Consolidations and Business Combinations Final
Test Solutions
Course Introduction
This course explores the accounting principles and practices associated with business combinations and the consolidation of financial statements. Students will learn to identify the various forms and motives of business combinations, analyze the legal and economic implications of mergers and acquisitions, and apply relevant accounting standards to the preparation of consolidated financial statements. Topics include purchase versus pooling-of-interests methods, allocation and impairment of goodwill, intercompany transactions, non-controlling interests, and the complexities arising from multi-subsidiary and international consolidations. Through case studies and practical exercises, students gain proficiency in the technical skills and professional judgment required to navigate the reporting and compliance challenges in combined entity accounting.
Recommended Textbook
Advanced Accounting 6th Edition by Debra C. Jeter
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Page 2
Chapter 1: Introduction to Business Combinations and the
Conceptual Framework
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Sample Questions
Q1) When following the economic unit concept in the preparation of consolidated financial statements,the basis for valuing the noncontrolling interest in net assets is the:
A)book values of subsidiary assets and liabilities.
B)fair values of subsidiary assets and liabilities.
C)general price level adjusted values of subsidiary assets and liabilities.
D)fair values of parent company assets and liabilities.
Answer: B
Q2) According to the economic unit concept,the primary purpose of consolidated financial statements is to provide information that is relevant to:
A)majority stockholders.
B)minority stockholders.
C)creditors.
D)both majority and minority stockholders.
Answer: D
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Chapter 2: Accounting for Business Combinations
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Q1) Under SFAS 141R,what value of the assets and liabilities is reflected in the financial statements on the acquisition date of a business combination?
A)Carrying value
B)Fair value
C)Book value
D)Average value
Answer: B
Q2) In a business combination accounted for as an acquisition,how should the excess of fair value of net assets acquired over the consideration paid be treated?
A)Amortized as a credit to income over a period not to exceed forty years.
B)Amortized as a charge to expense over a period not to exceed forty years.
C)Amortized directly to retained earnings over a period not to exceed forty years.
D)Recorded as an ordinary gain.
Answer: D
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4
Chapter 3: Consolidated Financial Statements Date of Acquisition
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Sample Questions
Q1) Eliminating entries are made to cancel the effects of intercompany transactions and are made on the:
A)books of the parent company.
B)books of the subsidiary company.
C)workpaper only.
D)books of both the parent company and the subsidiary.
Answer: C
Q2) Under the economic entity concept,consolidated financial statements are intended primarily for the benefit of the:
A)stockholders of the parent company.
B)creditors of the parent company.
C)minority stockholders.
D)all of these.
Answer: D
Q3) Under the acquisition method,indirect costs relating to acquisitions should be:
A)included in the investment cost.
B)expensed as incurred.
C)deducted from other contributed capital.
D)none of these.
Answer: B
Page 5
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Chapter 4: Consolidated Financial Statements After Acquisition
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Sample Questions
Q1) A parent company received dividends in excess of the parent company's share of the subsidiary's earnings subsequent to the date of the investment.How will the parent company's investment account be affected by those dividends under each of the following accounting methods?
A)Cost Method,no effect; Partial Equity Method,no effect
B)Cost Method,decreased; Partial Equity Method,no effect
C)Cost Method,no effect; Partial Equity Method,decreased
D)Cost Method,decreased; Partial Equity Method,decreased
Q2) P Company purchased 80% of the outstanding common stock of S Company on May 1,2017,for a cash payment of $318,000.During the calendar year 2017,S Company earned $210,000 evenly throughout the year and declared a dividend of $75,000 on November 1.What is the amount needed to establish reciprocity under the cost method in the preparation of a consolidated workpaper on December 31,2017?
A)$52,000
B)$65,000
C)$62,000
D)$108,000
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Page 6
Chapter 5: Allocation and Depreciation of Differences
Between Implied and Book Values
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Sample Questions
Q1) Sleepy Company,a 70%-owned subsidiary of Pickle Corporation,reported net income of $600,000 and paid dividends totaling $225,000 during Year 3.Year 3 amortization of differences between current fair values and carrying amounts of Sleepy's identifiable net assets at the date of the business combination was $112,500.The noncontrolling interest in consolidated net income of Sleepy for Year 3 was:
A)$146,250.
