Question 1

The acquisition method of accounting for a business combination is consistent with
A)Entity theory.
B)Proprietary theory.
C)Parent company theory.
D)Residual interest theory.

Accepted Answer

The acquisition method of accounting for a business combination is consistent with entity theory, which recognizes that the acquiring company has obtained control over the assets, liabilities, and operations of the acquired company as a separate entity. This method is in contrast with proprietary theory, which views the combined companies as a single economic unit owned by the parent company. The acquisition method also follows the residual interest theory, which holds that the acquiring company is responsible for any remaining economic interest in the acquired company after all other claims have been satisfied. Parent company theory is not relevant to the accounting treatment of a business combination.

Question 2

On October 1,Company X acquired for cash all of the outstanding common stock of Company Y.Both companies have a December 31 year end and have been in business for many years.Consolidated net income for the year ended December 31 should include net income of
A)Company X for3 months and Company Y for 3 months
B)Company X for 12 months and Company Y for 3 months
C)Company X for 12 months and Company Y for 12 months
D)Company X for 12 months,but no income from Company Y until Company Y distributed a dividend

Accepted Answer

B

Question 3

Under the acquisition method for a business combination,the cost incurred to effect the business combination,such as finders and legal fees are
A)Considered part of the historical cost of the business.
B)Expensed as incurred.
C)Allocated,along with the purchase price of the acquired company's stock to the assets of the acquiree company.
D)Deferred until a full accounting of all costs to acquire the acquire company are known.

Accepted Answer

Costs incurred to effect the business combination, such as finders and legal fees, are generally expensed as incurred under the acquisition method. They are not included in the historical cost of the business or allocated to the assets of the acquiree company. They are also not deferred until a full accounting of all costs is known.

Question 4

Under the acquisition method of accounting for a business combination,restructuring costs are
A)Capitalized and amortized over a period not exceeding ten years.
B)Fees paid to lawyers and accountants to bring about the business combination .
C)Costs incurred to effect the business combination.
D)Treated as post acquisition expenses.

Accepted Answer

Restructuring costs incurred after the acquisition are not considered part of the cost of the business combination and are treated as post acquisition expenses. The acquisition method only includes costs incurred to effect the combination, such as legal and accounting fees. Restructuring costs are not directly related to the combination and are therefore not capitalized or amortized.

Question 5

Goodwill represents the excess of the cost of an acquired company over the
A)Sum of the fair values assigned to identifiable assets acquired less liabilities assumed
B)Sum of the fair values assigned to tangible assets acquired less liabilities assumed
C)Sum of the fair values assigned to intangible assets acquired less liabilities assumed
D)Book value of an acquired company

Accepted Answer

Goodwill is calculated as the excess of the purchase price of an acquired company over the sum of the fair values of its identifiable assets less the liabilities assumed. It reflects the value of intangible assets such as brand reputation, customer relationships, and intellectual property that are not separately identifiable or separately recognized.

Question 6

Under the acquisition method of accounting for a business combination,a bargain purchase is
A)Reported as goodwill in the balance sheet.
B)Tested annually for impairment.
C)Reported as a gain in the income statement.
D)Reported as an adjustment to other comprehensive income.

Accepted Answer

A bargain purchase occurs when the purchase price of the acquired company is less than the fair value of its identifiable net assets. In this case, the excess amount is reported as a gain in the income statement of the acquiring company. It is not reported as goodwill in the balance sheet, nor is it tested for impairment. It is also not reported as an adjustment to other comprehensive income.

Question 7

Arkin,Inc.,owns 90 percent of the outstanding stock of Baldwin Company.Curtis,Inc.,owns 10 percent of the outstanding stock of Baldwin Company.On the consolidated financial statements of Arkin,Curtis should be considered as
A)A holding company
B)A subsidiary not to be consolidated
C)An affiliate
D)A noncontrolling interest

Accepted Answer

Curtis, Inc. owns 10% of the outstanding stock of Baldwin Company, but it is not a subsidiary of Arkin, Inc. because Arkin only owns 90% of the outstanding stock. Therefore, Curtis, Inc. should be classified as a noncontrolling interest on the consolidated financial statements of Arkin, Inc.

Question 8

Under the acquisition method of accounting for a business combination,goodwill is equal to
A)The acquired company's ability to generate excess profits .
B)The excess of the cost of the acquisition plus the fair value of the noncontrolling interest over the fair value of the acquiree's net assets.
C)The excess of the cost of the acquisition over the fair value of the acquiree's net assets.
D)The excess of the fair value of acquiree's net assets over the cost of acquisition.

