ACTG 450 Questions (Start - Midterm 1)

Which of the following are included in net income for an investment in equity shares accounted for under the fair-value method? a. Excess acquisition-date fair over book value amortization. b. Dividends from the investee. c. Investee other comprehensive income. d. Recognition of intra-entity gross profits accompanied by sales to outside entities.

b. Dividends from the investee.

For a 100% business acquisition where dissolution of the acquired firm does not occur, the parent company records on its books a. the fair values of the individual assets acquired and liabilities assumed. b. goodwill resulting from the business combination. c. the fair value of the acquired firm in an investment account.

c. the fair value of the acquired firm in an investment account.

Which of the following best describes a statutory consolidation? a. One company acquires the net assets of another firm and the acquired firm then is dissolved as a separate legal entity. b. One company acquires a majority interest in another company's voting stock. c. Both of the companies involved retain their separate legal existences. d. Two or more companies transfer their assets (and liabilities) or capital stock to a newly formed entity.

d. Two or more companies transfer their assets (and liabilities) or capital stock to a newly formed entity.

The sole criterion for application of the equity method for an investment in the ownership shares of another company is a. the ability to exercise control over an investee even though the investor holds 50% or less of the common stock. b. evidence that an investor does not exercise significant influence over an investee. c. ownership of voting equity shares in another company. d. the ability to exercise significant influence over an investee even though the investor holds 50% or less of the common stock.

d. the ability to exercise significant influence over an investee even though the investor holds 50% or less of the common stock.

An investor that accounts for an equity investment under the cost method records income from the investment based on its share of ___________________ declared from the investee.

dividends

One of the four non-routine issues that can arise which necessitates special procedures to apply the equity method is the reporting of the sale of a(n) ___________________ investment.

equity

The ability to exercise significant influence over the operating and financial policies of an investee company is the sole criterion for application of the ______________ method.

equity

When an equity method investment suffers a permanent decline in value, the investor recognizes an impairment loss and writes down the investment account to _______________ value.

fair

As of the date the equity method become applicable for an investment, the investor allocates its purchase price to its share of the investee's assets and liabilities based on their individual _________________ ______________ values. (2 words)

fair market

The measurement attribute used by an acquirer to recognize an acquired firm's assets and liabilities is ___________________ ___________________.

fair value

Even though measurement of an intangible asset (e.g., unpatented technology or customer relationships) may lack precision, recognition of the identified intangible may result in greater faithful representation. total consolidated assets. goodwill.

faithful representation. Reason: if an intangible asset is unrecognized, goodwill increases, thus leaving total assets unchanged. Reason: less goodwill results when more identified intangibles are recognized

Under the equity method, the excess of the investment cost over the proportionately-owned acquisition-date fair value of the investee's net identifiable assets is allocated to the asset __________________ .

goodwill

An excess price paid by an investor company over the percentage book value of the investee attributable to a depreciable asset will likely affect the equity method ______________________ recognized by the investor company over time.

income

The term used to describe inventory sales between an investor company and its equity-method investee is ____________-_____________ inventory sales

intra-entity

The investor decreases its ________________ account for its share of investee cash dividends.

investment

When an equity-method investment account balance is reduced to zero, the investor should discontinue use of the equity method rather than establish a _______________ balance.

negative

If an increase in an investment now provides an investor with the ability to exercise significant influence over an investee, the change to the equity method of investment accounting is applied on a _________________ basis.

prospective

When an equity-method investee company's activities require recognition of other comprehensive income (OCI), the investor company a. records its proportionate share of the investee's OCI as AOCI on its financial records. b. records its proportionate share of the investee's OCI as "equity in investee income" on its financial records. c. simply ignores any investee OCI in applying the equity method.

a. records its proportionate share of the investee's OCI as AOCI on its financial records.

Which of the following is not a non-routine issue that requires special procedures to apply the equity method? a. reporting investee income from continuing operations b. reporting investee losses c. reporting the sale of an equity investment

a. reporting investee income from continuing operations

Which of the following best describes a situation where one company acquires the net assets of another firm and the acquired firm then is dissolved as a separate legal entity? Statutory merger. Capital interest combination. Subsidiary acquisition. Consolidation.

Statutory merger.

True or false: Diversification of business risk allows enhanced profitability in business combinations.

