advanced accounting test 1

A statutory merger is a(n) A. business combination in which only one of the two companies continues to exist as a legal corporation. B. business combination in which both companies continues to exist. C. acquisition of a competitor. D. acquisition of a supplier or a customer. E. legal proposal to acquire outstanding shares of the target's stock.

A

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? A. 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. B. Net assets of the acquired company are maintained at book value and any excess of consideration transferred over book value of net assets acquired is allocated to goodwill. C. Acquired assets are revalued to their fair values. Acquired liabilities are maintained at book values. Any excess is allocated to goodwill. D. Acquired long-term assets are revalued to their fair values. Any excess is allocated to goodwill.

A

Push-down accounting is concerned with the A. impact of the purchase on the subsidiary's financial statements. B. recognition of goodwill by the parent. C. correct consolidation of the financial statements. D. impact of the purchase on the separate financial statements of the parent. E. recognition of dividends received from the subsidiary.

A

One company acquires another company in a combination accounted for as an acquisition. 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? A. It is the only method allowed by the SEC. B. It is relatively easy to apply. C. It is the only internal reporting method allowed by generally accepted accounting principles. D. Operating results on the parent's financial records reflect consolidated totals. E. When the initial method is used, no worksheet entries are required in the consolidation process.

B

Which of the following will result in the recognition of an impairment loss on goodwill? A. Goodwill amortization is to be recognized annually on a systematic and rational basis. B. Both the fair value of a reporting unit and its associated implied goodwill fall below their respective carrying values. C. The fair value of the entity declines significantly. D. The fair value of a reporting unit falls below the original consideration transferred for the acquisition. E. The entity is investigated by the SEC and its reputation has been severely damaged.

B

Which one of the following is a characteristic of a business combination accounted for as an acquisition? A. The combination must involve the exchange of equity securities only. B. The transaction establishes an acquisition fair value basis for the company being acquired. C. The two companies may be about the same size, and it is difficult to determine the acquired company and the acquiring company. D. The transaction may be considered to be the uniting of the ownership interests of the companies involved. E. The acquired subsidiary must be smaller in size than the acquiring parent.

B

All of the following would require use of the equity method for investments except: A. material intra-entity transactions. B. investor participation in the policy-making process of the investee. C. valuation at fair value. D. technological dependency. E. significant control.

C

How are stock issuance costs and direct combination costs treated in a business combination which is accounted for as an acquisition when the subsidiary will retain its incorporation? A. Stock issuance costs are a part of the acquisition costs, and the direct combination costs are expensed. B. Direct combination costs are a part of the acquisition costs, and the stock issuance costs are a reduction to additional paid-in capital. C. Direct combination costs are expensed and stock issuance costs are a reduction to additional paid-in capital. D. Both are treated as part of the acquisition consideration transferred. E. Both are treated as a reduction to additional paid-in capital.

C

In a transaction accounted for using the acquisition method where consideration transferred is less than fair value of net assets acquired, which statement is true? A. Negative goodwill is recorded. B. A deferred credit is recorded. C. A gain on bargain purchase is recorded. D. Long-term assets of the acquired company are reduced in proportion to their fair values. Any excess is recorded as a deferred credit. E. Long-term assets and liabilities of the acquired company are reduced in proportion to their fair values. Any excess is recorded as an extraordinary gain.

C

Which of the following internal record-keeping methods can a parent choose to account for a subsidiary acquired in a business combination? A. Initial value or book value. B. Initial value, lower-of-cost-or-market-value, or equity. C. Initial value, equity, or partial equity. D. Initial value, equity, or book value. E. Initial value, lower-of-cost-or-market-value, or partial equity.

C

Which of the following results in a decrease in the Equity in Investee Income account when applying the equity method? A. Dividends paid by the investor. B. Net income of the investee. C. Unrealized gain on intra-entity inventory transfers for the current year. D. Unrealized gain on intra-entity inventory transfers for the prior year. E. Extraordinary gain of the investee.

C

Which one of the following is a characteristic of a business combination that is accounted for as an acquisition? A. Fair value only for items received by the acquirer can enter into the determination of the acquirer's accounting valuation of the acquired company. B. Fair value only for the consideration transferred by the acquirer can enter into the determination of the acquirer's accounting valuation of the acquired company. C. Fair value for the consideration transferred by the acquirer as well as the fair value of items received by the acquirer can enter into the determination of the acquirer's accounting valuation of the acquired company. D. Fair value for only consideration transferred and identifiable assets received by the acquirer can enter into the determination of the acquirer's accounting valuation of the acquired company. E. Only fair value of identifiable assets received enters into the determination of the acquirer's accounting valuation of the acquired company.

