Advanced Accounting Chapter 3

Why is goodwill tested at the reporting unit level rather than the combined entity level?

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. Synergies represented by goodwill exist within the distinct operating lines represented by reporting units.

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

reporting

When an acquired subsidiary's intangible asset has an indefinite useful life, the intangible asset is not amortized but instead is assessed for on a periodic basis

impairment

When an acquired subsidiary's intangible asset has an indefinite useful life, the intangible asset is not amortized but instead is assessed for on a periodic basis.

impairment

When the parent has applied the partial equity method for multiple accounting periods, Consolidation Entry asterisk C will include a debit to the parent's RE when

there was an acquisition-date fair value adjustment that increased the amounts of limited life assets.

The following facts and circumstances may be useful in judging that a reporting unit's carrying amount exceeds its fair value.

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

The acquisition-date fair values assigned to an acquired subsidiary's intangible assets should be amortized over their useful lives unless such life is considered

unkown

When a parent company uses the partial equity method to account for an investment in a subsidiary, Consolidation Entry asterisk C is needed to adjust beginning retained earnings for cumulative expense related to acquisition-date fair value adjustments to the subsidiary's assets and liabilities.

amortization

When the acquisition-date fair value of subsidiary long-term debt exceeds its carrying amount, in periods subsequent to the acquisition, worksheet entries are needed to interest expense.

decrease

In accounting for goodwill impairment, the maximum amount of goodwill impairment to be recognized by a reporting unit is

the carrying amount of goodwill

How does a parent company account for contingent consideration at the date of the acquisition of a subsidiary company?

An obligation for contingent consideration classified as equity is recorded as a additional paid-in capital for its acquisition-date fair value. A cash payment contingency based on future performance is recorded as a liability for its acquisition-date fair value.

Using the equity method which of the following affects the Investment in Subsidiary account on the parents books

Decrease in subsidiary equity from subsidiary dividends The original consideration transferred for the investment increase in subsidiary equity from subsidiary net income

Consolidation entry I removes the equity in subsidiary earnings which is then replaced by the inclusion of the subsidiary's individual revenue and expense accounts on the consolidated income statement

T

Goodwill recognized in a business combination is considered to have an ......... life and thus is not amortized

indefinite

In applying a qualitative test as to whether a reporting unit's goodwill is impaired, a firm assesses the that a reporting unit's fair value is less than its carrying amount.

probability

Consolidation entry P

removes the balances from intra-entity receivables and payables

When the parent uses the equity method consolidation entry I

removes the parents recorded equity income

Neither the initial value method nor the partial equity method represent full accrual accounting for the subsidiary's income. Therefore over time the parents beginning .... ..... becomes misstated and must be appropriately established

retained earnings

Contingent stock issued in connection with a business combination is typically recorded by the parent as a component of

shareholders equity

the values assigned to intangible assets with indefinite useful lives are

subject to periodic impairment testing

When a firm reports a goodwill impairment loss, additional disclosures are required to describe

the facts and circumstances leading to the impairment. how the firm determined the fair value of the reporting unit.

When the acquisition-date fair value of subsidiary long-term debt exceeds its carrying amount, the difference serves to reduce interest expense over the life of the debt, similar to amortizing a bond

premium

In the quantitative goodwill impairment test, for each reporting unit

a comparison is made between the reporting unit's carrying amount (including goodwill) and fair value

A parent agreed to pay an additional cash amount to the former owners of its acquired subsidiary if certain performance metrics were achieved in the first year subsequent to acquisition. The amount paid to the former owners exceeds the fair value originally recorded by the parent. In accounting for the cash payment to the former owners, the parent records

a reduction of the performance obligation. a credit to cash. a loss on revaluation of the contingent performance obligation.