Accepted Answer

Goodwill under the acquisition method of accounting for a business combination is the excess of the cost of the acquisition plus the fair value of noncontrolling interest over the fair value of the acquiree's net assets. In other words, it represents the amount paid for the acquisition that cannot be attributed to any individual asset or liability of the acquiree. It reflects the intangible assets such as brand name, customer relationships, and other synergies that are expected to contribute to the future profitability of the combined company.

Question 9

Under which of the theories of equity is a manager's goals considered as important as those of the common stockholder.
A)Proprietary theory.
B)Commander theory.
C)Entity theory.
D)Enterprise theory.

Accepted Answer

The answer of Under which of the theories of equity...

Question 10

For a business combination,we measure all assets and liabilities of an acquired company at fair value.Fair value
A)Is an exit value.
B)Is an entry value.
C)Is an appraisal value.
D)Can be either an exit value or an entry value depending on the circumstances.

Accepted Answer

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, which is an exit value. Therefore, option A is the correct choice.

Question 11

Which of the following is not a consideration in segment reporting for diversified enterprises?
A)Allocation of joint costs
B)Transfer pricing
C)Defining the segments
D)Consolidation policy

Accepted Answer

Consolidation policy is not a consideration in segment reporting for diversified enterprises as it refers to the process of combining financial statements of subsidiary companies into the financial statements of the parent company, which is not relevant in segment reporting. The other options, allocation of joint costs, transfer pricing, and defining the segments are all relevant considerations in segment reporting for diversified enterprises.

Question 12

A subsidiary's functional currency is the local currency that has not experienced significant inflation.The appropriate exchange rate for translating the depreciation on plant assets in the income statement of the foreign subsidiary is the
A)Exit exchange rate
B)Historical exchange rate
C)Weighted average exchange rate over the economic life of each plant asset
D)Weighted average exchange rate for the current year

Accepted Answer

According to the temporal method of translation, the historical exchange rate should be used to translate the depreciation on plant assets in the income statement of the foreign subsidiary. This is because the historical exchange rate is used for translating non-monetary assets, such as plant assets, that have a determinable useful life and are not adjusted for inflation.

Question 13

Under the acquisition method of accounting for a business combination when the parent company has acquired only 90% of the voting stock of a subsidiary,
A)10% of the goodwill will be reported in a separate section of the balance sheet because it belongs to the noncontrolling interest .
B)The consolidated balance sheet will report 100% of the value of goodwill.
C)The consolidated balance sheet will report 90% of the value of goodwill.
D)Goodwill will be amortized over its useful life or 40 years whichever comes first.

Accepted Answer

Under the acquisition method of accounting, the consolidated financial statements must reflect 100% of the subsidiary's assets, liabilities and goodwill even if the parent company does not technically own all of the equity in the subsidiary. The noncontrolling interest is reported as a separate item within the stockholders' equity section of the consolidated balance sheet. Goodwill is not amortized, but is subject to an annual impairment test to determine if its carrying value needs to be reduced.

Question 14

Consolidated statements are proper for Neely,Inc.,Randle,Inc.,and Walker,Inc.,if
A)Neely owns 80 percent of the outstanding common stock of Randle and 40 percent of Walker; Randle owns 30 percent of Walker.
B)Neely owns 100 percent of the outstanding common stock of Randle and 90 percent of Walker; Neely bought the stock of Walker one month before the balance sheet date and sold it seven weeks later.
C)Neely owns 100 percent of the outstanding common stock of Randle and Walker; Walker is in legal reorganization.
D)Neely owns 80 percent of the outstanding common stock of Randle and 40 percent of Walker; Reeves,Inc.,owns 55 percent of Walker.

Accepted Answer

In this scenario, Neely owns a controlling interest in Randle and has a significant interest in Walker. Since Neely has the ability to control the financial and operating policies of both companies, consolidating the financial statements would provide a more accurate representation of the overall financial performance and position of the related companies. Furthermore, since Randle owns a portion of Walker, consolidating the financial statements would eliminate any intercompany transactions between the two companies that could artificially inflate reported revenues or expenses.

Question 15

The theoretically preferred method of presenting noncontrolling interest on a consolidated balance sheet is
A)As a separate item with the deferred credits section
B)As a reduction 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

Accepted Answer

The preferred method of presenting noncontrolling interest on a consolidated balance sheet is as a separate item within the stockholders' equity section. This presentation method provides clear and concise information to stakeholders about the ownership structure of the consolidated entity. Additionally, it aligns with the conceptual framework of separate recognition of equity interests for controlling and noncontrolling shareholders.

