Theories Chapter 2&3 PDF

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CHAPTER 2MULTIPLE CHOICE – THEORIES At the date of an acquisition which is not a bargain purchase, the acquisition method a. Consolidates the subsidiary's assets at fair value and the liabilities at book value b. Consolidates all subsidiary assets and liabilities at book value c. Consolidates all su...

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CHAPTER 2 MULTIPLE CHOICE – THEORIES 1. At the date of an acquisition which is not a bargain purchase, the acquisition method a. Consolidates the subsidiary's assets at fair value and the liabilities at book value b. Consolidates all subsidiary assets and liabilities at book value c. Consolidates all subsidiary assets and liabilities at fair value d. Consolidates all subsidiary assets and liabilities at fair value e. Consolidates current assets and liabilities at book value, long-term assets and liabilities at fair value 2. Lisa Co. paid cash for all of the voting common stock of Victoria Corp. Victoria will continue to exist a separate corporation. Entries for the consolidation d of Victoria Lisa and is Victoria secret consolidation would be recorded journal in a. A worksheet b. Lisa's general journal c. Victoria’s general journal d. Victoria’s secret consolidation journal e. The general journals of both companies 3. What is the primary accounting difference between accounting for when the subsidiary is dissolved and when the subsidiary retains its incorporation? a. If the subsidiary is dissolved, it will not be operated as a separate division b. If the subsidiary is dissolved, assets and liabilities are consolidated at their book values c. If the subsidiary retains its incorporation, there will be no goodwill associated with the acquisition d. If the subsidiary retains its incorporation, assets and liabilities are consolidated at their book values e. If the subsidiary retains its incorporation, the consolidation is not formally recorded in the accounting records of the acquiring company 4. A company is not required to consolidate a subsidiary in which it holds more than 50% of the voting stock when a. The subsidiary is located in a foreign country b. The subsidiary in question is a finance subsidiary c. The company holds more than 50% but less than 60% of the subsidiary's voting stock d. The company holds less than 75% of the subsidiary's voting stock e. The subsidiary is in bankruptcy 5. Which one of the following is a characteristic of c business combination that should be accounted for as an acquisition? a. The combination must involve the exchange of equity securities only b. The transaction establishes an acquisition fair value basis for the company being acquired c. The two companies may be about the same size and it is difficult to determine the acquired company and the acquiring company d. The transaction may be considered to be the uniting of the ownership interests of the companies involved e. The acquired subsidiary must be smaller in size than the acquiring parent 6. Which of the following is the best theoretical justification for consolidated financial statements? a. In form the companies are one entity: in substance they are separate. b. In form the companies are separate: in substance they are one entity. c. In form and substance the companies arc one entity. d. In form and substance the companies are separate.

7. What is the appropriate accounting treatment for the value assigned to in-process research and development acquired in a business combination? a. Expense upon acquisition. b. Capitalize as an asset. c. Expense if there is no alternative use for the assets used in the research and development and technological feasibility has yet to be reached. d. Expense until future economic benefits become certain and then capitalize as an asset. 8. An acquired entity has a long-term operating lease for an office building used for central management. The terms of the lease are very favorable relative to current market rates. However, the lease prohibits subleasing or any other transfer of fights. In its financial statements, the acquiring firm should report the value assigned to the lease contract as a. An intangible asset under the contractual- legal criterion. b. A part of goodwill. c. An intangible asset under the separability criterion. d. A building. 9. WW Company obtains all of the outstanding stock of JJ, Inc, In a consolidation prepared immediately after the takeover, at what value will JJ's inventory be consolidated? a. At JJ’s historical cost. b. A percentage of the acquisition cost paid by WW. c. The inventory will be omitted in the consolidation. d. At the acquisition- date fair value. 10. Under PFRS 3 when is a gain recognized in consolidating financial information? a. When any bargain purchase is created. b. In a combination created in the middle of a fiscal year. c. In an acquisition when the value of all assets and liabilities cannot be determined. d. When the amount of a bargain purchase exceeds the value of the applicable liability held by the acquired company. 11. What is push-down accounting? a. A requirement that a subsidiary must use the same accounting principles as a parent company. b. Inventory transfers made from a parent company to a subsidiary. c. A subsidiary's recording of the fair-value allocations as well as subsequent amortization. d. The adjustments required for consolidation When a parent has applied the equity method of accounting for internal reporting purposes. 12. A parent buys 32 percent of a subsidiary in one year and then buys an additional 40 percent in the next year. In a step acquisition of this type, the original 32 percent acquisition should be a. maintained at its initial value. b. adjusted to its equity method balance at the date of the second acquisition. c. adjusted to fair value at the date of the second acquisition with a resulting gain or loss recorded. d. adjusted to fair value at the date of the second acquisition with a resulting adjustment to additional paid-in capital. 13. If AA Company acquires 80 percent of the stock of BB Company on January 1, 20x2, immediately after the acquisition: a. Consolidated retained earnings will be equal to the combined retained earnings of the two companies. b. Goodwill will be reported in the consolidated c. AA Company's additional paid-in capital may be reduce to permit the carryforward of BB Company retained earnings. d. Consolidated retained earnings and AA Company retained earnings will be the

