Question 1

When a parent uses the acquisition method for business combinations and sells shares of its subsidiary, which of the following statements is false?
A) If majority control is still maintained, consolidated financial statements are still required.
B) If majority control is not maintained but significant influence exists, the equity method to account for the investment is still used but consolidated financial statements are not required.
C) If majority control is not maintained but significant influence exists, the equity method is still used to account for the investment and consolidated financial statements are still required.
D) If majority control is not maintained and significant influence no longer exists, a prospective change in accounting principle to the fair value method is required.
E) A gain or loss calculation must be prepared if control is lost.

Accepted Answer

If majority control is not maintained but significant influence exists, the equity method is used, but consolidated financial statements are not required.

Question 2

On January 1, 2019, Palk Corp. and Spraz Corp. had condensed balance sheets as follows:  On January 2, 2019, Palk borrowed the entire $84,000 it needed to acquire 80% of the outstanding common shares of Spraz. Shares of Spraz are not actively traded on the market. The loan was to be paid in ten equal annual principal payments, plus interest, beginning December 31, 2019. The excess consideration transferred over the underlying book value of the acquired net assets was allocated 60% to inventory and 40% to goodwill.What are the total consolidated current liabilities at January 2, 2019?
A) $53,200.
B) $56,000.
C) $64,400.
D) $42,000.
E) $70,000.

Accepted Answer

The answer of On January 1, 2019, Palk Corp. and...

Question 3

On January 1, 2019, Palk Corp. and Spraz Corp. had condensed balance sheets as follows:  On January 2, 2019, Palk borrowed the entire $84,000 it needed to acquire 80% of the outstanding common shares of Spraz. Shares of Spraz are not actively traded on the market. The loan was to be paid in ten equal annual principal payments, plus interest, beginning December 31, 2019. The excess consideration transferred over the underlying book value of the acquired net assets was allocated 60% to inventory and 40% to goodwill.What amount represents consolidated current assets at January 2, 2019?
A) $127,000.
B) $129,800.
C) $143,800.
D) $148,000.
E) $135,400.

Accepted Answer

The answer of On January 1, 2019, Palk Corp. and...

Question 4

When a subsidiary is acquired sometime after the first day of the fiscal year, which of the following statements is true?
A) Income from subsidiary is not recognized until there is an entire year of consolidated operations.
B) Income from subsidiary is recognized from date of acquisition to year-end.
C) Excess cost over acquisition value is recognized at the beginning of the fiscal year.
D) No goodwill can be recognized.
E) Income from subsidiary is recognized for the entire year.

Accepted Answer

Income from the subsidiary is recognized from the date of acquisition to the year-end, as the parent company only has control and ownership from that point forward.

Question 5

In a step acquisition, which of the following statements is false?
A) The acquisition method views a step acquisition essentially the same as a single step acquisition.
B) Income from subsidiary is computed by applying a partial year for a new purchase acquired during the year.
C) Income from subsidiary is computed for the entire year for a new purchase acquired during the year.
D) Obtaining control through a step acquisition is a significant measurement event.
E) Pre-acquisition earnings are not included in the consolidated income statement.

Accepted Answer

In a step acquisition, income from the subsidiary is computed by applying a partial year for a new purchase acquired during the year, not for the entire year.

Question 6

In measuring the noncontrolling interest immediately following the date of acquisition, which of the following would not be indicative of the value attributed to the noncontrolling interest?
A) Fair value based on stock trades of the acquired company.
B) Subsidiary cash flows discounted to present value.
C) Book value of subsidiary net assets.
D) Projections of residual income.
E) Consideration transferred by the parent company that implies a total subsidiary value.

Accepted Answer

The book value of subsidiary net assets does not reflect the fair value or market-based valuation methods typically used to measure noncontrolling interest.

Question 7

Brady, Inc., a calendar-year corporation, acquires 85% of Austin Company on September 1, 2019, and an additional 10% on January 1, 2020. Total annual amortization of $8,000 relates to the first acquisition. Austin reports the following figures for 2020:  Without regard for this investment, Brady independently earns $375,000 in net income during 2020.All net income is earned evenly throughout the year.What is the controlling interest in consolidated net income for 2020?
A) $464,250.
B) $474,450.
C) $481,250.
D) $492,000.
E) $500,000.

Accepted Answer

The answer of Brady, Inc., a calendar-year corporation, acquires 85%...

Question 8

When a parent uses the equity method throughout the year to account for its 80% investment in an acquired subsidiary, which of the following statements is false at the date immediately preceding the date on which adjustments are made on the consolidated worksheet?
A) Parent company net income equals controlling interest in consolidated net income.
B) Parent company retained earnings equals consolidated retained earnings.
C) Parent company total assets equals consolidated total assets.
D) Parent company dividends equals consolidated dividends.
E) Goodwill is not recorded on the parent's books.

