Advanced Accounting Exam 1 – Flashcards

A company should always use the equity method to account for an investment if: a. It has the ability to exercise significant influence over the operating policies of the investee b. It owns 30% of another company's stock c. It has a controlling interest (more than 50%) of another company's stock d. The investment was made primarily to earn a return on excess cash e. It does not have the ability to exercise significant influence over the operating policies of the investee

On 1/1/13, Jordan Inc. acquired 30% of Nico Corp. Jordan used the equity method to account for the investment. On 1/1/2014, Jordan sold 2/3 of its investment in Nico. It no longer has the ability to exercise significant influence over the operations of Nico. How should Jordan have accounted for this change? a. Jordan should continue to use the equity method to maintain consistency in its financial statements b. Jordan should restate the prior years' financial statements and change the balance in the investment account as if the fair-value method has been used since 2013 c. Jordan has the option of using either the equity method or the fair-value method for 2013 years d. Jordan should report the effect of the change from the equity to the fair-value method as a restropestive change in accounting principle e. Jordan should use fair-value method for 2014 and future years but shouldn't make a retrospective adjustment to the investment account

Club. Co appropriately uses the equity method to account for its investment in Chip Corp. As of the end of 2013, Chip's common stock had suffered a significant decline in fair value, which is expected to be recovered over the next several months. How should Club account for the decline in value? a. Club should switch to the FV method b. No accounting because the decline in FV is temporary c. Club should decrease the balance in the investment account to the current value &recognize a loss on the income statement d. Club shouldn't record its share of Chip's 2013 earnings until the decline in the fair value of the stock has been recovered e. Club should decrease the balance in the investment account to the current value and recognize an unrealized loss on the balance sheet

On 1/1/2011, Dermot Company purchased 15% of the voting common stock of Horne Corp. On 1/1/2013, Dermot purchased 28% of Horne's voting common stock. If Dermot achieves significant influence with this new investment, how must Dermot account for the change to the equity method? a. It must use the equity method for 2013 but should make no changes in its financial statements for 2011 and 2012 b. It should prepare consolidated financials statements for 2013 c. It must restate the financial statements for 2011& 2012 as if the equity method had been used for those 2 years d. It should record a prior period adjustment at the beginning of 2013 but should not restate the financial statements for 2011 and 2012 e. It must restate the financial statements for 2012 as if the equity method had been used then

An upstream sale of inventory is a sale: a. Between subsidiaries owned by a common parent b. With the transfer of goods scheduled by contract to occur on a specified future date c. In which the goods are physically transported by boat from a subsidiary to its parent d. Made by the investor to the investee e. Made by the investee to the investor

All of the following would require use of the equity method for investments except: a. Material intra-entity transactions b. Investor participation in the policy-making process of the investee c. Valuation at fair value d. Technological dependency e. Significant control

All of the following statements regarding the investment account using the equity method are true except: a. The investment is recorded at cost b. Dividends received are reported as revenue c. Net income of the investee increases the investment account d. Dividends received reduce the investment account e. Amortization of fair value over cost reduces the investment account

An investee company incurs an extraordinary loss during the period. The investor appropriately applies the equity method. Which of the following statements is true? a. Under the equity method, the investor only recognizes its share of the investors income from continuing operations b. The extraordinary loss would reduce the value of the investment c. The extraordinary loss should increase equity in investee income d. The extraordinary loss would not appear not he income statement but would be a component of comprehensive income d. The loss would be ignored but shown in the investor's notes to the financial statements

When an investor sells shares of its investee company, which of the following statements is true? a. A realized gain or loss is reported as the difference between selling price and original cost b. An unrealized gain or loss is reported as the difference between selling price and original cost c. A realized gain or loss is reported as the difference between selling price and carrying value d. An unrealized gain or loss is reported as the difference between selling price and carrying value e. Any gain or loss is reported as part of comprehensive income

When applying the equity method, how is the excess of cost over book value accounted for? a. Excess is allocated to the difference between FV & BV multiplied by the percent ownership of current assets b. Excess is allocated to the diff. between FV&BV multiplied by the percent ownership of total assets c. The excess is allocated to the difference between FV& BV multiplied by the percent ownership of net assets d. The excess is allocated to goodwill e. Excess is ignored

After allocating cost in excess of BV, which asset or liability would not be amortized over a useful life? a. COGS b. Property, plant and equipment c. Patents d. Goodwill e. Bonds payable

Which statement is true concerning unrealized profits in intra-entity inventory transfer when an investor uses the equity method? a. The investee must defer upstream ending inventory profits b. The investee must defer upstream beginning inventory profits c. The investor must defer downstream ending inventory profits d. The investor must defer downstream beginning inventory profits e. Investor must defer upstream beginning inventory profits

