Consolidations and Mergers Solved Exam Questions
Course Introduction
This course provides an in-depth exploration of the accounting and financial reporting principles governing consolidations and mergers. Students will learn the theoretical foundations and practical applications of business combinations, including acquisition methods, the preparation of consolidated financial statements, and the treatment of non-controlling interests. The course also examines the relevant regulatory frameworks, such as International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP), and addresses issues like goodwill, fair value measurement, intercompany transactions, and the disclosure requirements for merged and consolidated entities. By the end of the course, students will have a thorough understanding of how organizations account for and report the results of mergers and acquisitions in compliance with professional standards.
Recommended Textbook
Advanced Accounting 11th Edition by Floyd A. Beams
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Page 2
Chapter 1: Business Combinations
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Q1) Which of the following is not a reason for a company to expand through a combination, rather than by building new facilities?
A) A combination might provide cost advantages.
B) A combination might provide fewer operating delays.
C) A combination might provide easier access to intangible assets.
D) A combination might provide an opportunity to invest in a company without having to take responsibility for its financial results.
Answer: D
Q2) Historically, much of the controversy concerning accounting requirements for business combinations involved the ________ method.
A) purchase
B) pooling of interests
C) equity
D) acquisition
Answer: B
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Chapter 2: Stock Investments Investor Accounting and Reporting
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Q1) Assume that Pansy Incorporated used the cost method of accounting for its investment in Sunflower.The balance in the Investment in Sunflower account at December 31, 2013 was
A) $76,700.
B) $80,000.
C) $83,300.
D) $95,000.
Answer: B
Q2) Assume that Pansy has significant influence and uses the equity method of accounting for its investment in Sunflower.The balance in the Investment in Sunflower account at December 31, 2013 was
A) $78,200.
B) $80,000.
C) $81,800.
D) $83,300.
Answer: C
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Chapter 3: An Introduction to Consolidated Financial Statements
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Q1) On July 1, 2011, when Salaby Company's total stockholders' equity was $360,000, Pogana Corporation purchased 14,000 shares of Salaby's common stock at $30 per share.Salaby had 20,000 shares of common stock outstanding both before and after the purchase by Pogana, and the book value of Salaby's net assets on July 1, 2011 was equal to the fair value.On a consolidated balance sheet prepared at July 1, 2011, goodwill would be
A) $60,000.
B) $85,714.
C) $100,000.
D) $240,000.
Answer: D
Q2) Subsequent to an acquisition, the parent company and consolidated financial statement amounts would not be the same for
A) investments in unconsolidated subsidiaries.
B) investments in consolidated subsidiaries.
C) capital stock.
D) ending retained earnings.
Answer: B
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Chapter 4: Consolidated Techniques and Procedures
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Questions
Q1) A parent company uses the equity method to account for its wholly-owned subsidiary.Which of the following will be a correct procedure for the Investment account?
A) A debit for a subsidiary loss and a credit for dividends received
B) A credit for subsidiary income and a debit for dividends received
C) A debit for subsidiary dividends received and a credit for a subsidiary loss
D) A credit for a subsidiary loss and a credit for dividends received
Q2) What amount of total liabilities will be reported?
A) $206,000
B) $278,400
C) $319,600
D) $348,000
Q3) When preparing consolidated financial statements, which of the following is a subtraction in the calculation of cash flows from operating activities under the indirect method?
A) The change in the balance sheet of the common stock account
B) Noncontrolling interest dividends paid
C) Noncontrolling interest share
D) Undistributed income of equity investees
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6
Chapter 5: Intercompany Profit Transactions - Inventories
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Q1) If the sale referred to above was a downstream sale, the total sales revenue reported in the consolidated income statement for 2011 would be
A) $870,000.
B) $880,000.
C) $920,000.
D) $970,000.