Accepted Answer

The answer of When a parent uses the equity method...

Question 9

Scott Co. acquired 70% of Gregg Co. for $525,000 on December 31, 2019 when Gregg's book value was $580,000. The Gregg stock was not actively traded. On the date of acquisition, Gregg had equipment (with a ten-year life) that was undervalued in the financial records by $170,000. One year later, the two companies provided the selected amounts shown below. Additionally, no dividends have been paid.  What amount of consolidated net income for 2020 is attributable to Scott's controlling interest?
A) $580,000.
B) $668,200.
C) $680,100.
D) $692,000.
E) $723,000.

Accepted Answer

The answer of Scott Co. acquired 70% of Gregg Co....

Question 10

When a parent uses the partial equity method throughout the year to account for its 80% investment in an acquired subsidiary, which of the following statements is true at the date immediately preceding the date on which adjustments are made on the consolidated worksheet?
A) Parent company net income equals consolidated net income.
B) Parent company retained earnings equals consolidated retained earnings.
C) Parent company total assets equals consolidated total assets.
D) Parent company dividends equal consolidated dividends.
E) Goodwill is recorded on the parent's books.

Accepted Answer

The answer of When a parent uses the partial equity...

Question 11

Which of the following statements is true regarding the sale of subsidiary shares when using the acquisition method for accounting for business combinations?
A) If control continues, the difference between selling price and acquisition value is recorded as a realized gain or loss.
B) If control continues, the difference between selling price and acquisition value is an unrealized gain or loss.
C) If control continues, the difference between selling price and carrying value is recorded as an adjustment to additional paid-in capital.
D) If control continues, the difference between selling price and carrying value is recorded as a realized gain or loss.
E) If control continues, the difference between selling price and carrying value is recorded as an adjustment to retained earnings.

Accepted Answer

If control continues, the difference between the selling price and carrying value is recorded as an adjustment to additional paid-in capital, not as a gain or loss.

Question 12

When a parent uses the initial value method throughout the year to account for its 80% investment in an acquired subsidiary, which of the following statements is true at the date immediately preceding the date on which adjustments are made on the consolidated worksheet?
A) Parent company net income equals consolidated net income.
B) Parent company retained earnings equals consolidated retained earnings.
C) Parent company total assets equals consolidated total assets.
D) Parent company dividends equal consolidated dividends.
E) Goodwill is recorded on the parent's books.

Accepted Answer

The answer of When a parent uses the initial value...

Question 13

On January 1, 2019, Palk Corp. and Spraz Corp. had condensed balance sheets as follows:  On January 2, 2019, Palk borrowed the entire $84,000 it needed to acquire 80% of the outstanding common shares of Spraz. Shares of Spraz are not actively traded on the market. The loan was to be paid in ten equal annual principal payments, plus interest, beginning December 31, 2019. The excess consideration transferred over the underlying book value of the acquired net assets was allocated 60% to inventory and 40% to goodwill.What is the amount attributable to consolidated noncurrent assets at January 2, 2019?
A) $195,000.
B) $192,200.
C) $186,600.
D) $181,000.
E) $169,800.

Accepted Answer

The answer of On January 1, 2019, Palk Corp. and...

Question 14

Which of the following statements is false regarding multiple acquisitions of a subsidiary's existing common stock?
A) The parent recognizes a larger percent of subsidiary income.
B) A step acquisition resulting in control may result in a parent recognizing a gain on revaluation.
C) The book value of the subsidiary will increase.
D) The parent's percent ownership in subsidiary will increase.
E) Noncontrolling interest in subsidiary's net income will decrease.

Accepted Answer

The book value of the subsidiary itself does not increase due to the parent's acquisition of its stock; rather, the parent's ownership percentage and control over the subsidiary may change.

Question 15

When consolidating a subsidiary that was acquired on a date other than the first day of the fiscal year, which of the following statements is true of the subsidiary with respect to the presentation of consolidated financial statement information?
A) Pre-acquisition earnings are deducted from consolidated retained earnings.
B) Pre-acquisition earnings are added to consolidated revenues and expenses.
C) Pre-acquisition earnings are deducted from the beginning consolidated stockholders' equity.
D) Pre-acquisition earnings are added to the beginning consolidated stockholders' equity.
E) Pre-acquisition earnings are excluded from the consolidated income statement.

Accepted Answer

Pre-acquisition earnings are excluded from the consolidated income statement because they pertain to the period before the parent company gained control over the subsidiary.