TRUE

True or false: If an investor sells sufficient shares to cause it to lose its ability to exercise significant influence over an investee, the equity method would cease to be applicable.

TRUE Reason: The ability to exercise significant ability over an investee is a necessary condition for applying the equity method.

True or false: Equity method accounting requires that the investor recognize its share of investee other comprehensive income and accumulated other comprehensive income.

TRUE Reason: Both OCI and AOCI of an investee must be recognized by the investor.

True or false: When an acquired firm is legally dissolved upon acquisition, the acquirer will record on its books all of the former firm's assets and liabilities at their former book values.

FALSE Reason: Acquisition-date fair values are used to record acquired assets and liabilities assumed in a business combination.

True or false: In a business combination, the acquiring firm increases its retained earning for the amount of the acquisition-date subsidiary retained earnings.

FALSE Reason: None of the acquiree's stockholders' equity accounts are recorded by the acquiring firm in a business combination.

True or false: Pre-existing goodwill, when present on an acquired firm's separate balance sheet, is considered an identifiable intangible asset

FALSE Reason: Pre-existing goodwill is an unidentifiable asset.

What is the measurement attribute employed in determining the consideration transferred in a business combination? Carrying amount of subsidiary net assets. Fair value. Carrying amount of assets transferred.

Fair value.

T OR F: Under the equity method for investments with significant influence, the direction of the sale between the investor and investee (upstream or downstream) can only increase but cannot decrease the final amounts reported in the financial statements.

False

T or F When firms are affiliated through a common set of owners, measurements that recognize the relationships among the firms help provide subjectivity that can be used to create the footnotes for financial reporting. (start of ch 1 questions)

False Reason: When firms are affiliated through a common set of owners, measurements that recognize the relationships among the firms help provide objectivity in financial reporting.

Attorney fees paid for service provided related to a business combination are accounted for as a current period expense. a reduction of additional paid-in capital. a component of goodwill. as asset with an indefinite useful life.

a current period expense.

When an investor sells inventory to its 40%-owned investee (an intra-entity sale), why is 40% of the profit recognition delayed until the inventory is sold to an outside party? a. 40% of the investor's sale is effectively with itself. b. Intra-entity sales are not considered any differently than sales to outside parties. c. The investor does not have significant influence over the investee.

a. 40% of the investor's sale is effectively with itself.

Which of the following are included in the first two columns of the consolidated worksheet as of the acquisition date? a. An investment account in the parent's financial statement column. b. Any contingent performance liability that may have accompanied the combination. c. Pre-combination revenues and expenses of both the parent and subsidiary companies.

a. An investment account in the parent's financial statement column. b. Any contingent performance liability that may have accompanied the combination.

The acquisition method requires the recognition and measurement of which of the following? (select all that apply) a. Any existing noncontrolling interest. b. The subsidiary's stockholders' equity accounts. c. The acquiree's identified assets and liabilities assumed by the acquirer. d. Goodwill or a gain from bargain purchase.

a. Any existing noncontrolling interest. c. The acquiree's identified assets and liabilities assumed by the acquirer. d. Goodwill or a gain from bargain purchase.

How does an investor record income from its investment in an equity-method investee? a. As a credit to "Equity in Investee Income" b. As a debit to "Dividend Receivable" c. As a credit to "Dividend Income" d. As a credit to the Investment account.

a. As a credit to "Equity in Investee Income"

What factors indicate if the equity method should be used for an investment in another firm's equity securities? (select all) a. Investor participation in the policy-making process of the investee. b. Whether the investor and investee operate in the same industry. c. Technological dependency between the investor and investee. d. Investor representation on the investee's board of directors.

a. Investor participation in the policy-making process of the investee. c. Technological dependency between the investor and investee. d. Investor representation on the investee's board of directors.

Which of the following are considered potential advantages to growth through a business combination? (select all) a. Quick entry for new and existing products into domestic and foreign markets. b. Economies of scale allowing greater efficiency and negotiating power. c. Cost savings through elimination of duplicate facilities and staff. d. Larger firms with multiple lines of business are less subject to management difficulties.

a. Quick entry for new and existing products into domestic and foreign markets. b. Economies of scale allowing greater efficiency and negotiating power. c. Cost savings through elimination of duplicate facilities and staff.

