidated balances. excludes excess acquisition-date fair over book value amortizations. allows the inclusion of the "Equity in Subsidiary Earnings" account as a reported figure in the consolidated income statement. brings the "Equity in Subsidiary Earnings" account to a zero balance.

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

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

consolidated

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

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

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

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

expenses, net income, revenues

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

fair

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

Which of the following best describes the income recognition basis reflected by the equity method? Fair value basis Accrual basis Cash basis

Accrual basis

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 False

true

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 False

true

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

zero

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

indefinite

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

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

stockholders' equity

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 End of the current reporting period The acquisition date

Beginning of the current reporting period

Consolidation Entry A adjusts the subsidiary's assets to their unamortized acquisition-date fair value as of what date? The acquisition date End of the current reporting period Beginning of the current reporting period

Beginning of the current reporting period

A parent company, over time, will routinely make which of the following adjustments in applying the equity method to its investment in subsidiary account? Dividends from the subsidiary. Income as it is earned and reported by the subsidiary. Post-acquisition changes in the fair value of the subsidiary. Excess acquisition-date fair over book value amortization.

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

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

Which of the following Exhibit 3.4 balance accounts are eliminated for consolidated financial statement reporting? Investment in Sun Company Parrot Company's common stock Liabilities Goodwill

Investment in Sun Company

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? Included in consolidated dividend income. Not included having been eliminated in the consolidation process. As an increase in consolidated retained earnings. Included in consolidated dividends declared.

Not included having been eliminated in the consolidation process.

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? Subsidiary company balances only Both parent and subsidiary company balances Parent company balances only Neither parent nor subsidiary company balances

Parent company balances only

Why does Consolidation Entry S remove the subsidiary's stockholders' equity accounts? Because the subsidiary stockholders' equity accounts are reported in consolidated statements as part of the Investment in Subsidiary account. Because the subsidiary has been formally dissolved, its stockholders equity accounts no longer exist. Subsidiary ownership accounts are not relevant, because consolidated statements are prepared for the parent company owners.

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

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

The parent company accrues income as earned by the subsidiary. Unrealized gains on intra-entity transactions are deferred from income. The parent recognizes the income effect of amortizing excess subsidiary acquisition-date fair over book 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: Consolidated totals include the unamortized subsidiary acquisition-date excess of fair over book value allocations. True False

True

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

True

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

True

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

True