FAR F4
a. Yes / No (Fees of finders and consultants is expensed in the period incurred. Registration fees for equity securities decrease additional paid-in capital)
A business combination is accounted for properly as an acquisition. Direct costs of combination, other than registration and issuance costs of equity securities, should be: Fees of finders and consultants / Registration fees for equity securities issued a. Yes / No b. No / Yes c. No / No d. Yes / Yes
c. Deducted in determining the net income of the combined corporation for the period in which the costs were incurred. (Direct costs are expensed in the period incurred)
A business combination is accounted for properly as an acquisition. Direct costs of combination, other than registration and issuance costs of equity securities, should be: a. Included in the acquisition cost to be allocated to identifiable assets according to their fair values b. Deducted directly from the retained earnings of the combined corporation c. Deducted in determining the net income of the combined corporation for the period in which the costs were incurred. d. Capitalized as a deferred charge and amortized
c. The company's accounting policy for the investment (22% investment in another company means that it has "significant influence" over the company and is required to disclose the company's accounting policy for the investment)
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? a. The reason for the company's decision to invest in the investee company b. Whether the investee company is involved in any litigation c. The company's accounting policy for the investment d. The names and ownership percentages of the other stockholders in the investee company
c. Leases are not eligible for the fair value option. (The fair value applies to financial assets [debt and equity securities] and liabilities [notes payable]. Excluded from the fair value option are investments in subsidiaries, pension benefit assets/liabilities and assets/liabilities recognized under leases)
A company leases trucks and properly classifies the leases as finance leases. The leases have a 10-year term, and the lease calculations were done 3 years ago when interest rates were lower. Which of the following is the appropriate accounting treatment, if any, for the application of the fair value option to lease transactions? a. Recognize the change to fair value accounting with an unrealized loss in accumulated other comprehensive income b. Recognize the change to fair value accounting with an unrealized loss in the income statement c. Leases are not eligible for the fair value option d. Recognize the change to fair value accounting with a cumulative adjustment to beginning retained earnings
c. The primary beneficiary should discontinue consolidation of the VIE because the election to consolidate is no longer allowed (Primary beneficiary has the power to direct the activities of VIE that most significantly impacts the entity's economic performance)
A holder of a variable interest that is not the primary beneficiary acquired additional variable interests in the variable interest entity (VIE). What action, if any, should follow? a. The holder of the variable interest should reconsider whether it is now the primary beneficiary b. The holder of the variable interest should use the voting-interest model to determine whether the VIE should be consolidated c. The primary beneficiary should discontinue consolidation of the VIE because the election to consolidate is no longer allowed d. No action is necessary because the primary beneficiary of a VIE does not change subsequent to the initial assessment.
c. As a memorandum entry reducing the unit cost of all Guard stock owned (Total investment will be spread over a larger amount of shares, thereby reducing the unit cost of all Guard stock owned)
Band Co. uses the equity method to account for its investment in Guard, Inc. common stock. How should Band record a 2% stock dividend received from Guard? a. As dividend revenue at Guard's carrying value of the stock b. As dividend revenue at the market value of the stock c. As a memorandum entry reducing the unit cost of all Guard stock owned d. As a reduction in the total cost of Guard stock owned
a. $25,000
Chatham Co. owned 25% of the voting stock of Boyrum Co. Chatham applied the equity method to account for this investment. Boyrum reported income of $100,000 and paid $30,000 in cash dividends during the period. What amount should Chatham report as investment income? a. $25,000 b. $7,500 c. $0 d. $17,500
c. The subsidiary is in bankruptcy (Other restrictions include legal reorganization and operations under severe foreign restrictions)
Consolidated financial statements are typically prepared when one company has a controlling financial interest in another unless: a. The two companies are in unrelated industries, such as manufacturing and real estate b. The fiscal year-ends of the two companies are more than three months apart c. The subsidiary is in bankruptcy d. The subsidiary is a finance company
c. $30,000 (The unrealized gain would be accounted for in net income. RULE: Equity securities are generally reported at fair value through net income 160,000 - 130,000 = 30,000)
