Advanced Accounting Final

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An intra-entity transfer of a depreciable asset took place whereby the transfer price exceeded the book value of the asset. Which statement is true with respect to the year following the year in which the transfer occurred?

A worksheet entry is made with a debit to investment in subsidiary for a downstream transfer when the parent uses the equity method

Where is the translation adjustment reported in the parent company's financial statements?

Accumulated other comprehensive income

If a subsidiary re-acquires its outstanding shares from outside ownership for more than the noncontrolling interest valuation basis at the date of buying such treasury stock, which of the following statements is true?

Additional paid-in capital on the parent company's books will decrease

When is a goodwill impairment loss recognized?

After only definitive quantitative assessments of the fair value of goodwill is completed

Which of the following statements is true concerning the acquisition of existing debt of a consolidated affiliate in the year of the debt acquisition?

Any gain or loss is recognized in the year of acquisition on a consolidated income statement

Under the current rate method, how would cost of goods sold be translated?

Average rate

At the end of a partnership liquidation, how is any remaining cash distributed to the partners?

Based on the individual partners' final capital balances

How do intra-entity transfers of inventory affect the preparation of a consolidated statement of cash flows?

Because the consolidated balance sheet and income statement are used in preparing the consolidated statement of cash flows, no special elimination is required

In measuring the noncontrolling interest immediately following the date of acquisition, which of the following would not be indicative of the value attributed to the noncontrolling interest?

Book value of subsidiary net assets

A statutory merger is a(n)

Business combination in which only one of the two companies continues to exist as a legal corporation

Where do dividends paid to the noncontrolling interest of a subsidiary appear on a consolidated statement of cash flows?

Cash flows from financing activities

Under the temporal method, which accounts are remeasured using current exchange rates?

Cash, receivables, and most liabilities

Which is a true statement regarding the fundamental requirement of accounting for derivatives?

Changes in derivative fair value are included in comprehensive income

Consolidated net income using the equity method for an acquisition combination is computed as follows:

Combined revenues less combined expenses less equity in subsidiary's earnings less amortization of fair-value allocations in excess of book value

Which of the following variable interests entitles a holder to residual profits, losses, and dividends?

Common stock

How would consolidated earnings per share be calculated if the subsidiary has no convertible securities or warrants?

Consolidated net income divided by parent's number of shares outstanding

When a partnership is insolvent and a partner has a deficit capital account balance, that partner should:

Contribute enough cash to the partnership to offset their deficit

Strickland Company sells inventory to its parent, Carter Company, at a profit during 2020. Carter sells one-third of the inventory in 2020. In the consolidation worksheet for 2020, which of the following accounts would be debited to eliminate unrecognized intra-entity gross profit with regard to the 2020 intra-entity transfers?

Cost of goods sold

Under the current rate method, property, plant & equipment would be translated at what rate?

Current rate

Under the temporal method, inventory at net realizable value would be remeasured for the balance sheet at what rate?

Current rate

When a company applies the initial value method in accounting for its investment in a subsidiary, and the subsidiary reports income in excess of dividends paid, what entry would be made to convert to full-accrual totals in a consolidation worksheet for the second year?

DR Investment in subsidiary CR Retained earnings

The appropriate format of the December 31, 2020 closing entry for John & Hope Limited Liability Partnership, whose two partners had withdrawn their salaries from the partnership during the year, is:

DR John, Capital DR Hope, Capital CR John, Drawing CR Hope, Drawing

When a company applies the initial value method in accounting for its investment in a subsidiary and the subsidiary reports income less than dividends paid, what entry would be made to convert to full-accrual totals in a consolidation worksheet for the second year?

DR Retained earnings CR Investment in subsidiary

U.S. GAAP provides guidance for hedges of all the following sources of foreign exchange risk except

Deferred foreign currency gains and losses

In a business combination where a subsidiary retains its incorporation and which is accounted for under the acquisition method, how should stock issuance costs and direct combination costs be treated?

Direct combination costs are expensed as incurred and stock issuance costs result in a reduction to additional paid-in capital

How are direct and indirect costs accounted for when applying the acquisition method for a business combination?

Direct costs - expensed Indirect costs - expensed

Under the initial value method, the parent recognizes income when

Dividends are declared by the investee

All of the following statements regarding the investment account using the equity method are true except:

Dividends received are reported as revenue

In a situation where the investor exercises significant influence over the investee, which of the following entries is not actually posted to the books of the investor? (I) Debit to the Investment account, and a Credit to the Equity in Investee Income account. (II) Debit to Cash (for dividends received from the investee), and a Credit to Investment Income account. (III) Debit to Cash (for dividends received from the investee), and a Credit to the Dividend Receivable.

Entry II only

A variable interest entity can take all of the following forms except a(n):

Estate

According to GAAP regarding amortization of goodwill, which of the following statements is true?

Goodwill recognized in consolidation will not be amortized but subject to an annual test for impairment

Under the current rate method, common stock would be translated at what rate?

Historical rate

Under the temporal method, common stock would be remeasured at what rate?

Historical rate

Under the temporal method, depreciation expense would be remeasured at what rate?