C

Acquired in-process research and development is considered as A. a definite-lived asset subject to amortization. B. a definite-lived asset subject to testing for impairment. C. an indefinite-lived asset subject to amortization. D. an indefinite-lived asset subject to testing for impairment. E. a research and development expense at the date of acquisition.

D

After allocating cost in excess of book value, which asset or liability would not be amortized over a useful life? A. Cost of goods sold. B. Property, plant, & equipment. C. Patents. D. Goodwill. E. Bonds payable.

D

All of the following are acceptable methods to account for a majority-owned investment in subsidiary except A. The equity method. B. The initial value method. C. The partial equity method. D. The fair-value method. E. Book value method.

D

Consolidated net income using the equity method for an acquisition combination is computed as follows: A. Parent company's income from its own operations plus the equity from subsidiary's income recorded by the parent. B. Parent's reported net income. C. Combined revenues less combined expenses less equity in subsidiary's income less amortization of fair-value allocations in excess of book value. D. Parent's revenues less expenses for its own operations plus the equity from subsidiary's income recorded by parent. E. All of the above.

D

How is the fair value allocation of an intangible asset allocated to expense when the asset has no legal, regulatory, contractual, competitive, economic, or other factors that limit its life? A. Equally over 20 years. B. Equally over 40 years. C. Equally over 20 years with an annual impairment review. D. No amortization, but annually reviewed for impairment and adjusted accordingly. E. No amortization over an indefinite period time.

D

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? 1) Debit to the Investment account, and a Credit to the Equity in Investee Income account. 2) Debit to Cash (for dividends received from the investee), and a Credit to Dividend Revenue. 3) Debit to Cash (for dividends received from the investee), and a Credit to the Investment account. A. Entries 1 and 2. B. Entries 2 and 3. C. Entry 1 only. D. Entry 2 only. E. Entry 3 only.

D

Under the initial value method, when accounting for an investment in a subsidiary, A. Dividends received by the subsidiary decrease the investment account. B. The investment account is adjusted to fair value at year-end. C. Income reported by the subsidiary increases the investment account. D. The investment account remains at initial value. E. Dividends received are ignored.

D

Which of the following results in a decrease in the investment account when applying the equity method? A. Dividends paid by the investor. B. Net income of the investee. C. Net income of the investor. D. Unrealized gain on intra-entity inventory transfers for the current year. E. Purchase of additional common stock by the investor during the current year.

D

Which of the following results in an increase in the Equity in Investee Income account when applying the equity method? A. Amortizations of purchase price over book value on date of purchase. B. Amortizations, since date of purchase, of purchase price over book value on date of purchase. C. Extraordinary gain of the investor. D. Unrealized gain on intra-entity inventory transfers for the prior year. E. Sale of a portion of the investment at a loss.

D

What is the primary accounting difference between accounting for when the subsidiary is dissolved and when the subsidiary retains its incorporation? A. If the subsidiary is dissolved, it will not be operated as a separate division. B. If the subsidiary is dissolved, assets and liabilities are consolidated at their book values. C. If the subsidiary retains its incorporation, there will be no goodwill associated with the acquisition. D. If the subsidiary retains its incorporation, assets and liabilities are consolidated at their book values. E. If the subsidiary retains its incorporation, the consolidation is not formally recorded in the accounting records of the acquiring company.

E

Under the partial equity method of accounting for an investment, A. The investment account remains at initial value. B. Dividends received are recorded as revenue. C. The allocations for excess fair value allocations over book value of net assets at date of acquisition are applied over their useful lives to reduce the investment account. D. Amortization of the excess of fair value allocations over book value is ignored in regard to the investment account. E. Dividends received increase the investment account.

D

Which of the following statements is false regarding push-down accounting? A. Push-down accounting simplifies the consolidation process. B. Fewer worksheet entries are necessary when push-down accounting is applied. C. Push-down accounting provides better information for internal evaluation. D. Push-down accounting must be applied for all business combinations under a pooling of interests. E. Push-down proponents argue that a change in ownership creates a new basis for subsidiary assets and liabilities.

