Consolidated Financial Statements
Exam Materials
Course Introduction
This course provides an in-depth exploration of the concepts, standards, and techniques involved in the preparation and analysis of consolidated financial statements. Students will learn the rationale and methods for combining the financial statements of parent companies and their subsidiaries, including the identification and treatment of intercompany transactions, non-controlling interests, and goodwill. The course emphasizes the requirements under international financial reporting standards (IFRS) and generally accepted accounting principles (GAAP), covering complex scenarios such as step acquisitions, indirect holdings, and foreign subsidiaries. Practical examples and case studies reinforce the application of theoretical knowledge to real-world corporate group structures.
Recommended Textbook
Advanced Accounting 11th Edition by Joe Ben Hoyle
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Page 2
Chapter 1: The Equity Method of Accounting for Investments
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Q1) Which types of transactions, exchanges, or events would indicate that an investor has the ability to exercise significant influence over the operations of an investee?
Answer: When an investor has the ability to exercise significant influence over the operations of an investee, the investor should use the equity method to account for the investment. GAAP suggests several events or conditions which would indicate such influence: (1) investor representation on the investee's board of directors; (2) material transactions between the companies; (3) interchange of managerial personnel; (4) technological dependency between the companies; and (5) the extent of investor ownership and the concentration of other ownership interests in the investee; (6) investor participation in the policy-making process of the investee. All of these conditions should be examined to determine whether the investor has the ability to exercise significant influence over the investee.
Q2) What is the justification for the timing of recognition of income under the equity method?
Answer: According to the equity method, the investor should recognize its share of the investee's income in the same period in which it is earned by the investee. The equity method applies accrual accounting when the investor could exercise significant influence over the investee.
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Chapter 2: Consolidation of Financial Information
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Q1) A statutory merger is a(n)
A) business combination in which only one of the two companies continues to exist as a legal corporation.
B) business combination in which both companies continues to exist.
C) acquisition of a competitor.
D) acquisition of a supplier or a customer.
E) legal proposal to acquire outstanding shares of the target's stock.
Answer: A
Q2) How are bargain purchases accounted for in an acquisition business transaction?
Answer: A bargain purchase results when the collective fair values of the net identified assets acquired and liabilities assumed exceed the fair value of consideration transferred. The assets and liabilities acquired are recorded at their fair values and the bargain purchase is recorded as a Gain on Bargain Purchase.
Q3) Describe the accounting for direct costs, indirect costs, and issuance costs under the acquisition method of accounting for a business combination.
Answer: Direct and indirect combination costs are expensed and issuance costs reduce the otherwise fair value of the consideration issued under the acquisition method of accounting for business combinations.
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Chapter 3: Consolidations - Subsequent to the Date of Acquisition
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Q1) When consolidating a subsidiary under the equity method, which of the following statements is true?
A) Goodwill is never recognized.
B) Goodwill required is amortized over 20 years.
C) Goodwill may be recorded on the parent company's books.
D) The value of any goodwill should be tested annually for impairment in value.
E) Goodwill should be expensed in the year of acquisition.
Answer: D
Q2) An acquisition transaction results in $90,000 of goodwill. Several years later a worksheet is being produced to consolidate the two companies. Describe in words at what amount goodwill will be reported at this date.
Answer: The $90,000 attributed to goodwill is reported at its original amount unless a portion of goodwill is impaired or a unit of the business where goodwill resides is sold.
Q3) For an acquisition when the subsidiary retains its incorporation, which method of internal recordkeeping is the easiest for the parent to use?
Answer: The initial value method is the easiest to use.
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Chapter 4: Consolidated Financial Statements and Outside Ownership
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Q1) Jax Company uses the acquisition method for accounting for its investment in Saxton Company. Jax sells some of its shares of Saxton such that neither control nor significant influence exists. Which of the following statements is true?
A) The difference between selling price and acquisition value is recorded as a realized gain or loss.
B) The difference between selling price and acquisition value is recorded as an unrealized gain or loss.
C) The difference between selling price and carrying value is recorded as a realized gain or loss.
D) The difference between selling price and carrying value is recorded as an unrealized gain or loss.
E) The difference between selling price and carrying value is recorded as an adjustment to retained earnings.
Q2) Where may a non-controlling interest be presented in a consolidated balance sheet?
Q3) How is a non-controlling interest in the net income of an entity reported in the income statement?
Q4) Where should a non-controlling interest appear on a consolidated balance sheet?
Page 6
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Chapter 5: Consolidated Financial StatementsIntercompany Asset Transactions
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Q1) Walsh Company sells inventory to its subsidiary, Fisher Company, at a profit during 2010. One-third of the inventory is sold by Walsh uses the equity method to account for its investment in Fisher. In the consolidation worksheet for 2010, which of the following choices would be a debit entry to eliminate unrealized intra-entity gross profit with regard to the 2010 intra-entity sales?
