Advanced Financial Accounting Chapter #3 General

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 Consolidation entry A brings the subsidiary asset to its beginning-of-the-year balance. The consolidation entry E completes the adjustment for the current year.

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

True Goodwill is often recognized as an asset created in a business combination. Consolidation Entry A allocates the portion of the investment account represented by goodwill.

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.

Goodwill is not amortized on the Exhibit 3.7 consolidation worksheet because it is considered a(n)

Indefinite/Perpetual Lived Asset

The label "S" in Consolidation Worksheet Entry S refers to the subsidiary's

Stockholders' Equity Accounts

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. intra-entity receivable and payables are eliminated. subsidiary assets and liabilities are adjusted to reflect acquisition-date fair values net of post-acquisition amortization.

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.

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.

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

revenues. net income. expenses.

Consolidation Entry E recognizes amortization expenses related to

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

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 _ balance as part of the consolidated process.

zero

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

Impairment approach

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 Investment in subsidiary Retained earnings

Which of the following account balances are identical across the parent's records and consolidated totals when the parent applies the equity method for its Investment in Subsidiary account?

Net income and Retained Earnings

Consolidation Entry I

brings the "Equity in Subsidiary Earnings" account to a zero balance

When the parent applies the equity method for its 100% owned subsidiary, its Equity in Subsidiary Earnings account balance equals the effect of the subsidiary's income on

consolidated net income

Under the initial value method of accounting for an investment in a subsidiary company, the parent recognizes income when the subsidiary

declares a dividend

Entry S

eliminates the equity accounts of the subsidiary

When the parent uses the equity method, Consolidation Entry D

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

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.

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

reduces the subsidiary's dividends balance.

Book value

the difference between the cost of a depreciable asset and its related accumulated depreciation

Using the equity method, which of the following affects the Investment in Subsidiary account on the parent's books?

the original consideration transferred for the investment increases in subsidiary equity from subsidiary net income decreases in subsidiary equity from subsidiary dividends

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.

When the parent has applied the equity method in accounting for the earnings of its subsidiary, consolidated retained earnings will equal?

the parent's retained earnings balance

A parent company controls a subsidiary company through ownership of 100% of the subsidiary's voting stock. How are cash dividends declared by the subsidiary on its voting stock treated in the parent's consolidated financial reports?

Not included having been eliminated in the consolidation process.

Within the consolidated entity, goodwill impairment tests are conducted at the

Reporting Unit Level

What are some examples of Exhibit 3.4 income statement accounts that are simply added together (without adjustment)?

Revenues & Cost of Goods Sold

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 consolidation

Subsequent to acquisition, consolidated depreciation expense is based upon:

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

True or false: Consolidated totals include the unamortized subsidiary acquisition-date excess of fair over book value allocations.

True The valuation basis for an acquired subsidiary's assets is acquisition-date fair value over amortization.

Consolidation Entry P removes intra-entity payable and receivable balances because the parent and subsidiary companies are viewed as

A Single Entity

Equity in Subsidiary Earnings and Investment in Subsidiary Accounts are ___ in consolidation

Eliminated or "zeroed" out

Exhibit 3.4 shows Parrot Company's net income equal to $693,000. Consolidated net income is also equal to $693,000 because the parent company, in its internal financial records, employs the ___ method to account for its investment in the subsidiary.

Equity

By recognizing subsidiary income as it is earned, rather than when cash is received through a dividend, the equity method embraces the

Accrual Method of Accounting

What does "consideration" mean in terms of accounting?

Amount paid for a part or the entirety of a subsidiary company's outstanding voting stock.

True or false: Worksheet consolidation entries are not posted to the books of either the parent or the subsidiary.

True Consolidation entries are only used to adjust the parent and subsidiary balances on a worksheet to help prepare consolidated financial statements.

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

credit

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

Fair Values

True or false: The balances reported in consolidated financial statements will differ depending on the parent's selection of an investment accounting method (e.g., equity, initial value, or partial equity)

False The selection of particular investment accounting method does not affect the consolidated totals. In all cases the parent's investment and subsidiary income accounts are brought to a zero balance.

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 ___ company balances after appropriate adjustments.

Parent

Which of the following is a characteristic of the partial equity method of accounting for a parent company's investment in a subsidiary company?

The parent company accrues income as reported by the subsidiary.

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

When the parent applies the equity method for its 100% owned subsidiary, its Equity in Subsidiary Earnings account balance equals the effect of the subsidiary's income on

Consolidated Net Income

Reporting unit

For goodwill testing purposes, operating units within a combined entity that report information about their earnings activities to upper management are designated as reporting units.

Impairment Testing

accounting procedure carried out to find out if an asset is impaired i.e. whether the economic benefits that the asset embodies have dropped drastically. Under US GAAP, if the carrying value of an asset exceeds the sum of undiscounted expected cash flows of an asset, the asset is impaired.

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

Accrual Basis

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 Consolidation Entry A adjusts the subsidiary's assets to unamortized fair value as of the beginning of the current period. Then Consolidation Entry E finishes the update to the end of the current period.

Under the initial value method, the parent recognizes income when its subsidiary declares a dividend. Because of the brief time span between dividend declarations and cash payments, the initial value is said to reflect the _ basis for income recognition.

Cash

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

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

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

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

Fair Value

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

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

Zero balance

When a subsidiary's acquisition-date fair values exceed its book values for its limited-lived assets, the equity method records over time

a reduction in Equity in Subsidiary Earnings for amortization expense.

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.

Subsidiary dividends are excluded from consolidated retained earnings because they are attributable to the parent company and not to an

outside/external party

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.

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.

When the parent uses the equity method, Consolidation Entry I

removes the parent's recorded equity income.

The values assigned to intangible assets with indefinite useful lives are

subject to periodic impairment testing.

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 consolidation pocess.

Which of the following represent components of subsidiary income recognized when the parent applies the partial equity method?

The parent's share of the subsidiary's reported income.