D

An upstream sale of inventory is a sale: A. between subsidiaries owned by a common parent. B. with the transfer of goods scheduled by contract to occur on a specified future date. C. in which the goods are physically transported by boat from a subsidiary to its parent. D. made by the investor to the investee. E. made by the investee to the investor.

E

Under the partial equity method, the parent recognizes income when A. dividends are received from the investee. B. dividends are declared by the investee. C. the related expense has been incurred. D. the related contract is signed by the subsidiary. E. it is earned by the subsidiary.

E

A company has been using the equity method to account for its investment. The company sells shares and does not continue to have significant control. Which of the following statements is true? A. A cumulative effect change in accounting principle must occur. B. A prospective change in accounting principle must occur. C. A retrospective change in accounting principle must occur. D. The investor will not receive future dividends from the investee. E. Future dividends will continue to reduce the investment account.

B

An investee company incurs an extraordinary loss during the period. The investor appropriately applies the equity method. Which of the following statements is true? A. Under the equity method, the investor only recognizes its share of investee's income from continuing operations. B. The extraordinary loss would reduce the value of the investment. C. The extraordinary loss should increase equity in investee income. D. The extraordinary loss would not appear on the income statement but would be a component of comprehensive income. E. The loss would be ignored but shown in the investor's notes to the financial statements.

B

How should a permanent loss in value of an investment using the equity method be treated? A. The equity in investee income is reduced. B. A loss is reported the same as a loss in value of other long-term assets. C. The investor's stockholders' equity is reduced. D. No adjustment is necessary. E. An extraordinary loss would be reported.

B

At the date of an acquisition which is not a bargain purchase, the acquisition method A. consolidates the subsidiary's assets at fair value and the liabilities at book value. B. consolidates all subsidiary assets and liabilities at book value. C. consolidates all subsidiary assets and liabilities at fair value. D. consolidates current assets and liabilities at book value, long-term assets and liabilities at fair value. E. consolidates the subsidiary's assets at book value and the liabilities at fair value.

C

A company should always use the equity method to account for an investment if: A. It has the ability to exercise significant influence over the operating policies of the investee. B. It owns 30% of another company's stock. C. It has a controlling interest (more than 50%) of another company's stock. D. The investment was made primarily to earn a return on excess cash. E. It does not have the ability to exercise significant influence over the operating policies of the investee.

A

Lisa Co. paid cash for all of the voting common stock of Victoria Corp. Victoria will continue to exist as a separate corporation. Entries for the consolidation of Lisa and Victoria would be recorded in A. a worksheet. B. Lisa's general journal. C. Victoria's general journal. D. Victoria's secret consolidation journal. E. the general journals of both companies.

A

Which of the following results in an increase in the investment account when applying the equity method? A. Unrealized gain on intra-entity inventory transfers for the prior year. B. Unrealized gain on intra-entity inventory transfers for the current year. C. Dividends paid by the investor. D. Dividends paid by the investee. E. Sale of a portion of the investment during the current year.

A

Which of the following statements is true regarding a statutory consolidation? A. The original companies dissolve while remaining as separate divisions of a newly created company. B. Both companies remain in existence as legal corporations with one corporation now a subsidiary of the acquiring company. C. The acquired company dissolves as a separate corporation and becomes a division of the acquiring company. D. The acquiring company acquires the stock of the acquired company as an investment. E. A statutory consolidation is no longer a legal option.

A

Which of the following statements is true regarding the acquisition method of accounting for a business combination? A. Net assets of the acquired company are reported at their fair values. B. Net assets of the acquired company are reported at their book values. C. Any goodwill associated with the acquisition is reported as a development cost. D. The acquisition can only be effected by a mutual exchange of voting common stock. E. Indirect costs of the combination reduce additional paid-in capital.

A

All of the following statements regarding the investment account using the equity method are true except: A. The investment is recorded at cost. B. Dividends received are reported as revenue. C. Net income of investee increases the investment account. D. Dividends received reduce the investment account. E. Amortization of fair value over cost reduces the investment account.

B

Which statement is true concerning unrealized profits in intra-entity inventory transfers when an investor uses the equity method? A. The investor and investee make reciprocal entries to defer and realize inventory profits. B. The same adjustments are made for upstream and downstream transfers. C. Different adjustments are made for upstream and downstream transfers. D. No adjustments are necessary. E. Adjustments will be made only when profits are known upon sale to outsiders.