Which statement is true concerning unrealized profits in intra-entity inventory transfers when an investor uses the equity method? a. Investor & investee make reciprocal entries to defer and realize inventory profits b. The same adjustments are made for upstream& downstream transfers c. Diff. adjustments are made for upstream & downstream transfers d. No adjustments are necessary e. Adjustments will be made only when profits are known upon sale to outsiders

At the date of an acquisition, which is not a bargain purchase, the acquisition method: a. Consolidates the subsidiary's assets at FV and the liabilities at BV b. Consolidates all subsidiary's assets & liab. at BV c. Consolidates all subsidiary assets& liab. at FV d. Consolidates current assets & liab. at BV, long-term assets & liab. at FV e. Consolidates the subsidiary's assets at BV and liab. at FV

In the acquisition where control is achieved, how would the land accounts of the parent and the land accounts of the subsidiary be combined? a. P - BV, S - BV b. P - BV, S - FV c. P - FV, S - FV d. P - FV, S - BV e. P - Cost, S - Cost

Lisa Co. paid cash for all the voting common stock of Victoria Corp. Victoria will continue to exist as a separate corporation. Entries for consolidation of Lisa and Victoria would be recorded in: a. A worksheet b. Lisa's general journal c. Victoria's general journal d. Victoria's secret consolidation journal e. The general journals of both companies

Using the acquisition method for a business combination, goodwill is generally defined as: a. Cost of the investment less sub's BV at beg. of year b. Cost of the investment less the sub's BV at the acquisition date c. Cost of the investment less the sub's FV at the beg. of the year d. Cost of the investment less sub's FV at acquisition date e. Is no longer allowed under federal law

How are direct and indirect costs accounted for when applying the acquisition method for a business combination? a. D - expensed, IND - expensed b. D - inc. investment account, IND - decrease APIC c. D - expensed, IND - decrease APIC d. D - increase investment account, IND - expensed e. D - increase investment account, IND - increase investment account

What is the primary accounting diff. between accounting for when the sub is dissolved and when the sub retains its incorporation? a. If the sub is dissolved, it will not be operated as a separate division b. If the sub is dissolved, assets & liab. are consolidated at their BV c. If the sub retains its incorporation, there will be no goodwill associated with he acquisition d. If the sub retains its incorporation, assets and liab. are consolidated at their BV e. If the sub retains its incorporation, the consolidation isn't formally recorded in the accounting records of the acquiring company

An example of a difference in types of business combination is: a. A statutory merger can only be effected by an asset acquisition while a statutory consolidation can only be effected by a capital stock acquisition b. A statutory merger can only be effected by a capital stock acquisition while a statutory consolidation can only be effected by an asset acquisition c. A statutory merger requires dissolution of the acquired company while a statutory consolidation doesn't require dissolution d. A statutory consolidation requires dissolution of the acquired company while a statutory merger doesn't require dissolution e. Both a statutory merger and consolidation can only be effected by an asset acquisition but only a statutory consolidation requires dissolution of the acquired company

Acquired in-process research & development is considered as: a. Definite-lived asset subject to amortization b. Definite-lived asset subject to testing for impairment c. Indefinite-lived asset subject to amortization d. Indefinite-lived asset subject to testing for impairment e. Research & dev. expense at the date of acquisition

A statutory merger is a(n): a. Business combination in which only one of the two companies continue to exist as a legal corporation b. Business combination where both companies continue to exist c. Acquisition of a competitor d. Acquisition of a supplier or customer e. Legal proposal to acquire outstanding shares of the target's stock

How are stock issuance costs & direct combination costs treated in a business combination which is accounted for as an acquisition when the sub will retain its incorporation? a. Stock issuance costs are a part of the acquisition costs & the direct combination costs are expensed b. Direct combination costs are a part of acquisition costs & stock issuance costs are a reduction to APIC c. Direct combo costs are expensed and stock issuance costs are a reduction to APIC d. Both are treated as part of the acquisition consideration transferred e. Both are treated as a reduction to APIC

Which of the following is not a reason for a business combo to take place? a. Cost savings through elimination of duplicate facilities b. Quick entry for new & existing products into domestic and foreign markets c. Diversification of business risk d. Vertical integration e. Increase in stock price of the acquired company

In a transaction accounted for using the acquisition method where consideration transferred exceeds BV of the acquired company, which statement is true for the acquiring company w/regard to its investment? a. Net assets of the acquired company are revalued to their FV & any excess of consideration transferred over FV of N.A acquired is allocated to goodwill b. Net assets of the acquired company are maintained at BV & any excess of consideration transferred over BV of N.A acquired is allocated to goodwill c. Acquired assets are revalued to their FV; acquired liabilities are maintained at BV; excess allocated to goodwill d. Acquired LT-assets are revalued to their FV; excess allocated to goodwill

