Multiple Choice questions
1. The first three parts of the Handbook are divided into
a. GAAP for different types of organizations.
b. GAAP for different sizes of organizations.
c. GAAP for international, domestic, and cross-border transactions.
d. pre- and post-January 1,2011 GAAP.
2. An investor in a joint arrangement made a contractual agreement to establish joint
control. What method should the investor use to report this joint arrangement?
a. proportional consolidation
b. cost method
c. equity method
d. cost or equity method
3. Under the cost method, how are liquidating dividends from a subsidiary reported on the
parent's separate-entity financial statements?
a. They are treated as a reduction of the investment account.
b. They are reported in net income.
c. They are reported in other comprehensive income.
d. They are reported as a separate line item under retained earnings.
4. Negative goodwill is also known as
a. a reverse takeover.
b. a hostile takeover.
c. a bargain purchase.
d. using the new entity method.
5. A private enterprise has four subsidiaries. Which of the following statements is true?
a. All subsidiaries should be accounted for using the same method.
b. Subsidiaries can be accounted for using only the cost or equity methods.
c. Subsidiaries can only be consolidated.
d. Subsidiaries can be accounted for using only fair value or the equity method.
6. Which of the following situations does not require consolidation?
a. parent acquires control of a subsidiary through a contractual agreement
b. parent acquires control of a subsidiary through a reverse takeover
c. parent acquires control of a subsidiary by purchasing its shares for cash
d. parent acquires control of a subsidiary by purchasing its net assets for cash
7. Which of the following statements about an acquirer in a business combination is true?
a. The acquirer is always the larger company.
b. In a share exchange, the acquirer is always the company that issued shares.
c. The acquirer is always the company that may have to pay contingent consideration.
d. If an acquirer cannot be determined after reviewing voting rights, the composition of the board of directors should be reviewed.
8. Under the entity theory approach to consolidation, the consolidated entity
a. is viewed only from the parent company's shareholders' point of view.
b. is viewed as having controlling and non-controlling shareholders.
c. is viewed from the parent company's shareholders' point of view, but the non-controlling interest is shown as a liability.
d. does not recognize any goodwill that pertains to the non-controlling interest.
9. Which of the following statements about push-down accounting is true?
a. Reverse takeovers must be accounted for using push-down accounting.
b. Hostile takeovers must be accounted for using push-down accounting.
c. Under push-down accounting, the subsidiary must revalue all of its assets and liabilities, including goodwill, to the values used to calculate the consolidated statement of financial position.
d. Under push-down accounting, the parent must revalue all of its assets and liabilities, including goodwill, to the values used to calculate the consolidated statement of financial position.
10. In preparing consolidated financial statements, which step is not required if the parent company uses the equity method to record its investment in its subsidiary?
a. Calculate and allocate the acquisition differential.
b. Prepare a schedule of acquisition differentials, amortization, and impairment adjustments.
c. Calculate the non-controlling interest.
d. Calculate consolidated net income for the current year.
11. If the parent company has significant influence over its subsidiary, unrealized profit on upstream sales
a. should not be eliminated on the consolidated financial statements.
b. should be eliminated in their entirety on the consolidated financial statements.
c. that relate to the investor's share of ownership should be eliminated on the consolidated financial statements.
d. that relate only to the non-controlling share of ownership should be eliminated on the consolidated financial statements.
12. Zara Co. is a wholly owned subsidiary of Kelly Ltd., and Lori Ltd. owns 75% of Kelly. Kelly
a. must prepare consolidated financial statements.
b. is not required to prepare consolidated financial statements if Lori prepares consolidated financial statements.
c. is not required to prepare consolidated financial statements if Zara is reported at fair value.
d. is not required to prepare consolidated financial statements if it does not have any taxable income.
13. At the date of acquisition, Ron Ltd. expected that it would have to provide contingent consideration, in cash, based on share prices within the next two years. At the time of acquisition, Ron should
a. credit a liability account and debit an Investment in Subsidiary account.
b. credit a liability account and debit a Loss on Contingent Consideration account.
c. credit a liability account and debit a Gain on Contingent Consideration account.
d. not make a journal entry for the contingent consideration.
14. The non-controlling interest reported on the consolidated balance sheet is based on the subsidiary's shareholders' equity after it has been adjusted for
a. realized profits on downstream transactions.
b. unrealized profits on downstream transactions.
c. realized profits on upstream transactions.
d. unrealized profits on upstream transactions.
