Question 1

Noncontrolling interests affect only the balance sheet of consolidated financial statements.

Accepted Answer

Noncontrolling interests affect not only the balance sheet but also the income statement, where their share of the subsidiary's net income is reported, and the equity section, where their share of equity in the subsidiary is shown.

Question 2

A factor that contributes to recording goodwill when acquiring control of another company is ________.

Accepted Answer

Goodwill is the amount paid for an acquisition in excess of the net identifiable assets acquired. It is attributed to intangible assets such as the investee company's established brand names, customer relationships, and patents. The outstanding management skills of the parent company or unique product manufactured by parent company are not factors that directly contribute to the recognition of goodwill.

Question 3

The section of the annual report that explains major changes in the income statement,changes in liquidity and capital resources and the impact of inflation is called the ________.

Accepted Answer

The management's discussion and analysis section of the annual report explains major changes in the income statement, changes in liquidity and capital resources, and the impact of inflation. The notes to the financial statements provide additional details on specific items in the financial statements. The appendix to the financial statements may include additional financial information but does not provide an explanation of major changes. The internal control report describes the company's system of internal controls but does not discuss the financial results or changes.

Question 4

On January 1,2012,a parent company acquired all of the stock of a subsidiary.The following data is available:
$\begin{array}{ll}
&\text { Parent Company } & \text { Subsidiary } \
 \text {Total assets }&\$ 650 & \$ 400 \
 \text { Total liabilities }&\$ 200 & \$ 190 \
 \text {  Total stockholders' equity}&\$ 450 & \$ 210
\end{array}$
The acquisition by the parent company represents a 100 percent interest in the subsidiary.On January 1,2012,the fair value of the subsidiary's assets and liabilities are equal to their book value.The parent company paid $250 for the 100 percent interest in the subsidiary.What amount of goodwill is implied in the purchase?

Accepted Answer

The goodwill is the excess of the purchase price over the fair value of the net assets acquired. In this case, the purchase price is $250, and the fair value of the net assets acquired is $400 - $190 = $210. Therefore, the goodwill is $250 - $210 = $40.

Question 5

At the date of acquisition by a parent company,the fair value of a subsidiary's fixed assets was larger than their book value.When preparing consolidated financial statements,the fixed assets of the subsidiary are ________ and depreciation expense is ________.

Accepted Answer

According to the Generally Accepted Accounting Principles (GAAP), when a company acquires a subsidiary, the fixed assets of the subsidiary should be revalued to their fair value as of the date of acquisition. Therefore, the fixed assets of the subsidiary will be increased to their fair value on the consolidated financial statements. Moreover, since the fixed assets' remaining useful life is also adjusted to the date of acquisition, the depreciation expense is also increased to reflect the new fair value. Thus, the correct answer is B- increased to fair value; increased.

Question 6

Goodwill from the purchase of another company appears on the consolidated balance sheet as a ________.

Accepted Answer

Goodwill is a separate intangible asset account that appears on the consolidated balance sheet when a company acquires another company. It represents the premium paid for the acquired company over its net tangible assets.

Question 7

Keller Company has the following income statement for the year ending December 31,2016:
$\begin{array}{ll}
\text { Sales } & \$ 1,562 \
\text { Cost of goods sold } & {806} \
\text { Gross profit } &{756}
\end{array}$
Operating expenses:
$\begin{array}{ll}
\text { Wage expense } & 160 \
\text { Depreciation expense } & 16 \
\text { Rent expense } & 106 \
\text { Miscellaneous expense } & \underline{10} \
\text { Total operating expenses } & \underline{292} \
\text { Operating income } & 464 \
\text { Income tax expense } & \underline{162} \
\text { Net income } & \$ 302
\end{array}$
If Keller Company prepares a common size income statement,what will they report for Rent expense?

Accepted Answer

Rent expense as a percentage of sales is calculated as (106 / 1562) * 100 = 6.8%.

Question 8

Goodwill can only be recognized when one company acquires another company.

Accepted Answer

Goodwill is recognized in accounting when one company acquires another company for a price higher than the fair value of its net identifiable assets at the acquisition date.

Question 9

On January 1,2012,Remkus Company acquired all of the stock of a subsidiary.The following data is available:
$\begin{array}{lll}
& \text {Remkus Company} & \text {  Subsidiary } \
\text { Total assets } & \$ 650 & \$ 400 \
\text { Total liabilities }  & \$ 200 & \$ 190 \
\text { Total stockholders' equity }& \$ 450 & \$ 210
\end{array}$
The acquisition by Remkus Company represents a 100 percent interest in the subsidiary.On January 1,2012,the fair value of the subsidiary's assets and liabilities are equal to the book value.Remkus Company paid $250 for the 100 percent interest in the subsidiary.On January 1,2012,what is the total stockholders' equity on the consolidated balance sheet? (Assume elimination entries are completed.)

Accepted Answer

The total stockholders' equity on the consolidated balance sheet is the parent's equity of $450, as the subsidiary's equity is eliminated in consolidation.

Question 10

If the fair value of a subsidiary's assets exceeds their book value when the subsidiary is acquired,the assets of the subsidiary are written up at the time consolidated financial statements are prepared.

Accepted Answer

This is because according to the purchase accounting method, the excess of fair value over book value of a subsidiary's assets is recognized as goodwill on the consolidated balance sheet. The subsidiary's assets are written up to their fair value at the time of acquisition in order to reflect their true value on the balance sheet.

Question 11

Goodwill is recognized when one company purchases another company and ________.

Accepted Answer

Goodwill is recognized when the purchase price of the acquired company exceeds the fair value of the acquired company's identifiable assets less liabilities.