14. Which of the following statements is correct? a. The non-controlling shareholders' claim of the subsidiary's net assets is based on the book value of the subsidiary's net assets. b. Only the parent's portion of the difference between book value and fair value of the subsidiary's assets is assigned to those assets. c. Goodwill represents the differences between the book value of the subsidiary's net assets and the amount paid by the parent to buy ownership. d. Total assets reported by the parent generally will be less than total assets reported on the consolidated balance sheet. 15. Which of the following statements is correct? a. Foreign subsidiaries do not need to be consolidated if they are reported as a separate operating group under segment reporting. b. Consolidated retained earnings do not include the non-controlling interest's claim on the subsidiary's retained earnings. c. The non-controlling shareholders' claim should be adjusted for changes in the fair value of the subsidiary assets but should not include goodwill. d. Consolidation is expected any time the investor holds significant influence over the investee. 16. What is the theoretically preferred method of presenting a non-controlling interest in a consolidated balance sheet? a. As a separate item within the liability section, b. As a deduction from (contra to) goodwill from consolidation, if any. c. By means of notes or footnotes to the balance sheet. d. As a separate item within the stockholders' equity section. 17. Presenting consolidated financial statements this year when statements of individual companies were presented last year is: a. The correction of an error. b. An accounting change that should be reported prospectively. c. An accounting change that should be reported by restating the financial statements of all periods presented. d. Not an accounting change. 18. A subsidiary, acquired for cash in a business combination, owned equipment with a market value in excess of book value as of the date of combination. A consolidated balance sheet prepared immediately after the acquisition would treat this excess as: a. Goodwill b. Plant and equipment c. Retained Earnings d. Deferred Credit 19. Goodwill is: a. Seldom reported because it is too difficult to measure, b. Reported when more than book value is paid in purchasing another company, c. Reported when the fair value of the acquire is greater than the fair value of the net identifiable assets acquired. d. Generally smaller for small companies and increases in amount as the companies acquired increase in size. 20. Consolidated financial statements are designed to provide: a. informative information to all shareholders. b. the results of operations, cash flow, and the balance sheet in an understandable and informative manner for creditors. c. the results of operations, cash flow, and the balance sheet as if the parent and subsidiary were a single entity. d. subsidiary information for the subsidiary shareholders.