Q2) Psalm Enterprises owns 90% of the outstanding voting stock of Solomon Siding, which was purchased at a cost equal to 90% of the book value of Solomon's net assets many years ago.(At the time of purchase, the fair value and book value of Solomon's net assets were equal.)Psalm purchases merchandise from Solomon at 110% above Solomon's cost.In 2012, intercompany sales from Solomon to Psalm amounted to $362,000.Unrealized profits in Psalm's December 31, 2011 inventory and December 31, 2012 inventory were $82,000 and $26,000, respectively.Solomon reported net income of $980,000 for 2012.
Required:
1.Determine Psalm's income from Solomon for 2012.
2.In General Journal format, prepare consolidation working paper entries at December 31, 2012 to eliminate the effects of the intercompany inventory sales assuming the perpetual inventory method is used.
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Page 7
Chapter 6: Intercompany Profit Transactions - Plant Assets
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Q1) Paula's Pizzas purchased 80% of their supplier, Sarah's Sauces.Sarah's book values equaled fair value at the time of the acquisition.Paula sold Sarah some packaging equipment on January 2, 2011 for $100,000.The equipment had a carrying value of $90,000, and original cost of $120,000, and had a remaining life of 10 years.Both Paula and Sarah depreciate their assets on the straight-line method.The equipment has no salvage value.
Required: Prepare the following entries:
1.Journal entries Paula and Sarah will prepare on their separate books in 2011.
2.Eliminating/adjusting entries on the consolidation worksheet at the end of 2011.
3.Eliminating/adjusting entries on the consolidation worksheet at the end of 2012.
Q2) In preparing the consolidated financial statements for 2012, the elimination entry for depreciation expense was a
A) debit for $5,000.
B) credit for $5,000.
C) debit for $15,000.
D) credit for $15,000.
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Page 8
Chapter 7: Intercompany Profit Transactions - Bonds
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Q1) Bonds Payable appeared in the December 31, 2011 consolidated balance sheet of Pfadt Corporation and Subsidiary in the amount of
A) $398,925.
B) $441,000.
C) $443,250.
D) $450,000.
Q2) If the price paid by a parent company to acquire the debt of a subsidiary is greater than the book value of the liability, a ________ occurs.
A) realized loss on the retirement of debt from the viewpoint of the subsidiary
B) realized gain on the retirement of debt from the viewpoint of the subsidiary
C) constructive loss on the retirement of debt from the viewpoint of the consolidated entity
D) constructive gain on the retirement of debt from the viewpoint of the consolidated entity
Q3) Noncontrolling interest share for 2011 was
A) $23,000.
B) $23,600.
C) $24,000.
D) $24,400.
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Page 9
Chapter 8: Consolidations - Changes in Ownership
Interests
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Q1) At December 31, 2012 year-end, Arnold Corporation's investment in Oakes Inc.was $200,000 consisting of 80% of Oakes's $250,000 stockholders' equity on that date.On April 1, 2013, Arnold sold 20% interest (one-fourth of its holdings)in Oakes for $65,000.During 2013, Oakes had net income of $75,000 (earned uniformly)and on July 1, 2013, Oakes paid dividends of $40,000.Arnold uses the equity method to account for the investment.
Required:
1.What is the gain or loss on sale of the 20% interest?
2.Record the journal entries for Arnold for the year ending December 31, 2013.Use the beginning-of-the-year-sale-date assumption.
Q2) On January 1, 2011, assume the fair values of Savannah's identifiable assets and liabilities equal book values.What is the change in the amount of goodwill associated with the issuance of 80,000 additional shares to Goldberg? (Use four decimal places.)
A) Increase goodwill $38,176.
B) Decrease goodwill $38,176.
C) Increase goodwill $384,000.
D) Decrease goodwill $384,000.
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10
Chapter 9: Indirect and Mutual Holdings
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Q1) Bailey's noncontrolling interest share for 2011 is
A) $7,609.
B) $8,044.
C) $15,652.
D) $23,696.
Q2) When mutually-held stock involves subsidiaries holding the stock of each other, the ________ method is not used.
