Problem 1. Under the parent company concept, which of the following statements is true?
A) Holding control of a subsidiary provides the parent with an indivisible interest in that company.
B) Consolidated financial statements are produced primarily for the benefit of the parent company stockholders.
C) The parent company concept is a hybrid of the proportionate consolidation concept and the parent company concept.
D) All of the above.
Problem 2. Which one of the following is a characteristic of a business combination that should be accounted for as a purchase?
A) The combination must involve the exchange of equity securities only.
B) The transaction clearly establishes an acquisition price for the company being acquired.
C) The two companies may be about the same size, and it is difficult to determine the acquired company and the acquiring company.
D) The transaction may be considered to be the uniting of the ownership interests of the companies involved.
E) The acquired subsidiary must be smaller in size than the acquiring parent.
Problem 3. When a company applies the cost method in accounting for its investment in subsidiary and the subsidiary reports income in excess of dividends paid, what worksheet entry would be made?
A) Retained earnings
Investment in subsidiary
B) Investment in subsidiary
Retained earnings
C) Investment in subsidiary
Equity in subsidiary's income
D) Equity in subsidiary's income
Investment in subsidiary
E) Additional paid-in capital
Retained earnings
Problem 4. In translating a foreign subsidiary's financial statements, which exchange rate does the current method require being used for the subsidiary's assets and liabilities?
A) the exchange rate in effect when each asset or liability was acquired
B) the average exchange rate for the current year
C) a calculated exchange rate based on market value
D) the exchange rate in effect as of the balance sheet date
E) the exchange rate in effect at the start of the current year
Problem 5. In accounting, the term translation refers to
A) the calculation of gains or losses from hedging transactions.
B) the calculation of exchange rate gains or losses on individual transactions in foreign currencies.
C) the procedure required to identify a company's functional currency.
D) the calculation of gains or losses from all transactions for the year.
E) a procedure to prepare a foreign subsidiary's financial statements for consolidation.
Problem 6. Which one of the following characteristics of preferred stock would make the stock resemble a liability?
A) The preferred stock is callable.
B) The preferred stock is convertible.
C) The preferred stock has warrants attached.
D) The preferred stock is noncumulative.
E) The preferred stock is participating.
Problem 7. On January 1, 2003, Riley Corp. acquired some of the outstanding bonds of one of its subsidiaries. The bonds had a carrying value of $421,620, and Riley paid $401,937 for them. How should you account for the difference between the carrying value and the purchase price in the consolidated financial statements for 2003?
A) The difference is added to the carrying value of the debt.
B) The difference is deducted from the carrying value of the debt.
C) The difference is treated as a loss from the extinguishment of the debt.
D) The difference is treated as a gain from the extinguishment of the debt.
E) The difference does not influence the consolidated financial statements.
Problem 8. Which statement is true regarding a foreign currency option?
A) A foreign currency option gives the holder the obligation to buy or sell foreign currency in the future.
B) A foreign currency option gives the holder the obligation only sell foreign currency in the future.
C) A foreign currency option gives the holder the obligation to only buy foreign currency in the future.
D) A foreign currency option gives the holder the right but not the obligation to buy or sell foreign currency in the future.
E) A foreign currency option gives the holder the obligation to buy or sell foreign currency in the future at the spot rate.
Problem 9. A U.S. company sells merchandise to a foreign company denominated in the foreign currency. Which of the following statements is true?
A) If the foreign currency appreciates, a foreign exchange gain will result.
B) If the foreign currency depreciates, a foreign exchange gain will result.
C) No foreign exchange gain or loss will result.
D) If the foreign currency appreciates, a foreign exchange loss will result.
E) Any gain or loss will be included in comprehensive income.
Problem 10. Which accounts are remeasured using current exchange rates?
A) all revenues and expenses
B) all assets and liabilities
C) all monetary assets and liabilities
D) all current assets and liabilities
E) all noncurrent assets and liabilities