Question 16

Jax Company used the acquisition method when it acquired its investment in Saxton Company. Jax now sells some of its shares of Saxton such that neither control nor significant influence exists. Which of the following statements is true?
A) The difference between selling price and acquisition value is recorded as a realized gain or loss.
B) The difference between selling price and acquisition value is recorded as an unrealized gain or loss.
C) The difference between selling price and carrying value is recorded as a realized gain or loss.
D) The difference between selling price and carrying value is recorded as an unrealized gain or loss.
E) The difference between selling price and carrying value is recorded as an adjustment to retained earnings.

Accepted Answer

When Jax sells its shares and neither control nor significant influence exists, the difference between the selling price and the carrying value of the investment is recorded as a realized gain or loss.

Question 17

Scott Co. acquired 70% of Gregg Co. for $525,000 on December 31, 2019 when Gregg's book value was $580,000. The Gregg stock was not actively traded. On the date of acquisition, Gregg had equipment (with a ten-year life) that was undervalued in the financial records by $170,000. One year later, the two companies provided the selected amounts shown below. Additionally, no dividends have been paid.  What is the consolidated balance of the Equipment account at December 31, 2020?
A) $814,000.
B) $821,000.
C) $831,000.
D) $797,000.
E) $661,000.

Accepted Answer

The answer of Scott Co. acquired 70% of Gregg Co....

Question 18

All of the following statements regarding the sale of subsidiary shares are true except which of the following?
A) The use of specific identification based on serial number is acceptable.
B) The use of the FIFO assumption is acceptable.
C) The use of the averaging assumption is acceptable.
D) The use of specific LIFO assumption is acceptable.
E) The parent company must determine whether consolidation is still appropriate for the remaining shares owned.

Accepted Answer

The use of specific LIFO assumption is generally not acceptable for the sale of subsidiary shares, as it is not a common method for accounting for investments in subsidiaries.

Question 19

On January 1, 2019, Palk Corp. and Spraz Corp. had condensed balance sheets as follows:  On January 2, 2019, Palk borrowed the entire $84,000 it needed to acquire 80% of the outstanding common shares of Spraz. Shares of Spraz are not actively traded on the market. The loan was to be paid in ten equal annual principal payments, plus interest, beginning December 31, 2019. The excess consideration transferred over the underlying book value of the acquired net assets was allocated 60% to inventory and 40% to goodwill.What is consolidated stockholders' equity at January 2, 2019?
A) $112,000.
B) $133,000.
C) $168,000.
D) $182,000.
E) $203,000.

Accepted Answer

The answer of On January 1, 2019, Palk Corp. and...

Question 20

Scott Co. acquired 70% of Gregg Co. for $525,000 on December 31, 2019 when Gregg's book value was $580,000. The Gregg stock was not actively traded. On the date of acquisition, Gregg had equipment (with a ten-year life) that was undervalued in the financial records by $170,000. One year later, the two companies provided the selected amounts shown below. Additionally, no dividends have been paid.  What is the noncontrolling interest's share of the subsidiary's net income for the year ended December 31, 2020 and what is the ending balance of the noncontrolling interest in the subsidiary at December 31, 2020?
A) $48,000 and $262,800.
B) $48,000 and $273,000.
C) $42,900 and $267,900.
D) $42,900 and $262,800.
E) $48,000 and $267,900.

Accepted Answer

The answer of Scott Co. acquired 70% of Gregg Co....

Quiz 4: Consolidated Financial Statements and Outside Ownership

When a parent uses the acquisition method for business combinations and sells shares of its subsidiary, which of the following statements is false?

When a subsidiary is acquired sometime after the first day of the fiscal year, which of the following statements is true?

In a step acquisition, which of the following statements is false?

In measuring the noncontrolling interest immediately following the date of acquisition, which of the following would not be indicative of the value attributed to the noncontrolling interest?

When a parent uses the equity method throughout the year to account for its 80% investment in an acquired subsidiary, which of the following statements is false at the date immediately preceding the date on which adjustments are made on the consolidated worksheet?

When a parent uses the partial equity method throughout the year to account for its 80% investment in an acquired subsidiary, which of the following statements is true at the date immediately preceding the date on which adjustments are made on the consolidated worksheet?

Which of the following statements is true regarding the sale of subsidiary shares when using the acquisition method for accounting for business combinations?

When a parent uses the initial value method throughout the year to account for its 80% investment in an acquired subsidiary, which of the following statements is true at the date immediately preceding the date on which adjustments are made on the consolidated worksheet?

Which of the following statements is false regarding multiple acquisitions of a subsidiary's existing common stock?

When consolidating a subsidiary that was acquired on a date other than the first day of the fiscal year, which of the following statements is true of the subsidiary with respect to the presentation of consolidated financial statement information?

Jax Company used the acquisition method when it acquired its investment in Saxton Company. Jax now sells some of its shares of Saxton such that neither control nor significant influence exists. Which of the following statements is true?

All of the following statements regarding the sale of subsidiary shares are true except which of the following?