Data regarding Ball Corp's marketable equity securities follow: 12/31 Year 1: Cost = $150,000 / Market = $130,000 12/31 Year 2: Cost = $150,000 / Market = $160,000 Differences between cost and market values are considered temporary. The decline in market value was considered temporary and was porperly accounted for at 12/31 Year 1. Ball's Year 2 statement of changes in stockholder's equity would report an increase of: a. $20,000 b. $10,000 c. $30,000 d. $0
d. Yes / No (Concentration of credit risk - the risk that the other party to the instrument will not perform Market risk - the risk of loss from changes in market prices)
Disclosures about the following kinds of risks are required for most financial instruments: Concentration of credit risk / Market risk a. No / Yes b. Yes / Yes c. No / Yes d. Yes / No
b. $0 (Unrealized gains on available-for-sale securities are recorded in other comprehensive income [OCI]. The entire $6,000 unrealized gain will go in OCI, with no amount reflected on the income statement)
Dodd Co.'s debt securities at December 31 included available-for-sale securities with a cost basis of $24,000 and a fair value of $30,000. Dodd's income tax rate was 20%. What amount of unrealized gain or loss should Dodd recognize in its income statement at December 31? a. $4,800 gain b. $0 c. $6,000 loss d. $6,000 gain
Fair Value Method: -Holdings less than 20%, unrealized holdings recognized in net income [dividends declared; gains and losses from sale] -Record investment at cost Equity Method: -Holdings between 20% and 50%, unrealized holdings not recognized [proportionate share of investee income] -Record investment at cost, ignore market price fluctuation -If there is net income, increase subsidiary account -If there are dividends or losses, decrease subsidiary account Consolidation Method: -Holdings more than 50%, unrealized holdings not recognized
Fair Value Method Equity Method Consolidation Method
a .Neither Rose nor Jave (Although the threshold of applying the equity method is between 20-50%, it says in the question that neither Rose nor Jave gives Goll the ability to exercise significant influence over the company operating and financial policies)
Goll Co. has a 25% interest in the common stock of Rose Co. and an 18% interest in the common stock of Jave Co. Neither investment gives Goll the ability to exercise significant influence over either company's operating and financial policies. Which of the two investments should Goll account for using the equity method? a .Neither Rose nor Jave b. Rose only c. Both Rose an Jave d. Jave only
c. $209,000 (Purchase of 200,000 80,000 x 30% = 24,000 50,000 x 30% = -15,000 Total = 209,000)
Grant, Inc., acquired 30% of South Co.'s voting stock for $200,000 on January 2, Year 1, and did not elect the fair value option. The price equaled the carrying amount and the fair value of the interest purchased in South's net assets. Grant's 30% interest in South gave Grant the ability to exercise significant influence over South's operating and financial policies. During Year 1, South earned $80,000 and paid dividends of $50,000. South reported earnings of $100,000 for the 6 months ended June 30, Year 2, and $200,000 for the year ended December 31, Year 2. On July 1, Year 2, Grant sold half of its stock in South for $150,000 cash. South paid dividends of $60,000 on October 1, Year 2.In Grant's December 31, Year 1, balance sheet, what should be the carrying amount of this investment? a. $200,000 b. $230,000 c. $209,000 d. $224,000
d. $60,000 (Equity method for $100,000 common stock are recorded as a reduction to the investment account Preferred stock is accounted for using the fair value method since ownership does not allow the investor to exercise influence and so preferred stock dividends of 60,000 are recorded)
Green Corp. owns 30% of the outstanding common stock and 100% of the outstanding noncumulative nonvoting preferred stock of Axel Corp. In Year 1 Axel declared dividends of $100,000 on its common stock and $60,000 on its preferred stock. Green exercises significant influence over Axel's operations. What amount of dividend revenue should Green report in its income statement for the year ended Dec 31 Year 1? a. $90,000 b. $0 c. $30,000 d. $60,000
c. As a gain in earnings at the acquisition date
How should the acquirer recognize a bargain purchase in a business acquisition? a. As negative goodwill in the statement of financial position b. 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 d. As goodwill in the statement of financial position
b. Interest rates have increased since Lee purchased the bonds (If interest rates have increased, then the bonds' interest rate would be less attractive to investors now than when the bonds were originally issued. This would cause a decline in the bond's market value. Note that since this is held-to-maturity, it is reported at amortized cost NOT fair market value)
In Year 1, Lee Co. acquired at a premium, Enfield Inc.'s 10-year bonds classified as a held to maturity investment. At December 31, Year 2, Enfield's bonds are quoted at a small discount. Which of the following situations is most likely the cause of the decline in the bond's market value? a. Enfield issued a stock dividend b. Interest rates have increased since Lee purchased the bonds c. Interest rates have decreased since Lee purchased the bonds d. Enfield is expected to call the bonds at a premium, which is less than Lee's carrying amount.