21. Consolidated financial statements are appropriate even without a majority ownership if which of the following exists: a. the subsidiary has the right to appoint members of the parent company's board of directors. b. the parent company has the right to appoint a majority of the members of the subsidiary's board of directors through a large minority voting interest. c. the subsidiary owns a large minority voting interest in the parent company, d. the parent company has an ability to assume the role of general partner in a limited partnership with the approval of the subsidiary's board of directors. 22. The IASB has recommended that a parent corporation should consolidate the financial statements of the subsidiary into its financial statements when it exercises control over the subsidiary, even without majority ownership. In which of the following situations would control NOT be evident? a. Access to subsidiary assets is available to all shareholders. b. Dividend policy is set by the parent. c. The subsidiary does not determine compensation for its main employees. d. Substantially all cash flows of the subsidiary flow to the controlling shareholders. 23. The goal of the consolidation process is for: a. asset acquisitions and 100% Stock acquisitions to result in the same balance sheet. b. goodwill to appear on the balance sheet of the consolidated entity. c. the assets of the non-controlling interest to be predominately displayed on the balance sheet. d. the investment in the subsidiary to be properly valued on the consolidated balance sheet. 24. A subsidiary was acquired for cash in a business combination on December 31, 20x4. The purchase price exceeded the fair value of identifiable net assets. The acquired company owned with a fair value in excess of the book value as of the date of the combination. A consolidated balance sheet prepared on December 31, 20x1, would a. report the excess of the fair value over the book value of the equipment as part of goodwill. b. report the excess of the fair value over the book value of the equipment as part of the plant and equipment account. c. reduce retained earnings for the excess of the fair value of the equipment over its book value it d. make no adjustment for the excess of the fair value of the equipment over book value. Instead is an adjustment to expense over the life of the equipment. 25. The investment in a subsidiary should be recorded on the parent's books at the a. underlying book value of the subsidiary’s net assets. b. fair value of the subsidiary's not identifiable assets. c. fair value of the consideration given. d. fair value of the consideration given plus an estimated value for goodwill, 26. Which of the following cost of a business combination can be included in the value charged to paid-in capital in excess of par? a. direct and indirect acquisition costs b. direct acquisition costs c. direct acquisition costs and stock issue costs if stock is issued as consideration d. stock issue costs if stock is issued as consideration 27. When a company purchases another company that has existing goodwill and the transaction is accounted for as a stock acquisition, the goodwill should be treated in the following manner. a. Goodwill on the books of an acquired company should be disregarded. b. Goodwill is recorded prior to recording fixed assets. c. Goodwill is not recorded until all assets are stated at full fair value. d. Goodwill is treated consistent with other tangible assets.

28. The SEC requires the use 'of push-down accounting in some specific situations. Push-down accounting results in: a. goodwill be recorded in the parent company separate accounts. b. eliminating subsidiary retained earnings and paid-in capital in excess of par. c. reflecting fair values on the subsidiary's separate accounts. d. changing the consolidation worksheet procedure because no adjustment is necessary to eliminate the investment in subsidiary account. 29. A majority-owned subsidiary that is in legal reorganization should normally be accounted for using a. consolidated financial statements. b. the equity method. c. the market value method. d. the cost method. 30. Under the acquisition method, indirect costs relating to acquisitions should be a. included in the investment cost. b. expensed as incurred. c. deducted from other contributed capital. d. none of these. 31. Eliminating entries are made to cancel the effects of intercompany transactions and are made on the a. books of the parent company. b. books of the subsidiary company. c. workpaper only. d. books of both the parent company and the subsidiary. 32. One reason a parent company may pay an amount less than the book value of the subsidiary's stock acquired is a. an undervaluation of the subsidiary's assets. b. the existence of unrecorded goodwill. c. an overvaluation of the subsidiary's liabilities. d. the existence of unrecorded contingent liabilities. 33. In a business combination accounted for as an acquisition, registration costs related to common stock issued by the parent company are a. expensed as incurred. b. deducted from other contributed capital. c. included in the investment cost. d. deducted from the investment cost. 34. On the consolidated balance sheet, consolidated stockholders' equity is a. equal to the sum of the parent and subsidiary stockholders' equity. b. greater than the parent's stockholders' equity. c. less than the parent's stockholders' equity. d. equal to the parent's stockholders' equity. 35. Majority-owned subsidiaries should be excluded from the consolidated statements when a. an control does not rest with the majority owner. b. the subsidiary operates under governmentally imposed uncertainty. c. a foreign subsidiary is domiciled in a country with foreign exchange restrictions or controls. d. any of these circumstances exist.