In transaction accounted for using the acquisition method where consideration transferred is less than FV of N.A acquired, which statement is true? a. Negative goodwill is recorded b. Deferred credit is recorded c. Gain on bargain purchase is recorded d. LT-assets of acquired company are reduced in proportion to their FV; excess recorded as a deferred credit e. LT-assets & liab. of the acquired company are reduced in proportion to their FV; excess recorded as an extraordinary gain

Which one of the following accounts would not appear in the consolidated financial statements at the end of the first fiscal period of the combination? a. Goodwill b. Equipment c. Investment in Subsidiary d. Common Stock e. APIC

Which one of the following varies between the equity, initial value, and partial equity methods of accounting for an investment? a. The amount of consolidated net income b. Total assets on the consolidated balance sheet c. Total liabilities on the consolidated balance sheet d. Balance in the investment account on the parent's books e. Amount of consolidated COGS

Push-down accounting is concerned with the a. Impact of the purchase on the subsidiary's financial statements b. Recognition of goodwill by the parent c. Correct consolidation of the financial statements d. Impact of the purchase on the separate financial statements of the parent e. Recognition of dividends received from the sub

How does the partial equity method differ from the equity method? a. The total assets reported on the consolidated balance sheet b. In the treatment of dividends c. In the total liabilities reported on the consolidated balance sheet d. Under the partial equity method, subsidiary income does not increase the balance in the parent's investment account e. Under the partial equity method, the balance in the investment account is not decreased by amortization on allocations made in the acquisition of the sub

All of the following are acceptable methods to account for a majority-owned investment in subsidiary except: a. The equity method b. initial value method c. partial equity method d. fair-value method e. book value method

Under the partial equity method of accounting for an investment, a. The investment account remains at initial value b. Dividends received are recorded as revenue c. Allocations for excess fair value allocations over book value of net assets at date of acquisition are applied over their useful lives to reduce the investment account d. Amortization of the excess of fair value allocations over book value is ignored in regard to the investment account e. Dividends received increase the investment account

According to GAAP regarding amortization of goodwill & other intangible assets, which of the following statements is true? a. Goodwill recognized in consolidation must be amortized over 20 years b. Goodwill recognized in consolidation must be expensed in the period of acquisition c. Goodwill recognized in consolidation will not be amortized but subject to an annual test for impairment d. Goodwill recognized in consolidation can never be written off e. Goodwill recognized in consolidation must be amortized over 40 years

When consolidating a subsidiary under the equity method, which of the following statements is true with regard to the subsidiary subsequent to the year of acquisition? a. All net assets are revalued to fair value and must be amortized over they useful lives b. Only net assets that had excess fair value over book value when acquired by the parent must be amortized over their useful lives c. All depreciable net assets are revalued to fair value at date of acquisition and must be amortized over their useful lives d. Only depreciable net assets that have excess fair value over book value must be amortized over their useful lives e. Only assets that have excess fair value over book value must be amortized over their useful lives

Which of the following statements is false regarding push-down accounting? a. Push-down accounting simplifies the consolidation process b. Fewer worksheet entries are necessary when push-down accounting is applied c. Push-down accounting provides better information for internal evaluation d. Push-down accounting must be applied for all business combinations under a pooling of interests e. Push-down proponents argue that a change in ownership creates a new basis for subsidiary assets & liabilities

Which of the following is false regarding contingent consideration in business combinations? a. Contingent consideration payable in cash is reported under liabilities b. Contingent consideration payable in stock shares is reported under stockholders equity c. Contingent consideration is recorded because of its substantial probability of eventual payment d. The contingent consideration fair value is recognized as part of the acquisition regardless of whether eventual payment is based on future performance of the target firm of future stock price of the acquirer e. Contingent consideration is reflected in the acquirer's balance sheet at the present value of the potential expected future payment

Consolidated net income using the equity method for an acquisition combination is computed as follows: a. Parent company's income from its own operations plus the equity from subsidiary's income recorded by the parent b. Parent's reported net income c. Combined revenues less combined expenses less equity in subsidiary's income less amortization of FV allocations in excess of BV d. Parent's revenues less expenses for its own operations plus the equity from subsidiary's income recorded by the parent e. all of the above

When is a goodwill impairment loss recognized? a. Annually on a systematic and rational basis b. Never c. If both the FV of a reporting unit and its associated implied goodwill fall below their respective carrying values d. If the FV of a reporting unit falls below its original acquisition price e. Whenever the fair value of the entity declines significantly

How if the fair value allocation of an intangible asset allocated to expenses when the asset has no legal, regulatory, contractual, competitive, economic or other factors that limit its life? a. Equally over 20yrs b. Equally over 40yrs c. Equally over 20yrs with an annual impairment review d. No amortization, but annually reviewed for impairment and adjusted accordingly e. No amortization over an indefinite period time