AICPA Ch.1-5 Questions - Financial Accounting

Rowe Inc. owns 80% of Cowan Co.'s outstanding capital stock. On November 1, Rowe advanced $100,000 in cash to Cowan. What amount should be reported related to the advance in Rowe's consolidated balance sheet as of December 31? (AICPA 2011) A. $0 B. $ 20,000 C. $ 80,000 D. $ 100,000

A. $0 Consolidated financial statements should not include intercompany payables, receivables, or advances pertaining to consolidated subsidiaries. Intercompany advances must be eliminated from consolidated statements, in a manner similar to that used for receivables and payables. In addition, interest income and expense and interest accruals must be eliminated.

Tulip Co. owns 100% of Daisy Co.'s outstanding common stock. Tulip's cost of goods sold for the year totals $600,000 and Daisy's cost of goods sold totals $400,000. During the year, Tulip sold inventory costing $60,000 to Daisy for $100,000. By the end of the year, all transferred inventory was sold to third parties. What amount should be reported as cost of goods sold in the consolidated statement of income? (AICPA 2016) A. $900,000 B. $940,000 C. $960,000 D. $1,000,000

A. $900,000 $600K + $400K - $100K (TI) = $900K

Which of the following should be disclosed in a summary of significant accounting policies? (AICPA 2015) A. Basis of consolidation. B. Concentration of credit risk of financial instruments. C. Composition of plant assets. D. Adequacy of pension plan assets in relation to vested benefits.

A. Basis of consolidation.

Damon Co. purchased 100% of the outstanding common stock of Smith Co. in an acquisition by issuing 20,000 shares of its $1 par common stock that had a fair value of $10 per share and providing contingent consideration that had a fair value of $10,000 on the acquisition date. Damon also incurred $15,000 in direct acquisition costs. On the acquisition date, Smith had assets with a book value of $200,000, a fair value of $350,000, and related liabilities with a book and fair value of $70,000. What amount of gain should Damon report related to this transaction? (AICPA 2011) A. $ 55,000 B. $ 70,000 C. $ 80,000 D. $ 250,000

B. $ 70,000 Under the acquisition method, current assets, and noncurrent marketable securities of the acquired company are always recorded at their fair values and all liabilities assumed are recorded at their fair value (present value). If the fair value of the consideration transferred (including contingent consideration) is less than the fair value of the identifiable net assets, any excess is considered a bargain purchase. The acquirer recognizes a gain in earnings on the acquisition date.

A company incurred the following costs to complete a business combination in the current year Issuing securities $30,000 Registering securities 25,000 Legal fees 10,000 Due diligence costs 1,000 What amount should be reported as current-year expenses, not subject to amortization? (AICPA 2015) A. $ 1,000 B. $11,000 C. $36,000 D. $66,000

B. $11,000

A company acquires another company for $3,000,000 in cash, $10,000,000 in stock, and the following contingent consideration: $1,000,000 after Year 1, $1,000,000 after Year 2, and $500,000 after Year 3, if earnings of the subsidiary exceed $10,000,000 in each of the three years. The fair value of the contingent-based consideration portion is $2,100,000. What is the total consideration transferred for this business combination? (AICPA 2017) A. $15,500,000 B. $15,100,000 C. $13,000,000 D. $5,100,000

B. $15,100,000 In a business combination, the investment is valued at the fair value of the consideration given. The $15,100,000 acquisition value includes the cash of $3 million, the common stock of $10 million, and the fair value of the contingencies, which total $2.1 million.

King Inc. owns 70% of Simmon Co.'s outstanding common stock. King's liabilities total $450,000, and Simmon's liabilities total $200,000. Included in Simmon's financial statements is a $100,000 note payable to King. What amount of total liabilities should be reported in the consolidated financial statements? (AICPA 2013) A. $520,000 B. $550,000 C. $590,000 D. $650,000

B. $550,000 Because King owns 70% of Simmon Co.'s outstanding stock, King is regarded as having a controllable interest in Simmon Co. The total liabilities reported in the consolidated financial statements would be $550,000, which represents King's total liabilities of $450,000 and $100,000 of Simmon's liabilities, reflecting Simmon's total liabilities of $200,000 less the $100,000 note payable to King. Simmon's $100,000 note payable to King would be eliminated in the consolidated financial statements because the transaction would lack the criteria of being at arm's length.

At the beginning of the fiscal year, End Corp. purchased 25% of Turf Co. for $550,000. At the end of the fiscal year, Turf reported net income of $65,000 and declared and paid cash dividends of $30,000. End uses the equity method of accounting. At year end, what amount should End report in its balance sheet for the investment in Turf? (AICPA 2014) A. $550,000 B. $558,750 C. $566,250 D. $573,750

B. $558,750 Under the equity method, End will recognize 25% of Turf's income, $16,250, as an increase in the investment, and 25% of Turf's dividends, $7,500, as a reduction of the investment, resulting in a carrying value of $550,000 + $16,250 - $7,500 = $558,750.