c. Amortized cost (Bond investments intended to be held to maturity are classified as held-to-maturity securities and reported at their amortized cost)
Kale Co. purchased bonds at a discount on the open market as an investment and intends to hold these bonds to maturity. Kale should account for these bonds at: a. Fair value b. Cost c. Amortized cost d. Lower of cost or market
a. Available-for-sale debt securities (Unrealized gains and losses from marking available-for-sale debt securities to fair value at the balance sheet date are treated as other comprehensive income items and bypass the income statement)
Long Co. invested in marketable securities. At year-end, fair-value changes in this investment were included in Long's other comprehensive income. How would Long classify this investment? a. Available-for-sale debt securities b. Trading debt securities c. Held-to-maturity securities d. Equity securities
a. The fair value method (Significant influence cannot be exercised by holding non-voting stock, so the fair value method must be used)
Louis, Inc. Acquired 40% of the outstanding non-voting preferred stock of Rich Co. What method for recording the investment should Louis use? a. The fair value method b. The equity method if no other investor has more than a 40% interest c. The equity method because significant influence must be assumed d. The equity method if it can acquire an additional 11% by year-end
d. $22,000 (100,000 x 10% = 10,000 x 20% ownership = 2,000 Net income: 60,000 Preferred dividends: -10,000 =50,000 x 40% =20,000 + 2,000 = 22,000)
Moss Corp. owns 20% of Dubro Corp.'s preferred stock and 40% of its common stock. Dubro's stock outstanding at December 31, Year 1 is as follows: 10% cumulative preferred stock: $100,000 Common stock: $700,000 Dubro reported net income of $60,000 and paid dividends of $10,000 to its preferred shareholders for the year ended December 31, Year 1. How much total revenue should Moss record due to its investment in Dubro? a. $50,000 b. $70,000 c. $20,000 d. $22,000
b. $200,000 (900,000 / 90% = 1,000,000 - 800,000 = 200,000)
On December 31, Year 1, Starlight Enterprises acquired a 90% ownership interest in Lunar Importers by purchasing 90,000 of Lunar's 100,000 voting common shares outstanding for $900,000 cash. Additional information regarding Lunar as of December 31, Year 1 follows: Net assets BV: 600,000 Net assets FV: 800,000 Under U.S. GAAP, the consolidated balance sheet of Starlight Enterprises and subsidiary would report goodwill in the amount of: a. $460,000 b. $200,000 c. $280,000 d. $400,000
c. $15,000 (If goodwill was not in the question, then you'd take the carrying value of 500,000 - the fair value of 480,000)
On December 31, an entity's reporting unit had a net carrying value of $500,000. For the reporting unit, the entity determined the following: Fair value: $480,000 Value in use: $475,000 Goodwill: $15,000 What is the goodwill impairment loss that will be reported on the December 31, income statement under GAAP? a. $20,000 b. $5,000 c. $15,000 d. $25,000
b. $1,020,000 (The bond investments are classified as trading securities because the bonds are held for the purpose of selling them in the near term. Trading securities are reported at fair value on the balance sheet)
On January 1 of the current year, Barton Co. paid $900,000 to purchase two-year, 8%, $1,000,000 face value bonds that were issued by another publicly-traded corporation. Barton plans to sell the bonds in the first quarter of the following year. The fair value of the bonds at the end of the current year was $1,020,000. At what amount should Barton report the bonds in its balance sheet at the end of the current year? a. $900,000 b. $1,020,000 c. $950,000 d. $1,000,000
a. $303,000 Dallas' consolidated stockholder's equity will be the parent company's stockholder's equity plus the noncontrolling interest on December 31, Year 1. Common stock: $50,000 + APIC: 80,250 + NCI (see below): 33,000 + RE: 139,750 = $303,000 NCINCI (1/1): $30,000 + NCI share of NI: 4,000 - NCI share of dividends: 1,000 = NCI (12/31): $33,000