A) Retained earnings.
B) Cost of goods sold.
C) Inventory.
D) Investment in Fisher Company.
E) Sales.
Q2) On November 8, 2011, Power Corp. sold land to Wood Co., its wholly owned subsidiary. The land cost $61,500 and was sold to Wood for $89,000. From the perspective of the combination, when is the gain on the sale of the land realized?
A) Proportionately over a designated period of years.
B) When Wood Co. sells the land to a third party.
C) No gain can be recognized.
D) As Wood uses the land.
E) When Wood Co. begins using the land productively.
Q3) How is the gain on an intra-entity transfer of a depreciable asset realized?
Page 7
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Chapter 6: Intercompany Debt, Consolidated Statement of
Cash Flows, and Other
Issues
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Q1) Where do dividends paid by a subsidiary to the parent company appear in a consolidated statement of cash flows?
A) Cash flows from operating activities.
B) Cash flows from investing activities.
C) Cash flows from financing activities.
D) Supplemental schedule of noncash investing and financing activities.
E) They do not appear in the consolidated statement of cash flows.
Q2) What would differ between a statement of cash flows for a consolidated company and an unconsolidated company using the indirect method?
A) Parent's dividends would be subtracted as a financing activity.
B) Gain on sale of land would be deducted from net income.
C) Non-controlling interest in net income of subsidiary would be added to net income.
D) Proceeds from the sale of long-term investments would be added to investing activities.
E) Loss on sale of equipment would be added to net income.
Q3) Parent Corporation had just purchased some of its subsidiary's outstanding bonds on the open market. What items related to these bonds will have to be accounted for in the consolidation process?
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Chapter 7: Consolidated Financial Statements - Ownership
Patterns and Income Taxes
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Sample Questions
Q1) Which of the following statements is false concerning a father-son-grandson configuration?
A) This type of ownership pattern does not significantly alter the worksheet process.
B) Most worksheet entries are simply made twice.
C) The doubling of entries may seem overwhelming.
D) The individual consolidation procedures remain unaffected.
E) Consolidated financial statements are required for only the father and son companies.
Q2) Which of the following statements is true regarding a subsidiary's investment in the parent company's stock?
A) The treasury stock approach focuses on the parent's control over its subsidiary.
B) For consolidation, both the parent and subsidiary must eliminate all intra-entity investments.
C) In consolidation, the parent's retained earnings will not be reduced by the dividends it paid to the subsidiary.
D) This corporate combination is known as mutual ownership.
E) All of the above are true statements.
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9
Chapter 8: Segment and Interim Reporting
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Q1) According to U.S. GAAP, what revenues and expenses included in segment profit or loss need to be disclosed?
Q2) For companies that provide quarterly reports, how is the fourth quarter reported?
A) Every company that reports for the first three quarters must also publish a fourth-quarter report.
B) No fourth-quarter report is required.
C) No company may publish a fourth-quarter report.
D) The SEC requires selected quarterly financial data to be reported separately as a fourth-quarter report.
E) When fourth-quarter financial statements are provided, special accounting items should be disclosed in the annual financial statements.
Q3) What related items need to be disclosed in regard to total segment assets?
Q4) List the five aggregation criteria that need to be considered by management in determining whether business activities and environments are similar.
Q5) According to U.S. GAAP, what general information about an operating segment needs to be disclosed?
Q6) What is meant by the term: disaggregated financial information?
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Chapter 9: Foreign Currency Transactions and Hedging
Foreign Exchange Risk
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Sample Questions
Q1) Winston Corp., a U.S. company, had the following foreign currency transactions during 2011: (1.) Purchased merchandise from a foreign supplier on July 16, 2011 for the U.S. dollar equivalent of $47,000 and paid the invoice on August 3, 2011 at the U.S. dollar equivalent of $54,000.
(2)) On October 15, 2011 borrowed the U.S. dollar equivalent of $315,000 evidenced by a non-interest-bearing note payable in euros on October 15, 2011. The U.S. dollar equivalent of the note amount was $295,000 on December 31, 2011, and $299,000 on October 15, 2012.
What amount should be included as a foreign exchange gain or loss from the two transactions for 2012?
A) $1,000 loss.
B) $1,000 gain.
C) $2,000 loss.
D) $4,000 gain.
E) $4,000 loss.
Q2) What happens when a U.S. company purchases goods denominated in a foreign currency and the foreign currency depreciates?
Q3) What is the purpose of a hedge of foreign exchange risk?