Historical rate

Under the temporal method, property, plant & equipment would be remeasured at what rate?

Historical rate

Authoritative literature provides guidance for hedges of the following sources of foreign exchange risk. I. Recognized foreign currency denominated assets and liabilities. II. Unrecognized foreign currency firm commitments. III. Forecasted foreign currency denominated transactions.

I, II, and III

A U.S. company sells merchandise to a foreign company denominated in the foreign currency. Which of the following statements is true?

If the foreign currency appreciates, a foreign exchange gain will result

When a subsidiary is acquired sometime after the first day of the fiscal year, which of the following statements is true?

Income from subsidiary is recognized from date of acquisition to year-end

Under the equity method of accounting for an investment:

Income reported by the subsidiary increases the investment account

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

Investment in Subsidiary

Which of the following results in a decrease in the Equity in Investee Income account when applying the equity method?

Investor's share of gross profit from intra-entity inventory sales for the current year

One company acquires another company in a combination accounted for under the acquisition method. The acquiring company decides to apply the initial value method in accounting for the combination. What is one reason the acquiring company might have made this decision?

It is relatively easy to apply

On January 1, 2019, Dermot Company purchased 15% of the voting common stock of Horne Corp. On January 1, 2021, Dermot purchased 28% of Horne's voting common stock. If Dermot achieves significant influence with this new investment, how must Dermot account for the change to the equity method?

It must use the equity method for 2021 but should make no changes in its financial statements for 2020 and 2019

Which of the following has most of the characteristics of a general partnership except that it significantly reduces the partners' liability?

Limited Liability Partnership

Which of the following is a type of investment designed primarily for individuals who want the tax benefits of a partnership but who do not wish to work in a partnership or have unlimited liability?

Limited Partnership

Dilty Corp. owned a subsidiary in France. Dilty concluded that the subsidiary's functional currency was the U.S. dollar. Which one of the following statements would justify this conclusion?

Most of the subsidiary's sales and purchases were with companies in the U.S.

Which of the following statements is true regarding the acquisition method of accounting for a business combination?

Net assets of the acquired company are reported at their fair values

In a transaction accounted for using the acquisition method where consideration transferred exceeds book value of the acquired company, which statement is true for the acquiring company with regard to its investment?

Net assets of the acquired company are revalued to their fair values and any excess of consideration transferred over fair value of net assets acquired is allocated to goodwill

MacDonald, Inc. owns 80% of the outstanding stock of Stahl Corporation. During the current year, Stahl made $125,000 in sales to MacDonald. How does this transfer affect the consolidated statement of cash flows?

Not reported in the consolidated statement of cash flows

When a parent uses the initial value method throughout the year to account for its 80% investment in an acquired subsidiary, which of the following statements is true at the date immediately preceding the date on which adjustments are made on the consolidated worksheet?

Parent company dividends equal consolidated dividends

In reporting consolidated earnings per share when there is a wholly owned subsidiary, which of the following statements is true?

Parent company earnings per share equals consolidated earnings per share when the equity method is used

Which item is not shown on the statement of partnership liquidation?

Personal assets of the partners

Partnerships have alternative legal forms including all of the following except which of the following?

Subchapter S Partnership

When consolidating a foreign subsidiary, which of the following statements is true?

Subsidiary's cumulative translation adjustment is carried forward to the consolidated balance sheet

Which of the following statements is true regarding a statutory merger?

The acquired company dissolves as a separate corporation and becomes a division of the acquiring company

Which of the following statements regarding consolidation of a VIE with its primary beneficiary is true?

The allocation of the VIE's net income is based on an analysis of the underlying contractual arrangements between the primary beneficiary and other holders of variable interests

When preparing a consolidation worksheet for a parent and its foreign subsidiary accounted for under the equity method, which of the following statements is false?

The allocations of excess of fair value over book value at the date of acquisition are eliminated

Which of the following methods is not used to value a noncontrolling interest under circumstances where a control premium is applied to determine the appropriate value for such interest?

The application of a safe harbor discount rate

What is a company's functional currency?

The currency of the primary economic environment in which it operates

According to U.S. GAAP, when the local currency is the functional currency, which method is usually required for translating a foreign subsidiary's financial statements into the parent's reporting currency?

The current rate method

Which of the following is not a condition of accounting for hedge derivatives?

The derivative is minimally effective in offsetting changes in the cash flows or fair value related to the hedged item

Which of the following statements is true concerning the distribution of safe payments?

The distribution of safe payments assumes that any capital deficit balances will prove to be a total loss to the partnership

When applying the equity method, how is the excess of cost over book value calculated and accounted for?

The excess is allocated to the difference between fair value and book value multiplied by the percent ownership of net assets

All of the following are acceptable methods to account for a majority-owned investment in subsidiary except

The fair-value method

All of the following data points are needed to determine the fair value of a forward contract (at any point), except

The forward rate for a contract that has the same duration as the forward contract entered into

All of the following data may be needed to determine the fair value of a forward contract at any point in time except

The future spot rate

What accounting transactions are not recorded by an accountant during partnership liquidation?