On January 1, Year 1, Dallas Inc. acquired 80% of Style Inc.'s outstanding common stock for $120,000. On that date, the carrying amount of Style's assets and liabilities approximated their fair values. During Year 1, Style paid $5,000 in cash dividends to stockholders. Summarized balance sheet info for the two companies is below. Dallas (12/31/1) Investment in Style (equity method): $132,000 Other assets: $138,000Common stock: $50,000 Additional paid-in-capital: $80,250 Retained earnings: $139,750 Style (12/31/1) Other assets: $115,000 Common stock: $20,000 Additional paid in capital: $44,000 Retained earnings: $51,000 Style (1/1/1)Other assets: $100,000 Common stock: $20,000 Additional paid-in-capital: $44,000 Retained earnings: $36,000 What amount of total stockholder's equity should be reported in Dallas' December 31, Year 1, consolidated balance sheet? a. $303,000 b. $385,000 c. $286,000 d. $270,000
d. 40% of Iona's income for August 1 to December 31, Year 2 only (Significant influence was acquired on August 1, Year when Point purchased 40% of Iona's common stock)
On January 1, Year 2, Point, Inc. purchased 10% of Iona Co.'s common stock. Point purchased additional shares bringing its ownership up to 40% of Iona's common stock outstanding on August 1, Year 2. During October, Year 2, Iona declared and paid a cash dividend on all of its outstanding common stock. How much income from the Iona investment should Point's Year 2 income statement report? a. Amount equal to dividends received from Iona b. 40% of Iona's Year 2 income c. 10% of Iona's dividends for January 1 to July 31, Year 2, plus 40% of Iona's income for August 1 to December 31, Year 2 d. 40% of Iona's income for August 1 to December 31, Year 2 only
a. $100,000 (100% of a purchased subsidiary's shareholders' equity as of the date of acquisition is eliminated in consolidation)
On January 2, Year 1, Pare Co. purchased 75% of Kidd Co's outstanding common stock. Selected balance sheet data at December 31, Year 1, is as follows: Pare / Kidd Total assets: $420,000 / $180,000 Liabilities: $120,000 / $60,000 Common stock: $100,000 / $50,000 Retained earnings: $200,000 / $70,000 During Year 1, Pare and Kidd paid cash dividends of $25,000 ad $5,000, respectively, to their shareholders. There were no other intercompany transactions. In its December 31, Year 1, consolidated balance sheet, what should Pare report as common stock? a. $100,000 b. $150,000 c. $137,500 d. $50,000
a. $435,000 (Beginning investment: 100,000 500,000 x 10% = 50,000 150,000 x 10% = -15,000 Total = 435,000)
On January 2, Year 3, Well Co. purchased 10% of Rea, Inc.'s outstanding common shares for $400,000. Well is the largest single shareholder in Rea, and Well's officers are a majority on Rea's board of directors. Rea reported net income of $500,000 for Year 3 and paid dividends of $150,000. In its December 31, Year 3, balance sheet, what amount should Well report as investment in Rea? a. $435,000 b. $385,000 c. $450,000 d. $400,000
d. $3,250,000 (3,200,000 + 800,000 - 750,000) = 3,250,000
On June 30, Year 1, Pane Corp. exchanged 150,000 shares of its $20 par value common stock for all of Sky Corp.'s common stock. At that date, the FV of Pane's common stock issued was equal to the book value of Sky's net assets. Both corporations continue to operate as separate businesses, maintaining accounting records with years ending December 31. Info from the separate company operations follows: Pane / Sky Retained earnings: $3,200,000 / $925,000 Net income $800,000 / $275,000 Dividends paid: $750,000 / $0 If the business combination is accounted for as an acquisition, what amount of RE would Pane report on 6/30/1? a. $3,525,000 b. $4,450,000 c. $5,200,000 d. $3,250,000
b. $150,000 (FV of sub = 2,850,000 / 75% = 3,800,000 - 3,000,000 - 200,000 - 150,000 - 300,000 = 150,000)
Pacific Corporation acquired 75% of Sand Corp's 200,000 outstanding common shares for 2,850,000. Sand's net assets = 3,000,000. Book value equaled fair value for all Sand's assets and liabilities except land, which had a fair value of 200,000 greater than book value. Sand had a non-compete agreement with a fair value of 300,000. What is the goodwill to be reported on Pacific's balance sheet per GAAP? a. $312,500 b. $150,000 c. $450,000 d. $362,500
