Chapter 3

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 (1) process.

1. consolidation

When a parent includes equity method earnings with its own earnings, the parent's net income equals consolidated net income. As a result, the equity method is often referred to as a single-line (1).

1. consolidation

When a subsidiary's tangible asset has an excess acquisition-date book over fair value, Consolidation Entry E will show a (1) to depreciation expense.

1. credit

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 (1) interest expense.

1. decrease

Periodic amortization expense should be recognized for the acquisition-date fair values of acquired subsidiary intangible assets with (1) useful lives.

1. definite

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 (1) long-term debt.

1. increase

Impairment testing (as opposed to amortization) is considered appropriate for measuring a decline in goodwill because goodwill is considered to have an (1) life.

1. indefinite

The acquisition-date fair values assigned to an acquired subsidiary's intangible assets should be amortized over their useful lives unless such life is considered (1).

1. indefinite

In applying a qualitative test as to whether a reporting unit's goodwill is impaired, a firm assesses the (1) that a reporting unit's fair value is less than its carrying amount.

1. likelihood

Contingent stock issued in connection with a business combination is typically recorded by the parent as a component of (1) (2).

1. shareholders 2. equity

The label "S" in Consolidation Worksheet Entry S refers to the subsidiary's (1) (2) accounts.

1. stockholders' 2. equity

Consolidation entries S and A are part of a sequence of worksheet adjustments that bring the Investment in Subsidiary account to a (1) balance.

1. zero

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 (1) balance as part of the consolidation process.

1. zero

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 (1) balance.

1. zero

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

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

In the quantitative goodwill impairment test, for each reporting unit

a comparison is made between the reporting unit's carrying amount (including goodwill) and fair value.

When the parent uses the equity method, Consolidation Entry I

removes the parent's recorded equity income.

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

Retained earnings (ending balance) Net income

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

fair

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.

Consolidation Entry P

removes the balances from intra-entity receivables and payables.

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

revenues. net income. expenses.

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

revenues and expenses. assets and liabilities.

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 (1) balance as part of the consolidation process.

1. zero

Select all that apply 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. Excess acquisition-date fair over book value amortization. Income as it is earned and reported by the subsidiary.

Select all that apply Which of the following are descriptive of goodwill impairment accounting under IFRS?

Goodwill is tested for impairment using a one-step approach. Goodwill recognized in a business combination is allocated across cash-generating units expected to benefit from the business combination. Goodwill is considered impaired if the carrying amount of a cash-generating unit exceeds its fair value.

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 (1) balance.

1. zero

Subsequent to acquisition, consolidated depreciation expense is based upon

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

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

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

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.

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

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

By recognizing subsidiary income as it is earned, rather than when cash is received through a dividend, the equity method embraces the (1) method of accounting.

1. accrual

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- (1) basis.

1. accrual

Under the initial value method, the parent records income when the subsidiary declares a (1).

1. dividend

In the quantitative test for goodwill impairment, if an individual reporting unit's fair value exceeds its carrying amount, goodwill is not considered (1) and no further procedures are needed.

1. impaired

Because goodwill has an indefinite life, rather than amortization the FASB utilizes an (1) approach to assessing the appropriateness of reported values for goodwill.

1. impairment

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 (1) company balances after appropriate adjustments.

1. parent

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 (1) (2) becomes misstated and must be appropriately established.

1. retained 2. earnings

Select all that apply The following facts and circumstances may be useful in judging that a reporting unit's carrying amount exceeds its fair value.

A deterioration in macroeconomic conditions that affect the firm. Declining operating cash flows. Increases in materials and labor that the firm may be unable to pass along to its customers.

Select all that apply Under the partial equity method the parent records income from it subsidiary as

An increase in the investment in subsidiary account Equity in subsidiary earnings

Select all that apply How does a parent company account for contingent consideration at the date of the acquisition of a subsidiary company?

An obligation for contingent consideration classified as equity is recorded as a additional paid-in capital for its acquisition-date fair value. A cash payment contingency based on future performance is recorded as a liability for its acquisition-date fair value.

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

Select all that apply 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?

Income from the subsidiary Retained earnings Investment in subsidiary

Select all that apply 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.

Income from the subsidiary. Retained earnings. The investment account.

Select all that apply How do the consolidation worksheets compare across Exhibit 3.5 (parent uses the equity method) and Exhibit 3.9 (parent uses the initial value method)?

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

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

No effect.

Why does the FASB allow a firm the option to assess qualitative factors to determine whether further testing is required for detecting goodwill impairment?

The determination of fair values for a reporting unit's assets and liabilities is a costly periodic exercise.

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

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

True

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

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.

When the parent uses the equity method, Consolidation Entry D

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

Select all that apply Possible methods for determining the fair value of a reporting unit for goodwill impairment testing include

prices of comparable businesses. the use of market prices. present value techniques.

Select all that apply 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.

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

reduces the subsidiary's dividends balance.

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.

The values assigned to intangible assets with indefinite useful lives are

subject to periodic impairment testing.

Select all that apply When a firm reports a goodwill impairment loss, additional disclosures are required to describe

the facts and circumstances leading to the impairment. how the firm determined the fair value of the reporting unit.

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.

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

the partial equity method. the initial value method. the equity method.

Consolidation Entry E recognizes amortization expenses related to

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

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

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

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 (1) (2) by the parent.

1. consideration 2. transferred

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 (1) totals.

1. consolidated

Subsidiary dividends attributable to its parent are excluded from (1) totals because they represent an intra-entity transfer with no financial effect outside the reporting entity.

1. consolidated

Consolidation Entry P removes intra-entity payable and receivable balances because the parent and subsidiary companies are viewed as a single (1) for financial reporting purposes.

1. entity

Select all that apply 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)?

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

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.

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.

Select all that apply Why is goodwill tested at the reporting unit level rather than the combined entity level?

Synergies represented by goodwill exist within the distinct operating lines represented by reporting units. A goodwill impairment in one reporting unit may be offset by an increase in goodwill in another unit thus preventing the detection of the impairment.

Are the acquisition-date fair values of subsidiary intangible assets amortized to expense across time on consolidated financial statements?

Yes, but only for intangible assets with definite useful lives.

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.

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- (1) basis.

1. accrual

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 (1) expense related to acquisition-date fair value adjustments to the subsidiary's assets and liabilities.

1. amortization

Rather than the term "reporting units," IFRS uses the terminology (1) - (2) units to describe the business components that form the basis for goodwill impairment testing.

1. cash 2. generating

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

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

When the parent employs either the initial value or the partial equity method, establishing an appropriate beginning (1) (2) balance for the parent is crucial to the preparation of consolidated financial statements.

1. retained 2. earnings

True or false: Included in the consolidated totals are the unamortized subsidiary acquisition-date excess fair over book value allocations.

True

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

Accrual basis

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 (1) and (2) to arrive at full-accrual ending retained earnings.

1. revenues 2. expenses

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