B)$33,750.
C)$67,500.
D)$180,000.
Q2) On January 1,2016,Lester Company purchased 70% of Stork Corporation's $5 par common stock for $600,000.The book value of Stork net assets was $640,000 at that time.The fair value of Stork's identifiable net assets were the same as their book value except for equipment that was $40,000 in excess of the book value.In the January 1,2016,consolidated balance sheet,goodwill would be reported at:
A)$152,000.
B)$177,143.
C)$80,000.
D)$0.
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Chapter 6: Elimination of Unrealized Profit on Intercompany
Sales of Inventory
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Q1) P Company sold merchandise costing $240,000 to S Company (90% owned)for $300,000.At the end of the current year,one-third of the merchandise remains in S Company's inventory.Applying the lower-of- cost-or-market rule,S Company wrote this inventory down to $92,000.What amount of intercompany profit should be eliminated on the consolidated statements workpaper?
A)$20,000.
B)$18,000.
C)$12,000.
D)$10,800.
Q2) The noncontrolling interest's share of the selling affiliate's profit on intercompany sales is considered to be realized under:
A)partial elimination.
B)total elimination.
C)100% elimination.
D)both total and 100% elimination.
Q3) Past and proposed GAAP agree that unrealized intercompany profit should not be included in consolidated net income or assets.Briefly explain the preferred approach of eliminating intercompany profit.
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Chapter 7: Elimination of Unrealized Gains or Losses on Intercompany Sales
of Property and Equipment
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Sample Questions
Q1) P Company purchased land from its 80% owned subsidiary at a cost of $100,000 greater than it subsidiary's book value.Two years later P sold the land to an outside entity for $50,000 more than P's cost.In its current year consolidated income statement P and its subsidiary should report a gain on the sale of land of:
A)$50,000.
B)$120,000.
C)$130,000.
D)$150,000.
Q2) In the year an 80% owned subsidiary sells equipment to its parent company at a gain,the noncontrolling interest in consolidated income is calculated by multiplying the noncontrolling interest percentage by the subsidiary's reported net income:
A)plus the intercompany gain considered realized in the current period.
B)plus the net amount of unrealized gain on the intercompany sale.
C)minus the net amount of unrealized gain on the intercompany sale.
D)minus the intercompany gain considered realized in the current period.
Q3) When there have been intercompany sales of depreciable property,workpaper entries are necessary to accomplish several financial reporting objectives.Identify three of these financial reporting objectives for depreciable property.
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Chapter 8: Changes in Ownership Interest
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Sample Questions
Q1) On January 1,2016,P Corporation purchased 75% of S Corporation for $500,000.S's stockholders' equity on that date was equal to $600,000 and S had 40,000 shares issued and outstanding on that date.S Corporation sold an additional 8,000 shares of previously unissued stock on December 31,2016. Assume S sold the 8,000 shares to outside interests,P's percent ownership would be:
A)56 1/4%
B)62 1/2%
C)75%
D)79 1/6%
Q2) If a parent company acquires additional shares of its subsidiary's stock directly from the subsidiary for a price less than their book value:
A)total noncontrolling book value interest increases.
B)the controlling book value interest increases.
C)the controlling book value interest decreases.
D)total noncontrolling book value interest increases; and the controlling book value interest decreases.
Q3) A parent's ownership percentage in a subsidiary may change for several reasons.Identify three reasons the ownership percentage may change.
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Page 10
Chapter 9: Intercompany Bond Holdings and Miscellaneous Topics Consolidated Financial Statements
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Sample Questions
Q1) Constructive gains and losses from intercompany bond transactions are:
A)treated as extraordinary items on the consolidated income statement
B)included as other revenues and expenses on the consolidated income statement.
C)excluded from the consolidated income statement until realized.
D)eliminated from the consolidated income statement.
Q2) Pointe Company purchased bonds issued by Sentient Company on the open market at a premium.Sentient Company is a 100% owned subsidiary of Pointe Company.Pointe intends to hold the bonds until maturity.In a consolidated balance sheet,the difference between the bond carrying values in the two companies would be:
A)included as a decrease to retained earnings.
B)included as an increase to retained earnings.
C)reported as a deferred debit to be amortized over the remaining life of the bonds.