c. $950,000 (NCI = Fair value of subsidiary x NCI % FV of sub = 2,850,000 / 75% = 3,800,000 NCI = 3,800,000 x 25% = 950,000)
Pacific Corporation acquired 75% of Sand Corp's 200,000 outstanding common shares for 2,850,000. Sand's net assets = 3,000,000. Book value equaled fair value for all Sand's assets and liabilities except land, which had a fair value of 200,000 greater than book value. Sand had a non-compete agreement with a fair value of 300,000. What is the non-controlling interest to be reported on Pacific's balance sheet per GAAP? a. $912,500 b. $750,000 c. $950,000 d. $800,000
a. No accounting necessary (Any goodwill created in an investment accounted for under the equity method is ignored)
Palmetto Inc. is currently using the equity method to account for its 30% investment in Royal Company. In the acquisition last year of Royal Co. common stock, Palmetto calculated $1,000,000 of goodwill. The correct accounting for this goodwill during the current year is: a. No accounting necessary b. Amortization over the anticipated holding period of the Royal Company stock c. Amortization over 40 years d. Test for impairment at year-end
d. Decrease / No effect (Inventory Excess: Decreases Investment in Subsidiary Land Excess: No Effect on Earnings (Land is NOT Amortized)
Park Co. uses the equity method to account for its January 1, Year 1, purchase of Tun, Inc.'s common stock. On January 1, Year 1, the fair values of Tun's FIFO inventory and land exceeded their carrying amounts. How do these excesses of fair values over carrying amounts affect Park's reported equity in Tun's Year 1 earnings? Inventory excess / Land excess a. Decrease / Decrease b. Increase / Increase c. Increase / No effect d. Decrease / No effect
a. $500,000 (400,000 + 350,000 - 250,000 = 500,000)
Parker Corp. owns 80% of Smith, Inc.'s common stock. During the year, Parker sold Smith $250,000 of inventory on the same terms as sales made to third parties. Smith sold all of the inventory purchased from Parker during the year. The following information pertains to Smith's and Parker's sales for the year: Parker / Smith Sales: $1,000,000 / $700,000 Cost of Sales: $400,000 / $350,000 What amount should Parker report as cost of sales in its Year 1 consolidated income statement? a. $500,000 b. $680,000 c. $430,000 d. $750,000
a. No / No (Under the fair value method, receipt of a dividend is recorded as income and does not affect the investment account Under the equity method, receipt of a dividend is recorded as a decrease in the investment account)
Peel Co. received a cash dividend from a common stock investment. Should Peel report an increase in the investment account if it uses the fair value method or the equity method of accounting? Fair Value / Equity a. No / No b. Yes / Yes c. Yes / No d. No / Yes
a. 33% of the gain on sale
Port, Inc., owns 100% of Salem, Inc. On January 1, Port sold Salem delivery equipment at a gain. Port had owned the equipment for 2 years and used a 5-year straight-line depreciation rate with no residual value. Salem is using a 3-year straight-line depreciation rate with no residual value for the equipment. In the consolidated income statement, Salem's recorded depreciation expense on the equipment for the year will be decreased by: a. 33% of the gain on sale b. 100% of the gain on sale c. 20% of the gain on sale d. 50% of the gain on sale
d. $0 (All intercompany transactions should be eliminated upon consolidation, included loans and advances)
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? a. $100,000 b. $80,000 c. $20,000 d. $0
a. $1,365,000 (200,000 x 12 = 2,400,000 200,000 x 5 = 1,000,000 2,400,000 - 1,000,000 = 1,400,000 - 35,000 = 1,365,000 Registration and issuance costs are recorded as a direct reduction to the value of the stock and legal and consulting fees are expensed)
Sayon Co. issues 200,000 shares of $5 par value common stock to acquire Trask Co. in an acquisition-business combination. The market value of Sayon's common stock is $12 per share. Legal and consulting fees incurred in relation to the acquisition 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? a. $1,365,000 b. $1,255,000 c. $1,545,000 d. $1,400,000