The initiation of legal action by creditors of the partnership

Under the initial value method, when accounting for an investment in a subsidiary,

The investment account does not change from year to year

Which of the following statements is true regarding a statutory consolidation?

The original companies dissolve while remaining as separate divisions of a newly created company

A subsidiary issues new shares of common stock at an amount below book value. Outsiders buy all of these shares. Which of the following statements is true?

The parent's additional paid-in capital will be decreased

Which one of the following characteristics of preferred stock would make the stock a dilutive security for purposes of calculating earnings per share?

The preferred stock is convertible

The forward rate may be defined as

The price today at which a foreign currency can be purchased or sold in the future

An historical exchange rate for common stock of a foreign subsidiary is best described as

The rate when the common stock was originally issued for the acquisition transaction

Which of the following statements is correct regarding the admission of a new partner?

The right to participate in management of the business cannot be conveyed without the consent of other existing partners

Which statement is true concerning unrecognized profits in intra-entity inventory sales when an investor uses the equity method?

The same adjustments are made for upstream and downstream sales

Which of the following statements is true regarding the acquisition method of accounting for a business combination?

The transaction establishes an acquisition fair value basis for the company being acquired

When consolidating parent and subsidiary financial statements, which of the following statements is true?

The value of any goodwill should be tested annually for impairment in value

A net asset balance sheet exposure exists and the foreign currency depreciates. Which of the following statements is true?

There is a negative translation adjustment

A net asset balance sheet exposure exists and the foreign currency appreciates. Which of the following statements is true?

There is a positive translation adjustment

Where do dividends paid by a subsidiary to the parent company appear in a consolidated statement of cash flows?

They do not appear in the consolidated statement of cash flows

Where do intra-entity transfers of inventory appear in a consolidated statement of cash flows?

They do not appear in the consolidated statement of cash flows

The partnership of Clapton, Seidel, and Thomas is insolvent and will be unable to pay $30,000 in liabilities that are currently due. What recourse is available to the partnership's creditors?

They may seek remuneration from any partner they choose

How do outstanding subsidiary stock warrants affect the calculation of consolidated earnings per share?

They will only be included in diluted earnings per share if they are dilutive

An impairment model is used

To assess whether asset write-downs are appropriate for indefinite-lived assets

In comparing U.S. GAAP and International Financial Reporting Standards (IFRS) with regard to a basis for measurement of a noncontrolling interest, which of the following is true?

U.S. GAAP requires acquisition-date fair value measurement, but IFRS allows an option for acquisition-date fair value measurement

How does the partial equity method differ from the equity method?

Under the partial equity method, the balance in the investment account is not decreased by amortization on allocations made in the acquisition of the subsidiary

When is a goodwill impairment loss recognized?

When both the fair value of a reporting unit and its associated implied goodwill fall below their respective carrying values

A proposed schedule of liquidation is developed

based on the underlying assumption that all future events will result in total losses

A necessary condition to use the equity method of reporting for an equity investment is that the investor company must

have the ability to exercise significant influence over the operating and financial policies of the investee

When the hybrid method is used to record the withdrawal of a partner, the partnership

revalues assets and liabilities but does not record goodwill

The disadvantages of the partnership form of business organization, compared to corporations, include

unlimited liability for the partners

The dissolution of a partnership occurs

when there is any change in the individuals who make up the partnership

Which of the following statements are true concerning variable interest entities (VIEs)? (1.) The role of the VIE equity investors can be fairly minor. (2.) A VIE may be created specifically to benefit the business enterprise that established it with low-cost financing. (3.) VIE governing agreements often limit activities and decision-making. (4.) VIEs usually have a well-defined and limited business activity.

1, 2, 3, and 4

To account for a forward contract cash flow hedge of a foreign currency denominated asset or liability at the balance sheet date:

1. Adjust hedged asset or liability to fair value, with counterpart (change in fair value) reported as foreign exchange gain or loss in net income, 2. Adjust forward contract to fair value (either an asset or a liability), with counterpart (change in fair value) reported in OCI, 3. Recognize a loss or gain related to the hedging instrument to offset the foreign exchange gain or loss on the hedged item recognized in 1, and 4. Recognize a portion of the forward points (discount or premium) in net income with the counterpart reported in OCI.

To account for a forward contract cash flow hedge of a foreign currency denominated asset or liability at initiation date requires which of the following?

1. Recognize the transaction (sale or purchase) and foreign currency denominated asset or liability 2. No entry related to forward contract (zero fair value)

Which statement is true regarding a foreign currency option?

A foreign currency option gives the holder the right but not the obligation to buy or sell foreign currency in the future

The accounting problems encountered in consolidated intra-entity debt transactions when the debt is acquired by an affiliate from an outside party include all of the following except:

A gain or loss must be recognized by both parent and subsidiary companies

If new bonds are issued from a parent to its subsidiary, which of the following statements is false?

A net gain or loss on the bond transaction will be reported

Which of the following is not a characteristic of a partnership?

A partnership requires written Articles of Partnership

When an investor sells shares of its investee company, which of the following statements is true?

A recognized gain or loss is reported as the difference between selling price and carrying value


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