D)reported as a deferred credit to be amortized over the remaining life of the bonds.
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11
Chapter 10: Insolvency Liquidation and Reorganization
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Sample Questions
Q1) A bankruptcy petition filed by a firm is a:
A)chapter petition.
B)involuntary petition.
C)voluntary petition.
D)chapter 11 petition.
Q2) Ford Corporation entered into a troubled debt restructuring agreement with their local bank.The bank agreed to accept land with a carrying value of $200,000 and a fair value of $300,000 in exchange for a note with a carrying amount of $425,000.Ignoring income taxes,what amount should Ford report as a gain on its income statement?
A)$0.
B)$100,000.
C)$125,000.
D)$225,000.
Q3) In a troubled debt restructuring involving a modification of terms,the debtor's gain on restructuring:
A)will equal the creditor's gain on restructuring.
B)will equal the creditor's loss on restructuring.
C)may not equal the creditor's gain on restructuring.
D)may not equal the creditor's loss on restructuring.
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Page 12
Chapter 11: International Financial Reporting Standards
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Q1) Milestones in the transition plan for mandatory adoption of IFRS by US companies include all of the following EXCEPT:
A)Improvements in accounting standards.
B)Limited early adoption of IFRS in an effort to enhance comparability for US investors
C)Mandatory use of IFRS by US entities.
D)All of the above are milestones in the transition plan for mandatory adoption of IFRS by US companies.
Q2) The goals of the International Accounting Standards Committee include all of the following EXCEPT:
A)To improve international accounting.
B)To formulate a single set of auditing standards to be applied in all countries.
C)To promote global acceptance of its standards.
D)To harmonize accounting practices between countries.
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13
Chapter 12: Accounting for Foreign Currency Transactions and Hedging Foreign
Exchange Risk
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Q1) Accounting for a foreign currency transaction involves the terms measured and denominated.Describe a foreign currency transaction and distinguish between the terms measured and denominated.
Q2) A transaction gain or loss is reported currently in the determination of income if the purpose of the forward contract is to:
A)hedge a net investment in a foreign entity.
B)hedge an identifiable foreign currency commitment.
C)speculate in foreign currency.
D)none of these.
Q3) From the viewpoint of a U.S.company,a foreign currency transaction is a transaction:
A)measured in a foreign currency.
B)denominated in a foreign currency.
C)measured in U.S.currency.
D)denominated in U.S.currency.
Q4) A transaction gain is recorded when there is an:
A)importing transaction and the exchange rate increases.
B)exporting transaction and the exchange rate increases.
C)exporting transaction and the exchange rate decreases.
D)none of these.
Page 14
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Chapter 13: Translation of Financial Statements of Foreign
Affiliates
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Q1) The process of translating the accounts of a foreign entity into its functional currency when they are stated in another currency is called:
A)verification.
B)translation.
C)remeasurement.
D)None of these.
Q2) The appropriate exchange rate for translating a plant asset in the balance sheet of a foreign subsidiary in which the functional currency is the U.S.dollar is the:
A)current exchange rate.
B)average exchange rate for the current year.
C)historical exchange rate in effect when the plant asset was acquired or the date of acquisition,whichever is later.
D)forward rate.
Q3) The translation process can be done using either the current rate method or the temporal method.Explain under what circumstances each of the methods is appropriate.
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Chapter 14: Reporting for Segments and for Interim
Financial Periods
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Q1) Which of the following does NOT have to be disclosed in interim reports?
A)Seasonal costs or expenses.
B)Significant changes in estimates.
C)Disposal of a segment of a business.
D)All of these must be disclosed.
Q2) Advertising costs may be accrued or deferred to provide an appropriate expense in each period for:
A)Interim Reporting,Yes; Annual Reporting,No
B)Interim Reporting,Yes; Annual Reporting,Yes
C)Interim Reporting,No; Annual Reporting,No
D)Interim Reporting,No; Annual Reporting,Yes
Q3) Selected data for a segment of a business enterprise are to be separately reported in accordance with SFAS No.131 when the revenues of the segment is 10% or more of the combined:
A)net income of all segments reporting profits.
B)external and internal revenue of all reportable segments.
C)external revenue of all reportable segments.
D)revenues of all segments reporting profits.
