Question 1

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.

Accepted Answer

Consolidated statements of highly diversified companies cannot be compared with industry standards because the inclusion of multiple subsidiaries in different industries makes it difficult to accurately assess the overall financial position and performance of the company.

Question 2

Majority-owned subsidiaries should be excluded from the consolidated statements when:
A)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.

Accepted Answer

Majority-owned subsidiaries are typically included in consolidated financial statements. However, they may be excluded under certain circumstances such as when control does not rest with the majority owner, when there's governmentally imposed uncertainty affecting the subsidiary's operations, or when a foreign subsidiary is in a country with foreign exchange restrictions or controls. These conditions can impair the parent company's ability to control the subsidiary, thus justifying exclusion from consolidated statements.

Question 3

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.

Accepted Answer

A

Question 4

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.

Accepted Answer

The answer of One reason a parent company may pay...

Question 5

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 these.

Accepted Answer

Consolidated financial statements are intended primarily for the benefit of all stakeholders, including the stockholders of the parent company, creditors of the parent company, and minority stockholders. The purpose of consolidated financial statements is to provide a complete picture of the financial position and performance of a group of companies as if they were a single entity. This information is important for decision-making by all stakeholders.

Question 6

Price Company acquired 75 percent of the common stock of Shandie Corporation on December 31,2016.On the date of acquisition,Price held land with a book value of $150,000 and a fair value of $300,000; Shandie held land with a book value of $100,000 and fair value of $500,000.What amount would land be reported in the consolidated balance sheet prepared immediately after the combination?
A)$650,000
B)$500,000
C)$550,000
D)$375,000

Accepted Answer

The consolidated balance sheet would report land at its combined fair value. Price's land fair value is $300,000 and Shandie's land fair value is $500,000. Since Price acquired 75% of Shandie, it consolidates 100% of its own assets and 100% of Shandie's assets, leading to a total land value of $300,000 (Price) + $500,000 (Shandie) = $800,000. However, the correct answer is not listed, indicating a possible mistake in the question or answer choices. Based on the provided choices, $650,000 is the closest incorrect option, but the explanation shows the calculation based on fair values.

Question 7

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.

Accepted Answer

The answer of In a business combination accounted for as...

Question 8

What is the method of presentation required by SFAS 160 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.

Accepted Answer

SFAS 160 requires non-controlling interest to be presented as a part of stockholders' equity on the consolidated balance sheet. This reflects the ownership interest of minority shareholders in the consolidated entity. Non-controlling interest represents the portion of a subsidiary's equity that is not owned by the parent company.

Question 9

The main evidence of control for purposes of consolidated financial statements involves:
A)possessing majority ownership
B)having decision-making ability that is not shared with others.
C)being the sole shareholder
D)having the parent company and the subsidiary participating in the same industry.

Accepted Answer

The answer of The main evidence of control for purposes...

Question 10

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.

Accepted Answer

Consolidated stockholders' equity is the sum of the parent and subsidiary stockholders' equity. Therefore, it equals the parent's stockholders' equity plus the subsidiary's stockholders' equity.

Question 11

On January 1,2016,Pell Company and Sand Company had condensed balance sheets as follows:  On January 2,2016 Pell borrowed $240,000 and used the proceeds to purchase 90% of the outstanding common stock of Sand.This debt is payable in 10 equal annual principal payments,plus interest,starting December 30,2016.Any difference between book value and the value implied by the purchase price relates to land.
On Pell's January 2,2016 consolidated balance sheet,noncurrent liabilities should be:
A)$440,000.
B)$416,000.
C)$240,000.
D)$216,000.

Accepted Answer

The $240,000 borrowed by Pell to purchase Sand's common stock should be recorded under noncurrent liabilities since it's payable in 10 equal annual payments, starting December 30, 2016. Thus, Pell's noncurrent liabilities are increased by $240,000. However, there is a difference between the purchase price and book value (implied value) of the acquired company, which relates to land. This difference is not a liability and should be recorded as an increase in property, plant, and equipment or investment in the subsidiary, depending on the accounting method used. Therefore, the noncurrent liabilities on Pell's January 2, 2016 consolidated balance sheet should be $416,000 ($176,000 + $240,000).

Question 12

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.

Accepted Answer

Eliminating entries are made on the workpaper only and not on the books of either the parent company or the subsidiary company. The purpose of these entries is to remove the effects of intercompany transactions and ensure that the consolidated financial statements reflect only transactions with external parties.

Question 13

On January 1,2016,Pell Company and Sand Company had condensed balance sheets as follows:  On January 2,2016 Pell borrowed $240,000 and used the proceeds to purchase 90% of the outstanding common stock of Sand.This debt is payable in 10 equal annual principal payments,plus interest,starting December 30,2016.Any difference between book value and the value implied by the purchase price relates to land.
On Pell's January 2,2016 consolidated balance sheet,noncurrent assets should be:
A)$520,000.
B)$536,000.
C)$544,000.
D)$586,667.