Which of the following are typical costs that accompany a business combination? (select all that apply) a. Secretarial and management time allocated to acquisition activity. b. Professional service fees for attorneys and accountants. c. Write downs to fair value of acquired assets. d. Costs incurred to register and issue securities.

a. Secretarial and management time allocated to acquisition activity. b. Professional service fees for attorneys and accountants. d. Costs incurred to register and issue securities.

What are some general criticisms of the equity method for investments in the ownership shares of another firm? a. Significant influence and control may not be properly defined by existing quantitative guidelines. correct b. Because the investor recognizes the investee's net income as it is earned, the equity method does not follow accrual accounting. c. By not including the investee's assets and liabilities in the investor's financial statement amounts, performance metric may be biased. d. The liabilities of equity-method investees appear in the body of the investor's financial statements.

a. Significant influence and control may not be properly defined by existing quantitative guidelines. c. By not including the investee's assets and liabilities in the investor's financial statement amounts, performance metric may be biased.

Which of the following may be included in the calculation of the consideration transferred for a newly acquired firm? (select all) a. The equity interests issued by the acquirer in the combination. b. Sum of the acquisition-date fair values of the assets transferred by the acquirer. c. The liabilities incurred by the acquirer to former owners of the acquiree. d. The stockholder equity account balances of the acquired firm.

a. The equity interests issued by the acquirer in the combination. b. Sum of the acquisition-date fair values of the assets transferred by the acquirer. c. The liabilities incurred by the acquirer to former owners of the acquiree.

If an investment qualifies for the equity method following a series of purchases, what valuation basis should the investor employ in applying the equity method? a. The investment's total fair value as of the date the investment qualifies for the equity method. b. The investor's percentage ownership multiplied by the fair values of the investee's net assets. c. The total cost incurred by the investor over the series of purchases leading to equity method qualification. d. The investment fair value less any excess fair over book value allocation to specific investee assets or liabilities.

a. The investment's total fair value as of the date the investment qualifies for the equity method.

Why does the equity method record investee dividends declared as reductions to the investment account? a. The investor's equity in the investee decreases when it becomes entitled to receive a dividend. b. Investee dividends declared reduce the total assets of the investor. c. Investee dividends declared reduce the income earned by the investor. d. The investment account mirrors changes to the investee's equity section resulting from income and dividends.

a. The investor's equity in the investee decreases when it becomes entitled to receive a dividend. d. The investment account mirrors changes to the investee's equity section resulting from income and dividends.

Which of the following procedures are followed in applying the cost method of accounting for an investment in another firm's equity securities? a. The investor's share of the investee's dividend declarations is recorded as income. b. Investment income is recognized when the investee reports its net income. c. The investment must be periodically assessed for impairment. d. In limited circumstances, a cost method investment may be increased when similar securities experience price increases.

a. The investor's share of the investee's dividend declarations is recorded as income. c. The investment must be periodically assessed for impairment. d. In limited circumstances, a cost method investment may be increased when similar securities experience price increases.

Which of the following describes a fair value exchange price in an orderly transaction between market participants? a. The price that would be received from selling an asset. b. An offering price for selling an asset. c. The price that would be paid for transferring a liability

a. The price that would be received from selling an asset. c. The price that would be paid for transferring a liability

What accounting procedures are appropriate when an acquired firm is dissolved immediately following a business combination? a. The surviving company records the dissolved company's assets and liabilities on its financial records. b. The surviving company reports consolidated financial information, but does not record the dissolved company's assets and liabilities on its books. c. Worksheets are typically used to organize and adjust the information needed to prepare consolidated financial statements.

a. The surviving company records the dissolved company's assets and liabilities on its financial records.

Why are consolidated financial statements prepared when a business combination of two or more companies creates a single economic entity? a. There is a presumption that consolidated financial statements are more meaningful than separate financial statements. b. External shareholders wish to evaluate each of the companies separately. c. A controlling financial interest is absent in the combination. d. The single economic entity becomes a single legal entity through the acquisition of control.

a. There is a presumption that consolidated financial statements are more meaningful than separate financial statements.

Contingent consideration is... a. a contractual provision to pay additional amounts to former owners of a business based upon achievements of future performance measures. b. not recorded as part of total consideration transferred in a business combination. c. recognized only when payments are actually made upon achievement of performance objectives. d. immediately expensed at the acquisition date of the business combination.

a. a contractual provision to pay additional amounts to former owners of a business based upon achievements of future performance measures.