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Chapter 15: Partnerships: Formation, operation and Ownership Changes
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Q1) Agler,Bates and Colter are partners who share income in a 5:3:2 ratio.Colter,whose capital balance is $150,000,retires from the partnership.
Required:
Determine the amount paid to Colter under each of the following cases:
(1)$50,000 is debited to Agler capital account; the bonus approach is used.
(2)Goodwill of $60,000 is recorded; the partial goodwill approach is used.
(3)$66,000 is credited to Bates' capital account; the total goodwill approach is used.
Q2) The bonus and goodwill methods of recording the admission of a new partner will produce the same result if the:
A)new partner's profit-sharing ratio equals his capital interest
B)old partners' profit-sharing ratio in the new partnership is the same relatively as it was in the old partnership.
C)both new partner's profit-sharing ratio equals his capital interest and old partners' profit-sharing ratio in the new partnership is the same relatively as it was in the old partnership are met
D)none of these.
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Chapter 16: Partnership Liquidation
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Q1) During the liquidation of the partnership of Karr,Rice,and Long.Karr accepts,in partial settlement of his interest,a machine with a cost to the partnership of $150,000,accumulated depreciation of $70,000,and a current fair value of $110,000.The partners share net income and loss equally.The net debit to Karr's account (including any gain or loss on disposal of the machine)is:
A)$90,000.
B)$100,000.
C)$110,000.
D)$150,000.
Q2) In a partnership liquidation the final cash distribution to the partners should be made in accordance with the:
A)partners' profit and loss sharing ratio.
B)balances of the partners' capital accounts.
C)ratio of the capital contributions by the partners.
D)ratio of capital contributions less withdrawals by the partners.
Q3) An advance cash distribution plan specifies the order in which each partner will receive cash and the dollar amount each will receive as it becomes available for distribution.Identify the four steps in the preparation of an advance cash distribution plan.
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Chapter 17: Introduction to Fund Accounting
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Q1) The expendable fund entity's measurement focus is on:
A)the flow of current financial resources.
B)the flow of economic resources.
C)the flow of revenue,expenses,and net income.
D)none of these.
Q2) The GASB has the responsibility for establishing financial accounting standards for all of the following entities EXCEPT:
A)state and local government entities.
B)veterans hospitals.
C)school districts.
D)civic organizations.
Q3) The two basic statements prepared for expendable fund entities are a balance sheet and a(n):
A)income statement.
B)statement of revenue.
C)statement of expenditures and encumbrances.
D)none of these.
Q4) Expendable fund entities prepare closing entries at the end of each period just as business enterprises do.Describe the necessary closing entries for expendable funds.
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Chapter 18: Introduction to Accounting for State and Local
Governmental Units
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Q1) Which of the following funds of a governmental unit recognizes revenues and expenditures under the same basis of accounting as the general fund?
A)Debt service
B)Enterprise
C)Internal service
D)Nonexpendable trust
Q2) Which of the following funds would account for operations that are financed and operated in a manner similar to private business enterprises?
A)Debt Service Fund
B)Enterprise Fund
C)Internal Service Fund
D)Special Revenue Fund
Q3) A nonrecurring contribution from the General Fund to the Enterprise Fund is an example of an interfund:
A)reimbursement.
B)transfer.
C)services provided and used.
D)loan.
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Chapter 19: Accounting for Nongovernment Nonbusiness
Organizations: Colleges and Universities, hospitals, and
Other Health Care Organizations
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Q1) Admissions,counseling and registration are considered to be:
A)educational and general services.
B)auxiliary enterprises.
C)student services.
D)institutional support.
Q2) Revenues and expenses of hospitals are recorded in the accounts of the:
A)Endowment Fund.
B)General Fund.
C)Plant Replacement Fund.
D)Specific Purpose Fund.
Q3) The following events affected the New Athens University Loan Fund:
1.$300,000 is received from a donor to establish a student loan fund.Loans will carry a 6% annual interest rate.
2.The Loan Fund loaned the $300,000 to students.Five percent of the loans are estimated to be uncollectible.
3.Loans of $50,000 were repaid with $3,000 of interest.
4.A $1,000 student loan was written off as uncollectible. Required:
Prepare the journal entries necessary to record these transactions.
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