Question 16

Meredith Company and Kyle Company were combined in an acquisition transaction.Meredith was able to acquire Kyle at a bargain price.The sum of the market or appraised values of identifiable assets acquired less the fair value of liabilities assumed exceeded the cost to Meredith.After revaluing noncurrent assets to zero there was still some of the bargain purchase amount remaining formerly termed negative goodwill).Proper accounting treatment by Meredith is to report the amount as
A)An extraordinary item
B)Part of current income in the year of combination
C)A deferred credit and amortize it
D)Paid-in capital

Accepted Answer

The answer of Meredith Company and Kyle Company were combined...

Question 17

Which of the following is the appropriate basis for valuing fixed assets acquired in a business combination carried out by exchanging cash for common stock?
A)Historic cost
B)Book value
C)Cost plus any excess of purchase price over book value of asset acquired
D)Fair value

Accepted Answer

Fair value is the appropriate basis for valuing fixed assets acquired in a business combination as it reflects the current market value of the asset. This method ensures that assets are not over or undervalued, providing a more accurate representation of their worth.

Question 18

In a business combination that is accounted for under the acquisition method the entity that obtains control over one or more businesses and establishes the acquisition date that control was achieved is called the
A)Controller.
B)Acquirer.
C)Proprietor.
D)Controlling interest.

Accepted Answer

The entity that obtains control over one or more businesses and establishes the acquisition date that control was achieved is called the acquirer. This is because they are the ones acquiring or obtaining control over the other business(es).

Question 19

A sale of goods,denominated in a currency other than the entity's functional currency,resulted in a receivable that was fixed in terms of the amount of foreign currency that would be received.Exchange rates between the functional currency and the currency in which the transaction was denominated changed.The resulting gain should be include as a an)
A)Other comprehensive income
B)Deferred credit
C)Component of income from continuing operations
D)Extraordinary item

Accepted Answer

The answer of A sale of goods,denominated in a currency...

Question 20

The noncontrolling interest in a subsidiary is reported in the consolidated balance sheet
A)As an investment.
B)As a liability.
C)At fair value,as determined on the acquisition date.
D)As an element of stockholders' equity.

Accepted Answer

The noncontrolling interest represents the portion of a subsidiary that is not owned by the parent company. It is reported in the consolidated balance sheet as an element of stockholders' equity, specifically as a separate line item within the equity section. This is because the noncontrolling interest represents the equity ownership in the subsidiary by outside investors, rather than by the parent company.

Quiz 16: Accounting for Multiple Entities

The acquisition method of accounting for a business combination is consistent with

On October 1,Company X acquired for cash all of the outstanding common stock of Company Y.Both companies have a December 31 year end and have been in business for many years.Consolidated net income for the year ended December 31 should include net income of

Under the acquisition method for a business combination,the cost incurred to effect the business combination,such as finders and legal fees are

Under the acquisition method of accounting for a business combination,restructuring costs are

Goodwill represents the excess of the cost of an acquired company over the

Under the acquisition method of accounting for a business combination,a bargain purchase is

Arkin,Inc.,owns 90 percent of the outstanding stock of Baldwin Company.Curtis,Inc.,owns 10 percent of the outstanding stock of Baldwin Company.On the consolidated financial statements of Arkin,Curtis should be considered as

Under the acquisition method of accounting for a business combination,goodwill is equal to

Under which of the theories of equity is a manager's goals considered as important as those of the common stockholder.

For a business combination,we measure all assets and liabilities of an acquired company at fair value.Fair value

Which of the following is not a consideration in segment reporting for diversified enterprises?

A subsidiary's functional currency is the local currency that has not experienced significant inflation.The appropriate exchange rate for translating the depreciation on plant assets in the income statement of the foreign subsidiary is the

Under the acquisition method of accounting for a business combination when the parent company has acquired only 90% of the voting stock of a subsidiary,

Consolidated statements are proper for Neely,Inc.,Randle,Inc.,and Walker,Inc.,if

The theoretically preferred method of presenting noncontrolling interest on a consolidated balance sheet is

Which of the following is the appropriate basis for valuing fixed assets acquired in a business combination carried out by exchanging cash for common stock?

In a business combination that is accounted for under the acquisition method the entity that obtains control over one or more businesses and establishes the acquisition date that control was achieved is called the

The noncontrolling interest in a subsidiary is reported in the consolidated balance sheet