In employing the accrual basis, the equity method recognizes income for the investor a. as earnings are reported by the investee. b. as the fair value of the investee equity shares changes. c. when the investee declares a dividend. d. only when the investor sells the equity shares

a. as earnings are reported by the investee.

When an equity-method investment account balance is reduced to zero due to a current year investee loss, the investor should a. discontinue use of the equity method and not establish a negative balance. b. accrue no additional losses. c. establish a negative balance for the investment account. d. leave the investment account balance at zero until subsequent investee profits eliminate all unrecognized losses.

a. discontinue use of the equity method and not establish a negative balance. b. accrue no additional losses. d. leave the investment account balance at zero until subsequent investee profits eliminate all unrecognized losses.

When a company acquires a majority, but less than 100% of the voting stock of another company, a. each company maintains its separate legal existence. b. dissolution of the acquired firm takes place. c. legal control is not possible. d. a business combination has not taken place.

a. each company maintains its separate legal existence.

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at a measurement date is known as a. fair value. b. net realizable value. c. historical cost. d. equity value.

a. fair value.

Under the equity method for investments with significant influence, the direction of the sale between the investor and investee (upstream or downstream) ________ the final amounts reported in the financial statements. a. has no effect on b. increases c. decreases

a. has no effect on

The equity method in accounting for an equity investment is applied when the investor company: (select all that apply) a. has representation on the investee's board of directors b. participates in policy-making decisions of the investee c. has control over the investee's operating and financial policies

a. has representation on the investee's board of directors b. participates in policy-making decisions of the investee

Goodwill recognized in a business combination (select all) a. may capture value derived from other intangible assets not otherwise eligible for recognition. b. results when the fair value of the net identified assets of the acquired firm exceeds the consideration transferred in a 100% acquisition. c. may embody synergies the acquirer expects to achieve from the combination. d. is an asset that represents future economic benefits

a. may capture value derived from other intangible assets not otherwise eligible for recognition. c. may embody synergies the acquirer expects to achieve from the combination. d. is an asset that represents future economic benefits

What is the primary vehicle that business firms employ to exercise control over other business entities? a. Control through contractual arrangements with other firms. b. Control through majority voting stock ownership. c. Control through variable interests. d. Control through minority participation rights.

b. Control through majority voting stock ownership.

When one firm controls the entire decision making process of another firm, (select all) a. such control may result from majority voting stock ownership or contracts with a variable interest entity. b. one set of financial statements are created for the combined assets, liabilities, revenues and expenses of both firms. c. the investor-investee relationship results in separate external financial reporting for each firm's assets, liabilities, revenues and expenses. d. for reporting purposes the two companies are considered to be a single economic entity.

a. such control may result from majority voting stock ownership or contracts with a variable interest entity. b. one set of financial statements are created for the combined assets, liabilities, revenues and expenses of both firms. d. for reporting purposes the two companies are considered to be a single economic entity.

In a business combination when each combining firm maintains its separate incorporation (select all that apply) a. the acquiring firm utilizes an investment account to record the acquisition. b. the acquiring firm records on its books the individual assets acquired and liabilities assumed at their respective fair values. c. consolidation worksheets are employed to generate financial reports for the combined economic entity. d. each company maintains independent record keeping.

a. the acquiring firm utilizes an investment account to record the acquisition. c. consolidation worksheets are employed to generate financial reports for the combined economic entity. d. each company maintains independent record keeping.

The fair-value option for reporting investments that would otherwise be accounted for under the equity method requires a. the inclusion in net income of changes in b. the fair value of an equity investment. the valuation of the equity method investment at fair value as of the investor's balance sheet date. c. an irrevocable election to elect fair value as the measurement attribute for an equity investment d. amortization for the excess of acquisition-date fair over book value.

a. the inclusion in net income of changes in b. the fair value of an equity investment. the valuation of the equity method investment at fair value as of the investor's balance sheet date. c. an irrevocable election to elect fair value as the measurement attribute for an equity investment

When an acquired firm's legal status is dissolved in a business combination, the acquiring firm's entry to record the combination includes a. the individual fair values of the assets acquired and liabilities assumed. b. the fair value of the consideration transferred. c. goodwill in all circumstances when control is obtained.

a. the individual fair values of the assets acquired and liabilities assumed. b. the fair value of the consideration transferred. Reason: Goodwill or a bargain purchase gain may be recorded depending on the circumstances.