a. $0 (The purchase by the member of a consolidated group of stock of another member of the consolidated group is treated as a treasury stock transaction. [you cannot make money selling stock to yourself])
Sun, Inc. is a wholly-owned subsidiary of Patton, Inc. On June 1, Year 1, Patton declared and paid a $1 per share cash dividend to stockholders of record on May 15, Year 1. On May 1, Year 1, Sun bought 10,000 shares of Patton's common stock for $700,000 on the open market, when the book value per share was $30. What amount of gain should Patton report from this transaction in its consolidated income statement for the year ended December 31, Year 1? a. $0 b. $410,000 c. $390,000 d. $400,000
b. $252,000 (After issuance, Thyme now owns 64% of the stock [16,000 / 25,000]; therefore the NCI is 36%. 700,000 x 36% = 252,000
Thyme, Inc. owns 16,000 of Sage Co.'s 20,000 outstanding common shares. The carrying value of Sage's equity is $500,000. Sage subsequently issues an additional 5,000 previously unissued shares for $200,000 to an outside party that is unrelated to either Thyme or Sage. What is the total noncontrolling interest after the additional shares are issued? a. $300,000 b. $252,000 c. $140,000 d. $172,000
a. Yes / No (Trading debt securities are reported at fair value with unrealized gains and losses included in earnings. Held-to-maturity debt securities are reported at their amortized costs)
Unrealized holding gains/losses would be included in earnings for which of the following debt securities? Trading / Held-to-maturity a. Yes / No b. No / No c. Yes / Yes d. No / Yes
a. $800,000 (The acquisition cost of the stock doesn't include any measure of the relocation costs associated with East's company headquarters)
West, Inc. acquired 60% of East Co.'s outstanding common stock. West paid $800,000 to acquire the stock. West plans to relocate East's company headquarters, which is expected to cost between $100,000 and $300,000. The present value of the probability-adjusted relocation cost is $240,000. What is West's acquisition cost? a. $800,000 b. $900,000 c. $1,040,000 d. $1,100,000
d. Carrying amount / Carrying amount
When the market value of an investment in debt securities in which the company has a positive intent and ability to hold to maturity exceeds its carrying amount, how should each of the following assets be reported at the end of the year? Long-term marketable debt securities / Short-term marketable debt securities a. Market value / Market value b. Carrying amount / Market value c. Market value / Carrying amount d. Carrying amount / Carrying amount
b. The notes to the financial statements
Where in its financial statements should a company disclose information about its concentration of credit risks? a. Management's report to shareholders b. The notes to the financial statements c. No disclosure is required d. Supplementary information to the financial statements
d. The entity's equity investment at risk is less than the equity investment at risk of similar non-VIE entities
Which of the following circumstances would indicate that an entity has an insufficient level of equityinvestment at risk? a. The entity can finance its own activities b. The facts and circumstances indicate that there is sufficient equity at risk c. The fair value of the equity investment at risk is greater than expected losses d. The entity's equity investment at risk is less than the equity investment at risk of similar non-VIE entities
b. Greater than 50% ownership of the VIE (Under the VIE model, the primary beneficiary is not required to have greater than 50% ownership of the VIE)
Which of the following is not a characteristic that is used to determine the primary beneficiary of a variable interest entity (VIE) under U.S. GAAP? a. The power to direct the activities of the VIE b. Greater than 50% ownership of the VIE c. The right to receive the expected VIE residual returns d. The obligation to absorb expected VIE losses
a. Accounts payable (Most liabilities represent variable interests)
Which of the following is not an example of a variable interest in an entity? a. Accounts payable b. An option to acquire a leased asset at fair value at the end of the lease term c. An explicit guarantee to the entity's debt d. A forward contract to sell assets owned by the entity