15. Tom Co. purchased 75% of the bonds issued by its wholly-owned subsidiary, Mark Ltd. The elimination of the inter-company accounts with respect to the bondholdings in preparing Tom's consolidated financial statements resulted in a gain. Which of the following statements is true?
a. The gain on the inter-company bondholdings is recorded on Tom 's separate-entity financial statements prior to being reported on Tom 's consolidated financial statements.
b. The gain on the inter-company bondholdings is reported on Tom 's consolidated financial statements prior to being recorded on Tom 's separate-entity financial statements.
c. The gain on the inter-company bondholdings is reported on Tom's consolidated financial statements but is not recorded on Tom 's separate-entity financial statements.
d. The gain on the inter-company bondholdings is recorded on Tom 's separate-entity financial statements but is not reported on Tom's consolidated financial statements.
16. Under which consolidation theory is all of a subsidiary's value, except for the NCI's share of goodwill, included on the consolidated balance sheet?
a. proprietary
b. parent company
c. parent company extension
d. entity
17. Where is the amortization of the acquisition differential reflected?
a. consolidated financial statements
b. parent company's separate-entity financial statements
c. subsidiary company's separate-entity financial statements
d. Acquisition differentials are not amortized.
18. Which of the following statements is true?
a. Impairment losses on assets can be reversed, but impairment losses on goodwill cannot be reversed.
b. Impairment losses on goodwill can be reversed, but impairment losses on assets cannot be reversed.
c. Impairment losses on both goodwill and assets can be reversed.
d. Impairment losses can never be reversed.
19. The bottom portion of a consolidated income statement
a. segregates consolidated net income into amounts attributable to the parent company and to the subsidiary company.
b. segregates consolidated net income into amounts attributable to the shareholders of the parent company and to the NCI.
c. segregates consolidated net income into amounts attributable to the current year
and to past years.
d. shows the consolidated income in total, without any attribution.
20. A company can account for its investment in a subsidiary by using the cost method or the equity method. In comparing the financial statements under the two methods, all of the accounts on the statement of financial position will be the same except for
a. Investment in Subsidiary and Goodwill.
b. Goodwill and Share Capital.
c. Share Capital and Retained Earnings.
d. Investment in Subsidiary and Retained Earnings.
Writing questions
Q1
On April 1, 20X3, Sue Ltd. purchased 10% of Nina for $750,000. Both Sue and Nina have March 31 year-ends. For its 20X4 fiscal year-end, Nina reported net income of $600,000.
On March 31, 20X4, Nina had a market value of $825,000 and it paid out dividends of $375,000. On July 31, 20X4, Nina paid out dividends of$150,000. Sue sold its investment in Nina on October 31, 20X4 for $1,020,000.
Required:
a. Prepare the 20X3 and 20X4 journal entries for Sue for the above transactions. Assume that Sue does not have significant influence.
b. Prepare the 20X3 and 20X4 journal entries for Sue for the above transactions. Assume that Sue does have significant influence.
Q2
On January 2, 20X6, John Ltd. acquired 60% of the voting shares of Sam Ltd. by issuing shares worth $399,000. John consolidates using entity theory.
Required:
Prepare the consolidated balance sheet immediately following the acquisition of Sam Ltd.
Q3
John and Sam provided the following information for 20X6:
- During 20X6, Sam sold goods to John for $560,000. As of December 31, 20X6, John still had 25% of the goods in its inventory. John paid the same price for the goods as Sam's other customers.
- During 20X6,John sold goods to Sam for $532,000. As of December 31, 20X6, Sam still had 20% of the goods in its inventory. Sam paid the same price for the goods as John's other customers.
- Sam's warehouse and equipment have remaining useful lives of 10 years and 5 years, respectively. Both Sam and John use straight-line amortization.
- Neither John nor Sam has disposed of or has written off any property, plant, or equipment.
- There has been no impairment of goodwill.
Required:
Prepare John's consolidated balance sheet, consolidated income statement, and consolidated statement of retained earnings for December 31 , 20X6.
Q4
John and Sam provided the following information for 20X7:
- All the goods that were in inventory at December 31, 20X6 were sold to third parties by Apri120X7.
- During 20X7, Sam sold goods to John for $425,600. The gross margin is unchanged from 20X6. At December 31, 20X7, John still had 50% of the goods in its inventory.
- At the beginning of December, John sold goods to Sam for $106,400. John's gross margin on this sale was 50%. By the end of the year, Sam had not sold any of these goods.
Required:
Calculate the following amounts for the year ended December 31, 20X7:
a. non-controlling interest in earnings that would appear on John's consolidated income statement.
b. non-controlling interest that would appear on John's consolidated balance sheet.