A) equity
B) cost
C) conventional
D) treasury stock
Q3) Raymond Company owns 90% of Rachel Company.Rachel Company owns 10% of Raymond Company.The treasury stock method is used.On the books of Rachel Company, we maintain the Investment in Raymond using the ________ method.The ending balance in Investment in Raymond is ________ stockholders' equity in the consolidated balance sheet.
A) equity; deducted from B) cost; deducted from C) treasury stock; deducted from D) conventional; added to
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Chapter 10:
Preferred
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Q1) Assume a company's preferred stock is cumulative with a call provision and has dividends in arrears.The amount of stockholders' equity allocated to preferred stockholders is equal to the number of shares outstanding times the
A) sum of the par value per share plus any liquidation premium per share, plus the sum of any preferred dividends in arrears, plus the current year's dividend requirement, but only if dividends have been declared.
B) sum of the par value per share, plus any liquidation premium per share, plus the sum of any preferred dividends in arrears, plus the current year's dividend requirement, regardless of whether dividends have been declared.
C) call price plus the sum of any preferred dividends in arrears, plus the current year's dividend requirement, but only if dividends have been declared.
D) call price plus the sum of any preferred dividends in arrears, plus the current year's dividend requirement, regardless of whether dividends have been declared.
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Chapter
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Q1) Under parent company theory, noncontrolling interest is classified on the consolidated balance sheet as ________.Under entity theory, noncontrolling interest is classified on the consolidated balance sheet as ________.
A) stockholders' equity; stockholders' equity
B) stockholders' equity; liability
C) liability; a liability
D) liability; stockholders' equity
Q2) Under the entity theory, a consolidated balance sheet prepared immediately after the business combination will show noncontrolling interest of
A) $5,000.
B) $7,500.
C) $9,000.
D) $10,000.
Q3) Goodwill was reported in the December 31, 2011 consolidated balance sheet at A) $170,000.
B) $180,000.
C) $200,000.
D) $210,000.
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Chapter 12: Derivatives and Foreign Currency: Concepts and Common Transactions
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Q1) Slade Corporation, a U.S.company, purchased materials on account from a manufacturer in Mexico on June 15.The invoice was denominated in the shipper's currency for 480,000 pesos.The goods were paid for on July 18.Slade closes their fiscal year on June 30, and used the following indirect quotes to measure the amounts related to the transactions.
June 15 $1.00 = 12.50 pesos
June 30 $1.00 = 12.80 pesos
July 18 $1.00 = 12.00 pesos
Required:
Show all related journal entries for Slade Company.
Q2) On September 1, 2011, Bylin Company purchased merchandise from Himeji Company of Japan for 20,000,000 yen payable on October 1, 2011.The spot rate for yen was $0.0079 on September 1 and the spot rate was $0.0077 on October 1.The purchase was paid on October 1, 2011.
Required:
1.Did the U.S.dollar strengthen or weaken from September to October and what are the implications for Bylin's business?
2.What journal entry did Bylin record on September 1, 2011?
3.What journal entry did Bylin record on October 1, 2011?
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Chapter 13: Accounting for Derivatives and Hedging
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Q1) Taydus Corporation, a U.S.corporation, sold goods on December 2 to a company overseas, and is now carrying a receivable denominated in euros.Taydus signed a 60-day forward contract on that same date to sell euros.The spot rate was $1.40 on the date they signed the contract and the 60-day forward rate was $1.36.At the end of that month when they closed the books at their fiscal year-end, the spot rate was $1.42 and the 30-day forward rate was $1.40.Assume this is a fair value hedge.The forward contract will not be settled net.What would be reported by Taydus for the year ending December 31?
A) Net exchange gain
B) Net exchange loss
C) Deferred exchange gain
D) Deferred exchange loss
Q2) A forward contract used as a cash flow hedge will be recorded as an asset if
A) the holder is expecting to receive a payment as a result of the contract.
B) the holder is accounting for the hedged instrument as a fair value hedge.
C) the holder is hedging the net investment in a foreign entity.
D) the holder is using the alternate accounting method and deferring all gains or losses from the hedge.