36. Under the economic entity concept consolidated financial statements are intended primarily for the benefit of the a. stockholders of the parent company. b. creditors of the parent company. c. minority stockholders. d. all of the above. 37. Reasons a parent company may pay more than book Value for the subsidiary company’s stock include all of the following except a. the fair value of one of the subsidiary's assets may exceed its recorded value because of appreciation. b. the existence of unrecorded goodwill. c. liabilities may be overvalued. d. stockholders' equity may be undervalued. 38. What is the method of presentation required by PFRS 10 of "non-controlling interest" on a consolidated balance sheet? a. As a deduction from goodwill from consolidation. b. As a separate item within the long-term liabilities section. c. As a part of stockholders' equity. d. As a separate item between liabilities and stockholders' equity. 39. Which of the following is a limitation of consolidated financial statements? a. Consolidated statements provide no benefit for the stockholders and creditors of the parent company. b. Consolidated statements of highly diversified companies cannot be compared with industry standards. c. Consolidated statements are beneficial only when the consolidated companies operate within the same industry. d. Consolidated statements are beneficial only when the consolidated companies operate in different industries. 40. When a company purchases another company that has existing goodwill and the transaction is accounted for as a stock acquisition, the goodwill should be treated in the following manner. a. Goodwill on the books of an acquired company should be disregarded. b. Goodwill is recorded prior to recording fixed assets. c. Goodwill is not recorded until all assets are stated at full fair value. d. Goodwill is treated consistent with other tangible assets. 41. The use of push-down accounting in some specific situations. Push-down accounting results in: a. goodwill be recorded in the parent company separate accounts. b. eliminating subsidiary retained earnings and paid-in capital in excess of par. c. reflecting fair values on the subsidiary's separate accounts. d. changing the consolidation worksheet procedure because no adjustment is necessary to eliminate the investment in subsidiary account. 42. What is push-down accounting? a. A requirement that a subsidiary must use the same accounting principles as a parent company• b. Inventory transfers made from a parent company to a subsidiary. c. A subsidiary's recording of the fair-value allocations as well as subsequent amortization. d. The adjustments required for consolidation when a parent has applied the equity meth0d of accounting for internal reporting purposes.

43. A parent buys 32 percent of a subsidiary in one year and then buys an additional 40 percent in the next year. In a step acquisition of this type, the original 32 percent acquisition should be a. maintained at its initial value. b. adjusted to its equity method balance at the date of the second acquisition. c. adjusted to fair value at the date of the Second acquisition with a resulting gain or loss recorded. d. adjusted to fair value at the date of the second acquisition with a resulting adjustment to additional paid-in capital. 44. A newly acquired subsidiary has pre-existing goodwill on its books. The parent company's consolidated balance sheet will: a. treat the goodwill the same as other intangible assets of the acquired company. b. will always show the preexisting goodwill of the subsidiary at its book value. c. not show any valve for the subsidiary’s pre-existing goodwill d. loan impairment test to see if any of it has been impaired. 45. What is push-down accounting? a. A requirement that a subsidiary must use the same accounting principles as a parent company. b. Inventory transfers made from a parent company to a subsidiary, c. A subsidiary's recording of the fair-value allocations as well as subsequent amortization, d. The adjustments required for consolidation when a parent has applied the equity method of accounting for internal reporting purposes. 46. The main evidence of control for purposes of consolidated financial statements involves a. possessing majority ownership b. having decision-making ability that is no! shared with others. c. being the sole shareholder. d. having the parent company and the subsidiary participating in the same industry. 47. In which of the following cases would consolidation be inappropriate? a. The subsidiary is in bankruptcy. b. Subsidiary's operations are dissimilar from those of the parent. c. The parent owns 90 percent of the subsidiary's common stock, but all of the subsidiary's nonvoting preferred stock is held by a single investor. d. Subsidiary is foreign 48. The primary beneficiary of a variable interest entity (VIE) must consolidate the VIE into its financial statements whenever a. substantially all of the entity's activities are conducted on behalf of an investor who has disproportionally few voting rights. b. the voting rights are not proportional to the obligations to absorb the expected losses or receive expected residual returns. c. the total equity at risk is not sufficient to permit the entity to finance 'its activities without additional subordinated financial support from other parties. d. the holders of the equity investment at risk have the rig...