Accepted Answer

The answer of On January 1,2016,Pell Company and Sand Company...

Question 14

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.

Accepted Answer

Indirect costs relating to acquisitions are expensed as incurred under the acquisition method, according to accounting standards.

Question 15

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 pre-existing goodwill of the subsidiary at its book value.
C)not show any value for the subsidiary's pre-existing goodwill.
D)do an impairment test to see if any of it has been impaired.

Accepted Answer

When a company acquires a subsidiary, the pre-existing goodwill on the subsidiary's books is not recognized in the consolidated financial statements. Instead, any goodwill recognized is calculated based on the purchase price of the subsidiary over the fair value of its net identifiable assets at the acquisition date. Pre-existing goodwill of the subsidiary is not carried over to the consolidated balance sheet.

Question 16

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.

Accepted Answer

If stockholders' equity is undervalued, it would mean that the book value of the subsidiary company's stock is already higher than its true value, so paying more than book value would not make sense. The other options provide possible reasons for paying more than book value.

Question 17

The Difference between Implied and Book Value account is:
A)an asset or liability account reflected on the consolidated balance sheet.
B)used in allocating the amounts paid for recorded balance sheet accounts that are different than their fair values.
C)the excess implied value assigned to goodwill.
D)the unamortized excess that cannot be assigned to any related balance sheet accounts

Accepted Answer

The answer of The Difference between Implied and Book Value...

Question 18

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.

Accepted Answer

When a majority-owned subsidiary is in legal reorganization, it is considered a temporary situation where the subsidiary's assets and liabilities are likely to be sold or otherwise disposed of during the reorganization period. Therefore, the cost method should be used to account for the investment in the subsidiary. This is because the subsidiary's financial results are not expected to have any significant influence on the parent company's financial statements during the reorganization period, and the cost of the investment reflects the parent company's original investment in the subsidiary. Consolidation, equity, and market value methods would not be appropriate in this circumstance.

Question 19

On January 1,2016,Pell Company and Sand Company had condensed balance sheets as follows:  On January 2,2016 Pell borrowed $240,000 and used the proceeds to purchase 90% of the outstanding common stock of Sand.This debt is payable in 10 equal annual principal payments,plus interest,starting December 30,2016.Any difference between book value and the value implied by the purchase price relates to land.
On Pell's January 2,2016 consolidated balance sheet,current liabilities should be:
A)$200,000.
B)$184,000.
C)$160,000.
D)$120,000.

Accepted Answer

The answer of On January 1,2016,Pell Company and Sand Company...

Question 20

Pina Corp.owns 60% of Simon Corp.'s outstanding common stock.On May 1,2016,Pina advanced Simon $90,000 in cash,which was still outstanding at December 31,2016.What portion of this advance should be eliminated in the preparation of the December 31,2016 consolidated balance sheet?
A)$90,000.
B)$54,000.
C)$36,000.
D)$-0-.

Accepted Answer

In preparing consolidated financial statements, intercompany balances and transactions between the parent company and its subsidiaries must be eliminated in full. Since Pina Corp. advanced $90,000 to Simon Corp., and both are part of the same consolidated entity, the entire $90,000 advance should be eliminated to avoid double counting of assets and liabilities within the consolidated group.

Quiz 3: Consolidated Financial Statements Date of Acquisition

Which of the following is a limitation of consolidated financial statements?

Majority-owned subsidiaries should be excluded from the consolidated statements when:

In which of the following cases would consolidation be inappropriate?

One reason a parent company may pay an amount less than the book value of the subsidiary's stock acquired is:

Under the economic entity concept,consolidated financial statements are intended primarily for the benefit of the:

In a business combination accounted for as an acquisition,registration costs related to common stock issued by the parent company are:

What is the method of presentation required by SFAS 160 of "non-controlling interest" on a consolidated balance sheet?

The main evidence of control for purposes of consolidated financial statements involves:

On the consolidated balance sheet,consolidated stockholders' equity is:

Eliminating entries are made to cancel the effects of intercompany transactions and are made on the:

Under the acquisition method,indirect costs relating to acquisitions should be:

A newly acquired subsidiary has pre-existing goodwill on its books.The parent company's consolidated balance sheet will:

Reasons a parent company may pay more than book value for the subsidiary company's stock include all of the following EXCEPT:

The Difference between Implied and Book Value account is:

A majority-owned subsidiary that is in legal reorganization should normally be accounted for using:

Pina Corp.owns 60% of Simon Corp.'s outstanding common stock.On May 1,2016,Pina advanced Simon $90,000 in cash,which was still outstanding at December 31,2016.What portion of this advance should be eliminated in the preparation of the December 31,2016 consolidated balance sheet?