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Chapter 14: Foreign Currency Financial Statements
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Q1) Paskin Corporation's wholly-owned Canadian subsidiary has a Canadian dollar functional currency.In translating the subsidiary's account balances into U.S.dollars for reporting purposes, which one of the following accounts would be translated at historical exchange rates?
A) Accounts Receivable
B) Notes Payable
C) Capital Stock
D) Retained Earnings
Q2) A U.S.parent corporation loans funds to a foreign subsidiary to be used to purchase equipment.The loan is denominated in U.S.dollars and the functional currency of the subsidiary is the euro.This intercompany transaction is a foreign currency transaction of A) neither the subsidiary nor the parent, as it is eliminated as part of the consolidation procedure.
B) the subsidiary but not the parent.
C) both the subsidiary and the parent.
D) the parent but not the subsidiary.
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16
Chapter 15: Segment and Interim Financial Reporting
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Q1) GAAP requires disclosures for each reportable operating segment for each of the following, except for
A) Revenues.
B) Depreciation expense.
C) R&D expenditures.
D) Extraordinary items.
Q2) What is the threshold for reporting a major customer?
A) 5 percent of revenues
B) 5 percent of profits
C) 10 percent of revenues
D) 10 percent of profits
Q3) What is the purpose of interim reporting?
A) Provide shareholders with more timely information
B) Provide shareholders with more accurate information
C) Provide shareholders with more extensive detail about specific accounts and transactions
D) Provide shareholders with more current audited information
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Chapter 16: Partnerships - Formation, Operations, and Changes in Ownership Interests
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Q1) In a limited partnership, a general partner
A) is excluded from management of the business.
B) is not entitled to a bonus at the end of the year.
C) has limited liability for partnership debt.
D) has unlimited liability for partnership debt.
Q2) Required:
1.Prepare a schedule to allocate income to the partners assuming that partnership net income for 2011 is $330,000.
2.Prepare a journal entry to distribute the partnership's income to the partners (assume that an Income Summary account is used by the partnership).
Q3) What will the profit and loss sharing ratios be after Oran's investment?
A) 1:2:4:2
B) 2:3:5:2
C) 3:4:6:2
D) 4:6:10:5
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18
Chapter 17: Partnership Liquidation
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Q1) Creditors of the partnership may seek the personal assets of the partners to satisfy amounts owed.When this happens
A) creditors may only file against partnership assets.
B) creditors must file against all partners and recover their claims based on the individual partner's profit and loss distribution percentage.
C) creditors must file against all partners and recover their claims based on the individual partner's percentage ownership.
D) creditors may file against an individual partner to recover their claims, or against any combination of partners.
Q2) A simple partnership liquidation requires
A) periodic payments to creditors and partners determined by a safe payments schedule.
B) partnership assets to be converted into cash with full payment made to all outside creditors before remaining cash is distributed to partners.
C) only creditors to be paid in an orderly manner.
D) periodic payments to partners as cash becomes available.
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Chapter 18: Corporate Liquidations and Reorganizations
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Q1) When a corporation's total liabilities are greater than the fair value of total assets, the firm is
A) a distressed corporation.
B) a bankrupt corporation.
C) insolvent in the equity sense.
D) insolvent in the bankruptcy sense.
Q2) Which of the following must approve a Chapter 11 plan?
A) The organization's management and the assigned trustee
B) The assigned trustee and creditors
C) The assigned trustee and entity's stockholders
D) The bankruptcy court and the creditors
Q3) A company emerging from bankruptcy will have a reorganization value that
A) approximates the book value of the entity's assets prior to bankruptcy.
B) approximates the book value of the entity prior to bankruptcy.
C) approximates the fair market value of the entity without considering liabilities.
D) approximates the fair market value of the entity's liabilities.
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20
Chapter 19: An Introduction to Accounting for State and Local Governmental Units
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Q1) What funds are reported in Government-wide financial statements?