When an investor sells a portion of an equity-method investment, a. the investment account should reflect a balance current as of the date of sale. b. no gain or loss is recognized if the investor continues to have the ability to exercise significant influence over the investee. c. the investor recognizes a gain or loss on the sale. d. the investor continues to apply the equity method if the investor continues to have the ability to exercise significant influence over the inve

a. the investment account should reflect a balance current as of the date of sale. c. the investor recognizes a gain or loss on the sale. d. the investor continues to apply the equity method if the investor continues to have the ability to exercise significant influence over the inve

In applying the equity method, a. the investor recognizes its proportionate share of the investee's income. b. the existence of significant influence requires the investor to recognized investee dividends as revenue. c. no changes are made to the investment account until it is sold. d. the investor increases the investment account for investee dividends declared

a. the investor recognizes its proportionate share of the investee's income.

Because certain intangible assets are considered to have indefinite lives, they are not subject to ._____________________ .

amortization

What are the financial reporting requirements when one business organization possesses control over another business organization? a. The controlling business shows investments in other businesses as single amounts on its statement of financial position. b. A single set of consolidated financial statements is prepared for the separate business entities tied together through common control. c. No special financial reporting is required when one business organization controls another. (start of ch 2 questions)

b. A single set of consolidated financial statements is prepared for the separate business entities tied together through common control.

An investor originally purchased 5% of an investee and appropriately applied the fair-value method to account for its investment. Later, the investor purchased sufficient additional shares to qualify the investment for the equity method. How should the investor account for the newly qualified equity investment? a. Include both purchases in the investment account at cost. b. Add the cost of the shares to the current basis of its previous 5% investment. c. Adjust all shares owned as if the equity method had always been applied with an offsetting amount to retained earnings. d. Adjust all shares owned as if the equity method had always been applied with an offsetting amount to current net income.

b. Add the cost of the shares to the current basis of its previous 5% investment.

How does the acquisition method treat contingent consideration when present in a business combination a. As an expense recognized in the period of the business combination. b. As a negotiated component of the fair value of the consideration transferred. c. Any contingent consideration is ignored until payment is made.

b. As a negotiated component of the fair value of the consideration transferred.

Which of the following procedures are followed in applying the fair-value method of accounting for an investment in another firm's equity securities? a. Dividends declared on the equity securities owned are recorded as an increase in fair value. b. Changes in the fair value of equity securities owned during a period are reported as income. c. The initial investment in equity securities is recorded at cost. d. The investment account is increased for the amount of the investee's reported income.

b. Changes in the fair value of equity securities owned during a period are reported as income. c. The initial investment in equity securities is recorded at cost.

When an investor purchases an investment for an amount in excess of the investee's book value, how is the excess amount allocated? a. The entire amount is allocated to the intangible asset goodwill. b. First to specifically identified assets and liabilities with any remainder allocated to goodwill. c. First to specifically identified assets and liabilities with any remainder allocated to acquisition expense. d. First to goodwill with any remainder allocated to specifically identified assets and liabilities.

b. First to specifically identified assets and liabilities with any remainder allocated to goodwill.

When should an investor recognize an impairment loss for its equity method investment? a. If the investee recognizes an impairment loss on its income statement for one or more of its assets. b. If evidence exists that the investor will not be able to recover the investment's carrying amount and the decline in value is other than temporary. c. When either a permanent or temporary drop in the fair value of the investment occurs.

b. If evidence exists that the investor will not be able to recover the investment's carrying amount and the decline in value is other than temporary.

Which of the following best describes a statutory merger? a. One company obtains control over another by acquiring a majority interest in another company's voting stock. b. One company acquires the net assets of another company and the acquired company then is dissolved as a separate legal entity. c. Two or more companies transfer their assets and liabilities to a newly formed entity. d. Two or more companies transfer their capital stock to a newly formed entity and the predecessor companies formally undergo dissolution.

b. One company acquires the net assets of another company and the acquired company then is dissolved as a separate legal entity.