B

According to GAAP, the pooling of interest method for business combinations A. Is preferred to the purchase method. B. Is allowed for all new acquisitions. C. Is no longer allowed for business combinations after June 30, 2001. D. Is no longer allowed for business combinations after December 31, 2001. E. Is only allowed for large corporate mergers like Exxon and Mobil.

C

A company has been using the fair-value method to account for its investment. The company now has the ability to significantly control the investee and the equity method has been deemed appropriate. Which of the following statements is true? A. A cumulative effect change in accounting principle must occur. B. A prospective change in accounting principle must occur. C. A retrospective change in accounting principle must occur. D. The investor will not receive future dividends from the investee. E. Future dividends will continue to be recorded as revenue.

C

According to GAAP regarding amortization of goodwill and other intangible assets, which of the following statements is true? A. Goodwill recognized in consolidation must be amortized over 20 years. B. Goodwill recognized in consolidation must be expensed in the period of acquisition. C. Goodwill recognized in consolidation will not be amortized but subject to an annual test for impairment. D. Goodwill recognized in consolidation can never be written off. E. Goodwill recognized in consolidation must be amortized over 40 years.

C

An example of a difference in types of business combination is: A. A statutory merger can only be effected by an asset acquisition while a statutory consolidation can only be effected by a capital stock acquisition. B. A statutory merger can only be effected by a capital stock acquisition while a statutory consolidation can only be effected by an asset acquisition. C. A statutory merger requires dissolution of the acquired company while a statutory consolidation does not require dissolution. D. A statutory consolidation requires dissolution of the acquired company while a statutory merger does not require dissolution. E. Both a statutory merger and a statutory consolidation can only be effected by an asset acquisition but only a statutory consolidation requires dissolution of the acquired company.

C

Racer Corp. acquired all of the common stock of Tangiers Co. in 2009. Tangiers maintained its incorporation. Which of Racer's account balances would vary between the equity method and the initial value method? A. Goodwill, Investment in Tangiers Co., and Retained Earnings. B. Expenses, Investment in Tangiers Co., and Equity in Subsidiary Earnings. C. Investment in Tangiers Co., Equity in Subsidiary Earnings, and Retained Earnings. D. Common Stock, Goodwill, and Investment in Tangiers Co. E. Expenses, Goodwill, and Investment in Tangiers Co.

C

Under the equity method, when the company's share of cumulative losses equals its investment and the company has no obligation or intention to fund such additional losses, which of the following statements is true? A. The investor should change to the fair-value method to account for its investment. B. The investor should suspend applying the equity method until the investee reports income. C. The investor should suspend applying the equity method and not record any equity in income of investee until its share of future profits is sufficient to recover losses that have not previously been recorded. D. The cumulative losses should be reported as a prior period adjustment. E. The investor should report these losses as extraordinary items.

C

When an investor sells shares of its investee company, which of the following statements is true? A. A realized gain or loss is reported as the difference between selling price and original cost. B. An unrealized gain or loss is reported as the difference between selling price and original cost. C. A realized gain or loss is reported as the difference between selling price and carrying value. D. An unrealized gain or loss is reported as the difference between selling price and carrying value. E. Any gain or loss is reported as part as comprehensive income.

C

When applying the equity method, how is the excess of cost over book value accounted for? A. The excess is allocated to the difference between fair value and book value multiplied by the percent ownership of current assets. B. The excess is allocated to the difference between fair value and book value multiplied by the percent ownership of total assets. C. The excess is allocated to the difference between fair value and book value multiplied by the percent ownership of net assets. D. The excess is allocated to goodwill. E. The excess is ignored.

C

When consolidating a subsidiary under the equity method, which of the following statements is true with regard to the subsidiary subsequent to the year of acquisition? A. All net assets are revalued to fair value and must be amortized over their useful lives. B. Only net assets that had excess fair value over book value when acquired by the parent must be amortized over their useful lives. C. All depreciable net assets are revalued to fair value at date of acquisition and must be amortized over their useful lives. D. Only depreciable net assets that have excess fair value over book value must be amortized over their useful lives. E. Only assets that have excess fair value over book value must be amortized over their useful lives

C

When is a goodwill impairment loss recognized? A. Annually on a systematic and rational basis. B. Never. C. If both the fair value of a reporting unit and its associated implied goodwill fall below their respective carrying values. D. If the fair value of a reporting unit falls below its original acquisition price. E. Whenever the fair value of the entity declines significantly.