A) Governmental only
B) Proprietary only
C) Governmental and proprietary
D) Governmental, proprietary and fiduciary
Q2) Government-wide financial statements exclude the
A) general fund.
B) fiduciary funds.
C) proprietary funds.
D) special revenue funds.
Q3) The following are transactions for the city of Franklin.
a.Borrowed $20,000 by issuing a two-year note.
b.Purchased equipment for $6,000 cash.
c.Licenses for $700 were billed on account.
d.Accrued employee salary costs of $7,000.
e.Depreciation expense on equipment for year, $1,000.
Required:
Analyze the above transactions by using the accounting equation for a proprietary fund.
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Chapter 20: Accounting for State and Local Governmental Units
- Governmental Funds
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Q1) Middlefield County incurred the following transactions during 2011:
1.The county authorized a new general obligation bond issue of $5 million par to construct an office building with a contract price of $4,975,000.The bonds were issued for $4,980,000.
2.The county levied real property taxes of $10,000,000.Eighty-five percent of the net taxes were collected immediately.Two percent of the total levy was estimated to be uncollectible.
3.The office building was completed and the county paid the contract price to the contractor.
4.The General Fund transferred $500,000 to the Debt Service Fund.
5.The county paid $200,000 for interest on the bonds from the Debt Service Fund.
Required:
Prepare journal entries for each of the above transactions.Identify the appropriate fund or funds used by Middlefield County.
Q2) At any point in time, a government will be able to spend an amount equal to
A) appropriations minus expenditures.
B) appropriations minus expenditures minus encumbrances.
C) appropriations minus encumbrances.
D) expenditures minus encumbrances.
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Chapter 21: Accounting for State and Local Governmental Units
- Proprietary and Fiduciary Funds
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Q1) Thoroughgood County has a municipal golf course and tennis club which is funded by the membership fees it charges.The club also has 6% bonds outstanding amounting to $20,000,000 on which it pays interest semi-annually.The club had the following transactions.
1.An addition to the golf clubhouse was added for $2,000,000, funded out of operations.
2.The following expenses were incurred and paid: $80,000 wages; $10,000 payroll taxes; $45,000 water bill; and $12,000 equipment repair.
3.Interest on the bonds was paid amounting to $600,000.
4.$5,000,000 of operating cash excess was repaid to the general fund for a previous loan.
5.Depreciation of $500,000 was recorded for the buildings.
Required:
Prepare the necessary journal entries for each of the above transactions for the Enterprise Fund.
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Page 23
Chapter 22: Accounting for Not-For-Profit Organizations
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Q1) Will Wealth made three charitable donations in 2011.Each was for $500,000, however they were made to three different organizations as follows:
1.Will donated to a local voluntary health and welfare organization (VHWO), and indicated that the funds could be used as the VHO wanted.
2.Will donated to a local private, not-for-profit university, designating the funds to be used for scholarships and student aid.
3.Will donated to the local not-for-profit, nongovernmental hospital, designating the funds to be used for purchase of diagnostic equipment.
Required:
For each of the above three situations:
A.Prepare the journal entry that each organization would prepare at the time of the contribution.
B.Prepare the journal entry that each organization would prepare at the time of the subsequent spending of the funds.Assume that the spending is in accordance with any restrictions that Will placed on the donation.
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Chapter 23: Estates and Trusts
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Q1) Cindy Lou's parents passed away while she was still dependent on them, and their will designated that a trust should be established with their estate proceeds to care for her.The following transactions occurred in the first two months following their deaths.
1.The trust account was opened with the $2,000,000 in funds received from the estate.The funds were deposited into a non-interest bearing checking account to be used for expenses.
2.$1,500,000 was put into a multi-year certificate of deposit which earned 3% annually, with interest paid monthly back to the checking account.
3.One month's interest from the certificates of deposit was received.
4.The bank's trust administration fee was paid for $65.
5.Tuition was paid for the boarding school where Cindy Lou was living for $6,500. Required:
Prepare the journal entries for the listed transactions.Disregard the impact of estate and income taxes.
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