To provide consistency in application, what is the FASB's general quantitative guideline for application of the equity method? a. Ownership of 20-100% of the voting stock of an investee. b. Ownership of 20-50% of the voting stock of an investee. c. Ownership of greater than 50% of the voting stock of an investee.

b. Ownership of 20-50% of the voting stock of an investee.

To provide consistency in application, what is the FASB's general quantitative guideline for application of the equity method? a. Ownership of greater than 50% of the voting stock of an investee. b. Ownership of 20-50% of the voting stock of an investee. c. Ownership of 20-100% of the voting stock of an investee.

b. Ownership of 20-50% of the voting stock of an investee.

When each company in a business combination maintains its separate legal existence, which of the following occurs? a. A statutory merger takes place among the new affiliates in the business combination. b. The acquiring company establishes a single investment account in its financial records. c. The financial accounts of newly acquired subsidiary are unaffected. d. Each company continues to maintain an independent accounting system

b. The acquiring company establishes a single investment account in its financial records. c. The financial accounts of newly acquired subsidiary are unaffected. d. Each company continues to maintain an independent accounting system

An intra-entity inventory sale occurs between an investor and its equity-method investee. What factors determine the amount of gross profit from the sale to be deferred as of the end of the year? a. Whether the intra-entity sale was upstream or downstream. b. The amount of the intra-entity sale remaining in ending inventory. c. The seller's gross profit percentage. d. The investor's proportionate ownership of the investee.

b. The amount of the intra-entity sale remaining in ending inventory. c. The seller's gross profit percentage. d. The investor's proportionate ownership of the investee.

An investor's excess investment cost over its percentage of investee book value is attributable to a limited-lived tangible asset. How should the investor account for this excess cost in recognizing investment income under the equity method? a. The equity in investee income is increased by the depreciation associated with the excess cost attributable to the limited-lived tangible asset. b. The equity in investee income is reduced by the depreciation associated with the excess cost attributable to the limited-lived tangible asset. c. The excess investment cost over investee book value attributable to a limited-lived tangible asset has no effect on investment income. d. The investor increases its depreciation expense associated with the excess cost attributable to the limited-lived tangible asset.

b. The equity in investee income is reduced by the depreciation associated with the excess cost attributable to the limited-lived tangible asset.

Why is it necessary to identify the sources of the difference between the price paid for an investment and its underlying book value in applying the equity method? a. The excess cost of book value is immediately expensed on the date the investment is purchased. b. The equity method will likely expense excess costs allocated to different asset categories over different useful lives. c. The equity method reports the underlying assets and liabilities of the investee in the investor's balance sheet.

b. The equity method will likely expense excess costs allocated to different asset categories over different useful lives.

Which of the following is an attribute of a statutory consolidation? a. An acquiring company gains a controlling, but less than 100 per cent, interest in an acquiree's voting stock. b. Two or more existing companies are united under the ownership of a newly created company. c. One company acquires another company that is subsequently dissolved by the surviving firm. d. All of the companies involved in the business combination retain their separate legal existences.

b. Two or more existing companies are united under the ownership of a newly created company.

When does a company like Coca-Cola account for its investment using the equity method? a. A company must use the equity method for any investment in equity shares regardless of the level of influence or control. b. When the investment provides the company with the ability to exercise significant influence over the decisions of the investee. c. A company uses the equity method for all equity investments in foreign investees. d. When the investment provides the company with complete control over the decisions of the investee.

b. When the investment provides the company with the ability to exercise significant influence over the decisions of the investee.

Size and scale are important drivers of business competitiveness because (select all) a. as firms grow, they produce larger shareholder returns in the stock market. b. increases in scale can produce larger profits from enhanced sales volume despite smaller profit margins. c. large firms are inevitably more profitable from the greater negotiating power that accompanies greater size. d. if firms can become more efficient in delivering goods and services, they may gain a competitive advantage and become more profitable.

b. increases in scale can produce larger profits from enhanced sales volume despite smaller profit margins. d. if firms can become more efficient in delivering goods and services, they may gain a competitive advantage and become more profitable.