C

Which of the following is false regarding contingent consideration in business combinations? A. Contingent consideration payable in cash is reported under liabilities. B. Contingent consideration payable in stock shares is reported under stockholders' equity. C. Contingent consideration is recorded because of its substantial probability of eventual payment. D. The contingent consideration fair value is recognized as part of the acquisition regardless of whether eventual payment is based on future performance of the target firm or future stock price of the acquirer. E. Contingent consideration is reflected in the acquirer's balance sheet at the present value of the potential expected future payment.

C

Which of the following statements is true regarding a statutory merger? A. The original companies dissolve while remaining as separate divisions of a newly created company. B. Both companies remain in existence as legal corporations with one corporation now a subsidiary of the acquiring company. C. The acquired company dissolves as a separate corporation and becomes a division of the acquiring company. D. The acquiring company acquires the stock of the acquired company as an investment. E. A statutory merger is no longer a legal option.

C

Which of the following statements is true? A. The pooling of interests for business combinations is an alternative to the acquisition method. B. The purchase method for business combinations is an alternative to the acquisition method. C. Neither the purchase method nor the pooling of interests method is allowed for new business combinations. D. Any previous business combination originally accounted for under purchase or pooling of interests accounting method will now be accounted for under the acquisition method of accounting for business combinations. E. Companies previously using the purchase or pooling of interests accounting method must report a change in accounting principle when consolidating those subsidiaries with new acquisition combinations.

C

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? A. Goodwill. B. Equipment. C. Investment in Subsidiary. D. Common Stock. E. Additional Paid-In Capital

C

Which statement is true concerning unrealized profits in intra-entity inventory transfers when an investor uses the equity method? A. The investee must defer upstream ending inventory profits. B. The investee must defer upstream beginning inventory profits. C. The investor must defer downstream ending inventory profits. D. The investor must defer downstream beginning inventory profits. E. The investor must defer upstream beginning inventory profits.

C

One company acquires another company in a combination accounted for as an acquisition. The acquiring company decides to apply the equity method in accounting for the combination. What is one reason the acquiring company might have made this decision? A. It is the only method allowed by the SEC. B. It is relatively easy to apply. C. It is the only internal reporting method allowed by generally accepted accounting principles. D. Operating results on the parent's financial records reflect consolidated totals. E. When the equity method is used, no worksheet entries are required in the consolidation process.

D

Under the equity method of accounting for an investment, A. The investment account remains at initial value. B. Dividends received are recorded as revenue. C. Goodwill is amortized over 20 years. D. Income reported by the subsidiary increases the investment account. E. Dividends received increase the investment account.

D

Using the acquisition method for a business combination, goodwill is generally defined as: A. Cost of the investment less the subsidiary's book value at the beginning of the year. B. Cost of the investment less the subsidiary's book value at the acquisition date. C. Cost of the investment less the subsidiary's fair value at the beginning of the year. D. Cost of the investment less the subsidiary's fair value at acquisition date. E. is no longer allowed under federal law.

D

When consolidating a subsidiary under the equity method, which of the following statements is true? A. Goodwill is never recognized. B. Goodwill required is amortized over 20 years. C. Goodwill may be recorded on the parent company's books. D. The value of any goodwill should be tested annually for impairment in value. E. Goodwill should be expensed in the year of acquisition.

D

Which one of the following varies between the equity, initial value, and partial equity methods of accounting for an investment? A. The amount of consolidated net income. B. Total assets on the consolidated balance sheet. C. Total liabilities on the consolidated balance sheet. D. The balance in the investment account on the parent's books. E. The amount of consolidated cost of goods sold.

D

Factors that should be considered in determining the useful life of an intangible asset include A. Legal, regulatory, or contractual provisions. B. The residual value of the asset. C. The entity's expected use of the intangible asset. D. The effects of obsolescence, competition, and technological change. E. All of the above choices are used in determining the useful life of an intangible asset.

E

How does the partial equity method differ from the equity method? A. In the total assets reported on the consolidated balance sheet. B. In the treatment of dividends. C. In the total liabilities reported on the consolidated balance sheet. D. Under the partial equity method, subsidiary income does not increase the balance in the parent's investment account. E. 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.

E

Which of the following is a not a reason for a business combination to take place? A. Cost savings through elimination of duplicate facilities. B. Quick entry for new and existing products into domestic and foreign markets. C. Diversification of business risk. D. Vertical integration. E. Increase in stock price of the acquired company.

E