Q4) What is the major assumption underlying the one-transaction perspective?
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Chapter 10: Translation of Foreign Currency Financial Statements
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Q1) What is a company's functional currency?
A) the currency of the primary economic environment in which it operates.
B) the currency of the country where it has its headquarters.
C) the currency in which it prepares its financial statements.
D) the reporting currency of its parent for a subsidiary.
E) the currency it chooses to designate as such.
Q2) Under the temporal method, retained earnings would be remeasured at what rate?
A) Beginning of the year rate.
B) Average rate.
C) Current rate.
D) Historical rate.
E) Composite amount.
Q3) Under the temporal method, depreciation expense would be remeasured at what rate?
A) Beginning of the year rate.
B) Average rate.
C) Current rate.
D) Historical rate.
E) Composite amount.
Q4) Contrast the purpose of remeasurement with the purpose of translation.
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Chapter 11: Worldwide Accounting Diversity and International Accounting Standards
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Q1) Which topic was not covered by FASB under the short-term convergence project?
A) Inventory costs.
B) Asset exchanges.
C) Liability transfers.
D) Accounting changes.
E) Earnings-per-share.
Q2) What international organization currently promulgates IFRS?
A) IASB.
B) IASC.
C) IOSCO.
D) FASB.
E) EU.
Q3) Which of the following is not an IFRS pronouncement originally issued by the IASB?
A) Business Combinations.
B) First-Time Adoption of IFRS.
C) Financial Instruments: Disclosures.
D) Agriculture.
E) Operating Segments.
Q4) What were the major objectives of the Treaty of Rome?
Page 13
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Chapter 12: Financial Reporting and the Securities and Exchange Commission
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Q1) EDGAR stands for:
A) Electronic Debits, Gains, Assets and Revenues System.
B) Electronic Data Gathering, Analysis, and Retrieval System.
C) Explanatory Data Gathering, Analysis, and Retrieval System.
D) Explanatory Debits, Gains, Assets and Revenues System.
E) Electronic Data, Gross Analysis, and Revenues System.
Q2) Briefly describe Regulation S-K. What is its purpose?
Q3) Why was the Public Utility Holding Company Act of 1935 created?
Q4) What was the purpose of the Securities Act of 1933?
Q5) How are the operations of the SEC funded?
Q6) Audited financial statements in an annual report of an issuer that is subject to SEC regulation must include:
A) three balance sheets, three income statements, and three statements of cash flows.
B) three balance sheets, two income statements, and two statements of cash flows.
C) one balance sheet, one income statement, and one statement of cash flows.
D) two balance sheets, three income statements, and three statements of cash flows.
E) two balance sheets, two income statements, and two statements of cash flows.
Page 14
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Chapter 13: Accounting for Legal Reorganizations and Liquidations
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Q1) The statement of financial affairs should be prepared
A) under the going concern assumption.
B) under the concept of conservatism.
C) under the assumption that liquidation will occur.
D) under the continuity concept.
E) only for a company in Chapter 7 bankruptcy.
Q2) What is meant by a "fully secured liability"?
Q3) What information is conveyed by the Statement of Realization and Liquidation?
A) Account balances reported by the company at the date of the filing of the bankruptcy petition.
B) Cash receipts generated by the sale of the debtor's property.
C) Write up of assets.
D) Recognition of recorded liabilities.
E) Assets and liabilities but not stockholders' equity.
Q4) In a statement of financial affairs, assets are classified
A) according to whether they are pledged with particular creditors.
B) as current or noncurrent.
C) as monetary or nonmonetary.
D) as operating or non-operating.
E) as direct or indirect.
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Chapter 14: Partnerships: Formation and Operation
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Q1) Norr and Caylor established a partnership on January 1, 2010. Norr invested cash of $100,000 and Caylor invested $30,000 in cash and equipment with a book value of $40,000 and fair value of $50,000. For both partners, the beginning capital balance was to equal the initial investment. Norr and Caylor agreed to the following procedure for sharing profits and losses:
- 12% interest on the yearly beginning capital balance
- $10 per hour of work that can be billed to the partnership's clients
- the remainder divided in a 3:2 ratio
The Articles of Partnership specified that each partner should withdraw no more than $1,000 per month.
For 2010, the partnership's income was $70,000. Norr had 1,000 billable hours, and Caylor worked 1,400 billable hours. In 2011, the partnership's income was $24,000, and Norr and Caylor worked 800 and 1,200 billable hours respectively. Each partner withdrew $1,000 per month throughout 2010 and 2011.
Determine the amount of net income allocated to each partner for 2010.
Q2) How is accounting for a partnership different from accounting for a corporation?
Q3) For what events or conditions should the Articles of Partnership make provision?