The equity method in accounting for an equity investment is applied when the investor company: a. has control over the investee's operating and financial policies b. participates in policy-making decisions of the investee c. has representation on the investee's board of directors

b. participates in policy-making decisions of the investee c. has representation on the investee's board of directors

WarningDue in less than 12 hours Multiple Choice Question Companies such as Microsoft, Google, and Starbucks each have large amounts of short-term investments in marketable equity securities that can: a. give them access to inside company information that will enable them to gain greater market share in their own markets. b. produce both dividend income and share value appreciation. c. provide them with business perks such as free products in the company they invest in and access to the other company's employees if they need extra labor.

b. produce both dividend income and share value appreciation.

Zell Company sells inventory at a $10,000 gross profit to its equity method investee, Aaron Company. Before the end of the year, Aaron resells all of this inventory to an outside, unrelated entity. As a result of these activities, Zell Company should... a. defer the $10,000 gross profit to the extent of its proportional ownership interest in Aaron Company. b. recognize the entire $10,000 gross profit on its income statement. c. defer the entire $10,000 gross profit. d. recognize gross profit to the extent of its proportional ownership interest in Aaron Company.

b. recognize the entire $10,000 gross profit on its income statement.

When a business combination is accompanied by contingent consideration to be paid by the parent upon completion of specified performance metrics, the journal entry to record the combination includes (select all) a. a liability for the maximum amount payable under the contingency agreement. b. the fair value of the contingent consideration in the investment account as part of the overall consideration transferred. c. a liability for the fair value of the contingent consideration.

b. the fair value of the contingent consideration in the investment account as part of the overall consideration transferred. c. a liability for the fair value of the contingent consideration.

When the collective fair value of the net identified assets acquired and liabilities assumed exceeds the consideration transferred, (select all that apply) a. goodwill is recorded for the excess fair value acquired. b. the fair value of the net identifiable assets becomes the valuation basis for the acquired firm. c. the acquirer recognizes a gain on bargain purchase.

b. the fair value of the net identifiable assets becomes the valuation basis for the acquired firm. c. the acquirer recognizes a gain on bargain purchase.What is the accounting treatment of the acquired subsidiary's equity accounts in a business combination?

What are the two main reasons that firms purchase equity shares in other firms? a. to make pivotal decisions in the other company or to attempt a hostile takeover of the other firm b. to earn a return on idle cash and to achieve voting privileges in the other firm c. to build the empire of the firm or to try to take over the other firm altogether

b. to earn a return on idle cash and to achieve voting privileges in the other firm

Which of the following best describes control through a majority voting stock acquisition? a. Two or more companies transfer their assets or capital stock to a newly formed entity. b. One company acquires the net assets of another company and the acquired company then is dissolved as a separate legal entity. c. Although one company controls another, no dissolution occurs and each company remains a separately incorporated entity. d. The acquiring company must gain 100 percent all voting shares before legally dissolving the subsidiary.

c. Although one company controls another, no dissolution occurs and each company remains a separately incorporated entity.

Which of the following best describes control through majority voting stock ownership? a. The acquiring company must gain 100% of all voting shares of another company before exclusive control can be exercised. b. Control is exercised through contractual arrangements that entitle one firm to become the primary beneficiary of another firm. c. By exercising majority voting power, one firm can dictate the operating and financing activities of another firm.

c. By exercising majority voting power, one firm can dictate the operating and financing activities of another firm.

How can a company actively manage reported amounts by keeping voting share ownership of another firm below 50%? a. By avoiding consolidation, a firm employing the equity method will report larger values for total assets and liabilities. b. Using the equity method, investee's sales can be included on the investor's income statement. c. In applying the equity method, the liabilities of the investee company are not combined with those on the investor's balance sheet. (end of ch 1 questions)

c. In applying the equity method, the liabilities of the investee company are not combined with those on the investor's balance sheet.

How can a company actively manage reported amounts by keeping voting share ownership of another firm below 50%? a. Using the equity method, investee's sales can be included on the investor's income statement. b. By avoiding consolidation, a firm employing the equity method will report larger values for total assets and liabilities. c. In applying the equity method, the liabilities of the investee company are not combined with those on the investor's balance sheet.

c. In applying the equity method, the liabilities of the investee company are not combined with those on the investor's balance sheet.