When a particular asset acquired in a business combination has an acquisition date book value in excess of 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 ........ party

outside

The consolidation entry asterisk C is needed to

Stimulate the equity method in adjusting the parents beginning retained earnings adjust the parent's beginning retained earnings to a full-accrual basis

The label "S" in Consolidation worksheet Entry S refers to the subsidiary's ____________ equity accounts

Stockholders equity

Why does the FASB allow a firm the option to assess qualitative factors to determine whether further testing is required for detecting goodwill impairment?

The determination of fair values for a reporting unit's assets and liabilities is a costly periodic exercise.

Consolidation entry A may include an adjustment to recognize goodwill created by the business combination

T

When an indefinite-lived intangible asset has been assessed to be impaired, the accounting for the impairment includes

a reduction of the intangible asset's carrying amount to fair value a recognition of the impairment loss on the income statement

Consolidated entry E recognizes excess acquisition date fair over book value ..... expense as part of the consolidation process

amortization

Rather than the term "reporting units," IFRS uses the terminology - units to describe the business components that form the basis for goodwill impairment testing.

cash generating

Consolidation entry A in the first year subsequent to acquisition adjusts the subsidiaries assets and liabilities balances to acquisition date ...... values

fair

To measure an impairment loss for an indefinite-lived intangible asset, the asset's carrying amount is compared to its value.

fair

In the quantitative test for goodwill impairment, if an individual reporting unit's fair value exceeds its carrying amount, goodwill is not considered and no further procedures are needed.

impaired

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

impairment

When the acquisition-date fair value of subsidiary long-term debt exceeds its carrying amount, in periods subsequent to the acquisition, consolidation worksheet entries are needed to long-term debt

increase

When the carrying amount of acquisition-date subsidiary long-term debt exceeds its fair value, a consolidation worksheet entry is required to the amount of interest expense for consolidated financial reporting.

increase

When a particular asset acquired in a business combination has an acquisition date fair value in excess of its acquisition date book value the assets 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 declaration account

reduces the subsidiary's dividends balance

When the parent employs either the initial value or the partial equity method, establishing an appropriate beginning ... .... balance for the parent is crucial to the preparation of consolidated financial statements.

retained earnings

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

Possible methods for determining the fair value of a reporting unit for goodwill impairment testing include

the use of market prices. prices of comparable businesses. present value techniques.

Consolidation entry I

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

Which of the following Exhibit 3.4 income statement accounts are eliminated for consolidated financial statement reporting

Equity in subsidiary earnings

Consolidated income statements report goodwill impairment losses as

a component of operating income.

Which of the following are descriptive of goodwill impairment accounting under IFRS?

Goodwill is tested for impairment using a one-step approach. Goodwill is considered impaired if the carrying amount of a cash-generating unit exceeds its fair value. Goodwill recognized in a business combination is allocated across cash-generating units expected to benefit from the business combination.

Why does an increase to the fair value of acquisition-date subsidiary debt result in a decrease to interest expense on the consolidated worksheet?

The parent has essentially borrowed the fair value of the debt, but only will repay the lesser contractual maturity value.

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

Equity in subsidiary earnings the parent's share of subsidiary dividends declared investment in subsidiary

Worksheet consolidation entries are not posted to the books of either the parent or the subsidiary

True

Are the acquisition-date fair values of subsidiary intangible assets amortized to expense across time on consolidated financial statements?

Yes, for both definite and indefinite-lived intangible assets.

Periodic amortization expense should be recognized for the acquisition-date fair values of acquired subsidiary intangible assets with useful lives

limited

When the parent pays cash to the former owners of its subsidiary upon achievement of certain performance metrics as part of its negotiated agreement, any excess of amount paid over the previous valuation of the contingency is recorded as a from revaluation of the contingent performance obligation.

loss

Which of the following parts of a enterprise represent possible reporting units?

An entire enterprise the operating segments of an enterprise a component of an operating segment at a level below that operating segment

Prior to impairment testing for an indefinite-lived intangible asset, a reporting entity has the option to

perform a qualitative assessment as to the likelihood of impairment.