Advanced Accounting Test 1

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 as equity method losses in its income statement.

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.

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) Interchange of managerial personnel.

C) Valuation at fair value.

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) The fair-value method.

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 does not change from year to year. E) Dividends received are ignored.

D) The investment account does not change from year to year.

When consolidating parent and subsidiary financial statements, 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) The value of any goodwill should be tested annually for impairment in value.

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 for a consolidation worksheet for the second year? A) Retained earnings Investment in subsidiary B) Investment in subsidiary Retained earnings C) Investment in subsidiary Equity in subsidiary's income D) Equity in subsidiary's income Investment in subsidiary E) Additional paid-in capital Retained earnings

B Investment in subsidiary Retained earnings

Tower Inc. owns 30% of Yale Co. and applies the equity method. During the current year, Tower bought inventory costing $66,000 and then sold it to Yale for $120,000. At year-end, only $24,000 of merchandise was still being held by Yale. What amount of intra-entity gross profit must be deferred by Tower? A) $ 6,480. B) $ 3,240. C) $10,800. D) $16,200. E) $ 6,610.

B) $ 3,240.

Assume that Bullen issued 12,000 shares of common stock, with a $5 par value and a $47 fair value, to obtain all of Vicker's outstanding stock. In this acquisition transaction, how much goodwill should be recognized? A) $144,000. B) $104,000. C) $ 64,000. D) $ 60,000. E) $ 0.

B) $104,000.

Assume that Bullen paid a total of $480,000 in cash for all of the shares of Vicker. In addition, Bullen paid $35,000 for secretarial and management time allocated to the acquisition transaction. What will be the balance in consolidated goodwill?

B) $20,000.

. 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 in the same manner as a loss in value of other long-term assets. C) The investor's stockholders' equity is reduced. D) No adjustment is necessary. E) Record an offset to cash.

B) A loss is reported in the same manner as a loss in value of other long-term assets.

A company has been using the fair-value method to account for its investment. The company now has the ability to significantly influence 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.

B) A prospective change in accounting principle must occur.

On January 1, 2018, Jordan Inc. acquired 30% of Nico Corp. Jordan used the equity method to account for the investment. On January 1, 2019, Jordan sold two-thirds of its investment in Nico. It no longer had the ability to exercise significant influence over the operations of Nico. How should Jordan account for this change? A) Jordan should continue to use the equity method to maintain consistency in its financial statements. B) Jordan should restate the prior years' financial statements and change the balance in the investment account as if the fair-value method had been used since 2018. C) Jordan has the option of using either the equity method or the fair-value method for 2018 and future years. D) Jordan should report the effect of the change from the equity to the fair-value method as a retrospective change in accounting principle.

Jordan should use the fair-value method for 2019 and future years, but should not make a retrospective adjustment to the investment account.

Which of the following is not a factor to be considered when determining the useful life of an intangible asset? A) Legal, regulatory or contractual provisions. B) The effects of obsolescence. C) The expected use of the asset by the organization. D) The fair value of the asset. E) The level of maintenance expenditures that will be required to obtain expected future benefits.

D) The fair value of the asset.

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) A worksheet.

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

An impairment model is used A) To assess whether asset write-downs are appropriate for indefinite-lived assets. B) To calculate the fair value of intangible assets. C) To calculate the amortization of indefinite-lived assets over their useful lives. D) To determine whether the fair value of assets should be recognized. E) To determine the likelihood that the fair value of an assumed liability will increase.

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

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, and long-term assets and liabilities at fair value. E) Consolidates the subsidiary's assets at book value and the liabilities at fair value.

C) Consolidates all subsidiary assets and liabilities at fair value.

According to GAAP, which of the following is true with respect to the pooling of interest method of accounting for business combinations? A) It was the only method used prior to 2002. B) It must be used for all new acquisitions. C) GAAP allowed its use prior to 2002. D) It, or the acquisition method, may be used at the acquirer's discretion. E) GAAP requires it to be used instead of the acquisition method for business combinations for which $50 billion or more in consideration is transferred.

C) GAAP allowed its use prior to 2002.

According to GAAP regarding amortization of goodwill, 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) Goodwill recognized in consolidation will not be amortized but subject to an annual test for impairment.

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) Initial value, equity, or partial equity.

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) Investment in Subsidiary.

. Which statement is true concerning unrecognized profits in intra-entity inventory sales 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) The investor must defer downstream ending inventory profits.

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) Amortization of the excess of fair value allocations over book value is ignored in regard to the investment account.

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) An indefinite-lived asset subject to testing for impairment.

Which of the following is not an example of an intangible asset? A) Customer list B) Database C) Lease agreement D) Broken equipment E) Trademark

D) Broken equipment

Using the acquisition method for a business combination, goodwill is generally calculated as the: 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) Zero, it is no longer allowed under federal law.

D) Cost of the investment less the subsidiary's fair value at acquisition date.

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. A) Entries I and II. B) Entries II and III. C) Entry I only. D) Entry II only. E) Entry III only.

D) Entry II only.

What is the primary difference between: (i) accounting for a business combination when the subsidiary is dissolved; and (ii) accounting for a business combination 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) If the subsidiary retains its incorporation, the consolidation is not formally recorded in the accounting records of the acquiring company.

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) Increase in stock price of the acquired company.

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) It is earned by the subsidiary.

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) Made by the investee to the investor.

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) 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.