1. Company A buys Company B and pays $5 million more than the fair value of the identifiable assets and liabilities. The $5 million was recorded as Goodwill. Which of the following statements is true?
A) Goodwill is amortized to expense over 40 years.
B) The rules have changed so that goodwill is now expensed immediately.
C) Goodwill must be checked for impairment periodically and reduced if impaired.
D) Goodwill is amortized over an appropriate period of 40 years or less
2. Big Company buys 80 percent of the outstanding shares of Little Company on January 1, Year One. How is the presence of the 20 percent noncontrolling interest reflected in a consolidated balance sheet?
A) It appears in the footnotes of the financial statements but not on the balance sheet.
B) Within stockholders' equity
C) Between the liabilities and the stockholders' equity (referred to as a mezzanine approach)
D) As a liability
3. Big Company buys Small Company and is now consolidating the financial statements as of the date of the acquisition. Each of the following four items has a fair value. Which of these is most likely to not be recognized on the consolidated balance sheet as an intangible asset at fair value as of the date of the acquisition?
A) Noncompetition agreement with a former employee
B) Unpatented technology
C) An employee who recently won the Nobel Prize for Chemistry
D) Secret formula for Small Company’s most popular product.
4. Big Company buys 100 percent of the outstanding shares of Little Company on January 1, Year One. On a consolidated balance sheet produced immediately thereafter, goodwill of $320,000 is reported. How was this goodwill determined?
A) It is the fair value of the consideration given up by Big less the fair value of all identifiable assets and liabilities owned by Little.
B) It was on the previous balance sheet of Little before the acquisition took place.
C) It is a figure calculated based on the expected cash flows to be generated by Little discounted at a reasonable interest rate.
D) The specific components that compose goodwill must be determined and individually valued.
5. Big Company creates Small Company for one specific purpose (ownership of a large building to be leased by Big). Although Big holds only a small equity ownership in Small (a bank holds most of the common stock), Big is viewed as its primary beneficiary because it bears the risks (through guarantees) and receives the benefits from its operations through favorable leasing rates. Small Company qualifies as a variable interest entity since the amount of potential losses to Big goes beyond the amount invested. How does Big report its ownership interest in Small?
A) Through footnote disclosure of the potential risks and rewards
B) As an investment at cost
C) As an investment reported by means of the equity method
D) By including the financial accounts of Small within consolidated financial statements
6. Several years ago, Jumbo Corporation bought Shrimp Company. Shrimp was a supplier of merchandise for Jumbo and one of the primary reasons for this acquisition was so that Jumbo could save money on these purchases. In the current year, Jumbo reports cost of goods sold of $900,000 while Shrimp reports $500,000. Half of Shrimp's sales were made to Jumbo for $400,000. As of the last day of the year, Jumbo still held 10 percent of these goods and planned to sell them early in the following year. What amount should Jumbo report as consolidated cost of goods sold?
A) $1,015,000
B) $1,040,000
C) $1,165,000
D) $1,190,000