Question 12

On January 1,2012,Parrot Company acquired all of the stock of a subsidiary.The following data is available:
$\begin{array}{ll}
&\text { Parrot Company } & \text { Subsidiary } \
 \text {Total assets }&\$ 650 & \$ 400 \
 \text { Total liabilities }&\$ 200 & \$ 190 \
 \text {  Total stockholders' equity}&\$ 450 & \$ 210
\end{array}$
The acquisition by the Parrot Company represents a 100 percent interest in the subsidiary.On January 1,2012,the fair value of the subsidiary's assets and liabilities are equal to their book value.Parrot Company paid $450 for the 100 percent interest in the subsidiary.What amount of goodwill is implied in the purchase?

Accepted Answer

The implied goodwill is the excess of the purchase price over the book value of the subsidiary's net assets. In this case, the purchase price is $450, and the book value of the subsidiary's net assets is $210 ($400 - $190). Therefore, the implied goodwill is $240 ($450 - $210).

Question 13

Maureen Company has the following income statement for the year ending December 31,2016:
$\begin{array}{ll}
\text { Sales } & \$ 1,562 \
\text { Cost of goods sold } & {806} \
\text { Gross profit } &{756}
\end{array}$
Operating expenses:
$\begin{array}{ll}
\text { Wage expense } & 110 \
\text { Depreciation expense } & 76 \
\text { Rent expense } & 36 \
\text { Miscellaneous expense } & \underline{70} \
\text { Total operating expenses } & \underline{292} \
\text { Operating income } & 464 \
\text { Income tax expense } & \underline{162} \
\text { Net income } & \$ 302
\end{array}$
If Maureen Company prepares a common size income statement,what will they report for Wage expense?

Accepted Answer

The common size percentage for Wage expense is calculated by dividing the Wage expense by Sales and then multiplying by 100. So, (110 / 1562) * 100 = 7.0%.

Question 14

On January 1,2012,Preview Company acquired all of the stock of a subsidiary.The following data is available:
$\begin{array}{lll}
& \text { Preview Company} & \text {  Subsidiary } \
\text { Total assets } & \$ 650 & \$ 400 \
\text { Total liabilities }  & \$ 200 & \$ 190 \
\text { Total stockholders' equity }& \$ 450 & \$ 210
\end{array}$
The acquisition by the Preview Company represents a 100 percent interest in the subsidiary.On January 1,2012,the fair value of the subsidiary's assets and liabilities are equal to the book value.Preview Company paid $250 for the 100 percent interest in the subsidiary.On January 1,2012,what are the total assets on the consolidated balance sheet? (Assume elimination entries are completed.)

Accepted Answer

The total assets on the consolidated balance sheet are the sum of Preview Company's assets ($650) and the subsidiary's assets ($400), minus the cash paid for the acquisition ($250), resulting in $800.

Question 15

Each year,goodwill on the consolidated balance sheet is ________.

Accepted Answer

Goodwill on the consolidated balance sheet is evaluated by management to determine if it is impaired each year. This means that management considers whether the value of goodwill has decreased and, if so, it may need to be written down or adjusted on the balance sheet. Goodwill is not amortized or depreciated, and it cannot be ignored as it represents a significant asset on the company's balance sheet.

Question 16

Goodwill is amortized on the consolidated financial statements.

Accepted Answer

Goodwill is not amortized but is instead tested annually for impairment.

Question 17

Naples Company acquired all of the shares of Tampa Company for $80 cash.At the time of the acquisition,the fair values of Tampa Company's assets were $200.At the time of acquisition,the fair values of Tampa Company's liabilities were $120.On the date of acquisition,what is the amount of goodwill on the consolidated balance sheet?

Accepted Answer

Goodwill is the excess of the purchase price over the fair value of the net assets acquired. In this case, the purchase price is $80, the fair value of the assets is $200, and the fair value of the liabilities is $120. Therefore, the goodwill is $200 - $120 - $80 = $0.

Question 18

To prepare common size income statements,percentages for line items are usually based on ________.To prepare common size balance sheets,percentages for line items are usually based on ________.

Accepted Answer

To prepare common size income statements, percentages for line items are usually based on sales because it represents the total revenue generated by a company. To prepare common size balance sheets, percentages for line items are usually based on total assets because it represents the total resources owned by a company. Therefore, the best choice is C.

Question 19

To compare companies that differ in size,analysts use ________.

Accepted Answer

Common size financial statements are used to compare companies of different sizes by expressing all items on the financial statement as a percentage of a common base, such as total assets, which allows for meaningful comparisons between companies of different sizes. The other options, such as MD&A and consolidated financial statements, may provide useful information but are not specifically designed for comparing the financial information of companies of different sizes. 10-K filings are required annual reports submitted by publicly traded companies to the SEC and provide a wealth of information about a company's financial performance and operations, but they do not directly address the issue of comparing companies of different sizes.

Question 20

Goller Company has the following income statement for the year ending December 31,2016:
$\begin{array}{ll}
\text { Sales } & \$ 1,562 \
\text { Cost of goods sold } & {806} \
\text { Gross profit } &{756}
\end{array}$
Operating expenses:
$\begin{array}{ll}
\text { Wage expense } & 160 \
\text { Depreciation expense } & 26 \
\text { Rent expense } & 36 \
\text { Miscellaneous expense } & \underline{70} \
\text { Total operating expenses } & \underline{292} \
\text { Operating income } & 464 \
\text { Income tax expense } & \underline{100} \
\text { Net income } & \$ 364
\end{array}$
If Goller Company prepares a common size income statement,what will they report for Income tax expense?

Accepted Answer

The answer of Goller Company has the following income statement...

Quiz 17: Understanding and Analyzing Consolidated Financial Statements