Q4) Why are the terms of the Articles of Partnership important to partners?
Q5) What events cause the dissolution of a partnership?
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Chapter 15: Partnerships: Termination and Liquidation
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Q1) Harding, Jones, and Sandy is in the process of liquidating and the partners have the following capital balances; $24,000, $24,000, and ($9,000) respectively. The partners share all profits and losses 16%, 48%, and 36%, respectively. Sandy has indicated that the ($9,000) deficit will be covered with a forthcoming contribution. The remaining partners have requested to immediately receive $20,000 in cash that is available. How should this cash be distributed?
A) Harding $5,000; Jones $15,000.
B) Harding $17,000; Jones $3,000.
C) Harding $11,154; Jones $8,846.
D) Harding $14,297; Jones $5,703.
E) Harding $12,500; Jones $7,500.
Q2) Xygote, Yen, and Zen were partners who were liquidating their partnership. Each partner has a deficit balance in their respective capital account. All assets from the partnership have been liquidated and all of the liabilities had been paid. How should any additional cash coming into the partnership be distributed to the partners?
Q3) What financial schedule would be prepared for a partnership that has begun liquidation but has not yet completed the process? What is the purpose of this schedule?
Q4) What should occur when a solvent partner has a deficit balance?
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Chapter 16: Accounting for State and Local Governments
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Q1) Which of the following is not a classification of non-exchange transactions?
A) Derived tax expenditures.
B) Voluntary non-exchange transactions.
C) Government-mandated non-exchange transactions.
D) Derived tax revenues.
E) Imposed non-exchange revenues.
Q2) Which of the following statements is true about Fund Balance classifications for the governmental funds?
A) A restricted fund balance is for monies the governing board has appropriated.
B) An assigned fund balance has been designated for a specific purpose and is restricted to use for only that purpose.
C) An unassigned fund balance has no restriction for use of the money and is only applicable to the General Fund.
D) A committed fund balance has been designated by an outside party for a particular use.
E) A non-spendable fund balance is designated only for Permanent Fund balances.
Q3) What is the purpose of fund financial statements?
Q4) What is the purpose of government-wide financial statements?
Q5) What are the five types of governmental funds?
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Chapter 17: Accounting for State and Local Governments
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Q1) GASB Codification Section 2200.106-107 makes which of the following statements regarding Management's Discussion and Analysis?
A) MD&A is required only for Proprietary Fund Financial Statements.
B) MD&A is required for all state and local government financial statements.
C) MD&A is only required for comprehensive annual financial reports.
D) MD&A for state and local government financial statements must include an analysis of potential, untapped revenue sources.
E) MD&A is an optional inclusion for state and local government financial statements.
Q2) According to the GASB (Governmental Accounting Standards Board), which one of the following is not a criterion for determining whether a government is legally separate?
A) The government can determine its own budget.
B) The government can issue debt.
C) The government has corporate powers including the right to sue and be sued.
D) The government has the power to levy taxes.
E) The government can issue preferred stock.
Q3) What is meant by the term fiscally independent?
Q4) What is meant by the term legally independent?
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Chapter 18: Accounting for Not-For-Profit Organizations
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Q1) A not-for-profit organization (Charity A) raises money for other charitable organizations. Charity A receives $10,000 to distribute to Charity B.
B.
Assume that the donor retains the right to revoke or redirect the gift. Prepare the journal entries for Charity A and Charity B. The entries should be for the gift when received by Charity A, and when the gift is distributed for Charity
Q2) Which one of the following is a voluntary health and welfare organization?
A) Charity raising money for underprivileged children.
B) Nursing home.
C) Clinic.
D) Hospital.
E) Preschool.
Q3) How does a voluntary health and welfare organization account for donated goods and cash contributed for operating purposes? What types of revenues are recognized by voluntary health and welfare organizations?
Q4) For a voluntary health and welfare organization, what are supporting services expenses?
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Chapter 19: Accounting for Estates and Trusts
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Q1) What are the goals of probate laws? (1) gather and preserve all of the decedent's property;
(2) carry out an orderly and fair settlement of all debts; (3) discover and follow the decedent's intent for the remaining property
A) 1 only.
B) 2 only.
C) 3 only.
D) 1 and 2.
E) 1, 2, and 3.
Q2) A gift of any remaining estate property is a A) general legacy.
B) specific legacy.
C) demonstrative legacy.
D) residual legacy.
E) devise.
Q3) What is the purpose of the Uniform Probate Code?
Q4) What is a remainderman of trust property?
Q5) What choices does an executor of an estate have in determining the values of assets included in the estate for tax purposes?
Q6) What are the three goals of probate laws?
Page 21
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