Goodwill should be tested for value impairment at which of the following levels? (AICPA 2007) A. Each identifiable long-term asset. B. Each reporting unit. C. Each acquisition unit. D. Entire business as a whole.

B. Each reporting unit.

Sayon Co. issues 200,000 shares of $5 par value common stock to acquire Trask Co. in a purchase business combination. The market value of Sayon's common stock is $12. Legal and consulting fees incurred in relationship to the purchase are $110,000. Registration and issuance costs for the common stock are $35,000. What should be recorded in Sayon's additional paid-in capital account for this business combination? (AICPA 2008) A. $1,545,000 B. $1,400,000 C. $1,365,000 D. $1,255,000

C. $1,365,000 ($12-$5) × 200,000 shares - $35,000 = $1,365,000

On January 1, year 1, Peabody Co. purchased an investment for $400,000 that represented 30% of Newman Corp.'s outstanding voting stock. For year 1, Newman reported net income of $60,000 and paid dividends of $20,000. At year end, the fair value of Peabody's investment in Newman was $410,000. Peabody elected the fair value option for this investment. What amount should Peabody recognize in net income for year 1 attributable to the investment? (AICPA 2012) A. $6,000 B. $10,000 C. $16,000 D. $18,000

C. $16,000 Entities may elect the fair value option for recognized financial assets and liabilities. An entity can choose to measure at fair value an investment that would otherwise be accounted for using the equity method. Under the fair value option, income is calculated as the amount of the dividend received of $6,000 ($20,000 x 30%) plus the appreciation for the year of $10,000.

Bard Co. owned several subsidiaries at December 31. The following table shows each subsidiary's total liabilities, excluding intercompany transactions, and percentage of stock owned by Bard: (AICPA 2014) Subsidiary Total liabilities % owned Brock Co. $4,000,000 70 Harlson Co. 2,000,000 48 Porter Co. 7,000,000 80 Nortin Co. 5,000,000 100 What amount should Bard include as liabilities in its consolidated balance sheet at December 31? A. $ 5,000,000 B. $12,000,000 C. $16,000,000 D. $18,000,000

C. $16,000,000

How should the acquirer recognize a bargain purchase in a business acquisition? (AICPA 2013) A. As negative goodwill in the statement of financial position. B. As goodwill in the statement of financial position. C. As a gain in earnings at the acquisition date. D. As a deferred gain that is amortized into earnings over the estimated future periods benefited.

C. As a gain in earnings at the acquisition date. Assets and liabilities acquired in a business combination must be valued at their fair value. In a bargain purchase where the fair value of the net assets acquired is more than the consideration exchanged for the net assets, the difference is recognized as a gain by the acquirer at the time of the acquisition.

For purposes of consolidating financial interests, a majority voting interest is deemed to be: (AICPA 2017) A. 50 percent of the directly or indirectly owned outstanding voting shares of another entity. B. 50 percent of the directly or indirectly owned outstanding voting shares and at least 50 percent of the directly or indirectly owned outstanding nonvoting shares of another entity. C. Greater than 50 percent of the directly or indirectly owned outstanding voting shares of another entity. D. Greater than 50 percent of the directly or indirectly owned outstanding voting shares and at least 50 percent of the directly or indirectly owned outstanding nonvoting shares of another entity.

C. Greater than 50 percent of the directly or indirectly owned outstanding voting shares of another entity. A majority voting interest is achieved when control over an investee is established or more than 50 percent of the voting stock of the investee has been acquired.

A company has a 22% investment in another company that it accounts for using the equity method. Which of the following disclosures should be included in the company's annual financial statements? (AICPA 2013) A. The names and ownership percentages of the other stockholders in the investee company. B. The reason for the company's decision to invest in the investee company. C. The company's accounting policy for the investment. D. Whether the investee company is involved in any litigation.

C. The company's accounting policy for the investment. Choice "c" is correct. A company owning a 22% investment in another company in which the investment is accounted for using the equity method is considered as having "significant influence" over the company and is required to disclose the company's accounting policy for the investment.

Park, Inc. acquired 100% of Gravel Co.'s net assets. On the acquisition date, Gravel's accounting records reflected $50,000 of costs associated with in-process research and development activities. The fair value of the in-process research and development activities was $400,000. Park's consolidated intangible assets will increase by what amount, if any, as a result of the acquisition of the in-process research and development activities? (AICPA 2016) A. $0 B. $50,000 C. $350,000 D. $400,000

D. $400,000