Advanced Final Exam - Chapter 3

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

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.

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) Income reported by the subsidiary increases the investment account.

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) Both the fair value of a reporting unit and its associated implied goodwill fall below their respective carrying values.

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? 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) It is relatively easy to apply.

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 for a consolidation worksheet in 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) Investment in subsidiary Additional paid-in capital E) Retained earnings Additional paid-in capital

A) Retained earnings Investment in subsidiary

When a company applies the partial equity method in accounting for its investment in a subsidiary and the subsidiary's equipment has a fair value greater than its book value, what consolidation worksheet entry is made in a year subsequent to the initial acquisition of the subsidiary? A) Retained earnings Investment in subsidiary B) Investment in subsidiary Retained earnings C) Investment in subsidiary Equity in subsidiary's income D) Investment in subsidiary Additional paid-in capital E) Retained earnings Additional paid-in capital

A) Retained earnings Investment in subsidiary

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.

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

When is a goodwill impairment loss recognized? A) Only after both a quantitative and qualitative assessment of the fair value of goodwill of a reporting unit. B) After only definitive quantitative assessments of the fair value of goodwill is completed. C) After only definitive qualitative assessments of the fair value of goodwill is completed. D) If the fair value of a reporting unit falls to zero or below its original acquisition price. E) Never.

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

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.

B) Only net assets that had excess fair value over book value when acquired by the parent must be amortized over their useful lives.

With respect to the recognition of goodwill in a business combination, which of the following statements is true? A) Only US GAAP requires recognition of goodwill when the fair value of the consideration transferred exceeds the net fair value of assets and liabilities. B) US GAAP standards require goodwill to be allocated to reporting units expected to benefit from the goodwill. C) Only IFRS standards require annual assessments for goodwill impairment. D) IFRS requires a reporting unit's implied fair value for goodwill to be calculated as the excess of such unit's fair value over the fair value of its identifiable net assets. E) Neither US GAAP, nor IFRS, provide that goodwill impairments will not be recoverable once recognized.

B) US GAAP standards require goodwill to be allocated to reporting units expected to benefit from the goodwill.

Consolidated net income using the equity method for an acquisition combination is computed as follows: A) Parent company's revenues from its own operations plus subsidiary retained earnings. B) Parent's reported net income plus subsidiary dividends. C) Combined revenues less combined expenses less equity in subsidiary's earnings 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 earnings less subsidiary dividends. E) None of these answer choices are correct.

C) 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 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) Contingent consideration is recorded because of its substantial probability of eventual payment.

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.

Racer Corp. acquired all of the common stock of Tangiers Co. in 2016. 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) Investment in Tangiers Co., Equity in Subsidiary Earnings, and Retained Earnings.

When is a goodwill impairment loss recognized? A) Annually on a systematic and rational basis. B) Never. C) When 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) When both the fair value of a reporting unit and its associated implied goodwill fall below their respective carrying values.

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.

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) No amortization, but annually reviewed for impairment and adjusted accordingly.

One company acquires another company in a combination accounted for under the acquisition method. 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) Operating results on the parent's financial records reflect consolidated totals.

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) The balance in the investment account on the parent's books.

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.

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.

According to the FASB ASC regarding the testing procedures for Goodwill Impairment, the proper procedure for conducting impairment testing is: A) Goodwill recognized in consolidation may be amortized uniformly and only tested if the amortization method originally chosen is changed. B) Goodwill recognized in consolidation must only be impairment tested prior to disposal of the consolidated unit to eliminate the impairment of goodwill from the gain or loss on the sale of that specific entity. C) Goodwill recognized in consolidation may be impairment tested in a two-step approach, first by quantitative assessment of the possible impairment of the fair value of the unit relative to the book value, and then a qualitative assessment as to why the impairment, if any, occurred for disclosure. D) Goodwill recognized in consolidation may be impairment tested in a two-step approach, first by qualitative assessment of the possibility of impairment of the unit fair value relative to the book value, and then quantitative assessments as to how much impairment, if any, occurred for disclosure. E) Goodwill recognized in consolidation may be impairment tested in a two-step approach, first by qualitative assessment of the possibility of impairment of the unit fair value relative to the book value, and then quantitative assessments as to how much impairment, if any, occurred for asset write-down.

E) Goodwill recognized in consolidation may be impairment tested in a two-step approach, first by qualitative assessment of the possibility of impairment of the unit fair value relative to the book value, and then quantitative assessments as to how much impairment, if any, occurred for asset write-down.

With respect to identifiable intangible assets other than goodwill, which of the following is true? A) If the value of the identified asset meets a de minimis exception, the entity may elect to treat it as goodwill. B) An identifiable intangible asset with an indefinite useful life must be assessed for impairment once every three years. C) If the average fair value of the asset is less than the average carrying amount of the asset with respect to, and determined for, the preceding three-year period, the asset is considered impaired and the entity may recognize a loss. D) A quantitative evaluation of value is required each year regardless of circumstances. E) If a qualitative assessment of the asset performed by an entity indicates impairment is likely, a quantitative assessment must be performed to determine whether there has been a loss in fair value.

E) If a qualitative assessment of the asset performed by an entity indicates impairment is likely, a quantitative assessment must be performed to determine whether there has been a loss in fair value.

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.

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.