A business combination occurs and the acquired firm is legally dissolved. If the consideration transferred by the acquiring firm equals the collective fair value of the acquired firm's net identifiable asset, then a. Intangible assets that had not been recognized by the acquired firm are similarly not recognized by the acquirer. b. The acquired firm's assets and liabilities are recorded by the acquiring firm at their former book values. c. Neither goodwill nor a bargain purchase gain is recorded.

c. Neither goodwill nor a bargain purchase gain is recorded.

What is the accounting treatment of the acquired subsidiary's equity accounts in a business combination? a. Subsidiary equity accounts are included at fair value in consolidated financial statements. b. Subsidiary equity accounts are included at book value in consolidated financial statements. c. Subsidiary equity accounts are excluded from the accounting for the business combination.

c. Subsidiary equity accounts are excluded from the accounting for the business combination.

Why is it necessary to identify the sources of the difference between the price paid for an investment and its underlying book value in applying the equity method? a. The excess cost of book value is immediately expensed on the date the investment is purchased. b. The equity method reports the underlying assets and liabilities of the investee in the investor's balance sheet. c. The equity method will likely expense excess costs allocated to different asset categories over different useful lives.

c. The equity method will likely expense excess costs allocated to different asset categories over different useful lives.

If an investment qualifies for the equity method following a series of purchases, what valuation basis should the investor employ in applying the equity method? a. The investment fair value less any excess fair over book value allocation to specific investee assets or liabilities. b. The investor's percentage ownership multiplied by the fair values of the investee's net assets. c. The investment's total fair value as of the date the investment qualifies for the equity method. d. The total cost incurred by the investor over the series of purchases leading to equity method qualification.

c. The investment's total fair value as of the date the investment qualifies for the equity method.

Consolidated financial statements are typically prepared when one company has... a. accounted for its investment in another company using the equity method. b. dividend income from another company. c. a controlling financial interest over another company. d. significant influence over the operating and financial policies of another company.

c. a controlling financial interest over another company.

When one firm can significantly influence the decisions of another firm through its ownership of voting shares, transactions between the two firms a. provide an objective basis for accounting valuations. b. are accounted for the same as transactions with outside parties. c. do not provide an objective basis for financial reporting.

c. do not provide an objective basis for financial reporting. Transactions with outside parties must be used to provide a basis for accounting valuation.

Which of the following is not a shared characteristic that enhances profitability in business combinations? a. cost savings through the elimination of duplicate facilities and staff b. the ability to access financing at more attractive rates c. increased needs for insurance of separate facilities d. vertical integration of one firm's output and another firm's distribution or further processing

c. increased needs for insurance of separate facilities

In a business combination when each combining firm remains a legally incorporated separate entity (select all) a. the parent records an investment account at the subsidiary's net book value of the assets acquired and liabilities assumed. b. the parent records on its accounting records each of the acquired assets and liabilities assumed in the business combination c. the parent company employs consolidated worksheet entries to help prepare a set of consolidated financial statements. d. the acquiring firm does not physically record the acquired firm's separate assets and liabilities.

c. the parent company employs consolidated worksheet entries to help prepare a set of consolidated financial statements. d. the acquiring firm does not physically record the acquired firm's separate assets and liabilities.

When an investor established control over an investee, financial reporting requires the _____________________ of the investor's and investee's financial statements. (Enter only one word per blank.)

consolidation

When an equity method investee declares a dividend, how should the investor company record the event? a. No entry is prepared until the dividend is paid in cash. b. As a credit to Dividend Income. c. As a debit to the Investment account. d. As a credit to the Investment account.

d. As a credit to the Investment account.

When one business entity has a controlling financial interest in another entity, why are consolidated financial statements prepared for external reporting? a. In all business combinations, the companies lose their separate legal identities. b. A dual economic entity is created requiring dual-based financial statements. c. The absence of a non-controlling interest causes one set of financial statements to become irrelevant. d. It is presumed that consolidated financial statements are necessary for a fair presentation.

d. It is presumed that consolidated financial statements are necessary for a fair presentation.

Which of the following best describes the accounting procedure for a statutory merger or statutory consolidation? a. The acquired firm records the acquirer's assets and liabilities on its financial records. b. No consolidation procedures are necessary. c. The acquired assets and liabilities are combined on a worksheet with no adjustments to the surviving firm's records. d. The surviving company records the assets acquired and liabilities assumed in the merger on its financial records.

d. The surviving company records the assets acquired and liabilities assumed in the merger on its financial records.